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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
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 Rule 14a-11(c) or Rule 14a-12
INTEGRATED HEALTH SERVICES, INC.
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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 the appropriate box):
[X] No Fee 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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5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
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[ ] 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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4) Date Filed:
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INTEGRATED HEALTH SERVICES, INC.
10065 RED RUN BOULEVARD
OWINGS MILLS, MARYLAND 21117
(410) 998-8400
April 30, 1998
Dear Fellow Stockholder:
You are cordially invited to attend the Company's Annual Meeting of
Stockholders to be held at 11:00 a.m., on Friday, May 22, 1998, at the
Pikesville Hilton Inn, 1726 Reisterstown Road, Baltimore, Maryland.
This year, you are being asked to vote only on the election of eight
directors to the Company's Board of Directors. In addition, I will be pleased to
report on the affairs of the Company and a discussion period will be provided
for questions and comments of general interest to stockholders.
We look forward to greeting personally those stockholders who are able to
be present at the meeting; however, whether or not you plan to be with us at the
meeting, it is important that your shares be represented. Accordingly, you are
requested to sign and date the enclosed proxy and mail it in the envelope
provided at your earliest convenience.
Thank you for your cooperation.
Very truly yours,
/s/ Robert N. Elkins, M.D.
Robert N. Elkins, M.D.
Chairman of the Board, President and
Chief Executive Officer
INTEGRATED HEALTH SERVICES, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Owings Mills, Maryland
April 30, 1998
Notice is hereby given that the Annual Meeting of Stockholders of
Integrated Health Services, Inc. will be held on Friday, May 22, 1998 at 11:00
a.m., at the Pikesville Hilton Inn, 1726 Reisterstown Road, Baltimore, Maryland,
for the following purposes:
(1) To elect eight directors to serve for the ensuing year; and
(2) To transact such other business as may properly come before the Annual
Meeting or any adjournment thereof.
Stockholders of record at the close of business on April 13, 1998 will be
entitled to notice of and to vote at the Annual Meeting or any adjournment
thereof.
All stockholders are cordially invited to attend the Annual Meeting in
person. Stockholders who are unable to attend the Annual Meeting in person are
requested to complete and date the enclosed form of proxy and return it promptly
in the envelope provided. No postage is required if mailed in the United States.
Stockholders who attend the Annual Meeting may revoke their proxy and vote their
shares in person.
MARC B. LEVIN
Secretary
INTEGRATED HEALTH SERVICES, INC.
10065 RED RUN BOULEVARD
OWINGS MILLS, MARYLAND 21117
PROXY STATEMENT
GENERAL INFORMATION
PROXY SOLICITATION
This Proxy Statement is furnished to the holders of Common Stock, par value
$.001 per share (the "Common Stock"), of Integrated Health Services, Inc. (the
"Company") in connection with the solicitation by the Board of Directors of the
Company of proxies for use at the Annual Meeting of Stockholders to be held on
Friday, May 22, 1998, or at any adjournment thereof, pursuant to the
accompanying Notice of Annual Meeting of Stockholders. The purposes of the
meeting and the matters to be acted upon are set forth in the accompanying
Notice of Annual Meeting of Stockholders. The Board of Directors is not
currently aware of any other matters that will come before the meeting.
Proxies for use at the meeting are being solicited by the Board of
Directors of the Company. Proxies will be mailed to stockholders on or about May
1, 1998 and will be solicited chiefly by mail. The Company will make
arrangements with brokerage houses and other custodians, nominees and
fiduciaries to send proxies and proxy material to the beneficial owners of the
shares and will reimburse them for their expenses in so doing. Should it appear
desirable to do so in order to ensure adequate representation of shares at the
meeting, officers, agents and employees of the Company may communicate with
stockholders, banks, brokerage houses and others by telephone, facsimile or in
person to request that proxies be furnished. All expenses incurred in connection
with this solicitation will be borne by the Company. The Company has retained
Georgeson & Company Inc. to assist in soliciting proxies for a fee of
approximately $8,000 plus out-of-pocket expenses.
REVOCABILITY AND VOTING OF PROXY
A form of proxy for use at the Annual Meeting and a return envelope for the
proxy are enclosed. Stockholders may revoke the authority granted by their
execution of proxies at any time before their effective exercise by filing with
the Secretary of the Company a written notice of revocation or a duly executed
proxy bearing a later date, or by voting in person at the meeting. Shares of the
Company's Common Stock represented by executed and unrevoked proxies will be
voted in accordance with the choice or instructions specified thereon. If no
specifications are given, the proxies intend to vote the shares represented
thereby to elect as directors the persons nominated and in accordance with their
best judgment on any other matters which may properly come before the meeting.
RECORD DATE AND VOTING RIGHTS
Only stockholders of record at the close of business on April 13, 1998 are
entitled to notice of and to vote at the Annual Meeting or any adjournment
thereof. On April 13, 1998 there were 45,067,206 shares of Common Stock
outstanding; each such share is entitled to one vote on each of the matters to
be presented at the Annual Meeting. The holders of a majority of the outstanding
shares of Common Stock, present in person or by proxy, will constitute a quorum
at the Annual Meeting. Abstentions and broker non-votes will be counted for
purposes of determining the presence or absence of a quorum. "Broker non-votes"
are shares held by brokers or nominees which are present in person or
represented by proxy, but which are not voted on a particular matter because
instructions have not been received from the beneficial owner. Under applicable
Delaware law, the effect of broker non-votes on a particular matter depends on
whether the matter is one as to which the broker or nominee has discretionary
voting authority under the applicable rule of the New York Stock Exchange. The
effect of broker non-votes on the election of directors is discussed under
Proposal No. 1.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth information as of March 1, 1998 (except as
otherwise noted in the footnotes) regarding the beneficial ownership (as defined
by the Securities and Exchange Commission (the "Commission")) of the Company's
Common Stock of: (i) each person known by the Company to own beneficially more
than five percent of the Company's outstanding Common Stock; (ii) each director
of the Company; (iii) each executive officer named in the Summary Compensation
Table (see "Executive Compensation"); and (iv) all directors and executive
officers of the Company as a group. Except as otherwise specified, the named
beneficial owner has sole voting and investment power over the shares listed.
AMOUNT AND NATURE
OF BENEFICIAL
OWNERSHIP OF PERCENTAGE OF
NAME OF BENEFICIAL OWNER COMMON STOCK COMMON STOCK
- ---------------------------------------------------------------------- -------------------- --------------
Robert N. Elkins ..................................................... 3,480,458(1) 7.6%
Integrated Health Services, Inc.
8889 Pelican Bay Boulevard
Naples, FL 34108
Pioneering Management Corporation .................................... 3,851,866(2) 8.8%
60 State Street
Boston, MA 02109
Lawrence P. Cirka .................................................... 914,681(3) 2.1%
Edwin M. Crawford .................................................... 100,000(4) *
Stephen P. Griggs .................................................... 1,363,545(5) 3.0%
Anthony R. Masso ..................................................... 209,211(6) *
Kenneth M. Mazik ..................................................... 107,740(7) *
Robert A. Mitchell ................................................... 100,000(4) *
Charles W. Newhall III ............................................... 129,422(8) *
Timothy F. Nicholson ................................................. 509,803(9) 1.2%
John L. Silverman .................................................... 150,000(4) *
George H. Strong ..................................................... 109,000(7) *
C. Christian Winkle .................................................. 338,557(10) *
All directors and executive officers as a group (17 persons) ......... 8,611,836(11) 17.0%
------------ ----
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* Less than one percent
(1) Includes 2,500,000 shares of Common Stock issuable to Dr. Elkins upon the
exercise of options granted under the Company's stock option plans, 30,000
shares held by Dr. Elkins' spouse, and 75,936 shares held by LifeWay
Partners LLC, of which Dr. Elkins owns 99% and his spouse owns the
remaining 1%. Dr. Elkins disclaims beneficial ownership of the shares held
by his spouse.
(2) This figure is based upon information set forth in Amendment No. 2 to
Schedule 13G, dated January 21, 1998, filed with the Commission by
Pioneering Management Corporation.
(3) Information as of April 13, 1998. Includes 870,464 shares of Common Stock
which may be acquired upon the exercise of options granted under the
Company's stock option plans, including 337,500 shares issuable to Mr.
Cirka upon the exercise of options which are not exercisable within 60 days
of March 1, 1998. Mr. Cirka ceased to be an executive officer and director
in March 1998.
(4) Represents shares which may be acquired upon the exercise of options
granted under the Company's stock option plans, including 25,000 shares
issuable upon the exercise of options which are not exercisable within 60
days of March 1, 1998.
(5) Includes 8,402 shares owned by L & G of Orlando, Inc., a corporation in
which Mr. Griggs is the principal shareholder, 870 shares owned by his
spouse, 391 shares owned by his spouse's trust, 750,000 shares which may be
acquired upon the exercise of warrants issued to Mr. Griggs in connection
with the Company's acquisition (the "RoTech Acquisition") of RoTech Medical
Corporation ("RoTech"), which warrants are not exercisable within 60 days
of March 1, 1998, and 493,510 shares which may be acquired upon the
exercise of options granted under stock option plans of RoTech and
converted into options to purchase shares of the Company's Common Stock in
connection with the RoTech Acquisition. See "Executive Compensation --
Employment Agreements."
2
(6) Includes 205,000 shares which may be acquired upon the exercise of options
granted under the Company's stock option plans, including 75,000 shares
issuable upon the exercise of options which are not exercisable within 60
days of March 1, 1998.
(7) Includes 100,000 shares of Common Stock which may be acquired upon the
exercise of options granted under the Company's stock option plans,
including 25,000 shares issuable upon the exercise of options which are not
exercisable within 60 days of March 1, 1998.
(8) Includes 128,082 shares which may be acquired upon the exercise of options
granted under the Company's stock option plans, including 25,000 shares
issuable upon the exercise of options which are not exercisable within 60
days of March 1, 1998, and 1,340 shares owned by his spouse.
(9) Includes 350,000 shares of Common Stock which may be acquired upon the
exercise of options granted under the Company's stock option plans,
including 25,000 shares issuable upon the exercise of options which are not
exercisable within 60 days of March 1, 1998, 55,000 shares owned by Mr.
Nicholson and his wife and 2,250 shares owned in trust for the benefit of
Mr. Nicholson's minor children.
(10) Includes 336,000 shares which may be acquired upon the exercise of options
granted under the Company's stock option plans, including 195,000 shares
issuable upon the exercise of options which are not exercisable within 60
days of March 1, 1998.
(11) Includes 6,004,852 shares which may be acquired upon the exercise of
options granted under the Company's stock option plans (including 1,269,050
shares issuable upon the exercise of options which are not exercisable
within 60 days of March 1, 1998), 750,000 shares which may be acquired upon
the exercise of warrants issued to Mr. Griggs in connection with the RoTech
Acquisition, which warrants are not exercisable within 60 days of March 1,
1998, and 493,510 shares which may be acquired upon the exercise of options
granted under stock option plans of RoTech and converted into options to
purchase shares of the Company's Common Stock in connection with the RoTech
Acquisition.
3
PROPOSAL NO. 1--ELECTION OF DIRECTORS
Eight directors (constituting the entire Board) are to be elected at the
Annual Meeting. Unless otherwise specified, the enclosed proxy will be voted in
favor of the persons named below to serve until the next annual meeting of
stockholders and until their successors shall have been duly elected and shall
qualify. Each person named below is now a director of the Company. In the event
any of these nominees shall be unable to serve as a director, the shares
represented by the proxy will be voted for the person, if any, who is designated
by the Board of Directors to replace the nominee. All nominees have consented to
be named and have indicated their intent to serve if elected. The Board of
Directors has no reason to believe that any of the nominees will be unable to
serve or that any vacancy on the Board of Directors will occur.
The nominees, their ages, the year in which each first became a director
and their principal occupations or employment during the past five years are:
YEAR FIRST PRINCIPAL OCCUPATION
NOMINEE AGE BECAME DIRECTOR DURING THE PAST FIVE YEARS
- -------------------------------- ----- ----------------- ------------------------------------------------------------
Robert N. Elkins, M.D. ......... 54 1986 Chairman of the Board and Chief Executive Officer of the
Company since March 1986; President of the Company since
March 1998 and from March 1986 to July 1994; from 1980 to
1986, Vice President of Continental Care Centers, Inc., an
owner and operator of long-term healthcare facilities; from
1976 to 1980, a practicing physician. (1)(2)
Edwin M. Crawford .............. 49 1995 President and Chief Executive Officer of MedPartners, Inc.
since March 1998; Chairman of the Board of Directors,
President and Chief Executive Officer of Magellan Health
Services, Inc. (formerly Charter Medical Corporation) from
1993 to March 1998; President and Chief Operating Officer
of Charter Medical from 1992 to 1993; Executive Vice
President -- Hospital Operations of Charter Medical from
1990 to 1992.(3)
Kenneth M. Mazik ............... 57 1995 Private investor involved in numerous enterprises; Chair-
man of the Jovius Foundation; President of Au Clair Pro-
grams and Orlando Financial Corporation, specializing in
investments in long-term care of the disabled.(3)(4)(5)
Robert A. Mitchell ............. 43 1995 Attorney, Law Offices of Robert A. Mitchell, 1986 to
present, with an emphasis on corporate and entertainment
law, as well as finance and public relations matters con-
cerning healthcare acquisitions; a founder, director and
treasurer of the Bone Marrow Foundation.(2)(6)
Charles W. Newhall III ......... 53 1986 General Partner, since 1978, of New Enterprise Associ-
ates, a group of venture capital partnerships.(4)(6)
Timothy F. Nicholson ........... 49 1986 Managing Director of Lyric Health Care LLC since February
1998; Chairman and Managing Director of Speciality Care PLC
from May 1993 to February 1998; Executive Vice President of
the Company from March 1986 to May 1993; from 1980 to 1986,
Executive Vice President of Continental Care Centers, Inc.;
from 1973 to 1980, a practicing attorney.
