SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF
1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for use of the Commission only (as permitted by Rule
14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to (section) 240.14a-11(c) or (section)
240.14a-12
ROTECH MEDICAL CORPORATION
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(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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(NAME OF PERSON(S) FILING PROXY STATEMENT IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check appropriate box):
[ ] No fees required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5)
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[x] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount previously paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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[LETTERHEAD OF ROTECH]
September 19, 1997
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders (the
"RoTech Special Meeting") of RoTech Medical Corporation ("RoTech") to be held at
SunTrust Bank, 200 South Orange Avenue, Second Floor, Campus Room, Orlando,
Florida, at 10:00 a.m., local time, on Tuesday, October 21, 1997.
At the meeting, you will be asked to consider and vote upon a proposal to
approve and adopt an Agreement and Plan of Merger, dated as of July 6, 1997 (the
"Merger Agreement"), among Integrated Health Services, Inc., a Delaware
corporation ("IHS"), IHS Acquisition XXIV, Inc., a Florida corporation and a
wholly-owned subsidiary of IHS ("Merger Sub"), and RoTech, pursuant to which,
among other things, (a) Merger Sub will merge with and into RoTech (the
"Merger") and RoTech will become a wholly-owned subsidiary of IHS and (b) each
outstanding share of common stock, $.0002 par value per share, of RoTech
("RoTech Common Stock") will be converted into the right to receive, and each
right to acquire a share of RoTech Common Stock will be converted into the right
to purchase, .5806 of a share of common stock, $.001 par value per share, of IHS
(the "Exchange Ratio"), with cash paid in lieu of any fractional shares.
Details of the proposed Merger, the Merger Agreement and other important
information regarding IHS and RoTech are set forth in the accompanying Joint
Proxy Statement/Prospectus, which you are urged to review carefully. A copy of
the Merger Agreement is also attached to the Joint Proxy Statement/Prospectus as
Appendix A.
Your Board of Directors has carefully considered and unanimously approved
the Merger proposal and has determined that the Merger is fair to, and in the
best interests of, RoTech and its stockholders. Accordingly, the RoTech Board
unanimously recommends that stockholders vote FOR approval of the Merger
Agreement. The RoTech Board of Directors has received the written opinion of
Smith Barney Inc. dated July 6, 1997 to the effect that, as of such date and
based upon and subject to certain matters stated in such opinion, the Exchange
Ratio was fair, from a financial point of view, to holders of RoTech Common
Stock. A copy of the opinion of Smith Barney Inc. dated July 6, 1997 is attached
to the Joint Proxy Statement/Prospectus as Appendix C and should be read
carefully in its entirety.
The Board of Directors appreciates and encourages stockholder
participation. However, whether or not you plan to be with us at the RoTech
Special Meeting, it is important that your shares be represented. Accordingly,
we request that you sign, date and mail the enclosed proxy in the envelope
provided at your earliest convenience. If you have multiple stockholder accounts
and receive more than one set of these materials, please be sure to vote each
proxy and return it in the envelope provided.
PLEASE DO NOT SEND ANY SHARE CERTIFICATES AT THIS TIME. FOLLOWING
CONSUMMATION OF THE MERGER, YOU WILL BE GIVEN INSTRUCTIONS REGARDING THE
PROCEDURE WHEREBY ROTECH COMMON STOCK CERTIFICATES CAN BE EXCHANGED FOR IHS
COMMON STOCK.
Thank you for your cooperation.
Very truly yours,
/S/ William P. Kennedy
WILLIAM P. KENNEDY
Chairman of the Board
ROTECH MEDICAL CORPORATION
4506 L.B. McLeod Road
Orlando, Florida 32811
------------------
NOTICE OF
SPECIAL MEETING OF STOCKHOLDERS
------------------
A Special Meeting of Stockholders (the "RoTech Special Meeting") of RoTech
Medical Corporation, a Florida corporation ("RoTech"), will be held at SunTrust
Bank, 200 South Orange Avenue, Second Floor, Campus Room, Orlando, Florida, on
Tuesday, October 21, 1997, at 10:00 a.m., local time, for the following
purposes:
1. To consider and vote upon a proposal to approve and adopt an Agreement
and Plan of Merger, dated as of July 6, 1997 (the "Merger Agreement"),
among Integrated Health Services, Inc., a Delaware corporation
("IHS"), IHS Acquisition XXIV, Inc., a Florida corporation and a
wholly-owned subsidiary of IHS ("Merger Sub"), and RoTech, pursuant to
which, among other things, (a) Merger Sub will merge with and into
RoTech (the "Merger") and RoTech will become a wholly-owned subsidiary
of IHS and (b) each outstanding share of common stock, $.0002 par
value per share, of RoTech ("RoTech Common Stock") will be converted
into the right to receive, and each right to acquire a share of RoTech
Common Stock will be converted into the right to purchase, .5806 of a
share of common stock, $.001 par value per share, of IHS, with cash
paid in lieu of any fractional shares.
2. To transact such other business as may properly come before the RoTech
Special Meeting or any adjournment or postponement thereof.
The Board of Directors of RoTech has unanimously approved the Merger
proposal and has determined that the Merger is fair to, and in the best
interests of, RoTech and its stockholders. Accordingly, the RoTech Board
unanimously recommends that you vote FOR approval of the Merger Agreement.
Stockholders of record at the close of business on September 1, 1997, are
entitled to notice of, and to vote at, the RoTech Special Meeting, or any
adjournment or postponement thereof.
Details of the Merger and other important information concerning IHS and
RoTech are more fully described in the accompanying Joint Proxy
Statement/Prospectus. Please give this information your careful consideration.
WHETHER OR NOT YOU PLAN TO ATTEND THE ROTECH SPECIAL MEETING, YOU ARE
REQUESTED TO FILL IN, DATE AND SIGN THE ENCLOSED PROXY, WHICH IS SOLICITED BY
THE BOARD OF DIRECTORS OF ROTECH, AND TO MAIL IT PROMPTLY IN THE ENCLOSED
ENVELOPE. IF YOU DO ATTEND THE ROTECH SPECIAL MEETING AND WISH TO VOTE IN
PERSON, YOU MAY WITHDRAW YOUR PROXY AND VOTE YOUR SHARES PERSONALLY.
By Order of the Board of Directors
William A. Walker II
Secretary
Orlando, Florida
September 19, 1997
JOINT PROXY STATEMENT
OF
INTEGRATED HEALTH SERVICES, INC. ROTECH MEDICAL CORPORATION
FOR THE SPECIAL FOR THE SPECIAL
MEETING OF STOCKHOLDERS MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 21, 1997 TO BE HELD ON OCTOBER 21, 1997
-----------------
PROSPECTUS
OF
INTEGRATED HEALTH SERVICES, INC.
-----------------
THIS JOINT PROXY STATEMENT/PROSPECTUS RELATES TO UP TO 19,625,323 SHARES OF
THE COMMON STOCK, PAR VALUE $.001 PER SHARE (TOGETHER WITH THE PREFERRED STOCK
PURCHASE RIGHTS ASSOCIATED THEREWITH, THE "IHS COMMON STOCK"), OF INTEGRATED
HEALTH SERVICES, INC. (TOGETHER WITH ITS SUBSIDIARIES, "IHS"), ISSUABLE TO THE
STOCKHOLDERS OF ROTECH MEDICAL CORPORATION, A FLORIDA CORPORATION ("ROTECH"),
UPON CONSUMMATION OF THE MERGER (AS DEFINED HEREIN). SUCH NUMBER OF SHARES
REPRESENTS THE MAXIMUM NUMBER OF SHARES THAT WILL BE ISSUED IN THE MERGER.
-----------------
This Joint Proxy Statement/Prospectus describes the terms of a proposed
business combination between IHS and RoTech, pursuant to which IHS will acquire
RoTech by means of the merger (the "Merger") of IHS Acquisition XXIV, Inc., a
Florida corporation and a wholly-owned subsidiary of IHS ("Merger Sub"), with
and into RoTech, with RoTech being the surviving corporation. After the Merger,
the combined operations of IHS and RoTech are expected to be conducted with
RoTech as a subsidiary of IHS. Upon consummation of the Merger, each issued and
outstanding share of common stock, par value $.0002 per share, of RoTech (the
"RoTech Common Stock" and, sometimes, collectively referred to herein as the
"RoTech Shares") will automatically be converted into the right to receive .5806
shares of IHS Common Stock (the "Exchange Ratio"). On September 18, 1997, the
last trading day prior to the date of this Joint Proxy Statement/Prospectus, the
closing price of RoTech Common Stock as reported on The Nasdaq Stock Market's
National Market (the "Nasdaq National Market") was $19.8125 and the closing
price of IHS Common Stock as reported on the New York Stock Exchange (the
"NYSE") was $34.625. At such price, the equivalent value of a share of RoTech
Common Stock would be $20.10, calculated based on the Exchange Ratio (the
"Equivalent Value"), and the aggregate Merger consideration would be
approximately $531,517,000 (based on 26,439,322 shares of RoTech Common Stock
outstanding on September 18, 1997, the last business day before the date of this
Joint Proxy Statement/Prospectus). The actual market price of the IHS Common
Stock may vary, which will cause a corresponding change in the Equivalent Value
and the aggregate Merger consideration. Additionally, the Equivalent Value may
differ from the actual market price of RoTech Common Stock. Each stockholder is
urged to obtain updated market information. RoTech stockholders will receive
cash (without interest) in lieu of fractional shares of IHS Common Stock. For a
more complete description of the terms of the Merger, see "The Merger."
This Joint Proxy Statement/Prospectus is being furnished in connection with
the Special Meetings of Stockholders of IHS and RoTech (the "Special Meetings").
All information contained or incorporated herein with respect to IHS and Merger
Sub has been furnished by IHS, and all information with respect to RoTech has
been furnished by RoTech. This Joint Proxy Statement/Prospectus also constitutes
the Prospectus of IHS filed as a part of the Registration Statement (as defined
herein). See "Available Information."
The Merger will be effected pursuant to the terms and subject to the
conditions of the Agreement and Plan of Merger, dated as of July 6, 1997, among
IHS, Merger Sub and RoTech (the "Merger Agreement"). The Merger Agreement is
attached to this Joint Proxy Statement/Prospectus as Appendix A and is
incorporated herein by reference.
THE PROPOSED MERGER IS A COMPLEX TRANSACTION. STOCKHOLDERS OF IHS AND
ROTECH ARE URGED TO READ AND CONSIDER CAREFULLY THIS JOINT PROXY
STATEMENT/PROSPECTUS IN ITS ENTIRETY.
SEE "RISK FACTORS" BEGINNING AT PAGE 27 FOR A DISCUSSION OF CERTAIN RISK
FACTORS RELATED TO THE MERGER, IHS AND ROTECH.
THE SECURITIES TO BE ISSUED 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 JOINT PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Joint Proxy Statement/Prospectus and the forms of Proxy are first
being mailed to IHS and RoTech stockholders on or about September 22, 1997.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS SEPTEMBER 19, 1997.
TABLE OF CONTENTS
PAGE
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AVAILABLE INFORMATION ............................................................... 2
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT ........................ 2
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE .................................... 3
SUMMARY OF JOINT PROXY STATEMENT/PROSPECTUS .......................................... 5
The Companies ..................................................................... 5
The Merger ........................................................................ 8
Risk Factors ..................................................................... 16
The Special Meetings ............................................................... 16
Market and Market Prices; Dividends ................................................ 19
Comparative Per Share Information ................................................ 21
Selected Historical Financial Information .......................................... 22
Summary Unaudited Pro Forma Financial Information ................................. 25
RISK FACTORS ........................................................................ 27
Risks Related to Substantial Indebtedness .......................................... 27
Risks Associated with Growth Through Acquisitions and Internal Development ......... 28
Risks Related to Managed Care Strategy ............................................. 29
Risks Related to Capital Requirements ............................................. 29
Risks Related to the Merger and Recent Acquisitions .............................. 30
Risks Related to Historical Financial Performance of First American ............... 31
Reliance on Reimbursement by Third Party Payors .................................... 31
Risk of Adverse Effect of Healthcare Reform ....................................... 32
Uncertainty of Government Regulation ............................................. 33
Competition ........................................................................ 35
Effect of Certain Anti-Takeover Provisions ....................................... 35
Possible Volatility of Stock Price; Fixed Exchange Ratio ........................... 35
Dilution of Voting Power of IHS Stockholders ....................................... 36
Benefits of the Merger to Certain Officers, Directors and Affiliates of RoTech ...... 36
Risks Related to Federal Income Tax Consequences .................................... 37
IHS RECENT DEVELOPMENTS ............................................................ 38
New Credit Facility ............................................................... 38
Proposed Acquisitions ............................................................... 38
First American Acquisition ......................................................... 40
Other Acquisitions and Divestitures ................................................ 41
Repurchase of 9 5/8% Senior Subordinated Notes and 10 3/4% Senior Subordinated Notes 42
Sale of 9 1/2% Senior Subordinated Notes due 2007 ................................. 42
Sale of 9 1/4% Senior Subordinated Notes due 2008 ................................. 42
ROTECH RECENT DEVELOPMENTS ............................................................ 43
Preliminary Year End Results ...................................................... 43
Acquisitions ........................................................................ 43
THE SPECIAL MEETINGS ............................................................... 44
General ........................................................................... 44
Purpose of the Special Meetings ................................................... 44
Dates, Places and Times ............................................................ 44
Record Dates; Quorums ............................................................ 44
Votes Required ..................................................................... 45
Voting and Revocation of Proxies ................................................... 45
Solicitation of Proxies ............................................................ 46
THE MERGER ........................................................................... 47
Terms of the Merger ............................................................... 47
Background of the Merger ......................................................... 48
Recommendations of the Boards of Directors ....................................... 50
Opinions of Financial Advisors ................................................... 53
Regulatory Approvals ............................................................... 61
NYSE Listing ..................................................................... 62
Limitations on Resale of IHS Common Stock by Affiliates ........................... 62
Additional Interests of Certain Persons in the Merger .............................. 63
Accounting Treatment ............................................................... 65
Certain Federal Income Tax Consequences .......................................... 65
No Appraisal Rights ............................................................... 66
RoTech Debentures .................................................................. 66
THE MERGER AGREEMENT ............................................................... 67
The Merger ........................................................................ 67
Effective Time and Effects of the Merger .......................................... 67
Conversion of RoTech Shares ...................................................... 67
No Fractional Shares of IHS Common Stock .......................................... 67
Exchange of Share Certificates ................................................... 68
Treatment of RoTech Stock Options ................................................... 69
Representations and Warranties ................................................... 70
Conditions to the Merger ......................................................... 70
i
PAGE
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Conduct of RoTech Business Pending the Merger; Other Covenants .................. 71
No Solicitation .................................................................. 73
Termination ..................................................................... 73
Expenses and Termination Fees ................................................... 74
Waiver and Amendment ............................................................ 75
Indemnification; Insurance ...................................................... 75
UNAUDITED PRO FORMA FINANCIAL INFORMATION .......................................... 76
Pro Forma Financial Information for the Combined Company ........................... 76
Pro Forma Financial Information for the Combined Company and Other Acquisitions and 82
Divestitures
Pro Forma Financial Information for RoTech ....................................... 90
BUSINESS OF IHS ..................................................................... 96
General Overview .................................................................. 96
Industry Background ............................................................... 97
Company Strategy .................................................................. 99
Patient Services .................................................................. 101
Management and Other Services ................................................... 104
Quality Assurance ............................................................... 104
Operations ........................................................................ 105
Joint Ventures .................................................................. 105
Sources of Revenue ............................................................... 105
Government Regulation ............................................................ 107
Federal and State Assistance Programs ............................................. 109
Competition ..................................................................... 111
Employees ........................................................................ 112
Insurance ........................................................................ 112
Legal Proceedings .................................................................. 112
BUSINESS OF ROTECH .................................................................. 113
General ........................................................................... 113
Operating and Expansion Strategy ................................................... 113
Sales and Marketing ............................................................... 113
Reimbursement for Services ......................................................... 114
Products and Services ............................................................ 114
Government Regulation ............................................................ 116
Competition ........................................................................ 118
Insurance ........................................................................ 118
Legal Proceedings .................................................................. 119
DESCRIPTION OF IHS CAPITAL STOCK ................................................... 120
Authorized Capital Stock ......................................................... 120
IHS Common Stock .................................................................. 120
IHS Preferred Stock ............................................................... 120
Options, Warrants and Convertible Debentures ....................................... 120
Certain Provisions of IHS' By-Laws and the DGCL ................................. 121
IHS Stockholders' Rights Plan ................................................... 121
Limitations on Liability of Officers and Directors .............................. 124
Transfer Agent and Registrar ...................................................... 124
COMPARISON OF RIGHTS OF IHS AND ROTECH STOCKHOLDERS ................................. 124
Classes and Series of Capital Stock ............................................. 124
Size and Election of the Board of Directors ....................................... 125
Amendment or Repeal of the Certificate of Incorporation and By-Laws ............... 125
Special Meetings of Stockholders ................................................ 126
Advance Notice Provisions for Stockholder Proposals and Stockholder Nominations of 126
Directors
Indemnification of Directors and Officers ....................................... 127
DESCRIPTION OF CERTAIN IHS INDEBTEDNESS ............................................. 129
New Credit Facility ............................................................... 129
5 3/4% Convertible Senior Subordinated Debentures due 2001 ........................ 130
6% Convertible Subordinated Debentures due 2003 ................................. 130
9 1/4% Senior Subordinated Notes due 2008 .......................................... 130
9 1/2% Senior Subordinated Notes due 2007 .......................................... 131
10 1/4% Senior Subordinated Notes due 2006 ....................................... 131
10 3/4% Senior Subordinated Notes due 2004 ....................................... 132
9 5/8% Senior Subordinated Notes due 2002, Series A .............................. 132
Certain Other Obligations ......................................................... 132
EXPERTS ........................................................................... 133
LEGAL MATTERS ..................................................................... 134
ADDITIONAL INFORMATION ............................................................ 134
Stockholder Proposals ............................................................ 134
Other Business .................................................................. 134
APPENDICES:
A. Agreement and Plan of Merger, dated as of July 6, 1997 ........................... A-1
B. Opinion of Donaldson, Lufkin & Jenrette Securities Corporation .................. B-1
C. Opinion of Smith Barney Inc. ................................................... C-1
ii
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE
OFFERING OF SHARES OF IHS COMMON STOCK MADE HEREBY AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY IHS, ROTECH OR ANY OTHER PERSON. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY
PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR
ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF IHS OR
ROTECH SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
AVAILABLE INFORMATION
Each of IHS and RoTech 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 each of IHS and RoTech with the
Commission can be inspected and copied at the public reference facilities
maintained by 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 IHS may be
inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005,
and reports, proxy materials and other information concerning RoTech may be
inspected at the reading room of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006. Additionally, the Commission
maintains a Web site on the Internet that contains reports, proxy and
information statements and other information regarding registrants, including
IHS and RoTech, that file electronically with the Commission and that is located
at http://www.sec.gov.
IHS has filed with the Commission a Registration Statement on Form S-4
(together with any amendments thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), which includes the
joint proxy statement of IHS and RoTech with respect to the Special Meetings and
the Merger and the prospectus of IHS with respect to the shares of IHS Common
Stock issuable in the Merger. This Joint Proxy Statement/Prospectus does not
contain all the information set forth in the Registration Statement, certain
portions of which are omitted in accordance with the rules and regulations of
the Commission and to which portions reference is made hereby for further
information with respect to IHS, RoTech, the Merger, the securities offered
hereby and related matters. Statements contained in this Joint Proxy
Statement/Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission, reference is made to the
exhibit or other filing for a more complete description of the matter involved,
and each such statement shall be deemed qualified in its entirety by such
reference. Copies of the Registration Statement together with exhibits may be
inspected at the office of the Commission in Washington, D.C., 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 Joint Proxy Statement/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, RoTech and the combined company that are based on
the beliefs of the managements of IHS or RoTech, as applicable, as well as
assump-
2
tions made by and information currently available to the managements of IHS and
RoTech, as applicable. When used in this Joint Proxy Statement/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 or RoTech, as applicable, 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. Neither IHS nor RoTech undertakes any
obligation to publicly release any revisions to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
INCORPORATION OF CERTAIN INFORMATION 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 Joint Proxy Statement/Prospectus:
1. Annual Report on Form 10-K for the year ended December 31, 1996
(which incorporates by reference certain information from IHS' Proxy
Statement relating to its 1997 Annual Meeting of Stockholders);
2. Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1997;
3. Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1997;
4. Current Report on Form 8-K dated October 17, 1996 reporting the
acquisition of First American Health Care of Georgia, Inc., as
amended by Form 8-K/A filed November 26, 1996 and Amendment No. 1 to
Form 8-K/A filed July 11, 1997;
5. Current Report on Form 8-K dated October 19, 1996 reporting the
execution of the Agreement and Plan of Merger among IHS, IHS
Acquisition XIX, Inc. and Coram Healthcare Corporation (the "Coram
Merger Agreement"), as amended by Form 8-K/A filed April 11, 1997,
reporting the termination of the Coram Merger Agreement;
6. Current Report on Form 8-K dated May 23, 1997 reporting IHS'
agreement to issue privately an aggregate of $450 million principal
amount of its 9 1/2% Senior Subordinated Notes due 2007;
7. Current Report on Form 8-K dated May 30, 1997 reporting (i) IHS'
issuance of an aggregate of $450 million principal amount of its 9
1/2% Senior Subordinated Notes due 2007 and (ii) IHS' acceptance for
payment of an aggregate of $114,975,000 principal amount of its 9
5/8% Senior Subordinated Notes due 2002, Series A and an aggregate of
$99,893,000 principal amount of its 10 3/4% Senior Subordinated Notes
due 2004 pursuant to cash tender offers;
8. Current Report on Form 8-K dated July 6, 1997 reporting the execution
of the Merger Agreement;
9. Current Report on Form 8-K dated September 9, 1997 reporting IHS'
agreement to issue privately an aggregate of $500 million principal
amount of its 9 1/4% Senior Subordinated Notes due 2008;
10. Current Report on Form 8-K dated September 15, 1997 reporting IHS'
$1.75 billion revolving credit and term loan facility;
11. The description of the IHS Common Stock contained in Item 1 of IHS'
Registration Statement on Form 8-A dated September 1, 1993; and
12. The description of IHS' Preferred Stock Purchase Rights contained in
Item 1 of IHS' Registration Statement on Form 8-A dated September 28,
1995.
3
The information in the following documents filed by RoTech with the
Commission (File No. 0-14003) pursuant to the Exchange Act is incorporated by
reference in this Joint Proxy Statement/Prospectus:
1. Annual Report on Form 10-K for the fiscal year ended July 31, 1996,
as amended by Form 10-K/A filed November 8, 1996 (which incorporates
by reference certain information from RoTech's Proxy Statement
relating to its 1996 Annual Meeting of Stockholders);
2. Quarterly Report on Form 10-Q for the fiscal quarter ended October
31, 1996;
3. Quarterly Report on Form 10-Q for the fiscal quarter ended January
31, 1997;
4. Quarterly Report on Form 10-Q for the fiscal quarter ended April 30,
1997;
5. Current Report on Form 8-K dated May 28, 1997 reporting the
settlement with the U.S. Attorney for the Middle District of Florida
in a civil action relating to Medicare claims the United States
Government believes it erroneously paid between 1987 and 1989;
6. Current Report on Form 8-K dated July 6, 1997 reporting the execution
of the Merger Agreement; and
7. Current Report on Form 8-K dated September 17, 1997 reporting
earnings for the fourth quarter and year ended July 31, 1997.
All documents filed by IHS and RoTech pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this Joint Proxy
Statement/Prospectus and prior to the date of its respective Special Meeting
shall be deemed to be incorporated by reference in this Joint Proxy
Statement/Prospectus and to be a part hereof from the respective dates 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 Joint Proxy
Statement/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 Joint Proxy Statement/Prospectus.
The information relating to IHS and RoTech contained in this Joint Proxy
Statement/Prospectus should be read together with the information in the
documents incorporated by reference.
THIS JOINT PROXY STATEMENT/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,
INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS JOINT PROXY STATEMENT/PROSPECTUS
IS DELIVERED, UPON WRITTEN OR ORAL REQUEST. REQUESTS FOR SUCH DOCUMENTS SHOULD
BE DIRECTED, IN THE CASE OF IHS DOCUMENTS, TO INTEGRATED HEALTH SERVICES, INC.,
10065 RED RUN BOULEVARD, OWINGS MILLS, MARYLAND 21117, ATTENTION: MARC B.
LEVIN, TELEPHONE: (410) 998-8400, AND, IN THE CASE OF ROTECH DOCUMENTS, TO
ROTECH MEDICAL CORPORATION, 4506 L.B. MCLEOD ROAD, SUITE F, ORLANDO, FLORIDA
32811, ATTENTION: REBECCA R. IRISH, TELEPHONE: (407) 841-2115. IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS PRIOR TO THE SPECIAL MEETINGS, ANY SUCH
REQUESTS SHOULD BE MADE BY OCTOBER 14, 1997.
4
SUMMARY OF JOINT PROXY STATEMENT/PROSPECTUS
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement/Prospectus. Certain capitalized terms used in this
Summary are defined elsewhere in this Joint Proxy Statement/Prospectus. This
Summary is not, and is not intended to be, complete by itself. Reference is made
to, and this Summary is qualified in its entirety by, the more detailed
information contained in this Joint Proxy Statement/Prospectus, the Appendices
hereto and the documents and information referred to or incorporated by
reference herein. Stockholders of IHS and RoTech are urged to review carefully
all of the information contained in this Joint Proxy Statement/Prospectus, the
Merger Agreement and the other Appendices hereto.
THE COMPANIES
INTEGRATED HEALTH SERVICES, INC.
Integrated Health Services, Inc. ("IHS") is one of the nation's leading
providers of post-acute healthcare services. Post-acute care is the provision of
a continuum of care to patients following discharge from an acute care hospital.
IHS' post-acute care services include subacute care, home care, skilled nursing
facility care and inpatient and outpatient rehabilitation, hospice and
diagnostic services. IHS' 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. IHS believes that its post-acute care network can be extended beyond
post-acute care to also provide "pre-acute" care, i.e., services to patients
which reduce the likelihood of a need for a hospital stay. IHS' post-acute care
network currently consists of approximately 1,050 service locations in 45
states.
IHS' 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) expanding the range of home
healthcare and related services it offers to patients directly in order to
provide patients with a continuum of care throughout their recovery, to better
control costs and to meet the growing desire by payors for one-stop shopping;
(ii) developing market concentration for its post-acute care services in
targeted states due to increasing payor consolidation and the increased
preference of payors, physicians and patients for dealing with only one service
provider; and (iii) developing subacute care units. Given the increasing
importance of managed care in the healthcare marketplace and the continued cost
containment pressures from Medicare, Medicaid and private payors, IHS has been
restructuring its operations to enable IHS to focus on obtaining contracts with
managed care organizations and to provide capitated services. IHS' strategy is
to become a preferred or exclusive provider of post-acute care services to
managed care organizations and other payors.
In implementing its post-acute care network strategy, 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 IHS' 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, Pennsylva-
5
nia and Tennessee. See "IHS Recent Developments." IHS intends to use the home
healthcare setting and the delivery franchise of its home healthcare branch and
agency network to (i) deliver sophisticated care, such as skilled nursing care,
home infusion therapy and rehabilitation, outside the hospital or nursing home;
(ii) serve as an entry point for patients into the IHS post-acute care network;
and (iii) provide a cost-effective site for case management and patient
direction.
In order to expand further its home healthcare services, IHS in July 1997
entered into the Merger Agreement to acquire RoTech, a provider of home
healthcare products and services, with an emphasis on home respiratory, home
medical equipment and infusion therapy, principally to patients in non-urban
areas. In August 1997, IHS agreed to acquire (the "Proposed Lithotripsy
Acquisition") the lithotripsy division (the "Coram Lithotripsy Division") of
Coram Healthcare Corporation ("Coram"), which provides lithotripsy services and
equipment maintenance in 180 locations in 18 states, in order to expand the
mobile diagnostic treatment and services it offers to patients, payors and other
providers. Lithotripsy is a non-invasive technique that utilizes shock waves to
disintegrate kidney stones. In August 1997, IHS also agreed to acquire Community
Care of America, Inc. ("CCA"), which develops and operates skilled nursing
facilities in medically underserved rural communities (the "Proposed 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. See "IHS Recent Developments -
Proposed Acquisitions," "The Merger" and "Business of RoTech."
IHS 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 IHS' 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, IHS' MSUs generate substantially higher net revenue
and operating profit per patient day than traditional geriatric care services.
IHS presently operates 172 geriatric care facilities (116 owned or leased
and 56 managed) and 158 MSUs located within 84 of these facilities. Specialty
medical services revenues, which include all MSU charges, all revenue from
providing rehabilitative therapies, pharmaceuticals, medical supplies and
durable medical equipment to all its patients, all revenue from its Alzheimer's
programs and all revenue from its provision of pharmacy, rehabilitation therapy,
home healthcare, hospice care and similar services to third-parties, constituted
approximately 57%, 65% and 70% of net revenues during the years ended December
31, 1994, 1995 and 1996, respectively. 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, 1996, approximately 17% of IHS'
revenues were derived from home health and hospice care, approximately 53% were
derived from subacute and other ancillary services, approximately 27% were
derived from traditional basic nursing services, and approximately 3% were
derived from management and other services. On a pro forma basis after giving
effect to the Merger and the acquisition of First American, for the year ended
December 31, 1996, approximately 44% of IHS' revenues were derived from home
health and hospice care, approximately 36% were derived from subacute and other
ancillary services, approximately 18% were derived from traditional basic
nursing home services and the remaining approximately 2% were derived from
management and other services.
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 term "IHS" includes Integrated Health
Services, Inc. and its subsidiaries.
6
ROTECH MEDICAL CORPORATION
RoTech Medical Corporation provides comprehensive home healthcare,
principally to patients in non-urban areas. RoTech currently operates 631
locations in 36 states. RoTech's home healthcare business provides a diversified
range of products and services, with an emphasis on home respiratory, home
medical equipment and infusion therapy. RoTech has pursued an aggressive
acquisition strategy since 1988, which included in the year ended July 31, 1997
acquisitions of 174 locations of smaller home healthcare companies and the
opening of 49 new locations. RoTech plans to continue to enter new home
healthcare markets through acquisitions or start-ups as competitive and pricing
pressures encourage consolidation and economies of scale.
Recent data suggests that there is a shortage of healthcare services in
non-urban markets. According to the United States Census Bureau, in 1990
non-urban areas of the United States accounted for roughly 25% of the national
population, or approximately 62 million people. However, according to the
American Medical Association, just 11% of physicians, or approximately 75,000
physicians, practice in non-metropolitan markets. This data indicates that
non-urban markets are underserved, and suggests that there may be opportunities
for improvement in access to primary care physicians, as well as specialty
services. RoTech believes that these needs result in significant opportunities
for companies such as RoTech, which can attract, retain and network physicians
in non-urban settings while offering ancillary services such as home healthcare,
to become a full-service non-institutional based primary healthcare provider.
RoTech was founded in 1981 to provide home respiratory and home medical
equipment products and services to patients in Florida. With its founders' roots
in pharmacy and pharmaceutical sales, RoTech's marketing directive has always
been to provide information to primary care physicians regarding the utilization
of home healthcare techniques, products and services for their patient base.
Providing information to these physicians as to disease management leads to
earlier identification and treatment of patients, enhancing the patient's
quality of life and longevity. RoTech has not targeted specialists, as their
patients are more acute and since specialists have historically been tied to
hospital systems, which results in higher hospitalization rates. RoTech's
marketing is directed at identifying patients of primary care physicians prior
to hospitalization and prior to an acuity level that would require utilizing a
specialist.
RoTech's strategy is to develop integrated healthcare delivery systems
through the acquisition of smaller local home healthcare companies in non-urban
areas. RoTech targets non-urban markets of smaller cities and rural areas, due
to the dominance of primary care physicians in these markets, reduced
competition and a tendency to care for patients in the home setting. RoTech
believes that acquisitions of home healthcare companies will continue to expand
the base of relationships with primary care physicians in these markets. Primary
care physicians in these markets typically have long-standing relationships with
loyal patient bases. These physicians are usually solo practitioners and are the
key decision makers in the treatment of their patients. RoTech believes that
making home healthcare products and services available to these physicians will
result in better, less expensive healthcare that provides an improved quality of
life for the patients and their caregivers in these communities.
RoTech was incorporated on September 1, 1981 as a Florida corporation.
RoTech's principal executive offices are located at 4506 L.B. McLeod Road, Suite
F, Orlando, Florida 32811 and its telephone number is (407) 841-2115. Unless the
context indicates otherwise, the term "RoTech" includes RoTech Medical
Corporation and its subsidiaries.
IHS ACQUISITION XXIV, INC.
Merger Sub, which was incorporated under the laws of Florida on July 1,
1997, is a direct, wholly-owned subsidiary of IHS and has not engaged in any
business activity unrelated to the Merger. The principal executive offices of
Merger Sub are located at 10065 Red Run Boulevard, Owings Mills, Maryland 21117
and its telephone number is (410) 998-8400.
7
THE MERGER
TERMS OF THE MERGER
The Merger Agreement provides that, subject to the requisite approval of
the stockholders of IHS and RoTech and the satisfaction or waiver (where
permissible) of certain other conditions, at the Effective Time (as hereinafter
defined) of the Merger, Merger Sub will be merged with and into RoTech, the
separate corporate existence of Merger Sub will cease, and RoTech as the
surviving corporation will become a wholly-owned subsidiary of IHS. At the time
the Merger is consummated (the "Effective Time"), each share of RoTech Common
Stock (other than shares held by RoTech or IHS or their subsidiaries, which will
be canceled) will be converted into the right to receive .5806 shares of IHS
Common Stock with cash paid in lieu of fractional shares. In addition, the
outstanding and unexercised options to acquire RoTech Common Stock and RoTech's
outstanding convertible debentures will be adjusted at the Effective Time to
permit them to remain outstanding and become exercisable for or convertible
into, as the case may be, IHS Common Stock, based on the Exchange Ratio, as more
fully described in the Merger Agreement. Each outstanding share of IHS Common
Stock will remain outstanding and unchanged following the Merger. See "The
Merger - Terms of the Merger," "- RoTech Debentures" and "The Merger Agreement."
On September 18, 1997, the last trading day prior to the date of this Joint
Proxy Statement/ Prospectus, the closing price of IHS Common Stock as reported
on the NYSE was $34.625 per share. At such price, the equivalent value of a
share of RoTech Common Stock would be $20.10, calculated based on the Exchange
Ratio (the "Equivalent Value"), and the aggregate Merger consideration would be
approximately $531,517,000 (based on 26,439,322 shares of RoTech Common Stock
outstanding on September 18, 1997, the last business day before the date of this
Joint Proxy Statement/Prospectus). The actual market price of the IHS Common
Stock may vary, which will cause a corresponding change in the Equivalent Value
and the aggregate Merger consideration. Additionally, the Equivalent Value may
differ from the actual market price of RoTech Common Stock. Each stockholder is
urged to obtain updated market information.
Consummation of the Merger is conditioned upon stockholder approval. There
is no guarantee that such stockholder approval will be obtained at the Special
Meetings. If such stockholder approval is not obtained, the Merger will not be
consummated. See "The Special Meetings." If the Merger is not consummated, IHS
will continue to pursue acquisitions to expand its home healthcare operations
and RoTech will continue its operating and acquisition strategies as a separate
home healthcare company.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
IHS. The Board of Directors of IHS (the "IHS Board") has unanimously
approved the Merger Agreement and recommends a vote FOR approval and adoption of
the Merger Agreement. The IHS Board believes the Merger Agreement is fair to and
in the best interests of the IHS stockholders.
In considering the advantages of the Merger, the IHS Board addressed the
following material considerations: the IHS Board's belief that the Merger will
enhance implementation of IHS' post-acute care network by expanding
significantly the home respiratory and infusion therapy services offered by IHS;
the strategic fit between IHS and RoTech, which in IHS' view offers the
opportunity for synergies through, among other things, potential joint-marketing
opportunities and the strength and expertise of the combined management of IHS
and RoTech; the belief that the combined company would be better able to respond
to the changing healthcare marketplace; the financial condition, results of
operations, business and prospects of each of IHS, RoTech and the combined
company; the Merger is expected to be treated as a purchase under generally
accepted accounting principles ("GAAP") and as a tax-free reorganization under
the Internal Revenue
8
Code of 1986, as amended (the "Code"); the opinion of the management of IHS that
the issuance of IHS Common Stock in the Merger is not believed to be dilutive to
earnings; the deleveraging effect of the Merger on IHS' balance sheet; and the
financial analyses performed by Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") in connection with its determination as to the fairness of
the Exchange Ratio, from a financial point of view, to the holders of IHS Common
Stock. In considering the disadvantages of the Merger, the IHS Board addressed
the following material factors: the risk that IHS would not be able to
successfully integrate the business of RoTech with that of IHS and thus not
realize the expected synergies, including the fact that an unsuccessful
integration would interrupt its normal business processes; the proposed
reductions in Medicare reimbursement for oxygen used in home respiratory
therapy; and the fact that IHS will be required to offer to repurchase an
aggregate of $110 million principal amount of RoTech's outstanding convertible
debentures immediately following the Merger. See "The Merger - Recommendations
of the Boards of Directors - IHS."
In considering the recommendation of the IHS Board with respect to the
Merger Agreement and the transactions contemplated thereby, IHS stockholders
should carefully consider the matters set forth under "Risk Factors."
RoTech. The Board of Directors of RoTech (the "RoTech Board") has
unanimously approved the Merger Agreement and recommends a vote FOR approval and
adoption of the Merger Agreement. The RoTech Board believes the Merger Agreement
is fair to and in the best interests of the stockholders of RoTech.
In considering the Merger, the RoTech Board addressed, among others, the
following considerations: the terms of the Merger Agreement, including, without
limitation, the fixed Exchange Ratio; the oral opinion of Smith Barney Inc.
("Smith Barney") to the effect that, as of the date of such opinion and based
upon and subject to certain matters set forth in such opinion, the Exchange
Ratio was fair to holders of RoTech Common Stock from a financial point of view;
the RoTech Board's review of the financial condition, results of operations,
cash flows and business of RoTech and IHS; the opportunity to participate in the
consolidation of the healthcare industry with a strong partner in a compatible
sector of the market, subacute care; the opportunity to preserve RoTech's
strength and continuity of key personnel in local markets in which RoTech
dominates or is a strong participant; continuing pressure from Medicare and
Medicaid payment arrangements, due to federal and state budget pressures subject
to political control; the compatibility of key management principles within IHS
and RoTech; the developed operating systems within IHS that would aid the
operations of RoTech in increasing efficiencies and maintaining compliance with
increasing regulatory oversight; the management strengths of IHS; that a
combination of IHS and RoTech would be far better positioned to consolidate and
expand a viable home health delivery system and to negotiate with healthcare
payors for proper compensation for such delivery; the support of the Merger by
all top management of RoTech; the attractiveness of allowing RoTech's
stockholders to become stockholders of a larger, more diverse company; the
potential long- and short-term benefits of the Merger; the expectation that the
Merger will generally be tax-free to RoTech and its stockholders; the
expectation that shares of IHS Common Stock issued in the Merger will be freely
transferable (other than shares issued to affiliates); and the expectation that
the Merger will be accounted for as a purchase. In considering potential
disadvantages of the Merger, the RoTech Board addressed the considerations set
forth below under "Risk Factors." The RoTech Board also considered the
circumstances under which the termination provisions and the significant
termination fee contained in the Merger Agreement would be payable, as well as
RoTech's ability to solicit other potential acquirors, and the effect these
provisions might have in reducing the likelihood of engaging in a business
combination with a party other than IHS. See "The Merger Recommendations of the
Boards of Directors - RoTech" and "Risk Factors."
9
In considering the recommendation of the RoTech Board with respect to the
Merger Agreement and the transactions contemplated thereby, RoTech stockholders
should carefully consider the matters set forth under "Risk Factors" and "The
Merger - Additional Interests of Certain Persons in the Merger."
OPINIONS OF FINANCIAL ADVISORS
IHS. DLJ has acted as financial advisor to IHS in connection with the
Merger and delivered a written opinion to the IHS Board dated July 6, 1997 to
the effect that, as of the date of such opinion and based upon and subject to
the assumptions, limitations and qualifications set forth therein, the Exchange
Ratio was fair, from a financial point of view, to the holders of IHS Common
Stock. DLJ also delivered to the IHS Board its opinion dated the date of this
Joint Proxy Statement/Prospectus to substantially the same effect. The full text
of the written opinion of DLJ dated the date of this Joint Proxy
Statement/Prospectus, which sets forth the assumptions made, procedures
followed, other matters considered and limits of the review undertaken, is
attached as Appendix B to this Joint Proxy Statement/Prospectus and should be
read carefully in its entirety. DLJ's opinion is directed to the IHS Board and
relates only to the fairness of the Exchange Ratio from a financial point of
view to the holders of IHS Common Stock, does not address any other aspect of
the Merger or related transactions and does not constitute a recommendation to
any IHS stockholder as to how such stockholder should vote at the IHS Special
Meeting. IHS STOCKHOLDERS ARE URGED TO READ SUCH OPINION CAREFULLY IN ITS
ENTIRETY. See "The Merger - Opinions of Financial Advisors - IHS."
In the ordinary course of business, DLJ and its affiliates may actively
trade or hold the securities of IHS and RoTech for their own account or for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities. DLJ in the past has provided certain investment
banking services to IHS unrelated to the proposed Merger, including acting as
co-manager for certain of IHS' private debt offerings and the initial public
offering of IHS' assisted living services subsidiary.
RoTech. Smith Barney has acted as financial advisor to RoTech in connection
with the Merger and has delivered to the RoTech Board a written opinion dated
July 6, 1997 to the effect that, as of the date of such opinion and based upon
and subject to certain matters stated therein, the Exchange Ratio was fair, from
a financial point of view, to the holders of RoTech Common Stock. The full text
of the written opinion of Smith Barney dated July 6, 1997, which sets forth the
assumptions made, matters considered and limitations on the review undertaken,
is attached as Appendix C to this Joint Proxy Statement/Prospectus and should be
read carefully in its entirety. The opinion of Smith Barney is directed to the
RoTech Board and relates only to the fairness of the Exchange Ratio from a
financial point of view, does not address any other aspect of the Merger or
related transactions and does not constitute a recommendation to any stockholder
as to how such stockholder should vote at the RoTech Special Meeting. HOLDERS OF
ROTECH COMMON STOCK ARE URGED TO READ SUCH OPINION CAREFULLY IN ITS ENTIRETY.
See "The Merger - Opinions of Financial Advisors - RoTech."
In the ordinary course of business, Smith Barney and its affiliates may
actively trade or hold the securities of IHS and RoTech for their own accounts
or for the accounts of their customers, and, accordingly, may at any time hold a
long or short position in such securities. Smith Barney has in the past provided
certain investment banking services to RoTech, including acting as lead manager
for certain of RoTech's equity public offerings and a convertible debt private
offering. Smith Barney has in the past also provided certain investment banking
services to IHS, including acting as lead manager for IHS' equity and debt
public and private offerings and the initial public offering of IHS' assisted
living services subsidiary, and as financial advisor to IHS in connection with
certain acquisitions and divestitures.
10
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of the Articles of Merger
by RoTech under the Business Corporation Act of the State of Florida (the
"FBCA"), or at such later time as may be specified in such Articles of Merger.
The Merger Agreement requires that this filing be made, subject to satisfaction
of the separate conditions to the obligations of each party to consummate the
Merger, as soon as practicable on or after the date of the Special Meetings, or
at such other time as may be agreed by IHS and RoTech. It is presently
anticipated that such filing will be made as soon as practicable after the
Special Meetings on October 21, 1997 (the date of such filing being hereinafter
referred to as the "Closing Date"), and that the Effective Time will occur upon
such filing, although there can be no assurance as to whether or when the Merger
will occur. See "The Merger Agreement - Effective Time and Effects of the
Merger."
EXCHANGE OF SHARE CERTIFICATES
AS SOON AS REASONABLY PRACTICABLE ON OR AFTER THE EFFECTIVE TIME,
TRANSMITTAL MATERIALS WILL be provided to each holder of record of shares of
RoTech Common Stock by a bank, trust company or similar entity chosen by IHS to
act as exchange agent (the "Exchange Agent") for use in exchanging such holder's
stock certificates for certificates evidencing shares of IHS Common Stock and
for receiving cash in lieu of fractional shares and any dividends or other
distributions to which such holder is entitled as a result of the Merger. ROTECH
STOCKHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES UNTIL THEY RECEIVE THE
LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT. See "The Merger Agreement -
Exchange of Share Certificates."
CONDITIONS TO THE MERGER
The obligation of each of IHS, Merger Sub and RoTech to consummate the
Merger is subject to certain conditions typical in transactions of this type,
including obtaining the requisite stockholder approvals; obtaining requisite
regulatory approvals from certain governmental authorities; the absence of legal
restraints or prohibitions preventing the consummation of the Merger; the
effectiveness of the Registration Statement of which this Joint Proxy
Statement/Prospectus is a part; approval for listing on the NYSE of the shares
of IHS Common Stock to be issued pursuant to the Merger; the representations and
warranties of the other party contained in the Merger Agreement being materially
true; the performance by the other party of all material obligations contained
in the Merger Agreement; the receipt of opinions of counsel in respect of
certain federal income tax consequences of the Merger; the opinions of DLJ and
Smith Barney not having been adversely modified or withdrawn as of the date of
mailing of this Joint Proxy Statement/Prospectus; Mr. William P. Kennedy,
RoTech's Chairman of the Board and Chief Executive Officer, and Ms. Rebecca R.
Irish, RoTech's Chief Financial Officer, having entered into severance and
non-competition agreements with RoTech; Mr. Stephen P. Griggs, RoTech's
President and Chief Operating Officer, having entered into an employment
agreement with RoTech; and the receipt of "cold comfort" letters from IHS' and
RoTech's independent auditors. See "The Merger Agreement Conditions to the
Merger."
REPRESENTATIONS, WARRANTIES AND COVENANTS
Under the Merger Agreement, IHS, Merger Sub and RoTech have each made a
number of representations regarding the organization and capital structures of
the respective companies and their affiliates, their operations, financial
condition and other matters, including their authority to enter into the Merger
Agreement and to consummate the Merger. The Merger Agreement provides that,
until the Effective Time, except as otherwise provided in the Merger Agreement,
11
RoTech will conduct its business in the ordinary course and will use its
reasonable best efforts to preserve intact its present business organization and
preserve its goodwill with customers, suppliers and others having business
dealings with RoTech. See "The Merger Agreement - Representations and
Warranties" and "- Conduct of RoTech Business Pending the Merger; Other
Covenants."
NO SOLICITATION
RoTech has agreed, subject to certain exceptions, that prior to the
Effective Time of the Merger or earlier termination of the Merger Agreement, it
will not, directly or indirectly, solicit, initiate, endorse or enter into any
agreement with respect to, or take any other action specifically to facilitate,
any inquiries or the making of any proposal or offer for any tender or exchange
offer, proposal for a merger, share exchange or other business combination or
similar transaction involving RoTech or any of its subsidiaries. See "The Merger
Agreement - No Solicitation."
REGULATORY APPROVALS
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), provides that certain business mergers (including the Merger) may
not be consummated until certain information has been furnished to the Antitrust
Division of the United States Department of Justice (the "DOJ") and the United
States Federal Trade Commission (the "FTC"), and certain waiting period
requirements (including any extensions thereof) have been satisfied. IHS and
RoTech filed the required information with the DOJ and the FTC on August 13,
1997, and on September 12, 1997 the waiting period under the HSR Act expired.
Notwithstanding the expiration of the waiting period of the HSR Act, the FTC and
DOJ or others could take action under the antitrust laws, including seeking to
enjoin the consummation of the Merger or, after the Effective Time, seeking the
divestiture by IHS of all or any part of the assets of RoTech acquired in the
Merger. There can be no assurance that a challenge to the Merger on antitrust
grounds will not be made or, if such a challenge were made, that it would not be
successful. IHS and RoTech will also be required to file other applications and
notices with certain federal and state regulatory agencies, including without
limitation the United States Drug Enforcement Agency, in connection with the
transactions contemplated by the Merger Agreement. See "The Merger - Regulatory
Approvals."
WAIVER AND AMENDMENT
The Merger Agreement provides that, at any time prior to the Effective
Time, the parties may, under certain circumstances, waive compliance with
covenants or conditions or amend or otherwise change the Merger Agreement,
except that, after approval by the stockholders of IHS and RoTech, no amendment
may be made that, under the FBCA, would require further stockholder approval,
without such further approval. See "The Merger Agreement - Waiver and
Amendment."
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after the requisite approval of the Merger Agreement by
the stockholders of IHS and RoTech under certain circumstances which are set
forth under "The Merger Agreement - Termination."
If the Merger Agreement is terminated (i) by RoTech because the RoTech
Board approves, recommends or endorses a RoTech Competing Transaction (as
hereinafter defined), or (ii) by IHS because (a) the RoTech Board recommends to
the RoTech stockholders a RoTech Competing
12
Transaction or RoTech enters into an agreement with respect to a RoTech
Competing Transaction or (b) a tender offer or exchange offer for 20% or more of
the outstanding capital stock of RoTech is commenced and the RoTech Board
recommends, within the time period specified under Rule 14e-2 under the Exchange
Act, that RoTech's stockholders tender their shares, then RoTech will be
obligated to reimburse all reasonable expenses incurred by IHS in connection
with the Merger Agreement and to pay to IHS a termination fee in the amount of
$25.0 million ($15.0 million in the event of a termination pursuant to clause
(ii)(b) above if the tender or exchange offer is for at least 20% but less than
50% of the outstanding shares of capital stock of RoTech) (the "RoTech
Termination Fee"). If the RoTech Termination Fee is paid, it will be IHS' sole
and exclusive remedy against RoTech under the Merger Agreement. Alternatively,
if the Merger Agreement is terminated (i) by RoTech because the RoTech Board
determines, in the exercise of its fiduciary duty under applicable law, not to
recommend the Merger, or shall have withdrawn such recommendation or (ii) by IHS
because the RoTech Board fails to make or withdraws its recommendation of the
Merger (unless as a result of the withdrawal by Smith Barney of its opinion for
reasons other than a RoTech Competing Transaction), then RoTech will be
obligated to pay to IHS a fee in the amount of $5.0 million. A "RoTech Competing
Transaction," which is defined under "The Merger Agreement - No Solicitation,"
generally refers to a transaction in which a third party proposes to acquire all
or a substantial portion of the outstanding stock or assets of RoTech, as well
as any tender offer or exchange offer for more than 20% of the outstanding
shares of RoTech or any person or group acquiring beneficial ownership of 15% or
more of RoTech's outstanding shares. Additionally, under the Merger Agreement,
RoTech will not, except to fulfill its fiduciary duties or as otherwise
specifically allowed by the Merger Agreement, directly or indirectly participate
in or initiate discussions or negotiations with any third party concerning any
merger, sale of assets or similar transaction. See "The Merger Agreement - No
Solicitation."
If the Merger Agreement is terminated (i) by IHS because the IHS Board
determines, in the exercise of its fiduciary duty under applicable law, not to
recommend the Merger, or shall have withdrawn such recommendation, or (ii) by
RoTech because the IHS Board fails to make or withdraws its recommendation of
the Merger, then IHS will be obligated to pay to RoTech a fee in the amount of
$10.0 million (the "IHS Termination Fee"). If the IHS Termination Fee is paid,
it will be RoTech's sole and exclusive remedy against IHS under the Merger
Agreement.
ADDITIONAL INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the RoTech Board with respect to the
Merger Agreement and the transactions contemplated thereby, RoTech stockholders
should be aware that certain members of the RoTech Board and management of
RoTech have certain interests in the Merger that are in addition to the
interests of RoTech stockholders generally. Certain of these persons may have
participated in the negotiation and consideration of the Merger Agreement as
well as certain of the arrangements described below. These interests include,
but are not limited to, the fact that (i) as a condition to closing, Mr. Stephen
P. Griggs, RoTech's President and Chief Operating Officer, will enter into a
five-year employment agreement and a related agreement with RoTech and IHS
providing for, among other things, (a) Mr. Griggs' serving as President of
RoTech at a base salary of $500,000 per annum, (b) his receipt of a $500,000
bonus in each year in which RoTech's net income contribution to IHS equals or
exceeds specified targets, with an additional bonus determined by IHS to be paid
if the net income contribution target is exceeded, (c) a one-time cash sign-on
bonus of $3.5 million, payable at the closing of the Merger (the "Closing"), (d)
the issuance to Mr. Griggs of warrants to purchase 750,000 shares of IHS Common
Stock, at a per share exercise price equal to the average closing sale price of
the IHS Common Stock on the NYSE for the 15 business days prior to the Closing
Date, such warrants to vest at a rate of 20% per year beginning on the first
anniversary of the Closing Date (subject to acceleration upon Mr. Griggs' death
or the occurrence of a change in control of IHS) and (e) the payment by RoTech
to Mr. Griggs of the amount of any excise tax payable by him under Section 4999
of the Code or
13
comparable state or local tax provisions (the "Excise Tax Provisions") as a
result of any payments to him pursuant to his employment agreement or in
connection with the Merger, as well as the income tax and excise tax on such
additional compensation such that, after the payment of income and excise taxes,
Mr. Griggs is in the same economic position in which he would have been if the
Excise Tax Provisions had not been applicable; (ii) Mr. William P. Kennedy,
RoTech's Chairman and Chief Executive Officer, will enter into a severance and
non-competition agreement and a related agreement with RoTech providing for,
among other things, (a) his resignation as an officer and director of RoTech,
(b) his serving as a consultant to RoTech for three years for a consulting fee
of $1.0 million, payable in one lump sum at the Closing, (c) his agreeing not to
compete with IHS or RoTech for 15 years in consideration of a non-compete
payment of $4.0 million, payable in one lump sum at the Closing, although
beginning five years after the Closing Mr. Kennedy can provide consulting
services to competing businesses and (d) the payment by RoTech to Mr. Kennedy of
the amount of any excise tax payable by him under the Excise Tax Provisions as a
result of any payments to him pursuant to his severance and non-competition
agreement or in connection with the Merger, as well as the income tax and excise
tax on such additional compensation such that, after the payment of income and
excise taxes, Mr. Kennedy is in the same economic position in which he would
have been if the Excise Tax Provisions had not been applicable; (iii) IHS has
reached an agreement in principle to purchase, for $4.0 million, a 30% interest
in a newly-formed limited partnership controlled by Mr. Kennedy, which limited
partnership will enter into a marketing arrangement for pharmaceutical products
produced by Nephron Pharmaceuticals Corporation, a corporation wholly-owned by
Mr. Kennedy, all on terms to be mutually agreed upon; (iv) Ms. Rebecca R. Irish,
RoTech's Chief Financial Officer, will enter into a severance and
non-competition agreement and a related agreement with RoTech providing for,
among other things, (a) her resignation as an officer of RoTech, (b) her serving
as a consultant to RoTech for two years for a consulting fee of $250,000,
payable in one lump sum at the Closing, (c) her agreeing not to compete with IHS
or RoTech for 15 years in consideration of a non-compete payment of $1.0
million, payable in one lump sum at the Closing, although beginning five years
after the Closing Ms. Irish can provide services to competing businesses as a
consultant, employee or otherwise and (d) the payment by RoTech to Ms. Irish of
the amount of any excise tax payable by her under the Excise Tax Provisions as a
result of any payments to her pursuant to her severance and non-competition
agreement or in connection with the Merger, as well as the income tax and excise
tax on such additional compensation such that, after the payment of income and
excise taxes, Ms. Irish is in the same economic position in which she would have
been if the Excise Tax Provisions had not been applicable; (v) each of the
executive officers of RoTech, other than William P. Kennedy, RoTech's Chairman
and Chief Executive Officer, and William A. Walker II, Secretary and a director
of RoTech, currently holds RoTech Options (as defined below), which will be
converted into IHS Exchange Options (as defined below) in the Merger based on
the Exchange Ratio; (vi) each of the non-employee directors of RoTech holds
rights to receive shares of RoTech Common Stock, which rights will become
immediately vested as a result of the Merger; and (vii) IHS and Merger Sub have
agreed, from and after the Effective Time, to continue to advance legal fees and
expenses and to indemnify present and former officers and directors of RoTech,
as provided in RoTech's Articles of Incorporation and By-laws as now in effect,
and to continue to perform under indemnification agreements currently in effect
between RoTech and certain of its officers and directors, and IHS has agreed to
maintain in effect for a period of five years after the Effective Time policies
of directors' and officers' liability insurance providing at least the same
coverage as RoTech's current policies in respect of acts, omissions or matters
occurring prior to the Effective Time, subject to certain limitations (provided,
however, that the foregoing does not obligate IHS to provide any greater
officers' and directors' liability insurance than that generally provided to
IHS' officers and directors). The RoTech Board was aware of these arrangements
and that such arrangements may give these individuals interests in the Merger
that are in addition to the interests of stockholders generally and determined
that such additional interests did not alter its conclusions regarding the
Merger or its recommendation to RoTech's stockholders. As of the RoTech Record
Date (as defined herein), directors and executive officers of RoTech and their
14
affiliates beneficially owned an aggregate of 2,040,073 shares of RoTech Common
Stock (excluding shares issuable upon exercise of options), representing
approximately 7.7% of the shares of RoTech Common Stock outstanding on such
date. See "The Merger - Additional Interests of Certain Persons in the Merger."
The directors and executive officers of RoTech and certain of their affiliates
have unanimously indicated their intentions to vote the shares of RoTech Common
Stock beneficially owned by them FOR the Merger.
ACCOUNTING TREATMENT
It is intended that the Merger will be accounted for as a "purchase
transaction" in accordance with GAAP. Under this method of accounting, the
Merger consideration will be allocated to RoTech's assets and liabilities based
upon their estimated fair market value at the Closing Date of the Merger. The
excess, if any, of purchase price over the fair values of the net assets
acquired will be recorded as intangible assets and amortized over a 15 to 40
year estimated life for accounting purposes. Assuming a price per share of IHS
Common Stock on the Closing Date of the Merger of $34.625 (the closing price of
IHS Common Stock on September 18, 1997 (the last trading day prior to the date
of this Joint Proxy Statement/Prospectus)) and based on the approximately
24,177,000 shares of RoTech Common Stock outstanding on April 30, 1997, IHS will
recognize intangible assets of approximately $544.2 million (substantially all
of which will be goodwill), which will result in annual amortization expense of
approximately $13.8 million. The actual amount of intangible assets will be
based upon the closing price of the IHS Common Stock on the day the Merger is
consummated and the number of shares of IHS Common Stock issued in the Merger.
At September 18, 1997 (the last business day prior to the date of this Joint
Proxy Statement/Prospectus), 26,439,322 shares of RoTech Common Stock were
outstanding. In addition, RoTech's operating results will be included in IHS'
consolidated operating results from and after the Closing Date of the Merger.
See "The Merger - Accounting Treatment" and "Unaudited Pro Forma Financial
Information."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Each of IHS and RoTech has received an opinion of its counsel, subject to
the assumptions contained therein, to the effect that the Merger will qualify as
a reorganization pursuant to Section 368(a) of the Code. If, as anticipated, the
Merger qualifies as such a reorganization, no gain or loss will be recognized by
a RoTech stockholder upon the exchange of the shares of RoTech Common Stock for
shares of IHS Common Stock pursuant to the Merger, except on the receipt of cash
in lieu of a fractional share interest in IHS Common Stock. EACH HOLDER OF
ROTECH COMMON STOCK IS URGED TO CONSULT HIS OR HER OWN PERSONAL TAX AND
FINANCIAL ADVISORS CONCERNING THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER,
AS WELL AS ANY APPLICABLE STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES, BASED
UPON SUCH HOLDER'S OWN PARTICULAR FACTS AND CIRCUMSTANCES. See "The Merger -
Certain Federal Income Tax Consequences."
NO APPRAISAL RIGHTS
Under the General Corporation Law of the State of Delaware (the "DGCL"), no
holders of IHS Common Stock will be entitled to appraisal rights in connection
with the Merger. Under the FBCA, no holders of RoTech Common Stock will be
entitled to appraisal rights in connection with the Merger.
LIMITATIONS ON RESALE OF IHS COMMON STOCK BY AFFILIATES
All shares of IHS Common Stock received by RoTech stockholders in the
Merger will be freely transferable, except that shares of IHS Common Stock
received by persons who are deemed to be "affiliates" (as such term is used in
Rule 145 under the Securities Act) will be subject to the
15
restrictions imposed by such rule. In accordance with Rule 145, an affiliate of
RoTech or IHS receiving IHS Common Stock issued in the Merger may not sell such
shares except pursuant to the volume and manner of sale limitations and other
requirements specified therein or pursuant to an effective registration
statement under the Securities Act. See "The Merger - Limitations on Resale of
IHS Common Stock by Affiliates."
NYSE LISTING
It is a condition to the obligation of IHS and RoTech to consummate the
Merger that the shares of IHS Common Stock to be received by RoTech stockholders
pursuant to the Merger be approved for listing on the NYSE, upon official notice
of issuance, at the Effective Time. A Subsequent Listing Application will be
filed with the NYSE to list the shares of IHS Common Stock to be issued to the
RoTech stockholders. Although no assurance can be given that the NYSE will
accept such shares of IHS Common Stock for listing, IHS anticipates that these
shares will qualify for listing. See "The Merger - NYSE Listing."
COMPARISON OF RIGHTS OF IHS AND ROTECH STOCKHOLDERS
IHS is incorporated under the laws of the State of Delaware and RoTech is
incorporated under the laws of the State of Florida. The holders of shares of
RoTech Common Stock, whose rights as stockholders are currently governed by
Florida law, RoTech's Articles of Incorporation, as amended, and RoTech's
By-laws, will, upon the exchange of their shares pursuant to the Merger, become
holders of shares of IHS Common Stock, and their rights as such will be governed
by Delaware law, IHS' Third Restated Certificate of Incorporation, as amended,
and IHS' By-laws. The material differences between the rights of holders of
shares of RoTech Common Stock and the rights of holders of shares of IHS Common
Stock result from differences in the corporate law of the States of Delaware and
Florida and in the governing corporate documents of IHS and RoTech and include:
differences in their classes and series of capital stock, in the size of their
boards of directors, in the manner of amendment or repeal of their Certificate
or Articles of Incorporation and By-laws, in the manner of calling special
meetings of stockholders, in their advance notice provisions for stockholder
proposals and stockholder nominations of directors, and in their provisions for
indemnification of directors and officers. A more complete summary of these
material differences is set forth under "Comparison of Rights of IHS and RoTech
Stockholders."
RISK FACTORS
Certain factors to be considered in connection with an investment in IHS
Common Stock and approval of the Merger are set forth under "Risk Factors."
These risk factors include risks associated with the Merger and IHS' growth
strategy in general, and risks associated with the businesses of IHS and RoTech,
including: IHS' level of indebtedness; IHS' managed care strategy; IHS' ability
to integrate First American, RoTech and other recent acquisitions into its
existing operations; the historical financial performance of First American;
capital requirements; the possible adverse effect of healthcare reform; reliance
on reimbursement by third party payors; uncertainty of government regulation;
competition; effect of certain anti-takeover provisions; possible volatility of
IHS' stock price; risk of a fixed Exchange Ratio; dilution of voting power to
IHS stockholders; benefits of the Merger to certain officers, directors and
affiliates of RoTech; and federal income tax consequences. For a complete
discussion of the risk factors, see "Risk Factors."
THE SPECIAL MEETINGS
IHS SPECIAL MEETING
Date, Time and Place. The IHS Special Meeting to consider and vote on the
Merger Agreement will be held on Tuesday, October 21, 1997 at 10:00 a.m., local
time, at the executive offices of IHS, 10065 Red Run Boulevard, Owings Mills,
Maryland.
16
Record Date; Quorum. Only holders of record of IHS Common Stock at the
close of business on September 1, 1997 (the "IHS Record Date") will be entitled
to notice of and to vote at the IHS Special Meeting. As of the IHS Record Date,
there were outstanding and entitled to vote 25,657,612 shares of IHS Common
Stock. The presence, in person or by proxy, of the holders of a majority of the
issued and outstanding shares of IHS Common Stock will constitute a quorum at
the Special Meeting. Abstentions and broker non-votes will be included in
determining whether a quorum is present. In the event that a quorum is not
present at the IHS Special Meeting, it is expected that such meeting will be
adjourned or postponed to solicit additional proxies.
Required Vote. Each issued and outstanding share of IHS Common Stock is
entitled to one vote on each matter to be presented at the IHS Special Meeting.
Although IHS stockholder approval is not required under the DGCL, it is required
under the rules of the NYSE in order to maintain NYSE listing of the IHS Common
Stock. Under the NYSE rules, the affirmative vote of the holders of a majority
of the outstanding shares of IHS Common Stock present or represented at the IHS
Special Meeting and entitled to vote is required for approval and adoption of
the Merger Agreement. As a result, broker non-votes will be treated as neither a
vote "for" nor "against" the matter, although they will be counted in
determining if a quorum is present. However, abstentions are considered in
determining the number of votes required to attain a majority of the shares
present or represented at the IHS Special Meeting and entitled to vote.
Accordingly, an abstention from voting on a matter by a stockholder present in
person or represented by proxy at the IHS Special Meeting has the same legal
effect as a vote "against" the matter because it represents a share present or
represented at the IHS Special Meeting and entitled to vote, thereby increasing
the number of affirmative votes required to approve the matter under
consideration, but is not considered an affirmative vote for the matter, even
though the stockholder or interested parties analyzing the results of the voting
may interpret such a vote differently, believing that an abstention expresses
neither an affirmative nor a negative position on the Merger.
As of the IHS Record Date, directors and executive officers of IHS and
their affiliates beneficially owned an aggregate of 488,318 shares of IHS Common
Stock (excluding shares issuable upon exercise of options), representing
approximately 1.9% of the shares of IHS Common Stock outstanding on such date.
The directors and executive officers of IHS and their affiliates have
unanimously indicated their intentions to vote the shares of IHS Common Stock
beneficially owned by them FOR the Merger Agreement.
Voting and Revocation of Proxies. Shares of IHS Common Stock represented by
a proxy properly signed and received at or prior to the IHS Special Meeting,
unless subsequently revoked, will be voted in accordance with the instructions
thereon. Any proxy may be revoked by the person giving it at any time before the
proxy is voted by the filing of an instrument revoking it or a duly executed
proxy bearing a later date with the Secretary of IHS prior to the vote at the
IHS Special Meeting, or by voting in person at the IHS Special Meeting.
For additional information relating to the IHS Special Meeting, see "The
Special Meetings."
ROTECH SPECIAL MEETING
Date, Time and Place. The RoTech Special Meeting to consider and vote on
the Merger Agreement will be held on Tuesday, October 21, 1997, at 10:00 a.m.,
local time, at SunTrust Bank, 200 South Orange Avenue, Second Floor, Campus
Room, Orlando, Florida.
Record Date; Quorum. Only holders of record of RoTech Common Stock at the
close of business on September 1, 1997 (the "RoTech Record Date") will be
entitled to notice of and to vote at the RoTech Special Meeting. As of the
RoTech Record Date, there were outstanding and entitled to vote 26,439,322
shares of RoTech Common Stock. The presence, in person or by proxy, of the
holders of a majority of the issued and outstanding shares of RoTech Common
Stock will constitute a quorum at the RoTech Special Meeting. Abstentions and
broker non-votes will be
17
included in determining whether a quorum is present. In the event that a quorum
is not present at the RoTech Special Meeting, it is expected that such meeting
will be adjourned or postponed to solicit additional proxies.
Vote Required. Each issued and outstanding share of RoTech Common Stock is
entitled to one vote on each matter to be presented at the RoTech Special
Meeting. Under the FBCA, approval and adoption of the Merger Agreement by the
stockholders of RoTech requires the affirmative vote of the holders of a
majority of the issued and outstanding shares of RoTech Common Stock. As a
result, failures to vote, abstentions and broker non-votes will be the
equivalents of votes against the Merger Agreement.
As of the RoTech Record Date, directors and executive officers of RoTech
and their affiliates beneficially owned an aggregate of 2,040,703 shares of
RoTech Common Stock (excluding shares issuable upon exercise of options),
representing approximately 7.7% of RoTech Common Stock outstanding on such date.
The directors and executive officers of RoTech and their affiliates have
unanimously indicated their intentions to vote the shares of RoTech Common Stock
beneficially owned by them FOR the Merger Agreement.
Voting and Revocation of Proxies. Shares of RoTech Common Stock represented
by a proxy properly signed and received at or prior to the RoTech Special
Meeting, unless subsequently revoked, will be voted in accordance with the
instructions thereon. Any proxy may be revoked by the person giving it at any
time before the proxy is voted by the filing of an instrument revoking it or a
duly executed proxy bearing a later date with the Secretary of RoTech prior to
the vote at the RoTech Special Meeting, or by voting in person at the RoTech
Special Meeting.
For additional information relating to the RoTech Special Meeting, see
"The Special Meetings."
18
MARKET AND MARKET PRICES; DIVIDENDS
The IHS Common Stock is traded on the NYSE under the symbol "IHS" and the
RoTech Common Stock is traded on the Nasdaq National Market under the symbol
"ROTC". The following table sets forth for the periods indicated the high and
low reported sale prices for the IHS Common Stock and the RoTech Common Stock as
reported on the NYSE Composite Tape and by the Nasdaq National Market,
respectively.
IHS
COMMON STOCK
----------------------
HIGH LOW
---------- -----------
CALENDAR YEAR 1995
First Quarter ......... $42 1/2 $34 1/2
Second Quarter ......... 37 1/4 28 5/8
Third Quarter ......... 32 7/8 27 5/8
Fourth Quarter ......... 29 3/4 20 3/8
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 3/8 22
CALENDAR YEAR 1997
First Quarter ......... 32 3/8 23 3/4
Second Quarter ......... 39 26 7/8
Third Quarter (through
September 18) ...... 39 1/8 32 11/16
ROTECH
COMMON STOCK
-----------------------
HIGH LOW
----------- -----------
FISCAL YEAR 1996
First Quarter ......... $15 $10 13/16
Second Quarter ......... 15 1/4 11 3/8
Third Quarter ......... 21 7/8 15
Fourth Quarter ......... 23 1/2 14 3/4
FISCAL YEAR 1997
First Quarter ......... 18 1/2 13 5/8
Second Quarter ......... 21 3/4 15 19/32
Third Quarter ......... 20 3/8 14 1/2
Fourth Quarter ......... 20 1/16 14 7/8
FISCAL YEAR 1998
First Quarter (through
September 18) ...... 20 1/8 18
In 1994, 1995 and 1996, IHS declared a cash dividend of $0.02 per share;
prior to 1994, IHS had never declared or paid any cash dividends on the IHS
Common Stock. The payment of any future dividends will be at the discretion of
the IHS Board and will depend upon, among other things, future earnings,
operations, capital requirements, the general financial condition of IHS,
contractual restrictions and general business conditions. IHS' revolving credit
facility prohibits the payment of dividends without the consent of the lenders,
and the indentures under which IHS' 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 payment of dividends unless certain financial
tests are met.
Since its formation RoTech has not paid any cash dividends on the RoTech
Common Stock.
The following table sets forth the closing price per share of RoTech Common
Stock, the closing price per share of IHS Common Stock and the "equivalent per
share price" (as defined herein) of RoTech Common Stock as of July 3, 1997, the
last trading day before RoTech and IHS announced execution of the Merger
Agreement and September 18, 1997, the last trading day prior to the date of this
Joint Proxy Statement/Prospectus. The "equivalent per share price" of RoTech
Common Stock as of such date equals the closing price per share of IHS Common
Stock on such date multiplied by .5806, which is the number of shares of IHS
Common Stock to be issued in exchange for each share of RoTech Common Stock
pursuant to the Merger Agreement.
ROTECH IHS EQUIVALENT
DATE COMMON STOCK COMMON STOCK PER SHARE
- -------------------------- -------------- -------------- -----------
July 3, 1997 ............ $18.875 $38.9375 $22.61
September 18, 1997 ...... $19.8125 $34.625 $20.10
STOCKHOLDERS ARE ADVISED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE IHS
COMMON STOCK AND THE ROTECH COMMON STOCK. No assurance can be given as to the
market price of the IHS Common Stock or the RoTech Common Stock at the Effective
Time or at any other time.
19
Because the Exchange Ratio of IHS Common Stock for RoTech Common Stock is
fixed at .5806 and will not increase or decrease due to fluctuations in the
market price of either stock, RoTech stockholders will not be compensated for
decreases in the market price of IHS Common Stock which could occur before the
Effective Time. As a result, in the event the market price of IHS Common Stock
decreases, the value of the IHS Common Stock to be received in the Merger in
exchange for RoTech Common Stock would decrease. In the event the market price
of IHS Common Stock instead increases, the value of the IHS Common Stock to be
received in the Merger in exchange for RoTech Common Stock would increase. See
"Risk Factors - Possible Volatility of Stock Price; Fixed Exchange Ratio" and
"The Merger - Terms of the Merger."
Following the Merger, RoTech Common Stock will no longer be traded on the
Nasdaq National Market.
20
COMPARATIVE PER SHARE INFORMATION
The following summary presents selected comparative per share information
for (i) IHS on a historical basis in comparison with pro forma information
giving effect to the Merger as if it had occurred on January 1, 1996 and (ii)
RoTech on a historical basis in comparison with pro forma equivalent information
after giving effect to the Merger, assuming that .5806 of a share of IHS Common
Stock is issued in exchange for each share of RoTech Common Stock in the Merger.
The historical and pro forma financial information should be read in conjunction
with the historical consolidated financial statements of IHS and RoTech and the
related notes thereto and with the unaudited pro forma financial information and
the related notes thereto appearing elsewhere or incorporated by reference in
this Joint Proxy Statement/Prospectus. See "Selected Historical Financial
Information of IHS," "- Selected Historical Financial Information of RoTech,"
"Unaudited Pro Forma Financial Information" and "Incorporation of Certain
Information by Reference."
The following information is not necessarily indicative of the combined
results of operations or combined financial position that would have resulted
had the Merger been consummated at the beginning of the periods indicated, nor
is it necessarily indicative of the combined results of operations in future
periods or future combined stockholders' equity.
