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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition Period from to
Commission File Number 1-12306
INTEGRATED HEALTH SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 23-2428312
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
10065 Red Run Blvd.
Owings Mills, Maryland 21117
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 410-998-8400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered:
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Common Stock, par value
$.001 per share New York Stock Exchange
9 5/8 % Senior Subordinated
Notes due 2002, Series A New York Stock Exchange
10 3/4 % Senior Subordinated
Notes due 2004 New York Stock Exchange
5 3/4 % Convertible Senior
Subordinated Debentures due 2001 New York Stock Exchange
6% Convertible Subordinated
Debentures due 2003 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
Aggregate market value of the Registrant's Common Stock held by
non-affiliates at March 26, 1996 (based on the closing sale price for such
shares as reported by the New York Stock Exchange): $498,042,731.
Common Stock outstanding as of March 26, 1996: 22,258,893 shares.
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PART I
ITEM 1. BUSINESS
GENERAL OVERVIEW
Integrated Health Services, Inc. ("IHS" or the "Company") is one of the
nation's leading providers of post-acute healthcare services. Post-acute care is
the provision of a continuum of care to patients following discharge from an
acute care hospital. Post-acute care services include subacute care, outpatient
and home care, inpatient and outpatient rehabilitation and pharmacy services.
The Company's post-acute network is designed to address the fact that the cost
containment measures implemented by private insurers and limitations on
government reimbursement of hospital costs have resulted in the discharge from
hospitals of many patients who continue to require medical and rehabilitative
care. The Company's post-acute healthcare system is intended to provide
continuity of care for its patients in multiple settings and enable payors to
contract with one provider to provide all of a patient's needs during the year
following discharge from acute care hospitals. IHS' post-acute care network
currently consists of over 600 service locations in 40 states.
The Company's post-acute care strategy is to use geriatric care facilities as
platforms to provide a wide variety of subacute medical and rehabilitative
services more typically delivered in the acute care hospital setting and to use
home healthcare to provide those medical and rehabilitative services which do
not require 24-hour monitoring. To implement its post-acute care strategy, the
Company has focused on (i) developing subacute care units; (ii) expanding the
range of home healthcare and related services it offers to patients directly,
rather than through third party providers, through the acquisition of service
companies, in order to provide patients with a continuum of care throughout
their recovery, to increase its control of certain costs and to meet the growing
desire by payors for one-stop shopping; (iii) developing market concentration
for its post-acute care services in targeted states due to increasing payor
consolidation; and (iv) forming strategic alliances with health maintenance
organizations, hospital groups and physicians.
The Company provides subacute care through medical specialty units ("MSUs"),
which are typically 20 to 75 bed specialty units with physical identities,
specialized medical technology and staffs separate from the geriatric care
facilities in which they are located. MSUs are designed to provide comprehensive
medical services to patients who have been discharged from acute care hospitals
but who still require subacute or complex medical treatment. The levels and
quality of care provided in the Company's MSUs are similar to those provided in
the hospital but at per diem treatment costs which the Company believes are
generally 30% to 60% below the cost of such care in acute care hospitals.
Because of the high level of specialized care provided, the Company's MSUs
generate substantially higher net revenue and operating profit per patient day
than traditional geriatric care services. Total revenues generated from MSUs
have increased from $104.3 million for the year ended December 31, 1993 to
$178.0 million for the year ended December 31, 1994 and to $290.2 million for
the year ended December 31, 1995. MSU revenues as a percentage of total revenues
were 35% in 1993 and 25% in each of 1994 and 1995. The percentage decrease in
1994 was primarily the result of the acquisition of facilities which did not
have MSUs at the time of acquisition as well as the acquisition of
rehabilitation, pharmacy, diagnostic, respiratory therapy, home healthcare and
related service companies in connection with the Company's vertical integration
strategy and the implementation of the Company's post-acute care network. MSU
revenue as a percentage of total revenues is expected to continue to decrease as
the Company implements its vertical integration strategy and continues to expand
its post-acute care network through the acquisition of rehabilitation, pharmacy
and home healthcare and similar service companies.
The Company presently operates 195 geriatric care facilities (122 owned or
leased and 73 managed) and 143 MSUs located within 77 of these facilities. The
Company focuses on private pay patients because the profitability of caring for
such patients is generally higher than for patients under government assistance
programs. During the years ended December 31, 1994 and 1995, the Company derived
approximately 44% and 45%, respectively, of its patient revenues from private
pay sources. Specialty medical services revenues, which include all MSU charges,
all revenue from providing rehabilitative
1
therapies, pharmaceuticals, medical supplies and durable medical equipment to
all its patients, all revenue from its Alzheimer's programs and all revenue from
its provision of pharmacy, rehabilitation therapy, home healthcare and similiar
services to third-parties, constituted approximately 57% and 65% of net revenues
during the years ended December 31, 1994 and 1995, respectively. The Company
also offers a wide range of basic medical services as well as a comprehensive
array of respiratory, physical, speech, occupational and physiatric therapy in
all its geriatric care facilities. In addition, the Company offers a wide range
of hospice services.
INDUSTRY BACKGROUND
In 1983, the Federal government acted to curtail increases in healthcare
costs under Medicare, a Federal insurance program under the Social Security Act
primarily for individuals age 65 or over. Instead of continuing to reimburse
hospitals on a cost plus basis (i.e., the hospital's actual cost of care plus a
specified return on investment), the Federal government established a new type
of payment system based on prospectively determined prices rather than
retrospectively determined costs, with payment for inpatient hospital services
based on regional and national rates established under a system of
diagnosis-related groups ("DRGs"). As a result, hospitals bear the cost risk of
providing care inasmuch as they receive specified reimbursement for each
treatment regardless of actual cost.
Concurrent with the change in government reimbursement of healthcare costs, a
"managed care" segment of the healthcare industry emerged based on the theme of
cost containment. The health maintenance organizations and preferred provider
organizations, which constitute the managed care segment, are able to limit
hospitalization costs by giving physicians incentives to reduce hospital
utilization and by negotiating discounted fixed rates for hospital services. In
addition, traditional third party indemnity insurers began to limit
reimbursement to pre-determined amounts of "reasonable charges," regardless of
actual cost, and to increase the amount of co-payment required to be paid by
patients, thereby requiring patients to assume more of the cost of hospital
care. These changes have resulted in the earlier discharge of patients from
acute care hospitals.