4
YEAR FIRST PRINCIPAL OCCUPATION
NOMINEE AGE BECAME DIRECTOR DURING THE PAST FIVE YEARS
- -------------------------------- ----- ----------------- ------------------------------------------------------------
John L. Silverman ......... 56 1986 Private investor in, and consultant to, healthcare compa-
nies; Chief Executive Officer and President of Asia Care,
Inc., a subsidiary of the Company, from June 1995 to De-
cember 1997; President of VentureCorp, Inc., a venture
capital and investment management company, from 1985 to
June 1995; Vice President and Chief Financial Officer of
Chi Systems, Inc. (formerly the Chi Group, Inc.), a
healthcare consulting company, from 1990 to 1997.
George H. Strong .......... 71 1994 From 1978 until 1993, a director and from 1978 to 1985 a
senior officer of Universal Health Services, Inc., a
publicly owned hospital management corporation which he
co-founded; currently a director of eight corporations.
(3)(5)
- ----------
(1) Dr. Elkins is the brother of Marshall A. Elkins, Executive Vice President
and General Counsel of the Company.
(2) Member of the Acquisitions Committee.
(3) Member of the Finance Committee of the Board of Directors.
(4) Member of the Compensation and Stock Option Committee of the Board of
Directors.
(5) Member of the Audit Committee of the Board of Directors.
(6) Member of the Related Party Policy Committee.
Dr. Elkins is a director of Capstone Capital Corporation and Imagyn Medical
Technologies, Inc. Mr. Crawford is a director of MedPartners, Inc. and First
Union National Bank of Georgia. Mr. Newhall is a director of HEALTHSOUTH
Corporation, Opta Food Ingredients, Inc. and MedPartners, Inc. Mr. Silverman is
a director of Superior Consultant Holdings Corporation and MHM Services, Inc.
Mr. Strong is a director of HEALTHSOUTH Corporation, Core Funds, AmeriSource
Health Corporation and Balanced Care Corporation.
During the fiscal year ended December 31, 1997, the Board of Directors held
15 meetings (six of which were regularly scheduled meetings) and acted three
times by unanimous written consent in lieu of a meeting. Each director attended
at least 75% of the meetings of the Board of Directors held and of all
committees of the Board of Directors on which he served while he was director of
the Company, except that Mr. Crawford attended 2/3 of the meetings of the Board
of Directors.
In September 1990, the Board of Directors established an Audit Committee to
review the internal accounting procedures of the Company and to consult with and
review the Company's independent auditors and the services provided by such
auditors. Messrs. Mazik and Strong are the current members of the Audit
Committee. The Audit Committee met three times in 1997.
In September 1990, the Board of Directors formed the Stock Option Plan
Committee to administer the Company's stock option plans. In July 1992, the
Board of Directors formed the Executive Compensation Committee to administer the
Company's executive compensation policies. In July 1993, the Board of Directors
merged the Executive Compensation Committee and the Stock Option Plan Committee
to form the Compensation and Stock Option Committee, which took on the
responsibilities previously held by its predecessor committees. Messrs. Mazik
and Newhall are the current members of this committee. The Compensation and
Stock Option Committee held four meetings and acted five times by unanimous
written consent in lieu of a meeting in 1997.
On February 1, 1996, the Board of Directors formed the Finance Committee to
oversee the treasury operations and supervise the financial affairs of the
Company and approve debt offerings and matters relating to the Company's line of
credit. Messrs. Crawford, Mazik and Strong are the current members of this
committee. The Finance Committee held five meetings in 1997.
5
On April 18, 1996, the Board of Directors formed the Related Party Policy
Committee to review proposed related party transactions and to recommend to the
Board of Directors action to be taken with respect to related party
transactions. Messrs. Mitchell and Newhall are the current members of this
committee. The Related Party Policy Committee did not meet in 1997.
On July 24, 1997, the Board of Directors formed the Acquisitions Committee
to approve transactions for the acquisition or disposition by the Company of
assets or businesses in which the consideration paid or received includes
capital stock of the Company or the purchaser, respectively, without the
necessity for further Board approval, as long as (i) the consideration to be
paid or received by the Company in connection with any such acquisition or
disposition does not exceed $50 million and (ii) the aggregate consideration to
be paid or received by the Company in any calendar year does not exceed $300
million. Messrs. Elkins and Mitchell are the current members of this committee.
The Acquisitions Committee acted twice by unanimous written consent in lieu of a
meeting in 1997.
VOTE REQUIRED
The eight nominees receiving the highest number of affirmative votes of the
shares present in person or represented by proxy and entitled to vote for them,
a quorum being present, shall be elected as directors. Only votes cast for a
nominee will be counted, except that the accompanying proxy will be voted for
all nominees in the absence of instruction to the contrary. Abstentions, broker
non-votes and instructions on the accompanying proxy card to withhold authority
to vote for one or more nominees will result in the respective nominees
receiving fewer votes. However, the number of votes otherwise received by the
nominee will not be reduced by such action.
THE BOARD OF DIRECTORS DEEMS "PROPOSAL NO. 1 -- ELECTION OF DIRECTORS" TO
BE IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A
VOTE "FOR" EACH NOMINEE.
6
EXECUTIVE COMPENSATION
The following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to the Company's chief executive
officer and each of the four other most highly compensated executive officers
who were serving at the end of 1997 for services in all capacities to the
Company and its subsidiaries.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
----------------------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1)
- ---------------------------------- ------ ------------------ ---------------------
Robert N. Elkins ................. 1997 $ 752,277 $ 3,250,000(5)
Chairman of the Board and 1996 $ 750,000 $ 2,500,000(6)
Chief Executive Officer(4) 1995 $ 735,577 $ 750,000(7)
Lawrence P. Cirka ................ 1997 $ 584,286 $ 1,417,619(12)
President(11) 1996 $ 550,000 $ 833,334(13)
1995 $ 539,423 $ 550,000(14)
Stephen P. Griggs ................ 1997 $ 95,890(17) $ 3,595,890(18)
President--RoTech 1996 -- --
Medical Corporation(16) 1995 -- --
C. Christian Winkle .............. 1997 $ 400,000 $ 300,000
Executive Vice President-- 1996 $ 300,000 $ 100,000
Chief Operating Officer(20) ..... 1995 $ 269,327 $ 80,000(21)
Anthony R. Masso ................. 1997 $ 327,278 $ 98,183
Executive Vice President-- 1996 $ 300,000 $ 75,000
Managed Care(24) 1995 $ 265,000 $ 100,000
LONG-TERM COMPENSATION
-------------------------------------
SECURITIES
RESTRICTED UNDERLYING
STOCK OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION AWARDS($)(2) SARS(#) COMPENSATION($)(3)
- ---------------------------------- ------------------ ------------------ ---------------------
Robert N. Elkins ................. -- 1,100,000 $ 14,453,794(8)
Chairman of the Board and -- 500,000 $ 7,592(9)
Chief Executive Officer(4) -- -- $ 287,942(10)
Lawrence P. Cirka ................ -- -- $ 2,136(9)
President(11) -- 300,000 $ 2,765(9)
-- 300,000 $ 179,416(15)
Stephen P. Griggs ................ -- 750,000(19) --
President--RoTech -- -- --
Medical Corporation(16) -- -- --
C. Christian Winkle .............. -- -- $ 56,470(23)
Executive Vice President-- -- 100,000 $ 41,776(23)
Chief Operating Officer(20) ..... $ 39,996(22) 25,000 $ 49,510(23)
Anthony R. Masso ................. -- -- $ 42,352(23)
Executive Vice President-- -- 30,000 $ 38,485(23)
Managed Care(24) $ 50,006(25) -- $ 37,500(23)
- ----------
(1) Represents cash portion of bonus. In addition, in 1995 Messrs. Masso and
Winkle received a portion of their bonus in shares issued pursuant to the
Company's Cash Bonus Replacement Plan. These shares are listed under
"Restricted Stock Awards."
(2) Represents the value of shares issued pursuant to the Company's Cash Bonus
Replacement Plan at $22.00 per share, the fair market value on the date of
issuance. All of the shares granted are fully-vested.
(3) Does not include perquisites paid to the listed officers, such as
automobile allowances.
(4) The Company is a party to an employment and related agreements with Dr.
Elkins. Dr. Elkins has indicated to the Company that he intends to use all
salary and bonus in excess of $500,000 received by him in 1998, net of
taxes, to repay outstanding indebtedness to the Company. See "-- Employment
Agreements" and "Certain Transactions."
(5) Includes the bonus earned in accordance with Dr. Elkins' employment
agreement ($750,000) and $2,500,000 of the $5,000,000 bonus granted in 1996
which became payable in 1997 upon the satisfaction of certain conditions.
In 1996, Dr. Elkins was granted a bonus of $5,000,000 which would become
payable if certain conditions were met. The conditions for the bonus, as
amended, were as follows: (i) 25% of the bonus would be paid if the Company
met the Company's earnings per share projections for the 12 months ended
June 30, 1997 before taking into account the payment of the bonus and any
non-recurring non-cash charges; (ii) 25% of the bonus would be paid if the
proposed sale of the Company's pharmacy division to Capstone Pharmacy
Services, Inc. pursuant to the Asset Purchase Agreement dated as of June
20, 1996 was consummated; (iii) 25% of the bonus would be paid if the
proposed initial public offering of the Company's subsidiary Integrated
Living Communities, Inc. ("ILC") was consummated at a price of at least
$9.00 per share, or if after the proposed initial public offering of ILC at
a lower price, the price per share of ILC traded at a price of at least
$9.00 per share; and (iv) 25% of the bonus would be paid if the proposed
acquisition of First American Health Care of Georgia, Inc. pursuant to the
Merger Agreement dated as of February 21, 1996 was consummated. Conditions
(ii) and (iv) were met in 1996, and conditions (i) and (iii) were met in
1997. Dr. Elkins was required to use 50% of the after-tax amount of the
bonus (including the advance) to purchase shares of the Company's Common
Stock.
(6) Consists of $2,500,000 of the $5,000,000 bonus granted in 1996 which became
payable in 1996 upon the satisfaction of certain conditions. Does not
include the remaining $2,500,000 of such $5,000,000 bonus, which amount was
advanced in 1996 but became payable in 1997 upon the satisfaction of
certain conditions. See Note 5 above.
7
(7) Consists of the bonus earned in accordance with Dr. Elkins' employment
agreement.
(8) Represents $281,432 of loan forgiveness, $14,169,200 contributed by the
Company to the Key Employee Supplemental Executive Retirement Plan and
$3,162 of life insurance premium payments made by the Company on behalf of
Dr. Elkins. See "--Supplemental Deferred Compensation Plans" and "Certain
Transactions."
(9) Represents life insurance premium payments made by the Company on behalf of
the named individual.
(10) Represents $285,350 contributed by the Company to the Supplemental Deferred
Compensation Plan and $2,592 of life insurance premium payments made by the
Company on behalf of Dr. Elkins. See "--Supplemental Deferred Compensation
Plans."
(11) Mr. Cirka ceased to be an officer and director of the Company in March
1998. See "--Employment Agreements."
(12) Includes the bonus earned in accordance with Mr. Cirka's employment
agreement ($584,286) and $833,333 of the $1,666,667 bonus granted in 1996
which became payable in 1997 upon the satisfaction of certain conditions.
See Note 5 above.
(13) Consists of $833,334 of the $1,666,667 bonus granted in 1996 which became
payable in 1996 upon the satisfaction of certain conditions. Does not
include the remaining $833,333 of such $1,666,667 bonus, which amount was
advanced in 1996 but became payable in 1997 upon the satisfaction of
certain conditions. See Note 5 above. Mr. Cirka was required to use 50% of
the after-tax amount of the bonus (including the advance) to purchase
shares of the Company's Common Stock.
(14) Consists of the bonus earned in accordance with Mr. Cirka's employment
agreement.
(15) Includes $161,700 contributed by the Company to the Supplemental Deferred
Compensation Plan, $17,700 of loan forgiveness and $16 of life insurance
premium payments made by the Company on behalf of Mr. Cirka. See
"--Supplemental Deferred Compensation Plans."
(16) Mr. Griggs joined the Company on October 21, 1997 upon consummation of the
RoTech Acquisition. Mr. Griggs was President of RoTech at the time of the
RoTech Acquisition. The Company is a party to an employment agreement with
Mr. Griggs. See "--Employment Agreements."
(17) Does not include amounts paid to Mr. Griggs by RoTech prior to consummation
of the RoTech Acquisition.
(18) Includes a sign-on bonus of $3,500,000 paid to Mr. Griggs upon consummation
of the RoTech Acquisition. See "-- Employment Agreements."
(19) Consists of 750,000 shares which may be acquired upon the exercise of
warrants issued to Mr. Griggs in connection with the RoTech Acquisition.