STOCKHOLDERS'
PER COMMON AND EQUITY
COMMON EQUIVALENT (BOOK VALUE)
------------------ ------------------
1996(1) 1997(2) 1996(3) 1997(4)
--------- --------- -------- ---------
EARNINGS BEFORE EXTRAORDINARY ITEM PER
SHARE (FULLY-DILUTED)(5)(6):
IHS
Historical ........................... $ 1.82 $ 0.92 $ 22.64 $ 22.90
Pro forma combined .................. 1.66 0.90 26.98 26.97
RoTech
Historical ........................... 0.96 0.56 8.11 8.46
Pro forma equivalent(7) ............ 0.96 0.52 15.66 15.66
CASH DIVIDENDS PER SHARE:
IHS
Historical ........................... 0.02 -
Pro forma combined .................. 0.02 -
RoTech
Historical ........................... - -
Pro forma equivalent(7) ............ 0.01 -
- ----------
(1) Represents for IHS the year ended December 31, 1996 and for RoTech the 12
months ended January 31, 1997. RoTech's fiscal year-end is July 31 of each
year. The RoTech financial data for the 12 months ended January 31, 1997 and
the six months ended April 30, 1997 both include RoTech's results of
operations for the three months ended January 31, 1997.
(2) Represents for IHS the six months ended June 30, 1997 and for RoTech the six
months ended April 30, 1997. The RoTech financial data for the 12 months
ended January 31, 1997 and the six months ended April 30, 1997 both include
RoTech's results of operations for the three months ended January 31, 1997.
(3) Represents for IHS as of December 31, 1996 and for RoTech as of January 31,
1997.
(4) Represents for IHS as of June 30, 1997 and for RoTech as of April 30, 1997.
(5) In each of the year ended December 31, 1996 and the six months ended June
30, 1997, IHS recorded a loss on extinguishment of debt, which loss is
presented as an extraordinary item in IHS' statement of operations. See "-
Selected Historical Financial Information - Selected Historical Financial
Information of IHS."
(6) Fully-diluted earnings per share is computed based on the weighted average
number of common and common equivalent shares outstanding during the periods
assuming the dilution resulting from the issuance of outstanding options and
warrants at the end-of-period price per share, rather than the weighted
average price for the period, and the issuance of common stock upon the
assumed conversion of outstanding convertible subordinated debentures. An
adjustment for interest expense and amortization of underwriting costs
related to such debentures is added, net of tax, to earnings for the purpose
of calculating fully-diluted earnings per share.
(7) RoTech pro forma equivalent per common share data is calculated by
multiplying the pro forma IHS amounts by the fixed Exchange Ratio of .5806.
21
SELECTED HISTORICAL FINANCIAL INFORMATION
The following tables summarize certain selected consolidated financial data
of (i) IHS for each of the years in the five-year period ended December 31, 1996
and the six months ended June 30, 1996 and 1997 and (ii) RoTech for each of the
years in the five-year period ended July 31, 1996 and the nine months ended
April 30, 1996 and 1997. The selected historical financial information of IHS
and RoTech have been derived from, and should be read in conjunction with, the
historical consolidated financial statements of IHS or RoTech, as the case may
be, including the notes thereto, incorporated by reference herein. The results
of IHS as of and for the six months ended June 30, 1997 and the results of
RoTech as of and for the nine months ended April 30, 1997 are not necessarily
indicative of the results to be achieved by IHS and RoTech, respectively, for
the full fiscal year.
SELECTED HISTORICAL FINANCIAL INFORMATION OF IHS
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------- -------------- -------------- -------------- --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA(1)(2):
Net Revenues:
Basic medical services .................. $ 100,799 $ 113,508 $ 269,817 $ 368,569 $ 389,773
Specialty medical services ............... 88,065 162,017 404,401 770,554 999,209
Management services and other ............ 13,232 20,779 37,884 39,765 45,713
---------- ------------- ------------- ----------- -----------
Total .................................... 202,096 296,304 712,102 1,178,888 1,434,695
Cost and Expenses:
Operating expenses ........................ 145,623 212,936 528,131 888,551 1,093,948
Corporate administrative and general ...... 11,927 16,832 37,041 56,016 60,976
Depreciation and amortization ............ 4,334 8,126 26,367 39,961 41,681
Rent .................................... 19,509 23,156 42,158 66,125 77,785
Interest, net ........................... 1,493 5,705 20,602 38,977 64,110
Loss on impairment of long-lived assets
(3) .................................... - - - 83,321 -
Other non-recurring charges (income)(4) . - - - 49,639 (14,457)
---------- ------------- ------------- ----------- -----------
Earnings (loss) before equity in earnings
(loss) of affiliates, income taxes and
extraordinary items ..................... 19,210 29,549 57,803 (43,702) 110,652
Equity in earnings (loss) of affiliates ... (36) 1,241 1,176 1,443 828
---------- ------------- ------------- ----------- -----------
Earnings (loss) before income taxes and
extraordinary items ..................... 19,174 30,790 58,979 (42,259) 111,480
Income tax provision (benefit) ............ 7,286 12,008 22,117 (16,270) 63,715
---------- ------------- ------------- ----------- -----------
Earnings (loss) before extraordinary
items ................................. 11,888 18,782 36,862 (25,989) 47,765
Extraordinary items(5) ..................... 2,524 2,275 4,274 1,013 1,431
---------- ------------- ------------- ----------- ------------
Net earnings (loss) ..................... $ 9,364 $ 16,507 $ 32,588 $ (27,002) $ 46,334
========== ============= ============= =========== ===========
Per Common Share (fully-diluted)(6):
Earnings (loss) before extraordinary
items ................................. $ 1.01 $ 1.35 $ 1.73 $ (1.21) $ 1.82
Net earnings (loss) ..................... .80 1.22 1.57 (1.26) 1.78
========== ============= ============= =========== ===========
Weighted average number of common and
common equivalent shares outstanding(6). 1,996,815 17,261,079 27,154,153 21,463,464 31,652,620
========== ============= ============= =========== ===========
BALANCE SHEET DATA:
Cash and temporary investments ............ $ 103,858 $ 65,295 $ 63,347 $ 41,304 $ 41,072
Working capital ........................... 144,074 69,495 76,383 136,315 57,549
Total assets .............................. 313,671 776,324 1,255,989 1,433,730 1,993,107
Long-term debt, including current por-
tion(7) 142,620 402,536 551,452 770,661 1,054,747
Stockholders' equity ..................... 146,013 216,506 453,811 431,528 534,865
AS OF AND FOR THE
SIX MONTHS
ENDED JUNE 30,
----------------------------
1996 1997
-------------- -------------
STATEMENT OF OPERATIONS DATA(1)(2):
Net Revenues:
Basic medical services .................. $ 195,279 $ 176,810
Specialty medical services ............... 446,393 722,802
Management services and other ............ 21,381 19,304
------------- -------------
Total .................................... 663,053 918,916
Cost and Expenses:
Operating expenses ........................ 504,169 691,148
Corporate administrative and general ...... 29,947 36,151
Depreciation and amortization ............ 16,779 30,844
Rent .................................... 35,535 49,795
Interest, net ........................... 30,102 44,645
Loss on impairment of long-lived assets
(3) .................................... - -
Other non-recurring charges (income)(4) . - 20,047
------------- -------------
Earnings (loss) before equity in earnings
(loss) of affiliates, income taxes and
extraordinary items ..................... 46,521 46,286
Equity in earnings (loss) of affiliates ... 760 98
------------- -------------
Earnings (loss) before income taxes and
extraordinary items ..................... 47,281 46,384
Income tax provision (benefit) ............ 18,203 18,090
------------- -------------
Earnings (loss) before extraordinary
items ................................. 29,078 28,294
Extraordinary items(5) ..................... 1,431 18,168
------------- -------------
Net earnings (loss) ..................... $ 27,647 $ 10,126
============= =============
Per Common Share (fully-diluted)(6):
Earnings (loss) before extraordinary
items ................................. $ 1.10 $ 0.92
Net earnings (loss) ..................... 1.05 0.41
============= =============
Weighted average number of common and
common equivalent shares outstanding(6). 31,028,123 36,232,591
============= =============
BALANCE SHEET DATA:
Cash and temporary investments ............ $ 45,472
Working capital ........................... 159,042
Total assets .............................. 2,142,647
Long-term debt, including current por-
tion(7) 1,218,248
Stockholders' equity ..................... 581,319
- ---------
(1) IHS 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 (the "Pharmacy
22
Sale"), a majority interest in its assisted living services subsidiary
("ILC") in October 1996 (the "ILC Offering") and the remaining interest in
ILC in July 1997 (together with the ILC Offering, the "ILC Sale"). See
"Unaudited Pro Forma Financial Information."
(2) In 1995, IHS merged with IntegraCare, Inc. ("IntegraCare") in a transaction
accounted for as a pooling of interests. Accordingly, IHS' historical
financial statements for all periods prior to the effective date of the
IntegraCare merger have been restated to include the results of IntegraCare.
(3) In December 1995, IHS elected early implementation of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of, resulting in a non-cash charge of $83,321,000.
(4) In 1995, consists of (i) expenses of $1,939,000 related to the merger with
IntegraCare, (ii) a $21,915,000 loss on the write-off of accrued management
fees ($8,496,000), loans ($11,097,000) and contract acquisition costs
($2,322,000) related to IHS' termination of its agreement, entered into in
January 1994, to manage 23 long-term care and psychiatric facilities owned
by Crestwood Hospital and (iii) the write-off of $25,785,000 of deferred
pre-opening costs resulting from a change in accounting estimate regarding
the future benefit of deferred pre-opening costs. In 1996, consists
primarily of (i) a gain of $34,298,000 from the Pharmacy Sale, (ii) a loss
of $8,497,000 from its sale of shares in the ILC Offering, (iii) a
$7,825,000 loss on write-off of accrued management fees and loans resulting
from IHS' termination of its 10-year agreement, entered into in September
1994, to manage six geriatric care facilities owned by All Seasons and (iv)
a $3,519,000 exit cost resulting from the closure of redundant home
healthcare agencies. Because IHS' investment in the Capstone Pharmacy
Services, Inc. ("Capstone") common stock received in the Pharmacy Sale had a
very small tax basis, the taxable gain on the sale significantly exceeded
the gain for financial reporting purposes, thereby resulting in a
disproportionately higher income tax provision related to the sale. In 1997,
consists primarily of (i) a gain of $7,578,000 realized on the shares of
Capstone common stock received in the Pharmacy Sale, (ii) the write-off of
$6,553,000 of accounting, legal and other costs resulting from the proposed
transaction to acquire (the "Coram Merger Transaction") Coram Healthcare
Corporation ("Coram") and (iii) the payment to Coram of $21,000,000 in
connection with the termination of the proposed Coram Merger Transaction.
See "Unaudited Pro Forma Financial Information."
(5) In 1992, IHS recorded a loss on extinguishment of debt of $4,072,000
relating primarily to prepayment charges and the write-off of deferred
financing costs. Such loss, reduced by the related income tax effect of
$1,548,000, is presented for the year ended December 31, 1992 as an
extraordinary loss of $2,524,000. In 1993, IHS 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, IHS 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, IHS recorded a loss on
extinguishment of debt of $1,647,000 relating primarily to prepayment
charges and the write-off of deferred financing costs. Such loss, reduced by
the related income tax effect of $634,000, is presented for the year ended
December 31, 1995 as an extraordinary loss of $1,013,000. In 1996, IHS
recorded a loss on extinguishment of debt of $2,327,000, relating primarily
to the write-off of deferred financing costs. Such loss, reduced by the
related income tax effect of $896,000, is presented in the statement of
operations for the year ended December 31, 1996 and the six months ended
June 30, 1996 as an extraordinary loss of $1,431,000. During the six months
ended June 30, 1997, IHS recorded a loss on extinguishment of debt of
$29,784,000, representing approximately (i) $23,554,000 of cash payments for
premium and consent fees relating to the early extinguishment of
$214,868,000 aggregate principal amount of IHS' senior subordinated notes
and (ii) $6,230,000 of deferred financing costs written-off in connection
with the early extinguishment of such debt. Such loss, reduced by the
related income tax effect of $11,616,000, is presented in the statement of
operations for the six months ended June 30, 1997 as an extraordinary loss
of $18,168,000. See "IHS Recent Developments Repurchase of 9 5/8% Senior
Subordinated Notes and 10 3/4% Senior Subordinated Notes."
(6) The weighted average number of common and common equivalent shares
outstanding for the years ended December 31, 1992, 1993, 1994 and 1996 and
the six months ended June 30, 1996 and 1997 includes the assumed conversion
of IHS' convertible subordinated debentures into IHS 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 fully-diluted earnings per share. Such amounts aggregated
$183,000, $4,516,000, $10,048,000, $9,888,000, $4,944,000 and $4,904,000 for
the years ended December 31, 1992, 1993, 1994 and 1996 and the six months
ended June 30, 1996 and 1997, respectively. The weighted average number of
common and common equivalent shares outstanding for the year ended December
31, 1995 does not include the assumed conversion of IHS' convertible
subordinated debentures or the related interest expense and underwriting
costs, as such conversion would be anti-dilutive.
(7) In September 1997, IHS issued $500 million aggregate principal amount of its
9 1/4% Senior Subordinated Notes due 2008 and borrowed $750 million of term
loans under its new revolving credit and term loan facility. See "IHS Recent
Developments - New Credit Facility" and "- Sale of 9 1/4% Senior
Subordinated Notes due 2008."
23
SELECTED HISTORICAL FINANCIAL INFORMATION OF ROTECH
AS OF AND FOR THE FISCAL YEAR ENDED JULY 31,
------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------------ ------------------ ------------------ ----------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Operating revenue:
Home respiratory therapy & equip-
ment $ 15,706 (a) $ 23,857 (a) $ 41,579 (a) $ 56,533 $ 110,118
Home medical equipment & supplies (a) (a) (a) 32,305 92,062
Home infusion therapy & other phar-
macy related services 19,959 21,715 25,492 33,554 41,498
Other products & services ............... 1,457 2,811 4,399 11,719 19,352
----------- ----------- ----------- ---------- --------------
Total ................................. 37,122 48,383 71,470 134,111 263,030
Cost and expenses:
Cost of revenue ........................ 8,434 12,359 17,409 36,288 71,013
Selling, general and administrative ... 20,208 25,064 35,880 66,477 127,357
Depreciation and amortization ......... 2,486 2,801 5,338 9,565 26,520
Interest .............................. 305 76 67 835 5,228
----------- ----------- ----------- ---------- --------------
Total cost and expenses ............... 31,433 40,300 58,694 113,165 230,118
Income before income taxes ............... 5,689 8,083 12,776 20,946 32,912
Income tax expense ..................... 2,003 2,956 4,664 7,801 12,356
----------- ----------- ----------- ---------- --------------
Net income ........................... $ 3,686 $ 5,127 $ 8,112 $ 13,145 $ 20,556
=========== =========== =========== ========== ==============
Net income per share(b):
Primary ................................. $ 0.30 $ 0.38 $ 0.50 $ 0.64 $ 0.83
Fully-diluted ........................... $ 0.30 $ 0.38 $ 0.50 $ 0.63 $ 0.82
=========== =========== =========== ========== ==============
Other Data:
Weighted average shares outstanding(b):
Primary ................................. 12,350 13,384 16,294 20,684 24,657
Fully-diluted ........................... 12,350 13,384 16,294 20,984 25,206
=========== =========== =========== ========== ==============
BALANCE SHEET DATA:
Working capital (deficit) ............... $ 9,617 $ 18,203 $ 27,783 $ 41,587 $ 36,007
Total assets ........................... 25,137 40,019 94,433 175,425 374,614
Long-term debt (less current portion) ... 1,053 - - - 110,000 (d)
Shareholders' equity(b) .................. 17,518 36,197 83,320 149,659 174,675
AS OF AND FOR THE
NINE MONTHS ENDED APRIL 30,
-------------------------------
1996 1997
----------- -------------------
STATEMENT OF OPERATIONS DATA:
Operating revenue:
Home respiratory therapy & equip-
ment $ 75,108 $ 144,403
Home medical equipment & supplies . 62,297 84,027
Home infusion therapy & other phar-
macy related services 28,121 49,200
Other products & services ............... 14,040 19,944
---------- ------------
Total ................................. 179,566 297,574
Cost and expenses:
Cost of revenue ........................ 49,312 77,091
Selling, general and administrative ... 86,602 145,710
Depreciation and amortization ......... 17,502 30,344
Interest .............................. 3,098 9,214
---------- ------------
Total cost and expenses ............... 156,514 262,359
Income before income taxes ............... 23,052 35,215
Income tax expense ..................... 8,356 13,322
---------- ------------
Net income ........................... $ 14,696 $ 21,893
========== ============
Net income per share(b):
Primary ................................. $ 0.60 $ 0.84
Fully-diluted ........................... $ 0.60 $ 0.81 (d)
========== ============
Other Data:
Weighted average shares outstanding(b):
Primary ................................. 24,354 26,186
Fully-diluted ........................... 24,680 30,729 (d)
========== ============
BALANCE SHEET DATA:
Working capital (deficit) ............... $ (37,195)(c)
Total assets ........................... 518,567
Long-term debt (less current portion) ... 110,000 (d)
Shareholders' equity(b) .................. 201,214
- ---------
RoTech has acquired various businesses in the five years shown above. Results of
these acquisitions' operations are included from the respective dates acquired.
(a) A breakout of home respiratory therapy and equipment revenues and home
medical equipment and supplies was not available for the years ended July
31, 1992, 1993 and 1994. All revenue related to these two product lines has
been presented as "home respiratory therapy and equipment" for the years
indicated.
(b) On May 21, 1996, RoTech distributed a 100% common stock dividend to
shareholders of record as of April 30, 1996 to effect a 2-for-1 stock split.
Shareholders' equity has been restated to give retroactive recognition to
the stock split for all periods. In addition, per share amounts and weighted
average shares outstanding have been restated to give retroactive effect to
the split.
(c) Notes payable to banks of $162 million are classified as short-term
liabilities, causing the working capital deficit at April 30, 1997.
(d) Represents 5 1/4% convertible subordinated debentures due 2003 and the
related dilutive effect for the nine months ended April 30, 1997.
24
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma summary financial information gives
effect to the Merger using the purchase method of accounting (including the
effect of the refinancing of certain RoTech indebtedness in connection with the
Merger), assuming a price per share of IHS Common Stock of $34.625 (the closing
price of IHS Common Stock on September 18, 1997 (the last trading day prior to
the date of this Joint Proxy Statement/Prospectus)) and based on the
approximately 24,177,000 shares of RoTech Common Stock outstanding on April 30,
1997. The following unaudited pro forma summary financial information does not
give pro forma effect to (i) the other acquisitions and divestitures consummated
by IHS and RoTech during 1996 and 1997, (ii) the Proposed Lithotripsy
Acquisition, (iii) the Proposed CCA Acquisition (together with the Proposed
Lithotripsy Acquisition, the "Proposed Acquisitions"), (iv) IHS' issuance of
$500 million aggregate principal amount of 9 1/4% Senior Subordinated Notes due
2008 (the "9 1/4% Senior Notes") in September 1997 and (v) IHS' borrowing of
$750 million of term loans under its new $1.75 billion revolving credit and term
loan facility (the "New Credit Facility") in September 1997. See "Unaudited Pro
Forma Financial Information - Pro Forma Financial Information for the Combined
Company and Other Acquisitions and Divestitures" for information showing the pro
forma effect on the combined company of certain other acquisitions and
divestitures consummated by IHS in 1996 and 1997 and "Unaudited Pro Forma
Financial Information - Pro Forma Financial Information for RoTech" for
information showing the pro forma effect on RoTech of certain acquisitions
consummated by RoTech in the fiscal year ended July 31, 1997. The unaudited pro
forma summary financial information provided below is not necessarily indicative
of the results of operations or the financial position which would have been
attained had the Merger been consummated as of the indicated dates or which may
be attained in the future. This unaudited pro forma summary financial
information should be read in conjunction with the historical financial
statements of IHS and RoTech, which are included or incorporated by reference
elsewhere in this Joint Proxy Statement/ Prospectus and the information set
forth under "Unaudited Pro Forma Financial Information" presented elsewhere in
this Joint Proxy Statement/Prospectus.
AS OF AND
FOR THE
FOR THE SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996(1) 1997(2)
-------------- ------------
(IN THOUSANDS, EXCEPT PER
SHARE
AMOUNTS)
STATEMENT OF OPERATIONS DATA:(3)
Net revenues:
Basic medical services ....................................... $ 389,773 $ 176,810
Specialty medical services .................................... 1,343,799 930,068
Management services and other ................................. 45,713 19,304
---------- -----------
Total ...................................................... 1,779,285 1,126,182
---------- -----------
Cost and expenses:
Operating expenses .......................................... 1,352,839 845,333
Corporate administrative and general ........................ 60,976 36,151
Depreciation and amortization ................................. 79,716 51,494
Rent ......................................................... 77,785 49,795
Interest, net ................................................ 75,420 52,988
Other non-recurring charges (income)(4) ..................... (14,457) 20,047
---------- -----------
Earnings before equity in earnings of affiliates, income taxes
and extraordinary items .................................... 147,006 70,374
Equity in earnings of affiliates .............................. 828 98
---------- -----------
Earnings before income taxes and extraordinary items ......... 147,834 70,472
Income tax provision .......................................... 80,261 28,573
---------- -----------
Earnings before extraordinary items(5) ..................... $ 67,573 $ 41,899
========== ===========
Per Common Share (fully-diluted):
Earnings before extraordinary items ........................... $ 1.66 $ 0.90
========== ===========
Weighted average number of common shares outstanding ......... 46,675 51,839
========== ===========
BALANCE SHEET DATA:
Cash and temporary investments ................................. $ 54,210
Working capital(6) ............................................. 269,661
Total assets ................................................... 2,954,677
Long-term debt, including current portion(7) .................. 1,490,262
Stockholders' equity .......................................... 1,064,318
25
(1) Consists of the results of operations of IHS for the year ended December 31,
1996 and RoTech for the 12 months ended January 31, 1997. The pro forma
results of operations data for the year ended December 31, 1996 and the six
months ended June 30, 1997 both include RoTech's results of operations for
the three months ended January 31, 1997.
(2) Consists of the results of operations of IHS for the six months ended June
30, 1997 and RoTech for the six months ended April 30, 1997, and balance
sheet data of IHS as of June 30, 1997 and RoTech as of April 30, 1997. The
pro forma results of operations data for the year ended December 31, 1996
and the six months ended June 30, 1997 both include RoTech's results of
operations for the three months ended January 31, 1997.
(3) Certain amounts have been reclassified to conform the presentation of IHS
and RoTech.
(4) In 1996, consists primarily of (i) a gain of $34,298,000 from the Pharmacy
Sale, (ii) a loss of $8,497,000 from IHS' sale of shares in the ILC
Offering, (iii) a $7,825,000 loss on write-off of accrued management fees
and loans resulting from IHS' termination of its 10-year agreement, entered
into in September 1994, to manage six geriatric care facilities owned by All
Seasons and (iv) a $3,519,000 exit cost resulting from IHS' closure of
redundant home healthcare agencies. Because IHS' investment in the Capstone
common stock received in the Pharmacy Sale had a very small tax basis, the
taxable gain on the sale significantly exceeded the gain for financial
reporting purposes, thereby resulting in a disproportionately higher income
tax provision related to the sale. In 1997, consists primarily of (i) a gain
of $7,578,000 realized on the shares of Capstone common stock received in
the Pharmacy Sale, (ii) the write-off of $6,553,000 of accounting, legal and
other costs resulting from IHS' proposed Coram Merger Transaction and (iii)
the payment to Coram of $21,000,000 in connection with the termination of
the proposed Coram Merger Transaction. See "Unaudited Pro Forma Financial
Information."
(5) In 1996, IHS recorded a loss on extinguishment of debt of $2,327,000,
relating primarily to the write-off of deferred financing costs. Such loss,
reduced by the related income tax effect of $896,000, is presented for the
year ended December 31, 1996 as an extraordinary loss of $1,431,000. During
the six months ended June 30, 1997, IHS recorded a loss on extinguishment of
debt of $29,784,000, representing approximately (i) $23,554,000 of cash
payments for premium and consent fees relating to the early extinguishment
of $214,868,000 aggregate principal amount of IHS' senior subordinated notes
and (ii) $6,230,000 of deferred financing costs written-off in connection
with the early extinguishment of such debt. Such loss, reduced by the
related income tax effect of $11,616,000, is presented in the statement of
operations for the six months ended June 30, 1997 as an extraordinary loss
of $18,168,000. See "IHS Recent Developments - Repurchase of 9 5/8% Senior
Subordinated Notes and 10 3/4% Senior Subordinated Notes."
(6) Borrowings under RoTech's revolving credit facility are classified on
RoTech's balance sheet as current liabilities. Amounts outstanding under the
RoTech facility will be refinanced in connection with the Merger with
borrowings under IHS' New Credit Facility, which borrowings are classified
as long-term debt. See "IHS Recent Developments - New Credit Facility."
(7) In September 1997, IHS issued $500 million aggregate principal amount of its
9 1/4% Senior Notes and borrowed $750 million of term loans under the New
Credit Facility. See "IHS Recent Developments - New Credit Facility" and "-
Sale of 9 1/4% Senior Subordinated Notes due 2008."
26
RISK FACTORS
In addition to the other information in this Joint Proxy
Statement/Prospectus, the following factors should be considered carefully by
RoTech and IHS stockholders in evaluating the Merger and determining whether or
not to vote in favor of the approval and adoption of the Merger Agreement. This
Joint Proxy Statement/Prospectus contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
The combined 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 Joint Proxy
Statement/Prospectus.
RISKS RELATED TO SUBSTANTIAL INDEBTEDNESS
IHS' indebtedness is substantial in relation to its stockholders' equity.
At June 30, 1997, IHS' total debt, including current portion, accounted for
67.7% of its total capitalization. On a pro forma basis after giving effect to
the Merger (assuming a price per share of IHS Common Stock of $34.625 (the
closing price of IHS Common Stock on September 18, 1997 (the last trading day
prior to the date of this Joint Proxy Statement/Prospectus)) and based on
26,439,322 shares of RoTech Common Stock outstanding on September 18, 1997), the
Proposed Acquisitions, the New Credit Facility and the issuance of the 9 1/4%
Senior Notes and the use of proceeds therefrom and from the term loan portion of
the New Credit Facility to repay amounts outstanding under the prior credit
facility, to pay the cash portion of the purchase price of the Proposed
Acquisitions and to repay certain indebtedness to be assumed in the Merger and
the Proposed Acquisitions, IHS' total debt, including current portion, at June
30, 1997 accounted for 66.7% of its total pro forma capitalization. IHS also has
significant lease obligations with respect to the facilities operated pursuant
to long-term leases, which aggregated approximately $212.1 million at June 30,
1997 ($227.1 million on a pro forma basis after giving effect the Merger). For
the year ended December 31, 1996 and the six months ended June 30, 1996 and
1997, IHS' rent expense was $77.8 million ($108.9 million on a pro forma basis
after giving effect to the Merger, the acquisition of First American (the "First
American Acquisition"), the ILC Sale, the Pharmacy Sale and certain other
acquisitions consummated by IHS in 1996 and 1997), $35.5 million ($49.8 million
on a pro forma basis after giving effect to the Merger, the First American
Acquisition, the ILC Sale, the Pharmacy Sale and certain other acquisitions
consummated by IHS in 1996 and 1997) and $49.8 million ($57.8 million on a pro
forma basis after giving effect to the Merger and certain other acquisitions
consummated by IHS in 1997), respectively. See "Unaudited Pro Forma Financial
Information - Pro Forma Financial Information for the Combined Company and Other
Acquisitions and Divestitures." In addition, IHS is obligated to pay up to an
additional $155 million in respect of the acquisition of First American during
2000 to 2004 under certain circumstances. See "IHS Recent Developments - First
American Acquisition." IHS' 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 IHS is leveraged, as well as its rent expense,
could have important consequences to holders of IHS Common Stock, 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. To the extent IHS finances its activities
with additional debt, IHS may become subject to certain additional financial and
other covenants that may restrict its ability to pursue its growth strategy.
There can be no assurance that any such efforts would be successful or timely or
that the terms of any
27
such financing or refinancing would be acceptable to IHS. See "- Risks Related
to Capital Requirements" and "Description of Certain IHS Indebtedness."
In connection with IHS' offering of 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. S&P stated that IHS' speculative-grade ratings reflect IHS'
aggressive transition toward becoming a full-service alternate-site healthcare
provider, and its limited cash flow relative to its heavy debt burden. S&P noted
that IHS would be greatly challenged to control, integrate and further expand
operations that were only a quarter of their current size just three years ago,
and also noted the continuing uncertainty with regard to the adequacy of
reimbursement from government sponsored programs for the indigent and elderly.
S&P also noted that there is the potential that a large debt financed
acquisition could lead to a ratings downgrade. In connection with the offering
of the 9 1/4% Senior Notes, Moody's Investors Service ("Moody's") downgraded to
B2 IHS' other senior 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 IHS'
continued rapid growth through acquisitions, which has resulted in negative
tangible equity of $114 million, making no adjustment for the $259 million of
convertible debt outstanding. Moody's also stated that the availability provided
by the New Credit Facility and the 9 1/4% Senior Notes positioned IHS 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. IHS' planned expansion and growth require that IHS expand
its home healthcare services through the acquisition of additional home
healthcare providers and that IHS acquire, or establish relationships with,
third parties which provide post-acute care services not currently provided by
IHS, that additional MSUs be established in IHS' existing facilities and that
IHS acquire, lease or acquire the right to manage for others additional
facilities in which MSUs can be established. Such expansion and growth will
depend on IHS' ability to create demand for its post-acute care programs, the
availability of suitable acquisition, lease or management candidates and IHS'
ability to finance such acquisitions and growth. The successful implementation
of IHS' post-acute healthcare system, including the capitation of rates, will
depend on IHS' 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 IHS' operations, that MSUs can be successfully
established in acquired facilities or that IHS' post-acute healthcare system,
including the capitation of rates, can be successfully implemented. The
post-acute care market is highly competitive, and IHS faces substantial
competition from hospitals, subacute care providers, rehabilitation providers
and home healthcare providers, including competition for acquisitions. IHS
anticipates that competition for acquisition opportunities will intensify due to
the ongoing consolidation in the healthcare industry. See "- Risks Related to
Managed Care Strategy" and "- Competition."
The successful integration of acquired businesses, including First American
and, if the Merger and the Proposed Acquisitions are consummated, RoTech, the
Coram Lithotripsy Division and CCA, is important to IHS' 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 IHS in a timely manner. The integration of IHS' recent
acquisitions, including, if the Merger and the Proposed Acquisitions are
consummated, RoTech, the Coram Lithotripsy Division and CCA, 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 IHS' 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 IHS' operations
and financial results. There can be no assurance that IHS will realize any of
the anticipated
28
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 IHS'
profitability.
IHS' current and anticipated future growth has placed, and will continue to
place, significant demands on the management, operational and financial
resources of IHS. IHS' ability to manage its growth effectively will require it
to continue to improve its operational, financial and management information
systems and to continue to attract, train, motivate, manage and retain key
employees. There can be no assurance that IHS will be able to manage its
expanded operations effectively. See "- Risks Related to Capital Requirements."
There can be no assurance that IHS 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, IHS' business, financial condition and results of
operations will be materially adversely affected.
RISKS RELATED TO MANAGED CARE STRATEGY
Managed care payors and traditional indemnity insurers have experienced
pressure from their policyholders to curb or reduce the growth in premiums paid
to such organizations for healthcare services. This pressure has resulted in
demands on healthcare service providers to reduce their prices or to share in
the financial risk of providing care through alternate fee structures such as
capitation or fixed case rates. Given the increasing importance of managed care
in the healthcare marketplace and the continued cost containment pressures from
Medicare and Medicaid, IHS has been restructuring its operations to enable IHS
to focus on obtaining contracts with managed care organizations and to provide
capitated services. IHS 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
and RoTech have 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 and/or RoTech will cover
the cost of services provided. If revenue for capitated services is insufficient
to cover the treatment costs, IHS' and/or RoTech's 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 IHS', RoTech's or, if the Merger is
consummated, the combined 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 and/or RoTech require licensure as an insurance
company, there can be no assurance that IHS and/or RoTech could obtain or
maintain the necessary licensure, or that IHS and/or RoTech would be able to
meet any financial criteria imposed by a state. If IHS were precluded from
providing services under risk-sharing fee arrangements, its managed care
strategy would be adversely affected. See "- Uncertainty of Government
Regulation."
RISKS RELATED TO CAPITAL REQUIREMENTS
IHS' growth strategy requires substantial capital for the acquisition of
additional home healthcare and related service providers and geriatric care
facilities and the establishment of new, and expansion of existing, MSUs. The
effective integration, operation and expansion of the existing businesses will
also require sub-
29
stantial capital. IHS 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.
IHS' bank credit facility limits IHS' ability to make acquisitions, and certain
of the indentures under which IHS' outstanding senior subordinated debt
securities were issued limit IHS' ability to incur additional indebtedness
unless certain financial tests are met. See "- Risks Related to Substantial
Indebtedness," "Business of IHS - Company Strategy" and "Description of Certain
IHS Indebtedness."
RISKS RELATED TO THE MERGER AND RECENT ACQUISITIONS
IHS believes that the Merger represents another step in IHS' development of
a post-acute care network. In addition, IHS has recently completed several major
acquisitions, including the acquisition of First American, and is still in the
process of integrating those acquired businesses. The IHS Board and senior
management of IHS face a significant challenge in their efforts to integrate the
acquired businesses, including First American and, if the Merger and the
Proposed Acquisitions are consummated, RoTech, the Coram Lithotripsy Division
and CCA. The dedication of management resources to such integration may detract
attention from the day-to-day business of IHS. The difficulties of 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, including RoTech if the Merger is
consummated and the Coram Lithotripsy Division and CCA if the Proposed
Acquisitions are consummated, will be successful or that the anticipated
benefits of the Merger, the Proposed Acquisitions or the other recent
acquisitions will be fully realized.
IHS has recently expanded significantly its home healthcare operations.
During the year ended December 31, 1996 and the six months ended June 30, 1996
and 1997, home healthcare accounted for approximately 16.3%, 4.0% and 30.8%,
respectively, of IHS' total revenues. On a pro forma basis after giving effect
to the Merger and the First American Acquisition, home healthcare accounted for
approximately 43.9%, 38.3% and 42.2%, respectively, of IHS' total revenues, of
which approximately 64.2%, 68.8% and 56.3%, respectively, was derived from home
nursing services and approximately 28.7%, 26.1% and 33.8%, respectively, was
derived from home respiratory services. On a pro forma basis, after giving
effect to the Merger and the acquisition of First American (which derives
substantially all its revenues from Medicare), approximately 70.7%, 78.3% and
69.2% of IHS' home healthcare revenues were derived from Medicare in the year
ended December 31, 1996 and the six months ended June 30, 1996 and 1997,
respectively. Medicare has developed a national fee schedule for infusion
therapy, respiratory therapy and home medical equipment which provides
reimbursement at 80% of the amount of any fee on the schedule. The remaining 20%
is paid by other third party payors (including Medicaid in the case of
"medically indigent" patients) or patients; with respect to home nursing,
Medicare generally reimburses for the cost (including a rate of return) of
providing such services, up to a regionally adjusted allowable maximum per visit
and per discipline with no fixed limit on the number of visits. There generally
is no deductible or coinsurance. As a result, there is no reward for efficiency,
provided that costs are below the cap, and traditional home healthcare services
carry relatively low margins. However, IHS expects that Medicare will implement
a prospective payment system for home nursing services in the next several
years, and implementation of a prospective payment system will be a critical
element to the success of IHS' expansion into home nursing services. Based upon
prior legislative proposals, IHS believes that a prospective payment system
would most likely provide a healthcare provider a predetermined rate for a given
service, with providers that have costs below the predetermined rate being
entitled to keep some or all of this difference. There can be no assurance that
Medicare will implement a prospective payment system for home nursing services
in the next several years or at all. The implementation of a prospective payment
system will require IHS to make contingent payments related to the First Ameri-
30
can Acquisition of $155 million over a period of five years. In addition, the
Balanced Budget Act of 1997, enacted in August 1997, reduces the Medicare
national payment limits for oxygen and oxygen equipment used in home respiratory
therapy by 25% in 1998 and 30% (from 1997 levels) in 1999 and each subsequent
year. Approximately 22% of RoTech's total revenues for the year ended July 31,
1997 were derived from the provision of oxygen services to Medicare patients.
The inability of IHS to realize operating efficiencies and provide home
healthcare services at a cost below the established Medicare fee schedule could
have a material adverse effect on IHS' home healthcare operations and its
post-acute care network. See "- Risk of Adverse Effect of Healthcare Reform,"
"IHS Recent Developments - First American Acquisition" and "Unaudited Pro Forma
Financial Information."
IHS believes that the Proposed Acquisitions represent additional steps in
IHS' development of its post-acute care network. However, consummation of the
Proposed Acquisitions are subject to a number of conditions, some of which are
beyond IHS' control. There can be no assurance that these conditions will be
satisfied. There can also be no assurance that the Proposed Acquisitions will be
consummated on the proposed terms, on different terms or at all.
RISKS RELATED TO HISTORICAL FINANCIAL PERFORMANCE OF FIRST AMERICAN
During the year ended December 31, 1995 and the nine months ended September
30, 1996, First American recorded a net loss of $110.4 million and $36.2
million, respectively. Numerous factors have affected First American's
performance and financial condition prior to its acquisition by IHS, including,
among others, high administrative costs and the settlement of claims for
reimbursement of certain overpayments and unallowable reimbursements under
Medicare (which settlement resulted in a reduction to patient service revenues
of $54.6 million for the year ended December 31, 1995 and $10.4 million for the
nine months ended September 30, 1996). In addition, in February 1996, in
response to the stoppage by the Health Care Financing Administration ("HCFA") of
its bi-weekly periodic interim payments ("PIP") to First American, First
American was forced to declare bankruptcy. In March 1996, the bankruptcy court
ordered HCFA to resume PIP payments to First American. However, the bankruptcy
filing and operation of First American in bankruptcy until its acquisition by
IHS adversely affected the business, results of operations and financial
condition of First American. There can be no assurance that these factors or the
First American bankruptcy will not continue to have an adverse effect on First
American's and IHS' business, financial condition and results of operations in
the future. There can be no assurance that the historical losses incurred by
First American will not continue. See "IHS Recent Developments First American
Acquisition."
RELIANCE ON REIMBURSEMENT BY THIRD PARTY PAYORS
IHS and RoTech receive payment for services rendered to patients from
private insurers and patients themselves, from the Federal government under
Medicare, and from the states in which they operate 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 and RoTech, which
has adversely affected, and may continue to adversely affect, IHS' margins,
particularly in its skilled nursing and subacute facilities. Aspects of certain
healthcare reform proposals, such as cutbacks in the Medicare and Medicaid
programs, reductions in Medicare reimbursement rates and/or limitations on
reimbursement rate increases, containment of healthcare costs on an interim
basis by means that could include a short-term freeze on prices charged by
healthcare providers, and permitting greater state flexibility in the
administration of Medicaid, could adversely affect IHS and RoTech. See "- Risk
of Adverse Effect of Healthcare Reform." During the years ended December 31,
1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997, IHS derived
approximately 56%, 55%, 60%, 57% and 67%, respectively, of its patient revenues
from Medicare and Medicaid. On a pro forma basis after giving effect to the
Merger, the acquisition of First American (which derives substantially all its
revenues from Medicare) and the ILC Sale, approximately 66.5%, 67.5% and 64.7%
of IHS' patient revenues have been derived from Medicare and Medicaid during the
year ended December 31, 1996 and the six months ended June 30, 1996 and 1997,
respectively.
31
The sources and amounts of IHS' 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 IHS' patients among the private
pay, Medicare and Medicaid categories can significantly affect the profitability
of IHS' operations. IHS' cost of care for its MSU patients generally exceeds
regional reimbursement limits established under Medicare. The success of IHS'
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
IHS will be able to obtain the waivers necessary to enable IHS to recover its
excess costs. See "Business of IHS - Sources of Revenue."
Managed care organizations and other third party payors have continued to
consolidate to enhance their ability to influence the delivery of healthcare
services. Consequently, the healthcare needs of a large percentage of the United
States population are provided by a small number of managed care organizations
and third party payors. These organizations generally enter into service
agreements with a limited number of providers for needed services. To the extent
such organizations terminate IHS and/or RoTech as a preferred provider and/or
engage IHS' and/or RoTech's competitors as a preferred or exclusive provider,
the business of IHS and/or RoTech 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
IHS', RoTech's or, following the Merger, the combined 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 IHS and/or RoTech. In
addition, there have been proposals to convert the current cost reimbursement
system for home nursing services covered under Medicare to a prospective payment
system. The prospective payment system proposals generally provide for
prospectively established per visit payments to be made for all covered
services, which are then subject to an annual aggregate per episode limit at the
end of the year. Home health agencies that are able to keep their total expenses
per visit during the year below their per episode annual limits will be able to
retain a specified percentage of the difference, subject to certain aggregate
limitations. Such changes could have a material adverse effect on IHS and its
growth strategy and/or on RoTech. The implementation of a prospective payment
system will require IHS to make contingent payments related to the First
American Acquisition of $155 million over a period of five years. The inability
of IHS to provide home healthcare and/or skilled nursing services at a cost
below the established Medicare fee schedule could have a material adverse effect
on IHS' home healthcare operations, post-acute care network and business
generally. The Balanced Budget Act of 1997, enacted in August 1997, provides,
among other things, for a prospective payment system for home nursing to be
implemented for cost reporting periods beginning on or after October 1, 1999, a
reduction in current cost reimbursement for home healthcare pending
implementation of a prospective payment system, reductions (effective January 1,
1998) in Medicare reimbursement for oxygen and oxygen equipment for home
respiratory therapy and a shift of the bulk of home health coverage from Part A
to Part B of Medicare. The failure to implement a prospective payment system for
home nursing services in the next several years could adversely affect IHS'
post-acute care network strategy. IHS expects that there will continue to be
numerous initiatives on the federal and state levels for comprehensive reforms
affecting the payment for and availability of healthcare services, including
proposals that will further limit reimbursement under Medicare and Medicaid. It
is not clear at this time what proposals, if any, will be adopted or, if
adopted, what effect such proposals will have on IHS' business. See "- Risks
Related to the Merger and Recent Acquisitions," "- Reliance on Reimbursement by
Third Party Payors," and "IHS Recent Developments - First American Acquisition."
There can be no assurance that currently proposed or future healthcare
legislation or other changes in the administration or interpretation of
governmental healthcare programs will not have an adverse effect on IHS
32
and/or RoTech 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 IHS and RoTech and may similarly affect the price of the
IHS Common Stock and the RoTech Common Stock in the future. See "- Uncertainty
of Government Regulation," "Business of IHS Government Regulation" and "Business
of RoTech - Government Regulation."
UNCERTAINTY OF GOVERNMENT REGULATION
IHS, RoTech and the healthcare industry generally are subject to extensive
federal, state and local regulation governing licensure and conduct of
operations at existing facilities, construction of new facilities, acquisition
of existing facilities, additions of new services, certain capital expenditures,
the quality of services provided and the manner in which such services are
provided and reimbursement for services rendered. Changes in applicable laws and
regulations or new interpretations of existing laws and regulations could have a
material adverse effect on licensure, eligibility for participation, permissible
activities, operating costs and the levels of reimbursement from governmental
and other sources. There can be no assurance that regulatory authorities will
not adopt changes or new interpretations of existing regulations that could
adversely affect IHS and/or RoTech. The failure to maintain or renew any
required regulatory approvals or licenses could prevent IHS and/or RoTech from
offering existing services or from obtaining reimbursement. In certain
circumstances, failure to comply at one facility may affect the ability of IHS
and/or RoTech to obtain or maintain licenses or approvals under Medicare and
Medicaid programs at other facilities. In addition, in the conduct of their
business IHS' and RoTech's operations are subject to review by federal and state
regulatory agencies. In the course of these reviews, problems are from time to
time identified by these agencies. Although each of IHS and RoTech has to date
been able to resolve these problems in a manner satisfactory to the regulatory
agencies without a material adverse effect on its business, there can be no
assurance that it will be able to do so in the future.
Recently effective provisions of the regulations adopted under the Omnibus
Budget Reconciliation Act of 1987 ("OBRA") have implemented stricter guidelines
for annual state surveys of long-term care facilities and expanded remedies
available to HCFA to enforce compliance with the detailed regulations mandating
minimum healthcare standards and may significantly affect the consequences to
IHS if annual or other HCFA facility surveys identify noncompliance with these
regulations. Remedies include fines, new patient admission moratoriums, denial
of reimbursement, federal or state monitoring of operations, closure of
facilities and termination of provider reimbursement agreements. These
provisions eliminate the ability of operators to appeal the scope and severity
of any deficiencies and grant state regulators the authority to impose new
remedies, including monetary penalties, denial of payments and termination of
the right to participate in the Medicare and/or Medicaid programs. IHS 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, IHS' acquisition of poorly performing
facilities could adversely affect IHS' business to the extent remedies are
imposed at such facilities.
In September 1997, President Clinton, in an attempt to curb Medicare fraud,
imposed a moratorium on the certification under Medicare of new home healthcare
companies, which moratorium is expected to last approximately six months, and
implemented rules requiring home healthcare providers to reapply for Medicare
certification every three years. In addition, HCFA will double the number of
detailed audits of home healthcare providers it completes each year and increase
by 25% the number of home healthcare claims it reviews each year. IHS cannot
predict what effect, if any, these new rules will have on IHS' business and the
expansion of its home healthcare operations.
IHS and RoTech are 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 prod-
33
ucts and services. These laws include the federal "Stark Bills", which prohibit,
with limited exceptions, financial relationships between ancillary service
providers and referring physicians, and the federal "anti-kickback law", which
prohibits, among other things, the offer, payment, solicitation or receipt of
any form of remuneration in return for the referral of Medicare and Medicaid
patients. The Office of Inspector General of the Department of Health and Human
Services, the Department of Justice and other federal agencies interpret these
fraud and abuse provisions liberally and enforce them aggressively. Members of
Congress have proposed legislation that would significantly expand the federal
government's involvement in curtailing fraud and abuse and increase the monetary
penalties for violation of these provisions. In addition, some states restrict
certain business relationships between physicians and other providers of
healthcare services. Many states prohibit business corporations from providing,
or holding themselves out as a provider of, medical care. Possible sanctions for
violation of any of these restrictions or prohibitions include loss of licensure
or eligibility to participate in reimbursement programs (including Medicare and
Medicaid), asset forfeitures and civil and criminal penalties. These laws vary
from state to state, are often vague and have seldom been interpreted by the
courts or regulatory agencies. IHS and RoTech seek to structure their business
arrangements in compliance with these laws and, from time to time, IHS and
RoTech have 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 IHS and RoTech. See "Business of IHS
Government Regulation" and "Business of RoTech - Government Regulation."
In 1994 RoTech began to acquire primary care physician practices as part of
its strategy to develop integrated healthcare delivery systems. RoTech's
acquisitions of primary care physician practices are structured to attempt to
comply with federal and state law restrictions on business relationships between
RoTech and persons who may be in a position to refer patients to RoTech for the
provision of healthcare related items or services. Accordingly, RoTech endeavors
to undertake such acquisitions in a manner where the consideration offered and
paid is consistent with fair market value in arms-length transactions and is not
determined in a manner that takes into account the volume or value of any
referrals or business that might otherwise be generated between RoTech and the
physician whose practice is to be acquired and for which payment may be made
under Medicare or Medicaid. While RoTech believes that its acquisitions do not
entail any form of unlawful remuneration, there can be no assurance that
enforcement authorities will not attempt to construe the consideration exchanged
in certain acquisition transactions as entailing unlawful remuneration and to
challenge such transactions on such basis. In many states, the "corporate
practice of medicine doctrine" prohibits business corporations from providing,
or holding themselves out as providers of, medical care through the employment
of physicians. Although the two states in which RoTech has acquired practices of
primary care physicians, Florida and Mississippi, have not adopted this
prohibition, there can be no assurance that either state will not adopt this
doctrine in the future. Enforcement of such doctrine could require divestiture
of acquired practices or restructuring of physician relationships.
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 IHS' 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.
IHS and RoTech are 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 IHS' and/or RoTech's business, results of operations and
financial condition. See "- Risk of Adverse Effect of Healthcare Reform."
34
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. IHS and RoTech compete on a local and regional basis with other
providers on the basis of the breadth and quality of their services, the quality
of their facilities and, to a more limited extent, price. IHS also competes with
other providers in the acquisition and development of additional facilities and
service providers. IHS' 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 IHS. In addition, IHS 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 IHS.
New service introductions and enhancements, acquisitions, continued industry
consolidation and the development of strategic relationships by IHS' and
RoTech's competitors could cause a significant decline in sales or loss of
market acceptance of IHS' and RoTech's services or intense price competition or
make IHS' and/or RoTech's 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 and RoTech. There can be no assurance
that IHS and RoTech will be able to compete successfully against current or
future competitors or that competitive pressures will not have a material
adverse effect on IHS', RoTech's or, following the Merger, the combined
company's business, financial condition and results of operations. IHS and
RoTech also compete with various healthcare providers with respect to attracting
and retaining qualified management and other personnel. Any significant failure
by IHS and RoTech to attract and retain qualified employees could have a
material adverse effect on their business, results of operations and financial
condition. See "Business of IHS Competition" and "Business of RoTech -
Competition."
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
IHS' Third Restated Certificate of Incorporation and By-laws, as well as
the DGCL, contain certain provisions that could have the effect of making it
more difficult for a third party to acquire, or discouraging a third party from
attempting to acquire, control of IHS. These provisions could limit the price
that certain investors might be willing to pay in the future for shares of IHS
Common Stock. Certain of these provisions allow IHS to issue, without
stockholder approval, preferred stock having voting rights senior to those of
the IHS 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 IHS 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 IHS Capital Stock - Certain Provisions of IHS' By-Laws and the
DGCL," "- IHS Stockholders' Rights Plan" and "Comparison of Rights of IHS and
RoTech Stockholders."
POSSIBLE VOLATILITY OF STOCK PRICE; FIXED EXHANGE RATIO
There may be significant volatility in the market price for IHS 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 IHS 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 prices 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
35
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.
Because the Exchange Ratio is fixed at .5806 and will not increase or
decrease due to fluctuations in the market price of either stock, RoTech
stockholders will not be compensated for decreases in the market price of IHS
Common Stock which could occur before the Effective Time. As a result, in the
event the market price of IHS Common Stock decreases, the value of the IHS
Common Stock to be received in the Merger in exchange for RoTech Common Stock
would decrease. In the event the market price of IHS Common Stock instead
increases, the value of the IHS Common Stock to be received in the Merger in
exchange for RoTech Common Stock would increase. See "The Merger - Terms of the
Merger." Further, the market value of the IHS Common Stock issued in the Merger,
and the market value of the RoTech Common Stock surrendered in the Merger, may
vary significantly from the price as of the date of execution of the Merger
Agreement, the date of this Joint Proxy Statement/Prospectus or the date on
which stockholders vote on the Merger due to, among other things, market
perception of the benefits of the Merger, changes in the business, operations or
prospects of IHS and/or RoTech, and general market and economic conditions.
There can be no assurance that following consummation of the Merger shares of
IHS Common Stock will not trade below their historical trading price range or
the price of the IHS Common Stock at the Effective Time.
DILUTION OF VOTING POWER OF IHS STOCKHOLDERS
Consummation of the Merger will result in an approximate 60% increase in
the number of shares of IHS Common Stock outstanding. Stockholders of IHS will,
therefore, experience a dilution of their voting power. In exchange for 100% of
the outstanding RoTech Common Stock, stockholders of RoTech will receive
approximately 37% of the voting stock of IHS which will be outstanding
immediately following the Merger. Accordingly, stockholders of IHS will
experience a dilution of approximately 37% of their relative voting power after
the Merger.
BENEFITS OF THE MERGER TO CERTAIN OFFICERS, DIRECTORS AND AFFILIATES OF ROTECH
In considering the recommendation of the RoTech Board with respect to the
Merger Agreement and the transactions contemplated thereby, RoTech stockholders
should be aware that certain members of the RoTech Board, management of RoTech
and certain affiliates of RoTech have certain interests in the Merger that are
in addition to the interests of RoTech stockholders generally. Certain of these
persons may have participated in the negotiation and consideration of the Merger
Agreement as well as certain of the arrangements described below. These
interests include, but are not limited to, the fact that (i) as a condition to
closing, Mr. Stephen P. Griggs, RoTech's President and Chief Operating Officer,
will enter into a five-year employment agreement and related agreement with
RoTech providing for, among other things, (a) Mr. Griggs' serving as President
of RoTech at a base salary of $500,000 per annum, (b) his receipt of a $500,000
bonus in each year in which RoTech's net income contribution to IHS equals or
exceeds specified targets, with an additional bonus determined by IHS to be paid
if the net income contribution target is exceeded, (c) a one-time cash sign-on
bonus of $3.5 million, payable at the Closing, (d) the issuance to Mr. Griggs of
warrants to purchase 750,000 shares of IHS Common Stock, at a per share exercise
price equal to the average closing sale price of the IHS Common Stock on the
NYSE for the 15 business days prior to the Closing Date, such warrants to vest
at a rate of 20% per year beginning on the first anniversary of the Closing Date
(subject to acceleration upon Mr. Griggs' death or the occurrence of a change in
control of IHS) and (e) the payment by RoTech to Mr. Griggs of the amount of any
excise tax payable by him under the Excise Tax Provisions as a result of any
payments to him pursuant to his employment agreement or in connection with the
Merger, as well as the income tax and excise tax on such additional compensation
such that, after the payment of income and excise taxes, Mr. Griggs is in the
same economic position in which he would have been if the Excise Tax Provisions
had not been applicable; (ii) Mr. William P. Kennedy, RoTech's Chairman and
Chief Executive Officer, will enter into a severance and non-competition
agreement and related agreement with RoTech providing for, among other things,
(a) his resignation as an officer and director of RoTech, (b) his serving as a
consultant to RoTech for three years for a consulting fee of $1.0 million,
payable in one lump sum at the Closing, (c) his agreeing not to compete with IHS
or RoTech for 15
36
years in consideration of a non-compete payment of $4.0 million, payable in one
lump sum at the Closing, although beginning five years after the Closing Mr.
Kennedy can provide consulting services to competing businesses and (d) the
payment by RoTech to Mr. Kennedy of the amount of any excise tax payable by him
under the Excise Tax Provisions as a result of any payments to him pursuant to
his severance and non-competition agreement or in connection with the Merger, as
well as the income tax and excise tax on such additional compensation such that,
after the payment of income and excise taxes, Mr. Kennedy is in the same
economic position in which he would have been if the Excise Tax Provisions had
not been applicable; (iii) IHS has reached an agreement in principle to
purchase, for $4.0 million, a 30% interest in a newly-formed limited partnership
controlled by Mr. Kennedy, which limited partnership will enter into a marketing
arrangement for pharmaceutical products produced by Nephron Pharmaceuticals
Corporation, a corporation wholly-owned by Mr. Kennedy, all on terms to be
mutually agreed upon; (iv) Ms. Rebecca R. Irish, RoTech's Chief Financial
Officer, will enter into a severance and non-competition agreement and related
agreement with RoTech providing for, among other things, (a) her resignation as
an officer of RoTech, (b) her serving as a consultant to RoTech for two years
for a consulting fee of $250,000, payable in one lump sum at the Closing, (c)
her agreeing not to compete with IHS or RoTech for 15 years in consideration of
a non-compete payment of $1.0 million, payable in one lump sum at the Closing,
although beginning five years after the Closing Ms. Irish can provide services
to competing businesses as a consultant, employee or otherwise and (d) the
payment by RoTech to Ms. Irish of the amount of any excise tax payable by her
under the Excise Tax Provisions as a result of any payments to her pursuant to
her severance and non-competition agreement or in connection with the Merger, as
well as the income tax and excise tax on such additional compensation such that,
after the payment of income and excise taxes, Ms. Irish is in the same economic
position in which she would have been if the Excise Tax Provisions had not been
applicable; (v) each of the executive officers of RoTech, other than William P.
Kennedy, RoTech's Chairman and Chief Executive Officer and William A. Walker II,
Secretary and a director of RoTech, currently holds RoTech Options (as defined
below), which will be converted into IHS Exchange Options (as defined below) in
the Merger based on the Exchange Ratio; (vi) each of the non-employee directors
of RoTech holds rights to receive shares of RoTech Common Stock, which rights
will become immediately vested as a result of the Merger; and (vii) IHS and
Merger Sub have agreed, from and after the Effective Time, to continue to
advance legal fees and expenses and to indemnify present and former officers and
directors of RoTech, as provided in RoTech's Articles of Incorporation and
By-laws as now in effect, and to continue to perform under indemnification
agreements currently in effect between RoTech and certain of its officers and
directors, and IHS has agreed to maintain in effect for a period of five years
after the Effective Time policies of directors' and officers' liability
insurance providing at least the same coverage as RoTech's current policies, in
respect of acts, omissions or matters occurring prior to the Effective Time,
subject to certain limitations (provided, however, that the foregoing does not
obligate IHS to provide any greater officers' and directors' liability insurance
than that generally provided to IHS' officers and directors). As of the RoTech
Record Date, directors and executive officers of RoTech and their affiliates
beneficially owned an aggregate of 2,040,703 shares of RoTech Common Stock
(excluding shares issuable upon exercise of options), representing approximately
7.7% of the shares of RoTech Common Stock outstanding on such date. See "The
Merger Additional Interests of Certain Persons in the Merger." The directors and
executive officers of RoTech and certain of their affiliates have unanimously
indicated their intentions to vote the shares of RoTech Common Stock
beneficially owned by them FOR the Merger.
RISKS RELATED TO FEDERAL INCOME TAX CONSEQUENCES
Although each of IHS and RoTech has received an opinion of its counsel that
the Merger constitutes a tax-free reorganization under Section 368(a) of the
Code, neither IHS nor RoTech has requested or will receive an advance ruling
from the Internal Revenue Service (the "Service") as to the federal income tax
consequences of the Merger, and there can be no assurance that the Service will
not challenge the opinions of counsel. If the Merger were not to constitute a
tax-free reorganization under Section 368(a) of the Code, each holder of RoTech
Common Stock would recognize gain or loss equal to the difference between the
fair market value of the IHS Common Stock received and cash received in lieu of
fractional shares and such holder's basis in the shares of RoTech Common Stock
exchanged therefor. See "The Merger - Certain Federal Income Tax Consequences."
37
IHS RECENT DEVELOPMENTS
NEW CREDIT FACILITY
On September 15, 1997, IHS entered into a $1.75 billion revolving credit
and term loan facility with Citibank, N.A., as Administrative Agent, and certain
other lenders (the "New Credit Facility") to replace its existing $700 million
revolving credit facility. The New Credit Facility consists of a $750 million
term loan facility (the "Term Facility") and a $1 billion revolving credit
facility, including a $100 million letter of credit subfacility and a $10
million swing line subfacility (the "Revolving Facility"). The Term Facility,
all of which was borrowed on September 17, 1997, matures on December 31, 2004
and will be amortized beginning December 31, 1998 as follows: 1998 - $7.5
million; each of 1999, 2000, 2001 and 2002 - $7.5 million (payable in equal
quarterly installments); 2003 - $337.5 million (payable in equal quarterly
installments); and 2004 - $375 million (payable in equal quarterly
installments). Any unpaid balance will be due on the maturity date. The Term
Facility will bear interest at a rate equal to, at the option of IHS, either (i)
in the case of Eurodollar loans, the sum of (x) one and three-quarters percent
or two percent (depending on the ratio of IHS' Debt (as defined in the New
Credit Facility) to earnings before interest, taxes, depreciation, amortization
and rent, pro forma for any acquisitions or divestitures during the measurement
period (the "Debt/EBITDAR Ratio")) and (y) the interest rate in the London
interbank market for loans in an amount substantially equal to the amount of
borrowing and for the period of borrowing selected by IHS or (ii) the sum of (a)
the higher of (1) Citibank, N.A.'s base rate or (2) one percent plus the latest
overnight federal funds rate plus (b) a margin of one-half percent or
three-quarters of one percent (depending on the Debt/EBITDAR Ratio). The Term
Facility can be prepaid at any time in whole or in part without penalty.
The Revolving Facility will reduce to $800 million on September 30, 2001
and $500 million on September 30, 2002, with a final maturity on September 15,
2004; however, the $100 million letter of credit subfacility and $10 million
swing line subfacility will remain at $100 million and $10 million,
respectively, until final maturity. The Revolving Facility will bear interest at
a rate equal to, at the option of IHS, either (i) in the case of Eurodollar
loans, the sum of (x) between three-quarters of one percent and one and
three-quarters percent (depending on the Debt/EBITDAR Ratio) and (y) the
interest rate in the London interbank market for loans in an amount
substantially equal to the amount of borrowing and for the period of borrowing
selected by IHS or (ii) the sum of (a) the higher of (1) Citibank, N.A.'s base
rate or (2) one percent plus the latest overnight federal funds rate plus (b) a
margin of between zero percent and one-half percent (depending on the
Debt/EBITDAR Ratio). Amounts repaid under the Revolving Facility may be
reborrowed prior to the maturity date.
The New Credit Facility limits IHS' ability to incur indebtedness or
contingent obligations, to make additional acquisitions, to sell or dispose of
assets, to create or incur liens on assets, to pay dividends, to purchase or
redeem IHS' stock and to merge or consolidate with any other person. In
addition, the New Credit Facility requires that IHS meet certain financial
ratios, and provides the banks with the right to require the payment of all
amounts outstanding under the facility, and to terminate all commitments under
the facility, if there is a change in control of IHS or if any person other than
Dr. Robert N. Elkins, IHS' Chairman and Chief Executive Officer, or a group
managed by Dr. Elkins, owns more than 40% of IHS' stock. The New Credit Facility
is guaranteed by all of IHS' subsidiaries (other than inactive subsidiaries) and
secured by a pledge of all of the stock of substantially all of IHS'
subsidiaries.
The New Credit Facility replaced IHS' $700 million credit facility (the
"Prior Credit Facility"). As a result, IHS anticipates that it will record an
extraordinary loss on extinguishment of debt of approximately $2.4 million (net
of related tax benefit of approximately $1.6 million) in the third quarter of
1997 resulting from the write-off of deferred financing costs of $4.0 million
related to the Prior Credit Facility.
PROPOSED ACQUISITIONS
Proposed Lithotripsy Acquisition. On August 21, 1997, IHS, T2 Medical,
Inc., a wholly-owned subsidiary of Coram, Coram Healthcare Corporation of
Greater New York, a wholly-owned subsidiary of Coram, and Coram entered into a
purchase agreement (the "Lithotripsy Purchase Agreement") providing for the
purchase by IHS of substantially all of the assets of Coram's Lithotripsy
Division, which
38
operates 20 mobile lithotripsy units and 13 fixed-site machines in 180 locations
in 18 states. The Coram Lithotripsy Division also provides maintenance services
to its own and third-party equipment. Lithotripsy is a non-invasive technique
that utilizes shock waves to disintegrate kidney stones. The Coram Lithotripsy
Division had revenues of $49.0 million and pre-tax income (after minority
interest) of $21.8 million for the year ended December 31, 1996 and revenues of
$23.9 million and pre-tax income (after minority interest) of $11.9 million for
the six months ended June 30, 1997.
Coram's agreements with its lithotripsy partners, which IHS will assume,
contemplate that Coram will acquire the remaining interest in each partnership
at a defined price in the event that legislation is passed or regulations are
adopted or interpreted that would prevent the physician partners from owning an
interest in the partnership and using the partnership's lithotripsy equipment
for the treatment of his or her patients. Coram has represented to IHS that its
partnership arrangements with physicians in its lithotripsy business are in
compliance with current law. The sale by Coram of its interests in the
partnerships to IHS requires the consent of the partners of each partnership.
Within the last three years, HCFA released a proposed rule defining the
rate at which ambulatory surgery centers and certain hospitals would be
reimbursed for the technical component of a lithotripsy procedure. This proposed
rule has not been finalized. IHS cannot predict what the final rate for such
reimbursement will be or what effect, if any, the adoption of this proposed rule
would have on lithotripsy revenue and whether this decreased reimbursement rate
will be applied to lithotripsy procedures performed at hospitals, where a
majority of the Coram Lithotripsy Division's lithotripsy machines are currently
utilized.
The Lithotripsy Purchase Agreement provides that IHS will pay $130.0
million in cash for the Coram Lithotripsy Division, subject to reduction in the
event of adverse changes in the business of the Coram Lithotripsy Division prior
to the closing, as described in the Lithotripsy Purchase Agreement. IHS will
assume $1.0 million of intercompany debt to Coram in the transaction. The
closing of the Proposed Lithotripsy Acquisition, which is expected to occur in
the fourth quarter of 1997, is subject to customary conditions, including, among
others, receipt of required regulatory approvals and third party consents
(including the other partners in the 13 partnerships which operate a substantial
portion of the Coram Lithotripsy Division's business). The Lithotripsy Purchase
Agreement provides for the payment of break-up fees under certain circumstances.
IHS intends to use the proceeds from the sale of the 9 1/4% Senior Notes and
borrowings under the Term Facility to pay the purchase price for the Coram
Lithotripsy Division.
There can be no assurance that the Proposed Lithotripsy Acquisition will be
consummated on these terms, on different terms or at all.
Community Care of America, Inc. On August 1, 1997, IHS, IHS Acquisition
XXVI, Inc., a wholly-owned subsidiary of IHS ("CCA Merger Sub"), and CCA, a
related party company, entered into a definitive agreement and plan of merger
(the "CCA Merger Agreement") providing for (i) the commencement by CCA Merger
Sub of a cash tender offer for all the outstanding common stock of CCA at $4.00
per share and (ii) if certain conditions are met, including that there be
tendered and accepted for payment at least a majority of the outstanding common
stock of CCA on a fully-diluted basis, the merger of CCA Merger Sub with and
into CCA, with CCA becoming a wholly-owned subsidiary of IHS. CCA develops and
operates skilled nursing facilities in medically underserved rural communities.
CCA currently operates 54 licensed long-term care facilities with 4,450 licensed
beds, one rural healthcare clinic, two outpatient rehabilitation centers, one
child day care center and 115 assisted living units within six of the facilities
which CCA operates. CCA currently operates in Alabama, Colorado, Florida,
Georgia, Iowa, Kansas, Louisiana, Maine, Missouri, Nebraska, Texas and Wyoming.
According to CCA's filings with the Commission, CCA had revenues of $127.5
million and a net loss of $18.9 million for the year ended December 31, 1996 and
revenues of $65.5 million and a net loss of $2.4 million for the six months
ended June 30, 1997. IHS owns warrants to purchase approximately 13.5% of CCA's
common stock, and Dr. Robert N. Elkins, Chairman of the Board and Chief
Executive Officer of IHS, beneficially owns 21.0% of CCA's outstanding common
stock (excluding the warrants owned by IHS). In addition, IHS has guaranteed
certain obligations of CCA and made available to CCA a $10.0 million credit
facility, of which $6.9 million was outstanding at September 18, 1997. See
"Description of Certain IHS Indebtedness - Certain Other Obligations."
39
IHS will pay approximately $32.9 million for all the outstanding capital
stock of CCA, repay approximately $25.6 million of indebtedness to be assumed in
the Proposed CCA Acquisition and assume approximately $36.4 million of
indebtedness in the Proposed CCA Acquisition. In addition, on July 28, 1997, IHS
entered into a letter of intent with Health and Retirement Properties Trust
("HRPT"), CCA's principal landlord and a significant lender to CCA, relating to
an agreement-in-principle to restructure the lease and loan agreements between
CCA and HRPT if the transactions contemplated by the CCA Merger Agreement are
consummated. In April 1997 IHS had guaranteed CCA's obligations to HRPT. Under
the agreement-in-principle, (i) IHS or a nominee will purchase for $33.5 million
14 facilities, aggregating 1,238 beds, currently owned by HRPT and leased to
CCA, (ii) approximately $12.2 million principal amount of loans from HRPT to CCA
will be prepaid and the collateral security released, (iii) three facilities
mortgage financed by HRPT will be sold to HRPT and leased to IHS or a nominee,
(iv) approximately $8.8 million of mortgage indebtedness due HRPT and secured by
nine facilities owned by CCA will be assumed by IHS or a nominee, (v) leases of
16 facilities operated by CCA will be assumed by IHS or a nominee, and (vi) the
leases and mortgages being assumed will be modified to reduce future rent and
mortgage interest rate increases and release cash security deposits. IHS will
guarantee all lease and mortgage obligations to HRPT, which will receive a $3.7
million modification fee. The restructuring of CCA's lease and loan arrangements
with HRPT is subject to the completion of definitive documentation, and there
can be no assurance CCA's lease and loan arrangements with HRPT will be
restructured on these terms, on different terms or at all. IHS intends to use
the proceeds from the sale of the 9 1/4% Senior Notes and borrowings under the
Term Facility to pay the purchase price for CCA, repay certain indebtedness to
be assumed in the Proposed CCA Acquisition and to make the approximately $50.0
million of payments to HRPT.
IHS has extended the expiration date of the offer to 5:00 p.m., New York
City time, on Thursday, September 25, 1997, unless the tender offer is further
extended. The extension was made in order to receive all of the necessary
approvals under state change of ownership, healthcare licensure and certificate
of need laws and regulations and all other required consents of third parties,
including HRPT. The offer had previously been scheduled to expire at 5:00 p.m.,
New York City time, on Thursday, September 18, 1997. At September 18, 1997,
approximately 96% of CCA's outstanding common stock (representing approximately
68% of CCA's fully-diluted shares) had been validly tendered and not withdrawn
in the offer.
There can be no assurance that the Proposed CCA Acquisition will be
consummated on these terms, on different terms or at all.
FIRST AMERICAN ACQUISITION
ON OCTOBER 17, 1996, IHS ACQUIRED THROUGH MERGER FIRST AMERICAN HEALTH CARE
OF GEORGIA, INC., A provider of home health services in 21 states, principally
Alabama, California, Florida, Georgia, Michigan, Pennsylvania and Tennessee. IHS
believes the acquisition of First American is an important component in the
implementation of its post-acute care network. See "Business of IHS - Company
Strategy."
The purchase price for First American was $154.1 million in cash plus
contingent payments of up to $155 million. The contingent payments will be
payable if (i) legislation is enacted that changes the Medicare reimbursement
methodology for home health services to a prospectively determined rate
methodology, in whole or in part, or (ii) in respect of any year the percentage
increase in the seasonally unadjusted Consumer Price Index for all Urban
Consumers for the Medical Care expenditure category (the "Medical CPI") is less
than 8% or, even if the Medical CPI is greater than 8% in such year, in any
subsequent year prior to 2004 the percentage increase in the Medical CPI is less
than 8%. If payable, the contingent payments will be paid as follows: $10
million for 1999, which must be paid on or before February 14, 2000; $40 million
for 2000, which must be paid on or before February 14, 2001; $51 million for
2001, which must be paid on or before February 14, 2002; $39 million for 2002,
which must be paid on or before February 14, 2003; and $15 million for 2003,
which must be paid on or before February 14, 2004. IHS has concluded, based on
its current expectations with respect to the Medical CPI, that the contingent
payments due in 2000 and 2001 are probable of occurrence. Accordingly, IHS has
accrued on its balance sheet a long-term liability representing the present
value of the $50 million aggregate contin-
40
gent payments due in 2000 and 2001, which at June 30, 1997 aggregated $35.3
million. IHS borrowed the cash purchase price paid at the closing under its
revolving credit facility. $115 million of the $154.1 million paid at closing
was paid to HCFA, the Department of Justice and the United States Attorney for
the Southern District of Georgia in settlement of claims by the United States
government seeking repayment from First American of certain overpayments and
unallowable reimbursements under Medicare. The total settlement with the United
States government was $255 million; the remaining $140 million will be paid from
the contingent payments to the extent such payments become due. In addition,
HCFA and First American agreed to a specified bi-weekly PIP payment from August
27, 1996 through December 31, 1996, without adjustment for any liability,
overpayment or underpayment.
Substantially all of First American's revenues are derived from Medicare.
The following table summarizes certain selected financial and operating data of
First American for the three years ended December 31, 1995 and the nine months
ended September 30, 1995 and 1996. The selected historical financial information
of First American has been derived from, and should be read in conjunction with,
the historical consolidated financial statements of First American, including
the notes thereto, incorporated by reference herein. The results for the nine
months ended September 30, 1996 are not necessarily indicative of the results
achieved for the full fiscal year.
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------- ------------ ------------
($ IN THOUSANDS)
Total revenues(1) ............ $ 340,897 $ 452,163 $ 563,747 $ 439,873 $ 370,654
Total expenses ............... 356,387 496,647 673,658 515,332 402,106
Loss from operations ......... (15,490) (44,484) (109,911) (75,459) (31,452)
Net loss ..................... (15,557) (55,314) (110,376) (75,776) (36,189)
Visits to patient homes ...... 5,036,000 7,433,203 9,024,271 6,966,451 5,731,026
Number of States ............ 17 22 23 21 21
Number of service locations ... 288 379 456 426 410
Number of employees (est.) ... 9,000 12,000 16,000 15,000 13,700
(1) As a result of the settlement of the HCFA claims, First American recorded
reductions to patient service revenues of $8.7 million for the period ending
December 31, 1992, $11.4 million, $29.3 million and $54.6 million for the
years ended December 31, 1993, 1994 and 1995, respectively, and $41.0
million and $10.4 million for the nine months ended September 30, 1995 and
1996, respectively.
See "Risk Factors - Risks Related to Historical Financial Performance of
First American" and "Unaudited Pro Forma Financial Information - Pro Forma
Financial Information for the Combined Company and Other Acquisitions and
Divestitures."
OTHER ACQUISITIONS AND DIVESTITURES
IHS continues to acquire and lease additional geriatric care facilities,
enter into new management agreements, acquire rehabilitation, home healthcare
and related service companies and implement its strategy of expanding the range
of related services it offers directly to its patients in order to serve the
full spectrum of patients' post-acute care needs. See "Risk Factors - Risks
Associated with Growth Through Acquisitions and Internal Development" and
"Unaudited Pro Forma Financial Information."
From January 1, 1997 through September 1, 1997, IHS acquired nine home
healthcare companies, four mobile diagnostic companies and two rehabilitation
companies. The total cost for these acquisitions was approximately $94.1
million. In July 1997, IHS sold its remaining 37% interest in its assisted
living services subsidiary pursuant to a cash tender offer. IHS will recognize a
gain of approximately $4.0 million during the third quarter of 1997 as a result
of this transaction. In addition to the Merger and the Proposed Acquisitions,
IHS has also reached definitive agreements to purchase a home health company for
approximately $37.5 million and to lease a skilled nursing facility (including a
$4.0 million purchase option deposit). IHS has reached agreements-in-principle
to purchase a mobile x-ray company for approximately $200,000, a home health
company for approximately $4.5 million, a home health company for approximately
$60.0 million, a respiratory therapy company for approximately $11.1 million and
a
41
respiratory therapy company for approximately $1.8 million. There can be no
assurance that any of these pending acquisitions will be consummated on the
proposed terms, on different terms or at all. See "Unaudited Pro Forma
Financial Information - Pro Forma Financial Information for the Combined
Company and Other Acquisitions and Divestitures."