At the same time, the number of people over the age of 65 began to grow
significantly faster than the overall population. Further, advances in medical
technology have increased the life expectancies of an increasingly large number
of medically complex patients, many of whom require a high degree of monitoring
and specialized care and rehabilitative therapy that is generally not available
outside the acute care hospital. However, the changes in government and
third-party reimbursement and growth of the managed care segment of the
healthcare industry, when combined with the fact that the cost of providing care
to these patients in an acute care hospital is higher than in a non-acute care
hospital setting, provide economic incentives for acute care hospitals and
patients or their insurers to minimize the length of stay in acute care
hospitals. The early discharge from hospitals of patients who are not fully
recovered and still require medical care and rehabilitative therapy has
significantly contributed to the rapid growth of the home healthcare industry.
However, for some of these patients home healthcare is not a viable alternative
because of their continued need for a high degree of monitoring, more intensive
and specialized medical care, 24-hour per day nursing care and a comprehensive
array of rehabilitative therapy. As a result, the Company believes there is an
increasing need for non-acute care hospital facilities which can provide the
monitoring, specialized care and comprehensive rehabilitative therapy required
by the growing population of subacute and medically complex patients.
The traditional nursing home, despite its skilled care license and
eligibility for Medicare certification, has focused on providing custodial care
to Medicaid eligible persons until they die. The state Medicaid reimbursement
program reinforces this focus by typically setting "cost ceilings" on
reimbursement for each patient based on overall average state costs for all
patients. Since the "average" patient is a long-stay, non-medically complex
patient, nursing homes face an economic disincentive to treat medically complex
patients because Medicaid reimburses the nursing home as if it had provided only
custodial care to a non-medically complex patient regardless of the type of care
actually provided. In addition, state laws impose substantial restrictions on or
prohibitions against the ability of a facility to reduce the number of Medicaid
certified beds in a facility, thus making the process of converting to the
treatment of more medically complex non-Medicaid eligible persons a long and
financially risky process. As a result,
2
most traditional nursing homes, with high Medicaid census and earnings and cash
flow under pressure, are reluctant to spend the capital required to upgrade
staff, implement medical procedures (such as infection control) and equip a
nursing home to treat subacute and medically complex patients and provide the
comprehensive rehabilitative therapy required by many of these patients.
Moreover, recent healthcare reform proposals have focused on regional health
alliances, which would negotiate rates with providers on behalf of consumers,
and a reliance on managed care as a way to contain healthcare costs. These
proposals, together with the increasing complexity of medical services provided,
growing regulatory and compliance requirements and increasingly complicated
reimbursement systems, have resulted in a trend of consolidation of smaller,
local operators who lack the sophisticated management information systems,
operating efficiencies and financial resources to compete effectively into
larger, more established regional or national operators.
There are numerous initiatives on the federal and state levels for
comprehensive reforms affecting the payment for and availability of healthcare
services. It is not clear at this time what proposals, if any, will be adopted
or, if adopted, what effect such proposals would have on the Company's business.
Aspects of certain of these healthcare proposals, such as cutbacks in the
Medicare and Medicaid programs, containment of healthcare costs on an interim
basis by means that could include a short-term freeze on prices charged by
healthcare providers, and permitting greater state flexibility in the
administration of Medicaid, could adversely affect the Company. See "--Sources
of Revenue." There can be no assurance that currently proposed or future
healthcare legislation or other changes in the administration or interpretation
of governmental healthcare programs will not have an adverse effect on the
Company. Ongoing consolidation in the healthcare industry could also impact the
Company's business and results of operations.
COMPANY STRATEGY
Integrated Health Services, Inc. is one of the nation's leading providers of
post-acute healthcare services. Post-acute care is the provision of a continuum
of care to patients following discharge from the acute care hospital. Post-acute
care services include subacute care, outpatient and home care, inpatient and
outpatient rehabilitation and pharmacy services. The Company's post-acute
network is designed to address the fact that the cost containment measures
implemented by private insurers and limitations on government reimbursement of
hospital costs have resulted in the discharge from hospitals of many patients
who continue to require medical and rehabilitative care. The Company's
post-acute healthcare system is intended to provide continuity of care for its
patients in multiple settings and enable payors to contract with one provider to
provide all of a patient's needs during the year following discharge from acute
care hospitals. IHS' post-acute care network currently consists of over 600
service locations in 40 states.
The Company's post-acute care strategy is to use geriatric care facilities as
platforms to provide a wide variety of subacute medical and rehabilitative
services more typically delivered in the acute care hospital setting and to use
home healthcare to provide those medical and rehabilitative services which do
not require 24-hour monitoring. To implement its post-acute care strategy, the
Company has focused on (i) developing subacute care units; (ii) expanding the
range of home healthcare and related services it offers to patients directly,
rather than through third party providers, through the acquisition of service
companies, in order to provide patients with a continuum of care throughout
their recovery, to increase its control of certain costs and to meet the growing
desire by payors for one-stop shopping; (iii) developing market concentration
for its post-acute care services in targeted states due to increasing payor
consolidation; and (iv) forming strategic alliances with health maintenance
organizations, hospital groups and physicians.
The central elements of IHS' business strategy are:
Subacute Care Through Medical Specialty Units. The Company's strategy is
designed to take advantage of the need for early discharge of many patients from
acute care hospitals by using MSUs as subacute specialty units within its
geriatric care facilities. MSUs provide the monitoring and specialized care
still required by these persons after discharge from acute care hospitals at per
diem treatment costs which the Company believes are generally 30% to 60% below
the cost of care in acute care hospitals.
3
IHS also intends to continue to use its geriatric care facilities to meet the
increasing need for cost-efficient, comprehensive rehabilitation treatment of
these patients. The primary MSU programs currently offered by the Company are
complex care programs, ventilator programs and wound management programs. In
addition, the Company has developed additional MSU programs, including programs
for subacute rehabilitation, cardiology, oncology and HIV.