Does not include 493,510 shares which may be acquired upon the exercise of
options granted under stock option plans of RoTech and converted into
options to purchase shares of the Company's Common Stock in connection with
the RoTech Acquisition See "--Employment Agreements."
(20) On April 30, 1997, Mr. Winkle was appointed Executive Vice President--Chief
Operating Officer of the Company. The Company is a party to an employment
agreement with Mr. Winkle. See "--Employment Agreements."
(21) Includes a $40,000 signing bonus pursuant to Mr. Winkle's employment
agreement. See "--Employment Agreements."
(22) Represents the fair market value on the date of issuance of 1,818 shares
issued pursuant to the Cash Bonus Replacement Plan.
(23) Represents a contribution by the Company to the Supplemental Deferred
Compensation Plan. See "--Supplemental Deferred Compensation Plans."
(24) The Company is a party to an employment agreement with Mr. Masso. See
"--Employment Agreements."
(25) Represents the fair market value on the date of issuance of 2,273 shares
issued pursuant to the Cash Bonus Replacement Plan.
8
The following table sets forth information with respect to option grants in
1997 to persons named in the Summary Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (B)
--------------------------------------------------------------- -----------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED TO EXERCISE
UNDERLYING EMPLOYEES IN OR BASE EXPIRATION
NAME OPTION(#) FISCAL YEAR (A) PRICE($/SH) DATE 5%($) 10%($)
- ------------------------------ ---------------- -------------------- ------------- ----------- -------------- --------------
Robert N. Elkins ............. 700,000(1) 55.5% $ 32.50 5/1/07 $14,308,000 $36,260,000
400,000(1) 31.7% $ 33.44 9/29/07 $ 8,412,000 $21,316,000
Lawrence P. Cirka ............ -- -- -- -- -- --
Stephen P. Griggs(2) ......... -- -- -- -- -- --
C. Christian Winkle .......... -- -- -- -- -- --
Anthony R. Masso ............. -- -- -- -- -- --
- ----------
(A) Based on options to purchase 1,260,350 shares granted to all employees in
fiscal 1997.
(B) These amounts represent assumed rates of appreciation in the price of the
Company's Common Stock during the terms of the options in accordance with
rates specified in applicable federal securities regulations. Actual gains,
if any, on stock option exercises will depend on the future price of the
Company's Common Stock and overall market conditions. The 5% rate of
appreciation over the 10-year term of the option of the $32.50 and $33.44
stock prices on the respective dates of grant would result in stock prices
of $52.94 and $54.47, respectively. The 10% rate of appreciation over the
10-year term of the option of the $32.50 and $33.44 stock prices on the
respective dates of grant would result in stock prices of $84.30 and
$86.73, respectively. There is no representation that the rates of
appreciation reflected in this table will be achieved.
(1) These options became exercisable six months following the date of grant.
(2) Does not include 750,000 shares which may be acquired upon the exercise of
warrants issued to Mr. Griggs in connection with the RoTech Acquisition or
493,510 shares which may be acquired upon the exercise of options granted
under stock option plans of RoTech and converted into options to purchase
shares of the Company's Common Stock in connection with the RoTech
Acquisition. The warrant becomes exercisable as to 150,000 shares of Common
Stock on each of October 21, 1998, 1999, 2000, 2001 and 2002, subject to
acceleration upon Mr. Griggs' death or the occurrence of a change of
control of the Company. The potential realizable value of the warrant over
its ten year term would be $15,637,500 at an assumed 5% annual rate of
appreciation of the stock price (based on the $33.16 exercise price of the
warrant) over the ten year term and $39,637,000 at an assumed 10% annual
rate of appreciation. These amounts represent assumed rates of appreciation
in the price of the Company's Common Stock during the term of the warrants
in accordance with rates specified in applicable federal securities
regulations. Actual gains, if any, on warrant exercises will depend on the
future price of the Common Stock and overall stock market conditions. The
5% rate of appreciation over the 10-year warrant term of the $33.16
exercise price would result in a stock price of $54.01. The 10% rate of
appreciation over the 10-year warrant term of the $33.16 exercise price
would result in a stock price of $86.01. There is no representation that
these rates of appreciation will be achieved. See "--Employment
Agreements."
9
The following table sets forth information with respect to (i) stock
options exercised in 1997 by the persons named in the Summary Compensation Table
and (ii) unexercised stock options held by such individuals at December 31,
1997:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
ACQUIRED ON VALUE ----------------------------- ----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ ------------- ------------------- ------------- --------------- ------------- --------------
Robert N. Elkins ............. 650,000 $ 8,289,000(2) 2,200,000 400,000 $15,461,250 --
Lawrence P. Cirka ............ -- -- 732,964 337,500 $ 8,052,463 $3,114,281
Stephen P. Griggs(3) ......... -- -- 493,510 750,000 $ 3,556,683 --
C. Christian Winkle .......... -- -- 141,000 45,000 $ 1,362,898 $ 423,338
Anthony R. Masso ............. -- -- 122,500 7,500 $ 1,226,219 $ 65,156
- ----------
(1) Computed based upon the difference between the closing price of the
Company's Common Stock on December 31, 1997 ($31.1875) and the exercise
price.
(2) Represents the difference between the closing price of the Company's Common
Stock on the date of exercise and the exercise price of the option. Dr.
Elkins continues to hold these shares.
(3) Consists of 750,000 shares of Common Stock which may be acquired upon the
exercise of warrants issued to Mr. Griggs in connection with the RoTech
Acquisition, none of which were exercisable, and 493,510 shares which may
be acquired upon the exercise of options granted under stock option plans
of RoTech and converted into options to purchase shares of the Company's
Common Stock in connection with the RoTech Acquisition.
EMPLOYMENT AGREEMENTS
As of November 18, 1997, the Company amended its existing employment
agreement with Robert N. Elkins. As amended, the agreement provides for a five
year term (which commenced January 1, 1994) with an automatic one year extension
at the end of each year, unless 90 days' notice is given by either party. Under
the agreement Dr. Elkins currently receives an annual base salary of $796,396,
with annual increases of at least the increase in the consumer price index. Dr.
Elkins will receive a bonus of 100% of his base salary if the Company's annual
earnings generally equal or exceed the earnings per share targets set by the
Board of Directors. Twelve and one-half percent of the bonus is payable each
quarter; however, if the Company's annual earnings do not exceed the Board of
Directors' targets, these quarterly payments are treated as prepayments of
salary or must be repaid to the Company, net of all taxes paid or payable
(except to the extent Dr. Elkins receives tax benefits, through deductions, for
the repayment), with interest at the prime rate. The remaining fifty percent of
the bonus is payable at the end of the year if the Company's annual earnings
exceed the Board of Directors' targets. The agreement may be terminated by
either party on 90 days' notice. Upon termination of Dr. Elkins' employment by
the Company without "Cause" or by Dr. Elkins for "Good Reason" or if the Company
elects not to extend the term of the agreement, Dr. Elkins will be entitled (i)
to a lump-sum cash payment on the effective date of termination equal to five
times the sum of (a) his salary, (b) the "Bonus Amount" and (c) a pro rata
portion of the Bonus Amount through the date of termination minus any bonus
payments made for the fiscal year in which termination occurs that are not
required to be repaid and (ii) to receive certain employee and other benefits
for five years after termination. In addition, upon termination of Dr. Elkins'
employment by the Company without "Cause" or by Dr. Elkins for "Good Reason" or
upon the Company giving notice that it elects not to extend the term of
employment for another year, all stock options, other equity-based rights and
other benefits (including benefits under the Company's Supplemental Deferred
Compensation Plans) will become fully vested. Upon termination of Dr. Elkins'
employment for any reason other than by the Company for Cause or by Dr. Elkins
before he attains the age of 55 and not due to death, permanent disability or
Good Reason, and upon any change of control that occurs while Dr. Elkins is
employed with the Company or within one year following his termination (other
than for Cause, death, permanent disability or Good Reason), he is entitled to
exercise any outstanding stock option until the earlier of five years following
such event (or, if later, five years after
10
the date of termination of employment following a change of control) or the
stated term of the option. The agreement also provides that if Dr. Elkins is
required to pay an excise tax on "excess parachute payments" (as defined in
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")), the
Company is required to pay Dr. Elkins one hundred percent of the amounts that
are necessary to place him in the same after-tax financial position that he
would have been in if such excise tax had not been applicable. The agreement
contains a two year non-competition provision (one year in the case of a
termination of employment other than for Cause within one year after a change of
control). In addition, Dr. Elkins' employment agreement provides that upon
termination without Cause or resignation for Good Reason or if the Company fails
to renew the agreement, Dr. Elkins shall have the right to acquire from the
Company for no additional consideration an assignment of the Company's leasehold
interest in certain floors of the Company's offices and to be provided with an
office, secretarial assistance, automobile insurance, an automobile allowance
and use of a Company plane for five years following termination. The agreement
also grants Dr. Elkins the right, at any time during his term of employment and
for one year thereafter, to purchase the aircraft owned by the Company at a
price equal to book value, and to lease or purchase from the Company at fair
market rental, or purchase from the Company at book value, the hangar space for
such aircraft at the Naples, Florida airport. Upon a change of control or
termination of Dr. Elkins' employment (other than a termination by the Company
for Cause or by Dr. Elkins for other than permanent disability or Good Reason),
Dr. Elkins also has the right to purchase from the Company the current
automobile furnished to him at book value.
Dr. Elkins' employment agreement also provides for his participation in the
Company's Key Employee Supplemental Executive Retirement Plan (the "Key Employee
SERP"), and requires the establishment of a separate trust under the Key
Employee SERP to which the Company shall make irrevocable contributions at
specified times through January 2, 2001 such that, at January 2, 2001, there
would be $23,900,000 in such trust. Pursuant to the employment agreement, the
Company is required to use reasonable efforts to obtain an insurance policy or
letter of credit guaranteeing its obligations to make contributions to the
trust. Upon a change of control of the Company, the Company is obligated to
irrevocably fund the trust in the amount necessary to fund Dr. Elkins' pension
benefit under the Key Employee SERP. In addition, upon a change of control, Dr.
Elkins is entitled to a vested, nonforfeitable right to retirement benefits
under the Key Employee SERP as if he had retired with 15 years of service on the
date the change of control occurred (without reduction for retirement prior to
attaining age 62), payable (i) in a lump sum if he is an employee at the time of
the change of control and (ii) in the lump sum actuarial equivalent less the sum
of all retirement benefits previously received under the Key Employee SERP if
the change of control occurs within one year after he ceases to be an employee.
See "--Supplemental Deferred Compensation Plans--Key Employee Supplemental
Executive Retirement Plan."
For purposes of Dr. Elkins' employment agreement: (a) "Cause" is defined as
(i) conviction of a felony involving moral turpitude or (ii) willful gross
neglect or willful gross misconduct resulting in material economic harm to the
Company, unless Dr. Elkins believed in good faith that such conduct was in or
not opposed to the best interests of the Company; (b) "Good Reason" is defined
as (i) a material breach of the agreement by the Company, (ii) any termination
of Dr. Elkins' employment within one year following a change of control of the
Company, (iii) removal, dismissal from or failure of Dr. Elkins to be elected
Chairman of the Board of Directors or (iv) the relocation of Dr. Elkins to an
office which is more than 15 miles from his then principal residence; and (c)
"Bonus Amount" is defined as the highest of (i) Dr. Elkins' salary in the year
of termination, (ii) his bonus in the immediately preceding calendar year or
(iii) his bonus in the calendar year which was immediately prior to the year
immediately preceding the year of termination. The agreement provides that the
determination that Cause exists must be approved by 75% of the members of the
Board and that Dr. Elkins has a 60 day cure period. For purposes of the
agreement, the term "change of control" means the occurrence of one or more of
the following: (i) any person (as such term is used in Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) other than Dr.
Elkins and any group (as such term is used in Section 13(d)(3) of the Exchange
Act) of which he is a member, becomes a beneficial owner (as such term is used
in Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the capital
stock of the Company of any class or classes having general voting power under
ordinary circumstances, in the absence of contingencies, to elect directors
("Voting Stock"); (ii) the majority of the Board of
11
Directors of the Company consists of individuals other than individuals who are
members of the Board of Directors on November 18, 1997 ("Incumbent Directors"),
provided that any person becoming a director subsequent to such date whose
election or nomination for election was supported by two-thirds of the directors
who then comprised the Incumbent Directors shall be considered to be an
Incumbent Director, unless such election or nomination was the result of any
actual or threatened election contest of a type contemplated by Regulation
14a-11 under the Exchange Act; (iii) the Company adopts any plan of liquidation
providing for the distribution of all or substantially all of its assets; (iv)
there is consummated any consolidation, reorganization or merger of the Company
in which the Company is not a continuing or surviving corporation or pursuant to
which all or substantially all of the Voting Stock is converted into cash,
securities or other property (unless the stockholders of the Company immediately
prior to such consolidation, reorganization or merger beneficially own, directly
or indirectly, in substantially the same proportion as they owned the Voting
Stock, all of the voting stock or other ownership interests of the entity or
entities, if any, that succeed to the business of the Company); (v) in any
transaction not described in preceding clause (iv), all or substantially all of
the assets or business of the Company is disposed of pursuant to a merger,
consolidation or other transaction (unless the stockholders of the Company
immediately prior to such merger, consolidation or other transaction
beneficially own, directly or indirectly, in substantially the same proportion
as they owned the Voting Stock, all of the voting stock or other ownership
interests of the entity or entities, if any, that succeed to the business of the
Company); or (vi) the Company combines with another company and is the surviving
corporation but, immediately after the combination, the stockholders of the
Company immediately prior to the combination hold, directly or indirectly, 50%
or less of the shares of Voting Stock of the combined company (there being
excluded from the number of such shares held by such stockholders, but not from
the Voting Stock of the combined company, any such shares received by
"affiliates," as such term is defined in the rules of the Commission, of such
other company in exchange for stock of such other company).