In developing its post-acute healthcare system, IHS continuously evaluates
whether owning and operating businesses which provide certain ancillary
services, or contracting with third parties for such services, is more
cost-effective. As a result, IHS is continuously evaluating its existing
operations to determine whether to retain or divest operations. To date, IHS has
divested its pharmacy and its assisted living services divisions, and may divest
additional divisions or assets in the future. See "Unaudited Pro Forma Financial
Information - Pro Forma Financial Information for the Combined Company and Other
Acquisitions and Divestitures."
REPURCHASE OF 9 5/8% SENIOR SUBORDINATED NOTES AND 10 3/4% SENIOR SUBORDINATED
NOTES
On May 30, 1997, IHS completed cash tender offers to purchase its
outstanding 9 5/8% Senior Subordinated Notes due 2002, Series A (the "9 5/8%
Senior Notes") and its 10 3/4% Senior Subordinated Notes due 2004 (the "10 3/4%
Senior Notes") and related consent solicitations to eliminate certain
restrictive covenants and other provisions in the indentures pursuant to which
the 9 5/8% Senior Notes and 10 3/4% Senior Notes were issued in order to improve
the operating and financial flexibility of IHS. The consideration paid pursuant
to the tender offer and consent solicitation to holders of the 9 5/8% Senior
Notes who tendered their notes (and thereby delivered consents to the proposed
amendments to the indenture pursuant to which the 9 5/8% Senior Notes were
issued) prior to 12:00 midnight, New York City time, on May 14, 1997 (the
"Consent Date") was $1,094.00 plus accrued and unpaid interest to but not
including the payment date in respect of each $1,000 principal amount tendered,
consisting of $1,089.00 plus accrued and unpaid interest as tender offer
consideration and $5.00 as a consent payment. The total consideration paid
pursuant to the tender offer and consent solicitation to holders of the 10 3/4%
Senior Notes who tendered their notes (and thereby delivered consents to the
proposed amendments to the indenture pursuant to which the 10 3/4% Senior Notes
were issued) prior to 12:00 midnight, New York City time, on the Consent Date
was $1,119.50 plus accrued and unpaid interest to but not including the payment
date in respect of each $1,000 principal amount tendered, consisting of
$1,114.50 plus accrued and unpaid interest as tender offer consideration and
$5.00 as a consent payment. Of the $115,000,000 aggregate principal amount of
the 9 5/8% Senior Notes outstanding, an aggregate of $114,975,000 principal
amount of such notes was tendered. Of the $100,000,000 aggregate principal
amount of the 10 3/4% Senior Notes outstanding, an aggregate of $99,893,000
principal amount of such notes was tendered. IHS used approximately $247.2
million of the net proceeds from the sale of $450,000,000 aggregate principal
amount of 9 1/2% Senior Subordinated Notes due 2007 to pay the tender offer and
consent solicitation payments and accrued interest.
SALE OF 9 1/2% SENIOR SUBORDINATED NOTES DUE 2007
On May 30, 1997, IHS sold privately an aggregate of $450 million principal
amount of its 9 1/2% Senior Subordinated Notes due 2007 to Smith Barney, DLJ,
Morgan Stanley & Co. Incorporated and Salomon Brothers Inc (the "9 1/2% Initial
Purchasers"). The 9 1/2% Senior Subordinated Notes were subsequently resold by
the 9 1/2% Initial Purchasers pursuant to Rule 144A under the Securities Act.
IHS used approximately $247.2 million of the net proceeds to repurchase
substantially all its outstanding 9 5/8% Senior Notes and 10 3/4% Senior Notes
and the remaining $191.0 million of net proceeds to pay down borrowings under
its revolving credit facility. See "Description of Certain IHS Indebtedness -
9 1/2% Senior Subordinated Notes due 2007."
SALE OF 9 1/4% SENIOR SUBORDINATED NOTES DUE 2008
On September 11, 1997, IHS sold privately an aggregate of $500 million
principal amount of its 9 1/4% Senior Subordinated Notes due 2008 to Smith
Barney, Morgan Stanley & Co. Incorporated, DLJ and Citicorp Securities, Inc.
(the "9 1/4% Initial Purchasers"). The 9 1/4% Senior Notes were subsequently
resold by the 9 1/4% Initial Purchasers pursuant to Rule 144A under the
Securities Act. IHS used ap-
42
proximately $319.5 million of the net proceeds to repay all amounts outstanding
under the Prior Credit Facility. IHS intends to use the remaining approximately
$166.9 million of net proceeds for general corporate purposes, including working
capital, and for potential acquisitions. See "Description of Certain IHS
Indebtedness - 9 1/4% Senior Subordinated Notes due 2008."
ROTECH RECENT DEVELOPMENTS
PRELIMINARY YEAR END RESULTS
Set forth below are RoTech's preliminary unaudited results of operations
for the fiscal year ended July 31, 1997:
FISCAL YEAR RESULTS
%
1997 1996 INCREASE
---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Operating revenue ...... $422,692 $263,030 61%
Net income ............ $ 30,807 $ 20,556 50%
Earnings per share:
Primary ............... $ 1.17 $ 0.83 41%
Fully-diluted ......... $ 1.12 $ 0.82 37%
Weighted average shares:
Primary ............... 26,352 24,657 7%
Fully-diluted ......... 30,940 25,206 23%
For the year ended July 31, 1997, approximately 50% of RoTech's revenues
were derived from respiratory products and services, approximately 29% were
derived from home medical equipment, approximately 14% were derived from
pharmacy products and services and approximately 7% were derived from physician
and other services. Approximately 51% of RoTech's revenues for the fiscal year
ended July 31, 1997 were derived from Medicare, approximately 34% were derived
from other insurance and private pay, approximately 10% were derived from
Medicaid and approximately 5% were derived from managed care.
ACQUISITIONS
During the fiscal year ended July 31, 1997, RoTech acquired the net assets
or outstanding stock of 91 home healthcare companies, serving 161 locations in
28 states. The total cost for these acquisitions was approximately $142 million.
Subsequent to July 31, 1997, RoTech acquired the net assets or outstanding stock
of 11 home healthcare companies for approximately $13.2 million. RoTech also
currently has pending agreements in principle to purchase the net assets or
outstanding stock of 10 home healthcare companies for an aggregate purchase
price of approximately $15.8 million. There can be no assurance that any of
these pending acquisitions will be consummated on the proposed terms, on
different terms or at all. See "Unaudited Pro Forma Financial Information - Pro
Forma Financial Information for RoTech."
43
THE SPECIAL MEETINGS
GENERAL
This Joint Proxy Statement/Prospectus is being furnished to holders of IHS
Common Stock in connection with the solicitation of proxies by the IHS Board for
use at the IHS Special Meeting to consider and vote upon the approval and
adoption of the Merger Agreement and to transact such other business as may
properly come before the IHS Special Meeting, including any adjournments or
postponements thereof.
This Joint Proxy Statement/Prospectus is also being furnished to holders of
RoTech Common Stock in connection with the solicitation of proxies by the RoTech
Board for use at the RoTech Special Meeting to consider and vote upon the
approval and adoption of the Merger Agreement and to transact such other
business as may properly come before the RoTech Special Meeting, including any
adjournments or postponements thereof.
Each copy of this Joint Proxy Statement/Prospectus mailed to holders of IHS
Common Stock is accompanied by a form of proxy for use at the IHS Special
Meeting and each copy of this Joint Proxy Statement/Prospectus mailed to holders
of RoTech Common Stock is accompanied by a form of proxy to be used at the
RoTech Special Meeting.
PURPOSE OF THE SPECIAL MEETINGS
The purpose of the Special Meetings is to consider and vote upon the
approval and adoption of the Merger Agreement.
IHS Board. THE BOARD OF DIRECTORS OF IHS HAS, BY UNANIMOUS VOTE OF THE IHS
BOARD ON JULY 3, 1997, APPROVED THE MERGER AGREEMENT. THE IHS BOARD RECOMMENDS
THAT IHS STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
RoTech Board. THE BOARD OF DIRECTORS OF ROTECH HAS, BY UNANIMOUS VOTE OF
THE ROTECH BOARD ON JULY 6, 1997, APPROVED THE MERGER AGREEMENT. THE ROTECH
BOARD RECOMMENDS THAT ROTECH STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT.
DATES, PLACES AND TIMES
IHS. The IHS Special Meeting to consider and vote on the Merger Agreement
will be held on Tuesday, October 21, 1997 at 10:00 a.m., local time, at the
executive offices of IHS, 10065 Red Run Boulevard, Owings Mills, Maryland.
RoTech. The RoTech Special Meeting to consider and vote on the Merger
Agreement will be held on Tuesday, October 21, 1997 at 10:00 a.m., local time,
at SunTrust Bank, 200 South Orange Avenue, Second Floor, Campus Room, Orlando,
Florida.
RECORD DATES; QUORUMS
IHS. The IHS Board has fixed the close of business on September 1, 1997, as
the IHS Record Date for the determination of holders of IHS Common Stock
entitled to receive notice of and to vote at the IHS Special Meeting. At the IHS
Record Date, there were outstanding and entitled to vote 25,657,612 shares of
IHS Common Stock. The presence, in person or by proxy, of the holders of a
majority of the issued and outstanding shares of IHS Common Stock will
constitute a quorum at the IHS Special Meeting. Abstentions and broker non-votes
will be included in determining whether a quorum is present. In the event that a
quorum is not present at the IHS Special Meeting, it is expected that such
meeting will be adjourned or postponed to solicit additional proxies.
RoTech. The RoTech Board has fixed the close of business on September 1,
1997, as the RoTech Record Date for the determination of the holders of RoTech
Common Stock entitled to receive notice of and to vote at the RoTech Special
Meeting. At the RoTech Record Date, there were outstanding and
44
entitled to vote 26,439,322 shares of RoTech Common Stock. The presence, in
person or by proxy, of the holders of a majority of the issued and outstanding
shares of RoTech Common Stock will constitute a quorum at the RoTech Special
Meeting. Abstentions and broker non-votes will be included in determining
whether a quorum is present. In the event that a quorum is not present at the
RoTech Special Meeting, it is expected that such meeting will be adjourned or
postponed to solicit additional proxies.
VOTES REQUIRED
IHS. Each share of IHS Common Stock is entitled to one vote on each matter
that comes before the IHS Special Meeting. Although IHS stockholder approval is
not required under the DGCL, it is required under the rules of the NYSE in order
to maintain NYSE listing of the IHS Common Stock. Under the NYSE rules, the
affirmative vote of the holders of a majority of the outstanding shares of IHS
Common Stock present or represented at the IHS Special Meeting and entitled to
vote is required for approval and adoption of the Merger Agreement. As a result,
broker non-votes will be treated as neither a vote "for" nor "against" the
matter, although they will be counted in determining if a quorum is present.
However, abstentions are considered in determining the number of votes required
to attain a majority of the shares present or represented at the IHS Special
Meeting and entitled to vote. Accordingly, an abstention from voting on a matter
by a stockholder present in person or represented by proxy at the IHS Special
Meeting has the same legal effect as a vote "against" the matter because it
represents a share present or represented at the IHS Special Meeting and
entitled to vote, thereby increasing the number of affirmative votes required to
approve the matter under consideration, but is not considered an affirmative
vote for the matter, even though the stockholder or interested parties analyzing
the results of the voting may interpret such a vote differently, believing that
an abstention expresses neither an affirmative nor a negative position on the
Merger.
As of the IHS Record Date, directors and executive officers of IHS and
their affiliates beneficially owned an aggregate of 488,318 shares of IHS Common
Stock (excluding shares issuable upon exercise of options), representing
approximately 1.9% of the shares of IHS Common Stock outstanding on such date.
The directors and executive officers of IHS and their affiliates have
unanimously indicated their intentions to vote the shares of IHS Common Stock
beneficially owned by them FOR the Merger Agreement.
RoTech. Each share of RoTech Common Stock is entitled to one vote on each
matter that comes before the RoTech Special Meeting. Approval and adoption of
the Merger Agreement requires the affirmative vote of a majority of the issued
and outstanding shares of RoTech Common Stock. As a result, abstentions and
broker non-votes will be the equivalents of votes against the Merger Agreement.
As of the RoTech Record Date, directors and executive officers of RoTech
and their affiliates beneficially owned an aggregate of 2,040,703 shares of
RoTech Common Stock (excluding shares issuable upon exercise of options),
representing approximately 7.7% of the shares of RoTech Common Stock outstanding
on such date. The directors and executive officers of RoTech and their
affiliates have indicated their intention to vote the shares of RoTech Common
Stock beneficially owned by them FOR the Merger Agreement.
In the event that the Merger Agreement is not approved and adopted by the
stockholders of IHS and RoTech, the Merger Agreement may be terminated in
accordance with its terms. See "The Merger Agreement - Termination." If the
Merger is not consummated, IHS will continue to pursue acquisitions to expand
its home healthcare operations and RoTech will continue its operating and
acquisition strategies as a separate home healthcare company.
VOTING AND REVOCATION OF PROXIES
Shares of IHS Common Stock or RoTech Common Stock represented by a proxy
properly signed and received at or prior to the relevant Special Meeting, unless
subsequently revoked, will be voted in accordance with the instructions thereon.
Under the applicable rules of the NYSE, brokers who hold shares in street name
for customers who are the beneficial owners of such shares are prohibited from
giving a proxy to vote such customers' shares with respect to the proposal to
approve and adopt the Merger Agreement in the absence of specific instructions
from such custom-
45
ers ("broker non-votes"). IF A PROXY IS PROPERLY EXECUTED AND RETURNED WITHOUT
INDICATING ANY VOTING INSTRUCTIONS, SHARES OF IHS COMMON STOCK AND SHARES OF
ROTECH COMMON STOCK REPRESENTED BY THE PROXY WILL BE VOTED FOR APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT. ONLY SHARES VOTED FOR THE PROPOSALS AT THE
RESPECTIVE MEETINGS OF IHS AND ROTECH STOCKHOLDERS WILL BE COUNTED AS VOTED IN
FAVOR IN DETERMINING WHETHER SUCH PROPOSAL IS ADOPTED. THEREFORE, ABSTENTIONS
AND, IN THE CASE OF THE ROTECH SPECIAL MEETING, FAILURES TO VOTE AND BROKER
NON-VOTES WILL HAVE THE SAME EFFECT AS VOTES AGAINST ADOPTION OF THE PROPOSAL.
Any proxy given pursuant to the solicitation may be revoked by the person giving
it at any time before the proxy is voted by the filing of an instrument revoking
it or a duly executed proxy bearing a later date with the Secretary of IHS, for
IHS stockholders, or with the Secretary of RoTech, for RoTech stockholders,
prior to the vote at the relevant Special Meeting, or by voting in person at the
appropriate Special Meeting. Attendance at the relevant Special Meeting will not
in and of itself constitute a revocation of a proxy. The persons named as
proxies with respect to the Special Meetings may propose and vote for one or
more adjournments or postponements of the respective Special Meetings to permit
further solicitation of proxies in favor of the respective proposals to approve
and adopt the Merger Agreement; provided, however, that no proxy which is voted
against the respective proposals to approve and adopt the Merger Agreement will
be voted in favor of any such adjournment or postponement.
Proxies sent via facsimile transmission will be accepted if received not
later than 15 minutes prior to the scheduled commencement of the relevant
Special Meeting. Such proxies may be sent via facsimile to Georgeson & Company
Inc., Attention: Mr. Keith Haynes, proxy solicitors for IHS, at (212) 440-9009,
and to Corporate Investor Communications, Inc., Attention: Mr. Joe Montesano,
proxy solicitors for RoTech, at (201) 804-8693.
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of
IHS and RoTech, who will not be specifically compensated for such services, may
solicit proxies from IHS and RoTech stockholders, respectively, personally or by
telephone or telegram or other forms of communication. Except as otherwise
provided in the Merger Agreement, each party will bear its own expenses in
connection with the solicitation of proxies for its Special Meeting. IHS has
engaged the firm of Georgeson & Company Inc. to assist it in the distribution
and solicitation of proxies and has agreed to pay Georgeson & Company Inc. a fee
of approximately $8,000, plus expenses, for its services. RoTech has engaged the
firm of Corporate Investor Communications, Inc. to assist it in the distribution
and solicitation of proxies and has agreed to pay Corporate Investor
Communications, Inc. a fee of approximately $5,000, plus expenses, for its
services. Copies of solicitation materials will be furnished to banks, brokerage
houses, fiduciaries and custodians holding in their names shares of IHS Common
Stock or RoTech Common Stock beneficially owned by others to forward to such
beneficial owners. IHS and RoTech may reimburse persons representing such
beneficial owners for the costs of forwarding solicitation materials to such
beneficial owners. See "The Merger Agreement - Expenses and Termination Fees."
HOLDERS OF ROTECH COMMON STOCK SHOULD NOT SEND STOCK CERTIFICATES WITH
THEIR PROXY CARDS. THE PROCEDURE FOR THE EXCHANGE OF CERTIFICATES AFTER THE
MERGER IS CONSUMMATED IS SET FORTH IN THIS JOINT PROXY STATEMENT/ PROSPECTUS.
SEE "THE MERGER AGREEMENT - EXCHANGE OF SHARE CERTIFICATES."
46
THE MERGER
The description of the Merger contained in this Joint Proxy
Statement/Prospectus summarizes the material provisions of the Merger Agreement;
it is not complete and is qualified in its entirety by reference to the Merger
Agreement, the full text of which is attached hereto as Appendix A. All
stockholders are urged to read Appendix A carefully in its entirety.
TERMS OF THE MERGER
The acquisition of rotech by ihs will be effected by means of the merger of
merger sub with and into RoTech, with RoTech being the surviving corporation
(the "Surviving Corporation"). The Articles of Incorporation and the By-laws of
Merger Sub in effect at the Effective Time will govern the surviving corporation
until amended or repealed in accordance with applicable law. Following the
Effective Time, RoTech shall continue as the Surviving Corporation under the
name "RoTech Medical Corporation."
Upon consummation of the Merger, each share of RoTech Common Stock (other
than shares held by RoTech or IHS, which will be canceled) will be converted
into the right to receive .5806 of a share of IHS Common Stock. For example, if
a RoTech stockholder owned 100 shares of RoTech Common Stock as of the Effective
Time, that stockholder would receive 58 shares of IHS Common Stock in the Merger
and would receive cash for the remaining .06 of a share of IHS Common Stock.
Each holder of RoTech Common Stock exchanged pursuant to the Merger who would
otherwise have been entitled to receive a fraction of a share of IHS Common
Stock will receive, in lieu thereof, cash (without interest) in an amount equal
to such fractional part of a share of IHS Common Stock multiplied by the per
share average closing price on the NYSE Composite Tape of IHS Common Stock for
the 30 trading day period ending on the second trading day prior to the date of
the Effective Time (the "Closing Date").
Because the Exchange Ratio of IHS Common Stock for RoTech Common Stock is
fixed at .5806 and will not increase or decrease due to fluctuations in the
market price of either stock, RoTech stockholders will not be compensated for
decreases in the market price of IHS Common Stock which could occur before the
Effective Time. As a result, in the event the market price of IHS Common Stock
decreases, the value of the IHS Common Stock to be received in the Merger in
exchange for RoTech Common Stock would decrease. In the event the market price
of IHS Common Stock instead increases, the value of the IHS Common Stock to be
received in the Merger in exchange for RoTech Common Stock would increase. On
September 18, 1997, the last trading day prior to the date of this Joint Proxy
Statement/Prospectus, the closing price of IHS Common Stock was $34.625. At such
price, the Equivalent Value of a share of RoTech Common Stock would be $20.10
and the aggregate Merger consideration would be approximately $531,517,000
(based on 26,439,322 shares of RoTech Common Stock outstanding on September 18,
1997, the last business day before the date of this Joint Proxy Statement/
Prospectus). The actual market price of the IHS Common Stock may vary, which
will cause a corresponding change in the Equivalent Value and the aggregate
Merger consideration. Additionally, the Equivalent Value may differ from the
actual market price of RoTech Common Stock. Each stockholder is urged to obtain
updated market information. See "Risk Factors - Possible Volatility of Stock
Price; Fixed Exchange Ratio."
Because IHS and RoTech agreed to a fixed Exchange Ratio, the Merger
Agreement contains no condition to closing that IHS or RoTech receive an updated
fairness opinion from their respective financial advisors. The fairness opinions
received by IHS and RoTech from their respective financial advisors are
described under "- Opinions of Financial Advisors." However, either IHS or
RoTech may terminate the Merger Agreement if the average of the last per share
sale price of the IHS Common Stock over the 10 trading days ending on the fifth
trading day prior to the RoTech Special Meeting is equal to or less than $33.00.
All options to acquire RoTech Common Stock which are outstanding at the
Effective Time, whether or not then vested or exercisable, will be converted
into and become rights with respect to IHS Common Stock, such that each RoTech
stock option so assumed shall be exercisable for that number of shares of IHS
Common Stock equal to the number of RoTech Shares subject thereto multiplied by
the Exchange Ratio, and shall have an exercise price per share equal to the
RoTech exercise price divided by the Exchange Ratio.
47
In addition, RoTech's outstanding 5 1/4% convertible subordinated debentures due
2003 (the "RoTech Debentures") in the aggregate principal amount of $110 million
and having a current conversion price of $26.25 per share of RoTech Common Stock
(38.1 shares per $1,000 principal amount of RoTech Debentures) will become
convertible into IHS Common Stock at a conversion price of $45.21 per share
(22.12 shares per $1,000 principal amount of RoTech Debentures). See "- RoTech
Debentures."
STOCKHOLDERS ACTUALLY RECEIVE THEIR SHARES OF IHS COMMON STOCK AFTER THE
MERGER IS COMPLETED. SEE "THE MERGER AGREEMENT - EXCHANGE OF SHARE
CERTIFICATES."
BACKGROUND OF THE MERGER
A key component in the implementation of IHS' post-acute care network
strategy is the expansion of its home healthcare services to take advantage of
healthcare payors' increasing focus on having healthcare provided in the
lowest-cost setting possible and patients' desires to be treated at home. IHS
believes that the nation's aging population, when combined with advanced
technology which allows more healthcare procedures to be performed at home, has
resulted in an increasingly large number of patients with long-term chronic
conditions that can be treated effectively in the home. In addition, a
significant number of patients discharged from IHS' MSUs require home
healthcare. IHS also believes that it can expand its home healthcare services to
cover pre-acute, as well as post-acute, patients by having home healthcare
nurses provide preventive care services to home-bound senior citizens. In
addition, IHS believes that home healthcare will help IHS contain costs, thereby
providing it with a competitive advantage in contracting with managed care
companies and offering capitated rates. IHS believes that the changing
healthcare reimbursement environment, with the focus on cost containment, will
require healthcare providers to go "at risk" under capitated service agreements,
and that home healthcare will be a critical component of its ability to do so.
As a result, IHS has focused on the acquisition of companies which provide home
healthcare services.
RoTech has closely studied the rapidly unfolding managed care environment,
and its important role of supporting primary care at home under the direct
supervision of the patient's primary care physician. In January 1997, RoTech
engaged Smith Barney to assist RoTech in evaluating a possible transaction
pursuant to which RoTech could form a close relationship or combine with a
compatible healthcare provider who could join with RoTech in going "at risk" in
delivering cost-effective healthcare superior in patient and patient family
appeal. Because of IHS' depth in the subacute care field, IHS was considered to
be such a potential provider, and appeared to the RoTech Board to have both the
management and financial strength to accomplish the goal.
On April 16, 1997, at a meeting arranged by Smith Barney in New York, Dr.
Robert N. Elkins and Mr. Brian Davidson, Chairman of the Board and Chief
Executive Officer, and Executive Vice President-Development, respectively, of
IHS met with Stephen P. Griggs, President of RoTech, to discuss a possible
business combination. Messrs. Elkins, Davidson and Griggs reviewed, among other
things, the business strategies of their respective companies and discussed, on
a preliminary basis, the various operational and strategic synergies that could
result from a strategic combination.
On April 23, 1997, Dr. Elkins and Taylor Pickett, Executive Vice President
- - Acquisitions of IHS, met with William P. Kennedy, RoTech's Chairman and Chief
Executive Officer, Mr. Griggs and representatives of Smith Barney in Orlando,
Florida to discuss a possible transaction between IHS and RoTech. The
participants reviewed the advantages and disadvantages of a combination of the
two companies.
At an April 30, 1997, meeting of the IHS Board, the IHS Board reviewed with
senior management IHS' progress and strategy in implementing its post-acute care
network, during which the IHS Board and senior management discussed a possible
transaction with RoTech. The IHS Board authorized management to continue
discussions with RoTech.
On May 27, 1997, Mr. Pickett met with Mr. Griggs at RoTech's executive
offices in Orlando, Florida. Messrs. Pickett and Griggs reviewed in detail,
among other things, the business strategies of their respective companies and
discussed the various operational and strategic synergies that could result from
a strategic combination.
48
At a May 22, 1997, meeting of the IHS Board, the IHS Board reviewed with
senior management a proposed transaction with RoTech, including the various
operational and strategic synergies that could result from a transaction with
RoTech. The IHS Board also discussed potential pricing for the transaction.
On May 30, 1997, IHS proposed that IHS acquire RoTech in a tax-free
transaction, with each share of RoTech Common Stock having a value of .5555 of a
share of IHS Common Stock.
On June 11, 1997, IHS circulated a first draft of the Merger Agreement to
RoTech. On June 12, 1997, RoTech signed a confidentiality agreement relating to
information to be supplied by IHS, and on June 16, 1997, IHS signed a
confidentiality agreement relating to information to be supplied by RoTech.
On June 16, 1997, Mr. Griggs met with senior management at IHS to receive
an overview of IHS' business and to conduct due diligence of IHS.
On June 17, 1997, IHS personnel commenced a detailed due diligence review
of RoTech at RoTech's outside counsel's offices in Orlando, Florida. Also at
that time, interviews were conducted with key RoTech management and a review of
pending legal and regulatory matters were conducted.
At a June 20, 1997, meeting of the IHS Board, the IHS Board reviewed with
senior management the status of the negotiations with RoTech and the initial
results of IHS' due diligence examination of RoTech. The IHS Board directed
senior management to continue negotiations with RoTech.
At a June 23, 1997, meeting of the RoTech Board, the RoTech Board reviewed
with senior management the status of RoTech's negotiations with IHS and the
initial results of RoTech's due diligence examination of IHS. The RoTech Board
directed senior management to continue negotiations with IHS.
From June 26, 1997 to July 2, 1997, RoTech senior management and RoTech's
auditors met with IHS personnel at IHS' executive offices in Owings Mills,
Maryland and performed certain due diligence procedures with respect to IHS.
From June 27, 1997 to July 1, 1997, management of IHS and RoTech and their
respective legal and financial advisors held a number of telephone discussions
to discuss the Merger and negotiate a definitive merger agreement. On July 3,
1997, IHS and RoTech agreed to the Exchange Ratio.
On July 3, 1997, the IHS Board and its financial advisors met
telephonically to consider the approval of the Merger Agreement. IHS senior
management reviewed with the IHS Board the results of its due diligence
examination of RoTech, as well as the proposed terms of the transaction, and DLJ
reviewed with the IHS Board certain financial analyses performed by DLJ in
connection with its determination as to the fairness of the Exchange Ratio, from
a financial point of view, to the holders of the IHS Common Stock. On July 6,
1997, DLJ delivered to the IHS Board its written opinion to the effect that, as
of such date and based upon and subject to the assumptions, limitations and
qualifications set forth therein, the Exchange Ratio was fair, from a financial
point of view, to the holders of IHS Common Stock. See "- Opinions of Financial
Advisors - IHS."
At a meeting of the RoTech Board held by telephone on July 6, 1997, Smith
Barney rendered its oral opinion to the RoTech Board (subsequently confirmed by
delivery of a written opinion dated July 6, 1997) to the effect that, as of such
date and based upon and subject to certain matters stated in such opinion, the
Exchange Ratio was fair, from a financial point of view, to the holders of
RoTech Common Stock, and reviewed with the RoTech Board certain financial
analyses performed by Smith Barney in connection with such opinion. See
"Opinions of Financial Advisors - RoTech."
At the same meeting, the RoTech Board determined, based on competitive
analyses conducted by independent compensation consultants, that the total
direct compensation paid to William P. Kennedy, RoTech's Chairman and Chief
Executive Officer, during the years 1992 through 1997 was below both the average
and median levels of compensation for chief executives in RoTech's industry. At
such meeting, the RoTech Board, in light of RoTech's high level of performance
within its industry segment during such period, granted Mr. Kennedy a special
performance compensation award of $1.0 million, payable in August 1997.
49
After a full discussion of all of the relevant issues and upon
consideration of the factors described under "- Recommendations of the Boards of
Directors," the Boards of Directors of both RoTech and IHS, having been
previously advised by legal counsel as to the material terms and conditions of
the Merger Agreement and as to such Board's fiduciary duties with respect to the
Merger, concluded that the Merger Agreement was fair to and in the best
interests of their respective stockholders and each unanimously approved the
Merger Agreement. The definitive Merger Agreement was executed by the parties in
the late evening of July 6, 1997, and publicly announced on Monday morning, July
7, 1997, prior to the opening of the market.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
IHS Board. By the unanimous vote of the members of the IHS Board at a
special meeting held on July 3, 1997, the IHS Board determined that the proposed
Merger, and the terms and conditions of the Merger Agreement, were fair to and
in the best interests of IHS and resolved to recommend that the stockholders of
IHS vote FOR approval and adoption of the Merger Agreement. See "- Background of
the Merger." In reaching its conclusion to enter into the Merger Agreement and
recommending that the stockholders of IHS vote FOR the approval and adoption of
the Merger Agreement, the IHS Board consulted with IHS management and its
financial and legal advisors and considered a number of factors. The material
factors considered by the IHS Board in reaching its conclusion to approve and
recommend the Merger Agreement are as follows:
(i) the presentation and views expressed by IHS management (at the July
3, 1997 IHS Board meeting as well as numerous previously held meetings)
regarding (a) IHS' post-acute care network strategy and the implementation of
such strategy, (b) the alternatives available to IHS if it did not pursue a
transaction with RoTech, (c) the financial condition, results of operations,
business and prospects of each of IHS, RoTech and the combined company, and
(d) the recommendation of the Merger by IHS management;
(ii) the terms and conditions of the Merger Agreement, including the
Exchange Ratio of IHS Common Stock for RoTech Common Stock, which was
considered to be fair in light of the financial condition, business,
prospects and opportunities of IHS and RoTech and the stock trading history
of RoTech at the time of determination;
(iii) the Merger will enhance implementation of IHS' post-acute care
network strategy by expanding significantly the home respiratory, home
medical equipment and infusion therapy services which IHS can offer to third
party payors directly rather than through third party providers. The IHS
Board noted that the expansion of the home respiratory, home medical
equipment and infusion therapy services it can offer directly will complement
its extensive home nursing services, and will allow IHS to offer directly to
third-party payors the full range of home healthcare services. Based on its
review of the healthcare industry, the IHS Board determined that the combined
company that would result from the Merger would be better positioned in a
rapidly consolidating healthcare industry;
(iv) the strategic fit between IHS and RoTech, which in IHS' view offers
the opportunity for synergies through, among other things, potential
joint-marketing opportunities for each party and the strength and expertise
of the combined management of IHS and RoTech;
(v) the long-term and short-term interests of IHS and its
stockholders, as well as the interests of IHS' employees, customers,
creditors and suppliers and community and societal considerations including
those of any community in which any office or other facility of IHS is
located;
(vi) the belief that the combined company would be better able to
respond to the needs of consumers and customers, the increased
competitiveness of the healthcare industry and the opportunities that changes
in the healthcare industry might bring;
(vii) the perceived strengths of the combined company, and the belief of
the directors that RoTech could be integrated without disrupting or adversely
affecting the existing business operations of IHS or RoTech;
50
(viii) the opinion of the management of IHS that the issuance of the IHS
Common Stock in the Merger is not believed to be dilutive to earnings;
(ix) the fact that the Merger will deleverage IHS' balance sheet,
reducing the percentage of debt (including current portion) comprising IHS'
capitalization from approximately 67.7% at June 30, 1997 to approximately
58.3%;
(x) the financial analyses performed by DLJ in connection with its
determination as to the fairness of the Exchange Ratio, from a financial
point of view, to the holders of IHS Common Stock;
(xi) the Merger is expected to be treated as a purchase transaction
under GAAP;
(xii) the Merger is expected to be treated as a tax-free reorganization
under the Code;
(xiii) the regulatory approvals required to consummate the Merger,
including antitrust approvals and health regulatory approvals, and the
prospects of receiving such approvals; and
(xiv) the results of the due diligence review of RoTech conducted by
IHS' management and legal and financial advisors.
In considering the disadvantages of the Merger, the IHS Board addressed the
following material factors: the risk that IHS would not be able to successfully
integrate the business of RoTech with that of IHS and thus not realize the
expected synergies, including the fact that an unsuccessful integration would
interrupt its normal business processes; proposed reductions in Medicare
reimbursement for oxygen used in home respiratory therapy; the potential
volatility of the market price for stocks in the healthcare industry; and the
fact that IHS will be required to offer to repurchase the RoTech Debentures
immediately following the Merger.
The IHS Board considered that after the Merger, the current stockholders of
IHS will continue to own approximately 62% and the current stockholders of
RoTech will own approximately 38% of the combined company resulting from the
Merger. The IHS Board also reviewed the size of the termination fee payable in
the event the Merger Agreement is terminated, in relation to the size of RoTech
and IHS and the potential benefits of the Merger. See "The Merger Agreement
Expenses and Termination Fees." The IHS Board reviewed the circumstances under
which such fee would be payable by IHS or payable to IHS, as well as
restrictions on RoTech's ability to solicit potential acquirors other than IHS
prior to the closing of the Merger. See "The Merger Agreement - No
Solicitation."
The foregoing discussion of the information and factors considered by the
IHS Board is not intended to be exhaustive but includes all material factors
considered by the IHS Board. In view of the wide variety of factors considered
in connection with the evaluation of the Merger, the IHS Board did not attempt
to quantify or otherwise assign relative weights to the specific factors it
considered in reaching its determination, nor did it determine that any factor
was of particular importance. A determination of various weightings would, in
the view of the IHS Board, be impractical. Rather, the IHS Board viewed its
position and recommendations as being based on the totality of the information
presented to, and considered by, it. In addition, individual members of the IHS
Board may have given different weight to different factors.
RoTech Board. The RoTech Board believes that the terms of the Merger
Agreement and the transactions contemplated thereby are fair to and in the best
interests of RoTech and its stockholders. Accordingly, the RoTech Board has
unanimously approved the Merger Agreement and recommends approval thereof by the
stockholders of RoTech. In reaching its determination, the RoTech Board
consulted with RoTech management, as well as its legal counsel and its financial
advisors, and considered the following material factors:
(i) the terms and conditions of the Merger Agreement, including the
Exchange Ratio of IHS Common Stock for RoTech Common Stock, which was
considered to be fair in light of the financial condition, business,
prospects and opportunities of IHS and RoTech and the stock trading history
of RoTech and IHS at the time of determination;
51
(ii) the opportunity to participate in the consolidation of the
healthcare industry with a strong partner in a compatible sector of the
market, subacute care;
(iii) the opportunity to preserve its strength and continuity of key
personnel in local markets in which RoTech dominates or is a strong
participant;
(iv) continuing pressure from Medicare and Medicaid payment
arrangements, due to federal and state budget pressures subject to political
control;
(v) the compatibility of key management principles within IHS and
RoTech, and the support of the Merger by all top management of RoTech;
(vi) the developed operating systems within IHS that would aid the
operations of RoTech in increasing efficiencies and maintaining compliance
with increasing regulatory oversight;
(vii) the management strengths of IHS;
(viii) that a combination of IHS and RoTech would be far better
positioned to consolidate and expand a viable home health delivery system,
and to negotiate with healthcare payors for proper compensation for such
delivery;
(ix) the strategic fit between IHS and RoTech, which in RoTech's view
offers the opportunity for synergies through, among other things, potential
joint-marketing opportunities for each party and the strength and expertise
of the combined management of IHS and RoTech;
(x) the long-term and short-term interests of RoTech and its
stockholders, as well as the interests of RoTech's employees, customers,
creditors and suppliers and community and societal considerations including
those of communities in which offices of RoTech are located;
(xi) the opinion of Smith Barney dated July 6, 1997 to the effect that,
as of the date of such opinion and based upon and subject to certain matters
set forth therein, the Exchange Ratio was fair, from a financial point of
view, to the holders of RoTech Common Stock and that Smith Barney is not
required under the Merger Agreement to reaffirm its fairness opinion as of
any date subsequent to July 6, 1997;
(xii) the Merger is expected to be treated as a purchase transaction
under GAAP;
(xiii) the Merger is expected to be treated as a tax-free
reorganization under the Code;
(xiv) the regulatory approvals required to consummate the Merger,
including antitrust approvals and health regulatory approvals, and the
prospects of receiving such approvals; and
(xv) the results of the due diligence procedures with respect to IHS
conducted by RoTech's management and legal and financial advisors.
In considering the disadvantages of the Merger, the RoTech Board gave
consideration to the following material factors: the risk that IHS would not be
able to integrate successfully the businesses of RoTech, First American and
other recent acquisitions of IHS with that of IHS; the fact that the Merger
Agreement provided for a fixed Exchange Ratio, thereby subjecting RoTech's
stockholders to the risk of volatility in the markets for the constituent
companies' securities; and the historic marketing and strategic differences
between RoTech and IHS.
The RoTech Board also considered the benefits that would be realized by
certain members of RoTech management in the event the Merger is consummated. See
"-Additional Interests of Certain Persons in the Merger." The RoTech Board did
not consider any benefits to such persons arising out of ownership of RoTech
Common Stock to be different or in conflict with those of unaffiliated RoTech
stockholders. Moreover, the RoTech Board did not consider any benefits to be
realized by management through new employment agreements or severance and
non-competition agreements to be in derogation of any benefits RoTech's
stockholders might have been able otherwise to obtain, but rather believed that
such arrangements would be beneficial to RoTech's stockholders by providing for
some continuity of management and for a smoother transition and integration
period.
52
The RoTech Board also reviewed the size of the termination fee payable in
the event the Merger Agreement is terminated in relation to the size of RoTech
and IHS. See "The Merger Agreement - Expenses and Termination Fees." The RoTech
Board reviewed the circumstances under which such fee would be payable by or to
RoTech, as well as restrictions on RoTech's ability to solicit potential
acquirors other than IHS prior to the closing of the Merger. See "The Merger
Agreement - No Solicitation."
In view of the wide variety of factors considered in connection with its
evaluation of the proposed Merger, the RoTech Board did not quantify or
otherwise attempt to assign relative weights to specific factors considered in
reaching its determination.
OPINIONS OF FINANCIAL ADVISORS
IHS. IHS engaged DLJ to provide a fairness opinion in connection with the
transactions contemplated by the Merger Agreement based upon DLJ's
qualifications, expertise and reputation, as well as DLJ's prior investment
banking relationship and familiarity with IHS. On July 6, 1997, DLJ delivered
its written opinion to the IHS Board to the effect that, as of such date, and
based upon and subject to the assumptions, limitations and qualifications set
forth in such opinion, the Exchange Ratio was fair to the holders of IHS Common
Stock from a financial point of view. DLJ also delivered to the IHS Board its
opinion dated the date of this Joint Proxy Statement/Prospectus to substantially
the same effect (the "DLJ Opinion").
THE FULL TEXT OF THE DLJ OPINION DATED AS OF THE DATE OF THIS JOINT PROXY
STATEMENT/PROSPECTUS IS SET FORTH AS APPENDIX B TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AND SHOULD BE READ CAREFULLY IN ITS ENTIRETY FOR
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER MATTERS CONSIDERED AND LIMITS OF
THE REVIEW BY DLJ.
The DLJ opinions were prepared for the IHS Board and address only the
fairness of the Exchange Ratio to the holders of IHS Common Stock from a
financial point of view and do not constitute recommendations to any stockholder
of IHS as to how such stockholder should vote at the IHS Special Meeting. DLJ's
opinions do not constitute opinions as to the price at which IHS Common Stock
will actually trade at any time. The type and amount of consideration was
determined in arm's length negotiations between IHS and RoTech. No restrictions
or limitations were imposed upon DLJ with respect to the investigations made or
procedures followed by DLJ in rendering its opinions.
In arriving at the DLJ Opinion, DLJ reviewed the Merger Agreement,
including the exhibits thereto, as well as financial and other information that
was publicly available or furnished to it by IHS and RoTech, including
information provided during discussions with their respective managements.
Included in the information provided during discussions with the respective
managements were certain financial projections for IHS and RoTech prepared by
the management of IHS. In addition, DLJ compared certain financial and
securities data of IHS and RoTech with that of various other companies whose
securities are traded in public markets, reviewed the historical stock prices
and trading volumes of the RoTech Common Stock and IHS Common Stock, reviewed
prices and premiums paid in certain other business combinations and conducted
such other financial studies, analyses and investigations as DLJ deemed
appropriate for purposes of rendering its opinions.
In rendering its opinions, DLJ relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
it from public sources or that was provided to or discussed with it by IHS and
RoTech or their respective representatives. DLJ relied upon the estimates of the
management of IHS of the revenue and cost synergies (the "Synergies") achievable
as a result of the Merger. DLJ also assumed that the financial projections
regarding IHS and RoTech supplied by IHS to DLJ were reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
management of IHS as to the future operating and financial performance of IHS
and RoTech, respectively.
The DLJ Opinion is necessarily based on economic, market, financial and
other conditions as they exist on, and on information made available to DLJ as
of, the date hereof. DLJ does not have any obligation to update, revise or
reaffirm the DLJ Opinion.
53
The following is a summary of the analyses presented by DLJ to the IHS
Board at its July 3, 1997 meeting. All analyses discussed below, unless
otherwise indicated, (i) exclude the Synergies estimated by IHS management,
including annual cost savings of $8.0 million, and (ii) assume the Exchange
Ratio is calculated using an IHS Common Stock price of $38.50, based on the
closing price of the IHS Common Stock on July 1, 1997.
Common Stock Performance Analysis. DLJ's analysis of the performance of IHS
Common Stock consisted of an historical analysis of closing prices and trading
volumes for the period from July 1, 1996 through July 1, 1997. During this time
period, IHS Common Stock outperformed the S&P 500 and a comparable company index
comprised of Arbor Health Care Company, Beverly Enterprises, Inc., Genesis
Health Ventures, Inc., Health Care & Retirement Corp., Manor Care, Inc., Mariner
Health Group, Inc., Regency Health Services, Inc., Sun Healthcare Group, Inc.
and Vencor, Inc. During the above period, IHS Common Stock reached a high of
$38.75 per share and a low of $20.50 per share. On July 1, 1997, the closing
price of IHS Common Stock was $38.50 per share.
DLJ's analysis of the performance of RoTech Common Stock consisted of an
historical analysis of closing prices and trading volumes for the period from
July 1, 1996 through July 1, 1997. During this time period, RoTech Common Stock
underperformed the S&P 500 but outperformed a comparable company index comprised
of nine home healthcare companies whose securities are publicly traded and that
are deemed by DLJ to be reasonably comparable to RoTech: American HomePatient,
Inc., Apria Healthcare Group Inc., HealthCor Holdings, Inc., Home Health Corp.
of America, Inc., Housecall Medical Resources, Inc., Lincare Holdings Inc.,
Matria Healthcare, Inc. and Pediatric Services of America, Inc. (collectively,
the "RoTech Comparable Companies") and Transworld HealthCare, Inc. During the
above period, RoTech Common Stock reached a high of $21.75 per share and a low
of $13.63 per share. On July 1, 1997, the closing price of RoTech Common Stock
was $18.63 per share.
DLJ also analyzed the historical relationship between the trading prices of
IHS Common Stock and RoTech Common Stock for the period from July 1, 1996
through July 1, 1997. The average ratio of the closing price of RoTech Common
Stock to that of IHS Common Stock for the aforementioned time period was 0.651,
with a minimum ratio of 0.423 and a maximum ratio of 0.897.
Comparable Company Analysis. To provide contextual data and comparative
market information, DLJ analyzed the operating performance of RoTech relative to
the RoTech Comparable Companies. Historical financial information used in
connection with the ratios provided below with respect to RoTech and the RoTech
Comparable Companies is as of the most recent financial statements publicly
available for each company as of July 1, 1997.
DLJ performed a valuation analysis of RoTech by applying certain market
trading statistics for the RoTech Comparable Companies to RoTech's historical
and estimated financial results. DLJ examined certain publicly available
financial data of the RoTech Comparable Companies, including enterprise value
(defined as market value of common equity plus book value of total debt and
preferred stock less cash) as a multiple of: (a) latest 12 months ("LTM")
revenues, earnings before interest, taxes, depreciation and amortization
("EBITDA") and earnings before interest and taxes ("EBIT"); and (b) estimated
calendar year 1997 revenues, EBITDA and EBIT, and price to earnings ratios based
on: (x) LTM earnings per share ("EPS"); and (y) estimated calendar year 1997
EPS. DLJ noted that as of July 1, 1997, the RoTech Comparable Companies were
trading at implied multiples of enterprise value and earnings, as the case may
be, in (i) a range of 0.3x to 3.2x (with an average, excluding the high and low
(the "Trimmed Average"), of 1.2x) LTM revenues; (ii) a range of 6.4x to 13.0x
(with a Trimmed Average of 8.6x) LTM EBITDA; (iii) a range of 9.9x to 14.9x
(with a Trimmed Average of 12.3x) LTM EBIT; (iv) a range of 12.0x to 21.9x (with
a Trimmed Average of 17.8x) LTM EPS; (v) a range of 0.3x to 2.7x (with a Trimmed
Average of 1.0x) estimated calendar year 1997 revenues; (vi) a range of 2.7x to
7.8x (with a Trimmed Average of 6.3x) estimated calendar year 1997 EBITDA; (vii)
a range of 6.9x to 11.5x (with a Trimmed Average of 9.4x) estimated calendar
year 1997 EBIT; and (viii) a range of 10.6x to 18.5x (with a Trimmed Average of
13.0x) estimated calendar year 1997 EPS. Based on the valuation multiples of the
RoTech Comparable Companies discussed above, DLJ derived a summary valuation
range for RoTech Common Stock of $21.00 to $26.00 per share or an implied ratio
of RoTech value per share to IHS value per share ranging from 0.55 to 0.67 based
on IHS'
54
closing stock price of $38.50 per share on July 1, 1997. The calendar year 1997
EPS estimates for the RoTech Comparable Companies were based on estimates
provided by First Call Research Direct while the calendar year 1997 estimates
for revenues, EBITDA and EBIT were derived from publicly available research
reports. Revenue, EBITDA, EBIT and EPS calendar year 1997 estimates for RoTech
were based on estimates provided by IHS.
No company utilized in the comparable company analysis is identical to
RoTech. Accordingly, an analysis of the results of the foregoing necessarily
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the RoTech Comparable Companies and
RoTech and other factors that could affect the public trading value of the
RoTech Comparable Companies. Mathematical analysis such as determining the
average is not in itself a meaningful method of using comparable company data.
Comparable Transaction Analysis. DLJ also performed an analysis of
selected merger and acquisition transactions (the "Comparable Transactions") in
the home healthcare and broader healthcare industry. Multiples reviewed in the
Comparable Transactions consisted of (i) aggregate transaction value (defined
as the equity value of the offer plus book value of total debt and preferred
stock less cash) to (where available) LTM revenues, LTM EBITDA, LTM EBIT, and
estimated current year revenues, estimated current year EBITDA and estimated
current year EBIT as estimated at the time of the announcement of the
acquisition, and (ii) aggregate purchase price (defined as the equity value of
the offer) to (where available) LTM net income and estimated current year net
income as estimated at the time of the announcement of the acquisition. The
Comparable Transactions were comprised of the following 18 transactions
announced during the period 1993 to 1997: Vivra Inc. and Incentive AB
(pending); First American and IHS; Vitas Healthcare Corp. and Apria Healthcare
Group Inc.; Caremark International, Inc. and MedPartners/Mullikin, Inc.;
Quantum Health Resources, Inc. and Olsten Corp.; Rehability Corp. and Living
Centers of America, Inc.; Continental Medical Systems, Inc. and Horizon
Healthcare Corp.; Homedco Group, Inc. and Abbey Healthcare Group, Inc.; the
home infusion business of Caremark International, Inc. and Coram; Surgical
Health Corp. and HEALTHSOUTH Corp.; Hillhaven Corp. and Vencor, Inc.; Relife,
Inc. and HEALTHSOUTH Corp.; Home Nutritional Services, Inc. and W.R. Grace &
Co.; Critical Care America Inc. and Caremark International, Inc.; Rehab
clinics, Inc. and NovaCare, Inc.; Total Pharmaceutical Care, Inc. and Abbey
Healthcare Group, Inc.; Lifetime Corp. and Olsten Corp.; and Home Intensive
Care, Inc. and W.R. Grace & Co. DLJ noted that the implied multiples of
aggregate transaction value and aggregate purchase price, as the case may be,
for these transactions were in (i) a range of 0.5x to 3.7x (with a Trimmed
Average of 1.3x) LTM revenues; (ii) a range of 7.6x to 23.3x (with a Trimmed
Average of 12.5x) LTM EBITDA; (iii) a range of 10.4x to 34.7x (with a Trimmed
Average of 18.5x) LTM EBIT; (iv) a range of 20.3x to 39.6x (with a Trimmed
Average of 25.4x) LTM net income; (v) a range of 0.7x to 2.2x (with an average
of 1.3x) estimated current year revenues; (vi) a range of 6.9x to 12.9x (with
an average of 9.5x) estimated current year EBITDA; (vii) a range of 9.9x to
15.2x (with an average of 13.1x) estimated current year EBIT; and (viii) a
range of 18.6x to 23.8x (with an average of 21.6x) estimated current year net
income. Based on the multiples paid in the Comparable Transactions discussed
above, DLJ derived a summary valuation range for RoTech Common Stock of $20.00
to $28.00 per share or an implied ratio of RoTech value per share to IHS value
per share of 0.52 to 0.73 based on IHS' closing stock price of $38.50 per share
on July 1, 1997. The current year estimates of financial performance for the
Comparable Transactions used to derive the multiples above were based on
publicly available research reports available at the time of the announcement
of each transaction. Revenue, EBITDA, EBIT and net income estimates for RoTech
were based on estimates provided by IHS.
No transaction utilized in the comparable transaction analysis is identical
to the Merger. Accordingly, an analysis of the results of the foregoing
necessarily involves complex considerations and judgments concerning differences
in financial and operating characteristics of RoTech and other factors that
could affect the acquisition value of the companies to which it is being
compared. Mathematical analysis such as determining the average is not in itself
a meaningful method of using comparable transaction data.
Premium Analysis. DLJ derived an acquisition valuation for RoTech based on
premiums offered in merger and acquisition transactions ranging from $250
million to $1.0 billion in size and announced between January 1, 1994 and July
1, 1997. DLJ's analysis indicated that for the transactions reviewed,
55
the average premiums offered to the market price of the acquired company one
day, one week and one month prior to announcement were: 30.2%, 36.1% and 43.9%,
respectively, for stock transactions, 37.1%, 44.0% and 53.0%, respectively, for
cash transactions, and 33.8%, 40.4% and 48.9%, respectively, for all
transactions. Applying the above premiums to RoTech's closing stock price one
day, one week and one month prior to July 1, 1997, implies an acquisition
valuation range of approximately $24.00 to $27.00 per RoTech share or an
acquisition exchange ratio range of 0.62 to 0.70 based on IHS' closing stock
price of $38.50 on July 1, 1997.
Discounted Cash Flow Analysis. In addition, DLJ performed a discounted cash
flow analysis for the five-year period commencing January 1, 1997 and ending
December 31, 2001 based on the stand-alone unlevered free cash flows of RoTech,
without giving effect to the Synergies but including IHS' assessment of RoTech's
program of acquiring other home healthcare companies. Unlevered free cash flows
were calculated as the after-tax operating earnings of RoTech, plus depreciation
and amortization and other non-cash items, plus (or minus) net changes in
working capital, minus projected capital expenditures. DLJ calculated terminal
values by applying a range of estimated EBITDA multiples of 7.0x to 8.0x to the
projected EBITDA of RoTech in 2001. The unlevered free cash flows and terminal
values were then discounted to the present using a range of discount rates of
11.0% to 13.0% representing an estimated range of the weighted average cost of
capital of RoTech. Based on this analysis, DLJ calculated per share equity
values of RoTech ranging from $26.00 to $32.00 and ratios of RoTech value per
share to IHS value per share ranging from 0.68 to 0.83 based on IHS' closing
stock price of $38.50 per share on July 1, 1997.
EPS Impact Analysis. DLJ also analyzed the pro forma effects on the
projected EPS of IHS resulting from the Merger, including, without independent
verification, the Synergies projected by the management of IHS, for each of the
years ending December 31, 1997, 1998 and 1999, assuming exchange ratios of 0.55
and 0.60. The analysis for the fiscal year ending December 31, 1997 was pro
forma assuming the Merger occurred on January 1, 1997. This analysis was based
on a number of assumptions, including, among other things, estimated amounts and
timing of the Synergies and the projected financial performance of IHS and
RoTech. The analysis indicated that the Merger, accounted for as a purchase
transaction, with the benefit of the Synergies, is anticipated to be
accretive/(dilutive) to IHS' stand-alone EPS estimates by 4.6%, 2.4%, and 5.7%
assuming an exchange ratio of 0.55 or 0.5%, (1.3)% and 2.1% assuming an exchange
ratio of 0.60 for the years ending December 1997, 1998, and 1999, respectively.
Relative Contribution Analysis. DLJ analyzed the relative contributions of
IHS and RoTech to the revenues, EBITDA, EBIT and net income of the pro forma
combined entity for the projected calendar years 1997 and 1998, excluding
Synergies and transaction adjustments. Based on the projected financial
information for the calendar year 1997, RoTech's revenues, EBITDA, EBIT and net
income would represent 21.0%, 32.8%, 29.8% and 36.5%, respectively, of the pro
forma combined entity, assuming the transaction occurred at January 1, 1997.
Based on the projected financial information for the calendar year 1998,
RoTech's revenues, EBITDA, EBIT and net income would represent 24.4%, 31.0%,
28.1% and 32.0%, respectively, of the pro forma combined entity. The shares of
IHS Common Stock to be issued to the holders of RoTech Common Stock on a fully
diluted basis would represent approximately 30.0% of the outstanding shares of
IHS Common Stock after giving effect to the Merger at an exchange ratio of 0.55
or 32.0% at an exchange ratio of 0.60.
The summary set forth above does not purport to be a complete description
of the analyses performed by DLJ, but describes, in summary form, the principal
elements of the analyses contained in the materials presented by DLJ to the IHS
Board in connection with DLJ rendering its opinions. The preparation of a
fairness opinion involves various determinations as to the most appropriate and
relevant methods of financial analysis and the application of these methods to
the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Each of the analyses conducted by DLJ was
carried out in order to provide a different perspective on the transaction and
add to the total mix of information available. DLJ did not form a conclusion as
to whether any individual analysis, considered in isolation, supported or failed
to support an opinion as to fairness from a financial point of view. Rather, in
reaching its conclusion, DLJ considered the results of the analyses in light of
each other and ultimately reached its opinion based on the results of the
analyses taken as a whole. DLJ did not place particular reliance or weight on
any individual factor, but instead concluded that its analyses, taken as a
whole, sup-
56
ported its determination. Accordingly, notwithstanding the separate factors
summarized above, DLJ believes that its analyses must be considered as a whole
and that selecting portions of its analyses and the factors considered by it,
without considering all analyses and factors, could create an incomplete or
misleading view of the evaluation process underlying its opinion. In performing
its analyses, DLJ made numerous assumptions with respect to industry
performance, business and economic conditions and other matters, including the
continuing shift in the U.S. private healthcare system toward managed care
plans, the ongoing consolidation trend in the home healthcare industry, and the
absence of any material change in the competitive environment in the healthcare
industry or U.S. economic conditions, generally. The analyses performed by DLJ
are not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses.
DLJ was selected to render an opinion in connection with the Merger based
upon DLJ's qualifications, expertise and reputation, including the fact that
DLJ, as part of its investment banking business, is regularly engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
Pursuant to a letter agreement between IHS and DLJ dated July 2, 1997 (the
"DLJ Engagement Letter"), DLJ is entitled to (i) a retainer fee of $250,000
payable promptly upon execution of the DLJ Engagement Letter, (ii) a fee of
$700,000 payable at the time DLJ notified IHS that it was prepared to deliver an
opinion with respect to the Merger, irrespective of the conclusion reached
therein, and (iii) a fee of $50,000 for each update of a prior opinion delivered
by DLJ at IHS' request. In addition, IHS has agreed to reimburse DLJ for all
out-of-pocket expenses (including the reasonable fees and expenses of its
counsel) incurred by DLJ in connection with its engagement thereunder, whether
or not the Merger is consummated, and to indemnify DLJ for certain liabilities
and expenses arising out of the Merger or the transactions in connection
therewith, including liabilities under federal securities laws. The terms of the
fee arrangement with DLJ, which DLJ and IHS believe are customary in
transactions of this nature, were negotiated at arm's length between IHS and DLJ
and the IHS Board was aware of such arrangement.
DLJ provides a full range of financial, advisory and brokerage services and
in the course of its normal trading activities may from time to time effect
transactions and hold positions in the securities or options on the securities
of RoTech and/or IHS for its own account and for the accounts of customers. Over
the past two years, DLJ has co-managed a $500 million high yield offering for
IHS, a $450 million high yield offering for IHS, a $150 million high yield
offering for IHS and a $33.6 million initial public offering for IHS' former
subsidiary, Integrated Living Communities, Inc., for all of which it received
usual and customary compensation.
RoTech. Smith Barney was retained by RoTech to act as its financial advisor
in connection with the proposed Merger. In connection with such engagement,
RoTech requested that Smith Barney evaluate the fairness, from a financial point
of view, to the holders of RoTech Common Stock of the consideration to be
received by such holders in the Merger. On July 6, 1997, at a meeting of the
RoTech Board held to evaluate the proposed Merger, Smith Barney delivered to the
RoTech Board an oral opinion (which opinion was subsequently confirmed by
delivery of a written opinion dated July 6, 1997) to the effect that, as of the
date of such opinion and based upon and subject to certain matters stated
therein, the Exchange Ratio was fair, from a financial point of view, to the
holders of RoTech Common Stock.
In arriving at its opinion, Smith Barney reviewed the Merger Agreement and
held discussions with certain senior officers, directors and other
representatives and advisors of RoTech and certain senior officers and other
representatives and advisors of IHS concerning the businesses, operations and
prospects of RoTech and IHS. Smith Barney examined certain publicly available
business and financial information relating to RoTech and IHS as well as certain
financial forecasts and other information and data for RoTech and IHS which were
provided to or otherwise discussed with Smith Barney by the respective
managements of RoTech and IHS, including information relating to certain
strategic implications and operational benefits anticipated to result from the
Merger. Smith Barney reviewed the financial terms of the Merger as set forth in
the Merger Agreement in relation to, among other things: current and historical
market prices and trading volumes of RoTech Common Stock and IHS Common Stock;
57
the historical and projected earnings and other operating data of RoTech and
IHS; and the capitalization and financial condition of RoTech and IHS. Smith
Barney also considered, to the extent publicly available, the financial terms of
certain other similar transactions recently effected which Smith Barney
considered relevant in evaluating the Merger and analyzed certain financial,
stock market and other publicly available information relating to the businesses
of other companies whose operations Smith Barney considered relevant in
evaluating those of RoTech and IHS. In connection with its engagement, Smith
Barney was requested to approach, and held discussions with, third parties to
solicit indications of interest in a possible acquisition of RoTech. Smith
Barney also evaluated the potential pro forma financial impact of the Merger on
IHS. In addition to the foregoing, Smith Barney conducted such other analyses
and examinations and considered such other financial, economic and market
criteria as Smith Barney deemed appropriate in arriving at its opinion. Smith
Barney noted that its opinion was necessarily based upon information available,
and financial, stock market and other conditions and circumstances existing and
disclosed, to Smith Barney as of the date of its opinion.
In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information and data publicly available or furnished to or otherwise
reviewed by or discussed with Smith Barney. With respect to financial forecasts
and other information and data provided to or otherwise reviewed by or discussed
with Smith Barney, the managements of RoTech and IHS advised Smith Barney that
such forecasts and other information and data were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
respective managements of RoTech and IHS as to the future financial performance
of RoTech and IHS and the strategic implications and operational benefits
anticipated to result from the Merger. Smith Barney assumed, with the consent of
the RoTech Board, that the Merger will be treated as a tax-free reorganization
for federal income tax purposes. The opinion of Smith Barney, as set forth
therein, relates to the relative values of RoTech and IHS. Smith Barney did not
express any opinion as to what the value of the IHS Common Stock actually will
be when issued to RoTech stockholders pursuant to the Merger or the price at
which the IHS Common Stock will trade subsequent to the Merger. Smith Barney did
not make and was not provided with an independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of RoTech or IHS nor did Smith
Barney make any physical inspection of the properties or assets of RoTech or
IHS. Although Smith Barney evaluated the Exchange Ratio from a financial point
of view, Smith Barney was not asked to and did not recommend the specific
consideration payable in the Merger, which was determined through negotiation
between RoTech and IHS. No other limitations were imposed by RoTech on Smith
Barney with respect to the investigations made or procedures followed by Smith
Barney in rendering its opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF SMITH BARNEY DATED JULY 6, 1997,
WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN, IS ATTACHED HERETO AS APPENDIX C AND IS INCORPORATED HEREIN
BY REFERENCE. HOLDERS OF ROTECH COMMON STOCK ARE URGED TO READ THIS OPINION
CAREFULLY IN ITS ENTIRETY. THE OPINION OF SMITH BARNEY IS DIRECTED TO THE ROTECH
BOARD AND RELATES ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL
POINT OF VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER OR RELATED
TRANSACTIONS AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO
HOW SUCH STOCKHOLDER SHOULD VOTE AT THE ROTECH SPECIAL MEETING. THE SUMMARY OF
THE OPINION OF SMITH BARNEY SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In preparing its opinion, Smith Barney performed a variety of financial and
comparative analyses, including those described below. The summary of such
analyses does not purport to be a complete description of the analyses
underlying Smith Barney's opinion. The preparation of a fairness opinion is a
complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to summary description. Accordingly, Smith Barney
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and factors, without considering all analyses and
factors, could create a misleading or incomplete view of the processes
underlying such analyses and opinion. In its analyses, Smith Barney made
numerous assumptions with respect to RoTech, IHS, industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of RoTech and IHS. The estimates contained in such
analyses and the
58
valuation ranges resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than those suggested by such analyses.
In addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
securities actually may be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty. Smith Barney's opinion and
analyses were only one of many factors considered by the RoTech Board in its
evaluation of the Merger and should not be viewed as determinative of the views
of the RoTech Board or management of RoTech with respect to the Exchange Ratio
or the proposed Merger.
Selected Company Analysis. Using publicly available information, Smith
Barney analyzed, among other things, the market values and trading multiples of
RoTech and five selected publicly traded companies in the home healthcare
industry, consisting of: American Homepatient, Inc.; Apria Healthcare Group
Inc.; Lincare Holdings Inc.; Pediatric Services of America, Inc.; and Transworld
Healthcare, Inc. (collectively, the "Selected Companies"). Smith Barney compared
market values as multiples of, among other things, estimated calendar years 1997
and 1998 net income, and adjusted market values (fully diluted market value,
plus total debt outstanding, less cash) as multiples of, among other things,
latest 12 months and latest quarter annualized earnings before interest, taxes,
depreciation and amortization ("EBITDA"). Net income multiples for the Selected
Companies were based on estimates of selected investment banking firms and net
income multiples for RoTech were based both on internal estimates of the
management of RoTech and estimates of selected investment banking firms. All
multiples were based on closing stock prices as of July 2, 1997. Applying a
range of multiples for the Selected Companies of estimated calendar years 1997
and 1998 net income and latest 12 months and latest quarter annualized EBITDA of
10.8x to 18.6x, 10.1x to 17.1x, 6.4x to 12.7x and 4.9x to 11.3x, respectively,
to corresponding financial data for RoTech resulted in an equity reference range
for RoTech of approximately $14.46 to $30.04 per share, as compared to the
equity value implied by the Exchange Ratio of $22.50 per share based on a
closing stock price of IHS Common Stock on July 2, 1997.
Using publicly available information, Smith Barney also analyzed the market
values and trading multiples of IHS and 21 selected publicly traded companies in
the long-term care industry, consisting of: Advocat Inc.; Arbor Health Care
Company; Beverly Enterprises, Inc.; Community Care of America, Inc.;
Extendicare, Inc.; Genesis Health Ventures, Inc.; GranCare, Inc.; Harborside
Healthcare Corporation; Health Care & Retirement Corporation; Horizon/CMS
Healthcare Corporation; Living Centers of America, Inc.; Manor Care, Inc.;
Mariner Health Group, Inc.; The Multicare Companies Inc.; National HealthCare
L.P.; Regency Health Services, Inc.; Retirement Care Associates, Inc.; Summit
Care Corporation; Sun Healthcare Group, Inc.; Unison Healthcare Group; and
Vencor, Inc. (collectively, the "Long-Term Care Companies"). Smith Barney
compared market values as multiples of estimated calendar years 1996, 1997 and
1998 net income, and adjusted market values as multiples of latest 12 months and
latest quarter annualized net revenue, EBITDA and earnings before interest,
taxes, depreciation, amortization and rent ("EBITDAR"). Net income multiples for
the Long-Term Care Companies were based on estimates of selected investment
banking firms and net income multiples for IHS were based both on internal
estimates of the management of IHS and estimates of selected investment banking
firms. All multiples were based on closing stock prices as of July 2, 1997. The
ranges of multiples of estimated calendar years 1996, 1997 and 1998 net income
and latest 12 months and latest quarter annualized net revenue, EBITDA and
EBITDAR of the Long-Term Care Companies were as follows: (i) estimated calendar
years 1996, 1997 and 1998 net income: 10.2x to 27.0x, 10.4x to 22.6x and 9.6x to
19.1x, respectively; (ii) latest 12 months and latest quarter annualized net
revenue: 0.3x to 2.3x and 0.3x to 2.2x, respectively; (iii) latest 12 months and
latest quarter annualized EBITDA: 5.7x to 14.2x and 3.9x to 13.1x, respectively;
and (iv) latest 12 months and latest quarter annualized EBITDAR: 3.3x to 16.4x
and 3.4x to 12.8x, respectively. The multiples of estimated calendar years 1996,
1997, 1998, latest 12 months and latest quarter annualized net revenue, EBITDA
and EBITDAR of IHS were 17.6x, 15.1x, 12.9x, 1.1x, 1.2x, 11.2x, 8.1x, 10.2x and
7.8x, respectively.
Selected Merger and Acquisition Transactions Analysis. Using publicly
available information, Smith Barney analyzed the purchase price and implied
transaction value multiples paid or proposed to be paid in 10 selected
transactions in the home healthcare services industry, consisting of
(acquiror/target): IHS/Coram Healthcare Corporation; Apria Healthcare Group
Inc./Vitas Healthcare Corporation; The
59
Olsten Corporation/Quantum Health Resources, Inc.; Homedco Group Inc./Abbey
Healthcare Group, Inc.; Coram Healthcare Corporation/Caremark Home Infusion
Units; W.R. Grace & Co./Home Nutritional Services, Inc.; Caremark International
Inc./Critical Care America, Inc.; Abbey Healthcare Group/ Total Pharmaceutical
Care; The Olsten Corporation/Lifetime Corporation; and W.R. Grace & Co./ Home
Intensive Care, Inc. (collectively, the "Selected Transactions"). Smith Barney
compared purchase prices as multiples of, among other things, latest 12 months
net income and implied transaction values as multiples of latest 12 months
revenues, EBITDA and earnings before interest and taxes ("EBIT"). All multiples
for the Selected Transactions were based on information available at the time of
announcement of the transaction. Applying a range of multiples (excluding
outliers) for the Selected Transactions of latest 12 months net income,
revenues, EBITDA and EBIT of 19.2x to 32.7x, 0.57x to 1.55x, 7.1x to 15.6x and
10.9x to 24.7x, respectively, and an equity control premium of 25% to 40%, to
corresponding financial data for RoTech resulted in an equity reference range
for RoTech of approximately $14.97 to $33.91 per share, as compared to the
equity value implied by the Exchange Ratio of $22.50 per share based on the
closing stock price of IHS Common Stock on July 2, 1997.
No company, transaction or business used in the "Selected Company Analysis"
or "Selected Merger and Acquisition Transactions Analysis" as a comparison is
identical to RoTech, IHS or the Merger. Accordingly, an analysis of the results
of the foregoing is not entirely mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics and other factors that could affect the acquisition, public
trading or other values of the Selected Companies, Selected Transactions or the
business segment, company or transaction to which they are being compared.
Discounted Cash Flow Analysis. Smith Barney performed a discounted cash
flow analysis of the projected free cash flow of RoTech for the fiscal years
1998 through 2001, based on internal estimates of the management of RoTech. The
stand-alone discounted cash flow analysis of RoTech was determined by (i) adding
(x) the present value of projected free cash flows over the four-year period
from 1998 to 2001 and (y) the present value of RoTech's estimated terminal value
in year 2001 and (ii) subtracting the current net debt of RoTech. The range of
estimated terminal values for RoTech at the end of the four-year period was
calculated by applying terminal value multiples ranging from 7.0x to 9.0x to
RoTech's projected 2001 EBITDA, representing RoTech's estimated value beyond the
year 2001. The cash flows and terminal values of RoTech were discounted to
present value using discount rates ranging from 12.5% to 17.5%, with particular
focus on a discount rate of 15%. Utilizing such terminal values and a discount
rate of 15%, this analysis resulted in an equity reference range for RoTech of
approximately $15.94 to $27.04 per share, as compared to the equity value
implied by the Exchange Ratio of $22.50 per share based on the closing stock
price of IHS Common Stock on July 2, 1997.
Debt Capacity Analysis. Smith Barney performed an analysis designed to
determine the price that could be paid by a financial investor to complete a
leveraged buyout (an "LBO") of RoTech, based on RoTech's latest quarter
annualized EBITDA. For purposes of such analysis, Smith Barney assumed, among
other things, that the transaction could be financed using a capital structure
consisting of 40.0% bank debt at an assumed interest rate of 7.5%, 30%
subordinated debt at an assumed interest rate of 10.5%, and 30% equity. This
analysis resulted in an equity reference range for RoTech of approximately
$18.14 to $22.90 per share, as compared to the equity value implied by the
Exchange Ratio of $22.50 per share based on the closing stock price of IHS
Common Stock on July 2, 1997.
Contribution Analysis. Smith Barney analyzed the respective contributions
of RoTech and IHS to the estimated revenue, EBITDA, EBIT and net income of the
combined company for the latest 12 months and calendar years 1997 and 1998,
assuming certain cost savings and other potential synergies anticipated by the
managements of RoTech and IHS to result from the Merger were achieved. This
analysis indicated that (i) for the latest 12 months, RoTech would have
contributed approximately 21.3% of revenue, 31.2% of EBITDA, 25.8% of EBIT and
30.5% of net income, and IHS would have contributed approximately 78.7% of
revenue, 68.8% of EBITDA, 74.2% of EBIT and 69.5% of net income, of the combined
company; (ii) in calendar year 1997, RoTech would contribute approximately 19.7%
of revenue, 30.6% of EBITDA, 25.4% of EBIT and 31.8% of net income, and IHS
would contribute approximately 80.3% of revenue, 69.4% of EBITDA, 74.6% of EBIT
and 68.2% of net income, of the combined company; and (iii) in calendar year
1998, RoTech would contribute approxi-
60
mately 23.3% of revenue, 34.1% of EBITDA, 28.7% of EBIT and 35.1% of net income,
and IHS would contribute approximately 76.7% of revenue, 65.9% of EBITDA, 71.3%
of EBIT and 64.9% of net income, of the combined company. Based on the Exchange
Ratio, current stockholders of RoTech and IHS would own approximately 31.2% and
68.8%, respectively, of the equity value of the combined company upon
consummation of the Merger, and RoTech and IHS would constitute approximately
26.7% and 73.3%, respectively, of the enterprise value of the combined company.
Pro Forma Merger Analysis. Smith Barney analyzed certain pro forma effects
resulting from the Merger, including, among other things, the impact of the
Merger on the projected EPS of IHS for the fiscal years ended 1997 through 1999,
based on internal estimates of the managements of RoTech and IHS. The results of
the pro forma merger analysis suggested that the Merger could be dilutive to the
EPS of IHS in fiscal year 1997 and accretive to the EPS of IHS in fiscal years
1998 and 1999, assuming certain cost savings and other potential synergies
anticipated by the managements of RoTech and IHS to result from the Merger were
achieved. The actual results achieved by the combined company may vary from
projected results and the variations may be material.
Other Factors and Comparative Analyses. In rendering its opinion, Smith
Barney considered certain other factors and conducted certain other comparative
analyses, including, among other things, a review of (i) indications of interest
received from third parties other than IHS; (ii) historical and projected
financial results of RoTech and IHS; (iii) the history of trading prices and
volume for RoTech Common Stock and IHS Common Stock and the relationship between
movements of such common stock, movements in the common stock of the Selected
Companies and Long-Term Care Companies and movements in the S&P Industrial 500
Index; (iv) selected published analysts' reports on RoTech and IHS, including
analysts' estimates as to the earnings growth potential of RoTech and IHS; and
(v) a comparison of the Exchange Ratio with the historical ratio of the daily
closing prices of RoTech Common Stock and IHS Common Stock.
Pursuant to the terms of Smith Barney's engagement, RoTech has agreed to
pay Smith Barney for its services in connection with the Merger an aggregate
financial advisory fee equal to 0.75% of the total consideration (including
liabilities assumed) payable in connection with the Merger. RoTech has also
agreed to indemnify Smith Barney and related persons against certain
liabilities, including liabilities under the federal securities laws, arising
out of Smith Barney's engagement.
Smith Barney has advised RoTech that, in the ordinary course of business,
Smith Barney and its affiliates may actively trade or hold the securities of
RoTech and IHS for their own account or for the account of customers and,
accordingly, may at any time hold a long or short position in such securities.
Smith Barney has in the past provided investment banking services to RoTech and
IHS unrelated to the proposed Merger, for which services Smith Barney has
received compensation. In addition, Smith Barney and its affiliates (including
Travelers Group Inc. and its affiliates) may maintain relationships with RoTech
and IHS.
Smith Barney is an internationally recognized investment banking firm and
was selected by RoTech based on Smith Barney's experience, expertise and
familiarity with RoTech and its business. Smith Barney regularly engages in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
REGULATORY APPROVALS
As conditions precedent to the consummation of the Merger, the Merger
Agreement requires, among other things, that (i) no statute, rule or regulation
shall have been enacted by the government (or any governmental agency) of the
United States or any state, county, municipality or other political subdivision
thereof that makes the consummation of the Merger and any other transaction
contemplated thereby illegal and (ii) none of IHS, Merger Sub or RoTech nor any
of their respective subsidiaries shall be subject to any order, decree or
injunction by a court of competent jurisdiction which (a) prevents or materially
delays the consummation of the Merger or (b) would impose any material
limitation on the ability of IHS effectively to exercise full rights of
ownership of the common stock of the Surviving Corporation or any material
portion of the assets or business of RoTech, taken as a whole.