IHS opened its first MSU program in April 1988 and currently operates 143 MSU
programs in 77 facilities. In 1993, the Company opened 30 MSU programs and
expanded 24 MSU programs, aggregating 582 beds. During the year ended December
31, 1994, the Company opened 49 MSU programs and expanded 18 MSU programs,
aggregating 1,098 beds (including 33 beds located at a facility no longer
managed by the Company as of August 1994.) During the year ended December 31,
1995, the Company opened 31 MSU programs aggregating 691 beds and expanded
existing programs by 177 beds. Despite the increase in the number of MSU beds
during 1994 and 1995, census in the Company's MSU programs was 72% for the years
ended December 31, 1995 and 1994, as compared to 69% for the year ended December
31, 1993. IHS also emphasizes the care of medically complex patients through the
provision of a comprehensive array of respiratory, physical, speech,
occupational and physiatric therapy. The Company intends that its MSUs be a
lower cost alternative to acute care or rehabilitation hospitalization of
subacute or medically complex patients. IHS intends to expand its specialty
medical services at its existing and newly acquired facilities.
Vertical Integration of Post-acute Care Services. The Company is expanding
the range of home healthcare and related services it offers to its patients
directly in order to serve the full spectrum of patient needs following acute
hospitalization. As a result of the acquisitions consummated in 1993, 1994 and
1995, the Company is now able to offer directly to its patients, rather than
through third-party providers, pharmacy, home healthcare, rehabilitation
(physical, occupational and speech) and mobile x-ray and electrocardiogram
services. IHS believes that a full service provider is better able to respond to
the needs of its patients and referral sources. In addition, the Company
believes that by offering managed care organizations and insurance companies a
single source from which to obtain a full continuum of care to patients
following discharge from the acute care hospital, it will attract healthcare
payors seeking to improve the management of healthcare quality as well as to
reduce servicing and administrative expenses. The Company also believes that
offering a broad range of services will allow it to increase its control of
certain costs, since many of these services are currently provided to IHS by
third-parties. The Company's ability to control such costs will, the Company
believes, also provide it with a competitive advantage in contracting with
managed care companies and permit the development of capitated rates.
Expansion of Home-Based Services. The Company's strategy is to expand its
home healthcare services to take advantage of healthcare payors' increasing
focus on having healthcare provided in the lowest-cost setting possible and
patients' desires to be treated at home. The Company believes that the nation's
aging population, when combined with advanced technology which allows more
healthcare procedures to be performed at home, has resulted in an increasingly
large number of patients with long-term chronic conditions than can be treated
effectively in the home. The Company currently provides home healthcare
services, which range from light housekeeping to skilled professional care by
trained nurses and therapists, in 14 states. In addition, the Company has
entered into an agreement to acquire First American Healthcare of Georgia, Inc.,
which provides home health services in 23 states (including 18 states in which
IHS is already operating), although there can be no assurance the acquisition
will be consummated.
Concentration on Targeted Markets. The Company has implemented a strategy
focused on the development of market concentration for its post-acute care
services in targeted states due to increasing payor consolidation. The Company
also believes that by offering its services on a concentrated basis in targeted
markets, together with the vertical integration of its services, it will be
better positioned to meet the needs of managed care payors. The Company now
operates 195 geriatric care facilities (73 of which the Company manages), with
27 geriatric care facilities (24 of which are managed) in California, 41
geriatric care facilities in Florida (11 of which the Company manages), 14
geriatric care facilities in Pennsylvania (two of which the Company manages) and
25 geriatric care facilities in Texas (eight of which the Company manages).
4
Focus on Private Pay Patients. The Company attempts to locate and operate its
facilities in a manner designed to attract patients who pay directly to the
facilities for services without benefit of any governmental assistance programs
("private pay patients"). Generally, the profitability of caring for private pay
patients is higher than for patients under government assistance programs. For
the year ended December 31, 1995 the percentage of MSU revenue generated by
private pay patients was 37.7% as compared to 47.6% and 51.6% for the years
ended December 31, 1994 and 1993, respectively. The decrease in the percentage
of patient revenues generated by private pay patients in 1994 and 1995 was
primarily the result of the large number of Medicaid patients in the 41
Litchfield facilities acquired on September 1, 1994 and the large number of
Medicaid patients in the 30 Central Park Lodges facilities acquired on December
1, 1993, as well as the increase in the number of MSU programs. The Company's
experience to date has been that Medicare patients constitute a higher
percentage of an MSU program's occupancy in the first months of operation as
compared to private pay patients; however, as the Company's marketing program to
private pay patients is implemented, the number of private pay patients in the
MSU program tends to increase. Approximately one-third of all of the Company's
MSU patients are under the age of 70.
Expansion Through Acquisition. The Company has grown substantially through
acquisitions and the opening of MSUs, and expects to continue to expand its
business by establishing additional MSUs and rehabilitation programs in its
existing geriatric care facilities, by acquiring additional geriatric care
facilities in which to establish MSUs and rehabilitation programs, by
establishing MSUs with beds leased from third-party geriatric care facilities or
hospitals or at facilities managed by IHS and by expanding the number of MSU
programs offered and by expanding the amount of home healthcare and related
services it offers directly to its patients rather than through third-party
providers. From January 1, 1991 to date, the Company has increased the number of
geriatric care facilities it owns or leases from 25 to 122, has increased the
number of facilities it manages from 18 to 73 and has increased the number of
MSU programs it operates from 13 to 143. In addition, the Company has begun to
offer certain related services, such as pharmacy, rehabilitation, x-ray,
electrocardiogram and home healthcare, directly to its patients rather than
relying on third-party providers. The Company's planned expansion and growth
require that additional MSUs be established in the Company's existing
facilities, that the Company acquire, lease or acquire the right to manage for
others additional facilities in which MSUs can be established, that the Company
expand home healthcare services through the acquisition of additional home
healthcare providers, and that the Company acquire, or establish relationships
with, third-parties which provide post-acute care services not currently
provided by the Company. Such expansion and growth will depend on the Company's
ability to create demand for its MSU and post-acute care programs, the
availability of suitable acquisition, lease or management candidates and the
Company's ability to finance such acquisitions and growth. The successful
implementation of the Company's post-acute healthcare system, including the
capitation of rates, will depend on the Company's ability to expand the amount
of post-acute care services it offers directly to its patients rather than
through third-party providers. There can be no assurance that suitable
acquisition candidates will be located, that acquisitions can be consummated,
that acquired facilities or services can be successfully integrated into the
Company's operations, that MSUs can be successfully established in these
facilities or that the Company's post-acute healthcare system, including the
capitation of rates, can be successfully implemented. In expanding its
operations into the post-acute care market, the Company will face substantial
competition, including competition from hospitals, subacute care providers,
rehabilitation providers and home healthcare providers. If the Company were
unable to obtain any required regulatory approvals for its acquisitions or
expansions, the Company's business strategy would be adversely affected. The
Company continually considers acquisitions and conducts discussions regarding
potential acquisitions.