Pursuant to the supplemental agreement between Dr. Elkins and the Company,
Dr. Elkins is entitled to receive bonuses on each October 1 from 1998 to 2002 in
amounts sufficient to enable him to pay principal and interest on a loan made to
him by the Company less the amount of his salary and bonus for the prior
calendar year in excess of $500,000. See "Certain Transactions."
The Company was a party to an employment agreement with Lawrence P. Cirka
which provided for a five year term with an automatic one year extension at the
end of each year, unless 120 days' notice is given by either party. Under the
agreement Mr. Cirka was entitled to an annual base salary of $584,286 with
annual increases of at least the increase in the consumer price index. Mr. Cirka
was also entitled to a bonus of 100% of his base salary ("Bonus") if the
Company's annual earnings generally equaled or exceeded the earnings per share
targets set by the Board of Directors. Twelve and one-half percent of each bonus
was payable each quarter; however, if the Company's annual earnings did not
exceed the Board of Directors' targets, these quarterly payments were treated as
prepayment of salary or had to be repaid to the Company with interest at the
prime rate. The remaining fifty percent of each bonus was payable at the end of
the year if the Company's annual earnings exceeded the Board of Directors'
targets. The Company also agreed to pay a country club initiation fee for Mr.
Cirka. The agreement could be terminated by either party on 120 days' notice.
Upon termination of the agreement without Cause or in case Mr. Cirka resigned
for Good Reason or the Company failed to renew the agreement, Mr. Cirka would be
entitled to a payment of five times the sum of (a) his salary and (b) the
highest of (i) his salary in the year of termination, (ii) his Bonus in the
immediately preceding calendar year or (iii) his Bonus in the calendar year
which was immediately prior to the year immediately preceding the year of
termination. In addition, all stock option and other equity-based rights would
become fully vested and Mr. Cirka would be entitled to receive certain benefits
for five years after termination. The employment agreement also provided that if
Mr. Cirka was required to pay an excise tax on "excess parachute payments" (as
defined in Section 280G of the Code), the Company was required to pay Mr. Cirka
one hundred percent of the amount that would be necessary to place him in the
same after-tax financial position that he would have been in if such excise tax
had not been applicable. The agreement contains a two year non-competition
provision (one year in the case of a termination of employment other than for
Cause within one year after a change of control). For purposes of the agreement,
"Cause" is defined
12
as (i) willful and continuing neglect of duties, (ii) material breach of
confidentiality or non-compete provisions or (iii) conviction of a felony. "Good
Reason" is defined as (i) a material breach of the agreement by the Company,
(ii) resignation within one year after a change of control or (iii) removal,
dismissal from or failure of Dr. Elkins to be elected Chairman of the Board of
Directors. Mr. Cirka ceased to be an officer and director of the Company in
March 1998; however, the Company will continue to pay him under his employment
agreement as if it were terminated without Cause.
In connection with the RoTech Acquisition on October 21, 1997, RoTech
entered into an employment agreement with Stephen P. Griggs, the President of
RoTech. Pursuant to the agreement, Mr. Griggs serves as the President of RoTech
and receives an annual base salary of $500,000 per year and an annual bonus of
$500,000 for each year in which RoTech's net income contribution to the Company
equals or exceeds specified targets, with an additional bonus determined by the
Company to be paid if the net income contribution target is exceeded. In
addition, pursuant to the agreement Mr. Griggs received a one-time cash sign-on
bonus of $3,500,000 and a warrant to purchase 750,000 shares of Common Stock of
the Company at an exercise price of $33.16 per share, which warrant becomes
exercisable at a rate of 20% per year beginning on October 21, 1998 (subject to
acceleration upon Mr. Griggs' death or the occurrence of a change of control of
the Company). The employment agreement has a term of five years. Upon
termination of Mr. Griggs' employment by RoTech without "Cause" or in case Mr.
Griggs resigns for Cause, Mr. Griggs' unpaid base salary under the agreement and
the pro-rated portion of his performance-based bonus, if any, will become
payable in one lump sum and all of Mr. Griggs' unvested stock options will fully
vest. For purposes of the agreement, RoTech may terminate Mr. Griggs' employment
for Cause if Mr. Griggs (i) fails to perform any of his duties in any material
respect or breaches any material term of the agreement, which failure or breach
is not corrected within 30 days of notice, (ii) breaches any representation or
warranty under the agreement in any material respect, (iii) dies or becomes
disabled for 90 days or more and RoTech has provided Mr. Griggs with disability
insurance which is payable after such 90-day period, (iv) is convicted of a
felony or commits an act of theft, larceny or embezzlement or a similar act of
material misconduct with respect to property of RoTech, the Company, their
subsidiaries or employees or (v) commits a material act of malfeasance,
dishonesty or breach of trust with respect to RoTech, the Company or any of
their subsidiaries. Mr. Griggs may terminate his employment for Cause if RoTech
(i) fails to perform any of its duties under the agreement in any material
respect, (ii) fails to provide Mr. Griggs with a work environment reasonably
similar to Mr. Griggs' past work environment or (iii) substantially changes Mr.
Griggs' job responsibilities, each of which failure or action is not corrected
by RoTech within 15 days of notice. Under the agreement Mr. Griggs is subject to
a non-competition provision prohibiting him, for a period of three years
following the termination or expiration of his employment, from being employed
by, being a director or manager of, acting as a consultant for, being a partner
in, having a proprietary interest in, giving advice to, loaning money to or
otherwise associating with any entity which competes with RoTech or its
subsidiaries in the continental United States, subject to certain limited
exceptions. Pursuant to a related agreement, RoTech and the Company have agreed
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 RoTech Acquisition, 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 or local tax law) had not been applicable.
As of October 1, 1996, the Company entered into an employment agreement
with C. Christian Winkle, its Executive Vice President -- Chief Operating
Officer, pursuant to which Mr. Winkle currently receives an annual base salary
of $400,000 (subject to adjustment based on changes in the consumer price index)
plus a discretionary bonus. If the Company attains earnings per share goals set
by the Board of Directors, the bonus shall not be less than twenty-five percent
of annual base salary. The agreement has an initial term of three years and
contains an "evergreen" provision providing that the agreement is automatically
extended for an additional year at the end of each year unless either party
gives 120 days' prior notice of non-renewal. The agreement may be terminated by
either party on 90 days' notice. Upon termination without Cause or in case Mr.
Winkle resigns for Good Reason or the Company fails to renew
13
the contract, Mr. Winkle will be entitled to a payment of one and one-half times
the sum of (i) the greater of his salary in the year of termination or in the
previous year and (ii) the higher of his bonus in the year of termination or in
the previous year. In addition, all stock option and other equity-based rights
will become fully vested and Mr. Winkle will be entitled to receive certain
benefits for one and one-half years after termination. For purposes of the
agreement, "Cause" is defined as (i) material failure to perform duties, (ii)
material breach of confidentiality or non-compete provisions, (iii) conviction
of a felony or (iv) theft, larceny or embezzlement of Company property. "Good
Reason" is defined as (i) a material breach of the agreement by the Company or
(ii) resignation within one year after a change in control.
Effective June 1, 1994, the Company entered into an employment agreement
with Anthony R. Masso, its Executive Vice President--Managed Care, pursuant to
which Mr. Masso currently receives a base salary of $327,278, subject to annual
review, plus a discretionary bonus. Pursuant to the agreement, Mr. Masso was
granted options to purchase 100,000 shares of the Company's Common Stock
pursuant to the Company's 1994 Stock Incentive Plan at an exercise price of
$28.63, the Common Stock's fair market value on the date of grant. These options
were repriced to $20.88 on November 27, 1995. The agreement provides for a
three-year term of employment, with automatic one-year extensions unless either
party elects not to extend the agreement upon one year's prior notice. Pursuant
to this provision, the agreement has automatically been extended to June 1,
1999. The agreement may be terminated by either the Company or Mr. Masso for
"Cause." If Mr. Masso terminates the agreement for Cause or if the Company
terminates the agreement without Cause, the Company must pay Mr. Masso his
monthly salary (the "Severance Pay") for 24 months or the remaining term of the
agreement, whichever is less. During the period Mr. Masso receives Severance
Pay, he is subject to a non-competition provision prohibiting him, subject to
certain limited exceptions, from being employed by, being a director or manager
of, acting as a consultant for, being a partner in, having a proprietary
interest in, giving advice to, loaning money to or otherwise associating with
any entity which competes with the Company or its subsidiaries. The Company can
extend, to a total of 36 months, the period during which the non-competition
provision applies by paying Mr. Masso the Severance Pay during such extension.
In addition, the Company can obligate Mr. Masso to be bound by the
non-competition provision (i) for up to one year following expiration of the
agreement by paying him the Severance Pay during such period or (ii) for up to
nine months following termination by the Company for Cause by paying Mr. Masso
one-half of the Severance Pay during such period (which may be extended by an
additional three months, during which time the Company must pay Mr. Masso the
full Severance Pay). "Cause," for purposes of the Company's ability to terminate
the agreement, is defined as Mr. Masso's (i) failure to materially perform any
of his duties or breach of any material term of the agreement, either of which
is not corrected within 15 days after written notice from the Company, (ii)
disability which persists for a period of 60 days or more, (iii) conviction of a
misdemeanor or felony, or (iv) commission of theft, larceny or embezzlement of
the Company's tangible or intangible property. "Cause," for purposes of Mr.
Masso's ability to terminate the agreement, is defined as (i) the Company's
material breach of the agreement, which is not corrected within 60 days after
written notice from Mr. Masso, (ii) the removal or dismissal of Robert N. Elkins
as Chief Executive Officer of the Company or of Lawrence P. Cirka as Senior Vice
President and Chief Operating Officer of the Company after April 25, 1996, (iii)
a substantial diminution in Mr. Masso's employment duties or (iv) the failure to
grant Mr. Masso options for 100,000 shares of Common Stock pursuant to the
Company's 1994 Stock Incentive Plan.
SUPPLEMENTAL DEFERRED COMPENSATION PLANS
Key Employee Supplemental Executive Retirement Plan
In 1997 the Company amended and restated its Key Employee Supplemental
Executive Retirement Plan (the "Key Employee SERP"), which was adopted in 1996
to provide retirement benefits to certain key employees based on the highest
annual earnings in the ten most recent calendar years of employment. The
following table shows the estimated annual benefit payable (rounded to the
nearest thousand) upon retirement to participants in the Key Employee SERP at
the specified compensation and years-of-service classifications. The benefit
amounts listed in the following table are not subject to any deduction for
Social Security benefits or other offset amounts.
14
YEARS OF SERVICE
----------------------------------------
FINAL AVERAGE EARNINGS* 5 10 15 OR MORE
- ------------------------- ---------- ----------- -------------
$1,750,000............... $ 87,500 $280,000 $1,225,000
$2,000,000............... $100,000 $320,000 $1,400,000
$2,250,000............... $112,500 $360,000 $1,575,000
$2,500,000............... $125,000 $400,000 $1,750,000
$2,750,000............... $137,500 $440,000 $1,825,000
$3,000,000............... $150,000 $480,000 $2,100,000
$3,250,000............... $162,500 $520,000 $2,275,000
$3,500,000............... $175,000 $560,000 $2,450,000
$3,750,000............... $187,500 $600,000 $2,625,000
$4,000,000............... $200,000 $640,000 $2,800,000
$4,250,000............... $212,500 $680,000 $2,975,000
$4,500,000............... $225,000 $720,000 $3,150,000
$4,750,000............... $237,500 $760,000 $3,325,000
$5,000,000............... $250,000 $800,000 $3,500,000
- ----------
* Represents the highest annual compensation in the ten most recent calendar
years of employment.
Notwithstanding the foregoing, if the employment of a participant who has
at least five years of service terminates before the participant has attained
the age of 58 or, in the case of Robert N. Elkins, the age of 62, such
participant will be entitled to receive an annual benefit equal to the actuarial
equivalent of the benefit he would have received had he continued employment to
age 58 (62 in the case of Dr. Elkins), but based on years of service and
compensation at the time of termination. If Dr. Elkins' employment is terminated
after he attains the age of 58 but before he attains the age of 62, he shall be
entitled to receive an annual benefit equal to the benefit he would have
received had he attained the age of 62, reduced by two-twelfths of one percent
for each full calendar month by which the date of his termination precedes the
month of his 62nd birthday. Pursuant to a Supplemental Agreement entered into by
the Company and Dr. Elkins (the "Supplemental Agreement"), Dr. Elkins shall be
deemed to have completed 15 years of service if his employment is terminated
because of death, permanent disability, qualified medical termination, by Dr.
Elkins for Good Reason or by the Company without Cause (as such terms are
defined in the Supplemental Agreement or Dr. Elkins' employment agreement).