61
Certain persons, such as states' attorneys general and private parties,
could challenge the Merger as violative of the antitrust laws and seek to enjoin
the consummation of the Merger and, in the case of private persons, also seek to
obtain treble damages. There can be no assurance that a challenge to the Merger
on antitrust grounds will not be made or, if such a challenge is made, that it
will not be successful. Neither IHS nor RoTech intends to seek any further
stockholder approval or authorization of the Merger Agreement as a result of any
action that it may take to resist or resolve any objections by the FTC or other
objections, unless required to do so by applicable law.
The HSR Act provides that certain business mergers (including the Merger)
may not be consummated until certain information has been furnished to the DOJ
and the FTC and certain waiting period requirements have been satisfied. On
August 13, 1997, IHS and RoTech made their respective filings with the DOJ and
the FTC with respect to the Merger Agreement, and on September 12, 1997 the
waiting period under the HSR Act expired. Notwithstanding the expiration of the
waiting period of the HSR Act, the FTC, the DOJ or others could take action
under the antitrust laws, including, prior to the Effective Time, seeking to
enjoin the consummation of the Merger or, after the Effective Time, seeking the
divestiture by IHS of all or any part of the assets of RoTech acquired in the
Merger. There can be no assurance that a challenge to the Merger on antitrust
grounds will not be made or, if such a challenge is made, that it would not be
successful.
The operations of each of IHS and RoTech are subject to a substantial body
of federal, state, local and accrediting body laws, rules and regulations
relating to the conduct, licensing and development of healthcare businesses and
facilities. As a result, IHS and RoTech will be required to file applications
and notices with various federal and state regulatory agencies, including
without limitation the United States Drug Enforcement Agency, in connection with
the transactions contemplated by the Merger Agreement.
NYSE LISTING
A Subsequent Listing Application will be filed with the NYSE to list the
shares of IHS Common Stock to be issued to RoTech stockholders in connection
with the Merger. Although no assurance can be given that the shares of IHS
Common Stock so issued will be accepted for listing, IHS anticipates that these
shares will qualify for listing on the NYSE, upon official notification of
issuance thereof. It is a condition to the Merger that such shares of IHS Common
Stock be approved for listing on the NYSE, upon official notice of issuance, at
the Effective Time.
LIMITATIONS ON RESALE OF IHS COMMON STOCK BY AFFILIATES
IHS Common Stock to be issued to RoTech stockholders in connection with the
Merger has been registered under the Securities Act. IHS Common Stock received
by RoTech stockholders upon consummation of the Merger will be freely
transferable under the Securities Act, except for shares issued to any person
who may be deemed an "Affiliate" (as such term is used in Rule 145 promulgated
under the Securities Act) of RoTech or IHS. Affiliates of RoTech or IHS may not
sell their shares of IHS Common Stock acquired in connection with the Merger
except pursuant to an effective registration statement under the Securities Act
covering such shares or in compliance with Rule 145 under the Securities Act or
another applicable exemption from the registration requirements of the
Securities Act. In general, under Rule 145 under the Securities Act, for one
year following the Effective Time, an Affiliate (together with certain related
persons) would be entitled to sell shares of IHS Common Stock acquired in
connection with the Merger only through unsolicited "broker transactions" or in
transactions directly with a "market maker," as such terms are defined in Rule
144 under the Securities Act. Additionally, the number of shares to be sold by
an Affiliate (together with certain related persons and certain persons acting
in concert) during such one-year period within any three-month period for
purposes of Rule 145 under the Securities Act may not exceed the greater of 1%
of the outstanding shares of IHS Common Stock or the average weekly trading
volume of such stock during the four calendar weeks preceding such sale. Rule
145 under the Securities Act would remain available to Affiliates only if IHS
remained current with its information filings with the Commission under the
Exchange Act. One year after the Effective Time, an Affiliate would be able to
sell such IHS Common Stock without such manner of sale or volume limitations,
provided that IHS was current with its Exchange Act information
62
filings and such Affiliate was not then an Affiliate of IHS. Two years after the
Effective Time, an Affiliate would be able to sell such shares of IHS Common
Stock without any restrictions so long as such Affiliate was not, and had not
been for at least three months prior thereto, an Affiliate of IHS.
ADDITIONAL INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the RoTech Board with respect to the
Merger Agreement and the transactions contemplated thereby, RoTech stockholders
should be aware that certain members of the management of RoTech and of the
RoTech Board have certain interests in the Merger that are in addition to the
interests of stockholders of RoTech generally. Certain of these persons may have
participated in the negotiation and consideration of the Merger Agreement as
well as certain of the arrangements described below. The RoTech Board was aware
of the arrangements and that such arrangements may give these individuals
interests in the Merger that are in addition to the interests of stockholders
generally and determined that such additional interests did not alter its
conclusions regarding the Merger or its recommendation to RoTech's stockholders.
See "- Recommendations of the Boards of Directors - RoTech."
Arrangements with Stephen P. Griggs. In connection with and as a condition
to the Merger, Mr. Griggs will enter into a five-year agreement with RoTech
whereby he will serve as President of RoTech at a base salary of $500,000 per
annum. Under his employment agreement, Mr. Griggs will receive a $500,000 bonus
in each year in which RoTech's net income contribution to IHS equals or exceeds
specified targets, with an additional bonus determined by IHS to be paid if the
net income contribution target is exceeded. In addition, in connection with the
Merger Mr. Griggs will receive a one-time cash sign-on bonus of $3.5 million,
payable at the Closing, and be issued warrants to purchase 750,000 shares of IHS
Common Stock, at a per share exercise price equal to the average closing sales
price of the IHS Common Stock on the NYSE for the 15 business days prior to the
Closing Date, such warrants to vest at a rate of 20% per year beginning on the
first anniversary of the Closing Date (subject to acceleration upon Mr. Griggs'
death or the occurrence of a change in control of IHS). Pursuant to a related
agreement, RoTech will also be obligated to pay to Mr. Griggs the amount of any
excise tax payable by him under Section 4999 of the Code (or any corresponding
provisions of state or local tax law) as a result of any payments to him
pursuant to his employment agreement or in connection with the Merger, as well
as the income tax and excise tax on such additional compensation such that,
after the payment of income and excise taxes, Mr. Griggs is in the same economic
position in which he would have been if the provisions of Section 4999 of the
Code (or any corresponding provisions of state of local tax law) had not been
applicable.
Arrangements with Mr. Kennedy. In connection with and as a condition to the
Merger, Mr. William P. Kennedy, RoTech's Chairman and Chief Executive Officer,
will enter into a severance and non-competition agreement with RoTech which
provides that he will resign as an officer and director of RoTech upon the
Closing of the Merger. Following the Merger, Mr. Kennedy will serve as a
consultant to RoTech for three years for a consulting fee of $1.0 million,
payable in one lump sum at the Closing. In addition, Mr. Kennedy has agreed that
following the Merger, he will not compete with IHS or RoTech for 15 years in
consideration of a non-compete payment of $4.0 million, payable in one lump sum
at the Closing, although beginning five years after the Closing Mr. Kennedy can
provide consulting services to competing businesses. Pursuant to a related
agreement, RoTech will also be obligated to pay to Mr. Kennedy the amount of any
excise tax payable by him under Section 4999 of the Code (or any corresponding
provisions of state or local tax law) as a result of any payments to him
pursuant to the severance and non-competition agreement or in connection with
the Merger, as well as the income tax and excise tax on such additional
compensation such that, after the payment of income and excise taxes, Mr.
Kennedy is in the same economic condition in which he would have been if the
provisions of Section 4999 of the Code (or any corresponding provisions of state
or local tax law) had not been applicable. In addition, IHS has reached an
agreement in principle to purchase, for $4.0 million, a 30% interest in a
newly-formed limited partnership controlled by Mr. Kennedy, which limited
partnership will enter into a marketing arrangement for pharmaceutical products
produced by Nephron Pharmaceuticals Corporation, a corporation wholly-owned by
Mr. Kennedy, all on terms to be mutually agreed upon.
Arrangements with Ms. Irish. In connection with and as a condition to the
Merger, Ms. Rebecca R. Irish, RoTech's Chief Financial Officer, will enter into
a severance and non-competition agreement with RoTech which provides that she
will resign as an officer of RoTech upon the Closing of the Merger. Following
the
63
Merger, Ms. Irish will serve as a consultant to RoTech for two years for a
consulting fee of $250,000, payable in one lump sum at the Closing. In addition,
Ms. Irish has agreed that following the Merger, she will not compete with IHS or
RoTech for 15 years in consideration of a non-compete payment of $1.0 million,
payable in one lump sum at the Closing, although beginning five years after the
Closing Ms. Irish can provide services to competing businesses as a consultant,
employee or otherwise. Pursuant to a related agreement, RoTech will also be
obligated to pay to Ms. Irish the amount of any excise tax payable by her under
Section 4999 of the Code (or any corresponding provisions of state or local tax
law) as a result of any payments to her pursuant to the severance and
non-competition agreement or in connection with the Merger, as well as the
income tax and excise tax on such additional compensation such that, after the
payment of income and excise taxes, Ms. Irish is in the same economic position
in which she would have been if the provisions of Section 4999 of the Code (or
any corresponding provisions of state or local tax law) had not been applicable.
Stock Options and Rights. Pursuant to the terms of the Merger Agreement and
the outstanding options, as of the Effective Time, by virtue of the Merger and
without any action on the part of the optionholders, each option to purchase
shares of RoTech Common Stock that is outstanding immediately prior to the
Effective Time ("RoTech Options"), whether or not exercisable, shall be replaced
by a substitute option (such new options being hereinafter referred to as "IHS
Exchange Options") to purchase that number of shares of IHS Common Stock equal
to the number of shares of RoTech Common Stock subject to such option multiplied
by the Exchange Ratio at an exercise price per share of IHS Common Stock equal
to the option price per share of RoTech Common Stock subject to such option in
effect immediately prior to the Effective Time divided by the Exchange Ratio.
Each such IHS Exchange Option will otherwise contain substantially the same
terms and conditions as the RoTech Option it replaces, except that the IHS
Exchange Options will allow "cashless" exercise. All unvested RoTech Options
(other than options for 50,000 shares) will become fully-vested upon
consummation of the Merger. Mr. Griggs, Ms. Irish and Ms. Janet Ziomek, Vice
President of Finance of RoTech, currently own RoTech Options to purchase 850,000
shares, 200,000 shares and 100,000 shares, respectively, of RoTech Common Stock
at weighted average per share exercise prices of $13.92, $5.94 and $13.88,
respectively. Upon consummation of the Merger, the RoTech Options of Mr. Griggs,
Ms. Irish and Ms. Ziomek will become, if wholly unexercised prior to the
Effective Time, IHS Exchange Options to purchase 493,510 shares, 116,120 shares
and 58,060 shares, respectively, of IHS Common Stock at weighted average per
share exercise prices of $23.98, $10.23 and $23.91, respectively.
In addition, each of William A. Walker II, Jack T. Weaver and Leonard
Williams, the directors of RoTech other than William P. Kennedy and Stephen P.
Griggs, is a participant in RoTech's Restricted Stock Plan for Non-Employee
Directors (the "Restricted Stock Plan"). Under the Restricted Stock Plan, as
amended, each non-employee director of RoTech is entitled, for each year of
service on the RoTech Board, to that number of shares of RoTech Common Stock
which results from dividing the sum of $5,000 by the price of a share of RoTech
Common Stock at the close of trading on the date of the annual meeting of RoTech
stockholders. Each of Messrs. Walker, Weaver and Williams is currently entitled
to 1,764 shares of RoTech Common Stock pursuant to the Restricted Stock Plan,
which shares will vest and be distributed simultaneous with consummation of the
Merger, and each of them will receive 1,024 shares of IHS Common Stock in
respect thereof in the Merger.
Indemnification of RoTech Directors and Executive Officers. IHS and Merger
Sub have agreed, from and after the Effective Time, to continue to advance
legal fees and expenses and to indemnify present and former officers and
directors of RoTech, as provided in RoTech's Articles of Incorporation and
By-laws as now in effect, and to continue to perform under indemnification
agreements currently in effect between RoTech and certain of its officers and
directors, and IHS has agreed to maintain in effect for a period of five years
after the Effective Time policies of directors' and officers' liability
insurance with substantially the same coverage and containing substantially
similar terms and conditions as RoTech's current policies in respect of acts,
omissions or matters occurring prior to the Effective Time and subject to
certain limitations (provided, however, that the foregoing does not obligate
IHS to provide any greater officers' and director's liability insurance than
that generally provided to IHS' officers and directors). See "The Merger
Agreement - Indemnification; Insurance."
64
ACCOUNTING TREATMENT
The Merger will be accounted for under the "purchase" method of accounting
in accordance with GAAP. Under this method of accounting, the Merger
consideration will be allocated to RoTech's assets and liabilities based upon
their estimated fair market value at the Closing Date of the Merger. The excess,
if any, of purchase price over the fair values of the net assets acquired will
be recorded as intangible assets and amortized over a 15 to 40 year estimated
life for accounting purposes. Assuming a price per share of IHS Common Stock on
the Closing Date of the Merger of $34.625 (the closing price of IHS Common Stock
on September 18, 1997 (the last trading day prior to the date of this Joint
Proxy Statement/Prospectus)) and based on the approximately 24,177,000 shares of
RoTech Common Stock outstanding on April 30, 1997, IHS will recognize intangible
assets of approximately $544.2 million (substantially all of which will be
goodwill), which will result in annual amortization expense of approximately
$13.8 million. The actual amount of intangible assets will be based upon the
closing price of the IHS Common Stock on the day the Merger is consummated and
the number of shares of IHS Common Stock issued in the Merger. At September 18,
1997 (the last business day prior to the date of this Joint Proxy
Statement/Prospectus), 26,439,322 shares of RoTech Common Stock were
outstanding. In addition, RoTech's operating results will be included in IHS'
consolidated operating results from and after the Closing Date of the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary, based upon current law, is a general discussion of
the principal federal income tax consequences of the Merger, assuming the Merger
is consummated as contemplated herein. This summary is based upon the Code,
applicable regulations promulgated under the Code by the Treasury Department
("Treasury Regulations") and administrative rulings and judicial authority as of
the date hereof, all of which are subject to change, possibly with retroactive
effect. Any such change could affect the continuing validity of this summary.
This summary applies to holders of RoTech Common Stock who hold their shares of
RoTech Common Stock as capital assets. This summary does not discuss all aspects
of income taxation that may be relevant to a particular holder of RoTech Common
Stock in light of such holder's specific circumstances or to certain types of
holders subject to special treatment under the federal income tax laws (for
example, foreign persons, dealers in securities, banks and other financial
institutions, insurance companies, regulated investment companies, tax-exempt
organizations, and holders who acquire RoTech Common Stock pursuant to the
exercise of options or otherwise as compensation), and it does not discuss any
aspect of state, local, foreign or other tax laws. Consequently, each holder of
RoTech Common Stock should consult his, her or its own tax advisor as to the
specific tax consequences of the Merger to that stockholder.
Neither IHS nor RoTech has requested or will receive an advance ruling from
the Internal Revenue Service (the "Service") as to the federal income tax
consequences of the Merger. The respective obligations of RoTech and IHS to
consummate the Merger are conditioned upon receipt of certain legal opinions
relating to the federal income tax consequences of the Merger, in form and
substance satisfactory to RoTech and IHS and their respective counsel. The
opinions of such counsel are based upon the facts that are described herein, and
upon certain assumptions and customary representations made by RoTech, IHS and
Merger Sub and by the management of RoTech and by the management of IHS and
Merger Sub. Such opinions are also based upon the Code, Treasury Regulations
currently in effect thereunder, current administrative rulings and practice by
the Service, and judicial authority, all of which are subject to change. Any
such change could affect the continuing validity of such opinions and this
discussion. In addition, an opinion of counsel is not binding upon the Service,
and there can be no assurance, and none is hereby given, that the Service will
not take a position which is contrary to one or more positions reflected in the
opinions of such counsel, or that such opinions will be upheld by the courts if
challenged by the Service. See "Risk Factors - Risks Related to Federal Income
Tax Consequences."
As of the date of this Joint Proxy Statement/Prospectus, Winderweedle,
Haines, Ward & Woodman, P.A. has advised RoTech that in its opinion (i) the
Merger will qualify as a reorganization pursuant to Section 368(a) of the Code,
(ii) no gain or loss will be recognized by RoTech as the result of the
consummation of the Merger, and (iii) no gain or loss will be recognized by a
RoTech stockholder upon the exchange of the shares of RoTech Common Stock for
shares of IHS Common Stock pursuant to this Merger, except on the receipt of
cash in lieu of a fractional share interest in IHS Common Stock.
65
As of the date of this Joint Proxy Statement/Prospectus, Fulbright &
Jaworski L.L.P. has advised IHS and Merger Sub that in its opinion (i) the
Merger will qualify as a reorganization pursuant to Section 368(a) of the Code
and (ii) no gain or loss will be recognized by either IHS, Merger Sub or RoTech
as the result of the consummation of the Merger.
Provided that the Merger constitutes a tax-free reorganization, the
aggregate adjusted tax basis of the IHS Common Stock received (including any
fractional share interests deemed received) by a stockholder of RoTech as a
result of the Merger will be the same as the aggregate adjusted tax basis of the
shares of RoTech Common Stock surrendered in exchange therefor. The holding
period of the IHS Common Stock received (including any fractional share
interests deemed received) by a stockholder of RoTech as a result of the Merger
will include the holding period of the shares of RoTech Common Stock surrendered
in exchange therefor. Any cash that a stockholder of RoTech receives in lieu of
a fractional interest in IHS Common Stock will be treated as if the fractional
share were distributed in the Merger and then redeemed, resulting in gain or
loss upon receipt of such cash taxed as provided in Section 302 of the Code. To
prevent "backup withholding" of federal income tax on any payments of cash to a
RoTech stockholder in the Merger, a RoTech stockholder must, unless an exception
applies under the applicable law and Treasury Regulations, provide the payor of
such cash with such holder's correct taxpayer identification number ("TIN") on a
substitute Form W-9 and certify under penalties of perjury that such number is
correct and that such holder is not subject to backup withholding. The
exceptions provide that certain 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, however, he or she must submit a signed
statement (i.e., Certificate of Foreign Status on Form W-8) attesting to his or
her exempt status. A Substitute Form W-9 will be provided to each RoTech
stockholder in the letter of transmittal to be mailed to each holder after the
Effective Time. If the correct TIN and certifications are not provided, a $50
penalty may be imposed on a RoTech stockholder by the Service, and any cash
received by such stockholder may be subject to backup withholding at a rate of
31%.
THE DISCUSSION SET FORTH ABOVE IS INTENDED ONLY AS A GENERAL SUMMARY OF THE
PRINCIPAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER BASED ON EXISTING LAW AS
OF THE DATE OF THIS JOINT PROXY STATEMENT/ PROSPECTUS, AND DOES NOT PURPORT TO
BE AN ANALYSIS OR DISCUSSION OF ANY CONSEQUENCES ARISING UNDER THE TAX LAWS OF
ANY STATE, LOCALITY OR FOREIGN JURISDICTION. STOCKHOLDERS OF ROTECH ARE URGED TO
CONSULT THEIR TAX ADVISORS TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO THEM
OF THE MERGER (INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS).
NO APPRAISAL RIGHTS
Under the DGCL, no holders of IHS Common Stock will be entitled to
appraisal rights in connection with the Merger because the shares of IHS Common
Stock entitled to vote on the Merger are listed on the NYSE and also because
approval of the Merger by the holders of IHS Common Stock is not required under
the DGCL. Under the FBCA, no holders of RoTech Common Stock will be entitled to
appraisal rights in connection with the Merger because the shares of RoTech
Common Stock are listed on the Nasdaq National Market.
ROTECH DEBENTURES
As of the Effective Time, RoTech's outstanding 5 1/4% convertible
subordinated debentures due 2003 (the "RoTech Debentures") in the aggregate
principal amount of $110 million and having a current conversion price of $26.25
per share of RoTech Common Stock (38.1 shares per $1,000 principal amount of
RoTech Debentures) will become convertible into IHS Common Stock at a conversion
price of $45.21 per share (22.12 shares per $1,000 principal amount of RoTech
Debentures). Pursuant to the terms of the indenture under which the RoTech
Debentures were issued, IHS is obligated to offer to repurchase the RoTech
Debentures immediately following the Merger.
66
THE MERGER AGREEMENT
The following description of the material provisions of the Merger
Agreement is only a summary and does not purport to be complete. This
description is qualified in its entirety by reference to the complete text of
the Merger Agreement, a copy of which is incorporated herein by reference and
attached as Appendix A hereto. All IHS and RoTech stockholders are urged to read
carefully the Merger Agreement in its entirety.
THE MERGER
The Merger Agreement provides that, subject to the approval of the Merger
Agreement by the stockholders of IHS and Rotech and the satisfaction or waiver
of other conditions to the Merger, Merger Sub will be merged with and into
RoTech, with RoTech continuing as the Surviving Corporation and as a direct
wholly-owned subsidiary of IHS.
EFFECTIVE TIME AND EFFECTS OF THE MERGER
If the Merger Agreement is approved by the stockholders of IHS and RoTech,
and the other conditions to the Merger are satisfied or waived, the Effective
Time will occur at the time of filing of a certificate of merger, in the form
required by and executed in accordance with the FBCA, with the Secretary of
State of the State of Florida. It is presently contemplated that the Effective
Time will occur as promptly as practicable after the Merger Agreement has been
approved by the stockholders of IHS and RoTech. At the Effective Time, the
Articles of Incorporation and By-laws of Merger Sub, as in effect immediately
prior to the Effective Time, shall be the articles of incorporation and by-laws
of the Surviving Corporation until thereafter changed or amended as provided
therein or by applicable law. The directors of Merger Sub immediately prior to
the Effective Time will be the directors of the Surviving Corporation, and the
officers of Merger Sub immediately prior to the Effective Time will be the
initial officers of the Surviving Corporation, in each case until their
successors are duly elected or appointed and qualify in the manner provided in
the articles of incorporation and by-laws of the Surviving Corporation, or as
otherwise provided by law.
CONVERSION OF ROTECH SHARES
The Merger Agreement provides that, as of the Effective Time, by virtue of
the Merger and without any action on the part of any RoTech stockholder, (i)
each share of RoTech Common Stock issued and outstanding immediately prior to
the Effective Time (except for shares, if any, owned by RoTech as treasury stock
or owned by any wholly-owned subsidiary of RoTech) shall be converted into the
right to receive .5806 of a share of IHS Common Stock; and (ii) each issued and
outstanding share of common stock of Merger Sub immediately prior to the
Effective Time shall be converted into one newly issued share of common stock,
par value $.01 per share, of the Surviving Corporation. At the Effective Time
all shares of RoTech Common Stock owned by RoTech or any wholly-owned subsidiary
of RoTech shall automatically be canceled as a result of the consummation of the
Merger.
For a description of the treatment of outstanding options to purchase
RoTech Common Stock and the RoTech Debentures, see "- Stock Options" and "The
Merger - RoTech Debentures." ROTECH STOCKHOLDERS SHOULD NOT SURRENDER THEIR
SHARE CERTIFICATES FOR EXCHANGE UNTIL THEY RECEIVE A TRANSMITTAL FORM.
NO FRACTIONAL SHARES OF IHS COMMON STOCK
No fractional shares of IHS Common Stock will be issued in the Merger. In
lieu of any such fractional shares of IHS Common Stock, each holder of shares of
RoTech Common Stock who otherwise would be entitled to receive a fractional
share of IHS Common Stock pursuant to the Merger will be paid an amount in cash,
without interest, equal to such fraction multiplied by the Average IHS Trading
Price (as defined below). The fractional share interests of each RoTech
stockholder will be aggregated, and no RoTech stockholder will receive cash in
an amount equal to or greater than the
67
value of one full share of IHS Common Stock. The "Average IHS Trading Price"
means the average closing price of the IHS Common Stock on the NYSE Composite
Tape for the 30 trading day period ending on the second trading day prior to the
Closing Date.
EXCHANGE OF SHARE CERTIFICATES
Exchange Agent. Prior to the Effective Time, IHS will enter into an
agreement with the Exchange Agent which will provide that IHS shall deposit with
the Exchange Agent as of the Effective Time, for the benefit of the holders of
RoTech Shares, certificates representing the shares of IHS Common Stock
(together with any dividends or distributions with respect thereto with a record
date after the Effective Time, the "Exchange Fund") which are issuable in
exchange for outstanding RoTech Shares pursuant to the Merger Agreement.
Exchange Procedures. As soon as reasonably practicable, but no later than
ten business days after the Effective Time, the Exchange Agent will mail to each
holder of record of a certificate or certificates which immediately prior to the
Effective Time represented outstanding RoTech Shares (the "Certificates") whose
shares were converted into the right to receive IHS Common Stock pursuant to the
Merger Agreement (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent and shall be in
such form and have such other provisions as IHS may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for certificates representing shares of IHS Common Stock. Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with such letter of
transmittal, duly executed, and such other documents as may reasonably be
required by the Exchange Agent, the holder of such Certificate shall be entitled
to receive in exchange therefor a certificate representing that number of whole
shares of IHS Common Stock which such holder has the right to receive pursuant
to the provisions of the Merger Agreement and any cash which may be paid in lieu
of a fractional share of IHS Common Stock, and the Certificate so surrendered
shall forthwith be canceled. In the event of a transfer of ownership of RoTech
Shares which is not registered in the transfer records of RoTech, a certificate
representing the proper number of shares of IHS Common Stock may be issued, and
any cash which may be paid in lieu of a fractional share of IHS Common Stock may
be paid, to a person other than the person in whose name the Certificate so
surrendered is registered, if such Certificate shall be properly endorsed or
otherwise be in proper form for transfer and the person requesting such issuance
shall pay any transfer or other taxes required by reason of the issuance of
shares of IHS Common Stock to a person other than the registered holder of such
Certificate or establish to the satisfaction of IHS that such tax has been paid
or is not applicable. Until surrendered as contemplated by the Merger Agreement,
each Certificate shall be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender the certificate
representing shares of IHS Common Stock and cash in lieu of any fractional
shares of IHS Common Stock as contemplated by the Merger Agreement. No interest
will be paid or will accrue on any cash payable in lieu of any fractional shares
of IHS Common Stock or on any cash dividends or distributions payable with
respect to IHS Common Stock. To the extent permitted by law, former stockholders
of record of RoTech shall be entitled to vote after the Effective Time at any
meeting of IHS stockholders the number of whole shares of IHS Common Stock into
which their respective RoTech Shares are converted, regardless of whether such
holders have exchanged their Certificates for certificates representing IHS
Common Stock in accordance with the Merger Agreement.
Distributions with Respect to Unexchanged Shares. No dividends or other
distributions with respect to IHS Common Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Certificate with
respect to the shares of IHS Common Stock represented thereby and no cash
payment in lieu of fractional shares shall be paid to any such holder until the
surrender of such Certificate in accordance with the Merger Agreement. Subject
to the effect of applicable laws, following surrender of any such Certificate,
there shall be paid to the holder of the certificate representing whole shares
of IHS Common Stock issued in exchange therefor, without interest, (i) at the
time of such surrender, the amount of any cash payable in lieu of a fractional
share of IHS Common Stock to which such holder is entitled pursuant to the
Merger Agreement and the amount of dividends or other distri-
68
butions with a record date after the Effective Time theretofore paid with
respect to such whole shares of IHS Common Stock and (ii) at the appropriate
payment date, the amount of dividends or other distributions with a record date
after the Effective Time but prior to such surrender and with a payment date
subsequent to such surrender payable with respect to such whole shares of IHS
Common Stock.
No Further Ownership Rights in RoTech Shares. All shares of IHS Common
Stock issued upon the surrender for exchange of Certificates in accordance with
the terms of the Merger Agreement (including any cash paid in lieu of fractional
shares of IHS Common Stock and any cash paid in respect of dividends or
distributions on shares of IHS Common Stock) shall be deemed to have been issued
(and paid) in full satisfaction of all rights pertaining to the RoTech Shares
theretofore represented by such Certificates.
No Fractional Shares. No certificates or scrip representing fractional
shares of IHS Common Stock shall be issued upon the surrender for exchange of
Certificates, and such fractional share interests will not entitle the owner
thereof to vote or to any rights of a stockholder of IHS. Each holder of shares
of RoTech Common Stock exchanged pursuant to the Merger Agreement who would
otherwise have been entitled to receive a fraction of a share of IHS Common
Stock (after taking into account all Certificates delivered by such holder)
shall receive, in lieu thereof, cash (without interest) in an amount equal to
such fractional part of a share of IHS Common Stock multiplied by the Average
IHS Trading Price.
Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of the Certificates for six months after
the Effective Time shall be delivered to IHS, upon demand, and any holders of
the Certificates who have not theretofore surrendered such Certificates shall
thereafter look only to IHS for payment of IHS Common Stock, any cash in lieu of
fractional shares of IHS Common Stock and any dividends or distributions with
respect to IHS Common Stock.
No Liability. None of IHS, Merger Sub, RoTech or the Exchange Agent shall
be liable to any person in respect of any shares of IHS Common Stock (or
dividends or distributions with respect thereto) or cash from the Exchange Fund
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
TREATMENT OF ROTECH STOCK OPTIONS
As of the Effective Time, by virtue of the Merger and without any action on
the part of the participants therein, each option to purchase shares of RoTech
Common Stock that is outstanding immediately prior to the Effective Time
("RoTech Options"), whether or not exercisable, shall be replaced by a
substitute option (such new options being hereinafter referred to as "IHS
Exchange Options") to purchase that number of shares of IHS Common Stock equal
to the number of shares of RoTech Common Stock subject to such option multiplied
by the Exchange Ratio at an exercise price per share of IHS Common Stock equal
to the option price per share of RoTech Common Stock subject to such option in
effect immediately prior to the Effective Time divided by the Exchange Ratio.
Each such IHS Exchange Option will otherwise contain substantially the same
terms and conditions as the RoTech Option it replaces, provided that the IHS
Exchange Options will permit cashless exercise. Pursuant to the terms of the
plans under which the RoTech Options were issued, the unvested portion of each
RoTech Option issued under such plans (other than options for 50,000 shares)
will immediately vest upon consummation of the Merger. As of the RoTech Record
Date, 3,172,000 shares of RoTech Common Stock were issuable upon the exercise of
outstanding RoTech Options, which options, given the Exchange Ratio of .5806 of
a share of IHS Common Stock per share of RoTech Common Stock, will be converted
to become options to purchase approximately 1,841,663 shares of IHS Common Stock
at the Effective Time. The weighted average exercise price per share of all
RoTech Options outstanding as of the RoTech Record Date is $11.647 per share of
RoTech Common Stock. Following the Merger, the weighted average exercise price
per share of IHS Exchange Options will be approximately $20.06 per share of IHS
Common Stock.
IHS has agreed to use its reasonable best efforts to file within thirty
days after the Effective Time a registration statement on Form S-8 (or other
appropriate form under the Securities Act) to register the shares of IHS Common
Stock issuable upon exercise of the IHS Exchange Options and to use its
reasonable efforts to have such registration statement declared effective and to
maintain the effective-
69
ness of such registration statement until the exercise or expiration of all such
options. To the extent permitted by applicable law, IHS shall register the
reoffer and resale by affiliates of IHS of the shares of IHS Common Stock issued
upon exercise of the IHS Exchange Options.
REPRESENTATIONS AND WARRANTIES
Under the Merger Agreement, IHS, Merger Sub and RoTech have each made a
number of representations regarding the organization and capital structures of
the respective companies and their affiliates, their filings with the
Commission, their operations, financial condition and other matters, including
their authority to enter into the Merger Agreement and to consummate the Merger.
None of the representations and warranties of the parties shall survive the
Effective Time.
CONDITIONS TO THE MERGER
Mutual Conditions. The respective obligations of each of IHS, Merger Sub
and RoTech to effect the Merger are subject to certain conditions, including the
following: (i) none of IHS, Merger Sub or RoTech nor any of their respective
subsidiaries shall be subject to any order, decree or injunction by a court of
competent jurisdiction which prevents or materially delays the consummation of
the Merger or would impose any material limitation on the ability of IHS
effectively to exercise full rights of ownership of the common stock of the
Surviving Corporation or any material portion of the assets or business of
RoTech, taken as a whole; (ii) no statute, rule or regulation shall have been
enacted by the government (or any governmental agency) of the United States or
any state, municipality or other political subdivision thereof that makes the
consummation of the Merger or any other significant transaction contemplated by
the Merger Agreement illegal; (iii) the holders of shares of RoTech Common Stock
and the holders of shares of IHS Common Stock each shall have approved the
adoption of the Merger Agreement; (iv) the shares of IHS Common Stock to be
issued in connection with the Merger shall have been approved for listing on the
NYSE, upon official notice of issuance, and shall have been issued in
transactions qualified or exempt from registration under applicable state
securities laws; (v) the Registration Statement of which this Joint Proxy
Statement/Prospectus is a part shall have been declared effective and no stop
order with respect thereto shall be in effect; (vi) IHS, Merger Sub and RoTech
shall have received all consents, approvals and authorizations of third parties
that are required of such third parties prior to the consummation of the Merger,
except where the failure to obtain such consents, approvals or authorizations
would not have a material adverse effect on the business of the Surviving
Corporation; (vii) all approvals of the Merger required under the HSR Act shall
have been obtained or the waiting periods thereunder shall have expired; and
(viii) each party shall have received the consent to the Merger of its senior
bank lenders (which consents have been received prior to the date hereof).
Conditions to the Obligations of IHS and Merger Sub. The obligations of IHS
and Merger Sub to consummate the Merger and the other transactions contemplated
by the Merger Agreement are further subject to, among others, the following
conditions: (i) RoTech shall have performed in all material respects each of the
agreements and acts required to be performed by it at or prior to the Closing
Date; (ii) the representations and warranties of RoTech set forth in the Merger
Agreement shall be true and correct as of the date of the Merger Agreement and
as of the Closing Date (except to the extent such representations and warranties
expressly relate to a specific date, in which case such representations and
warranties shall be true and correct as of such date), provided that RoTech
shall not be deemed to be in breach of any such representations or warranties
(a) if the inaccuracies of all representations of RoTech set forth in the Merger
Agreement would not, in the aggregate, have a material adverse effect on RoTech
and its subsidiaries, taken as a whole or (b) if IHS knew or should have known
such breach would arise from the taking of any action permitted to be taken by
RoTech pursuant to Section 7.2 of the Merger Agreement; (iii) IHS and Merger Sub
shall have obtained, or obtained the transfer of, any licenses and other
regulatory approvals necessary prior to the Effective Time to allow the
Surviving Corporation to operate RoTech's business, unless the failure to obtain
such transfer or approval would not have a material adverse effect on the
Surviving Corporation; (iv) IHS shall have received an opinion from Fulbright &
Jaworski L.L.P. to the effect that the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code and the opinion of
Winderweedle, Haines, Ward & Woodman, P.A., counsel to RoTech, with respect to
certain other matters; (v) all consents, authorizations, orders
70
and approvals of (or filings or registrations with) any governmental commission,
board or other regulatory body required in connection with the execution,
delivery and performance of the Merger Agreement shall have been obtained or
made, except for filings in connection with the Merger and any other documents
required to be filed after the Effective Time; (vi) the opinion of DLJ dated
July 6, 1997 shall not have been adversely modified or withdrawn as of the date
of mailing of this Joint Proxy Statement/ Prospectus; (vii) each of Messrs.
Griggs and Kennedy and Ms. Irish shall have terminated their employment
agreement with RoTech and (a) Mr. Griggs, RoTech's President and Chief Operating
Officer, shall have entered into a five-year employment agreement with RoTech
and (b) each of Mr. Kennedy, RoTech's Chairman and Chief Executive Officer, and
Ms. Irish, RoTech's Chief Financial Officer, shall have entered into a severance
and non-competition agreement with RoTech; and (viii) IHS shall have received a
"cold comfort" letter from Deloitte & Touche LLP, RoTech's independent
accountants, dated the Effective Time and addressed to IHS, as to such matters
reasonably requested by IHS.
Conditions to the Obligation of RoTech. The obligation of RoTech to
consummate the Merger and the other transactions contemplated by the Merger
Agreement is further subject to, among others, the following conditions: (i) IHS
and Merger Sub shall have performed in all material respects each of the
agreements and acts required to be performed by them at or prior to the Closing
Date; (ii) the representations and warranties of IHS and Merger Sub set forth in
the Merger Agreement shall be true and correct as of the date of the Merger
Agreement and as of the Closing Date (except to the extent such representations
and warranties expressly relate to a specific date, in which case such
representations and warranties shall be true and correct as of such date),
provided that IHS shall not be deemed to be in breach of any such
representations or warranties if the inaccuracies of all representations and
warranties of IHS set forth in the Merger Agreement would not, in the aggregate,
have a material adverse effect on IHS and its subsidiaries, taken as a whole;
(iii) RoTech shall have received an opinion from Winderweedle, Haines, Ward &
Woodman, P.A., to the effect that the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code and the opinion of Blass &
Driggs with respect to certain other matters; (iv) the opinion from Smith Barney
opining that the consideration to be received in the Merger is fair to RoTech's
stockholders from a financial point of view shall not have been adversely
modified or withdrawn as of the date of this Joint Proxy Statement/Prospectus;
(v) all consents, authorizations, orders and approvals of (or filings or
registrations with) any governmental commission, board or other regulatory body
required in connection with the execution, delivery and performance of the
Merger Agreement shall have been obtained or made, except for filings in
connection with the Merger and any other documents required to be filed after
the Effective Time; and (vi) RoTech shall have received a letter from KPMG Peat
Marwick LLP, IHS' independent accountants, dated the Effective Time and
addressed to RoTech, as to such matters reasonably requested by RoTech.
CONDUCT OF ROTECH BUSINESS PENDING THE MERGER; OTHER COVENANTS
The Merger Agreement provides that, prior to the Effective Time or the
termination of the Merger Agreement, RoTech will conduct its business in the
ordinary course and will use its commercially reasonable best efforts to
preserve the business organization of RoTech intact, to keep available to IHS
and the Surviving Corporation the services of the present employees of RoTech,
and to preserve for IHS and the Surviving Corporation the goodwill of the
suppliers, customers and others having business relations with RoTech.
Under the Merger Agreement, RoTech has agreed that, prior to the Effective
Time, it will not and will not permit any of its subsidiaries to (in each case
other than (i) as contemplated by the terms of the Merger Agreement and the
other documents contemplated thereby, (ii) with respect to transactions for
which there is a binding commitment existing prior to the date of the Merger
Agreement, and (iii) certain other transactions disclosed to IHS), without first
obtaining the written consent of IHS: (i) encumber any asset or enter into any
transaction or make any contract or commitment relating to the properties,
assets and business of RoTech, other than in the ordinary course of business;
(ii) enter into any employment contract which is not terminable upon notice of
90 days or less, at will, and without penalty except as provided in the Merger
Agreement; (iii) enter into any contract or agreement which (a) cannot be
terminated or does not terminate within 12 months or less without cause or (b)
obligates RoTech for amounts in excess of $250,000; (iv) make any payment or
distribution to the trustee under
71
any bonus, pension, profit-sharing or retirement plan or arrangement or incur
any obligation to make any such payment or contribution which is not in
accordance with RoTech's usual past practice, or make any payment or
contributions or incur any obligation pursuant to or in respect of any other
plan or contract or arrangement providing for bonuses, options, executive
incentive compensation, pensions, deferred compensation, retirement payments,
profit-sharing or the like, establish or enter into any such plan, contract or
arrangement, or terminate or modify any plan; (v) guarantee the obligations of
any person, firm or corporation, except in the ordinary course of business
consistent with prior practices; (vi) amend its Articles of Incorporation or
By-laws; (vii) issue any shares of its capital stock, effect any stock split or
otherwise change its capitalization, except pursuant to options, warrants,
conversion rights or other contractual rights disclosed in the Merger Agreement
(provided that RoTech may issue to employees additional options to purchase up
to 100,000 shares of RoTech Common Stock at an exercise price of not less than
the market value of such stock as of the date of grant); (viii) discharge or
satisfy any material lien or encumbrance, or pay or satisfy any material
obligation or liability (absolute, accrued, contingent or otherwise) other than
(a) liabilities shown or reflected on the April 30, 1997 balance sheet of RoTech
(the "RoTech Balance Sheet") or (b) liabilities incurred since the date of the
RoTech Balance Sheet in the ordinary course of business; (ix) increase or
establish any reserve for taxes or any other liability on its books or otherwise
provide therefor, except as may be required due to income from operations of
RoTech since the date of the RoTech Balance Sheet in the ordinary course of
business; (x) mortgage, pledge or subject to any lien, charge or other
encumbrance any assets, tangible or intangible, other than in the ordinary
course of business; (xi) acquire any assets, securities or businesses in excess
of $5.0 million in any one transaction or sell or transfer any material assets,
cancel any material debts or claims or waive any material rights; (xii) (a)
grant any general or uniform increase in the rates of pay of employees or grant
any material increase in salary payable or to become payable by RoTech to any
officer or employee, consultant or agent (except as provided by contract or
bonus plan), or (b) by means of any bonus or pension plan, contract or other
commitment, increase in a material respect the compensation of any director,
officer, employee, consultant or agent, except for bonuses payable to
non-officer employees in the ordinary course of business; (xiii) except for the
Merger Agreement and any other agreement executed and delivered pursuant to the
Merger Agreement, enter into any material transaction other than in the ordinary
course of business; (xiv) suffer the loss of, terminate or modify any contract
to which it or any of its subsidiaries is a party involving more than $250,000
of annual revenue or expense other than in accordance with its terms; (xv)
declare, set aside or pay any dividend or make any other distribution or payment
with respect to any shares of its capital stock or, directly or indirectly,
redeem, repurchase or otherwise acquire any shares of its capital stock; (xvi)
suffer any material casualty or loss not covered by insurance; (xvii) make any
material change in applicable accounting policies; (xviii) close any location
from which it operates its business except in the ordinary course of business;
or (xix) enter into any agreement or commitment to do any of the foregoing.
The Merger Agreement contains certain other covenants, including covenants
relating to (i) access to information; (ii) the calling and holding of
stockholder meetings to approve and adopt the Merger Agreement; (iii) the
preparation and filing of this Joint Proxy Statement/Prospectus and the
Registration Statement; (iv) the listing of the IHS Common Stock to be issued in
the Merger on the NYSE; (v) the obtaining of all required governmental and third
party approvals, consents, authorizations and permits, including without
limitation the making of all filings under the HSR Act and the exemption of the
Merger from state anti-takeover statutes; (vi) public announcements; (vii) the
resignation of RoTech officers and directors on or prior to the Closing Date;
(viii) the preparation by RoTech and delivery to IHS of certain monthly
financial statements; (ix) the filing with the Commission of all periodic
reports required under the Exchange Act; (x) the parties not taking any action,
or the parties failing to take action, which would cause their respective
representations and warranties to be untrue in any material respect, which would
cause any conditions to the Merger not to be satisfied, which would delay the
Effective Time, which would materially adversely affect the ability of any party
to obtain any consents or approvals required for the consummation of the Merger
without imposition of a condition or restriction which would have a material
adverse effect on the Surviving Corporation or which would otherwise materially
impair the ability of such party to consummate the Merger; (xi) coordination and
cooperation with respect to actions and filings with governmental agencies,
officers or authorities and other third parties, including the holders of the
RoTech Debentures; (xii) the obtaining of tax opinions (see "The
72
Merger - Certain Federal Income Tax Consequences"); (xiii) notices of certain
events; and (xiv) the requirement that IHS obtain RoTech's consent before
entering into any transaction which would require IHS to issue shares of IHS
Common Stock having a market value at the time of issuance of more than $250
million.
NO SOLICITATION
RoTech has agreed, until the earlier of the Effective Time or the
termination of the Merger Agreement, not to initiate, solicit or encourage
(including by way of furnishing assistance or proprietary information), or take
any other action to facilitate, any inquiries or the making of any proposal
relating to, or that may reasonably be expected to lead to, any RoTech Competing
Transaction (as hereinafter defined), or enter into any discussions or negotiate
with any person or entity in furtherance of such inquiries or to obtain a RoTech
Competing Transaction or agree to or endorse any RoTech Competing Transaction or
authorize or permit any of the officers, directors or employees of RoTech or its
subsidiaries or any investment banker, financial advisor, attorney, accountant
or other representative retained by RoTech or any of its subsidiaries to take
any such action; provided, however, that, prior to the receipt of the approval
of the Merger by RoTech's stockholders at the RoTech Special Meeting, the RoTech
Board shall not be prohibited from (i) furnishing information to, or entering
into discussions or negotiations with, any person or entity in connection with
an unsolicited bona fide offer by such person or entity to acquire RoTech
pursuant to a merger, consolidation, share exchange, business combination or
other similar transaction or to acquire greater than 50% of the assets of RoTech
and its subsidiaries, taken as a whole, to the extent and only to the extent
that (a) the RoTech Board, after consultation with and based upon advice of
independent legal counsel, determines in good faith that such action is
advisable for the RoTech Board to comply with its fiduciary duties under
applicable law and (b) prior to furnishing information to, or entering into
discussions or negotiations with, such person, RoTech provides notice to IHS and
enters into a confidentiality agreement with such person reasonably calculated
under the circumstances, in the reasonable judgment of RoTech, to protect the
confidentiality of RoTech's proprietary information, or (ii) complying with Rule
14e-2 promulgated under the Exchange Act with regard to a RoTech Competing
Transaction. A "RoTech Competing Transaction" means any of the following (other
than the transactions contemplated by the Merger Agreement) involving RoTech:
(i) any merger, consolidation, share exchange, business combination or similar
transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 20% or more of the assets of RoTech and its subsidiaries, taken
as a whole; (iii) any tender offer or exchange offer for more than 20% of the
outstanding shares of the capital stock of RoTech; (iv) any person acquiring
beneficial ownership of, or any group (as such term is defined under Section
13(d) of the Exchange Act) being formed which beneficially owns or has the right
to acquire beneficial ownership of, 15% or more of the outstanding capital stock
of RoTech; or (v) any public announcement of a proposal, plan or intention to do
any of the foregoing or any agreement to engage in any of the foregoing.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time, either before or after approval of matters presented in connection with
the Merger by the holders of RoTech Common Stock and IHS Common Stock, (i) by
mutual written consent of IHS, Merger Sub and RoTech or (ii) by either IHS or
RoTech (a) if any approval of the holders of RoTech Common Stock or IHS Common
Stock necessary to consummate the Merger and the transactions contemplated by
the Merger Agreement has not been obtained, (b) if the Merger is not consummated
on or before November 30, 1997, unless the failure to consummate the Merger is
the result of a willful and material breach of the Merger Agreement by the party
seeking to terminate the Merger Agreement (however, the passage of such period
shall be tolled for any part thereof (but not exceeding 60 days in the
aggregate) during which any party shall be subject to a non-final order, decree,
filing or action restraining, enjoining or otherwise prohibiting the
consummation of the Merger or the calling or holding of a meeting of
stockholders), (c) if any court of competent jurisdiction or other governmental
entity has issued an order, decree or ruling or taken any other action
permanently enjoining, restraining or otherwise prohibiting the Merger and such
order, decree, ruling or other action has become final and nonappealable, (d) in
the event of a
73
material breach (as defined in the Merger Agreement) by the other party of any
representation, warranty, covenant or other agreement contained in the Merger
Agreement which is not cured as provided therein (provided that the terminating
party is not then in Material Breach (as defined in the Merger Agreement) of any
representation, warranty, covenant or other agreement contained in the Merger
Agreement), (e) in the event of notice pursuant to the Merger Agreement of a
breach by the other party of any representation, warranty, covenant or other
agreement contained in the Merger Agreement or notice from such party to the
other party of such other party's breach of any representation, warranty,
covenant or other agreement contained in the Merger Agreement, in either case
which cannot be or has not been cured as provided in the Merger Agreement
(provided that the terminating party is not then in Material Breach of any
representation, warranty, covenant or other agreement contained in the Merger
Agreement), (f) if the average of the last per share sale prices of the IHS
Common Stock, as reported on the NYSE Composite Tape, for the ten consecutive
trading days ending on the fifth trading day immediately preceding the date of
the RoTech Special Meeting is equal to or less than $33.00 or (g) all of the
mutual conditions to such party's obligation to consummate the Merger have been
satisfied but any other condition to such party's obligation to consummate the
Merger is not capable of being satisfied by November 30, 1997 (or such later
date as permitted by clause (b) above).
The Merger Agreement may be terminated by RoTech at any time prior to the
Effective Time, either before or after approval of matters presented in
connection with the Merger by the holders of RoTech Common Stock and IHS Common
Stock, if (i) the RoTech Board shall have (a) determined, in the exercise of its
fiduciary duties under applicable law, not to recommend the Merger to the
holders of RoTech Common Stock or shall have withdrawn such recommendation or
(b) approved, recommended or endorsed any RoTech Competing Transaction other
than the Merger Agreement or (ii) the IHS Board fails to make or withdraws its
recommendation of the adoption of the Merger Agreement or the Merger.
The Merger Agreement may be terminated by IHS at any time prior to the
Effective Time, either before or after approval of matters presented in
connection with the Merger by the holders of RoTech Common Stock and IHS Common
Stock, if (i) (a) the RoTech Board fails to make or withdraws its recommendation
of the adoption of the Merger Agreement, (b) the RoTech Board shall have
recommended to RoTech's stockholders any RoTech Competing Transaction or entered
into an agreement with respect to a RoTech Competing Transaction or (c) a tender
offer or exchange offer for 20% or more of the outstanding shares of capital
stock of RoTech is commenced, and the RoTech Board recommends, within the time
period specified under Rule 14e-2 under the Exchange Act, that RoTech's
stockholders tender their shares into such tender or exchange offer; or (ii) the
IHS Board shall have determined, in the exercise of its fiduciary duties under
applicable law, not to recommend the Merger to the holders of IHS Common Stock
or shall have withdrawn such recommendation,
Each of IHS and RoTech has agreed to reimburse the other for fees incurred
in connection with the Merger Agreement and to pay a termination fee if it
terminates the Merger Agreement under certain circumstances. See "- Expenses
and Termination Fees."
EXPENSES AND TERMINATION FEES
The Merger Agreement provides that, except as otherwise described therein
or agreed in writing, all costs and expenses incurred in connection with the
Merger Agreement and the transactions contemplated thereby shall be paid by the
party incurring such cost or expense.
RoTech has agreed that if the Merger Agreement is terminated by (i) RoTech
because the RoTech Board approves, recommends or endorses a RoTech Competing
Transaction, or (ii) IHS because (a) the RoTech Board recommends to the RoTech
stockholders a RoTech Competing Transaction or RoTech enters into an agreement
with respect to a RoTech Competing Transaction or (b) a tender offer or exchange
offer for 20% or more of the outstanding capital stock of RoTech is commenced
and the RoTech Board recommends, within the time period specified under Rule
14e-2 under the Exchange Act, that RoTech's stockholders tender their shares,
then RoTech will be obligated to reimburse all reasonable expenses incurred by
IHS in connection with the Merger Agreement and to pay to IHS a termination fee
in the amount of $25.0 million ($15.0 million in the event of a termination
pursuant to clause (ii)(b) above if the tender or exchange offer is for at least
20% but less than 50% of the outstanding
74
shares of capital stock of RoTech) (the "RoTech Termination Fee"). If the RoTech
Termination Fee is paid, it will be IHS' sole and exclusive remedy against
RoTech under the Merger Agreement. Alternatively, if the Merger Agreement is
terminated by (i) RoTech because RoTech's Board determines, in the exercise of
its fiduciary duty under applicable law, not to recommend the Merger, or shall
have withdrawn such recommendation or (ii) by IHS because the RoTech Board fails
to make or withdraws its recommendation of the Merger (unless as a result of the
withdrawal of the opinion of Smith Barney for reasons other than a RoTech
Competing Transaction), then RoTech will be obligated to pay to IHS a fee in the
amount of $5.0 million.
If the Merger Agreement is terminated by (i) IHS because IHS' Board
determines, in the exercise of its fiduciary duty under applicable law, not to
recommend the Merger, or shall have withdrawn such recommendation, or (ii)
RoTech because the IHS Board fails to make or withdraws its recommendation of
the Merger, then IHS will be obligated to pay to RoTech a fee in the amount of
$10.0 million (the "IHS Termination Fee"). If the IHS Termination Fee is paid,
it will be RoTech's sole and exclusive remedy against IHS under the Merger
Agreement.
WAIVER AND AMENDMENT
The Merger Agreement provides that, at any time prior to the Effective
Time, the parties may (i) extend the time for the performance of any of the
obligations or other acts of the other parties, (ii) waive any inaccuracies in
the representations and warranties contained in the Merger Agreement or in any
document delivered pursuant to the Merger Agreement or (iii) subject to the
proviso in the following sentence, waive compliance with any of the agreements
or conditions contained in the Merger Agreement. In addition, the Merger
Agreement may be amended by the parties at any time before or after any required
approval of matters presented in connection with the Merger by the holders of
RoTech Common Stock or IHS Common Stock; provided, however, that after any such
approval, no amendment may be made that requires further approval by the RoTech
or IHS stockholders pursuant to the FBCA.
INDEMNIFICATION; INSURANCE
The Merger Agreement requires IHS and the Surviving Corporation to advance
legal fees and expenses and to indemnify current and former officers and
directors of RoTech for all acts or omissions occurring prior to the Effective
Time (the "Pre-Merger Matters") to the fullest extent provided under RoTech's
Articles of Incorporation, By-laws and indemnification agreements in effect on
the date of the Merger Agreement. Pursuant to the Merger Agreement, IHS is also
obligated to maintain in effect for a period of at least five years from the
Effective Time directors' and officers' liability insurance providing at least
the same coverage with respect to RoTech's officers and directors as the
policies maintained by RoTech on behalf of its officers and directors as of the
date of the Merger Agreement and containing terms and conditions which are no
less advantageous with respect to Pre-Merger Matters (to the extent such
insurance is available with respect to such matters). Notwithstanding the
foregoing, IHS is not obligated to provide any greater officers' and directors'
liability insurance than that generally afforded to officers and directors of
IHS under policies maintained by IHS with respect to its officers and directors.
See "The Merger - Additional Interests of Certain Persons in the Merger."
75
UNAUDITED PRO FORMA FINANCIAL INFORMATION
PRO FORMA FINANCIAL INFORMATION FOR THE COMBINED COMPANY
The following unaudited pro forma financial information for the combined
company gives effect to the Merger, which is expected to be accounted for by the
purchase method. For a description of purchase accounting with respect to the
Merger and other accounting matters, see "The Merger - Accounting Treatment."
The pro forma condensed balance sheet gives effect to the Merger (including the
refinancing of certain indebtedness of RoTech in connection with the Merger), as
if the Merger had occurred on June 30, 1997. The pro forma condensed statements
of operations give effect to the Merger as if it had occurred on January 1,
1996. In combining the financial information of IHS and RoTech to reflect the
Merger and the accounting policies that will be used by the combined company,
certain reclassifications of historical financial data have been made. The
following unaudited pro forma condensed financial information for the combined
company does not give pro forma effect to the other acquisitions and
divestitures consummated by IHS and RoTech during 1996 or 1997, the Proposed
Lithotripsy Acquisition, the Proposed CCA Acquisition, the sale of $500 million
of IHS' 9 1/4% Senior Notes and the borrowing of $750 million of term loans
under the New Credit Facility. See "- Pro Forma Financial Information for the
Combined Company and Other Acquisitions and Divestitures" for information
showing the pro forma effect on the combined company of certain other
acquisitions and divestitures consummated by IHS in 1996 and 1997 and "- Pro
Forma Financial Information for RoTech" for information showing the pro forma
effect on RoTech of certain acquisitions consummated by RoTech during the year
ended July 31, 1997. See "IHS Recent Developments" for information on the
Proposed Acquisitions, the sale of the 9 1/4% Senior Notes and the New Credit
Facility.
The following pro forma financial information for the combined company
should be read in conjunction with the historical consolidated financial
statements of IHS and RoTech, including the respective notes thereto, which are
incorporated by reference in this Joint Proxy Statement/Prospectus, and in
conjunction with the selected historical consolidated financial data, including
the notes thereto, appearing elsewhere in this Joint Proxy Statement/Prospectus.
See "Incorporation of Certain Documents by Reference" and "Summary of Joint
Proxy Statement/Prospectus - Selected Historical Financial Information."
THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION IS PRESENTED FOR
INFORMATIONAL PURPOSES ONLY AND IS NOT NECESSARILY INDICATIVE OF THE OPERATING
RESULTS OR FINANCIAL POSITION THAT WOULD HAVE OCCURRED HAD THE MERGER BEEN
CONSUMMATED AT THE DATES INDICATED, NOR IS IT NECESSARILY INDICATIVE OF THE
FUTURE OPERATING RESULTS OR FINANCIAL POSITION OF IHS FOLLOWING THE MERGER.
76
INTEGRATED HEALTH SERVICES, INC.
PRO FORMA COMBINED BALANCE SHEET AS OF JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS)
ASSETS
IHS ROTECH PRO FORMA PRO FORMA
HISTORICAL* HISTORICAL(1)** ADJUSTMENTS COMBINED
------------- ----------------- --------------------- --------------
Current Assets:
Cash and cash equivalents ............... $ 43,105 $ 8,738 $ 51,843
Temporary investments ..................... 2,367 2,367
Patient accounts and third-party payor
settlements receivable, net ............ 344,144 116,879 461,023
Inventories, prepaid expenses and
other current assets .................. 28,931 23,862 52,793
Income tax receivable .................. 30,617 - $ 800 (2) 31,417
---------- -------- ------------- ----------
Total current assets .................. 449,164 149,479 800 599,443
---------- -------- ------------- ----------
Property, plant and equipment, net ......... 910,772 114,847 1,025,619
Intangible assets ........................ 633,206 252,433 291,751 (3) 1,177,390
Other assets .............................. 149,505 1,808 151,313
---------- -------- ------------- ----------
Total assets ........................... $2,142,647 $518,567 $ 292,551 $2,953,765
========== ======== ============= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt . $ 13,161 $162,014 $ (162,014)(4) $ 13,161
Accounts payable and accrued 4,750 (2)
expenses ................................. 276,961 24,660 10,250 (5) 316,621
---------- -------- ------------- ----------
Total current liabilities ............... 290,122 186,674 (147,014) 329,782
---------- -------- ------------- ----------
Long-term debt:
Convertible subordinated debentures . 258,750 110,000 (110,000)(4) 258,750
Other long-term debt less current
maturities .............................. 946,337 - 272,014 (4) 1,218,351
---------- -------- ------------- ----------
Total long-term debt .................. 1,205,087 110,000 162,014 1,477,101
---------- -------- ------------- ----------
Other long-term liabilities(6) ............ 35,315 - 35,315
Deferred income taxes ..................... 25,073 17,357 42,430
Deferred gain on sale-leaseback
transactions .............................. 5,731 - 5,731
Redeemable common stock .................. - 3,322 (3,322) (7) -
Stockholders' equity:
Common stock .............................. 25 5 9 (8) 39
Additional paid-in capital ............... 492,892 127,403 358,620 (8) 978,915
(74,621)(8)
Retained earnings (deficit) ............... 89,940 74,621 (3,950)(2) 85,990
Treasury stock ........................... (1,538) (815) 815 (8) (1,538)
---------- -------- ------------- ----------
Total stockholders' equity ............ 581,319 201,214 280,873 1,063,406
---------- -------- ------------- ----------
Total liabilities and stockholders'
equity .............................. $2,142,647 $518,567 $ 292,551 $2,953,765
========== ======== ============= ==========
- ----------
* As of June 30, 1997
** As of April 30, 1997
77
INTEGRATED HEALTH SERVICES, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
IHS ROTECH PRO FORMA PRO FORMA
HISTORICAL* HISTORICAL(1)** ADJUSTMENTS COMBINED(1)
------------- ----------------- ----------------- ------------
Net revenues:
Basic medical services .................................... $ 389,773 $ - $ 389,773
Specialty medical services ................................. 999,209 344,590 1,343,799
Management services and other .............................. 45,713 - 45,713
---------- -------- ---------
Total revenues .......................................... 1,434,695 344,590 1,779,285
---------- -------- ---------
Costs and expenses:
Operating expenses .......................................... 1,093,948 258,891 1,352,839
Corporate administrative and general ........................ 60,976 - 60,976
Depreciation and amortization .............................. 41,681 36,074 $ 1,961 (9) 79,716
Rent ...................................................... 77,785 - 77,785
Interest, net ............................................. 64,110 9,456 1,854 (10) 75,420
Other non-recurring income, net(11) ........................ (14,457) - (14,457)
---------- -------- ----------- ---------
Total costs and expenses ................................. 1,324,043 304,421 3,815 1,632,279
---------- -------- ----------- ---------
Earnings (loss) before equity in earnings of affiliates, in-
come taxes and extraordinary items 110,652 40,169 (3,815) 147,006
Equity in earnings of affiliates ........................... 828 - 828
---------- -------- ----------- ---------
Earnings (loss) before income taxes and extraordinary
items ................................................... 111,480 40,169 (3,815) 147,834
Federal and state income taxes .............................. 63,715 15,240 1,306 80,261
---------- -------- ----------- ---------
Earnings (loss) before extraordinary items (12) ............ $ 47,765 $ 24,929 $ (5,121) $ 67,573
========== ======== =========== =========
Earnings before extraordinary items per common share:
Primary ................................................... $ 2.03 $ 0.98 $ 1.76
Fully-diluted(13) .......................................... 1.82 0.96 1.66
========== ======== =========
Weighted average shares (primary) ........................... 23,574 25,513 (10,700) 38,387
Weighted average shares (fully-diluted)(13) ............... 31,653 30,063 (15,041) 46,675
========== ======== =========== =========
- ----------
* Year Ended December 31, 1996
** Twelve Months Ended January 31, 1997
78
INTEGRATED HEALTH SERVICES, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
IHS ROTECH PRO FORMA PRO FORMA
HISTORICAL* HISTORICAL(1)** ADJUSTMENTS COMBINED(1)
------------- ----------------- ---------------- ------------
Net revenues:
Basic medical services .................................... $176,810 $ - $ 176,810
Specialty medical services ................................. 722,802 207,266 930,068
Management services and other .............................. 19,304 - 19,304
-------- -------- -----------
Total revenues .......................................... 918,916 207,266 1,126,182
-------- -------- -----------
Costs and expenses:
Operating expenses .......................................... 691,148 154,185 845,333
Corporate administrative and general ........................ 36,151 - 36,151
Depreciation and amortization .............................. 30,844 21,334 $ (684)(9) 51,494
Rent ...................................................... 49,795 - 49,795
Interest, net ............................................. 44,645 6,784 1,559 (10) 52,988
Other non-recurring charges, net(14) ........................ 20,047 - 20,047
-------- -------- ----------- -----------
Total costs and expenses ................................. 872,630 182,303 875 1,055,808
-------- -------- ----------- -----------
Earnings (loss) before equity in earnings of affiliates, in-
come taxes and extraordinary items 46,286 24,963 (875) 70,374
Equity in earnings of affiliates ........................... 98 - 98
-------- -------- ----------- -----------
Earnings (loss) before income taxes and extraordinary
items ................................................... 46,384 24,963 (875) 70,472
Federal and state income taxes .............................. 18,090 9,421 1,062 28,573
-------- -------- ----------- -----------
Earnings (loss) before extraordinary items(15) ............ $ 28,294 $ 15,542 $ (1,937) $ 41,899
======== ======== =========== ===========
Earnings before extraordinary items per common share:
Primary ................................................... $ 1.05 $ 0.59 $ 0.99
Fully-diluted(13) .......................................... 0.92 0.56 0.90
======== ======== ===========
Weighted average shares (primary) ........................... 26,963 26,506 (11,117) 42,352
Weighted average shares (fully-diluted)(13) ............... 36,233 31,069 (15,463) 51,839
======== ======== =========== ===========
- ----------
* Six Months Ended June 30, 1997
** Six Months Ended April 30, 1997
79
NOTES TO PRO FORMA FINANCIAL INFORMATION FOR THE COMBINED COMPANY
(1) Certain amounts have been reclassified to conform the presentation of
RoTech and IHS. The RoTech financial data for the 12 months ended January
31, 1997 and the six months ended April 30, 1997, and the pro forma
combined financial data for the year ended December 31, 1996 and the six
months ended June 30, 1997 all include RoTech's results of operations for
the three months ended January 31, 1997.
(2) Represents nonrecurring charges directly attributable to the Merger, which
will be included in IHS' statement of operations within the 12 month period
following the transaction. Such charges represent the nonrecurring lump sum
payments to certain RoTech officers aggregating $4,750,000 less related
income tax benefit of $800,000. See "The Merger - Additional Interests of
Certain Persons in the Merger."
(3) Represents the excess of the purchase price (assuming a price per share of
IHS Common Stock of $34.625 (the closing price of IHS Common Stock on
September 18, 1997 (the last trading day prior to the date of this Joint
Proxy Statement/Prospectus)) and using the 24,177,000 shares of RoTech
Common Stock outstanding at April 30, 1997 (including 388,079 shares of
redeemable common stock (see note 7 below)) adjusted for the Exchange Ratio
of .5806) including estimated direct costs of the Merger of $10,250,000
(see note 5 below), over the estimated fair values of the net assets
acquired as follows:
Merger consideration for RoTech ...... $486,037,000
Direct costs of acquisition ......... 10,250,000
-------------
496,287,000
Stockholders' equity of RoTech ...... 204,536,000
-------------
$291,751,000
=============
The actual amount of intangible assets will be based upon the closing price
of the IHS Common Stock on the day the Merger is consummated and the number
of shares of IHS Common Stock issued in the Merger. At April 30, 1997, RoTech
held 1,994,314 shares in escrow related to acquisitions as contingent shares
to be released upon the development of future events, with such measurement
dates from May 1, 1997 to March 29, 2000. Such shares are not considered
outstanding until the contingencies have been met.
(4) Represents the pay down of borrowings outstanding under RoTech's credit
facility and repurchase of the RoTech Debentures with borrowings under IHS'
credit facility. Under the terms of the indenture under which the RoTech
Debentures were issued, IHS is obligated to offer to repurchase the RoTech
Debentures at a purchase price equal to 100% of the aggregate principal
amount thereof immediately following the Merger. Because the conversion
price of the RoTech Debentures ($45.21 after giving effect to the Merger)
is in excess of the current market price of the IHS Common Stock, IHS has
assumed for these purposes that holders of RoTech Debentures will accept
IHS' repurchase offer.
(5) Represents the estimated expenses of the Merger of $10,250,000 as follows:
Non-compete payments to certain officers ($5,000,000); professional fees
($2,500,000); filing fees ($500,000); and other ($2,250,000). Other
primarily represents severance payments and related benefits anticipated to
be paid to identified employees whose employment will be terminated after
the Merger in accordance with a restructuring plan to be adopted.
(6) Represents the present value of contingent payments aggregating
$50,000,000 due in 2000 and 2001 relating to the First American
Acquisition, which payments IHS deems probable. See "IHS Recent
Developments - First American Acquisition."
(7) Represents 388,079 shares of RoTech Common Stock subject to put options at
the sole discretion of the RoTech stockholder at prices ranging from $8.75
to $17.50 per share. The put options expire at various dates between May 1,
1997 and April 30, 1998. Because the put price is below the current market
price of the RoTech Common Stock, IHS has assumed for purposes of these pro
forma financial statements that the put options will not be exercised and,
therefore, the shares of IHS Common Stock issued in exchange for such
RoTech Shares have not been classified as redeemable common stock, but have
been included in stockholders' equity for purposes of the pro forma
financial statements.
(8) Represents the Merger consideration of $486,037,000 (see note 3 above),
less $14,000 allocated to Common stock and less RoTech's Additional paid-in
capital of $127,403,000. Other adjustments represent eliminations of
RoTech's equity account balances.
(9) Represents additional amortization relating to goodwill and other
intangibles recorded as a result of the Merger, amortized using the
straight line method over 15-40 years as follows:
RoTech intangible assets ...... $252,433,000
Acquisition adjustment ......... 291,751,000
-------------
$544,184,000
=============
TWELVE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, 1997 APRIL 30, 1997
--------------------- -----------------
Amortization of covenants not to compete of $5,000,000
- 15 year life .................................... $ 334,000 $ 167,000
Amortization of goodwill for remainder - 40 year life. 13,480,000 6,740,000
----------- ----------
13,814,000 6,907,000
Less amortization of intangible assets recorded by
RoTech ............................................. 11,853,000 7,591,000
----------- ----------
Pro forma adjustment ................................. $ 1,961,000 $ (684,000)
=========== ==========
80
(10) Represents additional interest on borrowings by IHS to repay RoTech's
credit facility and to repurchase the RoTech Debentures as follows:
TWELVE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, 1997 APRIL 30, 1997
--------------------- -----------------
Credit facility:
Average borrowings outstanding during the period . $ 85,290,000 $ 120,786,000
IHS average borrowing rate during the period ...... 7.13% 7.23%
Pro forma interest ................................. $ 6,081,000 $ 4,366,000
RoTech Debentures:
Average borrowings outstanding during period
($110,000,000 issued June 1, 1996) ............... $ 73,333,000 $ 110,000,000
Pro forma interest ................................. 5,229,000 3,977,000
------------ -------------
Total pro forma interest ........................... 11,310,000 8,343,000
Less actual interest .............................. 9,456,000 6,784,000
------------ -------------
Pro forma adjustment .............................. $ 1,854,000 $ 1,559,000
============ =============
(11) For IHS consists primarily of (i) a gain of $34,298,000 from IHS' sale of
its pharmacy division, (ii) a loss of $8,497,000 from IHS' sale of shares
in the ILC Offering, (iii) a $7,825,000 loss on write-off of accrued
management fees and loans resulting from IHS' termination of its ten year
contract, entered into in September 1994, to manage six geriatric care
facilities in the State of Washington owned by All Seasons and (iv) a
$3,519,000 exit cost resulting from IHS' closure of redundant home
healthcare agencies.
(12) In 1996 IHS recorded a loss on extinguishment of debt of $2,327,000
relating primarily to the write-off of deferred financing costs. Such loss,
reduced by the related income tax effect of $896,000, is presented in the
statement of operations for the year ended December 31, 1996 as an
extraordinary loss of $1,431,000.
(13) Fully-diluted earnings per share is computed based on the weighted average
number of common and common equivalent shares outstanding during the
periods assuming the dilution resulting from the issuance of the
outstanding options and warrants at the end-of-period price per share,
rather than the weighted average price for the period, and the issuance of
common stock upon the assumed conversion of convertible subordinated
debentures. An adjustment for interest expense and amortization of
underwriting costs related to such debentures is added, net of tax, to
earnings for the purpose of calculating fully-diluted earnings per share.
Pro forma weighted average shares were calculated based upon IHS' weighted
average shares plus RoTech's weighted average shares adjusted for the
Exchange Ratio of .5806.
(14) Consists primarily of (i) a gain of $7,578,000 realized on the shares of
Capstone Pharmacy Services, Inc. common stock received in the Pharmacy
Sale, (ii) the write-off of $6,553,000 of accounting, legal and other costs
resulting from the proposed Coram Merger Transaction and (iii) the payment
to Coram of $21,000,000 in connection with the termination of the proposed
Coram Merger Transaction.
(15) During the six months ended June 30, 1997, IHS recorded a loss on
extinguishment of debt of $29,784,000, representing approximately (i)
$23,554,000 of cash payments for premium and consent fees relating to the
early extinguishment of $214,868,000 aggregate principal amount of IHS'
senior subordinated notes and (ii) $6,230,000 of deferred financing costs
written-off in connection with the early extinguishment of such debt. Such
loss, reduced by the related income tax effect of $11,616,000, is presented
in the statement of operations for the six months ended June 30, 1997 as an
extraordinary loss of $18,168,000. See "IHS Recent Developments -
Repurchase of 9 5/8% Senior Subordinated Notes and 10 3/4% Senior
Subordinated Notes."
81
PRO FORMA FINANCIAL INFORMATION FOR THE COMBINED COMPANY AND
OTHER ACQUISITIONS AND DIVESTITURES
The following unaudited pro forma statements of operations give effect to
(i) the Merger, which is expected to be accounted for as a purchase (including
the effect of the refinancing of certain RoTech indebtedness in connection with
the Merger), assuming a price per share of IHS Common Stock of $34.625 (based on
the closing price of IHS Common Stock on September 18, 1997 (the last trading
day prior to the date of this Joint Proxy Statement/Prospectus)) and using the
24,177,000 shares of RoTech Common Stock outstanding at April 30, 1997
(including 388,079 shares of redeemable common stock), (ii) the sale by IHS of
its pharmacy division in July 1996 (the "Pharmacy Sale"), (iii) the sale by IHS
of a majority interest in its assisted living services subsidiary ("ILC") in
October 1996 (the "ILC Offering"), (iv) the acquisition by IHS of First American
in October 1996 (the "First American Acquisition"), and (v) the acquisition by
IHS of (a) Vintage Health Care Center, a skilled nursing and assisted living
facility, in January 1996 (the "Vintage Acquisition"), (b) Rehab Management
Systems, Inc., an outpatient rehabilitation company, in March 1996 (the "RMS
Acquisition"), (c) Hospice of the Great Lakes, Inc., a hospice company, in May
1996 (the "Hospice Acquisition"), (d) J.R. Rehab Associates, Inc., an inpatient
and outpatient rehabilitation center, in August 1996 (the "J.R. Rehab
Acquisition"), (e) Extendicare of Tennessee, Inc., a home health company, in
August 1996 (the "Extendicare Acquisition"), (f) Edgewater Home Infusion
Services, Inc., a home infusion company, in August 1996 (the "Edgewater
Acquisition"), (g) Century Home Services, Inc., a home health services company,
in September 1996 (the "Century Acquisition"), (h) Signature Home Care, Inc., a
home health company, in September 1996 (the "Signature Acquisition"), (i) Mediq
Mobile X-Ray Services, Inc., a mobile diagnostics company, in November 1996 (the
"Mediq Acquisition"), (j) Total Rehab Services, LLC and Total Rehab Services 02,
LLC, providers of contract rehabilitation and respiratory services, in November
1996 (the "Total Rehab Acquisition"), (k) Lifeway Inc., a physician management
and disease management company, in November 1996 (the "Lifeway Acquisition"),
(l) In-Home Health Care, Inc., a home health company, in January 1997 (the
"In-Home Acquisition"), (m) Portable X-Ray Labs, Inc., a mobile diagnostics
company, in February 1997 (the "Portable X-Ray Acquisition"), (n) Coastal
Rehabilitation, Inc., an inpatient rehabilitation company, in April 1997 (the
"Coastal Acquisition"), (o) Health Care Industries, Inc., a home health company,
in June 1997 (the "Health Care Industries Acquisition"), and (p) Rehab Dynamics,
Inc. and Restorative Therapy, Ltd., related contract rehabilitation companies,
in June 1997 (the "Rehab Dynamics Acquisition"). The pro forma statements of
operations for the year ended December 31, 1996 and the six months ended June
30, 1997 were prepared as if all of the foregoing transactions were consummated
on January 1, 1996.