PATIENT SERVICES
BASIC MEDICAL SERVICES
The Company provides a wide range of basic medical services at its geriatric
care facilities which are licensed as skilled care nursing homes. Services
provided to all patients include required nursing care, room and board, special
diets, and other services which may be specified by a patient's physician who
directs the admission, treatment and discharge of the patient.
5
The Company also operates assisted living facilities for elderly persons who
do not require the medical care provided in a geriatric care facility but need
assistance with the "activities of daily living," such as cooking, bathing,
driving, or administering their own medication. The Company believes that the
increase in life expectancies of the elderly, combined with the changing focus
of geriatric care facilities to the treatment of more medically demanding
patients, will result in increased demand for assisted living facilities for the
less medically demanding elderly. At December 31, 1995, the Company operated 712
assisted living beds in six facilities and 715 retirement units at 4 facilities.
SPECIALTY MEDICAL SERVICES
MEDICAL SPECIALTY UNITS
The Company's MSUs are typically 20 to 75 bed subacute specialty care units
located within discrete areas of IHS' facilities, with physical identities,
specialized medical technology and medical staffs separate from the geriatric
care facilities in which they are located. An intensive care unit nurse, or a
nurse with specialty qualifications, serves as clinical coordinator of each
unit, which generally is staffed with nurses having experience in the acute care
setting. The operations of each MSU are generally overseen by a Board certified
specialist in that unit's area of treatment. The patients in each MSU are
provided with a high degree of monitoring and specialized care similar to that
provided by acute care hospitals. The physiological monitoring equipment
required by the MSU is equivalent to that found in the acute care hospital. The
Company opened its first MSU program during April 1988 and currently operates
143 MSUs at 77 facilities. Approximately one-third of all of the Company's MSU
patients are under the age of 70.
Although each MSU has most of the treatment capabilities of an acute care
hospital in the MSU's area of specialization, the Company believes the per diem
treatment costs are generally 30% to 60% less than in acute care hospitals.
Additionally, the MSU is less "institutional" in nature than the acute care
hospital, families may visit MSU patients whenever they wish and family
counseling is provided. In marketing its MSU programs to insurers and healthcare
providers, IHS emphasizes the cost savings of its treatment as compared to acute
care hospitals. The Company also emphasizes the improved "quality of life"
compared to acute care and long-term care hospitals in marketing its MSU
programs to hospital patients and their families. The primary MSU programs
currently offered by the Company are complex care programs, ventilator programs,
wound management programs and cardiac care programs.
Complex Care Program. This program is designed to treat persons who are
generally subacute or chronically ill and sick enough to be treated in an acute
care hospital. Persons requiring this care include post-surgical patients,
cancer patients and patients with other diseases requiring long recovery
periods. This program is designed to provide the monitoring and specialized care
these patients require but in a less institutional and more cost efficient
setting than provided by hospitals. Some of the monitoring and specialized care
provided to these patients are apnea monitoring, continuous peripheral
intravenous therapy with or without medication, continuous subcutaneous
infusion, chest percussion and postural drainage, gastrostomy or naso-gastric
tube feeding, ileostomy or fistula care (including patient teaching),
post-operative care, tracheostomy care, and oral, pharyngeal or tracheal
suctioning. Patients in this program also typically undergo intensive
rehabilitative services to allow them to return home.
Ventilator Program. This program is designed for persons who require
ventilator assistance for breathing because of respiratory disease or
impairment. Persons requiring ventilation include sufferers of chronic
obstructive pulmonary disease, muscular atrophy and respiratory failure,
pneumonia, cancer, spinal cord or traumatic brain injury and other diseases or
injuries which impair respiration. Ventilators assist or effect respiration in
patients unable to breathe adequately for themselves by injecting heated,
humidified, oxygen-enriched air into the lungs at a pre-determined volume per
breath and number of breaths per minute and by controlling the relationship of
inhalation time to exhalation time. Patients in this program undergo respiratory
rehabilitation to wean them from ventilators by teaching them to breathe on
their own once they are medically stable. Patients are also trained to use the
ventilators on their own.
6
Wound Management Programs. These programs are designed to treat persons
suffering from post operative complications and persons infected by certain
forms of penicillin and other antibiotic resistant bacteria, such as methicillin
resistant staphylococcus aureus ("MRSA"). Patients infected with these types of
bacteria must be isolated under strict infection control procedures to prevent
the spread of the resistant bacteria. They are thus ideal patients for treatment
in MSUs. Because of the need for strict infection control, including isolation,
treatment of this condition in the home is not practical.
Cardiac Care Program. This program is designed to treat persons suffering
from congestive heart failure, severe cardiac arrhythmia, pre/post transplants
and other cardiac diagnoses. The monitoring and specialized care provided to
these patients includes electrocardiographic monitoring/telemetry, continuous
hemodynamic monitoring, infusion therapy, cardiac rehabilitation, stress
management and dietary counseling, planning and education.
The Company believes that MSU programs can be developed to address a wide
variety of medical conditions which require specialized care. In addition, the
Company has developed MSU programs for subacute rehabilitation, oncology and
HIV. The Company intends to establish additional MSUs in its existing facilities
and in facilities which it acquires or manages for others to address the various
market needs for MSU programs in the markets in which it operates.