Compensation covered by the Key Employee SERP is the aggregate calendar
year earnings included in the participant's income for federal tax purposes
(including bonuses but excluding stock option gains). Benefits under the Key
Employee SERP vest upon the earliest to occur of (i) participant's completion of
five years of service, (ii) attainment of age 58 (62 in the case of Dr. Elkins)
or, in the case of participants other than Dr. Elkins, completion of five years
of service if later, (iii) death or disability (as defined in the Key Employee
SERP or the participant's employment agreement) while actively employed by the
Company or (iv) a change of control of the Company (substantially as defined in
Dr. Elkins' employment agreement (see "--Employment Agreements"), except that
the date for determining Incumbent Directors is March 1, 1996). Notwithstanding
the foregoing, no retirement benefits are payable to a participant if his
employment with the Company terminates prior to his benefits vesting. Benefits
under the Key Employee SERP are payable in a lump sum distribution (based on the
1983 group annuity mortality table for males and an interest rate equal to the
average yield on 30-year U.S. Treasury Securities for the month preceding the
month in which the participant's employment terminates) or, if the participant
so elects, in the form of annual installments over a period not to exceed 10
years, in a joint and 50% survivor annuity or in an annuity for the life of the
participant. Participants in the Key Employee SERP also have the right to defer
a portion of their annual compensation into the Key Employee SERP, although such
amounts are immediately fully vested.
The Key Employee SERP is technically unfunded, and the Company will pay all
benefits from its general revenues and assets. To facilitate the payment of
benefits and provide participants with a measure of benefit security without
subjecting the Key Employee SERP to various rules under the Employee Retirement
Income Security Act of 1974, as amended, the Company has established two
irrevocable trusts, one for the benefit of Robert N. Elkins ("Trust B") and one
for the benefit of other participants ("Trust
15
A"). The Company intends to make contributions to the trusts from time to time,
and is obligated, within 30 days following a change of control of the Company,
to make an irrevocable contribution to each trust in an amount sufficient to pay
each participant their full retirement benefit. Dr. Elkins' employment agreement
requires that the Company make irrevocable contributions to Trust B at specified
times through January 2, 2001 such that, at January 2, 2001, there would be
$23,900,000 in such trust. Pursuant to the employment agreement, the Company is
required to use its reasonable efforts to obtain an insurance policy or letter
of credit guaranteeing its obligations to make contributions to the trust.
Assets of such trust are considered general assets of the Company and are
subject to claims of the Company's creditors in the event of insolvency. As of
December 31, 1997, the Company had contributed $485,242 to Trust A. As of such
date, the Company had contributed $15,776,306 to Trust B, of which $3,773,958
represents transfers of amounts previously contributed to Trust A or to the
trust established in connection with the Company's Supplemental Deferred
Compensation Plans on behalf of Dr. Elkins.
Dr. Robert N. Elkins and Lawrence P. Cirka are currently the only
participants in the Key Employee SERP. Dr. Elkins and Mr. Cirka currently have
11 years of service and 10 years of service, respectively, under the Key
Employee SERP.
Supplemental Deferred Compensation Plans
The Company's Supplemental Deferred Compensation Plans (the "SERP") are
unfunded deferred compensation plans which offer certain executive and other
highly compensated employees an opportunity to defer compensation until the
termination of their employment with the Company. Contributions to the SERP by
the Company, which vest over a period of five years, are determined by the Board
upon recommendation of the Compensation and Stock Option Committee and are
allocated to participants' accounts on a pro rata basis based upon the
compensation of all participants in the SERP in the year such contribution is
made. During 1997, the Company contributed $350,000 to the SERP, none of which
was allocated to the account of Dr. Elkins. In addition, a participant may elect
to defer a portion of his or her compensation and have that amount added to his
or her SERP account. Participants may direct the investments in their respective
SERP accounts. All participant contributions and the earnings thereon, plus the
participant's vested portion of the Company's contribution account, are payable
upon termination of a participant's employment with the Company.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation and Stock Option Committee (the "Committee") is comprised
of two independent non-employee directors. As members of the Committee, it is
our responsibility to administer the Company's executive compensation programs,
monitor corporate performance and its relationship to compensation of executive
officers, and make appropriate recommendations concerning matters of executive
compensation.
Compensation Policies
The Company was formed in 1986 as a private company, was initially publicly
traded in 1991, and is recognized today as an industry leader and a
growth-oriented company. One of the Company's strengths contributing to its
success is a strong management team -- many of whom are among the founders of
the organization. The Committee believes that low executive turnover has been
instrumental to the Company's success, and that the Company's compensation
program has played a major role in limiting executive turnover. The compensation
program is designed to enable the Company to attract, retain and reward capable
employees who can contribute to the continued success of the Company,
principally by linking compensation with the attainment of key business
objectives. Equity participation and a strong alignment to stockholders'
interests are key elements of the Company's compensation philosophy. Five key
principles serve as the guiding framework for compensation decisions for all
employees of the Company:
1. To attract and retain the most highly qualified management and
employee team;
2. To pay competitively compared to similar healthcare companies;
16
3. To emphasize sustained performance by aligning rewards with
stockholder interests, especially through the use of equity
participation programs;
4. To motivate executives and employers to achieve the Company's annual
and long-term business goals; and
5. To strive for fairness in administration by emphasizing
performance-related contributions as the basis of pay decisions.
To implement these policies, the Committee has designed a four-part
executive compensation program consisting of base salary, annual incentive plan,
stock options and other employment benefits.
Section 162(m) of the Internal Revenue Code of 1986 ("Section 162(m)")
establishes certain criteria for the tax deductibility of annual compensation in
excess of $1 million paid to certain of the Company's executive officers.
Generally, Section 162(m) permits the deductibility of "performance based"
remuneration, including stock options and bonus payments that are earned upon
the satisfaction of preestablished objective criteria in each case pursuant to a
plan which is approved by stockholders regardless of amount. Although the
Committee considers the net cost to the Company in making all compensation
decisions (including, for this purpose, the potential limitation on
deductibility of executive compensation), there is no assurance that
compensation realized with respect to any particular award will qualify as
"performance based" remuneration.
Although most of the Company's stock option, stock purchase and stock
incentive plans satisfy the criteria for Section 162(m), the Company's current
annual incentive plan, the 1996 Stock Incentive Plan and the Cash Bonus
Replacement Plan do not satisfy the criteria for deductibility of remuneration
in excess of $1 million under Section 162(m). The Committee believes, however,
that the flexibility to adjust annual bonuses upward, as well as downward, is an
important feature of annual incentive plans and one which serves the best
interests of the Company by allowing the Committee to recognize and motivate
individual executive officers, as well as to change performance objectives, as
circumstances warrant. Consequently, the Committee believes that the benefits
from having flexibility under the annual incentive plans outweigh the possible
loss of a tax deduction for a portion of such remuneration and, therefore, does
not propose to have the annual incentive plans comply with Section 162(m)
requirements. Amounts paid under the annual incentive plans to the executive
officers will count toward the $1 million deductibility limitation that is
provided in Section 162(m). Those portions of the executives' compensation that
are not performance based (as defined in Section 162(m)) and that exceed the cap
will not be tax deductible by the Company.
Base Salary. The Committee seeks to maintain levels of compensation that
are competitive with similar healthcare companies in the industry. For
comparison purposes, a group of 14 similar companies, including all companies
which comprise the Company's 1997 "peer group" for purposes of the Company
Performance Chart, below, is also utilized for determining competitive
compensation levels.
Base salary represents the fixed component of the executive compensation
program. The Company's philosophy regarding base salaries is conservative,
maintaining salaries for the aggregate officer group at approximately the
competitive industry average. Periodic increases in base salary relate to
individual contributions evaluated against established objectives, length of
service, and the industry's annual competitive pay practice movement. The
Committee has determined, after consultation with outside compensation
consultants, that base salary for 1997 for the Company's Chief Executive Officer
and for the other executive officers was generally at the competitive industry
average.
Annual Incentive Plan. The Company's executive officers are eligible to
participate in an annual incentive compensation program which awards cash
bonuses based on the attainment of corporate earnings per share goals, as well
as divisional and individual performance objectives, set by the Committee. While
performance against financial objectives is the primary measurement for
executive officers' annual incentive compensation, non-financial performance can
also affect pay. The amount of each annual incentive award is determined by the
Committee. The Committee determined that the Company had met the earnings per
share goals originally set forth by the Committee for 1997.
17
Cash Bonus Replacement Plan. Pursuant to the Cash Bonus Replacement Plan,
the Committee has the authority to award an aggregate of 500,000 shares of
Common Stock to key employees in payment of all or a portion of bonuses awarded
pursuant to employment agreements or discretionary awards of the Committee. The
number of shares of Common Stock to be paid as a bonus shall be equal in value
to a fixed cash amount, with the value of such Common Stock computed at the
higher of (a) the fair market value of the Common Stock paid on the
determination date, or (b) the par value of the Common Stock. The Committee may
determine that the Company will provide and bear the expense of a brokerage
mechanism through which employees may immediately, upon payment of their
bonuses, at the option of each employee, sell shares of Common Stock awarded to
them under the Plan, subject to any restrictions against disposition imposed on
officers or like employees under any applicable federal or state securities
laws.
Stock Options. The Committee strongly believes that the pay program should
provide employees with an opportunity to increase their ownership and
potentially gain financially from Company stock price increases. By this
approach, the best interests of stockholders, executives and employees will be
closely aligned. Therefore, executives and other employees are eligible to
receive stock options, giving them the right to purchase shares of Common Stock
of the Company in the future at a specified price.
The Committee believes that the use of stock options as the basis for
long-term incentive compensation meets the Committee's defined compensation
strategy and business needs of the Company by achieving increased value for
stockholders and retaining key employees.
Supplemental Deferred Compensation Plans. The Company's Supplemental
Deferred Compensation Plans (the "SERP") are unfunded deferred compensation
plans which offer certain executive and other highly compensated employees an
opportunity to defer compensation until the termination of their employment with
the Company. Contributions to the SERP by the Company, which vest over a period
of five years, are determined by the Board upon recommendation of the Committee
and are allocated to participants' accounts on a pro rata basis based upon the
compensation of all participants in the SERP in the year such contribution is
made. During 1997, the Company contributed $350,000 to the SERP, of which $0,
$0, $0, $56,470 and $42,352 was allocated to the accounts of Dr. Elkins, Mr.
Cirka, Mr. Griggs, Mr. Winkle and Mr. Masso. In addition, a participant may
elect to defer a portion of his or her compensation and have that amount added
to his or her SERP account. Participants may direct the investments in their
respective SERP accounts. All participant contributions and the earnings
thereon, plus the participant's vested portion of the Company's contribution
account, are payable upon termination of a participant's employment with the
Company.
In 1996 the Company adopted a Key Employee Supplemental Executive
Retirement Plan (the "Key Employee SERP") to provide retirement benefits to
certain key executives based on the highest annual earnings in the ten most
recent calendar years of employment. See "--Supplemental Deferred Compensation
Plans."
Other Benefits. The Company's philosophy is to provide adequate health- and
welfare-oriented benefits to executives and employees, but to maintain a highly
conservative posture relative to executive benefits. Consistent with industry
practices, the Company provides a car or car allowance to executive officers.
1997's Compensation for the Chief Executive Officer
The Company, concerned about retaining the services of Dr. Robert N.
Elkins, a founder of the Company, over the next five years, in 1997 engaged an
independent compensation consultant to advise the Committee. The consultant
studied Dr. Elkins current compensation arrangements and made various
recommendations. Based on these recommendations, the Company revised Dr. Elkins'
employment arrangements to create additional incentives to assure Dr. Elkins
continued active participation in the management of the Company over the next
several years. In 1997, Dr. Elkins' total cash compensation equalled $4,005,439,
which consisted of salary ($752,277), bonus ($3,250,000), of which $750,000 was
pursuant to his employment agreement and $2,500,000 was granted in 1996, subject
to the satisfaction of certain conditions which were satisfied in 1997, and life
insurance premium payments ($3,162). Dr.
18
Elkins was required to use 50% of the after-tax amount of the 1996 bonus to
purchase shares of the Company's Common Stock. In addition, Dr. Elkins was
granted options to purchase 700,000 shares of Common Stock at an exercise price
of $32.50, the market price on the date of grant, in May 1997 and options to
purchase 400,000 shares of Common Stock as an exercise price of $33.44, the
market price on the date of grant, in September 1997. These options have a term
of 10 years and became fully exercisable six months after the date of grant. In
1997 the Company loaned Dr. Elkins $13,447,000, the proceeds of which were used
to exercise options to acquire the Company's Common Stock, and forgave a
$281,432 principal payment due on another loan. Dr. Elkins also participates in
the SERP and the Key Employee SERP, and in 1997 the Company funded $14.2 million
in a trust for Dr. Elkins' benefit under the Key Employee SERP. See
"--Employment Agreements," "--Supplemental Deferred Compensation Plans" and
"Certain Transactions."
Summary
The Committee believes that the total compensation program for executives
of the Company is appropriate and competitive with the total compensation
programs provided by other similar healthcare industry companies with which the
Company competes. The Committee believes its compensation practices are directly
tied to stockholder returns and linked to the achievement of annual and
longer-term financial and operational results of the Company on behalf of the
Company's stockholders.