No pro forma balance sheet is presented because the transactions described
in the preceding paragraph (other than the Merger) were all consummated prior to
June 30, 1997 and are therefore reflected in the actual June 30, 1997 balance
sheet. The pro forma balance sheet at June 30, 1997 giving effect to the Merger
is set forth under "- Pro Forma Financial Information for the Combined Company."
The Pro Forma Financial Information for the Combined Company and Other
Acquisitions and Divestitures does not give pro forma effect to (i) acquisitions
consummated by RoTech during the year ended July 31, 1997 (see "- Pro Forma
Financial Information for RoTech"), (ii) the Proposed Acquisitions, (iii) the
New Credit Facility, (iv) the sale of IHS' remaining 37.3% interest in
Integrated Living Communities, Inc., (v) the acquisition of the assets of five
small ancillary service businesses during the six months ended June 30, 1997,
(vi) the acquisition of three home healthcare companies and one mobile
diagnostic company in August 1997 or (vii) the sale of the 9 1/4% Senior Notes
in September 1997.
The pro forma adjustments are based upon available information and certain
assumptions that management believes are reasonable. The unaudited pro forma
financial information set forth below is not necessarily indicative of IHS'
financial position or the results of operations that actually would have
occurred if the transactions had been consummated on the dates shown. In
addition, they are not intended to be a projection of results of operations that
may be obtained by IHS in the future. The unaudited pro forma financial
information should be read in conjunction with the consolidated financial
statements and related notes thereto incorporated by reference in this Joint
Proxy Statement/Prospectus, the selected consolidated historical financial data
and related notes thereto, the unaudited pro forma financial information for the
combined company and related notes thereto, and the unaudited pro forma
financial information for RoTech and related notes thereto, appearing elsewhere
in this Joint Proxy Statement/Prospectus. See "Incorporation of Certain
Documents by Reference," "Summary of Joint Proxy Statement/Prospectus Selected
Historical Financial Information," "- Pro Forma Financial Information for the
Combined Company" and "- Pro Forma Financial Information for RoTech."
82
INTEGRATED HEALTH SERVICES, INC.
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
IHS PHARMACY ILC
HISTORICAL(1) ADJUSTMENTS(2) ADJUSTMENTS(3)
--------------- ------------------- -------------------
Net revenues:
Basic medical services .................. $ 389,773 $ (16,101)(a)
Specialty medical services ............... 999,209 $ (52,331)(a)
Management services and other ............ 45,713 (1,020)(a)
----------- ------------ ------------
Total revenues ........................... 1,434,695 (52,331) (17,121)
Costs and expenses:
Operating, general and administra-
tive expenses 1,154,924 (43,279)(a) (12,453)(a)
Depreciation and amortization ............ 41,681 (1,785)(a) (833)(a)
Rent .................................... 77,785 (838)(a) (1,885)(a)
Interest, net ........................... 64,110 (3,817)(b) (963)(b)
Non-recurring charges (income) ............ (14,457) 34,298 (c) (8,497)(d)
----------- ------------ ------------
Total costs and expenses .................. 1,324,043 (15,421) (24,631)
Earnings (loss) before equity in
earnings (loss) of affiliates, in-
come taxes and extraordinary
items .................................... 110,652 (36,910) 7,510
Equity in earnings (loss) of affiliates . 828 722
----------- ------------ ------------
Earnings (loss) before income
taxes and extraordinary items ............ 111,480 $ (36,910) $ 8,232
============ ============
Federal and state income taxes ............ 63,715
-----------
Earnings before extraordinary
items .................................... $ 47,765
===========
Earnings before extraordinary items per common share:
Primary ................................. $ 2.03
Fully-diluted ........................... 1.82
===========
Weighted average shares:
Primary ................................. 23,574
Fully-diluted ........................... 31,653
===========
FIRST OTHER OTHER PRO FORMA
FIRST AMERICAN AMERICAN ACQUISITIONS ACQUISITIONS BEFORE
HISTORICAL(4) ADJUSTMENTS HISTORICAL(5) ADJUSTMENTS ROTECH
---------------- ----------------- --------------- ----------------- -------------
Net revenues:
Basic medical services .................. $ - $ 292 $ 373,964
Specialty medical services ............... 387,547 173,463 1,507,888
Management services and other ............ 3,115 3 47,811
---------- --------- ------------
Total revenues ........................... 390,662 173,758 1,929,663
Costs and expenses:
Operating, general and administra-
tive expenses 406,800 168,766 1,674,758
Depreciation and amortization ............ 5,439 $ 4,501 (e) 2,087 $ 2,381 (e) 53,471
Rent .................................... - 3,474 78,536
Interest, net ........................... 6,208 9,314 (b) 3,402 3,053 (b) 81,307
Non-recurring charges (income) ............ 3,468 - 14,812
---------- ---------- --------- ---------- ------------
Total costs and expenses .................. 421,915 13,815 177,729 5,434 1,902,884
Earnings (loss) before equity in
earnings (loss) of affiliates, in-
come taxes and extraordinary
items .................................... (31,253) (13,815) (3,971) (5,434) 26,779
Equity in earnings (loss) of affiliates . (671) 1,032 1,911
---------- ---------- --------- ---------- ------------
Earnings (loss) before income
taxes and extraordinary items ............ $ (31,924) $ (13,815) $ (2,939) $ (5,434) 28,690
========== ========== ========= ==========
Federal and state income taxes ............ 17,449
------------
Earnings before extraordinary
items .................................... $ 11,241
============
Earnings before extraordinary items per common share:
Primary ................................. $ 0.46
Fully-diluted ........................... 0.65
============
Weighted average shares:
Primary ................................. 922 24,496
Fully-diluted ........................... 922 32,575
========== ============
ROTECH* ROTECH PRO FORMA
HISTORICAL ADJUSTMENTS CONSOLIDATED
------------ ----------------- -------------
Net revenues:
Basic medical services .................. $ - $ 373,964
Specialty medical services ............... 344,590 1,852,478
Management services and other ............ - 47,811
---------- ------------
Total revenues ........................... 344,590 2,274,253
Costs and expenses:
Operating, general and administra-
tive expenses 258,891 1,933,649
Depreciation and amortization ............ 36,074 $ 1,961 (e) 91,506
Rent .................................... - 78,536
Interest, net ........................... 9,456 1,854 (f) 92,617
Non-recurring charges (income) ............ - 14,812
---------- ---------- ------------
Total costs and expenses .................. 304,421 3,815 2,211,120
Earnings (loss) before equity in
earnings (loss) of affiliates, in-
come taxes and extraordinary
items .................................... 40,169 (3,815) 63,133
Equity in earnings (loss) of affiliates . - 1,911
---------- ---------- ------------
Earnings (loss) before income
taxes and extraordinary items ............ $ 40,169 $ (3,815) 65,044
========== ==========
Federal and state income taxes ............ 33,994
------------
Earnings before extraordinary
items .................................... $ 31,050
============
Earnings before extraordinary items per common share:
Primary ................................. $ 0.79
Fully-diluted ........................... 0.86
============
Weighted average shares:
Primary ................................. 25,513 (10,700) 39,309
Fully-diluted ........................... 30,063 (15,041) 47,597
========== ========== ============
- ----------
* 12 months ended January 31, 1997
83
INTEGRATED HEALTH SERVICES, INC.
PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OTHER
IHS PHARMACY ACQUISITIONS
HISTORICAL(6) ADJUSTMENTS(2) HISTORICAL(7)
--------------- ---------------- ---------------
Net revenues:
Basic medical services .............................. $176,810 $ -
Specialty medical services ........................ 722,802 18,379
Management services and other ..................... 19,304
--------
Total revenues .................................... 918,916 18,379
Costs and expenses:
Operating, general and administrative expenses ...... 727,299 15,649
Depreciation and amortization ........................ 30,844 135
Rent ................................................ 49,795 547
Interest, net ....................................... 44,645 88
Non-recurring charges, net ........................... 20,047 $ 7,578 (c) -
-------- ---------- --------
Total costs and expenses ........................... 872,630 7,578 16,419
Earnings (loss) before equity in earnings of affili-
ates, income taxes and extraordinary items 46,286 (7,578) 1,960
Equity in earnings of affiliates ..................... 98 -
-------- ---------- --------
Earnings (loss) before income taxes and
extraordinary items .............................. 46,384 $ (7,578) $ 1,960
========== ========
Federal and state income taxes ..................... 18,090
--------
Earnings before extraordinary items ............... $ 28,294
========
Earnings before extraordinary items per common share:
Primary ............................................. $ 1.05
Fully-diluted ....................................... 0.92
========
Weighted average shares:
Primary ............................................. 26,963
Fully-diluted ....................................... 36,233
========
OTHER PRO FORMA
ACQUISITIONS BEFORE ROTECH ROTECH PRO FORMA
ADJUSTMENTS ROTECH HISTORICAL* ADJUSTMENTS CONSOLIDATED
-------------- ---------- ------------- ---------------- -------------
Net revenues:
Basic medical services .............................. $176,810 $ - $ 176,810
Specialty medical services ........................ 741,181 207,266 948,447
Management services and other ..................... 19,304 - 19,304
-------- --------- ---------- ------------
Total revenues .................................... 937,295 207,266 1,144,561
Costs and expenses:
Operating, general and administrative expenses ...... 742,948 154,185 897,133
Depreciation and amortization ........................ $ 306 (e) 31,285 21,334 $ (684)(e) 51,935
Rent ................................................ 50,342 - 50,342
Interest, net ....................................... 399 (b) 45,132 6,784 1,559 (f) 53,475
Non-recurring charges, net ........................... 27,625 - 27,625
--------- --------- --------- ------------ ------------
Total costs and expenses ........................... 705 897,332 182,303 875 1,080,510
Earnings (loss) before equity in earnings of affili-
ates, income taxes and extraordinary items (705) 39,963 24,963 (875) 64,051
Equity in earnings of affiliates ..................... 98 - 98
-------- --------- --------- ------------ ------------
Earnings (loss) before income taxes and
extraordinary items .............................. $ (705) 40,061 $ 24,963 $ (875) 64,149
======== ========= ===========
Federal and state income taxes ..................... 18,844 29,328
--------- ------------
Earnings before extraordinary items ............... $ 21,217 $ 34,821
========= ============
Earnings before extraordinary items per common share:
Primary ............................................. $ 0.78 $ 0.82
Fully-diluted ....................................... 0.71 0.76
========= ============
Weighted average shares:
Primary ............................................. 305 27,268 26,506 (11,117) 42,657
Fully-diluted ....................................... 305 36,538 31,069 (15,463) 52,144
======== ========= ========= =========== ============
* Six Months ended April 30, 1997.
84
NOTES TO PRO FORMA FINANCIAL INFORMATION FOR THE COMBINED
COMPANY AND OTHER ACQUISTIONS AND DIVESTITURES
(1) Includes the results of operations of (i) its pharmacy division through July
30, 1996, the date of the Pharmacy Sale, (ii) its assisted living services
subsidiary through October 9, 1996, the date of closing of the ILC Offering,
(iii) First American from October 17, 1996, the date of closing of the First
American Acquisition, (iv) Vintage Health Care Center from January 29, 1996,
the date of closing of the Vintage Acquisition, (v) Rehab Management
Systems, Inc. from March 19, 1996, the date of closing of the RMS
Acquisition, (vi) Hospice of the Great Lakes, Inc. from May 1, 1996, the
date of closing of the Hospice Acquisition, (vii) J.R. Rehab Associates,
Inc. from August 1, 1996, the date of closing of the J.R. Rehab Acquisition,
(viii) Extendicare of Tennessee, Inc. from August 12, 1996, the date of
closing of the Extendicare Acquisition, (ix) Edgewater Home Infusion
Services, Inc. from August 19, 1996, the date of closing of the Edgewater
Acquisition, (x) Century Home Services, Inc. from September 13, 1996, the
date of closing of the Century Acquisition, (xi) Signature Home Care, Inc.
from September 25, 1996, the date of closing of the Signature Acquisition,
(xii) Mediq Mobile X-Ray Services, Inc. from November 7, 1996, the date of
closing of the Mediq Acquisition, (xiii) Total Rehab Services, LLC and Total
Rehab Services 02, LLC from November 8, 1996, the date of closing of the
Total Rehab Acquisition and (xiv) Lifeway Inc. from November 8, 1996, the
date of closing of the Lifeway Acquisition. Also includes from October 9,
1996 IHS' equity in ILC's earnings. See notes 2, 3, 4 and 5 below.
(2) In July 1996, IHS sold its pharmacy division to Capstone Pharmacy Services,
Inc. ("Capstone") for a purchase price of $150 million, consisting of cash
of $125 million and shares of Capstone common stock having a value of $25
million. IHS used the net proceeds of the sale to repay borrowings under its
revolving credit facility. IHS had a pre-tax gain of $34.3 million. Because
IHS' investment in the pharmacy division had a very small tax basis, the
taxable gain on the sale significantly exceeded the gain for financial
reporting purposes, thereby resulting in a disproportionately higher income
tax provision related to the sale. IHS' investment in Capstone common stock
of $14.6 million was recorded at carryover cost and classified as securities
available for sale. In 1997, IHS recognized the remaining gain of $7.6
million when restrictions on transferability of such shares were removed.
(3) On October 9, 1996, Integrated Living Communities, Inc. ("ILC"), at the time
a wholly-owned subsidiary of IHS which provides assisted living and related
services to the private pay elderly market, completed an initial public
offering of ILC common stock. IHS sold 1,400,000 shares of ILC common stock
in the offering, for which it received aggregate net proceeds of
approximately $10.4 million. In addition, ILC used approximately $7.4
million of the net proceeds received by it to repay outstanding indebtedness
to IHS. IHS used the net proceeds from the sale to repay borrowings under
its credit facility. IHS recorded a pre-tax loss of approximately $8.5
million in the fourth quarter of 1996 as a result of this transaction. On
July 2, 1997, IHS sold the remaining 2,497,900 shares of ILC common stock it
owned, representing 37.3% of the outstanding ILC common stock, for $11.50
per share in a cash tender offer (the "ILC Sale"). IHS expects to record a
gain of approximately $4.0 million from the ILC Sale in the third quarter of
1997. The pro forma effect of the ILC Sale is not reflected in the pro forma
statements of operations.
(4) In October 1996, IHS acquired through merger First American. The purchase
price was $154.1 million in cash, which IHS borrowed under its credit
facility, plus contingent payments of up to $155 million payable at
various times through 2004. See "IHS Recent Developments - First American
Acquisition."
(5) Consists of the following acquisitions:
Vintage Acquisition. In January 1996, IHS purchased Vintage Health Care
Center, a 220 bed skilled nursing and assisted living facility in Denton,
Texas, for $6.9 million. A condominium interest in the assisted living
portion of this facility (valued at $3.5 million) was contributed to ILC on
June 1, 1996.
RMS Acquisition. In March 1996, IHS acquired all of the outstanding capital
stock of Rehab Management Systems, Inc. ("RMS"), which operates outpatient
rehabilitation therapy clinics in central Florida. RMS also managed one
therapy and one physician clinic. Total purchase price was
85
$10.0 million, including $8.0 million representing the issuance of 385,542
shares of IHS Common Stock. In addition, IHS incurred direct costs of
acquisition of $2.9 million. Total goodwill at the date of acquisition was
$12.8 million.
Hospice of the Great Lakes Acquisition. In May 1996, IHS acquired
substantially all the assets of Hospice of the Great Lakes, Inc., a hospice
company in Northbrook, Illinois. Total purchase price was $8.2 million
representing the issuance of 304,822 shares of IHS Common Stock. IHS incurred
direct costs of acquisition of $1.0 million. Total goodwill at the date of
acquisition aggregated $9.0 million.
J.R. Rehab Acquisition. In August 1996, IHS acquired all of the
outstanding capital stock of J.R. Rehab Associates, Inc., an inpatient and
outpatient rehabilitation clinic in Mooresville, North Carolina. Total
purchase price was approximately $2.1 million. IHS incurred direct costs of
acquisition of $200,000. Total goodwill at the date of acquisition
aggregated $3.2 million.
Extendicare Acquisition. In August 1996, IHS acquired substantially all of
the assets of Extendicare of Tennessee, Inc., a home healthcare company in
Memphis, Tennessee. Total purchase price was approximately $3.4 million. IHS
incurred direct costs of acquisition of $200,000. Total goodwill at the date
of acquisition aggregated $1.9 million.
Edgewater Acquisition. In August 1996, IHS acquired substantially all the
assets of Edgewater Home Infusion Services, Inc., a home infusion company in
Miami, Florida. Total purchase price was approximately $8.0 million. IHS
incurred direct costs of acquisition of $300,000. Total goodwill at the date
of acquisition aggregated $7.7 million.
Century Acquisition. In August 1996, IHS acquired substantially all the
assets of Century Health Services, Inc., a home healthcare company in
Murfreesboro, Tennessee. Total purchase price was approximately $2.4 million.
In addition, IHS used borrowings under its revolving credit facility to repay
approximately $1.6 million of debt of Century assumed in the acquisition. IHS
incurred direct costs of acquisition of $200,000. Total goodwill at the date
of acquisition aggregated $12.1 million.
Signature Acquisition. In September 1996, IHS acquired all of the
outstanding capital stock of Signature Home Care, Inc., a home care company
in Dallas, Texas. Total purchase price was approximately $9.2 million,
including $4.7 million representing the issuance of 196,374 shares of IHS
Common Stock. In addition, IHS used borrowings under its revolving credit
facility to repay approximately $1.9 million of Signature's debt. IHS
incurred direct costs of acquisition of $2.5 million. Total goodwill at the
date of acquisition aggregated $21.1 million.
Mediq Acquisition. In November 1996, IHS acquired the assets of Mediq Mobile
X-Ray Services, Inc., which provides mobile diagnostic services. The total
purchase price was $10.1 million, including $5.2 million representing the
issuance of 143,893 shares of IHS Common Stock (after giving effect to the
return of 59,828 shares of its Common Stock because of an increase in the
share price of IHS Common Stock between the date of issuance and the date
such shares were registered for resale). In addition, IHS incurred direct
costs of acquisition of $5.5 million. Total goodwill at the date of
acquisition was $15.6 million.
Total Rehab Acquisition. In November 1996, IHS acquired the assets of Total
Rehab Services, LLC and Total Rehab Services 02, LLC, which provide contract
rehabilitative and respiratory services. The total purchase price was $8.0
million, including $2.7 million representing the issuance of 106,559 shares
of IHS Common Stock. In addition, IHS repaid approximately $3.9 million of
Total Rehab's debt. In addition, IHS incurred direct costs of acquisition of
$1.3 million. Total goodwill at the date of acquisition was $12.0 million.
Lifeway Acquisition. In November 1996, IHS acquired all of the outstanding
stock of Lifeway, Inc., which provides physician and disease management
services. The total purchase price was $900,000 representing the issuance of
38,502 shares of IHS's Common Stock. IHS also issued 48,129 shares of Common
Stock to Robert Elkins, Chairman and Chief Executive Officer of IHS, in
payment of outstanding loans of $1.1 million from Mr. Elkins to Lifeway. In
addition, IHS incurred direct costs of acquisition of $275,000.
86
In-Home Acquisition. In January 1997, IHS acquired all the outstanding
capital stock of In-Home Health Care, Inc. ("In-Home"), a home health company
in Salt Lake City, Utah. Total purchase price was $3.2 million. IHS incurred
direct costs of acquisition of $250,000. Total goodwill at the date of
acquisition aggregated $3.9 million.
Portable X-Ray Acquisition. In February 1997, IHS acquired substantially all
the assets of Portable X-Ray Labs, Inc. ("Portable X-Ray"), a mobile
diagnostics company in Anaheim, California. Total purchase price was $4.9
million. IHS incurred direct costs of acquisition of $1.3 million. Total
goodwill at the date of acquisition aggregated $5.7 million.
Coastal Acquisition. In April 1997, IHS acquired substantially all the
assets of Coastal Rehabilitation, Inc. ("Coastal"), an inpatient
rehabilitation company in Indian Harbour, Florida. Total purchase price was
$1.3 million. IHS incurred direct costs of acquisition of $200,000. Total
goodwill at the date of acquisition aggregated $1.8 million.
Health Care Industries Acquisition. In June 1997, IHS acquired all the
outstanding capital stock of Health Care Industries, Inc. ("Health Care
Industries"), a home health company in Florida. Total purchase price was $1.8
million. IHS incurred direct costs of acquisition of $500,000. Total goodwill
at the date of acquisition aggregated $2.5 million.
Rehab Dynamics Acquisition. In June 1997, IHS acquired substantially all
the assets of Rehab Dynamics, Inc. and Restorative Therapy, Ltd.
(collectively "Rehab Dynamics"), a contract rehab company. Total purchase
price was $19.7 million, including $11.5 million representing the issuance
of 322,472 shares of IHS Common Stock. IHS incurred direct costs of
acquisition of $2.5 million. Total goodwill at the date of acquisition
aggregated $21.5 million.
(6) Includes the results of operations from the respective months of acquisition
as follows: (i) In-Home from January 10, 1997, (ii) Portable X-Ray from
February 5, 1997, (iii) Coastal from April 7, 1997, (iv) Health Care
Industries from June 10, 1997, and (iv) Rehab Dynamics from June 20, 1997.
(7) Consists of the In-Home Acquisition, the Portable X-Ray Acquisition, the
Coastal Acquisition, the Health Care Industries Acquisition and the Rehab
Dynamics Acquisition. See note 5 above.
----------------
For purposes of determining the effects of the acquisitions and divestitures
described in Notes 1 through 7 above, including those events which are (i)
directly attributable to the transaction, (ii) expected to have a continuing
impact on IHS, and (iii) factually supportable, the following estimates and
adjustments have been made:
(a) Represents actual revenues and expenses of divisions sold.
87
(b) Represents (reduction in) additional interest expense resulting from
(repayment) borrowings under IHS' revolving credit facility to finance
acquisitions based on the interest rate under the revolving credit
facility on the date of (repayment) borrowings, as follows:
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
DEBT MONTHS INTEREST INTEREST
(PROCEEDS) IN 1996 RATE ADJUSTMENT
------------ --------- ---------- -----------
Pharmacy ............................................. $ (91,000) 7.0 7.19 % $ (3,817)
ILC Offering ....................................... (17,851) 9.0 7.19 % (963)
First American ....................................... 165,000 9.5 7.13 % 9,314
--------- ----- -------- --------
Other Acquisitions
In-Home Health .................................... 3,200 12.0 7.38 % 236
Portable X-Ray .................................... 4,900 12.0 7.25 % 355
Coastal .......................................... 1,250 12.0 7.19 % 90
Health Care Industries ........................... 1,825 12.0 7.19 % 131
Rehab Dynamics .................................... 8,203 12.0 7.19 % 590
Total Rehab ....................................... 5,300 10.0 7.13 % 315
Mediq ............................................. 4,942 10.0 7.13 % 294
Century .......................................... 2,390 8.5 7.25 % 123
Signature ....................................... 4,519 9.0 7.19 % 244
Edgewater ....................................... 7,974 7.5 7.25 % 361
Extendicare ....................................... 3,410 7.5 7.25 % 155
J.R. Rehab ....................................... 2,100 7.0 7.25 % 89
RMS ............................................. 2,000 2.5 6.88 % 29
Vintage .......................................... 6,932 1.0 7.06 % 41
--------- --------
Total Other ....................................... 58,945 3,053
Total ............................................. $ 115,094 7.10%(1) $ 7,587
========= ========
Effect of 1/8% reduction in interest expense ... $ 115,094 6.98%(1) $ 7,433
Effect of 1/8% increase in interest expense ...... $ 115,094 7.23%(1) $ 7,699
- ----------
(1) Percentage is weighted average based on amount (repaid) borrowed.
SIX MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
DEBT MONTHS INTEREST INTEREST
(PROCEEDS) IN 1997 RATE ADJUSTMENT
------------ --------- ---------- -----------
Other Acquisitions
In-Home Health ................................. $ 3,200 .5 7.38 % $ 10
Portable X-Ray ................................. 4,900 1.3 7.25 % 37
Coastal .......................................... 1,250 3.3 7.19 % 24
Health Care Industries ........................... 1,825 5.3 7.19 % 57
Rehab Dynamics ................................. 8,203 5.5 7.19 % 271
------- ----
$19,378 7.24 % $399
======= ====
Effect of 1/8% reduction in interest expense ...... $19,378 7.11%(1) $392
Effect of 1/8% increase in interest expense ...... $19,378 7.36%(1) $406
- ----------
(1) Percentage is weighted average based on amount (repaid) borrowed.
(c) Represents gain on the sale of the pharmacy division of $34,298,000 and
$7,578,000 recorded in 1996 and 1997, respectively.
(d) Represents loss on sale of shares in the ILC Offering.
(e) Represents additional amortization relating to goodwill and other
intangibles recorded as a result of the acquisition, amortized using
the straight line method over 15-40 years, as follows:
88
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
LESS: PREVIOUSLY ADJUSTED MONTHS
ANNUAL RECORDED ANNUAL IN
COMPANY GOODWILL LIFE AMORTIZATION AMORTIZATION AMORTIZATION 1996 ADJUSTMENT
- --------------------------------- ----------- ------ -------------- ------------------ -------------- ------- -----------
First American ............ $ 227,406 40 $ 5,685 $ 0 $ 5,685 9.5 $4,501
---------- ------- --------- ------- ----- ------
RoTech goodwill ............ 539,184 40 13,480 (11,853) 1,627 12.0 1,627
---------- -- ------- --------- ------- ----- ------
RoTech non-compete
covenants .................. 5,000 15 334 0 334 12.0 334
---------- -- ------- --------- ------- ----- ------
Other Acquisitions
Lifeway .................. 0 40 0 0 0 10.0 0
Total Rehab ............... 11,982 40 300 0 300 10.0 250
Mediq ..................... 15,600 40 390 0 390 10.0 325
Century .................. 12,140 40 304 (5) 299 8.5 211
Signature ............... 21,122 40 528 (24) 504 9.0 378
Edgewater ............... 7,685 40 192 (1) 191 7.5 119
Extendicare ............... 1,945 40 49 0 49 7.5 30
J.R. Rehab ............... 3,159 40 79 (2) 77 7.0 45
Hospice of Great Lakes . 9,031 40 226 (2) 224 4.0 75
RMS ..................... 12,832 40 321 0 321 2.5 67
Vintage .................. 0 40 0 0 0 1.0 0
In Home Health ............ 3,856 40 96 0 96 12.0 96
Portable X-Ray ............ 5,653 40 141 0 141 12.0 141
Coastal .................. 1,764 40 44 0 44 12.0 44
Health Care Industries ... 2,505 40 63 0 63 12.0 63
Rehab Dynamics ............ 21,478 40 537 0 537 12.0 537
---------- -- ------- --------- ------- ----- ------
130,752 3,270 (34) 3,236 2,381
---------- ------- --------- ------- ------
Total ..................... $ 902,342 $22,769 $ (11,887) $10,882 $8,843
========== ======= ========= ======= ======
SIX MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
LESS: PREVIOUSLY SIX MONTHS MONTHS
SIX MONTHS RECORDED ADJUSTED IN
COMPANY GOODWILL LIFE AMORTIZATION AMORTIZATION AMORTIZATION 1996 ADJUSTMENT
- -------------------------------- ---------- ------ -------------- ------------------ -------------- ------- -----------
RoTech goodwill ............ $539,184 40 $ 6,740 $ (7,591) $ (851) 6 $ (851)
--------- -- ------- -------- ------ ---- ------
RoTech non-compete
covenants .................. 5,000 15 167 0 167 6 167
--------- -- ------- -------- ------ ---- ------
Other Acquisitions
In Home Health ............ 3,856 40 48 0 48 .5 4
Portable X-Ray ............ 5,653 40 71 0 71 1.3 15
Coastal .................. 1,764 40 22 0 22 3.3 12
Health Care Industries ... 2,505 40 32 0 32 5.3 28
Rehab Dynamics ............ 21,478 40 269 0 269 5.5 247
--------- -- ------- -------- ------ ---- ------
35,256 442 0 442 306
--------- ------- -------- ------ ------
Total ..................... $579,440 $ 7,349 $ (7,591) $ (242) $ (378)
========= ======= ======== ====== ======
(f) Represents additional interest on borrowings by IHS to repay RoTech's
credit facility and to repurchase the RoTech Debentures as follows:
TWELVE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, 1997 APRIL 30, 1997
--------------------- -----------------
Credit facility:
Average borrowings outstanding during the period . $ 85,290,000 $ 120,786,000
IHS average borrowing rate during the period ...... 7.13% 7.23%
Pro forma interest ................................. $ 6,081,000 $ 4,366,000
RoTech Debentures:
Average borrowings outstanding during period
($110,000,000 issued June 1, 1996) ............... $ 73,333,000 $ 110,000,000
Pro forma interest ................................. 5,229,000 3,977,000
------------ -------------
Total pro forma interest ........................... 11,310,000 8,343,000
Less actual interest .............................. 9,456,000 6,784,000
------------ -------------
Pro forma adjustment .............................. $ 1,854,000 $ 1,559,000
============ =============
89
PRO FORMA FINANCIAL INFORMATION FOR ROTECH
The pro forma condensed combined statement of income for the twelve months
ended July 31, 1996 has been prepared to illustrate the estimated combined
effects of the various Agreements of Purchase and Sale ("Agreements") upon
RoTech for those acquisition transactions consummated between August 1, 1995 and
July 31, 1997. The pro forma condensed combined statement of income was derived
by combining RoTech's historical statement of income for the year ended July 31,
1996 and the unaudited historical statements of income of the acquired entities
for a 12 month period ending within 90 days of RoTech's fiscal year end.
The pro forma condensed combined interim statement of income for the nine
months ended April 30, 1997 was derived by combining RoTech's unaudited interim
historical statement of income for the nine months ended April 30, 1997 and the
unaudited interim historical statements of income of the acquired entities for
the period prior to their respective inclusion in RoTech's unaudited interim
historical statement of income for the nine months ended April 30, 1997.
The pro forma condensed combined statements of income were prepared as if
the acquisitions had occurred on the first day of the respective periods
presented. The pro forma condensed combined statements of income presented are
not necessarily indicative of the results of operations that might have occurred
had such transactions been completed as of the date specified or of the results
of operations of RoTech and its subsidiaries for any future period.
The pro forma balance sheet at April 30, 1997 was prepared as if the
entities acquired during the period from May 1, 1997 to July 31, 1997 were all
acquired as of April 30, 1997.
The operations of any entities acquired subsequent to April 30, 1997 are
not included in RoTech's historical interim statement of income as presented
herein. The net assets of any entities acquired subsequent to April 30, 1997 are
not included in RoTech's historical balance sheet as of April 30, 1997.
No changes in operating revenue and expenses have been made to reflect the
results of any modification to operations that might have been made had the
Agreements been consummated on the aforesaid assumed effective dates for
purposes of presenting pro forma results. The pro forma condensed combined
statements of income include amortization of goodwill as if the Agreements had
been completed on the assumed effective date referred to above.
The pro forma condensed combined statements of income, which should be read
in conjunction with the audited consolidated financial statements and related
notes thereto, were prepared in accordance with the following principles:
(a) Amortization on intangibles recorded in the combined acquisitions was
amortized over various lives ranging from 5 to 25 years.
(b) Additional interest expense related to borrowings for cash paid to
acquire combined entities was assumed borrowed on the first day of the
respective period presented.
(c) Adjustment to income tax expense relating to the net income as adjusted
for the combined acquired entities was calculated on the basis that
operations of the consolidated company could be combined as one company
for federal income tax purposes at the actual historical rate for the
period.
(d) Additional shares of RoTech Common Stock issued pursuant to the
Agreements was assumed issued on the first day of the respective periods
presented.
The pro forma financial statements give effect to the following
acquisitions:
Hooks Acquisition. In October 1995, RoTech purchased substantially all of
the assets of Revco Home Health Care Centers, Inc. (also known as Hooks Home
Health Care), a respiratory and durable medical equipment company with 32
locations in Indiana, Ohio, Kentucky, Illinois and Tennessee. The acquisition
price was $10.4 million in cash and goodwill at the date of acquisition was
$969,000.
90
Rhema Acquisition. In January 1996, RoTech acquired all of the outstanding
shares of common capital stock of Rhema, Inc., a respiratory and durable medical
equipment company located in Irving, Texas, for $2.5 million in cash and 218,182
shares of RoTech Common Stock. Goodwill at the date of acquisition was $3.4
million.
Roth Medical Acquisition. In February 1996, RoTech acquired all of the
outstanding shares of common capital stock of Roth Medical Inc., a respiratory
and durable medical equipment company with three locations in Colorado, for $5.3
million in cash. Goodwill at the date of acquisition was $2.8 million.
RHO Medical Acquisition. In April 1996, RoTech acquired all of the
outstanding shares of common capital stock of RHO Medical Equipment also known
as Wound Management Services, a wound care company in Winter Park Florida, for
$3.2 million in cash and 108,108 shares of RoTech Common Stock. Goodwill at the
date of acquisition was $2 million.
Big B, Inc. Acquisition. In March 1997, RoTech purchased substantially all
the assets of Big B, Inc. d/b/a Alabama Medical, a respiratory and durable
medical equipment company with 9 locations in Georgia and Alabama, for $5.3
million in cash. Goodwill at the date of acquisition was $783,000.
Great Lakes Acquisition. In April 1997, RoTech purchased substantially all
the assets of Great Lakes Home Medical, Inc., a respiratory and durable medical
equipment company with 9 locations in Michigan, Wisconsin and Florida, for $5.8
million in cash. Goodwill at the date of acquisition was $5.0 million.
First Care Acquisition. In May 1997, RoTech purchased First Care, Inc., a
respiratory and durable medical equipment company in Wichita and Pratt, Kansas,
for $8.0 million in cash. Goodwill at the date of acquisition was $6.6 million.
Cambria Acquisition. In May 1997, RoTech purchased substantially all the
assets of Cambria Medical Supply, a respiratory and durable medical equipment
company with 4 locations in Pennsylvania, for $6.8 million in cash and 190,477
shares of RoTech Common Stock. Goodwill at the date of acquisition was $5.1
million.
Other Acquisitions. In August 1996 through July 31, 1997, RoTech completed
an aggregate of 91 other acquisition transactions of respiratory, durable
medical equipment and pharmacy products and services companies. The total cash
paid for such acquisitions was $221.8 million and RoTech issued 1.4 million
shares of RoTech Common Stock. Goodwill at the date of acquisition related to
such transactions was $155.3 million.
91
PRO FORMA COMBINED BALANCE SHEET
ROTECH MEDICAL CORPORATION
AS OF APRIL 30, 1997
(IN THOUSANDS)
(HISTORICAL)
COMBINED
HISTORICAL ACQUIRED PRO FORMA PRO FORMA
APRIL 30, 1997 ENTITIES ADJUSTMENTS COMBINED
---------------- ------------- ------------------ ----------
ASSETS
Current Assets:
Cash ............................................. $ 8,738 $ 17 $ 8,755
Accounts receivable ..............................
Trade, less allowance for doubtful accounts. 114,135 2,661 116,796
Other .......................................... 2,744 2,744
Inventories ....................................... 20,152 671 20,823
Prepaid assets .................................... 3,710 16 3,726
-------- ------ ---------
Total current assets ........................... 149,479 3,365 152,844
Property and equipment, net ........................ 114,847 4,834 119,681
Intangible assets, net ........................... 252,433 - $ 19,057 (a) 271,490
Other assets ....................................... 1,808 26 1,834
-------- ------ ----------- --------
Total Assets .................................... $518,567 $8,225 $ 19,057 $545,849
======== ======= =========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable, accrued expenses and other
liabilities .................................... $ 24,524 $6,594 $ (3,506)(b) $27,612
Notes payable to banks ........................... 162,014 - 24,194 (c) 186,208
Deferred income taxes .............................. 136 - 136
-------- ------- ----------- --------
Total current liabilities ........................ 186,674 6,594 20,688 213,956
Deferred income taxes .............................. 17,357 - 17,357
Convertible subordinated debt ..................... 110,000 - 110,000
Redeemable common stock ........................... 3,322 - 3,322
Shareholders' Equity:
Common stock ....................................... 5 117 (117)(b) 5
Treasury stock .................................... (815) - (815)
Additional paid-in-capital ........................ 127,403 6 (6)(b) 127,403
Retained earnings ................................. 74,621 1,508 (1,508)(b) 74,621
-------- ------- ----------- --------
201,214 1,631 (1,631) 201,214
-------- ------- ----------- --------
Total liabilities and shareholders' equity ...... $518,567 $8,225 $ 19,057 $545,849
======== ======= =========== ========
92
ROTECH MEDICAL CORPORATION
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED JULY 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ROTECH ROTECH
MEDICAL MEDICAL
CORPORATION CORPORATION
CONSOLIDATED COMBINED COMBINED
YEAR ENDED ACQUIRED PRO FORMA PRO FORMA
JULY 31, 1996 ENTITIES ADJUSTMENTS RESULTS
--------------- ---------- ----------------- ------------
Operating revenue .................. $263,030 $172,230 $435,260
Cost and expenses:
Cost of revenue ..................... 71,013 50,707 121,720
Selling, general and administra-
tive 127,357 89,630 216,987
Depreciation and amortization ...... 26,520 5,651 $ 8,555 (d) 40,726
Interest ........................... 5,228 1,960 12,597 (e) 19,785
-------- -------- ----------- ---------
230,118 147,948 21,152 399,218
-------- -------- ----------- ---------
Income before income taxes ......... 32,912 24,282 (21,152) 36,042
Income tax expense .................. 12,356 644 516 (f) 13,516
-------- -------- ----------- --------
Net Income ........................ $ 20,556 $ 23,638 $ (21,668) $ 22,526
======== ======== =========== ========
Net income per share:
Primary ........................... $ 0.83 $ 0.85
Fully diluted ..................... $ 0.82 $ 0.83
======== ========
Weighted average number of shares outstanding:
Primary ........................... 24,657 1,956 26,613
Fully diluted ..................... 25,206 1,956 27,162
======== ======== ========
93
ROTECH MEDICAL CORPORATION
PRO FORMA STATEMENT OF OPERATIONS
NINE MONTHS ENDED APRIL 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ROTECH
MEDICAL ROTECH
CORPORATION MEDICAL
CONSOLIDATED CORPORATION
NINE MONTHS COMBINED COMBINED
ENDED ACQUIRED PRO FORMA PRO FORMA
APRIL 30, 1997 ENTITIES ADJUSTMENTS RESULTS
---------------- ---------- ----------------- ------------
Operating revenue .................. $297,575 $ 68,169 $365,744
Cost and expenses:
Cost of revenue ..................... 77,091 18,616 95,707
Selling, general and administra-
tive 145,711 36,311 182,022
Depreciation and amortization ...... 30,344 2,565 $ 2,304 (d) 35,213
Interest ........................... 9,214 792 3,732 (e) 13,738
--------- --------- ---------- --------
262,360 58,284 6,036 326,680
--------- --------- ---------- --------
Income before income taxes ......... 35,215 9,885 (6,036) 39,064
Income tax expense .................. 13,322 62 1,382 (f) 14,766
--------- --------- ---------- --------
Net Income ........................ $ 21,893 $ 9,823 $ (7,418) $ 24,298
========= ========= ========== ========
Net income per share:
Primary ........................... $ 0.84 $ 0.90
Fully diluted ..................... $ 0.81 $ 0.86
========= ========
Weighted average number of shares outstanding:
Primary ........................... 26,187 769 26,956
Fully diluted ..................... 30,729 769 31,498
========= ========= ========
94
NOTES TO PRO FORMA FINANCIAL INFORMATION FOR ROTECH
(a) Represents the purchase price of 14 acquisitions in excess of the estimated
fair value of the net assets and outstanding stock acquired from May 1, 1997
through July 31, 1997, as follows:
Merger consideration ........................ $24,194,000
Other liabilities assumed .................. 3,087,764
------------
27,281,764
------------
Net assets and outstanding stock acquired . 8,224,887
------------
$19,056,877
============
(b) Represents the elimination of equity and intercompany accounts arising from
companies acquired from May 1, 1997 through July 31, 1997.
(c) Represents consideration paid for 14 companies acquired from May 1, 1997
through July 31, 1997.
(d) Represents additional amortization relating to goodwill recorded as a
result of the acquisitions, amortized using a straight line basis over 5-25
years.
(e) Represents additional interest expense resulting from borrowings under
RoTech's revolving credit facility of $270.1 million and $131.6 million for
the year ended July 31, 1996 and the nine months ended April 30, 1997,
respectively, to finance acquisitions.
(f) Represents effective tax rate for the year ended July 31, 1996 and nine
months ended April 30, 1997 of 37.5% and 37.8%, respectively.
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BUSINESS OF IHS
GENERAL OVERVIEW
Integrated Health Services, Inc. is one of the nation's leading providers
of post-acute healthcare services. Post-acute care is the provision of a
continuum of care to patients following discharge from an acute care hospital.
IHS' post-acute care services include subacute care, home care, skilled nursing
facility care and inpatient and outpatient rehabilitation, hospice and
diagnostic services. IHS' 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. IHS believes that its post-acute care network can be extended beyond
post-acute care to also provide "pre-acute" care, i.e., services to patients
which reduce the likelihood of a need for a hospital stay. IHS' post-acute care
network currently consists of approximately 1,050 service locations in 45
states.
IHS' 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) expanding the range of home
healthcare and related services it offers to patients directly in order to
provide patients with a continuum of care throughout their recovery, to better
control costs and to meet the growing desire by payors for one-stop shopping;
(ii) developing market concentration for its post-acute care services in
targeted states due to increasing payor consolidation and the increased
preference of payors, physicians and patients for dealing with only one service
provider; and (iii) developing subacute care units. Given the increasing
importance of managed care in the healthcare marketplace and the continued cost
containment pressures from Medicare, Medicaid and private payors, IHS has been
restructuring its operations to enable IHS to focus on obtaining contracts with
managed care organizations and to provide capitated services. IHS' strategy is
to become a preferred or exclusive provider of post-acute care services to
managed care organizations and other payors.
In implementing its post-acute care network strategy, 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 IHS' strategy, IHS in October
1996 acquired First American, a provider of home health services, principally
home nursing, in 21 states, primarily Alabama, California, Florida, Georgia,
Michigan, Pennsylvania and Tennessee. See "IHS Recent Developments." IHS intends
to use the home healthcare setting and the delivery franchise of its home
healthcare branch and agency network to (i) deliver sophisticated care, such as
skilled nursing care, home infusion therapy and rehabilitation, outside the
hospital or nursing home; (ii) serve as an entry point for patients into the IHS
post-acute care network; and (iii) provide a cost-effective site for case
management and patient direction.
In order to expand further its home healthcare services, IHS in July 1997
entered into the Merger Agreement to acquire RoTech, a provider of home
healthcare products and services, with an emphasis on home respiratory, home
medical equipment and infusion therapy, principally to patients in non-urban
areas. In August 1997, IHS agreed to acquire the Coram Lithotripsy Division,
which provides lithotripsy services and equipment maintenance in 180 locations
in 18 states, in order to expand the mobile diagnostic treatment and services it
offers to patients, payors and other providers. Lithotripsy is a non-invasive
technique that utilizes shock waves to disintegrate kidney stones. In August
1997, IHS also agreed to acquire CCA, which develops and operates skilled
nursing facilities in medically underserved rural communities. IHS believes that
CCA will broaden its post-acute care network to include more
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rural markets and will complement its existing home care locations in rural
markets as well as RoTech's business. See "IHS Recent Developments - Proposed
Acquisitions," "The Merger" and "Business of RoTech."
IHS 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 IHS' MSUs are similar to those provided in the hospital but at
per diem treatment costs which the 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, IHS' MSUs generate substantially higher net revenue
and operating profit per patient day than traditional geriatric care services.
Total revenues generated from MSUs have increased from $104.3 million for the
year ended December 31, 1993 to $178.0 million for the year ended December 31,
1994, $290.2 million for the year ended December 31, 1995 and $324.0 million for
the year ended December 31, 1996 and from $157.1 million for the six months
ended June 30, 1996 to $172.9 million for the six months ended June 30, 1997.
MSU revenues as a percentage of total revenues were 35% in 1993, 25% in each of
1994 and 1995, 23% in 1996 and 24% and 19% in the six months ended June 30, 1996
and 1997, respectively. The percentage decrease in 1994 was primarily the result
of the acquisition of facilities which did not have MSUs at the time of
acquisition as well as the acquisition of rehabilitation, pharmacy, diagnostic,
respiratory therapy, home healthcare and related service companies in connection
with IHS' vertical integration strategy and the implementation of IHS'
post-acute care network. MSU revenue as a percentage of total revenues is
expected to continue to decrease as IHS implements its vertical integration
strategy and continues to expand its post-acute care network through the
acquisition of home healthcare, rehabilitation and similar service companies.
IHS presently operates 172 geriatric care facilities (116 owned or leased
and 56 managed) and 158 MSUs located within 84 of these facilities. Specialty
medical services revenues, which include all MSU charges, all revenue from
providing rehabilitative therapies, pharmaceuticals, medical supplies and
durable medical equipment to all its patients, all revenue from its Alzheimer's
programs and all revenue from its provision of pharmacy, rehabilitation therapy,
home healthcare, hospice care and similiar services to third-parties,
constituted approximately 57%, 65% and 70% of net revenues during the years
ended December 31, 1994, 1995 and 1996, respectively. 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, 1996, approximately 17% of IHS'
revenues were derived from home health and hospice care, approximately 53% were
derived from subacute and other ancillary services, approximately 27% were
derived from traditional basic nursing home services and the remaining
approximately 3% were derived from management and other services. On a pro forma
basis after giving effect to the acquisition of First American, for the year
ended December 31, 1996, approximately 35% of IHS' revenues were derived from
home health and hospice care, approximately 41% were derived from subacute and
other ancillary services, approximately 21% were derived from traditional basic
nursing home services and the remaining approximately 3% were derived from
management and other services. On a pro forma basis after giving effect to the
Merger and the acquisition of First American, for the year ended December 31,
1996, approximately 44% of IHS' revenues were derived from home health and
hospice care, approximately 36% were derived from subacute and other ancillary
services, approximately 18% were derived from traditional basic nursing home
services and the remaining approximately 2% were derived from management and
other services.
INDUSTRY BACKGROUND
In 1983, the Federal government acted to curtail increases in healthcare
costs under Medicare, a Federal insurance program under the Social Security Act
primarily for individuals age 65 or over. Instead of continuing to reimburse
hospitals on a cost plus basis (i.e., the hospital's actual cost of care plus a
specified return on investment), the Federal government established a new type
of payment system based on prospectively determined prices rather than
retrospectively determined costs, with payment for
97
inpatient hospital services based on regional and national rates established
under a system of diagnosis-related groups ("DRGs"). As a result, hospitals bear
the cost risk of providing care inasmuch as they receive specified reimbursement
for each treatment regardless of actual cost.
Concurrent with the change in government reimbursement of healthcare costs,
a "managed care" segment of the healthcare industry emerged based on the theme
of cost containment. The health maintenance organizations and preferred provider
organizations, which constitute the managed care segment, are able to limit
hospitalization costs by giving physicians incentives to reduce hospital
utilization and by negotiating discounted fixed rates for hospital services. In
addition, traditional third party indemnity insurers began to limit
reimbursement to pre-determined amounts of "reasonable charges," regardless of
actual cost, and to increase the amount of co-payment required to be paid by
patients, thereby requiring patients to assume more of the cost of hospital
care. These changes have resulted in the earlier discharge of patients from
acute care hospitals.
At the same time, the number of people over the age of 65 began to grow
significantly faster than the overall population. Further, advances in medical
technology have increased the life expectancies of an increasingly large number
of medically complex patients, many of whom require a high degree of monitoring
and specialized care and rehabilitative therapy that is generally not available
outside the acute care hospital. However, the changes in government and
third-party reimbursement and growth of the managed care segment of the
healthcare industry, when combined with the fact that the cost of providing care
to these patients in an acute care hospital is higher than in a non-acute care
hospital setting, provide economic incentives for acute care hospitals and
patients or their insurers to minimize the length of stay in acute care
hospitals. The early discharge from hospitals of patients who are not fully
recovered and still require medical care and rehabilitative therapy has
contributed significantly to the rapid growth of the home healthcare industry,
as have recent advances in medical technology, which have facilitated the
delivery of services in alternate sites, demographic trends, such as an aging
population, and a preference for home healthcare among patients. As a result,
home healthcare is among the fastest growing areas in healthcare.
However, for some of these patients home healthcare is not a viable
alternative because of their continued need for a high degree of monitoring,
more intensive and specialized medical care, 24-hour per day nursing care and a
comprehensive array of rehabilitative therapy. As a result, IHS believes there
is an increasing need for non-acute care hospital facilities which can provide
the monitoring, specialized care and comprehensive rehabilitative therapy
required by the growing population of subacute and medically complex patients.
The traditional nursing home, despite its skilled care license and
eligibility for Medicare certification, has focused on providing custodial care
to Medicaid eligible persons until they die. The state Medicaid reimbursement
program reinforces this focus by typically setting "cost ceilings" on
reimbursement for each patient based on overall average state costs for all
patients. Since the "average" patient is a long-stay, non-medically complex
patient, nursing homes face an economic disincentive to treat medically complex
patients because Medicaid reimburses the nursing home as if it had provided only
custodial care to a non-medically complex patient regardless of the type of care
actually provided. In addition, state laws impose substantial restrictions on or
prohibitions against the ability of a facility to reduce the number of Medicaid
certified beds in a facility, thus making the process of converting to the
treatment of more medically complex non-Medicaid eligible persons a long and
financially risky process. As a result, most traditional nursing homes, with
high Medicaid census and earnings and cash flow under pressure, are reluctant to
spend the capital required to upgrade staff, implement medical procedures (such
as infection control) and equip a nursing home to treat subacute and medically
complex patients and provide the comprehensive rehabilitative therapy required
by many of these patients.
Moreover, recent healthcare reform proposals, which have focused on
containment of healthcare costs, together with the desire of third-party payors
to contract with one service provider for all post-acute care services, the
increasing complexity of medical services provided, growing regulatory and
compliance requirements and increasingly complicated reimbursement systems, have
resulted in a trend of consolidation of smaller, local operators who lack the
sophisticated management information systems,
98
operating efficiencies and financial resources to compete effectively into
larger, more established regional or national operators that offer a broad range
of services, either through its own network or through subcontracts with other
third-party service providers.
There are numerous initiatives on the federal and state levels for
comprehensive reforms affecting the payment for and availability of healthcare
services. It is not clear at this time what proposals, if any, will be adopted
or, if adopted, what effect such proposals would have on IHS' business. Aspects
of certain of these healthcare proposals, such as cutbacks in the Medicare and
Medicaid programs, reductions in Medicare reimbursement rates and/or limitations
on reimbursement rate increases, containment of healthcare costs on an interim
basis by means that could include a short-term freeze on prices charged by
healthcare providers, and permitting greater state flexibility in the
administration of Medicaid, could adversely affect IHS. See "- Sources of
Revenue." There can be no assurance that currently proposed or future healthcare
legislation or other changes in the administration or interpretation of
governmental healthcare programs will not have an adverse effect on IHS. Ongoing
consolidation in the healthcare industry could also impact IHS' business and
results of operations. See "Risk Factors - Risk of Adverse Effect of Healthcare
Reform" and "- Uncertainty of Government Regulation."
COMPANY STRATEGY
IHS' post-acute care network strategy is to provide cost-effective
continuity of care for its patients in multiple settings, using geriatric care
facilities as platforms to provide a wide variety of subacute medical and
rehabilitative services more typically delivered in the acute care hospital
setting and using home healthcare to provide those medical and rehabilitative
services which do not require 24-hour monitoring. IHS believes that the success
of its post-acute care strategy will depend in large part on its ability to
control each component of the post-acute care delivery system in order to
provide low-cost, high quality outcomes. The central elements of IHS' business
strategy are:
Vertical Integration of Post-acute Care Services. IHS is expanding the
range of home healthcare and related services it offers to its patients directly
in order to serve the full spectrum of patient needs following acute
hospitalization. In addition to subacute care, IHS is now able to offer directly
to its patients, rather than through third-party providers, home healthcare,
rehabilitation (physical, occupational and speech), hospice care and mobile
x-ray and electrocardiogram services. As a full service provider, IHS believes
that it is better able to respond to the needs of its patients and referral
sources. In addition, IHS believes that by offering managed care organizations
and insurance companies a single source from which to obtain a full continuum of
care to patients following discharge from the acute care hospital, it will
attract healthcare payors seeking to improve the management of healthcare
quality as well as to reduce servicing and administrative expenses. IHS also
believes that offering a broad range of services will allow it to better control
certain costs, which will provide it with a competitive advantage in contracting
with managed care companies and offering capitated rates, whereby IHS assumes
the financial risk for the cost of care.
Expansion of Home-Based Services. IHS' strategy is to expand its home
healthcare services to take advantage of healthcare payors' increasing focus on
having healthcare provided in the lowest-cost setting possible and patients'
desires to be treated at home. IHS believes that the nation's aging population,
when combined with advanced technology which allows more healthcare procedures
to be performed at home, has resulted in an increasingly large number of
patients with long-term chronic conditions that can be treated effectively in
the home. In addition, a significant number of patients discharged from IHS'
MSUs require home healthcare. IHS also believes that it can expand its home
healthcare services to cover pre-acute, as well as post-acute, patients by
having home healthcare nurses provide preventive care services to home-bound
senior citizens. In addition, IHS believes that home healthcare will help IHS
contain costs, thereby providing it with a competitive advantage in contracting
with managed care companies and offering capitated rates. IHS believes that the
changing healthcare reimbursement environment, with the focus on cost
containment, will require healthcare providers to go "at risk" under capitated
service agreements, and that home healthcare will be a critical component of its
ability to do so.
IHS believes that the acquisition of First American and the Merger are
important components in the implementation of its post-acute healthcare system.
First American, together with IHS' existing home healthcare operations, gives
IHS a significant home healthcare presence in 21 states, including
99
those states IHS has targeted for its post-acute healthcare system. IHS believes
that its expanded home healthcare network will assist it in meeting the desire
of payors for one stop shopping, as well as offering capitated rates to managed
care providers. Additionally, IHS expects that Medicare will implement a
prospective payment system for home nursing services in the next several years.
Currently, Medicare provides reimbursement for home nursing care on a cost basis
which includes a rate of return, subject to a cap. There is no reward for
efficiency, provided that costs are below the cap. Under current prospective
payment proposals, a healthcare provider would receive a predetermined rate for
a given service. Providers with costs below the predetermined rate will be
entitled to keep some or all of this difference. Under prospective pay, the
efficient operator will be rewarded. Since the largest component of home nursing
care costs is labor, which is basically fixed, IHS believes the differentiating
factor in profitability will be administrative costs. As a result of the First
American Acquisition, IHS, as a large provider of home nursing services, should
be able to achieve administrative efficiencies compared with the small providers
which currently dominate the home healthcare industry, although there can be no
assurance it will be able to do so. There can be no assurance that Medicare will
implement a prospective payment system for home nursing services in the next
several years or at all. See "Risk Factors - Risk of Adverse Effect of
Healthcare Reform."
Focus on Managed Care. Given the increasing importance of managed care in
the healthcare marketplace and the continued cost containment pressures from
Medicare and Medicaid, IHS has, over the past year, begun to restructure its
operations to position IHS to focus on obtaining contracts with managed care
organizations and to provide capitated services. IHS' strategy is to become a
preferred or exclusive provider to managed care organizations. Although to date
there has been limited demand among managed care organizations for post-acute
care services, IHS believes demand will increase as HMOs continue to attempt to
control healthcare costs and to penetrate the Medicare market. As part of its
focus on managed care and capitated rates, IHS spent several years collecting
outcome data for more than 50,000 patients. To date, IHS has service agreements
with approximately 395 managed care organizations. In January 1996, IHS was
chosen as the exclusive capitated provider for five years of long-term care,
subacute care and therapy services to Sierra Health Plan's Health Plan of Nevada
("Sierra Health"), the largest HMO in Nevada with approximately 26,000 Medicare
enrollees and 125,000 commercial enrollees. As the exclusive provider, IHS
provides all contracted services to the HMO's members; as a capitated provider,
IHS accepts full risk of patient care in exchange for a flat fee per enrollee.
The agreement with Sierra Health provides for annual capitation adjustments and
the ability to increase revenue through other non-capitated services, although
there can be no assurance that these provisions will be effective to protect
IHS. In addition, in October 1996 IHS entered into a three-year agreement to
provide, on an exclusive basis, long-term and subacute care to patients of
Foundation Health Corporation ("Foundation Health"), an HMO located in Florida,
on a capitated basis. Foundation Health currently has approximately 24,500
Medicare and 60,000 commercial enrollees. The agreement provides for increased
revenues to IHS for reduced hospital utilization. Although IHS has attempted to
minimize its risk under the contract, there can be no assurance that safeguards
it implemented will be effective. See "Risk Factors - Risks Related to Managed
Care Strategy."
Subacute Care Through Medical Specialty Units. IHS' strategy is designed to
take advantage of the need for early discharge of many patients from acute care
hospitals by using MSUs as subacute specialty units within its geriatric care
facilities. MSUs provide the monitoring and specialized care still required by
these persons after discharge from acute care hospitals at per diem treatment
costs which IHS believes are generally 30% to 60% below the cost of care in
acute care hospitals. IHS also intends to continue to use its geriatric care
facilities to meet the increasing need for cost-efficient, comprehensive
rehabilitation treatment of these patients. The primary MSU programs currently
offered by IHS are complex care programs, ventilator programs, wound management
programs and cardiac care programs; other programs offered include subacute
rehabilitation, oncology and HIV. IHS opened its first MSU program in April 1988
and currently operates 158 MSU programs in 84 facilities. IHS also emphasizes
the care of medically complex patients through the provision of a comprehensive
array of respiratory, physical, speech, occupational and physiatric therapy. IHS
intends that its MSUs be a lower cost alternative to acute care or
rehabilitation hospitalization of subacute or medically complex patients. IHS
intends to expand its specialty medical services at its existing and newly
acquired facilities. IHS believes that its subacute care programs will also
serve as an important referral base for its home healthcare and ancillary
services. In expanding its post-
100
acute care network, IHS expects to place less emphasis on subacute care through
MSUs and more emphasis on home healthcare. While IHS added 1,098 MSU beds in
1994 and 868 MSU beds in 1995, it only added an additional 383 MSU beds in 1996
and 105 MSU beds in the first half of 1997, and it anticipates that it will only
add an additional 200 to 300 MSU beds in each of 1997 and 1998.
Concentration on Targeted Markets. IHS has implemented a strategy focused
on the development of market concentration for its post-acute care services in
targeted states due to increasing payor consolidation. IHS also believes that by
offering its services on a concentrated basis in targeted markets, together with
the vertical integration of its services, it will be better positioned to meet
the needs of managed care payors. IHS now has approximately 1,050 service
locations in 45 states, including 172 geriatric care facilities in 30 states (56
of which IHS manages), with: 59 service locations, including 23 geriatric care
facilities (21 of which IHS manages), in California; 163 service locations,
including 32 geriatric care facilities (five of which IHS manages), in Florida;
75 service locations, including 14 geriatric care facilities (two of which IHS
manages), in Pennsylvania; and 138 service locations, including 20 geriatric
care facilities (six of which IHS manages), in Texas.
Expansion Through Acquisitions. IHS has grown substantially through
acquisitions and the opening of MSUs and the acquisition of home healthcare and
related service providers, and expects to continue to expand its business by
expanding the amount of home healthcare and related services it offers directly
to its patients rather than through third-party providers, by establishing
additional MSUs and rehabilitation programs in its existing geriatric care
facilities, by acquiring additional geriatric care facilities in which to
establish MSUs and rehabilitation programs and by expanding the number of MSU
programs offered. From January 1, 1991 to date, IHS has increased the number of
geriatric care facilities it owns or leases from 25 to 116, has increased the
number of facilities it manages from 18 to 56 and has increased the number of
MSU programs it operates from 13 to 158. In addition, IHS now offers certain
related services, such as home healthcare, rehabilitation, x-ray and
electrocardiogram, directly to its patients rather than relying on third-party
providers. IHS' planned expansion and growth require that IHS expand its home
healthcare services through the acquisition of additional home healthcare
providers, that IHS acquire, or establish relationships with, third-parties
which provide other post-acute care services not currently provided by IHS, that
additional MSUs be established in IHS' existing facilities and that IHS acquire,
lease or acquire the right to manage for others additional facilities in which
MSUs can be established. See "Risk Factors - Risks Associated with Growth
Through Acquisitions and Internal Development."
PATIENT SERVICES
BASIC MEDICAL SERVICES
IHS provides a wide range of basic medical services at its geriatric care
facilities which are licensed as skilled care nursing homes. Services provided
to all patients include required nursing care, room and board, special diets and
other services which may be specified by a patient's physician who directs the
admission, treatment and discharge of the patient.
SPECIALTY MEDICAL SERVICES
Medical Specialty Units
IHS' MSUs are typically 20 to 75 bed subacute specialty care units located
within discrete areas of IHS' facilities, with physical identities, specialized
medical technology and medical staffs separate from the geriatric care
facilities in which they are located. An intensive care unit nurse, or a nurse
with specialty qualifications, serves as clinical coordinator of each unit,
which generally is staffed with nurses having experience in the acute care
setting. The operations of each MSU are generally overseen by a Board certified
specialist in that unit's area of treatment. The patients in each MSU are
provided with a high degree of monitoring and specialized care similar to that
provided by acute care hospitals. The physiological monitoring equipment
required by the MSU is equivalent to that found in the acute care hospital. IHS
opened its first MSU program during April 1988 and currently operates 158 MSUs
at 84 facilities. Approximately one-third of all of IHS' MSU patients are under
the age of 70.
101
Although each MSU has most of the treatment capabilities of an acute care
hospital in the MSU's area of specialization, IHS believes the per diem
treatment costs are generally 30% to 60% less than in acute care hospitals.
Additionally, the MSU is less "institutional" in nature than the acute care
hospital, families may visit MSU patients whenever they wish and family
counseling is provided. In marketing its MSU programs to insurers and healthcare
providers, IHS emphasizes the cost advantage of its treatment as compared to
acute care hospitals. IHS also emphasizes the improved "quality of life"
compared to acute care and long-term care hospitals in marketing its MSU
programs to hospital patients and their families. The primary MSU programs
currently offered by IHS are complex care programs, ventilator programs, wound
management programs and cardiac care programs; other programs offered include
subacute rehabilitation, oncology and HIV.
Complex Care Program. This program is designed to treat persons who are
generally subacute or chronically ill and sick enough to be treated in an acute
care hospital. Persons requiring this care include post-surgical patients,
cancer patients and patients with other diseases requiring long recovery
periods. This program is designed to provide the monitoring and specialized care
these patients require but in a less institutional and more cost efficient
setting than provided by hospitals. Some of the monitoring and specialized care
provided to these patients are apnea monitoring, continuous peripheral
intravenous therapy with or without medication, continuous subcutaneous
infusion, chest percussion and postural drainage, gastrostomy or naso-gastric
tube feeding, ileostomy or fistula care (including patient teaching),
post-operative care, tracheostomy care, and oral, pharyngeal or tracheal
suctioning. Patients in this program also typically undergo intensive
rehabilitative services to allow them to return home.
Ventilator Program. This program is designed for persons who require
ventilator assistance for breathing because of respiratory disease or
impairment. Persons requiring ventilation include sufferers of chronic
obstructive pulmonary disease, muscular atrophy and respiratory failure,
pneumonia, cancer, spinal cord or traumatic brain injury and other diseases or
injuries which impair respiration. Ventilators assist or effect respiration in
patients unable to breathe adequately for themselves by injecting heated,
humidified, oxygen-enriched air into the lungs at a pre-determined volume per
breath and number of breaths per minute and by controlling the relationship of
inhalation time to exhalation time. Patients in this program undergo respiratory
rehabilitation to wean them from ventilators by teaching them to breathe on
their own once they are medically stable. Patients are also trained to use the
ventilators on their own.
Wound Management Programs. These programs are designed to treat persons
suffering from post operative complications and persons infected by certain
forms of penicillin and other antibiotic resistant bacteria, such as methicillin
resistant staphylococcus aureus ("MRSA"). Patients infected with these types of
bacteria must be isolated under strict infection control procedures to prevent
the spread of the resistant bacteria, which makes MSUs an ideal treatment site
for these patients. Because of the need for strict infection control, including
isolation, treatment of this condition in the home is not practical.
Cardiac Care Program. This program is designed to treat persons suffering
from congestive heart failure, severe cardiac arrhythmia, pre/post transplants
and other cardiac diagnoses. The monitoring and specialized care provided to
these patients includes electrocardiographic monitoring/telemetry, continuous
hemodynamic monitoring, infusion therapy, cardiac rehabilitation, stress
management and dietary counseling, planning and education.
IHS believes that MSU programs can be developed to address a wide variety
of medical conditions which require specialized care. In addition, IHS has
developed MSU programs for subacute rehabilitation, oncology and HIV. IHS
intends to establish additional MSUs in its existing facilities and in
facilities which it acquires or manages for others to address the various market
needs for MSU programs in the markets in which it operates.
Rehabilitation
IHS provides a comprehensive array of rehabilitative services for patients
at all of its geriatric care facilities, including those in its MSU programs, in
order to enable those persons to return home. These services include respiratory
therapy with licensed respiratory therapists, physical therapy with a partic-
102
ular emphasis on programs for the elderly, speech therapy, particularly for the
elderly recovering from cerebral vascular disorders, occupational therapy and
physiatric care. A portion of the rehabilitative service hours are provided by
independent contractors. In order to reduce the number of rehabilitative service
hours provided by independent contractors, IHS began in late 1993 to acquire
companies which provide physical, occupational and speech therapy to healthcare
facilities.
IHS also offers a rehabilitation program to stroke victims and persons who
have undergone hip replacement.
Home Healthcare Services
IHS provides a broad spectrum of home healthcare services to the
recovering, disabled, chronically ill or terminally ill person. Home healthcare
services may be as basic as assisting with activities of daily living or as
complex as cancer chemotherapy. Care involves either or both a service component
(provided by registered nurses, home health aides, therapists and technicians
through periodic visits) and a product component (drugs, equipment and related
supplies). Time spent with a patient may range from one or two visits to
around-the-clock care. Patients may be treated for several weeks, several months
or the remainder of their lives.
The home healthcare market is generally divided into four segments: nursing
services; infusion therapy; respiratory therapy; and home medical equipment. On
a pro forma basis after giving effect to the Merger, the acquisition of First
American and the ILC Sale, IHS had home healthcare revenues of approximately
$549.1 million, $812.3 million, $944.1 million, $398.9 million and $475.8
million during the years ended December 31, 1994, 1995 and 1996 and the six
months ended June 30, 1996 and 1997, respectively, representing approximately
45.4%, 43.6%, 44.9%, 39.3% and 43.0%, respectively, of total pro forma patient
revenues. On a pro forma basis after giving effect to the Merger and the
acquisition of First American, home nursing services accounted for approximately
80.7%, 77.4%, 64.2%, 68.8% and 56.3% of IHS' home healthcare revenues in 1994,
1995 and 1996 and the six months ended June 30, 1996 and 1997, respectively.
Home Nursing. Home nursing is the largest component of home healthcare, the
most labor-intensive and generally the least profitable. Home nursing services
range from skilled care provided by registered and other nurses, typically for
those recently discharged from hospitals, to unskilled services delivered by
home health aides for those needing help with the activities of daily living.
Home nursing also includes physical, occupational and speech therapy, as well as
social worker services. IHS substantially expanded its home nursing services
through the acquisition of First American, and currently provides home nursing
services at approximately 440 locations in 25 states.
Infusion Therapy. Infusion therapy, the second largest home healthcare
market, involves the intravenous administration of anti-infective, biotherapy,
chemotherapy, pain management, nutrition and other therapies. Infusion therapy
generally requires patient training, specialized equipment and periodic
monitoring by skilled nurses. Technological advances such as programmable pumps
that control frequency and intensity of delivery are increasing the percentage
of infections and diseases that are treatable in the home; previously these
infections and diseases generally required patients to be hospitalized. Home
infusion therapy is more skilled-labor-intensive than other home healthcare
segments. The Merger will significantly expand IHS' home infusion therapy
services. See "The Merger" and "Business of RoTech."
Respiratory Therapy. Respiratory therapy is provided primarily to older
patients with chronic lung diseases (such as chronic obstructive pulmonary
disease, asthma and cystic fibrosis) or reduced respiratory function. The most
common therapy is home oxygen, delivered through oxygen gas systems, oxygen
concentration or liquid oxygen systems. Respiratory therapy is monitored by
licensed respiratory therapists and other clinical staff under the direction of
physicians. The Merger will significantly expand IHS' respiratory therapy
services. See "The Merger" and "Business of RoTech."
Home Medical Equipment. Home medical equipment consists of the sale or
rental of medical equipment such as specialized beds, wheelchairs, walkers,
rehabilitation equipment and other patient aids. The Merger will significantly
expand IHS' provision of home medical equipment. See "The Merger" and "Business
of RoTech."
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Alzheimer's Program
IHS also offers a specialized treatment program for persons with
Alzheimer's disease. This program, called "The Renaissance Program," is located
in a specially designed wing separated from the remainder of the facility. The
physical environment is designed to address the problems of disorientation and
perceptual confusion experienced by Alzheimer's sufferers. The Renaissance
Program is designed to help reduce the stress and agitation of Alzheimer's
disease by addressing the problems of short attention spans and hyperactivity.
The staff for this program is specially recruited and staff training is highly
specialized. This program is designed not only to provide care to persons
suffering from Alzheimer's disease, but also to work with the patient's family.
IHS currently offers The Renaissance Program at 12 of its geriatric care
facilities with a total of 395 beds. Patients pay a small premium to IHS' per
diem rate for basic medical care to participate in this program.
Hospice Services
IHS provides hospice services, including medical care, counseling and
social services, to the terminally ill in the greater Chicago metropolitan area,
Michigan and Pennsylvania. Hospice care is a coordinated program of support
services providing physical, psychological, social and spiritual care for dying
persons and their families. Services are provided in the home and/or inpatient
settings. The goal of hospice care is typically to improve a terminal patient's
quality of life rather than trying to extend life. IHS also provides hospice
care to the terminally ill at its facility in Miami, Florida.
MANAGEMENT AND OTHER SERVICES
IHS manages geriatric care facilities under contract for others to
capitalize on its specialized care programs without making the capital outlay
generally required to acquire and renovate a facility. IHS currently manages 56
geriatric care facilities with 6,337 licensed beds. IHS is responsible for
providing all personnel, marketing, nursing, resident care, dietary and social
services, accounting and data processing reports and services for these
facilities, although such services are provided at the facility owner's expense.
The facility owner is also obligated to pay for all required capital
expenditures. IHS manages these facilities in the same manner as the facilities
it owns or leases, and provides the same geriatric care services as are provided
in its owned or leased facilities. Contract acquisition costs for legal and
other direct costs incurred to acquire long-term management contracts are
capitalized and amortized over the term of the related contract.
IHS receives a management fee for its services which generally is equal to
4% to 8% of gross revenues of the geriatric care facility. Certain management
agreements also provide IHS with an incentive fee based on the amount of the
facility's operating income which exceeds stipulated amounts. Management fee
revenues are recognized when earned and billed, generally on a monthly basis.
Incentive fees are recognized when operating results of managed facilities
exceed amounts required for incentive fees in accordance with the terms of the
management agreements. The management agreements generally have an initial term
of ten years, with IHS having a right to renew in most cases. The management
agreements expire at various times between August 1999 and May 2005, although
all can be terminated earlier under certain circumstances. IHS generally has a
right of first refusal in respect of the sale of each managed facility. IHS
believes that by implementing its specialized care programs and services in
these facilities, it will be able to increase significantly the operating income
of these facilities and thereby increase the management fees IHS will receive
for managing these facilities.
IHS also manages private duty and Medicare certified home health agencies
in the Dallas/Fort Worth, Texas market.
QUALITY ASSURANCE
IHS has developed a comprehensive Quality Assurance Program to verify that
high standards of care are maintained at each facility operated or managed by
IHS. IHS requires that its facilities meet standards of care more rigorous than
those required by Federal and state law. Under IHS's Quality Assurance Program,
standards for delivery of care are set and the care and services provided by
each
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facility are evaluated to insure they meet IHS' standards. A quality assurance
team evaluates each facility bi-annually, reporting directly to IHS' Chief
Executive Officer and to the Chief Operating Officer, as well as to the
administrator of each facility. Facility administrator bonuses are dependent in
part upon their facility's evaluation. IHS also maintains an 800 number, called
the "In-Touch Line," which is prominently displayed above telephones in each
facility and placed in patients' bills. Patients and staff are encouraged to
call this number if they have any problem with nursing or administrative
personnel which cannot be resolved quickly at the facility level. This program
provides IHS with an early warning of problems which may be developing at the
facility. IHS has also developed a specialized Quality Assurance Program for its
MSU programs.
IHS has begun a program to obtain accreditation by the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO") for each of its facilities.
At August 31, 1997, 72 of IHS' facilities had been fully accredited by the
JCAHO.
OPERATIONS
The day-to-day operations of each facility are managed by an on-site state
licensed administrator, and an on-site business office manager monitors the
financial operations of each facility. The administrator of each facility is
supported by other professional personnel, including the facility's medical
director, social workers, dietician and recreation staff. Nursing departments in
each facility are under the supervision of a director of nursing who is
state-registered. The nursing staffs are composed of registered nurses and
licensed practical nurses as well as nursing assistants.
IHS' home healthcare businesses are conducted through approximately 440
branches which are managed through three geographic area offices. The area
office provides each of its branches with key management direction and support
services. IHS' organizational structure is designed to create operating
efficiencies associated with certain centralized services and purchasing while
also promoting local decision making.
IHS' corporate staff provides services such as marketing assistance,
training, quality assurance oversight, human resource management, reimbursement
expertise, accounting, cash management and treasury functions, internal auditing
and management support. Financial control is maintained through fiscal and
accounting policies that are established at the corporate level for use at each
facility and branch location. IHS has standardized operating procedures and
monitors its facilities and branch locations to assure consistency of
operations. IHS emphasizes frequent communications, the setting of operational
goals and the monitoring of actual results. IHS uses a financial reporting
system which enables it to monitor, on a daily basis, certain key financial data
at each facility such as payor mix, admissions and discharges, cash collections,
net revenue and staffing.