OTHER SPECIALTY MEDICAL SERVICES
Rehabilitation. The Company provides a comprehensive array of rehabilitative
services for patients at all of its geriatric care facilities, including those
in its MSU programs, in order to enable those persons to return home. These
services include respiratory therapy with licensed respiratory therapists,
physical therapy with a particular emphasis on programs for the elderly, speech
therapy, particularly for the elderly recovering from cerebral vascular
disorders, occupational therapy, and physiatric care. A portion of the
rehabilitative service hours are provided by independent contractors. In order
to reduce the number of rehabilitative services hours provided by independent
contractors, the Company began in late 1993 to acquire companies which provide
physical, occupational and speech therapy to healthcare facilities. See "Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations--Acquisition and Divestiture History."
The Company has also begun to offer a rehabilitation program to stroke
victims and persons who have undergone hip replacement.
Home Healthcare Services. The Company provides home healthcare assistance to
the elderly in Arizona, Colorado, Florida, Illinois, Indiana, Kansas, Kentucky,
Missouri, New Mexico, North Carolina, Ohio, Pennsylvania, Tennessee and Texas.
Services offered range from light housekeeping to skilled professional care by
trained nurses and therapists.
Institutional Pharmacy Services. The Company provides institutional pharmacy
services to geriatric care facilities and other healthcare providers.
Institutional pharmacy services generally consist of non-retail dispensing,
consulting and compounding of prescription drugs in pharmacy outlets designed to
provide full pharmaceutical services to patients residing in institutional
settings. These pharmacy operations have enabled the Company to generate
revenues from services previously provided to IHS by third-party pharmacy
vendors.
Alzheimer's Program. IHS also offers a specialized treatment program for
persons with Alzheimer's disease. This program, called "The Renaissance
Program," is located in a specially designed wing separated from the remainder
of the facility. The physical environment is designed to address the problems of
disorientation and perceptual confusion experienced by Alzheimer's sufferers.
The Renaissance Program is designed to help reduce the stress and agitation of
Alzheimer's disease by addressing the problems of short attention spans and
hyperactivity. The staff for this program is specially recruited and staff
training is highly specialized. This program is designed not only to provide
care to persons suffering from Alzheimer's disease, but also to work with the
patient's family. The Company currently offers The Renaissance Program at 12 of
its geriatric care facilities with a total of 394 beds. Patients pay a small
premium to the Company's per diem rate for basic medical care to participate in
this program.
7
Hospice Services. The Company also provides hospice care to the terminally
ill at its facility in Miami, Florida. In addition, the Company provides hospice
services, including medical care, counseling and social services, to the
terminally ill in the greater Chicago metropolitan area and the state of
Michigan.
MANAGEMENT AND OTHER SERVICES
The Company manages geriatric care facilities under contract for others to
capitalize on its specialized care programs without making the capital outlay
generally required to acquire and renovate a facility. The Company currently
manages 73 geriatric care facilities with 8,721 licensed beds, including two
assisted living facilities with 222 living units. The Company is responsible for
providing all personnel, marketing, nursing, resident care, dietary and social
services, accounting and data processing reports and services for these
facilities, although such services are provided at the facility owner's expense.
The facility owner is also obligated to pay for all required capital
expenditures. The Company manages these facilities in the same manner as the
facilities it owns or leases, and provides the same geriatric care services as
are provided in its owned or leased facilities. Contract acquisition costs for
legal and other direct costs incurred to acquire long-term management contracts
are capitalized and amortized over the term of the related contract.
The Company receives a management fee for its services which generally is
equal to 4% to 8% of gross revenues of the geriatric care facility. Certain
management agreements also provide the Company with an incentive fee based on
the amount of the facility's operating income which exceeds stipulated amounts.
Management fee revenues are recognized when earned and billed generally on a
monthly basis. Incentive fees are recognized when operating results of managed
facilities exceed amounts required for incentive fees in accordance with the
terms of the management agreements. The management agreements generally have an
initial term of ten years, with the Company having a right to renew in most
cases. The management agreements expire at various times between May 1996 and
November 2004 although all can be terminated earlier under certain
circumstances. The Company generally has a right of first refusal in respect of
the sale of each managed facility. The Company believes that by implementing its
specialized care programs and services in these facilities, it will be able to
increase significantly the operating income of these facilities and thereby
increase the management fees the Company will receive for managing these
facilities.
The Company also manages private duty and Medicare certified home health
agencies in the Dallas/Fort Worth, Texas market.
In addition to the foregoing management services, the Company provided
consulting services for the development of subacute programs at the 25 Canadian
facilities operated by Central Park Lodges Ltd. ("CPL"), a wholly-owned Canadian
subsidiary of Trizec Corporation, Ltd. ("Trizec"), a publicly held Canadian real
estate company which owned CPL, for a period of two years through December 1995.
The Company received a fee of $4 million for these services in 1994, and
received a fee of $3 million for these services in 1995. In December 1993, the
Company acquired substantially all the United States operations of CPL,
consisting of 30 geriatric care facilities located in Florida, Pennsylvania and
Texas, nine retirement facilities located in Florida, an institutional pharmacy
division servicing geriatric care facilities in Florida, Pennsylvania and Texas
and a division which provides healthcare personnel and support services to home
healthcare and institutional markets in Florida and Pennsylvania.
QUALITY ASSURANCE
IHS has developed a comprehensive Quality Assurance Program to verify that
high standards of care are maintained at each facility operated or managed by
the Company. The Company requires that its facilities meet standards of care
more rigorous than those required by Federal and state law. Under the Company's
Quality Assurance Program standards for delivery of care are set and the care
and services provided by each facility are evaluated to insure they meet the
Company's standards. A quality assurance team evaluates each facility
bi-annually, reporting directly to the Company's Chief Executive Officer and to
the Chief Operating Officer, as well as to the administrator of each facility.
The Company has also developed a specialized Quality Assurance Program for its
MSU programs. The Company has
8
begun a program to obtain accreditation by the Joint Commission on Accreditation
of Healthcare Organizations ("JCAHO") for each of its facilities. At March 26,
1996, 34 of the Company's facilities had been fully accredited by the JCAHO.