Compensation and Stock Option Committee
of the Board of Directors
--Kenneth M. Mazik
--Charles W. Newhall III
COMPENSATION AND STOCK OPTION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation and Stock Option Committee currently consists of
Messrs. Mazik and Newhall. In January 1998, each of Messrs. Mazik and Newhall
were granted options to purchase 25,000 shares of Common Stock pursuant to the
1996 Stock Incentive Plan. See "--Compensation of Directors."
COMPANY PERFORMANCE
The following graph shows the cumulative total stockholder return on the
Company's Common Stock since January 1, 1993, compared to the returns of (i) the
New York Stock Exchange Market Index, and (ii) an industry peer group index (the
"1997 Peer Index"). The 1997 Peer Index consists of Beverly Enterprises, Inc.,
Genesis Health Ventures, Inc., Mariner Health Group, Inc., Novacare, Inc., Sun
Healthcare Group, Inc., Tenet Healthcare Corp. and Vencor Inc. Arbor Healthcare
Company, Grancare, Inc., Horizon/CMS Healthcare Corp., Regency Health Services,
Inc. and TheraTx, Inc., which were in the industry peer group in 1996, were not
included in the 1997 Peer Index because they were not in existence at December
31, 1997. In addition, the Company added Genesis Health Ventures, Inc. and
Vencor Inc. to the 1997 Peer Index.
19
INTEGRATED HEALTH SERVICES, INC.
COMPARISON OF CUMULATIVE TOTAL RETURN 1/93-12/97
VS. NYSE MARKET INDEX AND 1997 PEER INDEX
PERFORMANCE ANALYSIS
1992 1993 1994 1995 1996 1997
INTEGRATED HEALTH SERVICES 100.00 114.65 159.68 101.15 98.70 126.37
PEER GROUP INDEX 100.00 97.95 99.95 116.44 128.98 172.59
NYSE MARKET INDEX 100.00 113.54 111.33 144.36 173.90 228.78
Assumes $100 invested 1/93 in the Company's Common Stock, NYSE Market Index
and 1997 Peer Index; assumes dividend reinvestment.
COMPENSATION OF DIRECTORS
Directors currently receive $5,000 per regularly scheduled meeting and
$1,250 per telephonic meeting and committee meetings for services provided in
that capacity and are reimbursed for out-of-pocket expenses incurred in
connection with attendance at Board of Directors and committee meetings.
Directors who are also employees of or consultants to the Company participate in
the Equity Incentive Plan, the 1990 Employee Stock Option Plan, the 1992 Stock
Option Plan, the 1994 Stock Incentive Plan and the 1996 Stock Incentive Plan.
Dr. Elkins and Mr. Cirka, who was a director until March 1998, participate in
the Senior Executives' Stock Option Plan.
In July 1993 the Company adopted a Stock Option Plan for New Non-Employee
Directors (the "Directors' Plan") pursuant to which options to acquire a maximum
aggregate of 300,000 shares of Common Stock could be granted to non-employee
directors. The Directors' Plan provided for an automatic one-time grant to each
of the Company's non-employee directors of an option to purchase 50,000 shares
of Common Stock on the date of such director's initial election or appointment
to the Board of Directors. The options have an exercise price of 100% of the
fair market value of the Common Stock on the date of grant, have a ten-year term
and became exercisable on the first anniversary of the grant thereof, subject to
acceleration in the event of a change of control (as defined in the Directors'
Plan). Messrs. Newhall, Nicholson and Silverman, who were each directors of the
Company on the date the
20
Directors' Plan was adopted by the Board of Directors, each received an option
to purchase 50,000 shares of Common Stock at an exercise price of $23.50 per
share under the Directors' Plan on July 29, 1993, the date the Directors' Plan
was adopted by the Board of Directors. Mr. Strong received an option to purchase
50,000 shares of Common Stock at an exercise price of $35.75 per share under the
Directors' Plan on September 26, 1994, the date Mr. Strong joined the Board of
Directors. No options remain available for issuance under the Directors' Plan.
In December 1993, the Company adopted a Stock Option Compensation Plan for
Non-Employee Directors (the "Directors' Compensation Plan") pursuant to which
options to acquire a maximum aggregate of 300,000 shares of Common Stock could
be granted to non-employee directors. The Directors' Compensation Plan provided
for the automatic grant to each of the Company's non-employee directors of an
option to purchase 25,000 shares of Common Stock on the date of such director's
initial election or appointment to the Board of Directors and provided for the
automatic grant to each such director of an option to purchase 25,000 shares of
Common Stock on each anniversary date of such director's initial election or
appointment to the Board of Directors (or the date the plan was adopted by the
Board of Directors in the case of non-employee directors on the date the plan
was adopted). The options have an exercise price of 100% of the fair market
value of the Common Stock on the date of grant, have a ten-year term and become
exercisable on the first anniversary of the grant thereof, subject to
acceleration in the event of a change of control (as defined in the Directors'
Compensation Plan). Messrs. Newhall, Nicholson and Silverman, who were each
directors of the Company on the date the Directors' Compensation Plan was
adopted by the Board of Directors, each received under the Directors'
Compensation Plan options to purchase 25,000 shares of Common Stock on each of
December 23, 1993 and 1994, the date of adoption of the Directors' Compensation
Plan by the Board of Directors and the anniversary of the date of adoption,
respectively, at an exercise price of $27.88 per share and $38.00 per share,
respectively. Mr. Strong received an option to purchase 25,000 shares of Common
Stock, at an exercise price of $35.75 per share, under the Directors'
Compensation Plan on September 26, 1994, the date Mr. Strong joined the Board of
Directors, and an option to purchase an additional 25,000 shares of Common
Stock, at an exercise price of $28.25 per share, under the Directors'
Compensation Plan on September 26, 1995, the anniversary of the date Mr. Strong
became a director. No options remain available for issuance under the Directors'
Compensation Plan.
On November 27, 1995, the Board of Directors determined that the options
granted to that date under the Directors' Plan and the Directors' Compensation
Plan were exercisable at prices significantly in excess of the then current
market price of the Common Stock, and accordingly were not fulfilling their
designated purposes under such plans of providing incentive for such directors
to work for the best interests of the Company and its stockholders through the
ownership of Common Stock. Accordingly, to restore the purpose for which such
options were granted, the Board of Directors amended the Directors' Plan and the
Directors' Compensation Plan, subject to stockholder approval, to provide that
each option granted prior to November 27, 1995 to non-employee directors of the
Company in office on November 27, 1995 would be exercisable at an exercise price
of $20.88, the fair market value of the Common Stock on November 27, 1995. The
Company's stockholders approved such action at the 1996 Annual Meeting of
Stockholders.
In 1995 the Company adopted, subject to stockholder approval, the 1995
Stock Option Plan for Non-Employee Directors (the "1995 Directors' Plan")
pursuant to which options to acquire a maximum aggregate of 350,000 shares of
Common Stock can be granted to non-employee directors. The 1995 Directors' Plan
provides for an automatic one-time grant to each of the Company's non-employee
directors of an option to purchase 50,000 shares of Common Stock on the date of
such director's initial election or appointment to the Board of Directors. The
options have an exercise price of 100% of the fair market value of the Common
Stock on the date of such director's initial election or appointment to the
Board of Directors, have a ten-year term and become exercisable on the first
anniversary of the grant thereof, subject to acceleration in the event of a
change of control (as defined in the 1995 Directors' Plan). The 1995 Directors'
Plan also provided that Messrs. Crawford, Mazik, Mitchell, Newhall, Nicholson
and Strong, who were non-employee directors of the Company on the date the 1995
Directors' Plan was adopted by the Board of Directors, each receive an option to
purchase 50,000 shares of Common Stock at an exercise price of $20.88 per share
under the 1995 Directors' Plan on November 27,
21
1995, the date the 1995 Directors' Plan was adopted by the Board of Directors.
The 1995 Directors' Plan was approved at the 1996 Annual Meeting of
Stockholders. Options to purchase 50,000 shares of Common Stock remain available
for issuance under the 1995 Directors' Plan.
In September 1996, the Company adopted the 1996 Stock Incentive Plan. On
November 27, 1996 and January 28, 1998, each director, with the exception of Dr.
Elkins and Mr. Cirka, was granted an option to purchase 25,000 shares of Common
Stock at an exercise price of $22.63 and $28.25, respectively, per share. These
options become exercisable after one year from the date of grant if the director
has attended in person four out of the five regularly scheduled meetings of the
Board of Directors.
Messrs. Nicholson and Silverman have received compensation for services
rendered from entities in which the Company had an interest. See "Certain
Transactions."
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors, and persons who beneficially own more than ten percent of the
Company's Common Stock, to file initial reports of ownership and reports of
changes in ownership with the Commission and the New York Stock Exchange.
Executive officers, directors and greater than ten percent beneficial owners are
required by the Commission to furnish the Company with copies of all Section
16(a) forms they file.
Based upon a review of the copies of such forms furnished to the Company
and written representations from the Company's executive officers and directors,
the Company believes that during fiscal 1997 all Section 16(a) filing
requirements applicable to its executive officers, directors and greater than
ten percent beneficial owners were complied with, except that George H. Strong,
a director of the Company, failed to file in a timely manner a Form 4 with
respect to a sale of shares.
22
CERTAIN TRANSACTIONS
In April 1993, the Company purchased units, consisting of Preference Shares
and Class B Ordinary Shares, of Speciality Care PLC ("Speciality"), a United
Kingdom company formed by Mr. Nicholson to acquire Burley Healthcare PLC. The
Company paid approximately $2,993,000 for the units, which initially represented
(on a pre-dilution basis) approximately 25% of the voting equity of Speciality.
The Company purchased units at the same price and on the same terms as the
purchase by other outside, unaffiliated investors, including Nash & Sells, an
independent English venture capital firm. Speciality was prohibited from
undertaking certain major corporate actions, including refinancings and the sale
of Speciality, without the consent of the Company and the other outside,
unaffiliated investors. Entities controlled by Mr. Nicholson and Dr. Elkins paid
approximately $1,505,950 for Class A Ordinary Shares, which initially
represented approximately 50.1% of the voting equity of Speciality, although Dr.
Elkins gave Mr. Nicholson a proxy over the shares Dr. Elkins controlled. Mr.
Nicholson served as Chairman and Managing Director of Speciality. In addition, a
limited partnership in which a subsidiary of the Company was the general partner
and executive officers and certain directors of the Company were limited
partners (the "Company Partnership") paid approximately $585,000 for units
consisting of Preference Shares and Class B Ordinary Shares initially
representing approximately 3.5% of the voting equity of Speciality; this
purchase was at the same purchase price and on the same terms as the Company's
purchase. As a result of Dr. Elkins' and Mr. Nicholson's interest in the
transaction, a committee of directors consisting of then disinterested members
of the Board of Directors of the Company was established to review the
transaction.
In October 1994, the Company made a $1 million loan to Speciality for
purposes of acquiring a healthcare facility. The loan accrued interest at 9%,
was payable on demand, and was secured by substantially all the assets of
Speciality. In November 1994, the Company subscribed for an additional 100,000
Class B Ordinary Shares and 300,000 Preference Shares of Speciality at a price
of POUNDS 1 per share, the same price paid by Nash, Sells & Partners Ltd., which
purchase price was paid through cancellation of the loan. The foregoing
transactions with Speciality were approved by the disinterested members of the
Board of Directors. The Company agreed to allow a bank to take a first lien on
the aforementioned nursing facility and to have its lien become a second lien on
the same property.
In June 1995 the Company loaned Speciality POUNDS 5.9 million, which loan
was repaid in August 1995 upon the completion of the reorganization of
Speciality. In August 1995, the Company, together with other investors of
Speciality, completed a reorganization of the share capital of Speciality. The
Company purchased 4,773,846 Convertible Preference Shares from Speciality at a
subscription price of POUNDS 1 per share. Speciality redeemed 1,800,000
Preference Shares owned by the Company at a price of POUNDS 1 per Share. The
525,000 Class B Ordinary Shares owned by the Company were redesignated and
converted into 387,187 Ordinary Shares of 10p each of Speciality. In addition,
certain investors, including entities controlled by Mr. Nicholson, purchased the
shares owned by the Company Partnership for $1,504,990 (including accrued
dividends). As a result of the reorganization, the Company owned 63.65% of the
Convertible Preference Shares and 21.3% of the Ordinary Shares of Speciality
(31.38% of the outstanding Ordinary Shares assuming no further issuances and
conversion of the Convertible Preference Shares). Speciality also repaid POUNDS
752,741 owed to Mr. Nicholson. The reorganization of Speciality was approved by
the Board of Directors of the Company upon the recommendation of a special
committee of disinterested directors appointed by the Board, which had obtained
a fairness opinion and advice from independent legal counsel. Under the Articles
of Association of Speciality, the Company had the right to nominate two
directors; Dr. Elkins and Mr. Cirka were the Company's nominees.
In July 1995, Dr. Elkins sold a portion of his Speciality shares to an
entity controlled by Mr. Nicholson and contributed the remainder of his
Speciality shares to a limited partnership (the "Speciality Partnership"). The
general partners of the Speciality Partnership consisted of a limited
partnership controlled by Dr. Elkins and a corporation the sole stockholders of
which were Mr. Nicholson and his wife; however, the partnership agreement of
such limited partnership grants to the general partner controlled by Mr.
Nicholson all voting and dispositive power with respect to the Speciality shares
owned by the partnership. In September 1997 the Speciality Partnership was
dissolved and the Speciality shares owned by it were distributed to the entity
controlled by Mr. Nicholson.