Each facility and branch location has all necessary state and local
licenses. Most facilities are certified as providers under the Medicare program
and under the Medicaid program of the state in which they are located.
JOINT VENTURES
IHS has a 49% interest in a partnership formed in 1993 to manage and
operate approximately 8,000 geriatric care and assisted retirement beds
("Tutera"), and a 40% interest in HPC America, Inc., a Delaware corporation
("HPC") that operates home infusion and home healthcare companies in addition to
owning and managing physician practices. IHS does not participate in the
day-to-day operations of Tutera or HPC, although its consent is required for
certain material transactions. Under certain circumstances, IHS has the right to
purchase the remaining interest in these entities, based upon a multiple of such
entity's earnings, although IHS' right to purchase the remaining interest in HPC
expires in September 1997.
SOURCES OF REVENUE
IHS receives payments for services rendered to patients from private
insurers and patients themselves, from the Federal government under Medicare,
and from the states in which certain of its facilities are located under
Medicaid. The sources and amounts of IHS' patient revenues are determined by a
105
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 IHS' patients among the
private pay, Medicare and Medicaid categories can significantly affect the
profitability of IHS' operations. Generally, private pay patients are the most
profitable and Medicaid patients are the least profitable.
During the years ended December 31, 1994, 1995 and 1996, IHS derived
approximately $297.8 million, $509.3 million and $562.5 million, respectively,
or 44.2%, 44.7% and 40.5%, respectively, of its patient revenues from private
pay sources and approximately $376.4 million, $629.8 million and $826.4 million,
respectively, or 55.8%, 55.3% and 59.5%, respectively, of its patient revenues
from government reimbursement programs. Patient revenues from government
reimbursement programs during these periods consisted of approximately $225.6
million, $387.2 million and $516.7 million, or 33.5%, 34.0% and 37.2% of total
patient revenues, respectively, from Medicare and approximately $150.8 million,
$242.6 million and $309.7 million, respectively, or 22.3%, 21.3% and 22.3% of
total patient revenues, respectively, from Medicaid. During the six months ended
June 30, 1996 and 1997, IHS derived approximately $275.9 million and $301.4
million, respectively, or 43.0% and 33.5%, respectively, of its patient revenues
from private pay sources and approximately $365.8 million and $598.2 million,
respectively, or 57.0% and 66.5%, respectively, of its patient revenues from
government reimbursement programs. Patient revenues from government
reimbursement programs during these periods consisted of approximately $211.8
million and $442.1 million, respectively, or 33.0% and 49.1% of total patient
revenues, respectively, from Medicare and approximately $154.0 million and
$156.1 million, respectively, or 24.0% and 17.4% of total patient revenues,
respectively, from Medicaid. The increase in the percentage of revenue from
government reimbursement programs is due to the higher level of Medicare and
Medicaid patients serviced by the respiratory therapy, rehabilitative therapy,
home healthcare and mobile diagnostic companies acquired in 1994, 1995 and 1996.
On a pro forma basis after giving effect to the Merger, the acquisition of
First American (which derives substantially all its revenues from Medicare) and
the ILC Sale, during the years ended December 31, 1995 and 1996, IHS derived
approximately $585.3 million and $704.5 million, respectively, or 31.4% and
33.5%, respectively, of its patient revenues from private pay sources and
approximately $1.3 billion and $1.4 billion, respectively, or 68.6% and 66.5%,
respectively, of its patient revenues from government reimbursement programs.
Pro forma patient revenues from government reimbursement programs during these
periods consisted of approximately $1.0 billion and $1.0 billion, or 54.0% and
49.7%, respectively, from Medicare and approximately $271.4 million and $353.2
million, respectively, or 14.6% and 16.8%, respectively, from Medicaid. On a pro
forma basis after giving effect to the Merger, the acquisition of First American
and the ILC Sale, during the six months ended June 30, 1996 and 1997, IHS
derived approximately $329.3 million and $390.5 million, respectively, or 32.5%
and 35.3%, respectively, of its patient revenues from private pay sources and
approximately $684.6 million and $716.4 million, respectively, or 67.5% and
64.7%, respectively, of its patient revenues from government reimbursement
programs. Pro forma patient revenues from government reimbursement programs
during these periods consisted of approximately $512.9 million and $537.4
million, or 50.6% and 48.5%, respectively, from Medicare and approximately
$171.7 million and $179.0 million, respectively, or 16.9% and 16.2%,
respectively, from Medicaid.
IHS' experience has been that Medicare patients constitute a higher
percentage of an MSU program's initial occupancy than they do once the program
matures. However, as IHS' marketing program to private pay patients is
implemented in the new MSUs, the number of private pay patients in those
programs has traditionally increased. In addition, IHS received payments from
third parties for its management services, which constituted approximately 5.3%,
3.4%, 3.2%, 3.2% and 2.1% of total net revenues for the years ended December 31,
1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997,
respectively.
Gross third party payor settlements receivable, primarily from federal and
state governments (i.e., Medicare and Medicaid cost reports), were $36.2 million
at June 30, 1997, as compared to $42.6 million at December 31, 1996, $33.0
million at December 31, 1995 and $22.6 million at December 31, 1994.
Approximately $10.8 million, or 30%, of the third party payor settlements
receivable, primarily from
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Federal and state governments, at June 30, 1997 represent the costs for its MSU
patients which exceed regional reimbursement limits established under Medicare,
as compared to approximately $15.6 million, or 37%, at December 31, 1996,
approximately $7.6 million, or 23%, at December 31, 1995 and approximately $6.2
million, or 27%, at December 31, 1994.
IHS' cost of care for its MSU patients generally exceeds regional
reimbursement limits established under Medicare. The success of IHS' MSU
strategy depends in part on its ability to obtain per diem rate approvals for
costs which exceed the Medicare established per diem rate limits and by
obtaining waivers of these limitations. IHS has submitted waiver requests for
225 cost reports, covering all cost report periods through December 31, 1996. To
date, final action has been taken by HCFA on 221 waiver requests covering cost
report periods through December 31, 1995. IHS' final rates as approved by HCFA
represent approximately 95% of the requested rates as submitted in the waiver
requests. There can be no assurance, however, that IHS will be able to recover
its excess costs under any waiver requests which may be submitted in the future.
IHS' failure to recover substantially all these excess costs would adversely
affect its results of operations and could adversely affect its MSU strategy.
Both private third party and governmental payors have undertaken cost
containment measures designed to limit payments made to healthcare providers
such as IHS. Furthermore, government programs are subject to statutory and
regulatory changes, retroactive rate adjustments, administrative rulings and
government funding restrictions, all of which may materially increase or
decrease the rate of program payments to facilities managed and operated by IHS.
There can be no assurance that payments under governmental programs will remain
at levels comparable to present levels or will, in the future, be sufficient to
cover the costs allocable to patients participating in such programs. In
addition, there can be no assurance that facilities owned, leased or managed by
IHS now or in the future will initially meet or continue to meet the
requirements for participation in such programs. IHS could be adversely affected
by the continuing efforts of governmental and private third party payors to
contain the amount of reimbursement for healthcare services. The May 1997
balanced budget agreement between the President and Congress contemplated
changing Medicare payments for skilled nursing facilities and home nursing
services from a cost-reimbursement system to a prospective payment system. The
Balanced Budget Act of 1997, enacted in August 1997, provides, among other
things, for a prospective payment system for home nursing to be implemented for
cost reporting periods beginning on or after October 1, 1999, a reduction in
current cost reimbursement for home healthcare pending implementation of a
prospective payment system, reductions (effective January 1, 1998) in Medicare
reimbursement for oxygen and oxygen equipment for home respiratory therapy and a
shift of the bulk of home health coverage from Part A to Part B of Medicare. The
failure to implement a prospective payment system for home nursing services in
the next several years could adversely affect IHS' post-acute care network
strategy. In an attempt to limit the federal and state budget deficits, there
have been, and IHS expects that there will continue to be, a number of proposals
to limit Medicare and Medicaid reimbursement for healthcare services. IHS cannot
at this time predict whether this legislation or any other legislation will be
adopted or, if adopted and implemented, what effect, if any, such legislation
will have on IHS. See "Risk Factors - Risk of Adverse Effect of Healthcare
Reform."
GOVERNMENT REGULATION
The healthcare industry is subject to extensive federal, state and local
statutes and regulations. The regulations include licensure requirements,
reimbursement rules and standards and levels of services and care. Changes in
applicable laws and regulations or new interpretations of existing laws and
regulations could have a material adverse effect on licensure of IHS facilities,
eligibility for participation in federal and state programs, permissible
activities, costs of doing business, or the levels of reimbursement from
governmental, private and other sources. Political, economic and regulatory
influences are subjecting the healthcare industry in the United States to
fundamental change. It is not possible to predict the content or impact of
future legislation and regulations affecting the healthcare industry. In
addition, in the conduct of its business IHS' operations are subject to review
by federal and state regulatory agencies. In the course of these reviews,
problems are from time to time identified by these agencies. Although IHS has to
date been able to resolve these problems in a manner satisfactory to the
regulatory agencies without a material adverse effect on IHS, there can be no
assurance that IHS will be able to do so in the future. See "Risk Factors-
Uncertainty of Government Regulation."
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Most states in which IHS operates or is studying expansion possibilities
have statutes which require that prior to the addition or construction of new
beds, the addition of new services or certain capital expenditures in excess of
defined levels, IHS must obtain a certificate of need ("CON") which certifies
that the state has made a determination that a need exists for such new or
additional beds, new services or capital expenditures. These state
determinations of need or CON programs are designed to comply with certain
minimum federal standards and to enable states to participate in certain federal
and state health related programs. Elimination or relaxation of CON requirements
may result in increased competition in such states and may also result in
increased expansion possibilities in such states. Of the states in which IHS
operates, the following require CONs for the facilities that are owned, operated
or managed by IHS: Alabama, Colorado, Delaware, Florida, Georgia, Illinois,
Indiana, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Michigan,
Mississippi, Missouri, Nevada, New Hampshire, New Jersey, North Carolina, Ohio,
South Carolina, Tennessee, Texas, Virginia, Washington, West Virginia and
Wisconsin. To date the conversion of geriatric care beds to MSU beds has not
required a CON.
IHS' facilities are also subject to licensure regulations. Each of IHS'
geriatric care facilities is licensed as a skilled care facility and is
certified as a provider under the Medicare program and most are also certified
by the state in which they are located as a provider under the Medicaid program
of that state. IHS believes it is in substantial compliance with all material
statutes and regulations applicable to its business. In addition, all healthcare
facilities are subject to various local building codes and other ordinances.
State and local agencies survey all geriatric care centers on a regular
basis to determine whether such centers are in compliance with governmental
operating and health standards and conditions for participation in government
medical assistance programs. Such surveys include reviews of patient utilization
of healthcare facilities and standards for patient care. IHS endeavors to
maintain and operate its facilities in compliance with all such standards and
conditions. However, in the ordinary course of its business, IHS' facilities
receive notices of deficiencies for failure to comply with various regulatory
requirements. Generally, the facility and the reviewing agency will agree upon
the measures to be taken to bring the facility into compliance with regulatory
requirements. In some cases or upon repeat violations, the reviewing agency may
take adverse actions against a facility, including the imposition of fines,
temporary suspension of admission of new patients to the facility, suspension or
decertification from participation in the Medicare or Medicaid programs, and, in
extreme circumstances, revocation of a facility's license. These adverse actions
may adversely affect the ability of the facility to operate or to provide
certain services and its eligibility to participate in the Medicare or Medicaid
programs. In addition, such adverse actions may adversely affect other
facilities operated by IHS. See "- Federal and State Assistance Programs."
Effective July 1, 1995, HCFA implemented stricter guidelines for annual
state surveys of long-term care facilities. These guidelines eliminate the
ability of operators to appeal the scope and severity of any deficiencies and
grant state regulators the authority to impose new remedies, including monetary
penalties, denial of payments and termination of the right to participate in the
Medicare and/or Medicaid programs. IHS 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, IHS' acquisition of poorly performing facilities could adversely affect
IHS' business to the extent remedies are imposed at such facilities.
In September 1997, President Clinton, in an attempt to curb Medicare fraud,
imposed a moratorium on the certification under Medicare of new home healthcare
companies, which moratorium is expected to last approximately six months, and
implemented rules requiring home healthcare providers to reapply for Medicare
certification every three years. In addition, HCFA will double the number of
detailed audits of home healthcare providers it completes each year and increase
by 25% the number of home healthcare claims it reviews each year. IHS cannot
predict what effect, if any, these new rules will have on IHS' business and the
expansion of its home healthcare operations.
The operations of IHS' home healthcare branches are subject to numerous
federal and state laws governing pharmacies, nursing services, therapy services
and certain types of home health agency activities. Certain of IHS' employees
are subject to state laws and regulations governing the professional
108
practice of respiratory therapy, physical, occupational and speech therapies,
pharmacy and nursing. The failure to obtain, to renew or to maintain any of the
required regulatory approvals or licenses could adversely affect IHS' home
healthcare business and could prevent the branch involved from offering products
and services to patients. Generally, IHS is required to be licensed as a home
health agency in those states in which it provides traditional home health or
home nursing services. IHS' ability to expand its home healthcare services will
depend upon its ability to obtain licensure as a home health agency, which may
be restricted by state CON laws.
Various Federal and state laws regulate the relationship between providers
of healthcare services and physicians or others able to refer medical services,
including employment or service contracts, leases and investment relationships.
These laws include the fraud and abuse provisions of Medicare and Medicaid and
similar state statutes (the "Fraud and Abuse Laws"), which prohibit the payment,
receipt, solicitation or offering of any direct or indirect remuneration
intended to induce the referral of Medicare or Medicaid patients or for the
ordering or providing of Medicare or Medicaid covered services, items or
equipment. Violations of these provisions may result in civil and criminal
penalties and/or exclusion from participation in the Medicare and/or Medicaid
programs and from state programs containing similar provisions relating to
referrals of privately insured patients. The Department of Health and Human
Services ("HHS") and other federal agencies have interpreted these provisions
broadly to include the payment of anything of value to influence the referral of
Medicare or Medicaid business. HHS has issued regulations which set forth
certain "safe harbors," representing business relationships and payments that
can safely be undertaken without violation of the Fraud and Abuse Laws. In
addition, certain Federal and state requirements generally prohibit certain
providers from referring patients to certain types of entities in which such
provider has an ownership or investment interest or with which such provider has
a compensation arrangement, unless an exception is available. IHS considers all
applicable laws in planning marketing activities and exercises care in an effort
to structure its arrangements with healthcare providers to comply with these
laws. However, there can be no assurance that all of IHS' existing or future
arrangements will withstand scrutiny under the Fraud and Abuse Laws, safe harbor
regulations or other state or federal legislation or regulations, nor can it
predict the effect of such rules and regulations on these arrangements in
particular or on IHS' operations in general.
IHS' healthcare operations generate medical waste that must be disposed of
in compliance with Federal, state and local environmental laws, rules and
regulations. IHS' operations are also subject to compliance with various other
environmental laws, rules and regulations. Such compliance has not materially
affected, and IHS anticipates that such compliance will not materially affect,
IHS' capital expenditures, earnings or competitive position, although there can
be no assurance to that effect.
In addition to extensive existing governmental healthcare regulation, there
are numerous initiatives on the federal and state levels for comprehensive
reforms affecting the payment for and availability of healthcare services. It is
not clear at this time what proposals, if any, will be adopted or, if adopted,
what effect such proposals would have on IHS' business. Aspects of certain of
these healthcare proposals, such as cutbacks in the Medicare and Medicaid
programs, reductions in Medicare reimbursement rates and/or limitations on
reimbursement rate increases, containment of healthcare costs on an interim
basis by means that could include a short-term freeze on prices charged by
healthcare providers, and permitting greater state flexibility in the
administration of Medicaid, could adversely affect IHS. See "Risk Factors
Uncertainty of Government Regulation" and "- Sources of Revenue." There can be
no assurance that currently proposed or future healthcare legislation or other
changes in the administration or interpretation of governmental healthcare
programs will not have an adverse effect on IHS. 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 IHS, and may similarly affect the price of IHS Common Stock in the
future. IHS cannot predict the ultimate timing or effect of such legislative
efforts and no assurance can be given that any such efforts will not have a
material adverse effect on IHS' business, results of operations and financial
condition.
FEDERAL AND STATE ASSISTANCE PROGRAMS
Substantially all of IHS' geriatric care facilities are currently certified
to receive benefits as a skilled nursing facility provided under the Health
Insurance for the Aged and Disabled Act (commonly referred to
109
as "Medicare"), and substantially all are also certified under programs
administered by the various states using federal and state funds to provide
medical assistance to qualifying needy individuals ("Medicaid"). Both initial
and continuing qualification of a skilled nursing care facility to participate
in such programs depend upon many factors including, among other things,
accommodations, equipment, services, patient care, safety, personnel, physical
environment, and adequate policies, procedures and controls.
Services under Medicare consist of nursing care, room and board, social
services, physical and occupational therapies, drugs, biologicals, supplies,
surgical, ancillary diagnostic and other necessary services of the type provided
by extended care or acute care facilities. Under the Medicare program, the
federal government pays the reasonable direct and indirect allowable costs
(including depreciation and interest) of the services furnished and, through
September 30, 1993, provided a rate of return on equity capital (as defined
under Medicare). However, IHS' cost of care for its MSU patients generally
exceeds regional reimbursement limits established under Medicare. IHS has
submitted waiver requests to recover these excess costs. See "- Sources of
Revenue." There can be no assurance, however, that IHS will be able to recover
its excess costs under the pending waiver requests or under any waiver requests
which may be submitted in the future. IHS' failure to recover substantially all
these excess costs would adversely affect its results of operations and could
adversely affect its MSU strategy. Even though IHS' cost of care for its MSU
patients generally exceeds regional reimbursement limits established under
Medicare for nursing homes, IHS' cost of care is still lower than the cost of
such care in an acute care hospital.
The Medicare program reimburses for home healthcare services under two
basic systems: cost-based and charge-based. Under the cost-based system, IHS is
reimbursed at the lowest of IHS' reimbursable costs (based on Medicare
regulations), cost limits established by HCFA or IHS' charges. While a small
amount of corporate level overhead is permitted as part of reimbursable costs
under Medicare regulations, such costs consist predominantly of expenses and
charges directly incurred in providing the related services, and cannot include
any element of profit or net income to IHS. Under the charge-based system,
Medicare reimburses IHS on a "prospective payment" basis, which consists in
general of either a fixed fee for a specific service or a fixed per diem amount
for providing certain services. As a result, IHS can generate profit or net
income from Medicare charge-based revenues by providing covered services in an
efficient, cost-effective manner. All nursing services (including related
products) are Medicare cost-based reimbursed, except for nursing services
provided to hospice patients. Hospice care and all other home healthcare
services (including non-nursing related products) are Medicare charge-based
reimbursed.
The Balanced Budget Act of 1997 provides, among other things, for
implementation of a prospective payment system for home nursing services for
cost reporting periods beginning on or after October 1, 1999. Implementation of
a prospective payment system will be a critical element to the success of IHS'
expansion into home nursing services. Based upon prior legislative proposals,
IHS believes that a prospective payment system would most likely provide a
healthcare provider a predetermined rate for a given service, and that providers
with costs below the predetermined rate will be entitled to keep some or all of
this difference. Under such a prospective payment system, the efficient operator
will be rewarded. Since the largest component of home healthcare costs is labor,
which is basically fixed, IHS believes the differentiating factor in
profitability will be administrative costs. As a result of the First American
Acquisition, IHS, as a large provider of home nursing services, believes it
should be able to achieve administrative efficiencies compared with the small
providers which currently dominate the home healthcare industry, although there
can be no assurance it will be able to do so. There can be no assurance that
Medicare will implement a prospective payment system for home nursing services
in the next several years or at all. The inability of IHS to provide home
healthcare services at a cost below the established Medicare fee schedule could
have a material adverse effect on IHS' home healthcare operations and its
post-acute care network. See "Risk Factors Risk of Adverse Effect of Healthcare
Reform."
Under the various Medicaid programs, the federal government supplements
funds provided by the participating states for medical assistance to qualifying
needy individuals. The programs are administered by the applicable state welfare
or social service agencies. Although Medicaid programs vary from state to state,
typically they provide for the payment of certain expenses, up to established
limits. The majority of the MSU programs are not required to participate in the
various state Medicaid programs. However, should IHS' MSU programs be required
to admit Medicaid patients as a condition to contin-
110
ued participation in such programs by the facility in which the MSU program is
located, IHS' results of operations could be adversely affected since IHS' cost
of care in its MSU programs is substantially in excess of state Medicaid
reimbursement rates.
Funds received by IHS under Medicare and Medicaid are subject to audit with
respect to the proper preparation of annual cost reports upon which
reimbursement is based. Such audits can result in retroactive adjustments of
revenue from these programs, resulting in either amounts due to the government
agency from IHS or amounts due IHS from the government agency.
Both the Medicare and Medicaid programs are subject to statutory and
regulatory changes, administrative rulings, interpretations of policy
determinations by insurance companies acting as Medicare fiscal intermediaries
and governmental funding restrictions, all of which may materially increase or
decrease the rate of program payments to healthcare facilities. Since 1985,
Congress has consistently attempted to limit the growth of federal spending
under the Medicare and Medicaid programs. IHS can give no assurance that
payments under such programs will in the future remain at a level comparable to
the present level or be sufficient to cover the operating and fixed costs
allocable to such patients. Changes in reimbursement levels under Medicare or
Medicaid and changes in applicable governmental regulations could significantly
affect IHS' results of operations. It is uncertain at this time whether
additional legislation on healthcare reform will be implemented or whether other
changes in the administration or interpretation of governmental healthcare
programs will occur. There can be no assurance that future healthcare
legislation or other changes in the administration or interpretation of
governmental healthcare programs will not have an adverse effect on the results
of operations of IHS. IHS cannot at this time predict whether any healthcare
reform legislation will be adopted or, if adopted and implemented, what effect,
if any, such legislation will have on IHS. See "Risk Factors Risk of Adverse
Effect of Healthcare Reform."
COMPETITION
The healthcare industry is highly competitive and is subject to continuing
changes in the provision of services and the selection and compensation of
providers. IHS competes on a local and regional basis with other providers on
the basis of the breadth and quality of its services, the quality of its
facilities and, to a limited extent, price. IHS also competes with other
providers in the acquisition and development of additional facilities and
service providers. IHS' current and potential competitors include national,
regional and local operators of geriatric care facilities, acute care hospitals
and rehabilitation hospitals, extended care centers, retirement centers and
community home health agencies and similar institutions, many of which have
significantly greater financial and other resources than IHS. In addition, IHS
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 IHS. There can be no assurance that IHS
will not encounter increased competition which could adversely affect its
business, results of operations or financial condition. See "Risk Factors
Competition."
The geriatric care facilities operated and managed by IHS primarily compete
on a local and regional basis with other skilled care providers. IHS' MSUs
primarily compete on a local basis with acute care and long-term care hospitals.
In addition, some skilled nursing facilities have developed units which provide
a greater level of care than the care traditionally provided by nursing homes.
The degree of success with which IHS' facilities compete varies from location to
location and depends on a number of factors. IHS believes that the specialized
services and care provided, the quality of care provided, the reputation and
physical appearance of facilities and, in the case of private pay patients,
charges for services, are significant competitive factors. In light of these
factors, IHS seeks to meet competition in each locality by improving the
appearances of, and the quality and types of services provided at, its
facilities, establishing a reputation within the local medical communities for
providing competent care services, and by responding appropriately to regional
variations in demographics and tastes. There is limited, if any, competition in
price with respect to Medicaid and Medicare patients, since revenues for
services to such patients are strictly controlled and based on fixed rates and
cost reimbursement principles. Because IHS' facilities compete primarily on a
local and regional basis rather than a national basis, the competitive position
of IHS varies from facility to facility depending upon the types of services and
111
quality of care provided by facilities with which each of IHS' facilities
compete, the reputation of the facilities with which each of IHS' facilities
compete, and, with respect to private pay patients, the cost of care at
facilities with which each of IHS' facilities compete.
The home healthcare market is highly competitive and is divided among a
large number of providers, some of which are national providers but most of
which are either regional or local providers. IHS believes that the primary
competitive factors are availability of personnel, the price of the services and
quality considerations such as responsiveness, the technical ability of the
professional staff and the ability to provide comprehensive services.
IHS also competes with other healthcare companies for acquisitions and
management contracts. There can be no assurance that additional acquisitions can
be made and additional management contracts can be obtained on favorable terms.
EMPLOYEES
As of August 31, 1997, ihs had approximately 57,000 full-time and regular
part-time employees. Full-time and regular part-time service and maintenance
employees at 17 facilities, totaling approximately 1,300 employees, are covered
by collective bargaining agreements. IHS' corporate staff consisted of
approximately 1,900 people at such date. IHS believes its relations with its
employees are good.
IHS seeks the highest quality of professional staff within each market.
Competition in the recruitment of personnel in the healthcare industry is
intense, particularly with respect to nurses. Many areas are already facing
nursing shortages, and it is expected that the shortages will increase in the
future. Although IHS has, to date, been successful in hiring and retaining
nurses and rehabilitation professionals, IHS in the future may experience
difficulty in hiring and retaining nurses and rehabilitation professionals. IHS
believes that its future success and the success of its MSU programs will depend
in large part upon its continued ability to hire and retain qualified personnel.
INSURANCE
Healthcare companies are subject to medical malpractice, personal injury
and other liability claims which are generally covered by insurance. IHS
maintains liability insurance coverage in amounts deemed appropriate by
management based upon historical claims and the nature and risks of its
business. There can be no assurance that a future claim will not exceed
insurance coverage or that such coverage will continue to be available. In
addition, any substantial increase in the cost of such insurance could have an
adverse effect on IHS' business, results of operations and financial condition.
LEGAL PROCEEDINGS
IHS is from time to time involved in various legal proceedings. Although
IHS does not believe that any currently pending proceeding will materially and
adversely affect IHS, there can be no assurance that any current or future
proceeding will not have a material adverse effect on IHS' financial position or
results of operations.
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BUSINESS OF ROTECH
GENERAL
Rotech Medical Corporation ("RoTech") provides comprehensive home
healthcare and primary care physician services, principally to patients in
non-urban areas. RoTech operates 631 locations in 36 states. RoTech's home
healthcare business provides a diversified range of products and services, with
emphasis on home respiratory, home medical equipment and infusion therapy.
RoTech has pursued an aggressive acquisition strategy since 1988, which included
in fiscal 1997 acquisitions of 174 locations of smaller home healthcare
companies and the opening of 49 new locations. Current industry estimates
indicate that approximately half of the nation's home healthcare industry
remains fragmented and is run by either single operators or small, local chains.
These smaller providers are RoTech's main competition and main acquisition
opportunities. RoTech plans to continue to enter new home healthcare markets
through acquisition or start-up as competitive and pricing pressures encourage
consolidation and economies of scale.
Recent data suggests that there is a shortage of healthcare services in
non-urban markets. According to the United States Census Bureau, in 1990
non-urban areas of the United States accounted for roughly 25% of the national
population, or approximately 62 million people. However, according to the
American Medical Association, just 11% of physicians, or approximately 75,000
physicians, practice in non-metropolitan markets. This data indicates that
non-urban markets are underserved, and suggests that there may be opportunities
for improvement in access to primary care physicians, as well as specialty
services. RoTech believes that these needs result in significant opportunities
for companies such as RoTech, which can attract, retain and network physicians
in non-urban settings while offering ancillary services such as home healthcare,
to become a full-service non-institutional based primary healthcare provider.
OPERATING AND EXPANSION STRATEGY
RoTech was founded in 1981 to provide home respiratory and home medical
equipment products and services to patients in Florida. With its founders' roots
in pharmacy and pharmaceutical sales, RoTech's marketing directive has always
been to provide information to primary care physicians regarding the utilization
of home healthcare techniques, products and services for their patient base.
Providing information to these physicians as to disease management leads to
earlier identification and treatment of patients, enhancing the patient's
quality of life and longevity. RoTech has not targeted specialists, as their
patients are more acute and since specialists have historically been tied to
hospital systems, which results in higher hospitalization rates. RoTech's
marketing is directed at identifying patients of primary care physicians prior
to hospitalization and prior to an acuity level that would require utilizing a
specialist.
RoTech's strategy is to develop integrated healthcare delivery systems
through the acquisition of smaller local home healthcare companies in non-urban
areas. RoTech targets non-urban markets of smaller cities and rural areas, due
to the dominance of primary care physicians in these markets, reduced
competition and a tendency to care for patients in the home setting. RoTech
believes that acquisitions of home healthcare companies will continue to expand
the base of relationships with primary care physicians in these markets. Primary
care physicians in these markets typically have long-standing relationships with
loyal patient bases. These physicians are usually solo practitioners and are the
key decision makers in the treatment of their patients. RoTech believes that
making home healthcare products and services available to these physicians will
result in better, less expensive healthcare that provides an improved quality of
life for the patients and their caregivers in these communities.
SALES AND MARKETING
RoTech believes that the sales and marketing skills of its employees have
been instrumental in its growth to date and are critical to its future success.
RoTech emphasizes to its employees the importance of patient base growth and
retention by providing quality service to physicians and their patients.
Approximately 28% of RoTech's employees are actively involved in sales and
marketing. The sales representatives employed by RoTech include registered or
certified respiratory therapists, registered pharmacists and registered nurses
who market all of RoTech's services and products and are responsible for
maintaining and expanding RoTech's relationships with physicians, targeting
primary care physicians in non-urban areas.
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RoTech provides formal marketing, training, product and service information
to all of its technical and sales personnel so they can communicate effectively
with physicians about RoTech's services and products. These personnel are
instructed on methods of serving the physicians by providing them with
information on new procedures and medical technologies. Each technical and sales
person must attend periodic seminars conducted on a company-wide basis. RoTech
emphasizes the cross-marketing of all its products to physicians with which its
salespeople have already developed professional relationships. RoTech believes
its marketing approach allows the primary care physician to identify acute and
chronic patients earlier in the disease process. Treatment is done at the
primary care level and accordingly at less cost than the advanced treatment of
the disease by specialists or in a hospital setting.
REIMBURSEMENT FOR SERVICES
A substantial percentage of RoTech's revenue is attributable to third-party
payors, including private insurers, Medicare and, to a lesser extent, Medicaid.
RoTech has substantial expertise at processing claims and continues to create
and improve systems to manage third-party reimbursements, to produce clean
claims and obtain timely reimbursements by third-party payors. RoTech has
developed distinct billing and collection departments for Medicare and Medicaid
reimbursements and for private insurance company claims which are supported by
customized computer systems. These departments work closely with reimbursement
officers at branch locations and third-party payors and are responsible for the
review of patient coverage, the adequacy and timeliness of documentation and the
follow-up with third-party payors to expedite reimbursement payments.
Reimbursement from the Medicare program as a percentage of RoTech's total
operating revenue approximated 48% for fiscal 1996, 49% for fiscal 1995 and 35%
for fiscal 1994.
RoTech has achieved increased operating revenue in home respiratory and
other home medical equipment operations despite increased regulation and
corresponding reimbursement reductions. While the increased regulation tends to
reduce the amount of reimbursement from government sources for individual cases,
RoTech believes the continued increased regulation also benefits RoTech by
reducing the competition from joint ventures and fee revenue sharing
arrangements, which RoTech has historically avoided.
RoTech's levels of operating revenue and profitability of RoTech, like
those of other healthcare companies, are affected by the continuing efforts of
third-party payors to contain or reduce the costs of healthcare by lowering
reimbursement rates, increasing case management review of services and
negotiating reduced contract pricing. Home healthcare, which is generally less
costly to third-party payors than hospital-based care, has benefitted from those
cost containment objectives. However, as expenditures in the home healthcare
market continue to grow, initiatives aimed at reducing the costs of healthcare
delivery at non-hospital sites are increasing. Changes in reimbursement policies
by third-party payors, or the reduction in or elimination of such reimbursement
programs, could have a material adverse impact on RoTech's revenues. Various
state and federal health reform initiatives may lead to additional changes in
reimbursement programs.
PRODUCTS AND SERVICES
HOME HEALTHCARE PRODUCTS AND SERVICES
Home Respiratory Therapy and Equipment
RoTech provides a variety of home respiratory therapy products and services
on a monthly rental or sale basis. Home respiratory therapy and equipment
represented 42%, 42% and 49% of RoTech's revenues for the years ended July 31,
1995 and 1996 and the nine months ended April 30, 1997, respectively. RoTech
focuses on serving patients of primary care physicians with chronic pulmonary
diseases in their pre-acute stages. Early identification and retention of these
patients at the primary care level reduces the cost of healthcare and should
improve the quality of life of the patients and their families. RoTech also
enjoys patient retention post-hospitalization at the patient's or physician's
request and does not rely on referrals of patients by hospital discharge
planners or case managers. Nationwide home respiratory market revenues were
approximately $1.6 billion in 1993.
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RoTech's home respiratory care product line includes oxygen concentrators,
portable liquid oxygen systems, nebulizers and ventilator care. Oxygen
concentrators extract oxygen from room air and generally provide the least
expensive supply of oxygen for patients who require a continuous supply of
oxygen, are not ambulatory and who do not require excessive flow rates. Liquid
oxygen systems store oxygen under pressure in a liquid form. The liquid oxygen
is stored in a stationary unit that can be easily refilled at the patient's home
and can be used to fill a portable device that permits greatly enhanced patient
mobility. Nebulizers are devices which aerosolize medications, allowing them to
be inhaled directly into the patient's lungs. Ventilator therapy is used for the
individual that suffers from respiratory failure by mechanically assisting the
individual to breathe. RoTech provides technicians who deliver and/or install
the respiratory care equipment, instruct the patient in its use, refill the high
pressure and liquid oxygen systems as necessary and provide continuing
maintenance of the equipment.
Home Medical Equipment and Supplies
RoTech provides a full line of equipment and supplies of home medical
equipment and supplies for convalescents, including custom pieces required for
rehabilitation patients. Home medical equipment and supplies represented 24%,
35% and 28% of RoTech's revenues for the years ended July 31, 1995 and 1996 and
the nine months ended April 30, 1997, respectively. Provision of home medical
equipment enables RoTech to provide a "one-stop shopping" presence in its
non-urban markets, which is required for full patient service satisfaction.
These products are provided on a monthly rental or sale basis and include
wheelchairs, hospital beds, walkers, patient lifts, orthopedic supplies,
catheters, syringes and bathroom aids.
Home Infusion Therapy and Other Pharmacy Related Products and Services
Home infusion therapy involves the administration of antibiotics, nutrients
or other medications intravenously, intramuscularly, subcutaneously or through a
feeding tube. RoTech focuses on providing home infusion therapy to patients
prior to or in lieu of hospitalization, which generally offers significant cost
savings and preferable logistics for patients, their families and caregivers
over hospital-based treatments. RoTech believes that its marketing methods of
providing information to primary care physicians on home infusion therapies and
the continuing evolution of related technological advances should enable further
growth of this portion of the business. Focus on the referring primary care
physician facilitates the identification of patients requiring subacute
antibiotic treatments, which constitute 39% of RoTech's home infusion therapy
services performed. Home infusion therapies, which accounted for 25%, 16% and
17% of RoTech's revenues for the years ended July 31, 1995 and 1996 and the nine
months ended April 30, 1997, respectively, include the following:
Antibiotic Therapy - Antibiotic therapy, which represents the majority of
RoTech's home infusion therapy revenues, requires the infusion of antibiotic
drugs into the patient's bloodstream to treat infections and diseases, such as
osteomyelitis (bone infections), bacterial endocarditis (infection of the lining
around the heart), wound infections, infections associated with HIV/AIDS, and
infections of the kidneys and urinary tract. Antibiotics are generally believed
to be more effective when infused directly into the bloodstream than when taken
orally. These treatments can be prescribed by primary care physicians, are
short-term in nature and recur occasionally.
Enteral Nutrition Therapy - Enteral nutrition therapy is administered to
patients who cannot eat as a result of an obstruction to the upper
gastrointestinal tract or because they are otherwise unable to be fed orally. As
with total parenteral nutrition therapy, enteral nutrition therapy is often
administered over a long period.
Pain Management and Chemotherapy - Pain management therapy is the
administration of pain controlling drugs to terminally or chronically ill
patients and is often administered in conjunction with intravenous chemotherapy.
Chemotherapy is the continuous or intermittent intravenous administration of
anti-cancer drugs. Chemotherapy generally is administered periodically for
several weeks or months.
Total Parenteral Nutrition Therapy - Total parenteral nutrition (TPN)
therapy involves the intravenous feeding of nutrients to patients with impaired
digestive tracts due to gastrointestinal illnesses or conditions, due to
underlying conditions including cancer or HIV/AIDS. TPN is usually longer in
duration than other forms of infusion therapy, and can be lifelong.
115
Other Therapies. Other therapies and services include therapies such as
congestive heart failure therapy, hydration therapy and related nursing
services.
RoTech's home infusion therapy business is dependent in large measure upon
physicians continuing to prescribe the administration of drugs and nutrients
through intravenous and other infusion methods. Orally administered drugs and
alternative drug delivery systems may have an effect upon the demand for certain
infusion therapies. RoTech can predict neither the ultimate impact of these
treatments on RoTech's business nor the nature of future medical advances or
their eventual impact on RoTech's business.
PRIMARY CARE PHYSICIANS' PRACTICES
RoTech has acquired primary care physician practices in the States of
Florida and Mississippi. RoTech believes that it will be able to increase the
profitability of these individual practices through economies of scale and
greater efficiencies, and that its centralized billing and reimbursement
functions will typically result in lower costs per claim and quicker
reimbursement. Physician practices represented approximately 9%, 7% and 7% of
RoTech's revenues in the years ended July 31, 1995 and 1996 and the nine months
ended April 30, 1997, respectively.
GOVERNMENT REGULATION
The home care industry is subject to extensive government regulation at the
federal level through the Medicare program and at the state level through the
Medicaid program. Medicare is a federally funded health insurance program which
provides health insurance coverage for persons age 65 and older and certain
disabled persons, and generally provides reimbursement at specified rates for
sales and rentals of specified medical equipment and supplies, provided such
equipment and supplies are determined to be medically necessary by the treating
physician. Medicaid is a health insurance program administered by state
governments which provides reimbursements for healthcare for certain financially
or medically needy persons regardless of age.
RoTech is subject to government audits of its Medicare and Medicaid
reimbursement claims and has not, to date, experienced any material loss as a
result of any such government audits. Under existing federal law, the knowing
and willful offer or payment of any remuneration (including any kickback, bribe
or rebate) of any kind to another person to induce the referral of Medicare or
Medicaid beneficiaries for whom medical supplies and services may be reimbursed
by the Medicare or Medicaid programs is prohibited and could subject the parties
to such an arrangement to substantial criminal and civil penalties, including
exclusion from participation in these programs, for Medicare or Medicaid fraud.
The Office of Inspector General of the Department of Health and Human Services
("OIG") has promulgated regulatory "safe harbors" that describe certain
practices and business arrangements that comply with Medicare and Medicaid
regulations. The OIG and law enforcement authorities have recently increased
their investigatory efforts to determine whether various business practices
constitute remuneration for, or to induce, referrals. Certain states have also
passed statutes and regulations that prohibit payments for referral of patients.
These laws vary significantly from state to state. The result of legislative and
regulatory efforts is an extra compliance challenge and, therefore, risk. RoTech
reached a settlement with the U.S. Attorney for the Middle District of Florida
in a civil action related to Medicare claims the government believes it
erroneously paid between 1987 and 1989. RoTech remains confident that it was in
compliance with all material Medicare and other legal requirements related to
this matter. However, in an effort to reduce legal defense costs and to preserve
internal resources, RoTech paid $612,500 (approximately $380,000 on an after tax
basis) to resolve the matter. These monies represent a repayment of a portion of
the estimated disputed claims and related interest over approximately ten years.
RoTech received an inquiry from the Medicaid Department of the State of
Mississippi and subsequently received two subpoenas from the OIG concerning
RoTech's 1994 cost report for its Mississippi Rural Health Clinics. RoTech is
cooperating fully with such inquiries. There has been no statement of issues or
particular concerns giving RoTech sufficient information to permit RoTech to
determine the extent of financial exposure, if any. RoTech is not aware of any
material error in the one year's cost report under inquiry, following
consultation with its outside consultant, who also assisted in the prepa-
116
ration and filing of the original report. If any adjustments occur, such would
likely relate only to Mississippi physician clinics for 1994. However, Medicaid
and the OIG have the right to audit years subsequent to 1994, and RoTech cannot
predict the outcome of any such audit.
The types of services and products delivered by RoTech, the required
quality of such services and products and the manner in which such services and
products are delivered and billed are each subject to significant and complex
regulations promulgated, interpreted and administered by the appropriate federal
or state governmental agency. Although RoTech believes that its products,
services and procedures comply in all respects with such regulations applicable
to reimbursement eligibility, the unavailability of advance formal
administrative rulings in most regulated areas subjects RoTech to possible
subsequent adverse interpretations and rulings which may affect the eligibility
of some or all of RoTech's services and products for reimbursement. Such an
adverse interpretation or ruling could have a substantial adverse impact on
RoTech's business.
In addition, RoTech is required to obtain federal and state licenses and
permits relating to the distribution of pharmaceutical products, including a
federal Controlled Dangerous Substance Registration Certificate and Florida
State Wholesaler License. RoTech is required to obtain similar licenses from
each state in which it does business.
RoTech's acquisitions of primary care physician practices are structured to
attempt to comply with federal and state law restrictions on business
relationships between RoTech and persons who may be in a position to refer
patients to RoTech for the provision of healthcare related items or services.
Accordingly, RoTech endeavors to undertake such acquisitions in a manner where
the consideration offered and paid is consistent with fair market value in
arms-length transactions and is not determined in a manner that takes into
account the volume or value of any referrals or business that might otherwise be
generated between RoTech and the physician whose practice is to be acquired and
for which payment may be made under Medicare or Medicaid. While RoTech believes
that its acquisitions do not entail any form of unlawful remuneration, there can
be no assurance that enforcement authorities will not attempt to construe the
consideration exchanged in certain acquisition transactions as entailing
unlawful remuneration and to challenge such transactions on such basis.
In many states, the "corporate practice of medicine doctrine" prohibits
business corporations from providing, or holding themselves out as providers of,
medical care through the employment of physicians. Although the two states in
which RoTech has acquired practices of primary care physicians, Florida and
Mississippi, have not adopted this prohibition, there can be no assurance that
either state will not adopt this doctrine in the future. Enforcement of such
doctrine could require divestiture of acquired practices or restructuring of
physician relationships.
Healthcare is an area of extensive and dynamic regulatory change. Changes
in the law or new interpretations of existing laws can have a dramatic effect on
permissible activities, the relative costs associated with doing business, and
the amount of reimbursement by government and third-party payors. The Omnibus
Budget Reconciliation Act of 1987 ("OBRA 1987") created six categories of
durable medical equipment for purposes of reimbursement under the Medicare Part
B program. There is a separate fee schedule for each category. OBRA 1987 also
controls whether durable medical equipment products will be paid for on a rental
or sale basis and established fixed payment rates for oxygen service as well as
a 15-month rental ceiling on certain medical equipment. An interim final rule
implementing the payment methodology under the fee schedules recently was
published in the Federal Register. Payment based on the fee schedules is
effective with covered items furnished on or after January 1, 1989. Generally,
Medicare pays 80% of the lower of the supplier's actual charge for the item or
the fee schedule amount, after adjustment for the annual deductible amount. The
Omnibus Budget Reconciliation Act of 1990 made changes to Medicare Part B
reimbursement that were implemented in 1991. The substantive change was the
standardization of Medicare rates for certain equipment categories. Laws and
regulations often are adopted to regulate new products, services and industries.
The Balanced Budget Act of 1997, enacted in August 1997, reduces the Medicare
national payment limits for oxygen and oxygen equipment used in home respiratory
therapy by 25% in 1998 and 30% (from 1997 levels) in 1999 and each subsequent
year. Approximately 22% of RoTech's total revenues for the year ended July
117
31, 1997 were derived from the provision of oxygen services to Medicare
patients. There can be no assurance that either the states or the federal
government will not impose additional regulations upon RoTech's activities which
might adversely affect RoTech's business.
Political, economic and regulatory influences are subjecting the healthcare
industry in the United States to fundamental change. Although Congress has
failed to pass comprehensive healthcare reform legislation thus far, RoTech
anticipates that Congress and state legislatures will continue to review and
assess alternative healthcare delivery and payment systems and may in the future
propose and adopt legislation effecting fundamental changes in the healthcare
delivery system. Further, each area of medical care is subject to scrutiny and
revision as to the amount of reimbursement which is reasonable. Any reduction in
reimbursement in those goods and services provided by RoTech would have a direct
effect on gross revenues of RoTech. Legislative debate is expected to continue
in the future, and RoTech cannot predict what impact the adoption of any federal
or state healthcare reform measures or future private sector reform may have on
its industry or business.
Pursuant to federal legislation (commonly known as "Stark II") enacted as
part of the Omnibus Budget Reconciliation Act of 1993, and effective January 1,
1995, physicians are prohibited from making referrals to entities in which they
(or immediate family members) have an investment interest or compensation
arrangement, where such referral is for any "designated health service" covered
by Medicare/ Medicaid, including parenteral and enteral nutrients, equipment and
supplies, and home health services. Ownership by a physician of investment
securities in a publicly-held corporation with stockholders' equity exceeding
$75 million at the end of the corporation's most recent fiscal year or on
average during the previous three fiscal years is exempt from the investment
prohibition if the securities are traded on the New York, American or a regional
stock exchange, or the Nasdaq National Market. Exemptions from the compensation
arrangement prohibition include (i) amounts paid by an employer to a physician
pursuant to a bona fide employment relationship meeting specified requirements,
including payments being unrelated to referrals and consistent with the fair
market value of the services provided and (ii) other personal service
arrangements if certain requirements are met, including that compensation be
paid over the term of a written agreement with a term of one year or more, be
set in advance, not exceed fair market value, and be unrelated to referrals.
While RoTech intends to structure its acquisitions and operations to comply with
Stark II, there can be no assurance that future interpretations of that law will
not require structural and organizational modifications of RoTech's existing
relationships with physicians, nor can assurance be given that present or future
relationships between RoTech and physicians will be found to be in compliance
with such law.
COMPETITION
The home healthcare market is highly competitive and is divided among a
large number of providers, some of which are national providers but most of
which are either regional or local providers. RoTech believes that the primary
competitive factors in this market are the ability of a company to provide
prompt and reliable service, the expertise and availability of personnel, the
range of products and services offered and, to a limited extent, the price of
the product or service. RoTech's current and potential competitors include
several national providers which have significantly greater financial and other
resources than RoTech. There can be no assurance that RoTech will not encounter
increased competition which could adversely affect its business, results of
operations or financial condition. See "Risk Factors - Competition."
RoTech also competes with other home healthcare companies for acquisitions
and managed care contracts (deriving approximately 5% of its revenues from
managed care contracts). There can be no assurance that additional acquisitions
can be made and managed care contracts can be obtained on favorable terms or at
all.
INSURANCE
In recent years, participants in the healthcare market have become subject
to an increasing number of malpractice and product liability lawsuits, many of
which involve large claims and significant defense costs. As a result of the
liability risks inherent in RoTech's lines of business, including the risk of
liability
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due to the negligence of physicians or other healthcare professionals employed
by or otherwise under contract to RoTech, RoTech maintains liability insurance
intended to cover such claims. There can be no assurance that the coverage
limits of RoTech's insurance policies will be adequate, or that RoTech can
obtain liability insurance in the future on acceptable terms or at all.
RoTech currently has in force various liability insurance policies, with
total coverage limits of $26 million per occurrence and in the aggregate
annually. These policies contain various levels of deductibles and self-insured
retentions. They provide RoTech protection against claims alleging bodily injury
or property damage arising out of RoTech's operations, including home
healthcare, but excluding RoTech's employed physicians. RoTech has in force,
with respect to physicians employed by it, individual professional liability
insurance policies, with coverage limits ranging from $250,000 per occurrence to
$1 million per occurrence, and ranging from $750,000 in the aggregate annually
to $3 million in the aggregate annually. RoTech's insurance policies are subject
to annual renewal.
LEGAL PROCEEDINGS
RoTech is from time to time involved in various legal proceedings. Although
RoTech does not believe that any currently pending proceeding will materially
and adversely affect RoTech, there can be no assurance that any current or
future proceeding will not have a material adverse affect on RoTech's financial
position or results of operations.
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DESCRIPTION OF IHS 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.
THE FOLLOWING DESCRIPTION OF THE IHS CAPITAL STOCK SHOULD BE READ CAREFULLY
BY ROTECH STOCKHOLDERS SINCE, AT THE EFFECTIVE TIME, EACH ISSUED AND OUTSTANDING
SHARE OF ROTECH COMMON STOCK WILL BE CONVERTED INTO .5806 FULLY PAID AND
NONASSESSABLE SHARES OF IHS COMMON STOCK. SEE "THE MERGER AGREEMENT-CONVERSION
OF ROTECH SHARES."
AUTHORIZED CAPITAL STOCK
IHS is authorized to issue up to 150,000,000 shares of IHS Common Stock,
par value $.001 per share, 26,726,642 shares of which were issued and
outstanding at September 18, 1997, and 15,000,000 shares of IHS Preferred Stock,
none of which is outstanding as of the date hereof.
IHS COMMON STOCK
Holders of IHS 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 IHS Preferred Stock, holders of IHS Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the IHS Board out of funds legally available therefor. See "Summary
of Joint Proxy Statement/Prospectus - Market and Market Prices; Dividends." All
outstanding shares of IHS Common Stock are, and the shares to be issued in the
Merger will be, when issued pursuant to the Merger Agreement, fully paid and
nonassessable. In the event of any liquidation, dissolution or winding-up of the
affairs of IHS, holders of IHS 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 IHS Preferred Stock.
IHS PREFERRED STOCK
The IHS Board, without further stockholder authorization, is authorized to
issue shares of IHS 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 IHS Common Stock and one or more
other series of IHS 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 IHS Common Stock and one or more series of IHS
Preferred Stock. Although IHS has no present plans to issue any shares of IHS
Preferred Stock, the issuance of shares of IHS 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 "- IHS Stockholders' Rights Plan."
OPTIONS, WARRANTS AND CONVERTIBLE DEBENTURES
AT JULY 31, 1997, OPTIONS COVERING AN AGGREGATE OF APPROXIMATELY 11,320,000
SHARES OF IHS COMMON Stock and warrants covering an aggregate of 528,000 shares
of IHS Common Stock were outstanding. In addition, at July 31, 1997, IHS had
reserved for issuance approximately 354,000 additional shares of IHS Common
Stock for issuance under its stock option plans pursuant to options which have
not yet been granted and under its stock purchase plan. IHS also has reserved
for issuance 7,989,275 shares of IHS Common Stock for issuance upon conversion
of its 5 3/4% Convertible Senior Subordinated Debentures due 2001 and 6%
Convertible Subordinated Debentures due 2003. See "Description of Certain IHS
Indebtedness - 5 3/4% Convertible Senior Subordinated Debentures due 2001" and
"- 6% Convertible Subordinated Debentures due 2003."
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CERTAIN PROVISIONS OF IHS' BY-LAWS AND THE DGCL
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors. The IHS By-laws establish an advance notice procedure
with regard to the nomination, other than by or at the direction of the IHS
Board or a committee thereof, of candidates for election as directors (the
"Nomination Procedure") and with regard to other matters to be brought by
stockholders before an annual meeting of stockholders of IHS (the "Business
Procedure"). See "Comparison of Rights of IHS and RoTech Stockholders - Advance
Notice Provisions for Stockholder Proposals and Stockholder Nominations of
Directors."
The Nomination Procedure requires that a stockholder give prior written
notice, in proper form, of a planned nomination for the IHS Board to the
Secretary of IHS. The requirements as to the form and timing of that notice are
specified in the IHS By-laws. If the Chairman of the IHS Board determines that a
person was not nominated in accordance with the Nomination Procedure, such
person will not be eligible for election as a director.
Under the Business Procedure, a stockholder seeking to have any business
conducted at an annual meeting must give prior written notice, in proper form,
to the Secretary of IHS. The requirements as to the form and timing of that
notice are specified in the IHS By-laws. If the Chairman of the IHS Board
determines that the other business was not properly brought before such meeting
in accordance with the Business Procedure, such business will not be conducted
at such meeting.
Although the IHS By-laws do not give the IHS Board any power to approve or
disapprove stockholder nominations for the election of directors or of any other
business desired by stockholders to be conducted at an annual or any other
meeting, the IHS By-laws (i) may have the effect of precluding a nomination for
the election of directors or precluding the conduct of business at a particular
annual meeting if the proper procedures are not followed or (ii) may discourage
or deter a third party from conducting a solicitation of proxies to elect its
own slate of directors or otherwise attempting to obtain control of IHS, even if
the conduct of such solicitation or such attempt might be beneficial to IHS and
its stockholders.
Delaware Takeover Statute. IHS is subject to Section 203 of the DGCL which,
subject to certain exceptions, prohibits a Delaware corporation from engaging in
any of a broad range of business combinations with any "interested stockholder"
for a period of three years following the date that such stockholder became an
interested stockholder, unless (i) prior to such date, the board of directors of
the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (a) by persons who are directors and also
officers and (b) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or after such
date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder. An "interested
stockholder" is defined as any person that is (a) the owner of 15% or more of
the outstanding voting stock of the corporation or (b) an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the three-year period immediately
prior to the date on which it is sought to be determined whether such person is
an interested stockholder.
IHS STOCKHOLDERS' RIGHTS PLAN
The following is a description of the IHS Stockholders' Rights Plan (the
"IHS Rights Plan"). The description thereof set forth below is qualified in its
entirety by reference to the IHS Rights Plan, a copy of which has been filed
with the Commission. See "Available Information" and "Incorporation of Certain
Documents by Reference."
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The IHS Rights Plan provides that one preferred stock purchase right (a
"Right") will be issued with each share of IHS 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 IHS
Common Stock or (ii) 10 business days (or such later date as may be determined
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 IHS Common Stock (the earlier of such
dates being called the "Distribution Date"), the Rights will be evidenced by all
the IHS Common Stock share certificates and will be transferred with the IHS
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 IHS 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 IHS Common Stock or a
stock dividend on the IHS Common Stock payable in IHS Common Stock or
subdivisions, consolidations or combinations of the IHS 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 IHS 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 IHS Common Stock. Each share of Series A Preferred
Stock will have 100 votes, voting together with the shares of IHS Common Stock.
Finally, in the event of any merger, consolidation or other transaction in which
IHS Common Stock is exchanged, each share of Series A Preferred Stock will be
entitled to receive 100 times the amount received per share of IHS 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.
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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 IHS 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 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 IHS 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 IHS
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 IHS 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."
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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 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 IHS Common Stock is American Stock
Transfer & Trust Company, New York, New York.
COMPARISON OF RIGHTS OF IHS AND ROTECH STOCKHOLDERS
IHS is incorporated under the laws of the State of Delaware. RoTech is
incorporated under the laws of the State of Florida. The holders of shares of
RoTech Common Stock, whose rights as stockholders are currently governed by
Florida law, the Articles of Incorporation, as amended, of RoTech (the "RoTech
Articles"), and the RoTech By-laws, will, upon the exchange of their shares
pursuant to the Merger, become holders of shares of IHS Common Stock, and their
rights as such will be governed by Delaware law, the IHS Certificate and the IHS
By-laws. The material differences between the rights of holders of shares of
RoTech Common Stock and the rights of holders of shares of IHS Common Stock,
which result from differences in their governing corporate documents and
differences in Delaware and Florida corporate law, are summarized below.
The following summary does not purport to be a complete statement of the
rights of holders of shares of IHS Common Stock under applicable Delaware law,
the IHS Certificate and IHS By-laws or a comprehensive comparison with the
rights of the holders of shares of RoTech Common Stock under applicable Florida
law, the RoTech Articles and RoTech By-laws, or a complete description of the
specific provisions referred to herein. The identification of specific
differences is not meant to indicate that other equally or more significant
differences do not exist. This summary is qualified in its entirety by reference
to the DGCL, the FBCA and the governing corporate documents of IHS and RoTech,
to which holders of shares of IHS Common Stock and RoTech Common Stock are
referred. See "Incorporation of Certain Information by Reference."
CLASSES AND SERIES OF CAPITAL STOCK
RoTech. RoTech is authorized by the RoTech Articles to issue up to
50,000,000 shares of RoTech Common Stock, par value $.0002 per share. As of the
RoTech Record Date, 26,439,322 shares of RoTech Common Stock were issued and
outstanding. In addition, as of the RoTech Record Date there were
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outstanding options under RoTech stock option plans to purchase an additional
3,172,000 shares of RoTech Common Stock and 4,190,477 shares of RoTech Common
Stock reserved for issuance upon conversion of the RoTech Debentures.
IHS. IHS is authorized by the IHS Certificate to issue up to 165,000,000
shares of capital stock, of which 150,000,000 shares are designated IHS Common
Stock and 15,000,000 shares are designated as preferred stock, par value $.01
per share ("IHS Preferred Stock"). Seven hundred fifty thousand shares of IHS
Preferred Stock have been designated as Series A Junior Participating Cumulative
Preferred Stock. See "Description of IHS Capital Stock - IHS Stockholders'
Rights Plan." As of the IHS Record Date, there were 25,657,612 shares of IHS
Common Stock outstanding. In addition, at July 31, 1997 there were outstanding
options under IHS Common Stock option plans to purchase an additional
approximately 11,320,000 shares of IHS Common Stock and outstanding warrants to
purchase 528,000 additional shares of IHS Common Stock. An additional
approximately 354,000 shares of IHS Common Stock have been reserved for future
option grants under IHS stock option and stock purchase plans and 7,989,275
shares of IHS Common Stock have been reserved for issuance upon conversion of
IHS' outstanding convertible debentures. The IHS Board has the authority to
issue the IHS Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions for each such series, without any
further vote or action by the stockholders. As of the IHS Record Date, there
were no shares of IHS Preferred Stock issued and outstanding, and the IHS Board
has no present intention of issuing shares of IHS Preferred Stock, except as
provided in the IHS Rights Plan.
As a consequence of and following the Merger, RoTech stockholders will no
longer hold RoTech Common Stock, but will instead hold shares of IHS Common
Stock with associated rights to acquire Series A Preferred Stock.
SIZE AND ELECTION OF THE BOARD OF DIRECTORS
RoTech. The RoTech By-laws provide that the number of directors which shall
constitute the RoTech Board shall be not less than three nor more than seven.
The RoTech Board currently consists of five directors. Directors of RoTech are
elected by a plurality vote of the shares of RoTech Common Stock represented in
person or by proxy at the annual meeting of stockholders and entitled to vote on
the election of directors. The directors are elected each year at the annual
meeting of stockholders and hold office until the next annual meeting and until
their successors shall be duly elected and qualified.
IHS. The IHS By-laws provide that the IHS Board shall consist of nine
directors, except that whenever all of the shares of IHS are owned beneficially
and of record by either one or two stockholders, the number of directors may be
less than five but not less than the number of stockholders. Directors of IHS
are elected by a plurality of votes cast at the annual meeting of stockholders.
At each annual meeting of IHS stockholders, directors are elected to serve for a
term of one year and until their successors shall have been duly elected and
qualified or until their earlier resignation or removal.
As a consequence of and following the Merger, the rights and obligations of
holders of RoTech Shares exchanged for IHS Common Stock with respect to the size
and election of the IHS Board will be governed by the IHS By-laws as described
in the immediately preceding paragraph.
AMENDMENT OR REPEAL OF THE CERTIFICATE OF INCORPORATION AND BY-LAWS
Under the DGCL and the FBCA, unless its certificate or articles of
incorporation or by-laws otherwise provide, amendment of a corporation's
certificate or articles of incorporation generally requires the approval of the
holders of a majority of the outstanding stock entitled to vote thereon, and if
such amendment would increase or decrease the number of authorized shares of any
class or series or the par value of such shares or would adversely affect the
shares of such class or series, requires the approval of the holders of a
majority of the outstanding stock of such class or series.
RoTech. The RoTech Articles provide that amendments thereto must be
approved by the RoTech Board, proposed by the RoTech Board to the RoTech
stockholders, and approved at a RoTech stockholders' meeting by the holders of a
majority of the shares of RoTech Common Stock issued and entitled to be voted,
unless all RoTech directors and stockholders sign a written statement
manifesting their intention that an amendment to the RoTech Articles be made.
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The RoTech Articles and RoTech By-laws provide that stockholders of RoTech
by the vote of a majority of the stock entitled to vote at a meeting of
stockholders may adopt, alter, amend or repeal, in whole or in part, any RoTech
By-laws if notice of the proposed action was included in the notice of the
meeting or is waived in writing by the holders of a majority of the stock
entitled to vote thereon. The RoTech Articles and RoTech By-laws also provide
that the RoTech Board shall have the authority to adopt, alter, amend or repeal
the RoTech By-laws by the vote of a majority of the members of the RoTech Board
at any meeting thereof; provided, however, that any by-laws adopted by the
RoTech Board which are inconsistent with any by-laws adopted by the RoTech
stockholders shall be void, and the RoTech Board may not alter, amend or repeal
any by-laws adopted by the RoTech stockholders.
IHS. The IHS Certificate provides that the IHS Certificate shall not be
amended in any 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 at least
two-thirds of the outstanding shares of the Series A Preferred Stock, voting
together as a single class. Subject to the foregoing, the IHS Certificate and
the IHS By-laws provide that the IHS By-laws may be altered, amended or repealed
by a majority vote of the stockholders entitled to vote thereon at any annual or
special meeting duly convened after notice to the stockholders of that purpose
or by a majority vote of the members of the IHS Board at any regular or special
meeting of the IHS Board duly convened after notice to the IHS Board of that
purpose, subject always to the power of the stockholders to change such action
of the IHS Board.
As a consequence of and following the Merger, the rights and obligations of
holders of RoTech Shares exchanged for IHS Common Stock with respect to the
amendment or repeal of the IHS Certificate and IHS By-laws will be governed as
described in the immediately preceding paragraph.
SPECIAL MEETINGS OF STOCKHOLDERS
RoTech. The RoTech By-laws provide that special meetings of the
stockholders shall be held when directed by the President or the RoTech Board or
when requested in writing by stockholders who hold a majority of the stock
having the right and entitled to vote at such meetings.
IHS. The IHS By-laws provide that a special meeting of the IHS stockholders
may be called by the chairman of the IHS Board, the deputy chairman of the IHS
Board (if any) or the President or by order of the IHS Board.
As a consequence of and following the Merger, the rights and obligations of
holders of RoTech Shares exchanged for IHS Common Stock with respect to the
calling of special meetings of stockholders will be governed as described in the
immediately preceding paragraph.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER PROPOSALS AND STOCKHOLDER NOMINATIONS
OF DIRECTORS
RoTech. The RoTech Articles and RoTech By-laws provide no special
procedures regarding the nomination of persons for election to the RoTech Board
by stockholders or the proposal of business at an annual or special meeting of
stockholders.
IHS. The IHS By-laws provide that nominations of persons for election to
the IHS Board may be made by any stockholder of IHS entitled to vote for the
election of directors at the applicable meeting of stockholders only if written
notice to the Secretary of IHS of such stockholder's intent to make such
nomination or nominations is given, either by personal delivery or by U.S.
certified mail, postage prepaid, and received (i) not less than 120 days nor
more than 150 days before the first anniversary of the date of IHS' proxy
statement in connection with the last annual meeting of stockholders, or (ii) if
the applicable annual meeting has been changed by more than 30 days from the
date contemplated at the time of the previous year's proxy statement, not less
than 60 days before the date of the applicable annual meeting, or (iii) with
respect to any special meeting of stockholders called for the election of
directors, not later than the close of business on the seventh day following the
date on which notice of such meeting is first given to stockholders. Each such
notice shall set forth (a) as to the stockholder giving the notice, (i) the name
and address, as they appear on the stock transfer books of IHS, of such
stockholder, (ii) a representation that such stockholder is a stockholder of
record and intends to appear
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in person or by proxy at such meeting to nominate the person or persons
specified in the notice, (iii) the class and number of shares of stock of IHS
beneficially owned by such stockholder, and (iv) a description of all
arrangements or understandings between such stockholder and each nominee and any
other person or persons naming such person or persons pursuant to which the
nomination or nominations are to be made by such stockholder; and (b) as to each
person whom the stockholder proposes to nominate for election as a director, (i)
the name, age, business address and, if known, residence address of such person,
(ii) the principal occupation or employment of such person, (iii) the class and
number of shares of stock of IHS which are beneficially owned by such person,
(iv) any other information relating to such person that is required to be
disclosed in solicitations of proxies for the election of directors or is
otherwise required by the rules and regulations of the Commission promulgated
under the Exchange Act, and (v) the written consent of such person to be named
in the proxy statement as a nominee and to serve as a director if elected.
The IHS By-laws provide that at an annual meeting of the stockholders, only
such business shall be conducted as shall have been properly brought before the
meeting. For business to be properly brought before an annual meeting by a
stockholder, written notice thereof to the Secretary of IHS must be given,
either by personal delivery or by U.S. certified mail, postage prepaid, and
received at the principal executive offices of IHS (i) not less than 120 days
nor more than 150 days before the first anniversary of the date of IHS' proxy
statement in connection with the last annual meeting of stockholders or (ii) if
no annual meeting was held in the previous year or the date of the applicable
annual meeting has been changed by more than 30 days from the date contemplated
at the time of the previous year's proxy statement, not less than 60 days before
the date of the applicable annual meeting. Each such notice shall set forth as
to each matter: (a) the description of the business desired to be brought before
the annual meeting, including the complete text of any resolutions to be
presented at the annual meeting, (b) the name and address, as they appear on the
stock transfer books of IHS, of such stockholder proposing such business, (c) a
representation that such stockholder is a stockholder of record and intends to
appear in person or by proxy at such meeting to bring the business before the
meeting specified in the notice, (d) the class and number of shares of stock of
IHS beneficially owned by the stockholder and (e) any material interest of the
stockholder in such business.
As a consequence of and following the Merger, RoTech stockholders wishing
to nominate candidates to the IHS Board or bring business before a meeting of
stockholders will have to comply with the notice procedures of IHS set forth in
the two preceding paragraphs.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The DGCL and the FBCA permit a corporation to indemnify officers,
directors, employees and agents for actions taken in good faith and in a manner
they reasonably believed to be in, or not opposed to, the best interests of the
corporation, and with respect to any criminal action, which they had no
reasonable cause to believe was unlawful. The DGCL and the FBCA provide that a
corporation may advance expenses of defense (upon receipt of an undertaking to
reimburse the corporation if indemnification is ultimately determined not to be
appropriate) and must reimburse a successful defendant for expenses, including
attorneys' fees, actually and reasonably incurred. The DGCL and the FBCA also
permit a corporation to purchase and maintain liability insurance for its
directors and officers. The DGCL and the FBCA provide that indemnification may
not be made for any claim, issue or matter as to which a person has been
adjudged by a court of competent jurisdiction, after exhaustion of all appeals
therefrom, to be liable to the corporation, unless and only to the extent a
court determines that the person is entitled to indemnity for such expenses as
the court deems proper.
RoTech. The RoTech By-laws provide that RoTech shall indemnify each person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed claim, action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is or was
a director, officer, employee or agent of RoTech or is or was serving at the
request of RoTech as a director, partner, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement in connection with such claim, action, suit or proceeding.
Expenses incurred in defending
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any such civil or criminal action, suit or proceeding may be paid by RoTech in
advance of final disposition as authorized by the RoTech Board upon receipt of
an undertaking by or on behalf of such director, officer, employee or agent to
repay such amounts unless it shall ultimately be determined that he or she is
entitled to be indemnified by RoTech.
IHS. The IHS By-laws provide that IHS shall indemnify any director and any
officer of IHS holding the position of Senior Vice President or any higher
office (and may indemnify any other person) who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she is or was a director or an officer of IHS or
is or was serving at the request of IHS as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him or her in
connection with such action, suit or proceeding to the fullest extent and in the
manner set forth in and permitted by the DGCL and any other applicable law, as
from time to time in effect. Expenses incurred by a director or officer holding
the position of Senior Vice President or any higher office in defending any such
proceeding shall be paid by IHS (and, in the case of other persons, may be paid
by IHS) in advance of final disposition upon the representation that such person
believes he or she is entitled to indemnification thereunder and the receipt of
an undertaking by such person to repay all amounts advanced if it should be
ultimately determined that such person is not entitled to be indemnified.
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DESCRIPTION OF CERTAIN IHS INDEBTEDNESS
The following summarizes the material long-term indebtedness of IHS and its
subsidiaries. IHS' indebtedness is substantial in relation to its stockholders'
equity. At June 30, 1997, IHS' total long-term debt, including current portion,
accounted for 67.7% of its total capitalization. On a pro forma basis after
giving effect to the Merger (assuming a price per share of IHS Common Stock of
$34.625 (the closing price of IHS Common Stock on September 18, 1997 (the last
trading day prior to the date of this Joint Proxy Statement/Prospectus)) and
based on 26,439,322 shares of RoTech Common Stock outstanding on September 18,
1997), the Proposed Acquisitions, the New Credit Facility and the issuance of
the 9 1/4% Senior Notes and the use of proceeds therefrom and from the term loan
portion of the New Credit Facility to repay amounts outstanding under the prior
credit facility, to pay the cash portion of the purchase price of the Proposed
Acquisitions and to repay certain indebtedness to be assumed in the Merger and
the Proposed Acquisitions, IHS' total debt, including current portion, at June
30, 1997 accounted for 66.7% of its total pro forma capitalization. In
connection with the offering of the 9 1/4% Senior Notes, S&P confirmed its B
rating of IHS' other subordinated debt obligations, but with a negative outlook,
and assigned the same rating to the 9 1/4% Senior Notes, and Moody's downgraded
IHS' other senior subordinated debt obligations to B2, but noted that the
outlook for the rating was stable, and assigned the new rating to the 9 1/4%
Senior Notes. See "Risk Factors - Risks Related to Substantial Indebtedness."
The summary is not a complete description of such indebtedness. Copies of the
material agreements relating to such indebtedness have been filed with the
Commission and the description set forth below is qualified in its entirety by
reference to such agreements. See "Available Information."
NEW CREDIT FACILITY
On September 15, 1997, IHS entered into a $1.75 billion revolving credit
and term loan facility with Citibank, N.A., as Administrative Agent, and certain
other lenders (the "New Credit Facility") to replace its existing $700 million
revolving credit facility. The New Credit Facility consists of a $750 million
term loan facility (the "Term Facility") and a $1 billion revolving credit
facility, including a $100 million letter of credit subfacility and a $10
million swing line subfacility (the "Revolving Facility"). The Term Facility,
all of which was borrowed on September 17, 1997, matures on December 31, 2004
and will be amortized beginning December 31, 1998 as follows: 1998 - $7.5
million; each of 1999, 2000, 2001 and 2002 - $7.5 million (payable in equal
quarterly installments); 2003 - $337.5 million (payable in equal quarterly
installments); and 2004 - $375 million (payable in equal quarterly
installments). Any unpaid balance will be due on the maturity date. The Term
Facility will bear interest at a rate equal to, at the option of IHS, either (i)
in the case of Eurodollar loans, the sum of (x) one and three-quarters percent
or two percent (depending on the ratio of IHS' Debt (as defined in the New
Credit Facility) to earnings before interest, taxes, depreciation, amortization
and rent, pro forma for any acquisitions or divestitures during the measurement
period (the "Debt/EBITDAR Ratio")) and (y) the interest rate in the London
interbank market for loans in an amount substantially equal to the amount of
borrowing and for the period of borrowing selected by IHS or (ii) the sum of (a)
the higher of (1) Citibank, N.A.'s base rate or (2) one percent plus the latest
overnight federal funds rate plus (b) a margin of one-half percent or
three-quarters of one percent (depending on the Debt/EBITDAR Ratio). The Term
Facility can be prepaid at any time in whole or in part without penalty.
The Revolving Facility will reduce to $800 million on September 30, 2001
and $500 million on September 30, 2002, with a final maturity on September 15,
2004; however, the $100 million letter of credit subfacility and $10 million
swing line subfacility will remain at $100 million and $10 million,
respectively, until final maturity. The Revolving Facility will bear interest at
a rate equal to, at the option of IHS, either (i) in the case of Eurodollar
loans, the sum of (x) between three-quarters of one percent and one and
three-quarters percent (depending on the Debt/EBITDAR Ratio) and (y) the
interest rate in the London interbank market for loans in an amount
substantially equal to the amount of borrowing and for the period of borrowing
selected by IHS or (ii) the sum of (a) the higher of (1) Citibank, N.A.'s base
rate or (2) one percent plus the latest overnight federal funds rate plus (b) a
margin of between zero percent and one-half percent (depending on the
Debt/EBITDAR Ratio). Amounts repaid under the Revolving Facility may be
reborrowed prior to the maturity date.
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The New Credit Facility limits IHS' ability to incur indebtedness or
contingent obligations, to make additional acquisitions, to sell or dispose of
assets, to create or incur liens on assets, to pay dividends, to purchase or
redeem IHS' stock and to merge or consolidate with any other person. In
addition, the New Credit Facility requires that IHS meet certain financial
ratios, and provides the banks with the right to require the payment of all
amounts outstanding under the facility, and to terminate all commitments under
the facility, if there is a change in control of IHS or if any person other than
Dr. Robert N. Elkins, IHS' Chairman and Chief Executive Officer, or a group
managed by Dr. Elkins, owns more than 40% of IHS' stock. The New Credit Facility
is guaranteed by all of IHS' subsidiaries (other than inactive subsidiaries) and
secured by a pledge of all of the stock of substantially all of IHS'
subsidiaries.
The New Credit Facility replaced IHS' $700 million credit facility (the
"Prior Credit Facility"). As a result, IHS anticipates that it will record an
extraordinary loss on extinguishment of debt of approximately $2.4 million (net
of related tax benefit of approximately $1.6 million) in the third quarter of
1997 resulting from the write-off of deferred financing costs of $4.0 million
related to the Prior Credit Facility.
5 3/4% CONVERTIBLE SENIOR SUBORDINATED DEBENTURES DUE 2001
IHS has outstanding $143,750,000 principal amount of IHS' 5 3/4%
Convertible Senior Subordinated Debentures due 2001 (the "5 3/4% Debentures").
Interest on the 5 3/4% Debentures is payable semi-annually on January 1 and July
1. The 5 3/4% Debentures are redeemable in whole or in part at the option of IHS
at a price, expressed as a percentage of the principal amount, ranging from
103.29% in 1997 to 100.82% in 2000, plus accrued interest. The 5 3/4% Debentures
are convertible into IHS Common Stock at any time prior to redemption or final
maturity, initially at the conversion price of $32.60 per share (the equivalent
of 30.675 shares per $1,000 principal amount of 5 3/4% Debentures), subject to
adjustment upon the occurrence of certain events. In the event of a change in
control of IHS (as defined in the indenture under which the 5 3/4% Debentures
were issued), each holder of 5 3/4% Debentures may require IHS to repurchase
such holder's 5 3/4% Debentures, in whole or in part, at 100% of the principal
amount thereof, plus accrued interest to the repurchase date.
6% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
IHS has outstanding $115,000,000 aggregate principal amount of its 6%
Convertible Subordinated Debentures due 2003 (the "6% Debentures"). Interest on
the 6% Debentures is payable semi-annually on January 1 and July 1. The 6%
Debentures are redeemable in whole or in part at the option of IHS at any time
at a price, expressed as a percentage of the principal amount, ranging from
103.6% in 1997 to 100.6% in 2002, plus accrued interest. Prior to redemption,
the 6% Debentures are convertible into IHS Common Stock at the option of the
holder at any time at or before maturity at $32.125 per share (the equivalent of
31.128 shares per $1,000 principal amount of 6% Debentures), subject to
adjustment upon the occurrence of certain events. In the event of a change in
control of IHS (as defined in the indenture under which the 6% Debentures were
issued), each holder of 6% Debentures may require IHS to repurchase such
holder's 6% Debentures, in whole or in part, at 100% of the principal amount
thereof, plus accrued interest to the repurchase date.
9 1/4% SENIOR SUBORDINATED NOTES DUE 2008
IHS has outstanding $500,000,000 aggregate principal amount of its 9 1/4%
Senior Subordinated Notes due 2008 (the "9 1/4% Senior Notes"). Interest on the
9 1/4% Senior Notes is payable semi-annually on January 15 and July 15. The
9 1/4% Senior Notes are redeemable in whole or in part at the option of IHS at
any time on or after Janaury 15, 2003, at a price, expressed as a percentage of
the principal amount, initially equal to 104.625% and declining to 100% on
January 15, 2006, plus accrued interest thereon. In addition, IHS may redeem up
to $166,667,000 aggregate principal amount of 9 1/4% Senior Notes at any time
and from time to time prior to January 15, 2001 at a redemption price equal to
109.25% of the aggregate principal amount thereof, plus accrued interest
thereon, out of the net cash proceeds of one or more Public Equity Offerings (as
defined in the indenture under which the 9 1/4% Senior Notes were issued (the "9
1/4% Senior Notes Indenture")). In the event of a change in control of IHS (as
defined in the 9 1/4% Senior Notes Indenture), each holder of 9 1/4% Senior
Notes may require
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IHS to repurchase such holder's 9 1/4% Senior Notes, in whole or in part, at
101% of the principal amount thereof, plus accrued interest to the repurchase
date. The 9 1/4% Senior Notes Indenture contains certain covenants, including,
but not limited to, covenants with respect to the following matters: (i)
limitations on additional indebtedness unless certain coverage ratios are met;
(ii) limitations on other subordinated indebtedness; (iii) limitations on liens;
(iv) limitations on the issuance of preferred stock by IHS' subsidiaries; (v)
limitations on transactions with affiliates; (vi) limitations on restricted
payments and investments; (vii) application of the proceeds of certain asset
sales; (viii) limitations on restrictions on subsidiary dividends; and (ix)
restrictions on mergers, consolidations and the transfer of all or substantially
all of the assets of IHS to another person.
9 1/2% SENIOR SUBORDINATED NOTES DUE 2007
IHS has outstanding $450,000,000 aggregate principal amount of its 9 1/2%
Senior Subordinated Notes due 2007 (the "9 1/2% Senior Notes"). Interest on the
9 1/2% Senior Notes is payable semi-annually on March 15 and September 15. The
9 1/2% Senior Notes are redeemable in whole or in part at the option of IHS at
any time on or after September 15, 2002, at a price, expressed as a percentage
of the principal amount, initially equal to 104.75% and declining to 100% on
September 15, 2005, plus accrued interest thereon. In addition, IHS may redeem
up to $150,000,000 aggregate principal amount of 9 1/2% Senior Notes at any time
and from time to time prior to September 15, 2000 at a redemption price equal to
108.50% of the aggregate principal amount thereof, plus accrued interest
thereon, out of the net cash proceeds of one or more Public Equity Offerings (as
defined in the indenture under which the 9 1/2% Senior Notes were issued (the "9
1/2% Senior Notes Indenture")). In the event of a change in control of IHS (as
defined in the 9 1/2% Senior Notes Indenture), each holder of 9 1/2% Senior
Notes may require IHS to repurchase such holder's 9 1/2% Senior Notes, in whole
or in part, at 101% of the principal amount thereof, plus accrued interest to
the repurchase date. The 9 1/2% Senior Notes Indenture contains certain
covenants, including, but not limited to, covenants with respect to the
following matters: (i) limitations on additional indebtedness unless certain
coverage ratios are met; (ii) limitations on other subordinated indebtedness;
(iii) limitations on liens; (iv) limitations on the issuance of preferred stock
by IHS' subsidiaries; (v) limitations on transactions with affiliates; (vi)
limitations on restricted payments and investments; (vii) application of the
proceeds of certain asset sales; (viii) limitations on restrictions on
subsidiary dividends; and (ix) restrictions on mergers, consolidations and the
transfer of all or substantially all of the assets of IHS to another person.
10 1/4% SENIOR SUBORDINATED NOTES DUE 2006
IHS has outstanding $150,000,000 aggregate principal amount of its 10 1/4%
senior subordinated notes due 2006 (the "10 1/4% Senior Notes"). Interest on the
10 1/4% Senior Notes is payable semi-annually on April 30 and October 30. The
10 1/4% Senior Notes are redeemable for cash at any time after April 30, 2001,
at IHS' option, in whole or in part, initially at a redemption price equal to
105.125% of the principal amount, declining to 100% of the principal amount on
April 30, 2004, plus accrued interest thereon to the date fixed for redemption.
In the event of a change in control of IHS (as defined in the indenture under
which the 10 1/4% Senior Notes were issued), each holder of 10 1/4% Senior Notes
may require IHS to repurchase such holder's 10 1/4% Senior Notes, in whole or in
part, at 101% of the principal amount thereof, plus accrued interest to the
repurchase date. The indenture under which the 10 1/4% Senior Notes were issued
contains certain covenants, including, but not limited to, covenants with
respect to the following matters: (i) limitations on additional indebtedness
unless certain ratios are met; (ii) limitations on other subordinated debt;
(iii) limitations on liens; (iv) limitations on the issuance of preferred stock
by IHS' subsidiaries; (v) limitations on transactions with affiliates; (vi)
limitations on certain payments, including dividends; (vii) application of the
proceeds of certain asset sales; (viii) restrictions on mergers, consolidations
and the transfer of all or substantially all of the assets of IHS to another
person; and (ix) limitations on investments and loans.
The 10 1/4% Senior Notes were sold to Smith Barney, DLJ and Citicorp
Securities, Inc., as Initial Purchasers. The Initial Purchasers sold the 10 1/4%
Senior Notes to qualified institutional buyers under Rule 144A of the Securities
Act and to a limited number of institutional accredited investors. Pursuant to
an agreement with the Initial Purchasers, IHS was obligated to take certain
actions to effect an exchange offer within specified periods whereby each holder
of 10 1/4% Senior Notes would be offered
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the opportunity to exchange such notes for new notes identical in all material
respects to the 10 1/4% Senior Notes except that the new notes would be
registered under the Securities Act. IHS has not to date commenced the exchange
offer and, as a result, beginning November 25, 1996 the interest rate on the
10 1/4% Senior Notes increased to 10.5%, and will continue to increase by 0.25%
each 90 days until the exchange offer is commenced.
10 3/4% SENIOR SUBORDINATED NOTES DUE 2004
IHS has outstanding $107,000 aggregate principal amount of its 10 3/4%
Senior Subordinated Notes due 2004 (the "10 3/4% Senior Notes"). Interest on the
10 3/4% Senior Notes is payable semi-annually on January 15 and July 15. The
10 3/4% Senior Notes are redeemable in whole or in part at the option of IHS at
any time on or after July 15, 1999, at a price, expressed as a percentage of the
principal amount, initially equal to 105.375% and declining to 100% on July 15,
2002, plus accrued interest thereon. In the event of a change in control of IHS
(as defined in the indenture under which the 10 3/4% Senior Notes were issued
(the "10 3/4% Senior Notes Indenture")), each holder of 10 3/4% Senior Notes may
require IHS to repurchase such holder's 10 3/4% Senior Notes, in whole or in
part, at 101% of the principal amount thereof, plus accrued interest to the
repurchase date. The 10 3/4% Senior Notes Indenture contains certain limited
covenants, including a covenant with respect to the application of the proceeds
of certain asset sales.
On May 30, 1997, IHS repurchased $99,893,000 aggregate principal amount of
the 10 3/4% Senior Notes pursuant to a cash tender offer. As a condition of IHS'
obligation to repurchase tendered 10 3/4% Senior Notes, tendering holders
consented to amendments to the 10 3/4% Senior Notes Indenture which eliminated
or modified most of the restrictive covenants previously contained in such
indenture.
9 5/8% SENIOR SUBORDINATED NOTES DUE 2002, SERIES A
IHS has outstanding $25,000 aggregate principal amount of its 9 5/8% senior
subordinated notes due 2002, Series A (the "9 5/8% Senior Notes"). Interest on
the 9 5/8% Senior Notes is payable semi-annually on May 31 and November 30. The
9 5/8% Senior Notes are not redeemable prior to maturity. In the event of a
change in control of IHS (as defined in the indenture under which the 9 5/8%
Senior Notes were issued (the "9 5/8% Senior Notes Indenture")), each holder of
9 5/8% Senior Notes may require IHS to repurchase such holder's 9 5/8% Senior
Notes, in whole or in part, at 101% of the principal amount thereof, plus
accrued interest to the repurchase date. The 9 5/8% Senior Notes Indenture
contains certain limited covenants, including a covenant with respect to the
application of the proceeds of certain asset sales.
On May 30, 1997, IHS repurchased $114,975,000 aggregate principal amount of
the 9 5/8% Senior Notes pursuant to a cash tender offer. As a condition of IHS'
obligation to repurchase tendered 9 5/8% Senior Notes, tendering holders
consented to amendments to the 9 5/8% Senior Notes Indenture which eliminated or
modified most of the restrictive covenants previously contained in such
indenture.
CERTAIN OTHER OBLIGATIONS
IHS' contingent liabilities (other than liabilities in respect of
litigation and the contingent payment in respect of the First American
Acquisition) aggregated approximately $77.3 million as of June 30, 1997. IHS is
obligated to purchase its Greenbriar facility upon a change in control of IHS.
The net purchase price of the facility is approximately $4.0 million. IHS has
guaranteed approximately $6.6 million of the lessor's indebtedness. IHS is
required, upon certain defaults under the lease, to purchase its Orange Hills
facility at a purchase price equal to the greater of $7.1 million or the
facility's fair market value. IHS has guaranteed approximately $4.0 million owed
by Tutera Group, Inc. and Sunset Plaza Limited Partnership, a partnership
affiliated with a partnership in which IHS has a 49% interest, to Finova Capital
Corporation. IHS has established several irrevocable standby letters of credit
with the Bank of Nova Scotia to secure certain of IHS' self-insured workers'
compensation obligations, health benefits and other obligations. The maximum
obligation was $15.7 million at June 30, 1997. IHS has also established three
irrevocable standby letters of credit in the total amount of $10.7 million. IHS
has guaranteed approximately $539,000 owed by a managed facility to National
Health Investors Inc. and
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approximately $8.9 million owed by Litchfield Asset Management Corporation to
National Health Investors Inc. IHS has guaranteed approximately $4.8 million
owed by CCA, a related party company to which IHS provides certain management
services, to Daiwa Healthco-2 LLC. IHS has also guaranteed approximately $10.0
million owed by CCA to Health and Retirement Properties Trust under a loan and
lease financing agreement. In addition, IHS has established an irrevocable
standby line of credit with CCA with a maximum amount of $5.0 million available
to CCA at June 30, 1997. Subsequent to June 30, 1997, IHS established an
additional $5.0 million credit facility. On August 7, 1997, IHS commenced a cash
tender offer for all the outstanding stock of CCA at a price of $4.00 per share.
See "IHS Recent Developments - Proposed Acquisitions - Proposed CCA
Acquisition." IHS owns warrants to purchase approximately 13.5% of CCA, and IHS'
Chairman and Chief Executive Officer beneficially owns approximately 21.0% of
CCA's outstanding common stock (excluding the warrants owned by IHS). In
addition, IHS has obligations under operating leases aggregating approximately
$212.1 million at June 30, 1997. In addition, with respect to certain acquired
businesses IHS is obligated to make certain contingent payments if earnings of
the acquired businesses increase or earnings targets are met. IHS is also
obligated under certain circumstances to make contingent payments of up to $155
million in respect of the First American Acquisition. See "IHS Recent
Developments - First American Acquisition."
IHS leases ten facilities from Meditrust, a publicly-traded real estate
investment trust. With respect to all the facilities leased from Meditrust, IHS
is obligated to pay additional rent in an amount equal to a specified percentage
(generally five percent) of the amount by which the facility's gross revenues
exceed a specified amount (generally based on the facility's gross revenues
during its first year of operation). If an event of default occurs under any
Meditrust lease or any other agreement IHS has with Meditrust, Meditrust has the
right to require IHS to purchase the facility leased from the partnership at a
price equal to the higher of the then current fair market value of the facility
or the original purchase price of the facility paid by Meditrust plus the cost
of certain capital expenditures paid for by Meditrust, an adjustment for the
increase in the cost of living index since the commencement of the lease and all
rent then due and payable, all such amounts to be determined pursuant to the
prescribed formula contained in the lease. In addition, each Meditrust lease
provides that a default under any other Meditrust lease or any other agreement
IHS has with Meditrust constitutes a default under such lease. Upon such
default, Meditrust has the right to terminate the leases and to seek damages
based upon lost rent.
EXPERTS
The consolidated financial statements of Integrated Health Services, Inc.
and subsidiaries as of December 31, 1995 and 1996 and for each of the years in
the three-year period ended December 31, 1996, have been incorporated by
reference into this Joint Proxy Statement/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 financial statements and the related financial statement schedule
incorporated in this Joint Proxy Statement/Prospectus by reference from RoTech
Medical Corporation's Annual Report on Form 10-K for the year ended July 31,
1996 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 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 Joint Proxy Statement/Prospectus and in the Registration Statement from
IHS' Current Report on Form 8-K/A, as amended (dated October 17, 1996 and filed
with the Commission on July 11, 1997) in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as
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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.
Representatives of KPMG Peat Marwick LLP and Deloitte & Touche LLP are
expected to be present at the IHS Special Meeting and the RoTech Special
Meeting, respectively, will have the opportunity to make a statement if they
desire to do so and will be available to respond to appropriate questions.
LEGAL MATTERS
The validity of the shares of IHS Common Stock being offered hereby will be
passed upon for IHS by Fulbright & Jaworski L.L.P., New York, New York, counsel
to IHS. At August 31, 1997, partners of Fulbright & Jaworski L.L.P.
owned an aggregate of 300 shares of IHS Common Stock.
Certain federal income tax consequences of the Merger will be passed upon
for IHS by Fulbright & Jaworski L.L.P., New York, New York, and for RoTech by
Winderweedle, Haines, Ward & Woodman, P.A., Orlando, Florida. As of August 31,
1997, shareholders of Winderweedle, Haines, Ward & Woodman, P.A., owned or had a
financial interest in an aggregate of 3,264 shares of RoTech Common Stock
(including 1,764 shares of RoTech Common Stock representing undistributed stock
unit benefits that William A. Walker II has a financial interest in under
RoTech's Restricted Stock Plan), and such firm owns options to purchase up to,
but not exceeding in the aggregate, 20,000 shares of RoTech's Common Stock at
$13.88 per share and 20,000 shares of RoTech Common Stock at $19.50 per share.
The options are exercisable until June 30, 2000 and June 30, 2001, respectively.
ADDITIONAL INFORMATION
STOCKHOLDER PROPOSALS
RoTech Stockholders. In order to be eligible for inclusion in RoTech's
proxy solicitation materials for its 1997 annual meeting of stockholders, any
stockholder proposal to be considered at such meeting should have been received
by RoTech on or before July 14, 1997. RoTech will not be required to include in
its proxy solicitation material a stockholder proposal which is received after
that date or which otherwise fails to meet the requirements for stockholder
proposals established by regulations of the Commission. If the Merger is
consummated, there will be no 1997 annual meeting of RoTech stockholders.
IHS Stockholders. In order to be eligible for inclusion in IHS' proxy
solicitation materials for its 1998 annual meeting of stockholders, any
stockholder proposal to be considered at such meeting must have been received by
IHS not later than January 9, 1998. IHS will not be required to include in its
proxy solicitation material a stockholder proposal which is received after that
date or which otherwise fails to meet the requirements for a stockholder
proposal established by regulations of the Commission. IHS' By-laws impose
certain requirements which must be complied with in connection with the
submission of stockholder proposals. See "Comparison of Rights of IHS and RoTech
Stockholders - Advance Notice Provisions for Stockholder Proposals and
Stockholder Nominations of Directors."
OTHER BUSINESS
The RoTech and IHS Boards of Directors are not aware of any business to be
acted upon at the Special Meetings other than as described herein. If, however,
other matters are properly brought before the Special Meetings, or any
adjournments or postponements thereof, the persons appointed as proxies will
have discretion to vote or act thereon according to their best judgment and
applicable Commission rules.
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Appendix A
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (the "Plan of Merger") is made as of
the 6th day of July, 1997, among INTEGRATED HEALTH SERVICES, INC., a Delaware
corporation ("IHS"), and IHS ACQUISITION XXIV, INC., a Florida corporation
("Merger Sub"), and ROTECH MEDICAL CORPORATION, a Florida corporation
("RoTech").
WHEREAS, the respective Boards of Directors of RoTech, IHS, and Merger
Sub have approved the merger of Merger Sub with and into RoTech (the "Merger"),
upon the terms and subject to the conditions set forth herein, whereby each
share of Common Stock, par value $.0002 per share, of RoTech (the "RoTech Common
Stock" and the issued and outstanding shares thereof, the "RoTech Shares"), not
owned directly or indirectly by RoTech, will be converted into the right to
receive the Merger Consideration (as herein defined); and
WHEREAS, each of RoTech, IHS, and Merger Sub desires to make certain
representations, warranties, covenants, and agreements in connection with the
Merger and also to prescribe various conditions to the Merger; and
WHEREAS, it is intended that the Merger shall qualify for federal income
tax purposes as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended, and, for accounting purposes, as a
purchase and not as a pooling of interests.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties, intending to be legally bound, agree as follows:
ARTICLE I: THE MERGER
1.1 THE MERGER. Upon the terms and subject to the conditions set forth in
this Plan of Merger and in accordance with the General Corporation Law of the
State of Florida (the "FBCA"), at the Effective Time (as defined herein), Merger
Sub shall be merged with and into RoTech in accordance with the provisions of
Section 607.1101 of the FBCA. Following the Effective Time, the separate
existence of Merger Sub shall cease, and RoTech shall continue as the surviving
corporation in the Merger (hereinafter sometimes referred to as the "Surviving
Corporation") as a business corporation incorporated under the laws of the State
of Florida under the name "RoTech Medical Corporation", and shall succeed to and
assume all the rights and obligations of Merger Sub and RoTech in accordance
with the FBCA.
1.2 EFFECTIVE TIME OF THE MERGER. The Merger shall become effective at
such time (the "Effective Time") as a duly executed Certificate of Merger (the
"Certificate of Merger") is filed with the Secretary of State of the State of
Florida.
1.3 CLOSING. The closing (the "Closing") of the Merger will take place at
the New York offices of Blass & Driggs on a date and at the time to be agreed
upon by the parties (the "Closing Date") which is not later than the second
business day after satisfaction or waiver of the conditions set forth in this
Plan of Merger, but, subject to Section 8.4, in no event later than September
30, 1997, or such other date, time, and place as shall be agreed upon among the
parties hereto.
1.4 SURVIVING CORPORATION.
(A) CERTIFICATE OF INCORPORATION. The Certificate of Incorporation of
Merger Sub as in effect immediately prior to the Effective Time shall
be the Certificate of Incorporation of the Surviving Corporation,
until duly amended in accordance with the terms thereof and of the
FBCA.
(b) By-Laws. The By-laws of Merger Sub as in effect immediately prior to
the Effective Time shall be the By-laws of the Surviving Corporation
until duly amended in accordance with their terms and as provided by
the Certificate of Incorporation of the Surviving Corporation and the
FBCA.
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(C) DIRECTORS. The directors of Merger Sub at the Effective Time shall,
from and after the Effective Time, be the directors of the Surviving
Corporation until their respective successors have been duly elected
or appointed and qualified or until their earlier death, resignation,
or removal in accordance with the Surviving Corporation's Certificate
of Incorporation and By-laws.
(D) OFFICERS. The officers of Merger Sub at the Effective Time shall,
from and after the Effective Time, be the officers of the Surviving
Corporation until their successors have been duly elected or
appointed and qualified or until their earlier death, resignation, or
removal in accordance with the Surviving Corporation's Certificate of
Incorporation and By-laws.
(E) FURTHER ACTION. If at any time after the Effective Time, IHS shall
consider that any further deeds, assignments, conveyances,
agreements, documents, instruments, or assurances in law or any other
things are necessary or desirable to vest, perfect, confirm, or
record in the Surviving Corporation the title to any property,
rights, privileges, powers, and franchises of Merger Sub by reason
of, or as a result of, the merger, or otherwise to carry out the
provisions of this Plan of Merger, the officers of Merger Sub shall
execute and deliver, upon IHS's request, any instruments or
assurances, and do all other things necessary or proper to vest,
perfect, confirm, or record title to such property, rights,
privileges, powers, and franchises in the Surviving Corporation, and
otherwise to carry out the provisions of this Plan of Merger.
ARTICLE II: EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
2.1 SHARES OF THE CONSTITUENT AND THE SURVIVING CORPORATIONS. At the
Effective Time, by virtue of the Merger:
(A) Each share of capital stock of Merger Sub issued and outstanding
immediately prior to the Effective Time, without any action on the
part of the holder thereof, shall be converted into one fully paid
and nonassessable share of common stock, par value $.01 per share, of
the Surviving Corporation.
(B) Each share of RoTech Common Stock that is owned by RoTech or any
wholly owned subsidiary of RoTech shall automatically be canceled and
retired and shall cease to exist.
(C) Each other share of RoTech Common Stock issued and outstanding at the
Effective Time, without any further action by the holder thereof,
shall be converted into the right to receive, and become exchangeable
for a merger consideration (the "Merger Consideration") consisting of
.5806 (the "Exchange Ratio") validly issued, fully paid and
nonassessable shares of common stock, $.001 par value, of IHS (the
"IHS Common Stock," shares thereof, "IHS Shares" and the IHS Shares
to be issued pursuant hereto, the "IHS Merger Shares").
(D) If after the date hereof and prior to the Effective Time IHS shall
have declared a stock split (including a reverse split) of IHS Common
Stock or a dividend payable in IHS Common Stock, or any other
distribution of securities or dividend (in cash (other than ordinary
cash dividends) or otherwise) to holders of IHS Common Stock with
respect to their IHS Common Stock (including without limitation such
a distribution or dividend made in connection with a
recapitalization, reclassification, merger, consolidation,
reorganization or similar transaction) then the Merger Consideration
shall be appropriately adjusted to reflect such stock split, dividend
or other distribution of securities.
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2.2 EXCHANGE OF CERTIFICATES.
(A) EXCHANGE AGENT. Prior to the Effective Time, IHS shall designate a
bank or trust company or similar entity that is authorized to
exercise corporate trust or stock powers, and which is reasonably
acceptable to RoTech, to act as Exchange Agent with respect to the
Merger (the "Exchange Agent"). At the Effective Time, IHS will
deposit with the Exchange Agent, in trust for the holders of
certificates which immediately prior to the Effective Time
represented outstanding RoTech Shares (the "Certificates")
certificates representing the aggregate number of IHS Merger Shares,
into which the RoTech Shares were converted in the Merger in
accordance with Section 2.1(c) hereof (as adjusted in accordance with
subsection (c), below, with respect to dividends or distributions and
in accordance with subsection (e), below, with respect to fractional
shares).
(B) EXCHANGE PROCEDURES. As soon as reasonably practicable, but no later
than ten (10) business days after the Effective Time, IHS shall cause
the Exchange Agent to mail to each holder of record of a Certificate
whose shares were converted into the right to receive Merger
Consideration pursuant to Section 2.1(c), (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of
the Certificates to the Exchange Agent, and shall be in such form and
have such representations and warranties as to ownership and
authority, and shall contain such other provisions as IHS may
reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates
representing the IHS Merger Shares into which RoTech Shares
previously represented by such Certificates were converted in
accordance with Section 2.1 (as adjusted in respect of dividends or
distributions and fractional shares in accordance with subsections
(c) and (e) below). Upon surrender of any Certificate for
cancellation to the Exchange Agent, together with such letter of
transmittal, duly executed, and such other documents as may
reasonably be required by the Exchange Agent, the holder of such
Certificate shall be entitled to receive in exchange therefor a
certificate representing that number of whole IHS Merger Shares which
such holder has the right to receive pursuant to the provisions of
Section 2.1 (as adjusted pursuant to subsections (c) and (e) below),
and the Certificate so surrendered shall forthwith be canceled. In
the event of a transfer of ownership of RoTech Shares which is not
registered in the transfer records of RoTech, a certificate
representing the proper number of IHS Merger Shares required by
Section 2.1 (as adjusted pursuant to subsections (c) and (e) below)
may be issued and delivered to a person other than the person in
whose name the Certificate so surrendered is registered, if such
Certificate shall be properly endorsed or otherwise be in proper form
for transfer and the person requesting such payment shall pay any
transfer or other taxes required by reason of the issuance of shares
of IHS Common Stock to a person other than the registered holder of
such Certificate or shall establish to the satisfaction of IHS that
such tax has been paid or is not applicable. Until surrendered as
contemplated by this Section 2.2, each Certificate shall be deemed at
all times after the Effective Time to represent only the right to
receive the IHS Merger Shares into which RoTech Shares represented by
such Certificate were converted and cash in lieu of any fractional
shares of IHS Common Stock. No interest will be paid or will accrue
on any cash dividends or distributions payable with respect to IHS
Merger Shares. To the extent permitted by law, former stockholders of
record of RoTech shall be entitled to vote after the Effective Time
at any meeting of IHS stockholders the number of whole IHS Merger
Shares into which their respective RoTech Shares are converted,
regardless of whether such holders have exchanged their Certificates
in accordance with this Section 2.2.
(C) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or
other distributions with respect to IHS Common Stock with a record
date after the Effective Time shall be paid to the holder of any
unsurrendered Certificate with respect to the IHS Merger Shares
represented thereby and no cash payment shall be paid to any such
holder until the surrender of such Certificate in accordance with
this Article II. Subject to the effect of applicable laws, following
surrender of any such Certificate, there shall be paid to the holder
of the
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certificate representing whole shares of IHS Common Stock issued in
exchange therefor, without interest, in addition to the other amounts
payable under this Section 2.2, (i) at the time of such surrender,
the amount of any cash payable in lieu of a fractional share of IHS
Common Stock to which such holder is entitled pursuant to Section
2.3(e) and the amount of dividends or other distributions with a
record date after the Effective Time theretofore paid with respect to
such whole shares of IHS Common Stock and (ii) at the appropriate
payment date, the amount of dividends or other distributions with a
record date after the Effective Time but prior to such surrender and
with a payment date subsequent to such surrender payable with respect
to such whole shares of IHS Common Stock.
(D) NO FURTHER OWNERSHIP RIGHTS IN ROTECH SHARES. All IHS Merger Shares
issued upon the surrender for exchange of Certificates in accordance
with the terms of this Article II shall be deemed to have been issued
(and paid) in full satisfaction of all rights pertaining to RoTech
Shares theretofore represented by such Certificates. If, after the
Effective Time, Certificates are presented to the Surviving
Corporation or the Exchange Agent for any reason, they shall be
canceled and exchanged as provided in this Article II, except as
otherwise provided by applicable law.
(E) NO FRACTIONAL SHARES. No certificates or scrip representing
fractional shares of IHS Common Stock shall be issued upon the
surrender for exchange of Certificates, and such fractional share
interests will not entitle the owner thereof to vote or to any rights
of a stockholder of IHS. Notwithstanding any other provision of this
Agreement, each holder of RoTech Shares exchanged pursuant to the
Merger who would otherwise have been entitled to receive a fraction
of a share of IHS Common Stock (after taking into account all
Certificates delivered by such holder) shall receive, in lieu
thereof, cash (without interest) in an amount equal to such
fractional part of a share of IHS Common Stock multiplied by the
Average IHS Trading Price. "Average IHS Trading Price" means the
average closing New York Stock Exchange price of such stock for the
thirty (30) trading day period ending on the date which is two (2)
trading days prior to the Effective Time.
(F) TERMINATION OF EXCHANGE FUND. Any stock certificates that remain
undistributed to the holders of the Certificates for six (6) months
after the Effective Time shall be delivered by the Exchange Agent to
IHS, upon demand, and any holders of the Certificates who have not
theretofore complied with this Article II shall thereafter look only
to IHS for payment of Merger Consideration and any dividends or
distributions with respect to IHS Merger Shares.
(g) NO LIABILITY. None of IHS, Merger Sub, RoTech or the Exchange Agent
shall be liable to any person in respect of any IHS Merger Shares (or
dividends or distributions with respect thereto) delivered to a
public official pursuant to any applicable abandoned property,
escheat or similar law. If any Certificates shall not have been
surrendered prior to the end of the applicable period after the
Effective Time under escheat laws (or immediately prior to such
earlier date on which any IHS Merger Shares, or any cash in respect
of such Certificates would otherwise escheat to or become the
property of any governmental entity), any such shares or cash in
respect of such Certificates shall, to the extent permitted by
applicable law, become the property of the Surviving Corporation,
free and clear of all claims or interest of any person previously
entitled thereto.
2.3 CORPORATE ACTS OF MERGER SUB. All corporate acts, plans, policies,
approvals and authorizations of Merger Sub, its stockholders, its Board of
Directors, committees elected or appointed by the Board of Directors, and all
officers and agents, valid immediately prior to the Effective Time shall be
those of the Surviving Corporation and shall be as effective and binding thereon
as they were with respect to Merger Sub to the extent not inconsistent with
those of this Plan of Merger.
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ARTICLE III: REPRESENTATIONS AND WARRANTIES OF ROTECH
RoTech hereby represents and warrants to ihs as follows:
3.1 ORGANIZATION AND STANDING OF ROTECH. RoTech is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Florida. Copies of RoTech's Articles of Incorporation and By-Laws, and all
amendments thereof to date, have been delivered to IHS and are complete and
correct. RoTech has the power and authority to own the property and assets now
owned by it and to conduct the business presently being conducted by it.
3.2 ROTECH CAPITAL STOCK. RoTech's authorized capital consists of
50,000,000 shares of Common Stock, par value $.0002 per share, of which
26,152,744 shares are issued and outstanding as of April 30, 1997 and 41,771
shares are held in treasury. All of the issued and outstanding RoTech Shares are
duly and validly issued, fully paid and nonassessable. Except as set forth on
Exhibit 3.2 to the Disclosure Schedule delivered to IHS by RoTech at the time of
the execution and delivery of this Plan of Merger (the "RoTech Disclosure
Schedule"), there are no options, warrants, or similar rights granted by RoTech
or any other agreements to which RoTech is a party providing for the issuance or
sale by it of any additional securities. There is no liability for dividends
declared or accumulated but unpaid with respect to any RoTech Shares. Except as
set forth on Exhibit 3.2 to the RoTech Disclosure Schedule, and except as
permitted by this Plan of Merger, since the date of the "RoTech Balance Sheet"
(as defined in Section 3.9, below) except pursuant to options, warrants,
conversion rights or other contractual rights existing on such date, RoTech has
not issued any shares of its capital stock, effected any stock split or
otherwise changed its capitalization as it existed on such date.
3.3 SUBSIDIARIES. Except as set forth on Exhibit 3.3 to the RoTech
Disclosure Schedule, RoTech does not own stock in and does not control, directly
or indirectly, any other corporation, association or business organization.
Except as set forth on Exhibit 3.3 to the RoTech Disclosure Schedule, RoTech
does not own, directly or indirectly, an equity interest in, and RoTech does not
control, directly or indirectly, any other operating joint venture, partnership
or limited liability company. Except as set forth on Exhibit 3.3 to the RoTech
Disclosure Schedule, there are no outstanding options, warrants or other
agreements pursuant to which any person or entity has a right to acquire or be
issued any capital stock or other interest in any RoTech Subsidiary. Exhibit 3.3
to the RoTech Disclosure Schedule accurately sets forth RoTech's percentage
ownership interest in each such entity. Except as set forth on Exhibit 3.3 to
the RoTech Disclosure Schedule, each entity listed on Exhibit 3.3 to the RoTech
Disclosure Schedule (each a "RoTech Subsidiary" and collectively, the "RoTech
Subsidiaries") is a corporation, partnership, limited partnership or limited
liability company duly organized, validly existing and in good standing under
the laws of its jurisdiction of incorporation. Except as set forth on Exhibit
3.3 to the RoTech Disclosure Schedule, each RoTech Subsidiary has all necessary
corporate, partnership, limited partnership or limited liability company, as the
case may be, power to own its properties and assets and to carry on its business
as presently conducted. Except as set forth on Exhibit 3.3 to the RoTech
Disclosure Schedule, RoTech is not subject to any contractual obligation,
contingent or otherwise, to purchase, and there are no rights to acquire, any
additional interest in any such partnership or joint venture or any preemptive
rights or rights of first refusal with respect to any outstanding interest in
any such partnership or joint venture.
3.4 FOREIGN QUALIFICATIONS. Except as set forth on Exhibit 3.4 to the
RoTech Disclosure Schedule, each of RoTech and the RoTech Subsidiaries is
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction where the nature or character of the property owned, leased or
operated by it or the nature of the business transacted by it makes such
qualification necessary.
3.5 POWER AND AUTHORITY. Subject to the satisfaction of the conditions
precedent set forth herein, RoTech has the corporate power to execute, deliver
and perform this Plan of Merger and all agreements and other documents executed
and delivered or to be executed and delivered by it pursuant to this Plan of
Merger (the "Transaction Documents"), and subject to the satisfaction of the
conditions precedent set forth herein has taken all action required by its
Certificate of Incorporation, by-laws or otherwise, to authorize the execution,
delivery and performance of this Plan of Merger and such related documents.
Except as set forth on Exhibit 3.5 to the RoTech Disclosure Schedule, the
execution and
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delivery of this Plan of Merger does not and, subject to the receipt of required
stockholder approval the consummation of the Merger and the consummation of the
transaction contemplated hereby will not, violate any provisions of the
Certificate of Incorporation or By-laws of RoTech or any provisions of, or
result in the acceleration of any obligation under, any mortgage, lien, lease,
agreement, instrument order arbitration award, judgment or decree, to which
RoTech or any RoTech Subsidiary is a party, or by which any of them is bound, or
violate any restrictions of any kind to which any of them are subject. The
execution and delivery of this Plan of Merger has been approved by the Board of
Directors of RoTech.
3.6 CONSENTS. Except as set forth on Exhibit 3.6 to the RoTech Disclosure
Schedule, no authorization, consent, approval, license, exemption by, filing or
registration with any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, is or will be necessary
in connection with the execution, delivery and performance of this Agreement or
any of the Transaction Documents by RoTech.
3.7 ASSETS. As of the Closing, the consolidated assets of RoTech will
include all of the tangible and intangible assets of RoTech as presently
constituted, including, without limitation, cash and accounts receivable, and
will be sufficient to carry on the business of RoTech and the RoTech
Subsidiaries in the ordinary course as it is presently conducted; provided,
however, that such assets shall not include inventory, supplies and other assets
disposed of in the ordinary course of business, consistent with the prior
practice of RoTech's business.
3.8 TRADEMARKS. Exhibit 3.8 to the RoTech Disclosure Schedule sets forth
a complete and accurate list of all trademarks, service marks, or applications
for any of the same, copyrights, and other items of intellectual property that
are owned, possessed, or used by and which are material to RoTech or any of the
RoTech Subsidiaries. There are no claims or proceedings pending or, to the
knowledge of RoTech, overtly threatened against RoTech or any of the RoTech
Subsidiaries asserting that the use of any of the aforementioned properties or
rights infringes the rights of any other person, and, to the knowledge of
RoTech, RoTech is not infringing in any material respect on the intellectual
property rights of any other person.
3.9 REPORTS AND FINANCIAL STATEMENTS.
(A) RoTech has timely filed all reports required to be filed with the
Securities and Exchange Commission (the "SEC") pursuant to and in
accordance with the Securities Exchange Act of 1934, as amended
(together with the rules and regulations promulgated thereunder, the
"Exchange Act") and the applicable rules of the NASD, since January
1, 1995 (collectively, as heretofore amended, the "RoTech SEC
Reports"), and has previously furnished to IHS true and complete
copies of all such RoTech SEC Reports. None of such reports, as of
their respective dates, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading. Each of the
balance sheets (including the related notes) included in the RoTech
SEC Reports presents fairly in all material respects the consolidated
financial position of RoTech and the RoTech Subsidiaries as of the
respective dates thereof, and the other related consolidated
financial statements (including the related notes) included therein
present fairly in all material respects the results of operations and
cash flows of RoTech and the RoTech Subsidiaries for the respective
periods or as of the respective dates set forth therein, all in
conformity with generally accepted accounting principles consistently
applied ("GAAP") except as otherwise noted therein.
(B) Each of the balance sheets included in the "RoTech Quarterly
Financial Statements" (as defined in Section 7.9) presents or will
present fairly in all material respects, as the case may be, the
consolidated financial position of RoTech and the RoTech Subsidiaries
as of the respective dates thereof, and the other related
consolidated financial statements included therein present or will
present fairly in all material respects, as the case may be, the
consolidated results of operations and cash flows of RoTech and the
RoTech Subsidiaries,
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taken as a whole, for the periods reflected therein. The balance
sheets and statements of income included in the RoTech Quarterly
Financial Statements have been prepared in accordance with GAAP.
(C) Except as set forth on Exhibit 3.9(c) to the RoTech Disclosure
Schedule, there are no liabilities of RoTech and the RoTech
Subsidiaries on a consolidated basis which exceed $250,000 in any one
case or $500,000 in the aggregate and which are not reserved against
or disclosed in the balance sheet dated as of April 30, 1997,
included in the RoTech SEC Reports (the "RoTech Balance Sheet"), as
of the date thereof whether or not they are required to be so
reserved or disclosed under GAAP.
(D) Except as disclosed on Exhibit 3.9(d) to the RoTech Disclosure
Schedule and in the notes to the consolidated financial statements
and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the RoTech SEC Reports, the
consolidated financial statements included in the RoTech SEC Reports
do not reflect any non-recurring or extraordinary income or expense
reduction in excess of $500,000 in the aggregate not identified
therein.
3.10 ACCOUNTS RECEIVABLE. The accounts receivable set forth on the RoTech
Balance Sheet, and all accounts receivable arising since the date thereof, in
respect of the business of RoTech and the RoTech Subsidiaries represent bona
fide claims of RoTech and the RoTech Subsidiaries against debtors for sales,
services performed, or other charges arising on or before the date hereof, and
all the goods delivered and services performed which gave rise to said accounts
were delivered or performed in material compliance with the applicable orders,
contracts, or customer requirements. Said accounts receivable are subject to no
material defenses, counterclaims, or rights of set-off and are fully collectible
in the ordinary course of business, except in the aggregate to the extent of the
appropriate reserves for doubtful accounts receivable as set forth on the RoTech
Balance Sheet and, in the case of accounts receivable arising since the date
thereof, in the aggregate to the extent of a reasonable reserve rate for
doubtful accounts receivable which is not greater than the rate reflected by the
reserve for doubtful accounts on the RoTech Balance Sheet.
3.11 EMPLOYEE BENEFIT PLANS; EMPLOYMENT MATTERS.
(A) Except as set forth on Exhibit 3.11 to the RoTech Disclosure
Schedule, neither RoTech nor any RoTech Subsidiary has established or
maintains or is obligated to make contributions to or under or
otherwise participate in (i) any bonus or other type of incentive
compensation plan, program, or arrangement (whether or not set forth
in a written document), (ii) any pension, profit-sharing, retirement,
or other plan, program, or arrangement, or (iii) stock ownership,
stock purchase, phantom stock, retirement, vacation, severance,
disability, death benefit, hospitalization, or any other employee
benefit plan, fund, or program, including, but not limited to, those
described in Section 3(3) of ERISA. All such plans listed on Exhibit
3.11 (individually, a "RoTech Plan" and collectively, the "RoTech
Plans") have been operated and administered in all material respects
in accordance with, as applicable, ERISA, the Age Discrimination in
Employment Act of 1967, as amended, and the related rules and
regulations adopted by those federal agencies responsible for the
administration of such laws. No act or failure to act by RoTech or
any RoTech Subsidiary has resulted in a "prohibited transaction" (as
defined in ERISA) with respect to the RoTech Plans that is not
subject to a statutory or regulatory exception. No "reportable event"
(as defined in ERISA, but excluding any event for which notice is
waived under the ERISA regulations) has occurred with respect to any
of the RoTech Plans which is subject to Title IV of ERISA. No RoTech
Plan has any accumulated funding deficiency or liability to the
Pension Benefit Guaranty Corporation. Neither RoTech nor any of the
RoTech Subsidiaries has previously made, is currently making, or is
obligated in any way to make, any contributions to any multi-employer
plan within the meaning of the Multi-Employer Pension Plan Amendments
Act of 1980.
(B) Except as set forth on Exhibit 3.11 to the RoTech Disclosure
Schedule, neither RoTech nor any RoTech Subsidiary is a party to any
oral or written (i) employment or consulting
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agreement providing for the payment of compensation in excess of
$150,000 per year, (ii) union, guild, or collective bargaining
agreement which agreement covers employees (nor is it aware of any
union organizing activity currently being conducted in respect to any
of its employees), (iii) agreement with any executive officer or
other key employee the benefits of which are contingent, or the terms
of which are materially altered or permit termination, upon the
occurrence of a transaction of the nature contemplated by this Plan
of Merger, or (iv) agreement or plan, including any stock option
plan, stock appreciation rights plan, restricted stock plan, or stock
purchase plan, any of the benefits of which will be increased, or the
vesting of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Plan of Merger or the value of any
of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Plan of Merger.
(C) During the two years prior to the Closing Date, there has been no
material adverse change in the relationship between RoTech and its
employees nor any strike or material labor disturbance by such
employees affecting RoTech's business and, to the knowledge of
RoTech, there is no indication that such a change, strike, or labor
disturbance is likely.
3.12 MEDICARE AND MEDICAID PROGRAMS. Except as set forth on Exhibit 3.12
to the RoTech Disclosure Schedule, RoTech and the RoTech Subsidiaries, to the
extent necessary to conduct their business in a manner consistent with past
practice, are qualified for participation in Medicare and Medicaid programs.
Except as set forth on Exhibit 3.12 to the RoTech Disclosure Schedules, RoTech
and the RoTech Subsidiaries have no liability with respect to recoupment from
the Medicare or Medicaid programs or any other third party reimbursement source
that would exceed the reserves or allowances made therefor as set forth on the
RoTech Balance Sheet, and RoTech has no knowledge for the assertion of any such
recoupment claim that arose out of any transactions completed prior to the date
hereof, and no Medicare or Medicaid investigation, survey, or audit is pending
or, to the knowledge of RoTech, threatened with respect to the operation of the
business of RoTech or any of the RoTech Subsidiaries, except to the extent that
such investigation, survey, or audit is routine and is not reasonably likely to
have a material adverse effect on RoTech and the RoTech Subsidiaries taken as a
whole. None of RoTech, the RoTech Subsidiaries or, to the knowledge of RoTech,
their licensed employees has been convicted of, or pled guilty or nolo
contendere to any criminal offense related to any Medicare or Medicaid program
while such person was an employee of RoTech or a RoTech Subsidiary or after the
termination of such person's employment by RoTech or such subsidiary for acts
committed while employed by RoTech or a RoTech Subsidiary, and, to the knowledge
of RoTech, none of such employees has committed any offense which may serve as
the basis for suspension, restriction, or exclusion of RoTech or any RoTech
Subsidiary from the Medicare and Medicaid programs. Since January 1, 1996,
neither RoTech nor any RoTech Subsidiary has received any notice from the
Medicare or Medicaid programs or any other third party reimbursement source to
the effect that the basis on which it receives reimbursement for its services is
to be changed.
3.13 CONTRACTS, ETC.
(A) All contracts, leases, agreements, and arrangements (other than
employment or consulting agreements) to which RoTech or any RoTech
Subsidiary is a party which impose on RoTech or any RoTech
Subsidiary, or confer on RoTech or any RoTech Subsidiary benefits, in
any one instance, in excess of $250,000 per year, are legally valid,
binding, and enforceable in accordance with their terms and in full
force and effect, and RoTech has provided IHS with the opportunity to
review all such documents. RoTech and the RoTech Subsidiaries and, to
the knowledge of RoTech, all other parties to such contracts, leases,
agreements and arrangements have complied with the provisions of such
contracts, leases, agreements, and arrangements, and, RoTech and the
RoTech Subsidiaries are not and, to the knowledge of RoTech, no other
party is, in default thereunder, and no event has occurred which, but
for the passage of time or the giving of notice or both, would
constitute a default thereunder. Except as set forth on Exhibit
3.13(a) to the RoTech Disclosure Schedule, none of such contracts,
leases, agreements, or arrangements will, by its terms, terminate as
a result of the transactions contemplated hereby or require any
consent from any obligor thereto in order to remain in full force and
effect immediately after the Effective Time.
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(B) Set forth on Exhibit 3.13(b) to the RoTech Disclosure Schedule is a
list of (i) all contracts to which RoTech or a RoTech Subsidiary is a
party which cannot be terminated or do not terminate within 12 months
or less without cause or which obligate RoTech for amounts in excess
of $250,000, (ii) all contracts pursuant to which RoTech or any of
the RoTech Subsidiaries receives reimbursement for its services in
excess of $250,000 per year, (iii) all agreements or other
arrangements pursuant to which RoTech or any RoTech Subsidiary is or
may become obligated to pay any earn-out or other contingent
consideration to any third party in connection with the acquisition
of any stock, assets, or business, and (iv) all contracts pursuant to
which RoTech or any of the RoTech Subsidiaries receives reimbursement
for its services which individually or in the aggregate provide for a
reduction in the reimbursement payable under such contracts in excess
of $500,000.
(C) Except as set forth on Exhibit 3.13(c) to the RoTech Disclosure
Schedule, neither RoTech nor any RoTech Subsidiary is party to any
agreement for the sale of any of their respective assets, properties,
or rights (including by means of any sale of their capital stock,
merger, or otherwise) in excess of $100,000, except for sales of
inventory or supplies disposed of in the ordinary course of business,
or has granted any right of first refusal or similar right in favor
of any third party with respect to any portion of its properties or
assets in excess of $100,000 (excluding Permitted Liens described in
Section 3.16) or entered into any non-competition agreement or
similar agreement restricting its ability to engage in any business
in any location.
(D) True and complete copies of the contracts listed on Exhibits 3.13(a)
- 3.13(c) to the RoTech Disclosure Schedule have been made available
to IHS for inspection in connection with this Agreement.
3.14 SUBSEQUENT EVENTS. Except as set forth on Exhibit 3.14 to the
RoTech Disclosure Schedule or as contemplated by this Plan of Merger, RoTech
has not, since the date of the RoTech Balance Sheet:
(A) Incurred any material adverse change;
(B) Discharged or satisfied any material lien or encumbrance, or paid or
satisfied any material obligation or liability (absolute, accrued,
contingent, or otherwise) other than (i) liabilities shown or
reflected on the RoTech Balance Sheet or (ii) liabilities incurred
since the date of the RoTech Balance Sheet in the ordinary course of
business;
(C) Increased or established any reserve for taxes or any other liability
on its books or otherwise provided therefor, except as may have been
required due to income from operations of RoTech since the date of
the RoTech Balance Sheet in the ordinary course of business;
(D) Mortgaged, pledged, or subjected to any lien, charge or other
encumbrance any of the assets, tangible or intangible, other than in
the ordinary course of business;
(E) Acquired any assets, securities, or businesses in excess of
$5,000,000 in any one transaction or sold or transferred any material
assets, canceled any material debts or claims or waived any material
rights;
(F) Granted any general or uniform increase in the rates of pay of
employees or granted any material increase in salary payable or to
become payable by RoTech to any officer or employee, consultant, or
agent (except as provided by contract or bonus plan), or by means of
any bonus or pension plan, contracts, or other commitment, increased
in a material respect the compensation of any Director, officer,
employee, consultant or agent, provided that the foregoing shall not
apply to the payment of bonuses to non-officer employees of RoTech in
the ordinary course of business;
(G) Except for this Plan of Merger and any other agreement executed and
delivered pursuant to this Plan of Merger, entered into any material
transaction other than in the ordinary course of business;
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(H) Issued any stock, bonds, or other securities or any options or rights
to purchase any of its securities other than in connection with
existing agreements; provided that, prior to the Effective Time, (i)
RoTech shall be permitted to issue additional options to employees
for the purchase of up to 100,000 shares at an exercise price of not
less than the market value of such stock as of the respective dates
on which such options are granted, (ii) RoTech shall be permitted to
issue an aggregate of up to 750,000 shares of its capital stock in
connection with acquisitions of assets, securities, and businesses,
and (iii) RoTech shall be permitted to issue up to 20,000 additional
shares of its capital stock in the aggregate for any other purpose;
(I) Suffered the loss of, terminated or modified any contract to which
RoTech or a RoTech Subsidiary is party involving more than $250,000
of annual revenue or expense other than in accordance with their
terms;
(J) Declared, set aside, or paid any dividend or made any other
distribution or payment with respect to any shares of its capital
stock or, directly or indirectly, redeemed, repurchased, or otherwise
acquired any shares of its capital stock or made any commitment for
any such action;
(K) Suffered any material casualty or loss not covered by insurance;
(L) Made any material change in applicable accounting principles;
(M) Closed any location from which it operated its business, except in
the ordinary course of business; or
(N) Entered into any agreement or commitment to do any of the foregoing.
3.15 LICENSES; PERMITS; CERTIFICATES OF NEED. RoTech and each RoTech
Subsidiary, as applicable, hold all licenses, certificates of need, and other
governmental or other regulatory permits, authorizations or approvals required
for the operation of RoTech's business ("Licenses"). Exhibit 3.15 to the RoTech
Disclosure Schedule sets forth a description of all Licenses that are material
to the operation of the business of RoTech or any of the RoTech Subsidiaries.
RoTech and the RoTech Subsidiaries own, possess or otherwise have the exclusive
legal right to use the Licenses, free and clear of all liens, pledges, claims or
other encumbrances of any nature whatsoever. RoTech and the RoTech Subsidiaries
are not in material default under any such License, and neither RoTech nor any
RoTech Subsidiary has received any notice of any material default or any other
material claim or proceeding relating to any such License. Each License is in
full force and effect, and neither RoTech nor any of the RoTech Subsidiaries has
received written notice of any proceeding to terminate or suspend any License or
of any condition or event which, if uncured, would result in the termination or
suspension of any License. Any and all past litigation concerning any Licenses,
and all claims and causes of action raised therein, have been finally
adjudicated, and in the case of such litigation finally adjudicated since the
date of the RoTech Balance Sheet, such adjudication has not had a material
adverse effect on RoTech or any RoTech Subsidiary. Except as set forth on
Exhibit 3.15 to the RoTech Disclosure Schedule, no License has been revoked,
conditioned (except as may be customary) or restricted, and no action
(equitable, legal, or administrative), arbitration or other process is pending,
or to the best knowledge of RoTech, threatened, which in any way challenges the
validity of, or seeks to revoke, condition, or restrict any License.
3.16 TITLE, CONDITION OF PERSONAL PROPERTY.
(A) RoTech and the RoTech Subsidiaries have good and marketable title to,
or valid and subsisting leasehold interests in, all of the personal
property located at their places of business or used in connection
with the operation of their businesses, subject to no mortgage,
security interest, pledge, lien, claim, encumbrance or charge, or
restraint on transfer whatsoever other than Permitted Liens (as
defined below). No other person has any right to the use or
possession of any of such property which is owned and, except for
those which evidence Permitted Liens, RoTech has not signed any
financing statement or any security agreement authorizing any secured
party thereunder to file any such financing statement. All of such
personal property comprising equipment, improvements, furniture and
other tangible personal property in use by RoTech, whether owned or
leased, is in good operat-
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ing condition and repair, subject to normal wear and tear, and is
sufficient to enable RoTech to operate its business in a manner
consistent with its operation during the immediately preceding twelve
(12) months.
(B) Except as set forth on Exhibit 3.16(b) to the RoTech Disclosure
Schedule, no tangible personal property used by RoTech or any of the
RoTech Subsidiaries in connection with the operation of its business
is subject to a lease, conditional sale, security interest or similar
arrangement which requires annual payments in excess of $100,000.
RoTech has delivered to IHS a complete and correct copy of each of
the leases and other agreements listed on Exhibit 3.16(b) to the
RoTech Disclosure Schedule. All of said personal property leases are
valid, binding and enforceable in accordance with their respective
terms and are in full force and effect. RoTech is not in default
(defined as the occurrence of an event under the applicable lease
which, when added to defaults under any other such lease, would cause
RoTech or any RoTech Subsidiary to suffer liability in an amount in
excess of $500,000 on an aggregate basis) under any of such leases
and there has not been asserted, either by or against RoTech under
any of such leases, any written notice of default, set-off, or claim
of default. To the best knowledge of RoTech, the parties to such
leases other than RoTech are not in default of their respective
obligations under any of such leases, and there has not occurred any
event which with the passage of time or giving of notice (or both)
would constitute such a default or breach under any of such leases.
(C) "Permitted Liens" shall mean:
(I) carriers', warehouseman's, mechanics, materialmen's, repairmen's
or other like liens arising in the ordinary course of business
which are (i) not overdue for a period of more than 30 days or
(ii) which are being contested in good faith and by appropriate
proceedings, provided that if such contest shall continue for
more than 30 days, the amount thereof shall be bonded or
properly reserved against at the end of such 30-day period;
(II) deposits to secure the performance of bids, trade contracts
(other than for borrowed money), leases, statutory obligations,
surety and appeal bonds, performance bonds and other obligations
of like nature incurred in the ordinary course of business;
(III) pledges or deposits in connection with worker's compensation,
unemployment insurance, and other social security legislation;
(IV) liens securing obligations of less than $100,000 and which in
the aggregate are not material and which do not materially
affect the continued used of the property to which such liens
attach; and
(V) liens described on Exhibit 3.16(c) to the RoTech Disclosure
Schedule.
3.17 TITLE, CONDITION OF THE ROTECH REAL PROPERTY.
(A) Exhibit 3.17 to the RoTech Disclosure Schedule identifies all real
property owned or leased by RoTech or any of the RoTech Subsidiaries
(the "RoTech Real Property"). RoTech and the RoTech Subsidiaries, as
the case may be, have good and marketable title to the RoTech Real
Property, free and clear of all liens, claims, charges, easements,
encumbrances, and title exceptions of any kind whatsoever except for
Permitted Liens.
(B) Except as set forth on Exhibit 3.17, there are no leases or other
agreements granting to any third party the right to use or occupy any
of the RoTech Real Property and no person has any ownership interest
or option or right of first refusal (which has not been waived) to
acquire any ownership interest in any of the RoTech Real Property or
any building or improvements thereon;
(C) No written notices of violation have been issued by any governmental
authority and remain in effect which prohibit the existing use of the
structures presently comprising the RoTech Real Property;
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(D) To the knowledge of RoTech, there is no plan, study, or effort by any
governmental authority or agency which would in any material way
affect the present use or zoning of any of the RoTech Real Property
or any part thereof. To the knowledge of RoTech, there are no
assessments or proposed assessments and there is no existing,
proposed or contemplated plan to widen, modify, or realign any street
or highway or any existing, proposed, or contemplated eminent domain
proceedings that would in any material way affect any of the RoTech
Real Property;
(E) The buildings and other improvements comprising the RoTech Real
Property and all of their systems, including without limitation, the
heating, ventilating, and air conditioning systems, and the plumbing,
electrical, mechanical, and drainage systems, and roofs are in good
operating condition, repair, and working order, normal wear and tear
excepted;
(F) No assessment for public improvements has been made against any of
the RoTech Real Property that remains unpaid;
(G) All public utilities required for the operation of any parcel of
RoTech Real Property either enter the property through adjoining
public streets, or if they pass through adjoining private land do so
in accordance with valid easements. Each parcel of RoTech Real
Property is adjacent to or has access to an abutting street;
(H) There are no easements traversing or contiguous to any of the RoTech
Real Property which interfere in any material respect with the use
and operation of the RoTech Real Property; and
(I) Neither RoTech nor any of the RoTech Subsidiaries has received any
written notice of material noncompliance from any governmental
authority regarding any of the improvements constructed at the RoTech
Real Property or the use or occupancy thereof which remains uncured.
3.18 LEGAL PROCEEDINGS. Other than as set forth on Exhibit 3.18 to the
RoTech Disclosure Schedule, there are no claims, actions, suits or proceedings
or arbitrations, either administrative or judicial, pending, or, to the
knowledge of RoTech, overtly threatened against or affecting RoTech or any of
the RoTech Subsidiaries, or RoTech's ability to consummate the transactions
contemplated herein, at law or in equity or otherwise, before or by any court or
governmental agency or body, domestic or foreign, or before an arbitrator of any
kind.
3.19 INSURANCE AND SURETY AGREEMENTS. Exhibit 3.19 to the RoTech
Disclosure Schedule contains a true and correct list of: (a) all material
policies of fire, liability and other forms of insurance held or owned by RoTech
(including but not limited to medical malpractice insurance, and any state
sponsored plan or program for worker's compensation); and (b) all material
bonds, indemnity agreements and other agreements of suretyship made for or held
by RoTech, including a brief description of the character of the bond or
agreement and the name of the surety or indemnifying party. Exhibit 3.19 sets
forth for each such insurance policy the name of the insurer, the amount of
coverage, the type of insurance, the policy number, the annual premium and a
brief description of the nature of insurance included under each such policy and
of any claims made thereunder during the past two years. Such policies are owned
by and payable solely to RoTech or a RoTech Subsidiary, and said policies or
renewals or replacements thereof will be outstanding and duly in force at the
Closing Date. All insurance policies listed on Exhibit 3.19 are in full force
and effect, all premiums due on or before the Closing Date have been or will be
paid, financed or accrued on or before the Closing Date, RoTech has not been
advised by any of its insurance carriers of an intention to terminate or modify
any such policies other than under circumstances where RoTech has received a
commitment for a replacement policy, nor has RoTech failed to comply with any of
the material conditions contained in any such policies.
3.20 COMPLIANCE WITH LAWS IN GENERAL. RoTech is in material compliance
with all Governmental Requirements (as defined herein). Except for notices of
non-compliance as to which RoTech has taken corrective action acceptable to the
applicable governmental agency, and as set forth in Exhibit 3.20 to the RoTech
Disclosure Schedule, neither RoTech nor any of the RoTech Subsidiaries has,
within the period of twelve months preceding the date of this Agreement,
received any written notice that
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RoTech or such subsidiary fails to comply in any material respect with any
applicable Federal, state, local or other governmental laws or ordinances, or
any applicable order, rule or regulation of any Federal, state, local or other
governmental agency having jurisdiction over their businesses ("Governmental
Requirements"). RoTech shall report to IHS, within ten (10) business days after
receipt thereof, any written notices that RoTech or any RoTech Subsidiary is not
in compliance in any material respect with any of the foregoing.
3.21 COMMISSIONS AND FEES. Except for fees payable to Smith Barney Inc.
("Smith Barney") pursuant to the engagement letter dated January 30, 1997, there
are no valid claims for brokerage commissions or finder's or similar fees in
connection with the transactions contemplated by this Plan of Merger which may
be now or hereafter asserted against IHS, RoTech or any RoTech Subsidiary
resulting from any action taken by RoTech or its officers, directors, or agents,
or any of them.
3.22 OPINION OF FINANCIAL ADVISOR. The Board of Directors of RoTech has
received an opinion of Smith Barney dated the date of this Agreement, to the
effect that, as of such date, the Exchange Ratio is fair, from a financial point
of view, to the holders of RoTech Common Stock (the "Smith Barney Opinion").
3.23 VOTE REQUIRED. The affirmative vote of the holders of a majority of
the outstanding RoTech Shares entitled to vote thereon is the only vote of the
holders of any class or series of RoTech capital stock or other securities
(including debt securities) necessary to approve this Plan of Merger, the Merger
and the transactions contemplated hereby.
3.24 INVENTORY. RoTech has recorded its inventory on the RoTech Balance
Sheet in accordance with generally accepted accounting principles, consistently
applied, subject to normal year-end audit adjustments. The inventory reflected
in the RoTech Balance Sheet and not disposed of since such date is of good and
merchantable quality, of a quantity and quality saleable in the ordinary course
of business of RoTech and the RoTech Subsidiaries in accordance with past
practices, and is adequate as of the date hereof for the business of RoTech and
the RoTech Subsidiaries as conducted as of such date.
3.25 EQUIPMENT. Equipment used by RoTech and the RoTech Subsidiaries in
the conduct of their business is, as of the date hereof, taken as a whole in
good operating condition (reasonable wear and tear excepted) and is sufficient
to carry on the business of RoTech and the RoTech Subsidiaries in the ordinary
course as it is presently conducted.
3.26 TAX RETURNS.
(A) Except as set forth on Exhibit 3.26 to the RoTech Disclosure
Schedule, (i) all Tax (as defined below) returns, statements, reports
and forms or extensions with respect thereto required to be filed
with any Federal, state, local or other governmental department or
court or other authority having jurisdiction over it ("Governmental
Authority") on or before the Closing Date by or on behalf of RoTech
or any RoTech Subsidiary (collectively, the "Tax Returns"), have been
or will be timely filed on or before the Closing Date in accordance
in all material respects with all applicable Governmental
Requirements; and (ii) RoTech and the RoTech Subsidiaries have timely
paid all Taxes payable by them, except for Tax obligations which in
any one instance do not exceed $50,000 and which do not exceed
$250,000 in the aggregate.
(B) For purposes of this Agreement, "Tax" means any net income, gross
income, sales, use, franchise, personal, or real property tax.
3.27 ENCUMBRANCES CREATED BY THIS AGREEMENT. Execution and delivery of
this Agreement, or any of RoTech's Transaction Documents, does not, and the
consummation of the transactions contemplated hereby or thereby will not, create
any liens or other encumbrances on any assets of RoTech or any of the RoTech
Subsidiaries in favor of third parties.
3.28 NO UNTRUE STATEMENT. None of the representations and warranties made
pursuant to this Agreement contains any untrue statement of material fact or
omits to state a material fact necessary, in light of the circumstance under
which it was made, in order to make any such representation not misleading in
any material respect.
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3.29 LEASEHOLD INTERESTS. Exhibit 3.29 to the RoTech Disclosure Schedule
sets forth a complete and correct list of all leases pursuant to which RoTech or
any of the RoTech Subsidiaries leases real property. Except as set forth on
Schedule 3.29, the change of control of RoTech or any of the RoTech Subsidiaries
as a result of the Merger will not be deemed an assignment or other transfer of
the tenant's interest under any such lease which would require consent of the
landlord thereunder. Each of RoTech and the RoTech Subsidiaries has valid
leasehold interests in all such real property free and clear of all liens,
claims, charges and encumbrances of any kind whatsoever, except for Permitted
Liens. RoTech has provided to IHS access to complete and correct copies of the
leases identified in Exhibit 3.29.
3.30 BINDING EFFECT. This Agreement and all Transaction Documents
executed by RoTech constitute the legal, valid and binding obligations of such
party, enforceable against RoTech in accordance with their respective terms,
subject to applicable bankruptcy and insolvency laws and laws affecting
creditors' rights and the enforcement thereof generally.
3.31 QUESTIONABLE PAYMENTS. RoTech and the RoTech Subsidiaries have not
made, and no employee, agent, or other representative of any of them, and no
affiliate of RoTech, (a) has used any corporate funds of RoTech to make any
illegal or unlawful payment to any officer, employee, representative, agent of
any government, or to any political party or official thereof, including,
without limitation, any of same that would violate the Foreign Corrupt Practices
Act of 1977, as amended; or (b) has made or received any illegal payment, bribe,
kickback, political contribution or other similar questionable payment for any
referrals or recommendations or otherwise in connection with the operation of
RoTech's business, and no director, officer, or controlling person of RoTech has
done any of the foregoing, whether or not in connection with the operation of
RoTech's business.
3.32 COMPLIANCE WITH HEALTHCARE LAWS. Except as set forth on Exhibit 3.32
to the RoTech Disclosure Schedule, RoTech, the RoTech Subsidiaries and each of
their licensed employees is in compliance with all applicable statutes, laws,
ordinances, rules, orders, and regulations of any governmental authority with
respect to regulatory matters primarily relating to patient healthcare
(including without limitation Section 1128B(b) of the Social Security Act, as
amended, 42 U.S.C. Section WP-7(b) (Criminal Penalties Involving Medicare or
State Health Care Programs) commonly referred to as the "Federal Anti-Kickback
Statute" and The Social Security Act, as amended, Section 1877, 42 U.S.C.
Section WP (Prohibition Against Certain Referrals), commonly referred to as
"Stark Statute") (collectively, "Healthcare Laws"). RoTech and the RoTech
Subsidiaries have maintained all records required to be maintained by the Food
and Drug Administration, Drug Enforcement Agency and State Boards of Pharmacy
and the Medicare and Medicaid programs as required by applicable Healthcare
Laws, and, to the knowledge of RoTech, there are no presently existing
circumstances which would result or likely would result in violations of
Healthcare laws which could reasonably be expected to have a material adverse
effect on RoTech and the RoTech Subsidiaries taken as a whole. Exhibit 3.32 to
the RoTech Disclosure Schedule includes a copy of the IHS healthcare law
questionnaire which has been accurately completed by RoTech and does not contain
any material misstatement of any fact and does not omit any fact that would have
to be stated in order not to render any response to such questionnaire
materially misleading.
3.33 ENVIRONMENTAL MATTERS. RoTech and the RoTech Subsidiaries are in
compliance in all material respects with all environmental laws applicable to
them and their business and assets, including, without limitation, the Resource
Conversation and Recovery Act of 1976, the Comprehensive Environmental Response
Compensation and Liability Act of 1980, the Federal Water Pollution Control Act
(as amended by the Clean Water Act), the Federal Toxic Substances Act and the
Clean Air Act, each as amended to date.
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ARTICLE IV: REPRESENTATIONS AND WARRANTIES OF MERGER SUB
Merger Sub and IHS, jointly and severally, hereby represent and warrant
to RoTech as follows:
4.1 ORGANIZATION, EXISTENCE, AND CAPITAL STOCK. Merger Sub is a
corporation duly organized and validly existing and is in good standing under
the laws of the State of Florida. Merger Sub's authorized capital consists of
1,000 shares of Common Stock, par value $.01 per share, all of which shares are
issued and registered in the name of IHS.
4.2 POWER AND AUTHORITY. Merger Sub has the corporate power to execute,
deliver, and perform this Plan of Merger and all agreements and other documents
executed and delivered, or to be executed and delivered, by it pursuant to this
Plan of Merger, and, subject to the satisfaction of the conditions precedent set
forth herein, has taken all actions required by law, its Certificate of
Incorporation, its By-laws or otherwise, to authorize the execution and delivery
of this Plan of Merger and such related documents. Execution and delivery of
this Plan of Merger does not and, subject to the receipt of required regulatory
approvals and any other required third-party consents or approvals, the
consummation of the merger contemplated hereby will not, violate any provisions
of the Certificate of Incorporation or By-laws of Merger Sub, or any agreement,
instrument, order, judgment or decree to which Merger Sub is a party or by which
it is bound, violate any restrictions of any kind to which Merger Sub is
subject, or result in the creation of any lien, charge or encumbrance upon any
of the property or assets of Merger Sub.
4.3 COMMISSIONS AND FEES. There are no claims for brokerage commissions,
investment bankers' fees or finder's fees in connection with the transaction
contemplated by this Plan of Merger resulting from any action taken by Merger
Sub or any of its officers, Directors, or agents.
4.4 NO SUBSIDIARIES. Merger Sub does not own stock in, and does not
control directly or indirectly, any other corporation, association or business
organization. Merger Sub is not a party to any joint venture or partnership.
4.5 LEGAL PROCEEDINGS. There are no actions, suits, or proceedings
pending or threatened against Merger Sub, at law or in equity, relating to or
affecting Merger Sub, including the Merger.
4.6 NO CONTRACTS OR LIABILITIES. Other than the obligations created under
this Plan of Merger, Merger Sub has no obligations or liabilities (contingent or
otherwise) under any contracts, claims, leases, loans, or otherwise.
ARTICLE V: REPRESENTATIONS AND WARRANTIES OF IHS
IHS represents and warrants to RoTech as follows:
5.1 ORGANIZATION AND STANDING OF IHS. IHS is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Copies of IHS's Articles of Incorporation and By-Laws, and all
amendments thereof to date, have been delivered to RoTech and are complete and
correct. IHS has the power and authority to own the property and assets now
owned by it and to conduct the business presently being conducted by it.
5.2 IHS CAPITAL STOCK. IHS's authorized capital consists of (i)
150,000,000 shares of Common Stock, par value $.001 per share, of which
24,665,489 shares are issued and outstanding as of March 31, 1997, and none of
which shares are held in treasury, and (ii) 15,000,000 shares of Preferred
Stock, par value $.01 per share, none of which are issued and outstanding. All
of the issued and outstanding IHS Shares are duly and validly issued, fully paid
and nonassessable. Except as set forth on Exhibit 5.2 to the Disclosure Schedule
delivered to RoTech by IHS at the time of the execution and delivery of this
Plan of Merger (the "IHS Disclosure Schedule"), as of May 31, 1997, there were
no options, warrants, or similar rights granted by IHS or any other agreements
to which IHS is a party providing for the issuance or sale by it of any
additional securities. There is no liability for dividends declared or
accumulated but unpaid with respect to any IHS Shares. Except as set forth on
Exhibit 5.2 to the IHS Disclosure Sched-
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ule, since the date of the "IHS Balance Sheet" (as defined in Section 5.9,
below), except pursuant to options, warrants, conversion rights or other
contractual rights existing on such date, IHS has not issued any shares of its
capital stock, effected any stock split or otherwise changed its capitalization
as it existed on such date.
5.3 SUBSIDIARIES. Each operating subsidiary of IHS (each an "IHS
Subsidiary" and collectively, the "IHS Subsidiaries") is a corporation,
partnership, limited partnership or limited liability company duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation. Each IHS Subsidiary has all necessary corporate, partnership,
limited partnership or limited liability company, as the case may be, power to
own its properties and assets and to carry on its business as presently
conducted. There are no outstanding options, warrants, or other agreements
pursuant to which any person or entity has a right to acquire or be issued any
material portion of the capital stock or other material interest in any IHS
Subsidiary the revenues or assets of which are material to the revenues or
assets of IHS and the IHS Subsidiaries taken as a whole.
5.4 FOREIGN QUALIFICATIONS. Each of IHS and the IHS Subsidiaries is
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction where the nature or character of the property owned, leased or
operated by it or the nature of the business transacted by it makes such
qualification necessary.
5.5 POWER AND AUTHORITY. Subject to the satisfaction of the conditions
precedent set forth herein, IHS has the corporate power to execute, deliver and
perform this Plan of Merger and all agreements and other documents executed and
delivered or to be executed and delivered by it pursuant to this Plan of Merger,
and subject to the satisfaction of the conditions precedent set forth herein has
taken all action required by its Certificate of Incorporation, by-laws or
otherwise, to authorize the execution, delivery and performance of this Plan of
Merger and such related documents. Except as set forth on Exhibit 5.5 to the IHS
Disclosure Schedule, the execution and delivery of this Plan of Merger does not
and, subject to the receipt of required stockholder approval the consummation of
the Merger and the consummation of the transaction contemplated hereby will not,
violate any provisions of the Certificate of Incorporation or By-laws of IHS or
any provisions of, or result in the acceleration of any obligation under, any
mortgage, lien, lease, agreement, instrument, order, arbitration award,
judgment, or decree, to which IHS or any IHS Subsidiary is a party, or by which
any of them is bound, or violate any restrictions of any kind to which any of
them are subject. Execution and delivery of this Plan of Merger has been
approved by the Board of Directors of IHS.
5.6 CONSENTS. Except as set forth on Exhibit 5.6 to the IHS Disclosure
Schedule, no authorization, consent, approval, license, exemption by, filing or
registration with any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, is or will be necessary
in connection with the execution, delivery and performance of this Agreement or
any of the Transaction Documents by IHS, other than as may be required by or on
behalf of RoTech or any RoTech Subsidiary by reason of the change of control
resulting from the Merger.
5.7 REPORTS AND FINANCIAL STATEMENTS.
(A) IHS has timely filed all reports required to be filed with the
Securities and Exchange Commission (the "SEC") pursuant to and in
accordance with the Securities Exchange Act of 1934, as amended
(together with the rules and regulations promulgated thereunder, the
"Exchange Act") and the applicable rules of the NYSE, since January
1, 1995 (collectively, as heretofore amended, the "IHS SEC Reports"),
and has previously furnished to RoTech true and complete copies of
all such IHS SEC Reports. None of such reports, as of their
respective dates, contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading. Each of the
balance sheets (including the related notes) included in the IHS SEC
Reports fairly presents the consolidated financial position of IHS
and the IHS Subsidiaries as of the respective dates thereof, and the
other related consolidated financial statements (including the
related notes)
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included therein fairly present the results of operations and cash
flows of IHS and the IHS Subsidiaries for the respective periods or
as of the respective dates set forth therein, all in conformity with
GAAP except as otherwise noted therein.
(B) Each of the balance sheets included in the "IHS Quarterly Financial
Statements" (as defined in Section 7.9) fairly presents or will
present, as the case may be, the consolidated financial position of
IHS and the IHS Subsidiaries as of the respective dates thereof, and
the other related consolidated financial statements included therein
fairly present or will present, as the case may be, the consolidated
results of operations and cash flows of IHS and the IHS Subsidiaries,
taken as a whole, for the periods reflected therein. The balance
sheets and statements of income included in the IHS Quarterly
Financial Statements have been prepared in accordance with GAAP
except for the notes thereto (if any).
(C) There are no material liabilities of IHS and the IHS Subsidiaries on
a consolidated basis which are not reserved against or disclosed in
the balance sheet dated as of March 31, 1997, included in the IHS SEC
Reports (the "IHS Balance Sheet"), as of the date thereof whether or
not they are required to be so reserved or disclosed under GAAP.