In connection with its Quality Assurance Program, the Company conducts
quarterly evaluations of its services through written questionnaires of its
patients and their families. Facility administrator bonuses are dependent in
part upon their facility's ranking in such surveys. The Company also maintains
an 800 number, called the "In-Touch Line," which is prominently displayed above
telephones in each facility and placed in patients' bills. Patients and staff
are encouraged to call this number if they have any problem with nursing or
administrative personnel which cannot be resolved quickly at the facility level.
This program provides the Company with an early-warning of problems which may be
developing at the facility.
OPERATIONS
The day-to-day operations of each facility are managed by an on-site state
licensed administrator. An on-site business office manager monitors the
financial operations of each facility. The administrator of each facility is
supported by other professional personnel, including the facility's medical
director, social workers, dietician and recreation staff. Nursing departments in
each facility are under the supervision of a director of nursing who is
state-registered. The nursing staffs are composed of registered nurses and
licensed practical nurses as well as nursing assistants.
The Company's corporate staff provides services such as marketing assistance,
training, quality assurance oversight, human resource management, reimbursement
expertise, accounting, cash management and treasury functions, internal
auditing, and management support. Financial control is maintained through fiscal
and accounting policies that are established at the corporate level for use at
each facility. The Company has standardized operating procedures and monitors
its facilities to assure consistency of operations. IHS emphasizes frequent
communications, the setting of operational goals and the monitoring of actual
results. The Company uses a financial reporting system which enables it to
monitor, on a daily basis, certain key financial data at each facility such as
payor mix, admissions and discharges, cash collections, net revenue and
staffing.
Each facility has all necessary state and local licenses. Most facilities are
certified as providers under the Medicare and Medicaid programs of the state in
which they are located.
JOINT VENTURES
In January 1993, a wholly-owned subsidiary of IHS, Integrated Health Services
of Missouri, Inc. ("IHSM"), invested $4,650,000 for a 49% interest in a
partnership newly formed to manage and operate approximately 8,000 geriatric
care and assisted retirement beds. In connection with this transaction, the
Company guaranteed a $4.2 million first mortgage loan on one of these geriatric
care facilities. Cenill, Inc., a wholly owned subsidiary of Tutera Group, Inc.,
the former manager of the facilities, is the sole general partner of the
partnership and owns a 51% interest therein. Subject to certain material
transactions requiring the approval of IHSM, the business of the partnership is
conducted by its general partner. Under certain circumstances, IHSM has the
right to become a 51% owner and sole general partner of the partnership, or to
purchase the general partner's entire interest in the partnership, in each case
for a price based upon a multiple of the partnership's earnings.
In April 1993, a wholly-owned subsidiary of IHS, Southwood Holdings, Inc.
("Southwood"), acquired a 21.28% interest in the common stock and a 47.64%
interest in the 6% cumulative convertible preferred stock of Speciality Care PLC
("Speciality Care"), an owner and operator of geriatric care facilities in the
United Kingdom. The total cost of the investment was $748,000 for the common
stock and $2,245,000 for the preferred stock. The preferred stock contains
certain preferences as to liquidation. The Preferred Stock can be converted into
Common Stock at any time between July 1, 1997 and July 1, 2000, and is
automatically converted into common stock upon (A) the sale of Speciality Care
or (B) a public offering of Speciality Care. In 1994, Southwood loaned
$1,000,000 to Speciality Care bearing interest at 9%. In January 1995 Southwood
applied $627,000 of the loan to pay for additional shares
9
of common and preferred stock of Speciality Care PLC subscribed for in November
1994. In June 1995, Southwood loaned an additional $8,575,000 to Speciality Care
bearing interest at 12%. This loan was subsequently repaid in August 1995. In
addition, Southwood invested an additional $4,384,000 in Speciality Care.
Southwood currently owns 21.30% and 63.65% of the Common Stock and Preferred
Stock, respectively, and upon conversion of the Preferred Stock will own
approximately 31.38% of the outstanding Common Stock assuming no further
issuances.
In 1994, the Company sold its 49% interest in two joint ventures formed to
develop and operate assisted living facilities and acquired the 51% interest in
a joint venture which owned a facility which IHS managed. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Acquisition and Divestiture History."
In 1995, a wholly-owned subsidiary of IHS, Southwood, invested $8.2 million
for a 40% interest in HPC America, Inc. ("HPC"), a Delaware corporation that
operates home infusion and home healthcare companies, in addition to owning and
managing physician practices. Subject to certain material transactions requiring
the approval of Southwood, the business is conducted under the direction of the
Chief Executive Officer and President of HPC. Under certain circumstances, IHS
has the right to purchase the remaining 60% interest in HPC, based upon a
multiple of HPC's earnings, prior to September 1997.
SOURCES OF REVENUE
The Company receives payments for services rendered to patients from private
insurers and patients themselves, from the Federal government under Medicare,
and from the states in which certain of its facilities are located under
Medicaid. The sources and amounts of the Company's patient revenues derived from
the operations of its geriatric care facilities and MSU programs are determined
by a number of factors, including licensed bed capacity of its facilities,
occupancy rate, the mix of patients and the rates of reimbursement among payor
categories (private, Medicare and Medicaid). Changes in the mix of the Company's
patients among the private pay, Medicare and Medicaid categories can
significantly affect the profitability of the Company's operations. Generally,
private pay patients are the most profitable and Medicaid patients are the least
profitable.
During the years ended December 31, 1993, 1994 and 1995, the Company derived
approximately $151.6 million, $297.8 million and $509.3 million, respectively,
or 55.0%, 44.2% and 44.7%, respectively, of its patient revenues from private
pay sources and approximately $123.9 million, $376.4 million and $629.8 million,
respectively, or 45.0%, 55.8% and 55.3%, respectively, of its patient revenues
from government reimbursement programs. Patient revenues from government
reimbursement programs during these periods consisted of approximately $79.4
million, $225.6 million and $387.2 million, or 28.8%, 33.5% and 34.0%,
respectively, from Medicare and approximately $44.5 million, $150.8 million and
$242.6 million, respectively, or 16.2%, 22.3% and 21.3%, respectively, from
Medicaid. The increase in the percentage of revenue from government
reimbursement programs in 1994 and 1995 is due to the higher level of Medicare
and Medicaid patients serviced by the related service companies and the larger
concentration of Medicaid patients in the 30 Central Park Lodges facilities
acquired on December 1, 1993 and the 41 facilities leased on August 31, 1994, as
well as the increase in MSU beds.