23
In February 1998 Speciality was acquired by Craegmoor Healthcare Company
Limited, an owner and operator of residential nursing homes in the United
Kingdom. Craegmoor Healthcare operates 65 nursing homes with 3,106 beds,
including the 24 homes with 1,142 beds owned by Speciality. The stockholders of
Speciality received 10% of the outstanding ordinary shares of Craegmoor
Healthcare; as a result of their ownership of Speciality, the Company owns
approximately 5.3% of the outstanding ordinary shares of Craegmoor Healthcare
and the entity controlled by Mr. Nicholson owns approximately 1.6% of the
outstanding ordinary shares of Craegmoor Healthcare.
During fiscal year 1997 the Company's Symphony Rehabilitation Services and
Symphony Pharmacy Services divisions received payments from Community Care of
America, Inc. ("CCA") of approximately $2,029,000 and $176,000, respectively.
Dr. Elkins was a director and Mr. Silverman was Chairman of the Board of CCA.
Dr. Elkins beneficially owned 21.1% of the outstanding shares of CCA and the
Company owned warrants to purchase approximately 14.9% of CCA.
In December 1996, the Company entered into a management agreement with CCA
pursuant to which the Company agreed to supervise, manage and operate the
financial, accounting, MIS, reimbursement and ancillary services contract
functions for CCA (the "Services") from January 1, 1997 to December 31, 2001.
The Company was to receive a management fee as follows: (a) for 1997, an amount
equal to the lesser of (i) two percent (2%) of CCA's gross revenues (as
defined), subject to increase under certain circumstances, or (ii) twice the
amount of CCA's total direct and indirect costs in performing the Services for
the period July 1, 1996 to December 31, 1996 ("Owners' Cost"); and (b) for 1998
and thereafter, the lesser of (i) two percent (2%) of CCA's gross revenues,
subject to increase under certain circumstances, or (ii) a percentage of CCA's
gross revenues determined by dividing the Owners' Cost by CCA's gross revenues
for the period July 1, 1996 to December 31, 1996. The management fee was payable
monthly, but CCA could elect to defer all or a portion of the fee until May 31,
1998. Thereafter, the management fee could be deferred only to the extent funds
are not available after paying debt service and other expenses. Any management
fee not paid was accrued and bore interest.
In connection with the management agreement, the Company made available to
CCA a revolving credit facility pursuant to which CCA could borrow up to $5.0
million for additional working capital until December 27, 1998. Borrowings under
this line of credit bore interest at a rate equal to the annual rate set forth
in the Company's revolving credit agreement with Citibank, N.A. plus 2% per
annum. In connection therewith, CCA issued to the Company warrants to purchase
an aggregate of 752,182 shares of CCA's common stock, one-half of which were
exercisable at $3.22 per share (the average of the high and low trading price of
CCA's common stock on January 14 and 15, 1997) for a two-year period and the
remaining one-half of which were exercisable at $6.44 per share for a five-year
period. CCA granted the Company registration rights relating to the shares
underlying the warrants.
In April 1997, the Company guaranteed CCA's loan and lease obligations to
Health and Retirement Properties Trust, which aggregated approximately $10
million at March 31, 1997, and a $4.8 million overadvance made by Daiwa
Healthco-2 LLC to CCA. In connection with these guarantees, CCA issued to the
Company warrants to purchase 379,900 shares of CCA common stock at a purchase
price of $1.937 per share for a period of five years. CCA granted the Company
registration rights relating to the shares underlying the warrants.
In September 1997, the Company acquired CCA through a cash tender offer and
subsequent merger for a purchase price of $4.00 per share. As a result of the
transaction, Dr. Elkins and Messrs. Silverman and Cirka received $3,384,940,
$32,332 and $44,556, respectively. Certain other executive officers of the
Company owned shares of CCA which they purchased at prices higher than $4.00;
consequently, they lost money on the transaction.
In November 1995 the Company formed Integrated Living Communities, Inc.
("ILC") as a wholly-owned subsidiary of the Company to operate the assisted
living and other senior housing facilities owned, leased and managed by the
Company. Following ILC's formation, the Company transferred to ILC as a capital
contribution its ownership interest in three facilities, condominium interests
in three facilities, and agreements to manage nine facilities (five of which
were subsequently cancelled). In addition, the Company sublet two facilities to
ILC. Through October 9, 1996, the Company provided all of
24
ILC's required financial, legal, accounting, human resources and information
systems services, for which it received a flat fee of 6% of ILC's total
revenues, and satisfied all of ILC's capital requirements in excess of
internally generated funds through a $75 million revolving credit facility. The
Company estimates that the cost to ILC of obtaining these services from third
parties would have been significantly higher than the fee charged by the
Company. The Company provided certain building maintenance, housekeeping,
emergency call and residence meal services at certain of ILC's facilities.
On October 9, 1996, ILC completed an initial public offering of its common
stock to the public at a price of $8.00 per share. The Company 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 proceeds from the offering to repay outstanding indebtedness
to the Company. Following the closing of the offering, ILC borrowed an
additional $3.4 million from the Company (the "November Loan"). The loan bore
interest at the rate of 14% per annum, was to be repaid in 24 equal monthly
installments of principal plus interest beginning December 2, 1996 and was
subordinated to ILC's revolving credit facility with Nationsbank. In April 1997
IHS and ILC amended the November Loan to modify the payment schedule and provide
for an interest rate of 12%. The November Loan matured in November 1998 and was
subordinated to ILC's revolving credit facility with Nationsbank. In April 1997
IHS and ILC also entered into a $5.0 million revolving credit facility.
Borrowings under this facility bore interest at a rate per annum of 12%, and the
facility matured in April 1998. This facility was subordinated to ILC's
revolving credit facility with Nationsbank. Robert N. Elkins, the Company's
Chairman of the Board and Chief Executive Officer, served as Chairman of the
Board of ILC. Lawrence P. Cirka, the former President and a former director of
the Company, was a director of ILC. Messrs. Elkins and Cirka were granted
options to purchase 235,000 shares and 98,000 shares, respectively, of ILC
common stock at a purchase price of $8.00 per share, equal to the initial public
offering price, in June 1996. These options became exercisable in three equal
annual installments, commencing June 10, 1997, although they would become
immediately exercisable under certain circumstances generally related to a
change in control of ILC or Dr. Elkins or Mr. Cirka, as the case may be, ceasing
to be a director of ILC. In July 1997, an unrelated third party purchased all
the outstanding stock of ILC, including the Company's remaining 37.3% interest,
for $11.00 per share. All options granted to Dr. Elkins and Mr. Cirka became
immediately exercisable.
In November 1996, Mr. Nicholson entered into a consulting agreement with
ILC. Pursuant to the agreement, which was effective June 1, 1996 and terminated
upon the sale of ILC in July 1997, Mr. Nicholson advised ILC with respect to its
acquisition and development activities. Mr. Nicholson received an annual
consulting fee of $250,000, as well as negotiated brokerage commissions on
certain transactions. Mr. Nicholson did not receive any commissions from ILC.
During 1997 the Law Offices of Robert A. Mitchell, a director of the
Company, performed legal services for the Company for which such firm received
$194,450.
On December 12, 1997, the Company entered into an Aircraft Lease Agreement
(the "Lease") with RNE Skyview, LLC ("Skyview"), which is wholly owned by Dr.
Elkins. Pursuant to the Lease, the Company has agreed to lease one aircraft from
Skyview for seven years, commencing on December 12, 1997 and terminating on
December 12, 2004, with automatic one-year extensions unless either party
notifies the other in writing six months prior to termination. Under the Lease,
the Company has agreed to pay Skyview a commercially reasonable base rent, which
shall be no less than $89,675.81 per month and $1,076,109.72 per year. The
Company must also pay additional rent of $2,150 per block hour for any month in
which the number of block hours flown is more than 42 hours. The Company is
responsible for all maintenance and operation expenses of the aircraft during
the term of the Lease. The Lease provides that Dr. Elkins shall have exclusive
first use of the aircraft throughout the term of the Lease, even if Dr. Elkins
is terminated as an employee of the Company for any reason, including, without
limitation, as a result of a change of control of the Company (as defined in the
Company's credit facility). The Lease further provides that in the event of the
termination of Dr. Elkins' employment with the Company, including, without
limitation, as a result of a change of control of the Company, the members of
the aircraft's cockpit crew shall become employees of Skyview; however, the
salaries, expenses and benefits of such crew members shall be a cost and expense
of the Company throughout the term of the Lease.
25
Dr. Elkins is obligated to reimburse the Company for its out-of-pocket costs
associated with use of the aircraft if, at any time during the term of the
Lease, Dr. Elkins uses the aircraft for his own personal use. The Lease and the
aircraft are subject to a security interest in favor of BTM Capital Corporation
securing a loan in the amount of $9,177,159 made to Skyview. Dr. Elkins has also
pledged all of his membership interests in Skyview to secure such loan. In
connection with the Lease, Skyview purchased the Gulfstream II airplane then
owned by the Company, which aircraft was traded in. The Company recognized no
gain or loss on the sale of the aircraft to Skyview.
Pursuant to a Relocation Agreement between Mr. Cirka and the Company, the
Company purchased Mr. Cirka's Florida residence and Mr. Cirka agreed to perform
substantially all of his duties for the Company at its Owings Mills, Maryland
headquarters beginning on May 1, 1998. Mr. Cirka had previously performed his
duties for the Company at the Company's Naples, Florida, office. The Company
paid Mr. Cirka a total of $4,823,774 for his Florida residence and moving
expenses from Florida to Maryland, and agreed to allow Mr. Cirka to rent such
Florida residence on a month-to-month basis until May 1, 1998. In addition, Mr.
Cirka and the Company agreed that if Mr. Cirka does not exercise his option to
repurchase the residence and the Company loses money in connection with the
resale of the residence to a third party, such loss will be deducted from Mr.
Cirka's bonus.
In January 1998, the Company sold five long-term care facilities to Omega
Healthcare Investors, Inc. ("Omega") for $44,500,000, which facilities were
leased back by Lyric Health Care LLC ("Lyric"), a newly formed subsidiary of the
Company, at an annual rent of approximately $4,500,000. The Company also entered
into management and franchise agreements with Lyric, which agreements have
initial terms of 13 years with two renewal options of 13 years each. The base
management fee is 3% of gross revenues, subject to increase if gross revenues
exceed $350,000,000. In addition, the management agreement provides for an
incentive management fee equal to 70% of annual net cash flow (as defined in the
management agreement). The duties of the Company as manager include the
following: accounting, legal, human resources, operations, materials and
facilities management and regulatory compliance. The annual franchise fee is 1%
of gross revenues, which grants Lyric the authority to use the Company's trade
names and proprietary materials. In a related transaction, TFN Healthcare
Investors, Inc., an entity in which Mr. Nicholson is the principal stockholder
("TFN Healthcare"), purchased a 50% interest in Lyric for $1,000,000 and the
Company's interest in Lyric was reduced to 50%. Lyric will dissolve on December
31, 2047 unless extended for an additional 12 months. In addition, in April 1998
the Company sold an additional five long-term care facilities to Omega for
approximately $50,500,000, which facilities were leased back to Lyric at an
annual rent of approximately $4,949,000. IHS is managing these facilities for
Lyric pursuant to the above-described agreements.
In February 1998, Mr. Nicholson entered into an employment agreement with
Lyric pursuant to which Mr. Nicholson serves as Managing Director of Lyric,
having day-to-day authority for the management and operation of Lyric. Mr.
Nicholson receives a base salary of $250,000, which may be increased from time
to time with the Company's approval and shall be increased to $275,000, $300,000
and $350,000 upon Lyric achieving annual fiscal year revenues of $150 million,
$250 million and $450 million, respectively. Mr. Nicholson will also receive
benefits similar to those provided to the Company's executive officers. The
agreement has an initial term through December 31, 2002, subject to automatic
one year extensions thereafter unless the Company or Mr. Nicholson elects not to
extend. The agreement may be terminated by Lyric for Cause or by Mr. Nicholson
for Good Reason. Upon termination by Lyric without Cause or by Mr. Nicholson for
Good Reason, Mr. Nicholson will be entitled to a severance payment equal to one
year's salary plus the average of his last two annual bonuses, payable 50%
within 10 days of termination and 50% monthly in 12 equal installments unless
such termination occurs within one year following a change of control of the
Company or the Company and TFN Healthcare cease to own in aggregate 50% of
Lyric, in which case the entire severance payment shall be made in one lump sum.
If Mr. Nicholson resigns within 30 days after TFN Healthcare's interest in Lyric
is diluted below 33 1/3% and TFN Healthcare sells its interest in Lyric, then
Mr. Nicholson will be entitled to severance in an amount equal to up to three
times his annual salary. The employment agreement contains confidentiality and
non-compete provisions. For purposes of the agreement, "Cause" means (i) Mr.
Nicholson materially fails to perform his duties, (ii) Mr. Nicholson materially
breaches his confidentiality or non-compete covenants, (iii) Mr. Nicholson is
convicted of any felony or any misdemeanor involving moral
26
turpitude, or commits larceny, embezzlement or theft of Lyric's tangible or
intangible property, or (iv) TFN Healthcare disposes of more than 50% of its
interest in Lyric, and "Good Reason" is defined as (i) a material breach of the
agreement by Lyric, (ii) a change of control of the Company (similar to the
change of control definition contained in Dr. Elkins' employment agreement (see
"Executive Compensation--Employment Agreements")), (iii) the Company and TFN
Healthcare no longer own in aggregate 50% of Lyric or (iv) TFN Healthcare's
interest in Lyric is diluted below 33 1/3% and TFN Healthcare sells its interest
in Lyric.
