EXHIBIT (C)(8)
July 31, 1997
Integrated Health Services, Inc.
00000 Xxx Xxx Xxxxxxxxx
Xxxxxx Xxxxx, XX 00000
Re: Acquisition of Community Care of America, Inc.
Ladies and Gentlemen:
Reference is made to that certain Agreement and Plan of Merger dated as of
August 1, 1997 (the "Agreement") whereby Integrated Health Services Inc. ("IHS")
will acquire all of the outstanding shares of Community Care of America, Inc.
("CCA"). Unless otherwise defined, all capitalized terms shall have the meaning
given to them in the Agreement. The purpose of this letter is to memorialize my
pledge with respect to the proceeds generated from the sale of my shares of CCA.
Annexed as Exhibit A to this letter are projections (the "Projections") of
the net income to IHS after the incorporation of the CCA's assets described in
the Projections into IHS's operation ("CCA's Net Income") prepared by Xxxxxxxx
Xxxxxxx Partners Inc. The period covered by the Projections is the one (1) year
ending on the anniversary of the merger of CCA into IHS Acquisition XXVI, Inc.
(the "Guaranty Period"). The net income to IHS reflected in the Projections is
net of certain contemplated extraordinary transactions described on Exhibit B to
this letter.
In order to induce IHS to enter into the Agreement, I agree that, to the
extent CCA's Net Income for the Guaranty Period(1) is less than the CCA Net
Income set forth in the Projections, then I will pay to IHS an amount equal to
the shortfall subject to the Cap (hereinafter defined) (the "Guaranty
Payment")(2). Simply stated, I am guaranteeing the CCA Net Income for the
Guaranty Period (the "Guaranty").(3)
The Guaranty is limited in amount to the net proceeds (after payment of
applicable taxes) derived by me from the sale of my shares in CCA (the "Cap"); a
computation of the Cap is attached to this letter as Exhibit C. The Guaranty
Payment shall be payable ninety (90) days after the final computation thereof as
described in note 3 hereof.
The Guaranty is conditioned on reimbursement rates for CCA's services, in
general, remaining stable or increasing. If reimbursement rates decrease then my
Guaranty shall be reduced in proportion to the decrease in the reimbursement
rate decreases.
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1. Whenever the term calculation of the CCA Net Income or words of similar
content is used herein, they shall refer to a calculation thereof made by
applying the accounting policies and procedures presently utilized by IHS
in preparing IHS's financial statements, which are intended to enable the
calculation to be made in a manner consistent with the preparation of the
Projections. In the event an extraordinary transaction is not provided for
in Exhibit B, the calculation shall be made in accordance with generally
accepted accounting principles consistent with IHS's accounting practices,
as both are in effect as of the end of the Guaranty Period. In all events,
the calculation of the CCA's Net Income shall disregard any effect of IHS's
accounting treatment of the extraordinary transactions described on Exhibit
B.
2. IHS shall cause distinct accounting records to be maintained for the
business of CCA. The CCA Net Income shall include all income derived from
the CCA facilities existing at the beginning of the Guaranty Period and
shall also include all ancillary therapy services revenue generated from
CCA's facilities. If any CCA facilities currently included in the CCA Net
Income calculation are disposed of during the Guaranty Period, there shall
be added to the CCA Net Income calculation made by IHS for purposes of this
Guaranty the net income and ancillary therapy service revenue ascribed to
such facilities in the Projections.
3. Upon completion of the calculation, IHS will advise Xxxxxx in writing as to
the amount of the CCA Net Income at the end of the Guaranty Period. Upon
receipt of such advice, Xxxxxx shall be entitled to review the CCA Net
Income calculations so made by IHS and, within 15 days after receipt, shall
advise IHS if Xxxxxx disagrees with the calculation. Any disagreement or
controversy between Xxxxxx and IHS, which is not resolved by IHS and
Xxxxxx, as to the calculation of CCA Net Income for the periods in question
shall be determined by arbitration as follows: on ten days' written notice
by either Xxxxxx or IHS, each party shall designate a firm of independent
certified accountants of recognized national standing to resolve such
disagreement or controversy. If the two firms cannot agree on a resolution
within the two weeks from the date it is submitted to them, they shall
jointly agree on a third firm of independent certified accountants of
recognized national standing. The decision of any two of such accounting
firms on the correct calculation of CCA Net Income in accordance with the
terms of this Agreement shall be binding on both Xxxxxx and IHS. If two of
such firms have not agreed within two weeks following the appointment of
the third firm, all of such firms will be dismissed and the controversy
shall be settled by arbitration in accordance with the Rules of the
American Arbitration Association. The party prevailing in any such
arbitration proceeding shall be entitled to recover its costs (including
reasonable attorneys' fees) from the other party thereto.
This Guaranty should not be (a) considered as a substitute for due diligence
on the part of IHS and its advisors, or (b) construed confirmation or adoption
of any representation or warranty of CCA set forth in the Agreement.
Any notice or demand required or permitted to be made or given hereunder
shall be deemed sufficiently given or made if given by personal service or by
certified or registered mail, return receipt requested. This Guaranty may not be
changed or terminated orally, but only an agreement in writing signed by the
party against whom enforcement of any change, modification, termination, waiver,
or discharge is sought. This Guaranty shall be construed and enforced in
accordance with the laws of New York.
Please acknowledge your acceptance of the Guaranty be countersigning the
enclosed copy of this letter and returning the same to me.
Very truly yours,
/s/ Xxxxxx X. Xxxxxx
XXXXXX X. XXXXXX
ACCEPTED AND AGREED:
INTEGRATED HEALTH SERVICES, INC.
By /s/ Xxxxx Xxxxxxxx
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Name: Xxxxx Xxxxxxxx
Title: Executive Vice President-
-Development
EXHIBIT A
Years ended December 31
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Projected
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12 mos FY
1997 1998
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Patient Service Revenue $ 107,475 $ 117,423
Other Oper. Revenue 0 0
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Total Revenue 107,475 117,423
Operating Expense 87,187 91,874
Gross Income 20,289 25,549
SG&A 2,200 2,507
EBITDAR 18,089 23,042
Lease/Rent Exp. 7,430 7,745
EBITDA 10,659 15,297
Depreciation 2,323 2,396
Amortization 608 608
EBIT 7,728 12,293
Investment Income 80 157
Revolver Expense 0 0
Interest Expense (4,635) (4,814)
Pretax Income 3,172 7,636
Income Taxes 1,205 2,902
Net Inc. Bef. Extra. Item 1,967 4,734
Ex. Item, net of tax (2) 0 0
Net Income $ 1,967 $ 4,734
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EXHIBIT B
ASSUMPTIONS
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o Financial analysis is performed on a pro-forma basis assuming the sale or
closure of 12 facilities.
o The 12 month 1997 income statement represents the 12 month period from the
date of closure of the transaction.
o Pre-tax income of $3.172 million for the 12 months following the close of
the transaction is calculated based upon routine Medicare, Medicaid, and
private rate increases, as well as normal expense growth.