The Company's experience has been that Medicare patients constitute a higher
percentage of an MSU program's initial occupancy than they do once the program
matures. However, as the Company's marketing program to private pay patients is
implemented in the new MSUs, the number of private pay patients in those
programs has traditionally increased. In addition, the Company received payments
from third parties for its management services, which constituted approximately
7.0%, 5.3% and 3.3%, of total net revenues for the years ended December 31,
1993, 1994 and 1995, respectively.
Gross third party payor settlements receivable, primarily from federal and
state governments (i.e., Medicare and Medicaid cost reports), were $33.0 million
at December 31, 1995, as compared to $22.6 million at December 31, 1994.
Approximately $7.6 million, or 23%, of the third party payor settlements
receivable, primarily from Federal and state governments, at December 31, 1995
represent the costs for its MSU patients which exceed regional reimbursement
limits established under Medicare, as compared to approximately $6.2 million, or
27%, at December 31, 1994.
10
The Company's cost of care for its MSU patients generally exceeds regional
reimbursement limits established under Medicare. The success of the Company's
MSU strategy will depend in part on its ability to obtain per diem rate
approvals for costs which exceed the Medicare established per diem rate limits
and by obtaining waivers of these limitations. The Company has submitted waiver
requests for 133 cost reports, covering all cost report periods through December
31, 1994. To date, final action has been taken by the Health Care Financing
Administration ("HCFA") on 131 waiver requests covering cost report periods
through December 31, 1994. The Company's final rates as approved by HCFA
represent approximately 96% of the requested rates as submitted in the waiver
requests. There can be no assurance, however, that the Company will be able to
recover its excess costs under any waiver requests which may be submitted in the
future. The Company's failure to recover substantially all these excess costs
would adversely affect its results of operations and could adversely affect its
MSU strategy.
Both private third party and governmental payors have undertaken cost
containment measures designed to limit payments made to healthcare providers
such as the Company. Furthermore, government programs are subject to statutory
and regulatory changes, retroactive rate adjustments, administrative rulings and
government funding restrictions, all of which may materially increase or
decrease the rate of program payments to facilities managed and operated by the
Company. There can be no assurance that payments under governmental programs
will remain at levels comparable to present levels or will, in the future, be
sufficient to cover the costs allocable to patients participating in such
programs. In addition, there can be no assurance that facilities owned, leased
or managed by the Company now or in the future will initially meet or continue
to meet the requirements for participation in such programs. The Company could
be adversely affected by the continuing efforts of governmental and private
third party payors to contain the amount of reimbursement for healthcare
services. In an attempt to limit the federal and state budget deficits, there
have been, and the Company expects that there will continue to be, a number of
proposals to limit Medicare and Medicaid reimbursement for healthcare services.
The Company cannot at this time predict whether this legislation or any other
legislation will be adopted or, if adopted and implemented, what effect, if any,
such legislation will have on the Company.
GOVERNMENT REGULATION
Operation and development of the Company's geriatric care facilities are
subject to various federal, state and local statutes and regulations. Most
states in which the Company operates or is studying expansion possibilities have
statutes which require that prior to the addition or construction of new beds,
the addition of new services or certain capital expenditures in excess of
defined levels, the Company must obtain a certificate of need ("CON") which
certifies that the state has made a determination that a need exists for such
new or additional beds, new services or capital expenditures. These state
determinations of need or CON programs are designed to comply with certain
minimum federal standards and to enable states to participate in certain federal
and state health related programs. Certain states have recently permitted their
certificate of need programs to lapse or have relaxed their CON requirements.
Elimination or relaxation of CON requirements may result in increased
competition in such states and may also result in increased expansion
possibilities in such states. Of the states in which the Company operates, the
following require CONs for the facilities that are owned, operated or managed by
the Company: Alabama, Colorado, Florida, Georgia, Illinois, Indiana, Iowa,
Kentucky, Maryland, Michigan, Mississippi, Missouri, Nevada, New Hampshire, New
Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia,
Washington and Wisconsin. The conversion of geriatric care beds to MSU beds does
not require a CON.
The Company's facilities are also subject to licensure regulations. Each of
the Company's geriatric care facilities is licensed as a skilled care facility
and is certified as a provider under the Medicare program and most are also
certified by the state in which they are located as a provider under the
Medicaid program of that state. The Company believes it is in substantial
compliance with all material statutes and regulations applicable to its
business. In addition, all healthcare facilities are subject to various local
building codes and other ordinances. It is not possible to predict the content
or impact of future legislation and regulations affecting the healthcare
industry.
State and local agencies survey all geriatric care centers on a regular basis
to determine whether such centers are in compliance with governmental operating
and health standards and conditions for participation in government medical
assistance programs. Such surveys include reviews of patient utilization
11
of healthcare facilities and standards for patient care. The Company endeavors
to maintain and operate its facilities in compliance with all such standards and
conditions. However, in the ordinary course of its business the Company's
facilities receive notices of deficiencies for failure to comply with various
regulatory requirements. Generally, the facility and the reviewing agency will
agree upon the measures to be taken to bring the facility into compliance with
regulatory requirements. In some cases or upon repeat violations, the reviewing
agency may take adverse actions against a facility, including the imposition of
fines, temporary suspension of admission of new patients to the facility,
suspension or decertification from participation in the Medicare or Medicaid
programs, and, in extreme circumstances, revocation of a facility's license.
These adverse actions may adversely affect the ability of the facility to
operate or to provide certain services and its eligibility to participate in the
Medicare or Medicaid programs. In addition, such adverse actions may adversely
affect other facilities operated by the Company. See "--Federal and State
Assistance Programs."