In April 1998 the Company reached an agreement in principle to sell 44
facilities to Monarch Properties, Inc., a newly-formed real estate investment
trust ("Monarch"), for an aggregate purchase price of approximately $371
million. It is currently contemplated that Monarch will lease 42 of these 44
facilities to Lyric, and that Lyric will engage the Company to manage the
facilities pursuant to the arrangements described above. The transactions with
Monarch and Lyric are subject to completion of definitive documentation and
completion of Monarch's initial public offering, and there can be no assurance
that the transaction will be completed on these terms, on different terms or at
all. Dr. Elkins is Chairman of the Board of Directors of Monarch, and it is
currently contemplated that he will beneficially own between five and ten
percent of Monarch following completion of Monarch's public offering.
As of June 5, 1995, Asia Care, Inc., a wholly-owned subsidiary of the
Company ("Asia Care"), entered into an employment agreement with John L.
Silverman, subsequently amended, pursuant to which Mr. Silverman served as Chief
Executive Officer and President of Asia Care, with responsibility for pursuing
business opportunities and establishing Asia Care's business in Asia. In 1997
Mr. Silverman received salary of $202,277 plus a cash bonus of $60,000. The
Company had guaranteed the payment of Mr. Silverman's salary and bonus. Mr.
Silverman had the right to purchase 10% of the outstanding stock of Asia Care at
fair market value at any time during the term of the agreement and for a period
of six months after termination or expiration of the employment agreement. The
agreement, which had a term of three years, was terminated effective December
31, 1997 and Asia Care ceased operations. In connection with the termination of
the agreement, the Company paid Mr. Silverman $202,227 as consideration for his
12 month non-compete and non-solicitation agreement, and reimbursed certain
expenses, including the cost of Mr. Silverman and his wife relocating to the
United States.
At March 1, 1998, the Company had three outstanding loans to Robert N.
Elkins, the Company's Chairman and Chief Executive Officer, aggregating
$19,944,095. One loan, in the original principal amount of $4,690,527 ("Loan
A"), was used primarily to purchase shares of the Company's Common Stock, bears
interest at a rate per annum equal to the higher of 7.5% or the Company's cost
of borrowing under its bank credit facility and is due December 19, 2001. The
principal amount of Loan A, which is unsecured, is due in five annual
installments beginning December 19, 1997; however, repayment of the first
installment of principal of $281,432 was forgiven in 1997. The largest amount of
indebtedness outstanding under Loan A during fiscal 1997 was $4,690,527. During
1997 Dr. Elkins paid no interest to the Company in respect of Loan A. The second
loan is in the original principal amount of $13,447,000 ("Loan B"). Loan B,
which was used to exercise options, bears interest at 6.8% per annum, is due
October 1, 2002 and is unsecured. The largest amount of indebtedness outstanding
under Loan B during fiscal 1997 was $13,447,000. Dr. Elkins must prepay Loan B
with the proceeds (less broker's commissions and taxes) resulting from the sale
by him of up to 650,000 shares of the Company's Common Stock. Loan B provides
that upon the occurrence of any change of control of the Company or the
termination of Dr. Elkins' employment with the Company by death, for permanent
disability, by Dr. Elkins for Good Reason or by the Company without Cause (as
such terms are defined in Dr. Elkins' employment agreement), any amounts
outstanding and not then due under Loan B shall be automatically and immediately
discharged. Pursuant to the Supplemental Agreement entered into between the
Company and Dr. Elkins, Dr. Elkins is entitled to receive bonuses on each
October 1 from 1998 to 2002 in amounts sufficient to enable him to repay the
principal of and interest on Loan B less the amount of his salary and bonus for
the prior calendar year in excess of $500,000. The Supplemental Agreement also
provides that upon the occurrence of any change of control of the Company or the
termination of Dr. Elkins' employment with the Company by death, for permanent
disability, by Dr. Elkins for Good Reason or by the Company without Cause (as
such terms are defined in Dr. Elkins' employment agreement), any amounts
outstanding under Loan A shall be automatically and immediately discharged. The
third loan,
27
which was made in January 1998, is in the original principal amount of
$2,088,000 ("Loan C"). Loan C, which was used to exercise options, bears
interest at 6.8% per annum, is due January 28, 2003 and is unsecured. Dr. Elkins
must prepay Loan C with the proceeds (less broker's commissions and taxes)
resulting from the sale by him of the first 100,000 shares of Common Stock after
the earlier to occur of (i) repayment in full of Loan B or (ii) the sale of
650,000 shares of Common Stock and the use of the proceeds therefrom to repay a
portion of Loan B. Dr. Elkins continues to own the shares of Common Stock
acquired upon the exercise of options using the Loan B and Loan C proceeds. Dr.
Elkins has indicated to the Company that he intends to use all salary and bonus
in excess of $500,000 received by him in 1998, net of taxes, to repay these
loans.
At March 1, 1998, the Company had outstanding loans to Lawrence P. Cirka,
the former President and a former director of the Company, aggregating
$1,886,058. One loan, in the original principal amount of $1,474,530, was used
primarily to purchase shares of the Company's Common Stock, bears interest at
the higher of 7.5% or the Company's cost of borrowing under its bank credit
facility and is due December 19, 2001. The principal amount of the loan is due
in five annual installments beginning December 19, 1997 and is unsecured. In
December 1997, the Company loaned Mr. Cirka $500,000. This loan bears interest
at the rate of 8%, is unsecured, and is due in 10 equal annual installments
beginning December 10, 1998, although the Company has the right to accelerate
the maturity if Mr. Cirka leaves the Company's employ for any reason. The loan
provides that if Mr. Cirka's employment is terminated within one year after the
occurrence of any change of control of the Company, any amounts outstanding
under the loan shall be automatically and immediately forgiven as of the last
day of employment. The largest amount of indebtedness outstanding during fiscal
1997 was $1,974,530. During 1997 Mr. Cirka paid $85,139 in interest to the
Company and made principal repayments of $88,472 in respect of these loans.
At March 1, 1998, the Company had an outstanding loan to C. Taylor Pickett,
the Company's Executive Vice President -- Chief Financial Officer, of $500,000.
This loan bears interest at 6.8%, is unsecured and is due on November 13, 2002.
The largest amount of indebtedness outstanding during fiscal 1997 was $506,963.
At March 1, 1998, the Company had outstanding loans to Anthony R. Masso,
the Company's Executive Vice President -- Managed Care, aggregating $125,000.
One such loan, in the principal amount of $75,000, bears interest at 7.9%, is
secured by Mr. Masso's home and is due on July 31, 1999. The second loan, in the
principal amount of $50,000, bears interest at 4%, is unsecured and is due
January 1, 1999. The largest amount of indebtedness outstanding during fiscal
1997 was $125,000.
At March 1, 1998, the Company had outstanding loans to Brian K. Davidson,
the Company's Executive Vice President -- Development, aggregating $907,650. One
such loan, in the principal amount of $500,000, bears interest at 8%, is
unsecured and is due December 31, 1998. The second loan, in the principal amount
of $407,650, bears interest at 9%, is secured by two homes and other collateral,
and is due April 3, 2000. The largest amount of indebtedness outstanding during
fiscal 1997 was $907,650.
At March 1, 1998, the Company had outstanding loans to W. Bradley Bennett,
the Company's Executive Vice President -- Chief Accounting Officer, aggregating
$231,000. Two such loans in the aggregate principal amount of $181,000 are
unsecured and bear interest at 9%; $125,000 is due April 4, 1998 and the
remainder is due December 31, 1998; the third loan, in the principal amount of
$50,000, bears interest at 7.5%, is unsecured and is due August 6, 1998. The
largest amount of indebtedness outstanding during fiscal 1997 was $231,000.
At March 1, 1998, the Company had an outstanding loan to Marshall A.
Elkins, the Company's Executive Vice President and General Counsel, of $850,000.
This loan bears interest at 6.8%, is unsecured and is due October 1, 2002. The
largest amount of indebtedness outstanding during fiscal 1997 was $44,000.
At March 1, 1998, the Company had outstanding loans to Marc B. Levin, the
Company's Executive Vice President -- Investor Relations, aggregating $967,738.
Two such loans, in the aggregate principal amount of $908,000, are unsecured and
bear interest at 8%; $58,000 is due June 25, 2000 and the remainder is due
December 31, 2000; two additional loans, in the aggregate principal amount of
$39,738,
28
are unsecured and bear interest at 9%. A fifth loan, in the principal amount of
$20,000, bears interest at 7.5%, is unsecured, and is due May 13, 2000. The
largest amount of indebtedness outstanding during fiscal 1997 was $967,738.
At March 1, 1998, the Company had outstanding loans to C. Christian Winkle,
the Company's Executive Vice President -- Chief Operating Officer, aggregating
$610,000. One such loan, in the principal amount of $600,000, bears interest at
8%, is unsecured and is due November 18, 2000; the second loan, in the principal
amount of $10,000, bears interest at 9% and is unsecured. The largest amount of
indebtedness outstanding during fiscal 1997 was $610,000.
RELATIONSHIP WITH INDEPENDENT AUDITORS
KPMG Peat Marwick LLP have been the independent auditors for the Company
since its inception in 1986 and will serve in that capacity for the 1998 fiscal
year. A representative of KPMG Peat Marwick LLP will be present at the Annual
Meeting, will have an opportunity to make a statement if he desires to do so,
and will respond to appropriate questions from stockholders.
STOCKHOLDER PROPOSALS
All stockholder proposals which are intended to be presented at the 1999
Annual Meeting of Stockholders of the Company must be received by the Company no
later than January 1, 1999 for inclusion in the Board of Directors' proxy
statement and form of proxy relating to that meeting. The Company's By-laws
impose certain requirements which must be complied with in connection with the
submission of stockholder proposals.
OTHER BUSINESS
The Board of Directors knows of no other business to be acted upon at the
Annual Meeting. However, if any other business properly comes before the Annual
Meeting, it is the intention of the persons named in the enclosed proxy to vote
on such matters in accordance with their best judgment.
The prompt return of your proxy will be appreciated and helpful in
obtaining the necessary vote. Therefore, whether or not you expect to attend the
Annual Meeting, please sign the proxy and return it in the enclosed envelope.
By Order of the Board of Directors
MARC B. LEVIN
Secretary
Dated: April 30, 1998
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K WILL BE SENT WITHOUT
CHARGE TO ANY STOCKHOLDER REQUESTING IT IN WRITING FROM: INTEGRATED HEALTH
SERVICES, INC., ATTENTION: MARC B. LEVIN, EXECUTIVE VICE PRESIDENT--INVESTOR
RELATIONS, 10065 RED RUN BOULEVARD, OWINGS MILLS, MARYLAND 21117.
29
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INTEGRATED HEALTH SERVICES, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 22, 1998
Robert N. Elkins and C. Taylor Pickett, and each of them, as the true and
lawful attorneys, agents and proxies of the undersigned, with full power of
substitution, are hereby authorized to represent and to vote all shares of
Common Stock of Integrated Health Services, Inc. (the "Company") held of record
by the undersigned on April 13, 1998, at the Annual Meeting of Stockholders to
be held at 11:00 a.m. on Friday, May 22, 1998, at the Pikesville Hilton Inn,
1726 Reisterstown Road, Baltimore, Maryland and at any adjournments or
postponements thereof. Any and all proxies heretofore given are hereby revoked.
WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED AS DESIGNATED BY THE
UNDERSIGNED. IF NO CHOICE IS SPECIFIED, THE PROXY WILL BE VOTED FOR PROPOSAL
NO. 1.
1. Proposal No. 1 -- Election of Directors -- Nominees are:
Robert N. Elkins, M.D. Kenneth M. Mazik Charles W. Newhall III John L. Silverman and
Edwin M. Crawford Robert A. Mitchell Timothy F. Nicholson George H. Strong
FOR all nominees listed above WITHHOLD AUTHORITY
(except as listed below) [ ] to vote for all nominees listed above [ ]
To withhold authority to vote for any individual nominee, write that
nominee's name in the space provided:
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Discretionary authority is hereby granted with respect to such other
matters as may properly come before the meeting.
The undersigned acknowledges receipt of the Notice of Annual Meeting of
Stockholders and Proxy Statement of the Company, each dated April 30, 1998, and
the Company's Annual Report for the fiscal year ended December 31, 1997.
Dated
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Signature
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Signature if held jointly
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Title (if applicable)
PLEASE DATE, SIGN EXACTLY AS YOUR NAME
APPEARS ON THIS PROXY AND PROMPTLY
RETURN IN THE ENCLOSED ENVELOPE. IN THE
CASE OF JOINT OWNERSHIP, EACH JOINT
OWNER MUST SIGN. WHEN SIGNING AS
ATTORNEY, EXECUTOR, ADMINISTRATOR,
TRUSTEE OR GUARDIAN, OR IN ANY OTHER
SIMILAR CAPACITY, PLEASE GIVE FULL
TITLE. IF A CORPORATION, SIGN IN FULL
CORPORATE NAME BY PRESIDENT OR OTHER
AUTHORIZED OFFICER, GIVING TITLE. IF A
PARTNERSHIP, SIGN IN PARTNERSHIP NAME BY
AUTHORIZED PERSON.
THIS PROXY IS SOLICITED ON BEHALF
OF THE BOARD OF DIRECTORS
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