(D) The consolidated financial statements included in the IHS SEC Reports
do not reflect any material non-recurring or extraordinary income not
identified therein.
5.8 MEDICARE AND MEDICAID PROGRAMS. IHS and the IHS Subsidiaries, to the
extent necessary to conduct their business in a manner consistent with past
practice, are qualified for participation in Medicare and Medicaid programs. IHS
and the IHS Subsidiaries have no liability with respect to recoupment from the
Medicare or Medicaid programs or any other third party reimbursement source that
would materially exceed the reserves or allowances made therefor as set forth on
the financial Statements included in the IHS Balance Sheet, and IHS has no
knowledge for the assertion of any such recoupment claim that arose out of any
transactions completed prior to the date hereof, and no material Medicare or
Medicaid investigation, survey, or audit is pending or, to the knowledge of IHS,
threatened with respect to the operation of the business of IHS or any of the
IHS Subsidiaries, except to the extent that such investigation, survey, or audit
is routine and is not reasonably likely to have a material adverse effect on IHS
and the IHS Subsidiaries. None of IHS, the IHS Subsidiaries or, to the knowledge
of IHS, their licensed employees has been convicted of, or pled guilty or nolo
contendere to any criminal offense related to any Medicare or Medicaid program
while such person was an employee of IHS or an IHS Subsidiary or after the
termination of such person's employment by IHS or such subsidiary for acts
committed while employed by IHS or an IHS Subsidiary, and, to the knowledge of
IHS, none of such employees has committed any offense which may serve as the
basis for suspension or exclusion of IHS or any IHS Subsidiary from the Medicare
and Medicaid programs. Since January 1, 1996, neither IHS nor any IHS Subsidiary
has received any notice from the Medicare or Medicaid programs or any other
third party reimbursement source to the effect that the basis on which it
receives reimbursement for its services is to be changed.
5.9 CONTRACTS, ETC. All material contracts, leases, agreements, and
arrangements to which IHS or any IHS Subsidiary is a party are legally valid,
binding, and enforceable in accordance with their terms and in full force and
effect, and IHS has provided RoTech with the opportunity to review and copy all
such documents. IHS and the IHS Subsidiaries and, to the knowledge of IHS, all
other parties to such contracts, leases, agreements and arrangements have
complied in all material respects with the provisions of such contracts, leases,
agreements, and arrangements, and IHS and the IHS Subsidiaries are not and, to
the knowledge of IHS, no other party is, in default thereunder, and no event has
occurred which, but for the passage of time or the giving of notice or both,
would constitute a default thereunder, except, in each case, when the invalidity
of the lease, contract, agreement, or arrangement, or the default or breach
thereunder, would not, individually or in the aggregate, have a material adverse
effect on IHS and the IHS Subsidiaries, taken as a whole.
5.10 SUBSEQUENT EVENTS. Except as set forth on Exhibit 5.10 to the IHS
Disclosure Schedule or as contemplated by this Plan of Merger, IHS has not,
since the date of the IHS Balance Sheet:
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(A) Incurred any material adverse change;
(B) Through the date of this Plan of Merger, and except for this Plan of
Merger and any other agreement delivered pursuant to this Plan of
Merger, entered into any material transaction other than in the
ordinary course of business;
(C) Through the date of this Plan of Merger, issued in any material
amount any stock, bonds, or other securities or any options or rights
to purchase any of its securities other than in connection with
existing agreements;
(D) Suffered any material casualty or loss not covered by insurance;
(E) Made any material change in applicable accounting principles;
(F) Closed any location from which it operated any material part of its
business; or
(G) Entered into any agreement or commitment to do any of the foregoing.
5.11 LEGAL PROCEEDINGS. Other than as set forth on Exhibit 5.11 to the
IHS Disclosure Schedule, there are no claims, actions, suits or proceedings or
arbitrations, either administrative or judicial, pending, or, to the knowledge
of IHS, overtly threatened against or affecting IHS or any of the IHS
Subsidiaries, or IHS's ability to consummate the transactions contemplated
herein, at law or in equity or otherwise, before or by any court or governmental
agency or body, domestic or foreign, or before an arbitrator of any kind.
5.12 COMPLIANCE WITH LAWS IN GENERAL. IHS is in material compliance with
all Governmental Requirements (as defined herein). Except for notices of
non-compliance as to which IHS has taken corrective action acceptable to the
applicable governmental agency, neither IHS nor any of the IHS Subsidiaries has,
within the period of twelve months preceding the date of this Agreement,
received any written notice that IHS or such subsidiary fails to comply in any
material respect with any applicable Federal, state, local or other governmental
laws or ordinances, or any applicable order, rule or regulation of any Federal,
state, local or other governmental agency having jurisdiction over their
businesses ("Governmental Requirements"). IHS shall report to RoTech, within
five (5) business days after receipt thereof, any written notices that IHS or
any IHS Subsidiary is not in compliance in any material respect with any of the
foregoing.
5.13 COMMISSIONS AND FEES. Except for fees payable to Donaldson Lufkin &
Jenrette Securities Corporation pursuant to the engagement letter dated July 2,
1997, there are no valid claims for brokerage commissions or finder's or similar
fees in connection with the transactions contemplated by this Plan of Merger
which may be now or hereafter asserted against IHS or any IHS Subsidiary
resulting from any action taken by IHS or its officers, directors, or agents, or
any of them.
5.14 FAIRNESS OPINION. The Board of Directors of IHS has received from
Donaldson Lufkin & Jenrette Securities Corporation an opinion (the "IHS Fairness
Opinion") dated of even date herewith that the Exchange Ratio is fair to the
stockholders of IHS from a financial point of view.
5.15 VOTE REQUIRED. The affirmative vote of the holders of a majority of
the outstanding IHS Shares entitled to vote thereon is the only vote of the
holders of any class or series of IHS capital stock necessary to approve this
Plan of Merger, the Merger and the transactions contemplated hereby.
5.16 NO UNTRUE STATEMENT. None of the representations and warranties made
pursuant to this Agreement contains any untrue statement of material fact or
omits to state a material fact necessary, in light of the circumstance under
which it was made, in order to make any such representation not misleading in
any material respect.
5.17 BINDING EFFECT. This Agreement and all Transaction Documents
executed by IHS constitute the legal, valid and binding obligations of such
party, enforceable against IHS in accordance with their respective terms.
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5.18 QUESTIONABLE PAYMENTS. IHS and the IHS Subsidiaries have not made,
and no employee, agent, or other representative of any of them, and no affiliate
of IHS, (a) has used any corporate funds of IHS to make any illegal or unlawful
payment to any officer, employee, representative, agent of any government, or to
any political party or official thereof, including, without limitation, any of
same that would violate the Foreign Corrupt Practices Act of 1977, as amended;
or (b) has made or received any illegal payment, bribe, kickback, political
contribution or other similar questionable payment for any referrals or
recommendations or otherwise in connection with the operation of IHS's business,
and no director, officer, or controlling person of IHS has done any of the
foregoing, whether or not in connection with the operation of IHS's business.
5.19 COMPLIANCE WITH HEALTHCARE LAWS. IHS, the IHS Subsidiaries, and each
of their licensed employees is in compliance with all applicable statutes, laws,
ordinances, rules, orders, and regulations of any governmental authority with
respect to regulatory matters primarily relating to patient healthcare
(including without limitation Section 1128B(b) of the Social Security Act, as
amended, 42 U.S.C. Section WP-7(b) (Criminal Penalties Involving Medicare or
State Health Care Programs) commonly referred to as the "Federal Anti-Kickback
Statute" and The Social Security Act, as amended, Section 1877, 42 U.S.C.
Section WP (Prohibition Against Certain Referrals), commonly referred to as
"Stark Statute") (collectively, "Healthcare Laws"). IHS and the IHS Subsidiaries
have maintained all records required to be maintained by the Food and Drug
Administration, Drug Enforcement Agency and State Boards of Pharmacy and the
Medicare and Medicaid programs as required by applicable Healthcare Laws, and,
to the knowledge of IHS, there are no presently existing circumstances which
would result or likely would result in violations of Healthcare laws which could
reasonably be expected to have a material adverse effect on IHS and the IHS
Subsidiaries. Exhibit 5.19 to the IHS Disclosure Schedule sets forth a copy of
the RoTech healthcare law questionnaire which has been accurately completed by
IHS and does not contain any material misstatement of any fact and does not omit
any fact that would have to be stated in order not to render any response to
such questionnaire materially misleading.
5.20 INSURANCE COVERAGE. All insurance policies of IHS are in full force
and effect, contain coverage in amounts and against such losses and risks as are
generally maintained by comparable businesses, all premiums due on or before the
Closing Date have been or will be paid, financed or accrued on or before the
Closing Date, IHS has not been advised by any of its insurance carriers of an
intention to terminate or modify any such policies other than under
circumstances where IHS has received a commitment for a replacement policy, nor
has IHS failed to comply with any of the material conditions contained in any
such policies.
5.21 MERGER SUB COMMON STOCK. IHS owns, beneficially and of record, all
of the issued and outstanding shares of Common Stock, par value $.01 per share,
of Merger Sub (the "Merger Sub Common Stock") which are validly issued and
outstanding, fully paid and nonassessable, free and clear of all liens and
encumbrances. IHS has the corporate power to endorse and surrender such hares of
Merger Sub Common Stock for conversion pursuant to this Plan of Merger. IHS has,
or will by the Effective Time have, taken all such actions as may be required in
its capacity as the sole stockholder of Merger Sub to approve the Merger.
5.22 REGULATORY APPROVALS. IHS and each IHS Subsidiary holds all
licenses, permits, certificates of need, and other regulatory approvals required
or necessary to be applied for or obtained in connection with its business as
presently conducted or as proposed to be conducted. All such licenses, permits,
certificates of need, and other regulatory approvals relating to the business,
operations, and facilities of IHS and the IHS Subsidiaries are in full force and
effect. Except as may be disclosed on Schedule 5.11 to the IHS Disclosure
Schedule, any and all past litigation concerning such licenses, permits,
certificates of need, and regulatory approvals, and all claims and causes of
action raised therein have been finally adjudicated. No such license, permit,
certificate of need, or regulatory approval has been revoked, conditioned
(except as may be customary) or restricted in any manner, and no action
(equitable, legal, or administrative), arbitration or other process is pending,
or to the best knowledge of IHS, threatened, which in any way challenges the
validity of, or seeks to revoke, condition, or restrict any such license,
permit, certificate of need, or regulatory approval. Subject to compliance with
applicable securities laws and the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 (the "HSR Act"), the consummation of the Merger will not violate any
legal restriction to which IHS or an IHS Subsidiary is subject.
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5.23 ACCOUNTS RECEIVABLE. Since the date of the IHS Balance Sheet, IHS
has not changed any principle or practice with respect to the recordation of
accounts receivable, calculation of reserves therefor, or any material
collection, discount or write-off policy or procedure. IHS is in substantial
compliance with the terms and conditions of all third-party payer arrangements
relating to its accounts receivable.
5.24 RETIREMENT OR RE-ACQUISITION OF IHS COMMON STOCK. None of IHS and
the IHS Subsidiaries has agreed directly or indirectly to retire or re-acquire
all or part of the shares of IHS Common Stock issued pursuant to Section 2.1
hereof.
5.25 TRADEMARKS. There are no claims or proceedings pending or, to the
knowledge of IHS, overtly threatened against IHS or any of the IHS Subsidiaries
asserting that the use of any of the trademarks, service marks, or applications
for any of the same, copyrights, and other items of intellectual property that
are owned, possessed or used by and which are material to IHS infringes the
rights of any other person, and, to the knowledge of IHS, IHS is not infringing
in any material respect on the intellectual property rights of any other person.
5.26 EMPLOYEE BENEFIT PLANS; EMPLOYMENT MATTERS.
(A) Any (i) bonus or other type of incentive compensation plan, program,
or arrangement (whether or not set forth in a written document), (ii)
pension, profit-sharing, retirement, or other plan, program, or
arrangement, and (iii) stock ownership, stock purchase, phantom
stock, retirement, vacation, severance, disability, death benefit,
hospitalization, or any other employee benefit plan, fund, or
program, including, but not limited to, those described in Section
3(3) of ERISA, established or maintained by IHS or which IHS is
obligated to make contributions to or under or otherwise participate
in (individually, a "IHS Plan" and collectively, the "IHS Plans") has
been operated and administered in all material respects in accordance
with, as applicable, ERISA, the Age Discrimination in Employment Act
of 1967, as amended, and the related rules and regulations adopted by
those federal agencies responsible for the administration of such
laws. No act or failure to act by IHS or any IHS Subsidiary has
resulted in a "prohibited transaction" (as defined in ERISA) with
respect to the IHS Plans that is not subject to a statutory or
regulatory exception. No "reportable event" (as defined in ERISA, but
excluding any event for which notice is waived under the ERISA
regulations) has occurred with respect to any of the IHS Plans which
is subject to Title IV of ERISA. No IHS Plan has any accumulated
funding deficiency or liability to the Pension Benefit Guaranty
Corporation. Neither IHS nor any of the IHS Subsidiaries has
previously made, is currently making, or is obligated in any way to
make, any contributions to any multi-employer plan within the meaning
of the Multi-Employer Pension Plan Amendments Act of 1980.
(B) During the two years prior to the Closing Date, except to the extent
that any of the foregoing would not have a material adverse effect on
IHS and the IHS Subsidiaries taken as a whole, there has been no
material adverse change in the relationship between IHS and its
employees nor any strike or material labor disturbance by such
employees affecting IHS's business and, to the knowledge of IHS,
there is no indication that such a change, strike, or labor
disturbance is likely.
5.27 ENVIRONMENTAL MATTERS. IHS and the IHS Subsidiaries are in
compliance with all environmental laws applicable to them and their business and
assets, including, without limitation, the Resource Conversation and Recovery
Act of 1976, the Comprehensive Environmental Response Compensation and Liability
Act of 1980, the Federal Water Pollution Control Act (as amended by the Clean
Water Act), the Federal Toxic Substances Act and the Clean Air Act, each as
amended to date, except where the failure to be in compliance with such laws
would not have a material adverse effect on IHS and the IHS Subsidiaries taken
as a whole.
5.28 IHS COMMON STOCK. On the Closing Date, IHS will have a sufficient
number of authorized but unissued and/or treasury shares of its Common Stock
available for issuance to the holders of RoTech Shares in accordance with the
provisions of this Plan of Merger. The IHS Common Stock to be issued
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pursuant to this Plan of Merger will, when so delivered, be (i) duly and validly
issued, fully paid and nonassessable, (ii) issued pursuant to an effective
registration statement under the Securities Act of 1933, as amended, and (iii)
listed on the NYSE, upon official notice of issuance.
ARTICLE VI: INFORMATION AND RECORDS CONCERNING
ROTECH AND ITS SUBSIDIARIES
6.1 ACCESS TO ROTECH INFORMATION AND RECORDS BEFORE CLOSING. Prior to the
Closing Date, IHS may make, or cause to be made, such investigation of RoTech's
(it being understood that, for the purpose of this Article VI, "RoTech" shall be
deemed to refer collectively to RoTech and the RoTech Subsidiaries listed on
Schedule 3.3) financial and legal condition as IHS deems necessary or advisable
to familiarize itself with RoTech and/or matters relating to its history or
operation. RoTech shall permit IHS and its authorized representatives (including
legal counsel and accountants), to have full access to RoTech's books and
records upon reasonable notice and during normal business hours, and RoTech will
furnish, or cause to be furnished, to IHS such financial and operating data and
other information and copies of documents with respect to RoTech's products,
services, operations and assets as IHS shall from time to time reasonably
request. Documents to which IHS shall have access shall include, but not be
limited to, RoTech's tax returns and related work papers since their inception;
and RoTech shall make, or cause to be made, extracts thereof as IHS or their
representatives may request from time to time to enable IHS and their
representatives to investigate the affairs of RoTech and the accuracy of the
representations and warranties made in this Agreement. RoTech shall cause their
accountants to cooperate with IHS and to disclose the results of audits relating
to RoTech and to produce the working papers relating thereto. Without limiting
any of the foregoing, it is agreed that IHS will have full access to any and all
agreements between and among the previous and current shareholders regarding
their ownership of shares or the management or operation of RoTech. Access of
IHS pursuant to the foregoing shall be initiated and coordinated only through
William P. Kennedy, Stephen P. Griggs, Rebecca R. Irish, Janet L. Ziomek, or
such other persons as RoTech may from time to time designate. All such access
shall be granted at a reasonable time and upon reasonable notice.
6.2 ACCESS TO IHS INFORMATION AND RECORDS BEFORE CLOSING. Prior to the
Closing Date, RoTech may make, or cause to be made, such investigation of IHS's
(it being understood that, for the purpose of this Article VI, "IHS" shall be
deemed to refer collectively to IHS and the IHS Subsidiaries) financial and
legal condition as RoTech deems necessary or advisable to familiarize itself
with IHS and/or matters relating to its history or operation. IHS shall permit
RoTech and its authorized representatives (including legal counsel and
accountants), to have full access to IHS's books and records upon reasonable
notice and during normal business hours, and IHS will furnish, or cause to be
furnished, to RoTech such financial and operating data and other information and
copies of documents with respect to IHS's products, services, operations and
assets as RoTech shall from time to time reasonably request. Documents to which
RoTech shall have access shall include, but not be limited to, IHS's tax returns
and related work papers since their inception; and IHS shall make, or cause to
be made, extracts thereof as RoTech or their representatives may request from
time to time to enable RoTech and their representatives to investigate the
affairs of IHS and the accuracy of the representations and warranties made in
this Agreement. IHS shall cause their accountants to cooperate with RoTech and
to disclose the results of audits relating to IHS and to produce the working
papers relating thereto. Without limiting any of the foregoing, it is agreed
that RoTech will have full access to any and all agreements between and among
the previous and current shareholders regarding their ownership of shares or the
management or operation of IHS. Access of RoTech pursuant to the foregoing shall
be initiated and coordinated only through Taylor Pickett, Brian K. Davidson,
Marshall A. Elkins, Brad Bennett, or such other persons as IHS may from time to
time designate. All such access shall be granted at a reasonable time and upon
reasonable notice.
6.3 RETURN OF RECORDS. If the transactions contemplated hereby are not
consummated and this Plan of Merger terminates, each party agrees promptly to
return upon request all documents, contracts, records, or properties of the
other party and all copies thereof furnished pursuant to this Article VI or
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otherwise. All information disclosed by any party or any affiliate or
representative of any party shall be deemed to be "Evaluation Material" under
the terms of the Confidentiality Agreements, dated June 12, 1997 and June 16,
1997, respectively, between RoTech and IHS (the "Confidentiality Agreements").
6.4 EFFECT OF ACCESS.
(A) Nothing contained in this Article VI shall be deemed to create any
duty or responsibility on the part of either party to investigate or
evaluate the value, validity, or enforceability of any contract,
lease or, other asset included in the assets of the other party.
(B) With respect to matters as to which any party has made express
representations or warranties herein, the parties shall be entitled
to rely upon such express representations and warranties irrespective
of any investigations made by such parties.
ARTICLE VII: COVENANTS
7.1 PRESERVATION OF BUSINESS. Prior to the Effective Time or the
termination of this Agreement, RoTech will conduct its business in the ordinary
course. RoTech will use its commercially reasonable best efforts to preserve the
business organization of RoTech intact, to keep available to IHS and the
Surviving Corporation the services of the present employees of RoTech, and to
preserve for IHS and the Surviving Corporation the goodwill of the suppliers,
customers and others having business relations with RoTech.
7.2 MATERIAL TRANSACTIONS BY ROTECH. Prior to the Effective Time, without
first obtaining the written consent of IHS, RoTech will not, and will not permit
any RoTech Subsidiary to (in each case other than (i) as contemplated by the
terms of the Plan of Merger and the other documents contemplated hereby, (ii)
with respect to transactions for which there is a binding commitment existing
prior to the date hereof and disclosed in the RoTech Disclosure Schedules, (iii)
transactions described on Exhibit 7.2 to the RoTech Disclosure Schedule which do
not vary materially from the terms set forth on such Exhibit 7.2 or as otherwise
disclosed herein):
(A) Encumber any asset or enter into any transaction or make any contract
or commitment relating to the properties, assets and business of
RoTech, other than in the ordinary course of business;
(B) Acquired any assets, securities, or businesses in excess of
$5,000,000 in any one transaction;
(C) Enter into any employment contract which is not terminable upon
notice of 90 days or less, at will, and without penalty except as
provided herein and except in the ordinary course of RoTech's
business;
(D) Enter into any contract or agreement which (i) cannot be terminated
or does not terminate within 12 months or less without cause or (ii)
obligates RoTech for amounts in excess of $250,000;
(E) Make any payment or distribution to the trustee under any bonus,
pension, profit-sharing or retirement plan or arrangement, or incur
any obligation to make any such payment or contribution which is not
in accordance with RoTech's usual past practice, or make any payment
or contributions or incur any obligation pursuant to or in respect of
any other plan or contract or arrangement providing for bonuses,
options, executive incentive compensation, pensions, deferred
compensation, retirement payments, profit-sharing or the like,
establish or enter into any such plan, contract or arrangement, or
terminate or modify any plan;
(F) Guarantee the obligations of any person, firm or corporation, except
in the ordinary course of business consistent with prior practices;
(G) Amend its Certificates of Incorporation or By-laws;
(H) Except pursuant to options, warrants, conversion rights or other
contractual rights disclosed on Exhibit 3.2 to the RoTech Disclosure
Schedule, issue any shares of its capital stock, effect any stock
split or otherwise change its capitalization, provided that RoTech
shall be
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permitted to issue additional options to employees for the purchase
of up to 100,000 shares at an exercise price of not less than the
market value of such stock as of the respective dates on which such
options are granted;
(I) Take any action of a character described in Section 3.14(b) to
3.14(n), inclusive, other than 3.14(h).
7.3 MEETINGS OF STOCKHOLDERS.
(A) RoTech will take all steps necessary in accordance with its
Certificate of Incorporation and By-laws to call, give notice of,
convene and hold a meeting of its stockholders (the "RoTech
Stockholders Meeting") as soon as practicable after the effectiveness
of the Registration Statement (as defined in Section 7.4 hereof), for
the purpose of approving this Plan of Merger and for such other
purposes as may be necessary. Unless this Plan of Merger shall have
been validly terminated as provided herein, the Board of Directors of
RoTech (subject to the provisions of Section 8.1(d) hereof) will (i)
recommend to its stockholders the approval of this Plan of Merger,
the transactions contemplated hereby and any other matters to be
submitted to the stockholders of RoTech in connection therewith, to
the extent that such approval is required by applicable law in order
to consummate the Merger, and (ii) use its reasonable, good faith
efforts to obtain the approval by its stockholders of this Plan of
Merger and the transactions contemplated hereby.
(B) IHS will take all steps necessary in accordance with its Certificate
of Incorporation and By-laws to call, give notice of , convene and
hold a meeting of its stockholders (the "IHS Stockholders Meeting")
as soon as practicable after the effectiveness of the Registration
Statement (as defined in Section 7.4 hereof), for the purposes of
approving this Plan of Merger and for such other purposes as may be
necessary. Unless this Plan of Merger shall have been validly
terminated as provided herein, the Board of Directors of IHS (subject
to the provisions of Section 8.1(f) hereof) will (i) recommend to its
stockholders the approval of this plan or Merger, the transactions
contemplated hereby and any other matters to be submitted to the
stockholders of IHS in connection therewith, to the extent that such
approval is required by applicable law in order to consummate the
Merger, and (ii) use its reasonable, good faith efforts to obtain the
approval by its stockholders of this Plan of Merger and the
transactions contemplated hereby.
7.4 REGISTRATION STATEMENT.
(A) IHS shall prepare and file with the SEC and any other applicable
regulatory bodies, as soon as reasonably practicable a Registration
Statement on Form S-4 with respect to the shares of IHS Common Stock
to be issued in the Merger (the "Registration Statement"), and will
otherwise proceed promptly to satisfy the requirements of the
Securities Act. Such Registration Statement shall contain a joint
proxy statement of IHS and RoTech (the "Proxy Statement") containing
the information required by the Exchange Act. RoTech shall cooperate
with IHS in the preparation and filing of the Registration Statement
and Proxy Statement, and promptly will provide to IHS all such
information, including pro forma financial information, as IHS may
reasonably request for inclusion in such filings. IHS shall take all
reasonable steps to cause the Registration Statement to be declared
effective and to maintain such effectiveness until all of the shares
covered thereby have been distributed. IHS shall promptly amend or
supplement the Registration Statement to the extent necessary in
order to make the statements therein not misleading or to correct any
misstatements which have become false or misleading; provided that if
such statements or misstatements accurately reflect information
supplied for inclusion in the Registration Statement by RoTech, such
obligation shall adhere only upon RoTech's supplying to IHS
corrective information, which RoTech hereby agrees to provide
promptly. IHS and RoTech shall use their respective reasonable, good
faith efforts to have the Proxy Statement approved by the SEC under
the provisions of the Exchange Act. IHS shall provide RoTech with
copies of all filings made pursuant to this Section 7.4 and shall
consult with RoTech on responses to any comments made by the Staff of
the SEC with respect thereto.
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(B) RoTech covenants that the information supplied by RoTech for
inclusion in the Registration Statement shall not, at the time the
Registration Statement is declared effective, at the time any
amendment or supplement thereto is declared effective, at the time
the Proxy Statement is first mailed to holders of RoTech Common Stock
and IHS Common Stock, at the respective times of the IHS and RoTech
Stockholders Meetings, and at the Effective Time, 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. RoTech covenants that the
information supplied by RoTech for inclusion in the Proxy Statement
shall not, at the date the Proxy Statement (or any amendment thereof
or supplement thereto) is first mailed to holders of RoTech Common
Stock and IHS Common Stock, at the time any amendment or supplement
thereto is declared effective, at the respective times of the IHS and
RoTech Stockholders Meetings and at the Effective Time, 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, in light of the circumstances under which they
are made, not misleading. If at any time prior to the Effective Time
any event or circumstance relating to RoTech, or its officers or
Directors, should be discovered by RoTech which should be set forth
in an amendment to the Registration Statement or a supplement to the
Proxy Statement, RoTech shall promptly inform IHS. RoTech covenants
that all documents, if any, that RoTech is responsible for filing
with the SEC in connection with the transactions contemplated herein
will comply as to form and substance in all material respects with
the applicable requirements of the Securities Act and the rules and
regulations thereunder and the Exchange Act and the rules and
regulations thereunder.
(C) IHS covenants that the information supplied by IHS for inclusion in
the Registration Statement shall not, at the time the Registration
Statement is declared effective, at the time any amendment or
supplement thereto is declared effective, at the time the Proxy
Statement is first mailed to holders of RoTech Common Stock and IHS
Common Stock, at the respective times of the IHS and RoTech
Stockholders Meetings and at the Effective Time, 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. The information supplied by IHS
for inclusion in the Proxy Statement to be sent to the holders of
RoTech Common Stock and IHS Common Stock in connection with the IHS
and RoTech Stockholders Meetings shall not, at the date the Proxy
Statement (or any amendment thereof or supplement thereto) is first
mailed to holders of RoTech Common Stock and IHS Common Stock, at the
respective times of the IHS and RoTech Stockholders Meeting or at the
Effective Time, 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 statement therein, in light of the
circumstances under which they were made, not misleading. If at any
time prior to the Effective Time, any event or circumstance relating
to IHS or its officers or directors should be discovered by IHS which
should be set forth in an amendment to the Registration Statement or
a supplement to the Proxy Statement, IHS shall promptly inform RoTech
and shall promptly file such amendment to the Registration Statement.
All documents that IHS is responsible for filing with the SEC in
connection with the transactions contemplated herein will comply as
to form and substance in all material respects with the applicable
requirements of the Securities Act and the rules and regulations
thereunder and the Exchange Act and the rules and regulations
thereunder.
(D) Prior to the Closing Date, IHS shall use its reasonable, good faith
efforts to cause the shares of IHS Common Stock to be issued pursuant
to the Merger to be registered or qualified under all applicable
securities or Blue Sky laws of each of the states and territories of
the United States, and to take any other actions which may be
necessary to enable the IHS Common Stock to be issued pursuant to the
Merger to be distributed in each such jurisdiction.
(E) Prior to the Closing Date, IHS shall file a Subsequent Listing
Application with the NYSE relating to the shares of IHS Common Stock
to be issued in connection with the Merger,
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and shall use its best efforts to cause such shares of IHS Common
Stock to be approved for listing on the NYSE, upon official notice of
issuance, prior to the Closing Date.
(F) RoTech shall furnish all information to IHS with respect to RoTech as
IHS may reasonably request for inclusion in or in connection with the
Registration Statement and Proxy Statement and shall otherwise
cooperate with IHS in the preparation and filing of such documents
7.5 EXEMPTION FROM STATE TAKEOVER LAWS. RoTech shall take all reasonable
steps necessary and within its power to exempt the Merger from the requirements
of any state takeover statute or other similar state law which would prevent or
impede the consummation of the transactions contemplated hereby, by action of
RoTech's Board of Directors.
7.6 HSR ACT COMPLIANCE. IHS and RoTech shall promptly make their
respective filings, and shall thereafter use their reasonable, good faith
efforts to promptly make any required submissions, under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act") with respect to
the Merger and the transactions contemplated hereby. IHS and RoTech will use
their respective reasonable, good faith efforts to obtain all other permits,
authorizations, consents and approvals from third parties and governmental
authorities necessary to consummate the Merger and the transactions contemplated
hereby.
7.7 PUBLIC DISCLOSURES. IHS and RoTech will consult with each other
before issuing any press release or otherwise making any public statement with
respect to the transaction contemplated by this Plan of Merger, and shall not
issue any such press release or make any such public statement prior to such
consultation except as may be required by applicable law or requirements of the
NYSE and NASDAQ. The parties shall issue a joint press release, mutually
acceptable to IHS and RoTech, promptly upon execution and delivery of this Plan
or Merger.
7.8 RESIGNATION OF ROTECH DIRECTORS AND EXECUTIVE OFFICERS. On or prior
to the Closing Date, RoTech shall deliver to IHS evidence satisfactory to IHS
of the resignation of the Directors and executive officers of RoTech, such
resignations to be effective on the Closing Date.
7.9 INTERIM FINANCIAL STATEMENTS; EXCHANGE ACT REPORTS.
(A) RoTech covenants that prior to the Effective Time or earlier
termination of this Agreement, it will deliver to IHS a balance
sheet, income statement and statement of cash flow as of and for (i)
the one-month period ending the last day of each month subsequent to
the date of this Agreement that is not the last month of a fiscal
quarter that such consolidated financial statements will be delivered
within 30 days following the end of each such month, and (ii) the
three-month period ending on the last day of each fiscal quarter (the
"RoTech Quarterly Financial Statements"), which quarterly statement
will be delivered within 30 days following the end of each such
quarter.
(B) IHS covenants that prior to the Effective Time or earlier termination
of this Agreement, it will deliver to RoTech a balance sheet, income
statement and statement of cash flow as of and for the three-month
period ending on the last day of each fiscal quarter (the "IHS
Quarterly Financial Statements"), which quarterly statement will be
delivered within 30 days following the end of each such quarter.
(C) RoTech covenants that from and after the date hereof, it will file
all periodic reports required to be filed by it under the Exchange
Act and will promptly deliver to IHS copies of all such reports and
supporting internal management reports relating thereto.
(D) IHS covenants that from and after the date hereof, it will file all
periodic reports required to be filed by it under the Exchange Act
and will promptly deliver to RoTech copies of all such reports.
7.10 NO SOLICITATIONS. From the date of this Agreement until the
Effective Time or until this Agreement is terminated in accordance with Article
VIII hereof, RoTech shall not initiate, solicit or encourage (including by way
of furnishing assistance or proprietary information), or take any other
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action to facilitate, any inquiries or the making of any proposal relating to,
or that may reasonably be expected to lead to any RoTech Competing Transaction
(as defined below), or enter into any discussions or negotiate with any person
or entity in furtherance of such inquiries or to obtain a RoTech Competing
Transaction, or agree to or endorse any RoTech Competing Transaction or
authorize or permit any of the officers, directors or employees of RoTech or the
RoTech Subsidiaries or any investment banker, financial advisor, attorney,
accountant or other representative retained by RoTech or any RoTech Subsidiary
to take any such action, and RoTech shall promptly notify IHS of all relevant
terms (including the identity of the parties involved) of any such inquiries and
proposals received by RoTech or any RoTech Subsidiary or any such officer,
director, investment banker, financial advisor, attorney, accountant or other
representative relating to any of such matters, and if such inquiry or proposal
is in writing, RoTech shall promptly deliver or cause to be delivered to IHS a
copy of such inquiry or proposal; provided, however that, prior to the receipt
of the approval of the Merger of RoTech's stockholders at the RoTech
Stockholders Meeting, nothing contained in this Section 7.10 shall prohibit the
Board of Directors of RoTech from (i) furnishing information to, or entering
into discussions or negotiations with, any person or entity in connection with
an unsolicited bona fide offer by such person or entity to acquire RoTech
pursuant to a merger, consolidation, share exchange, business combination or
other similar transaction or to acquire greater than 50% of the assets or
capital stock of RoTech and the RoTech Subsidiaries, taken as a whole, to the
extent and only to the extent that (A) the Board of Directors of RoTech, after
consultation with and based upon advice of independent legal counsel, determines
in good faith that such action is advisable for RoTech's Board of Directors to
comply with its fiduciary duties under applicable law and (B) prior to
furnishing such information to, or entering into discussions or negotiations
with, such person or entity, RoTech (x) provides notice to IHS of the person or
entity and (y) enters into a confidentiality agreement with such person or
entity reasonably calculated under the circumstances, in the reasonable judgment
of RoTech, to protect the confidentiality of RoTech's proprietary information;
or (ii) complying with Rule 14e-2 promulgated under the Exchange Act with regard
to a RoTech Competing Transaction. For the purposes of this Agreement, "RoTech
Competing Transaction" shall mean any of the following (other than the
transactions contemplated by this Agreement) involving RoTech: (i) any merger,
consolidation, share exchange, business combination or similar transaction; (ii)
any sale, lease, exchange, mortgage, pledge, transfer or other disposition of
20% or more of the assets of RoTech and the RoTech Subsidiaries, taken as a
whole; (iii) any tender offer or exchange offer for more than 20% of the
outstanding shares of the capital stock of RoTech; (iv) any person acquiring
beneficial ownership of, or any group (as such term is defined under Section
13(d) of the Exchange Act) being formed which beneficially owns or has the right
to acquire beneficial ownership of, 15% or more of the outstanding shares of the
capital stock of RoTech; or (v) any public announcement of a proposal, plan or
intention to do any of the foregoing or any agreement to engage in any of the
foregoing.
7.11 OTHER ACTIONS. Subject to the provisions of Section 7.10 hereof,
none of RoTech, IHS and Merger Sub shall knowingly or intentionally take any
action, or omit to take any action, if such action or omission would, or
reasonably might be expect to, result in any of its representations and
warranties set forth herein being or becoming untrue in any material respect, or
in any of the conditions to the Merger set forth in this Plan or Merger not
being satisfied, or delay the Effective Time or (unless such action is required
by applicable law) which would materially adversely affect the ability of RoTech
or IHS to obtain any consents or approvals required for the consummation of the
Merger without imposition of a condition or restriction which would have a
material adverse effect on the Surviving Corporation or which would otherwise
materially impair the ability of RoTech or IHS to consummate the Merger in
accordance with terms of this Plan of Merger or materially delay such
consummation. Without limiting the generality of the foregoing, RoTech shall use
its reasonable best efforts to obtain all consents required of third parties in
respect of the Merger under all material contracts to which RoTech or any RoTech
Subsidiary is a party, including lessor consents.
7.12 Accounting Methods. Prior to Closing, neither IHS nor RoTech shall
change, in any material respect, its methods of accounting in effect at its most
recent fiscal year end, except as required by changes in generally accepted
accounting principles as concurred by such parties' independent accountants.
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7.13 COOPERATION.
(A) IHS and RoTech shall together, or pursuant to an allocation of
responsibility agreed to between them, (i) cooperate with one another
in determining whether any filings are required to be made or
consents required to be obtained in any jurisdiction prior to the
Effective Time in connection with the consummation of the
transactions contemplated hereby and cooperate in making any such
filings promptly and in seeking to obtain timely any such consents,
(ii) use their respective commercially reasonable efforts to cause to
be lifted any injunction prohibiting the Merger, or any part thereof,
or the other transactions contemplated thereby, and (iii) furnish to
one another and to one another's counsel all such information as may
be required to effect the foregoing actions.
(B) Subject to the terms and conditions herein provided, and unless this
Plan of Merger shall have been validly terminated as provided herein,
each of IHS and RoTech shall use all reasonable efforts (i) to take,
or cause to be taken, all actions necessary to comply promptly with
all legal requirements which may be imposed on such party (or any
subsidiaries or affiliates of such party) with respect to the Plan of
Merger and to consummate the transactions contemplated hereby,
subject to the vote of its stockholders described above, and (ii) to
obtain (and to cooperate with the other party to obtain) any consent,
authorization, order or approval of, or any exemption by, any
governmental entity and/or any other public or private third party
which is required to be obtained or made by such party or any of its
subsidiaries or affiliates in connection with this Plan of Merger and
the transactions contemplated hereby. Each of IHS and RoTech will
promptly cooperate with and furnish information to the other in
connection with any such burden suffered by, or requirement imposed
upon, either of them or any of their subsidiaries or affiliates in
connection with the foregoing.
7.14 STOCK OPTIONS; WARRANTS.
(A) As of the Effective Time, by virtue of the Merger and without any
action on the part of the participants therein, each option to
purchase shares of RoTech Common Stock that is outstanding
immediately prior to the Effective Time ("RoTech Options"), whether
or not exercisable, shall be replaced by a substitute option (such
new options being hereinafter referred to as "IHS Exchange Options")
to purchase that number of shares of IHS Common Stock equal to the
number of shares of RoTech Common Stock subject to such option
multiplied by .5806 at an exercise price per share of IHS Common
Stock equal to the option price per share of RoTech Common Stock
subject to such option in effect immediately prior to the Effective
Time divided by .5806. Each such IHS Exchange Option will otherwise
contain substantially the same terms and conditions as the RoTech
Option it replaces, provided that such IHS Exchange Option will
permit "cashless exercise" of such options. IHS shall use its
reasonable best efforts to file with the SEC a registration statement
on Form S-8 (or other appropriate form) or a post-effective amendment
to the Registration Statement within thirty (30) days after the
Effective Time, for purposes of registering all IHS Shares issuable
after the Effective Time upon exercise of the IHS Exchange Options,
and use all reasonable efforts to have such registration statement or
post-effective amendment become effective and to comply, to the
extent applicable, with state securities or blue sky law with respect
hereto at the Effective Time. Unless otherwise prohibited by law,
such Form S-8 shall also register the reoffer and resale by
affiliates of IHS of the IHS Shares issuable to such affiliates upon
exercise of the IHS Exchange Options. IHS shall maintain the
effectiveness under the Securities Act of such Form S-8 registration
statement as long as any such affiliates' options remain outstanding.
(B) As of the Effective Time, each warrant to purchase RoTech Shares (a
"RoTech Warrant") then outstanding shall remain outstanding and shall
be deemed to be a warrant to purchase, in place of the RoTech Shares
previously subject to such RoTech Warrant, that number of shares of
IHS Common Stock equal to the product of the number of RoTech Shares
subject to such RoTech Warrant, and not exercised prior the Effective
Time, multiplied by .5806 (the "IHS Exchange Warrants"). The exercise
price per share shall be equal to the exercise price per share under
the RoTech Warrant divided by .5806.
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(C) RoTech will take such reasonable steps as are necessary to effectuate
the agreement of this Section 7.14.
7.15 NOTICE OF SUBSEQUENT EVENTS. Each party hereto promptly shall notify
the other parties of any changes, additions or events of which they have or
obtain knowledge as to which they have concluded or reasonably should have
concluded would (i) cause any material change in or material addition to any
Exhibit to its Disclosure Schedule delivered by the notifying party under this
Plan of Merger, (ii) toll the time period for consummation of the Merger as
provided in Section 8.1(b)(iii) hereof, or (iii) otherwise would in such party's
reasonable judgment likely result in a breach of this Agreement by such party
prior to the Closing Date, promptly after the occurrence of the same.
7.16 COOPERATION REGARDING SEC FILINGS. Prior to the Effective Time,
RoTech shall cooperate and provide all information reasonably requested by IHS
and its underwriters, including, without limitation, copies of audit reports and
related work papers, accountant's comfort letters, and responses to
underwriters' due diligence requests, in connection with any filing by IHS of
any registration statement or other document or report with the SEC.
7.17 DISTRIBUTIONS. Prior to the Effective Time, without first obtaining
the written consent of RoTech, IHS will not pay any dividend or any other
distribution of cash or property in respect of its capital stock.
7.18 TAX OPINIONS. The parties hereto shall use their reasonable best
efforts to cause counsel for each of IHS and RoTech to render opinions as to the
federal income tax consequences of the Merger, which opinions shall be filed as
Exhibits to the Registration Statement. Each of IHS and RoTech agrees that it
shall provide certificates containing reasonable representations to such counsel
in connection with the rendering of such opinions.
7.19 MATERIAL TRANSACTIONS BY IHS. Prior to the Effective Time, without
first obtaining the written consent of RoTech, which consent shall not be
unreasonably withheld, IHS will not enter into any transaction pursuant to which
IHS would be required to issue shares of IHS Common Stock having a market value
at the time of issuance of more than Two Hundred Fifty Million ($250,000,000)
Dollars, provided that RoTech shall be deemed to have consented to such
transaction if RoTech does not give notice to IHS of its objection thereto
within five (5) business days after the date on which IHS shall have given
RoTech notice of such proposed transaction together with such information
thereon as would reasonably be necessary to enable RoTech to evaluate the
business merits of such transaction.
7.20 COOPERATION REGARDING ROTECH DEBENTURES. Prior to the Effective
Time, IHS shall cooperate and provide such information as shall be reasonably
requested by RoTech in connection with RoTech's obligations arising under its
indenture pertaining to RoTech's 5-1/4% Convertible Subordinated Debentures Due
2003 as a result of the Merger. IHS acknowledges that the debenture holders
under such RoTech indenture have the right to require repurchase of the
debentures held by them as a result of the Merger.
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ARTICLE VIII: TERMINATION, AMENDMENT, AND WAIVER
8.1 TERMINATION. This Plan of Merger may be terminated at any time prior
to the Effective Time, either before or after approval of matters presented in
connection with the Merger by the holders of RoTech Common Stock and IHS Common
Stock:
(A) by mutual written consent of IHS, Merger Sub and RoTech;
(B) by either IHS or RoTech:
(i) if, upon a vote at a duly held meeting of stockholders or any
adjournment thereof, any approval of the holders of RoTech
Common Stock necessary to consummate the Merger and the
transactions contemplated hereby shall not have been obtained;
(ii) if, upon a vote at a duly held meeting of stockholders or any
adjournment thereof, any approval of the holders of IHS Common
Stock necessary to consummate the Merger and the transactions
contemplated hereby shall not have been obtained;
(iii) if the Merger shall not have been consummated on or before
November 30, 1997, unless the failure to consummate the Merger
is the result of a willful and material breach of this Plan of
Merger by the party seeking to terminate this Plan of Merger,
provided, however, that the passage of such period shall be
tolled for any part thereof (but not exceeding 60 days in the
aggregate) during which any party shall be subject to a nonfinal
order, decree, filing or action restraining, enjoining or
otherwise prohibiting the consummation of the Merger or the
calling or holding of a meeting of stockholders;
(iv) if any court of competent jurisdiction or other governmental
entity shall have issued an order, decree or ruling or taken any
other action permanently enjoining, restraining or otherwise
prohibiting the Merger and such order, decree, ruling or other
action shall have become final and nonappealable;
(v) in the event of a breach by the other party of any
representation, warranty, covenant or other agreement contained
in this Plan of Merger which exists on the Closing Date that (A)
would give rise to the failure of a condition set forth in
Section 9.2(a) or (b) or Section 9.3(a) or (b), as applicable,
and (B) cannot be or has not been cured within 30 days after the
giving of written notice to the breaching party of such breach
(a "Material Breach") (provided that the terminating party is
not then in Material Breach of any representation, warranty,
covenant or other agreement contained in this Plan of Merger);
(vi) in the event of (i) notice pursuant to Section 7.15 of a breach
by the other party of any representation, warranty, covenant or
other agreement contained in this Plan of Merger or (ii) notice
from such party to the other party of such other party's breach
of any representation, warranty, covenant or other agreement
contained in this Plan of Merger, in either case which cannot be
or has not been cured within 30 days after the giving of written
notice of such breach to or by the other party (provided that
the terminating party is not then in Material Breach of any
representation, warranty, covenant or other agreement contained
in this Plan of Merger); or
(vii) if the average of the last per share sale prices of IHS common
stock, as reported on the NYSE Composite Tape, for the ten (10)
consecutive trading days ending on the fifth trading day
immediately preceding the date set for the RoTech Stockholders
Meeting is equal to or less than $33.00.
(C) by either IHS or RoTech in the event that (i) all of the conditions
to the obligation of such party to effect the Merger set forth in
Section 9.1 shall have been satisfied and (ii) any condition to the
obligation of such party to effect the Merger set forth in Section
9.2 (in the case of IHS) or Section 9.3 (in the case of RoTech) is
not capable of being satisfied prior to the end of the period
referred to in Section 8.1(b) (iii);
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(D) by RoTech, if RoTech's Board of Directors shall have (i) determined,
in the exercise of its fiduciary duties under applicable law, not to
recommend the Merger to the holders of RoTech Shares or shall have
withdrawn such recommendation or (ii) approved, recommended or
endorsed any RoTech Competing Transaction other than this Plan of
Merger;
(E) By IHS if (i) the Board of Directors of RoTech fails to make or
withdraws its recommendation of the adoption of this Agreement or the
Merger; (ii) the Board of Directors of RoTech shall have recommended
to RoTech's stockholders any RoTech Competing Transaction or entered
into an agreement with respect to a RoTech Competing Transaction; or
(iii) a tender offer or exchange offer for 20% or more of the
outstanding shares of capital stock of RoTech is commenced, and the
Board of Directors of RoTech recommends, within the time period
specified under Rule 14e-2 under the Exchange Act, that RoTech's
stockholders tender their shares into such tender or exchange offer;
(F) by IHS, if IHS's Board of Directors shall have determined in the
exercise of its fiduciary duties under applicable law, not to
recommend the Merger to the holders of IHS Shares or shall have
withdrawn such recommendation;
(G) by RoTech if the Board of Directors of IHS fails to make or withdraws
its recommendation of the adoption of this Agreement or the Merger.
8.2 EFFECT OF TERMINATION. In the event of termination of this Plan of
Merger as provided in Section 8.1, this Plan of Merger shall forthwith become
void and have no effect, without any liability or obligation on the part of any
party, other than to the extent provided in Sections 6.3 and 8.6, and except to
the extent that such termination results from the material breach by a party of
any of its representations, warranties, covenants or other agreements set forth
in this Plan of Merger.
8.3 AMENDMENT. This Plan of Merger may be amended by the parties at any
time before or after any required approval of matters presented in connection
with the Merger by the holders of RoTech Shares or IHS Shares; provided,
however, that after any such approval, there shall be made no amendment that
pursuant to the FBCA requires further approval by such stockholders. This Plan
of Merger may not be amended except by an instrument in writing signed on behalf
of each of the parties.
8.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties may (a) extend the time for the performance of any of the obligations or
other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties contained in this Plan of Merger or in any
document delivered pursuant to this Plan of Merger or (c) subject to the
provision of Section 8.3, waive compliance with any of the agreements or
conditions contained in this Plan of Merger. Any agreement on the part of a
party to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party. Without limiting the
generality of the foregoing, if the Merger is not consummated on or prior to
September 30, 1997, as a result of the Registration Statement not having been
declared effective by the SEC by August 15, 1997, and the Registration has been
declared effective by September 30, 1997, or RoTech and IHS are in bona fide
discussions with the SEC regarding the Registration Statement and diligently
pursuing the effectiveness of the Registration Statement with the SEC, then the
date set forth in Section 8.1(b) (iii) shall be extended to the earlier of
November 30, 1997, and the date that is thirty (30) days following the date on
which the Registration Statement is declared effective. The failure of any party
to this Plan of Merger to assert any of its rights under this Plan of Merger or
otherwise shall not constitute a waiver of such rights.
8.5 Procedure for Termination, Amendment, Extension or Waiver. A
termination of this Plan of Merger pursuant to Section 8.1, an amendment of this
Plan of Merger pursuant to Section 8.3, or an extension or waiver pursuant to
Section 8.4 shall, in order to be effective, require in the case of IHS, Merger
Sub or RoTech, action by its Board of Directors or the duly authorized designee
of the Board of Directors.
8.6 EXPENSES; BREAKUP FEES.
(A) All costs and expenses incurred in connection with this Plan of
Merger and the transactions contemplated hereby shall be paid by the
party incurring such expense, it being understood that if the Merger
is consummated, by reason thereof, IHS will indirectly bear the
expenses incurred by RoTech.
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(B) If the Merger is not consummated as a result of termination of this
Agreement pursuant to Section 8.1(d)(ii), 8.1(e)(ii) or 8.1(e)(iii)
hereof, RoTech shall pay to IHS a breakup fee in the amount of
Twenty-Five Million ($25,000,000) Dollars plus all expenses
reasonably incurred by IHS in connection with this Plan of Merger and
collection of such fee. Notwithstanding the foregoing, if this
Agreement is terminated pursuant to Section 8.1(e)(iii) and the
tender offer or exchange offer referred to in Section 8.1(e)(iii) is
for at least 20% but less than 50% of the outstanding shares of
capital stock of RoTech, the breakup fee payable by RoTech under this
Section 8.6(b) shall be in the amount of Fifteen Million
($15,000,000) Dollars, rather than Twenty-Five Million ($25,000,000)
Dollars plus the said expenses of IHS. If any breakup fee is paid as
set forth above, such payment shall be the sole and exclusive remedy
of IHS against RoTech hereunder.
(C) If the Merger is not consummated as a result of the termination of
this Agreement pursuant to Section 8.1(d)(i) or 8.1(e)(i) (except as
a result of the withdrawal of the Smith Barney Opinion for reasons
other than the existence of a RoTech Competing Transaction), RoTech
shall pay to IHS a breakup fee in the amount of Five Million
($5,000,000) Dollars, and, in such event, such payment shall be the
sole and exclusive remedy of IHS against RoTech hereunder.
Notwithstanding anything contained in this Plan of Merger to the
contrary, under no circumstances shall IHS be entitled to receive
both the breakup fee described in this Section 8.6(c) and the breakup
fee described in Section 8.6(b).
(D) If the Merger is not consummated as a result of the termination of
this Agreement pursuant to Section 8.1(f) or 8.1(g), IHS shall pay to
RoTech a breakup fee in the amount of Ten Million ($10,000,000)
Dollars, and, in such event, such payment shall be the sole and
exclusive remedy of RoTech against IHS hereunder.
ARTICLE IX: CONDITIONS TO CLOSING
9.1 MUTUAL CONDITIONS. The respective obligations of each party to effect
the Merger shall be subject to the satisfaction, at or prior to the Closing
Date, of the following conditions (any of which may be waived in writing by IHS,
Merger Sub or RoTech):
(A) None of IHS, Merger Sub or RoTech nor any of their respective
subsidiaries shall be subject to any order, decree or injunction by a
court of competent jurisdiction which (i) prevents or materially
delays the consummation of the Merger or (ii) would impose any
material limitation on the ability of IHS effectively to exercise
full rights of ownership of the common stock of the Surviving
Corporation or any material portion of the assets of business of
RoTech, taken as a whole.
(B) No statute, rule or regulation shall have been enacted by the
government (or any governmental agency) of the United States or any
state, municipality or other Political subdivision thereof that makes
the consummation of the Merger or any other significant transaction
contemplated hereby illegal.
(C) The holders of shares of RoTech Common Stock and the holders of the
shares of IHS Common Stock each shall have approved the adoption of
this Plan of Merger.
(D) The shares of IHS Common Stock to be issued in connection with the
Merger shall have been approved for listing on the NYSE, upon
official notice of issuance, and shall have been issued in
transactions qualified or exempt from registration under applicable
securities or Blue Sky laws of such states and territories of the
United States as may be required.
(E) The Registration Statement shall have been declared effective and no
stop order with respect to the Registration Statement shall be in
effect.
(F) IHS, Merger Sub and RoTech shall have received all consents,
approvals and authorizations of third parties that are required of
such third parties prior to the consummation of the Merger, in form
and substance reasonably acceptable to IHS or RoTech, as the case may
be, except where the failure to obtain any such consent, approval, or
authorization would not have a material adverse effect on the
business of the Surviving Corporation.
A-31
(G) All approvals of the Merger required under the HSR Act shall have
been obtained or the waiting periods thereunder shall have expired.
(H) The parties shall have obtained consents from their senior bank
lenders to the Merger and the transactions contemplated hereby not
later than four (4) weeks following the date of this Agreement.
9.2 CONDITIONS TO OBLIGATIONS OF IHS AND MERGER SUB. The obligations of
IHS and Merger Sub to consummate the Merger and the other transactions
contemplated hereby shall be subject to the satisfaction, at or prior to the
Closing Date, of the following conditions (any of which may be waived by IHS and
Merger Sub):
(A) Each of the agreements of RoTech to be performed at or prior to the
Closing Date pursuant to the terms hereof shall have been duly
performed in all material respects, and RoTech shall have performed,
in all material respects all of the acts required to be performed by
it at or prior to the Closing Date by the terms hereof.
(B) The representations and warranties of RoTech set forth in Article III
hereof shall be true and correct as of the date of this Plan of
Merger and as of the Closing Date, except to the extent such
representations and warranties expressly relate to a specific date
(in which case such representations and warranties shall be true and
correct as of such date); provided, however, that RoTech shall not be
deemed to be in breach of any such representations or warranties (i)
where the inaccuracies of all representations contained in Article
III hereof would not, in the aggregate, have a material adverse
effect on RoTech and the RoTech Subsidiaries, taken as a whole, or
(ii) as a result of the consequences that IHS knew or should have
known would arise from the taking of any action permitted to be taken
by RoTech (or otherwise approved by IHS) under Section 7.2 or
otherwise permitted herein. IHS and Merger Sub shall have been
furnished with a certificate, executed by a duly authorized officer
of RoTech, dated the Closing Date, certifying in such detail as IHS
and Merger Sub may reasonably request as to the fulfillment of the
foregoing conditions.
(C) IHS and Merger Sub shall have obtained, or obtained the transfer of,
any licenses and other regulatory approvals necessary prior to the
Effective Time to allow the Surviving Corporation to operate RoTech's
business, unless the failure to obtain such transfer or approval
would not have a material adverse effect on the Surviving
Corporation.
(D) IHS shall have received an opinion from Winderweedle, Haines, Ward &
Woodman, P.A. substantially to the effect set forth in Exhibit 9.2(d)
hereto.
(E) All consents, authorizations, orders and approvals of (or filings or
registrations with) any governmental commission, board or other
regulatory body required in connection with the execution, delivery
and performance of this Plan of Merger shall have been obtained or
made, except for filings in connection with the Merger and any other
documents required to be filed after the Effective Time.
(F) The opinion of Donaldson Lufkin & Jenrette Securities Corporation
referred in Section 5.14 hereof shall not have been adversely
modified or withdrawn as of the Date of the mailing of the Proxy
Statement.
(G) William P. Kennedy, Stephen P. Griggs, and Rebecca R. Irish shall
have agreed in writing to terminate their respective employment
agreement with RoTech, and (i) William P. Kennedy shall have executed
and delivered the Severance and Noncompetition Agreement with RoTech
in the form of Exhibit 9.2(g)(i) hereto, (ii) Stephen P. Griggs shall
have executed and delivered an Employment Agreement with RoTech in
the form of Exhibit 9.2(g)(ii) hereto, and (iii) Rebecca R. Irish
shall have executed and delivered the Severance and Noncompetition
Agreement with RoTech in the form of Exhibit 9.2(g)(iii) hereto.
(H) IHS shall have received a "cold comfort" letter from Deloitte &
Touche LLP, RoTech's independent accountants, dated the Effective
Time and addressed to IHS, as to such matters reasonably requested by
IHS.
A-32
(I) IHS shall have received an opinion from its tax counsel to the effect
that the Merger will constitute a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended,
which opinion may be based upon reasonable representations of fact
provided by officers of IHS, RoTech, and Merger Sub.
9.3 CONDITIONS TO OBLIGATIONS OF ROTECH. The obligations of RoTech to
consummate the Merger and the other transactions contemplated hereby shall be
subject to the satisfaction, at or prior to the Closing Date, of the following
conditions (any of which may be waived by RoTech):
(A) Each of the agreements of IHS and Merger Sub to be performed at or
prior to the Closing Date pursuant to the terms hereof shall have
been duly performed, in all material respects, and IHS and Merger Sub
shall have performed, in all material respects, all of the acts
required to be performed by them at or prior to the Closing Date by
the terms hereof.
(B) The representations and warranties of IHS and Merger Sub set forth in
Articles IV and V hereof shall be true and correct as of the date of
this Plan of Merger, and as of the Closing Date, except to the extent
such representations and warranties expressly relate to a specific
date (in which case such representations and warranties shall be true
and as of such date); provided, however, that IHS shall not be deemed
to be in breach of any such representations or warranties where the
inaccuracies of such representation and warranties would not, in the
aggregate, have a material adverse effect on IHS and the IHS
Subsidiaries, taken as a whole. RoTech shall have been furnished with
a certificate, executed by a duly authorized officer of IHS, dated
the Closing Date, certifying in such detail as RoTech may reasonably
request as to the fulfillment of the foregoing conditions.
(C) RoTech shall have received an opinion from Blass & Driggs
substantially to the effect set forth in Exhibit 9.3(c) hereto.
(D) The Smith Barney Opinion shall not have been adversely modified or
withdrawn as of the date of the joint proxy statement.
(E) All consents, authorizations, orders and approvals of (or filings or
registrations with) any governmental commission, board or other
regulatory body required in connection with the execution, delivery
and performance of this Plan of Merger shall have been obtained or
made, except for filing in connection with the Merger and any other
documents required to be filed after the Effective Time.
(F) RoTech shall have received a letter from KMPG Peat Marwick LLP, IHS's
independent accountants, dated the Effective Time and addressed to
RoTech, as to such matters reasonably requested by RoTech.
(G) RoTech shall have received an opinion from its tax counsel to the
effect that the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended, which opinion may be based upon reasonable representations
of fact provided by officers of IHS, RoTech, and Merger Sub.
A-33
ARTICLE X: MISCELLANEOUS
10.1 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties in this Plan of Merger or in any instrument
delivered pursuant to this Plan of Merger shall survive the Effective Time.
10.2 NOTICES. Any communications required or desired to be given
hereunder shall be deemed to have been properly given if sent by hand delivery
or by facsimile and overnight courier or overnight courier to the parties hereto
at the following addresses, or at such other address as either party may advise
the other in writing from time to time:
If to IHS:
Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, MD 21117
Attention: Taylor Pickett
With copies to:
Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, MD 21117
Attention: Marshall A. Elkins, Esq.
and
Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, MD 21117
Attention: Brian K. Davidson
and
Blass & Driggs, Esqs.
461 Fifth Avenue, 19th Floor
New York, NY 10017
Facsimile: (212) 447-5428
Attention: Michael S. Blass, Esq.
If to RoTech:
RoTech Medical Corporation
4506 L.B. McLeod Road, Suite F
Orlando, Florida 32811
Attention: Stephen P. Griggs
With a copy to:
Winderweedle, Haines, Ward & Woodman, P.A.
Barnett Bank Center
390 North Orange Avenue, 14th Floor
Post Office Box 1391
Orlando, Florida 32802-1391
Attention: Thomas A. Simser, Jr., Esq.
All such communications shall be deemed to have been delivered on the date of
hand delivery or facsimile or on the next business day following the deposit of
such communication with the overnight courier.
A-34
10.3 FURTHER ASSURANCES. Each party hereby agrees to perform any further
acts and to execute and deliver any documents which may be reasonably necessary
to carry out the provisions of this Plan of Merger.
10.4 INDEMNIFICATION.
(A) IHS and Merger Sub shall advance legal fees and expenses and indemnify
current or former directors or officers of RoTech for all acts or
omissions occurring prior to the Effective Time as provided in RoTech's
Certificate of Incorporation of bylaws or indemnification agreements in
effect as of the date hereof, and such obligations shall survive the
Merger and shall continue in full force and effect in accordance with
their terms. The provisions of this Section 10.4 are intended to be for
the benefit of, and shall be enforceable by, each such indemnified
party and each such indemnified party's heir and representatives.
(B) IHS shall cause to be maintained in effect for a period ending not
sooner than the fifth anniversary of the Effective Time directors' and
officers' liability insurance providing at least the same coverage with
respect to RoTech's officers and directors as the policies maintained
on behalf of directors and officers of RoTech as of the date hereof,
and containing terms and conditions which are no less advantageous,
with respect to matters occurring on or prior to the Effective Time (to
the extent such insurance is available with respect to such matters);
provided that IHS shall not be obligated to provide any greater
officers' and directors' liability insurance than that generally
afforded to officers and directors of IHS under policies maintained by
IHS with respect to its directors and officers.
10.5 GOVERNING LAW. This Plan of Merger shall be interpreted, construed
and enforced in accordance with the laws of the State of Delaware, applied
without giving effect to any conflicts-of-law principles.
10.6 "INCLUDING". The word "including", when following any general
statement, term or matter, shall not be construed to limit such statement, term
or matter to the specific terms or matters as provided immediately following the
word "including" or to similar items or matters, whether or not non-limiting
language (such as "without limitation", "but not limited to", or words of
similar import) is used with reference to the word "including" or the similar
items or matters, but rather shall be deemed to refer to all other items or
matters that could reasonably fall within the broadest possible scope of the
general statement, term or matter.
10.7 "KNOWLEDGE". "To the knowledge", "to the best knowledge, information
and belief", or any similar phrase shall be deemed to refer to the knowledge of
the Chairman of the Board, Chief Executive Officer, Chief Financial Officer,
Chief Operating Officer, General Counsel, or any Executive Vice President or
Senior Vice President of a party and to include the assurance that such
knowledge is based upon a reasonable investigation, unless otherwise expressly
provided.
10.8 "MATERIAL ADVERSE CHANGE" OR "MATERIAL ADVERSE EFFECT". "Material
Adverse Change" or "Material Adverse Effect" means, when used in connection with
RoTech or IHS, any change, effect, event or occurrence that has, or is
reasonably likely to have, individually or in the aggregate, a material adverse
impact on the assets, business, financial position revenues, or earnings of such
party and its subsidiaries taken as a whole.
10.9 CAPTIONS. The captions or headings in this Plan of Merger are made
for conveniences and general reference only and shall not be construed to
describe, define or limit the scope or intent of the provisions of this Plan of
Merger.
10.10 INTEGRATION OF EXHIBITS. All Exhibits to the Schedules attached to
this Plan of Merger are integral parts of this Plan of Merger as if fully set
forth herein.
10.11 ENTIRE AGREEMENT. This instrument, including all Exhibits attached
hereto and the Confidentiality Agreements contain the entire agreement of the
parties and supersede any and all prior or contemporaneous agreements between
the parties, written or oral, with respect to the transactions con-
A-35
templated hereby. Such agreement may not be changed or terminated orally, but
may only be changed by an agreement in writing signed by the party or parties
against whom enforcement of any waiver, change, modification, extension,
discharge or termination is sought.
10.12 COUNTERPARTS. This Plan of Merger may be executed in several
counterparts, each of which, when so executed, shall be deemed to be an
original, and such counterparts shall, together, constitute and be one and the
same instrument.
10.13 BINDING EFFECT. This Plan of Merger shall be binding on, and shall
inure to the benefit of, the parties hereto, and their respective successors and
assigns, and no other person shall acquire or have any right under or by virtue
of this Plan of Merger. No party may assign any right or obligation hereunder
without the prior written consent of the other parties.
10.14 NO RULE OF CONSTRUCTION. The parties agree that, because all
parties participated in negotiating and drafting this Plan of Merger, no rule of
construction shall apply to this Plan of Merger which construes ambiguous
language in favor of or against any party by reason of that party's role in
drafting this Plan of Merger.
[SIGNATURES ON THE FOLLOWING PAGE]
A-36
IN WITNESS WHEREOF, each of the parties hereto and in the capacity
indicated below has executed this Agreement as of the day and year first above
written.
ROTECH MEDICAL CORPORATION
By: /s/ Stephen P. Griggs
----------------------------------------
Its: President
INTEGRATED HEALTH SERVICES, INC.
By: /s/ Brian Davidson
----------------------------------------
Executive Vice President - Development
IHS ACQUISITION XXIV, INC.
By: /s/ Brian Davidson
----------------------------------------
A-37
APPENDIX B
September 19, 1997
Board of Directors
Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, MD 21117
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to the holders of common stock, $.001 par value per share ("Company Common
Stock"), of Integrated Health Services, Inc. (the "Company") of the
consideration to be paid by the Company pursuant to the terms of the Agreement
and Plan of Merger, dated as of July 6, 1997 (the "Agreement"), by and among the
Company, IHS Acquisition XXIV, Inc. ("Merger Sub"), a wholly owned subsidiary of
the Company, and RoTech Medical Corporation ("RoTech") pursuant to which Merger
Sub will be merged (the "Merger") with and into RoTech.
Pursuant to the Agreement, each outstanding share of common stock, par
value $.0002 per share ("RoTech Common Stock"), of RoTech will be converted into
the right to receive 0.5806 shares (the "Exchange Ratio") of Company Common
Stock.
In arriving at our opinion, we have reviewed the Agreement (including the
Exhibits thereto). We also have reviewed financial and other information that
was publicly available or furnished to us by the Company and RoTech including
information provided during discussions with their respective managements.
Included in the information provided during discussions with the respective
managements were certain financial projections of RoTech for the period
beginning January 1, 1997 and ending December 31, 2001 prepared by the
management of the Company and certain financial projections of the Company for
the period beginning January 1, 1997 and ending December 31, 2001 prepared by
the management of the Company. In addition, we have compared certain financial
and securities data of the Company and RoTech with various other companies whose
securities are traded in public markets, reviewed the historical stock prices
and trading volumes of RoTech Common Stock and Company Common Stock, reviewed
prices and premiums paid in certain other business combinations and conducted
such other financial studies, analyses and investigations as we deemed
appropriate for purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by the Company and RoTech or
their respective representatives, or that was otherwise reviewed by us. In
particular, we have relied upon the estimates of the management of the Company
of the operating synergies achievable as a result of the Merger and upon our
discussion of such synergies with the management of the Company. With respect to
the financial projections supplied to us, we have assumed that they have been
reasonably prepared on the basis reflecting the best currently available
estimates and judgments of the management of the Company as to the future
operating and financial performance of the Company and RoTech. We have not
assumed any responsibility for making any independent evaluation of RoTech's
assets or liabilities or for making any independent verification of any of the
information reviewed by us.
B-1
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion as to the prices
at which Company Common Stock will actually trade at any time. Our opinion does
not constitute a recommendation to any shareholder as to how such shareholder
should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. DLJ has performed
investment banking and other services for the Company in the past, including
acting as co-manager for the Company's offering of $450,000,000 9 1/2% Senior
Subordinated Notes due 2007 in May 1997 and the Company's offering of
$500,000,000 9 1/4% Senior Subordinated Notes due 2008 in September 1997, for
which DLJ received usual and customary underwriters' compensation.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the Exchange Ratio is fair to the holders of Company Common
Stock from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ Vanessa Burgess
------------------------------------
Vanessa Burgess
Managing Director
B-2
Appendix C
[SMITH BARNEY INC. LETTERHEAD]
July 6, 1997
The Board of Directors
RoTech Medical Corporation
4506 L.B. McLeod Road
Orlando, Florida 32811
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the common stock of RoTech Medical Corporation
("RoTech") of the consideration to be received by such holders pursuant to the
terms and subject to the conditions set forth in the Agreement and Plan of
Merger, dated as of July 6, 1997 (the "Merger Agreement"), among Integrated
Health Services, Inc. ("IHS"), IHS Acquisition XXIV, Inc., a wholly owned
subsidiary of IHS ("Merger Sub"), and RoTech. As more fully described in the
Merger Agreement, (i) Merger Sub will be merged with and into RoTech (the
"Merger") and (ii) each outstanding share of the common stock, par value $0.0002
per share, of RoTech (the "RoTech Common Stock") will be converted into the
right to receive 0.5806 (the "Exchange Ratio") of a share of the common stock,
par value $0.001 per share, of IHS (the "IHS Common Stock").
In arriving at our opinion, we reviewed the Merger Agreement and held
discussions with certain senior officers, directors and other representatives
and advisors of RoTech and certain senior officers and other representatives and
advisors of IHS concerning the businesses, operations and prospects of RoTech
and IHS. We examined certain publicly available business and financial
information relating to RoTech and IHS as well as certain financial forecasts
and other information and data for RoTech and IHS which were provided to or
otherwise discussed with us by the respective managements of RoTech and IHS,
including information relating to certain strategic implications and operational
benefits anticipated to result from the Merger. We reviewed the financial terms
of the Merger as set forth in the Merger Agreement in relation to, among other
things: current and historical market prices and trading volumes of RoTech
Common Stock and IHS Common Stock; the historical and projected earnings and
other operating data of RoTech and IHS; and the capitalization and financial
condition of RoTech and IHS. We considered, to the extent publicly available,
the financial terms of certain other similar transactions recently effected
which we considered relevant in evaluating the Merger and analyzed certain
financial, stock market and other publicly available information relating to the
businesses of other companies whose operations we considered relevant in
evaluating those of RoTech and IHS. We also evaluated the potential pro forma
financial impact of the Merger on IHS. In addition to the foregoing, we
conducted such other analyses and examinations and considered such other
financial, economic and market criteria as we deemed appropriate in arriving at
our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed by
or discussed with us. With respect to financial forecasts and other information
and data provided to or otherwise reviewed by or discussed with us, we have been
advised by the managements of RoTech and IHS that such forecasts and other
information and data were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the managements of RoTech and IHS
as to the future financial performance of RoTech and IHS and the strategic
implications and operational benefits anticipated to result from the Merger.
We have assumed, with your consent, that the Merger will be treated as a
tax-free reorganization for federal income tax purposes. Our opinion, as set
forth herein, relates to the relative values of RoTech and IHS. We are not
expressing any opinion as to what the value of the IHS Common Stock actually
will
C-1
The Board of Directors
RoTech Medical Corporation
July 6, 1996
Page 2
be when issued to RoTech stockholders pursuant to the Merger or the price at
which the IHS Common Stock will trade subsequent to the Merger. We have not made
or been provided with an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of RoTech or IHS nor have we made any
physical inspection of the properties or assets of RoTech or IHS. In connection
with our engagement, we were requested to approach, and held discussions with,
third parties to solicit indications of interest in a possible acquisition of
RoTech. Our opinion is necessarily based upon information available to us, and
financial, stock market and other conditions and circumstances existing and
disclosed to us, as of the date hereof.
Smith Barney has been engaged to render financial advisory services to RoTech in
connection with the proposed Merger and will receive a fee for such services, a
significant portion of which is contingent upon the consummation of the Merger.
We also will receive a fee in connection with the delivery of this opinion. In
the ordinary course of our business, we and our affiliates may actively trade or
hold the securities of RoTech and IHS for our own account or for the account of
our customers and, accordingly, may at any time hold a long or short position in
such securities. We have in the past provided investment banking services to
RoTech and IHS unrelated to the proposed Merger, for which services we have
received compensation. In addition, we and our affiliates (including Travelers
Group Inc. and its affiliates) may maintain relationships with RoTech and IHS.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of RoTech in its evaluation of the
proposed Merger, and our opinion is not intended to be and does not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
proposed Merger. Our opinion may not be published or otherwise used or referred
to, nor shall any public reference to Smith Barney be made, without our prior
written consent.
Based upon and subject to the foregoing, our experience as investment bankers,
our work as described above and other factors we deemed relevant, we are of the
opinion that, as of the date hereof, the Exchange Ratio is fair, from a
financial point of view, to the holders of RoTech Common Stock.
Very truly yours,
SMITH BARNEY INC.
C-2
ROTECH MEDICAL CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints William P. Kennedy, William A. Walker II,
Leonard E. Williams, Stephen P. Griggs, and Jack T. Weaver or any of them, the
proxies and attorneys-in-fact for the undersigned, with full power of
substitution and revocation, to represent and vote on behalf of the undersigned,
at a special meeting of stockholders of RoTech Medical Corporation (the
"Company"), to be held at SunTrust Bank, 200 South Orange Avenue, Second Floor,
Campus Room, Orlando, Florida, on Tuesday, October 21, 1997 at 10:00 a.m., local
time, and any adjournments or postponements thereof, all shares of the common
stock, $.0002 par value per share, of the Company standing in the name of the
undersigned or which the undersigned may be entitled to vote as follows on the
reverse side.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEM 1
---
TO BE COMPLETED AND SIGNED ON THE REVERSE SIDE [SEE REVERSE SIDE]
[ X ] Please mark votes as in this example
This proxy when properly executed will be voted in the manner directed
herein by the undersigned. If no direction is made, this proxy will be
voted FOR the proposal set forth below.
1. Proposal to adopt and approve an Agreement and Plan of Merger, dated as of
July 6, 1997 (the "Merger Agreement"), among the Company, Integrated Health
Services, Inc. ("IHS") and IHS Acquisition XXIV, Inc., a Florida
corporation and a wholly-owned subsidiary of IHS ("Merger Sub"), pursuant
to which, among other things, (a) Merger Sub will merge with and into the
Company (the "Merger") and the Company will become a wholly-owned
subsidiary of IHS and (b) each outstanding share of common stock, $.0002
par value per share, of the Company ("RoTech Common Stock") will be
converted into the right to receive, and each right to acquire a share of
RoTech Common Stock will be converted into the right to purchase, 0.5806 of
a share of common stock, $.001 par value per share, of IHS, with cash paid
in lieu of any fractional shares.
The submission of this proxy if properly
executed revokes all prior proxies given
by the undersigned.
Receipt of the Notice of Special Meeting
of Stockholders and accompanying Joint
Proxy Statement/Prospectus is hereby
acknowledged.
Note: Please sign, date and mail this
proxy promptly in the enclosed
postage-paid envelope.
Please sign exactly as name appears on
this card. When shares are held by joint
tenants, both should sign. When signing
as attorney, executor, administrator or
guardian, please give full title as such.
If a corporation, please sign in full
corporate name by president or other
authorized officer. If a partnership,
please sign in partnership name by
authorized person.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Signature: Date: Signature: Date:
--------------- ------- --------------- -------