In addition to extensive existing government healthcare regulation, there are
numerous initiatives on the federal and state levels for comprehensive reforms
affecting the payment for and availability of healthcare services. It is not
clear at this time what proposals, if any, will be adopted or, if adopted, what
effect such proposals would have on the Company's business. Aspects of certain
of these healthcare proposals, such as cutbacks in the Medicare and Medicaid
programs, containment of healthcare costs on an interim basis by means that
could include a short-term freeze on prices charged by healthcare providers, and
permitting greater state flexibility in the administration of Medicaid, could
adversely affect the Company. See "--Sources of Revenue." There can be no
assurance that currently proposed or future healthcare legislation or other
changes in the administration or interpretation of governmental healthcare
programs will not have an adverse effect on the Company. Concern about the
potential effects of the proposed reform measures has contributed to the
volatility of stock prices of companies in healthcare and related industries,
including the Company, and may similarly affect the price of the Company's
Common Stock in the future. The Company cannot predict the ultimate timing or
effect of such legislative efforts and no assurance can be given that any such
efforts will not have a material adverse effect on the Company's business and
results of operations.
FEDERAL AND STATE ASSISTANCE PROGRAMS
Substantially all of the Company's geriatric care facilities are currently
certified to receive benefits as a skilled nursing facility provided under the
Health Insurance for the Aged and Disabled Act (commonly referred to as
"Medicare"), and substantially all are also certified under programs
administered by the various states using federal and state funds to provide
medical assistance to qualifying needy individuals ("Medicaid"). Both initial
and continuing qualification of a skilled nursing care facility to participate
in such programs depend upon many factors including, among other things,
accommodations, equipment, services, patient care, safety, personnel, physical
environment, and adequate policies, procedures and controls.
Services under Medicare consist of nursing care, room and board, social
services, physical and occupational therapies, drugs, biologicals, supplies,
surgical, ancillary diagnostic and other necessary services of the type provided
by extended care or acute care facilities. Under the Medicare program, the
federal government pays the reasonable direct and indirect allowable costs
(including depreciation and interest) of the services furnished and, through
September 30, 1993, provided a rate of return on equity capital (as defined
under Medicare). However, the Company's cost of care for its MSU patients
generally exceeds regional reimbursement limits established under Medicare. The
Company has submitted waiver requests to recover these excess costs. See
"--Sources of Revenue." There can be no assurance, however, that the Company
will be able to recover its excess costs under the pending waiver request or
under any waiver requests which may be submitted in the future. The Company's
failure to recover substantially all these excess costs would adversely affect
its results of operations and could adversely affect its MSU strategy. Even
though the Company's cost of care for its MSU patients generally exceeds
regional reimbursement limits established under Medicare for nursing homes, the
Company's cost of care is still lower than the cost of such care in an acute
care hospital.
Under the various Medicaid programs, the federal government supplements funds
provided by the participating states for medical assistance to qualifying needy
individuals. The programs are administered by the applicable state welfare or
social service agencies. Although Medicaid programs vary from
12
state to state, typically they provide for the payment of certain expenses, up
to established limits. The majority of the MSU programs are not required to
participate in the various state Medicaid programs. However, should the
Company's MSU programs be required to admit Medicaid patients as a condition to
continued participation in such programs by the facility in which the MSU
program is located, the Company's results of operations could be adversely
affected since the Company's cost of care in its MSU programs is substantially
in excess of state Medicaid reimbursement rates.
Funds received by IHS under Medicare and Medicaid are subject to audit with
respect to the proper preparation of annual cost reports upon which
reimbursement is based. Such audits can result in retroactive adjustments of
revenue from these programs, resulting in either amounts due to the government
agency from IHS or amounts due IHS from the government agency.
Both the Medicare and Medicaid programs are subject to statutory and
regulatory changes, administrative rulings, interpretations of policy
determinations by insurance companies acting as Medicare fiscal intermediaries
and governmental funding restrictions, all of which may materially increase or
decrease the rate of program payments to healthcare facilities. Since 1985,
Congress has consistently attempted to limit the growth of federal spending
under the Medicare and Medicaid programs. The Company can give no assurance that
payments under such programs will in the future remain at a level comparable to
the present level or be sufficient to cover the operating and fixed costs
allocable to such patients. Changes in reimbursement levels under Medicare or
Medicaid and changes in applicable governmental regulations could significantly
affect the Company's results of operations. It is uncertain at this time whether
legislation on healthcare reform will ultimately be implemented or whether other
changes in the administration or interpretation of governmental healthcare
programs will occur. There can be no assurance that future healthcare
legislation or other changes in the administration or interpretation of
governmental healthcare programs will not have an adverse effect on the results
of operations of the Company. The Company cannot at this time predict whether
any healthcare reform legislation will be adopted or, if adopted and
implemented, what effect, if any, such legislation will have on the Company.
COMPETITION
The geriatric care facilities operated and managed by the Company primarily
compete on a local and regional basis with other skilled care providers. The
Company's MSUs primarily compete on a local basis with acute care and long-term
care hospitals. In addition, some skilled nursing facilities are developing
units which provide a greater level of care than the care traditionally provided
by nursing homes. Some competing providers have greater financial resources than
the Company or may operate on a nonprofit basis or as charitable organizations.
The degree of success with which the Company's facilities compete varies from
location to location and depends on a number of factors. The Company believes
that the specialized services and care provided, the quality of care provided,
the reputation and physical appearance of facilities and, in the case of private
pay patients, charges for services, are significant competitive factors. In
light of these factors, the Company seeks to meet competition in each locality
by improving the appearances of, and the quality and types of services provided
at, its facilities, establishing a reputation within the local medical
communities for providing competent care services, and by responding
appropriately to regional variations in demographics and tastes. There is
limited, if any, competition in price with respect to Medicaid and Medicare
patients, since revenues for services to such patients are strictly controlled
and based on fixed rates and cost reimbursement principles. Because the
Company's facilities compete primarily on a local and regional basis rather than
a national basis, the competitive position of the Company varies from facility
to facility depending upon the types of services and quality of care provided by
facilities with which each of the Company's facilities compete, the reputation
of the facilities with which each of the Company's facilities compete, and, with
respect to private pay patients, the cost of care at facilities with which each
of the Company's facilities compete.
The Company also competes with other healthcare companies for facility
acquisitions and management contracts. There can be no assurance that additional
facilities and management contracts can be acquired on favorable terms.
13
EMPLOYEES
As of December 31, 1995, the Company had approximately 23,000 full-time and
regular part-time employees. Full-time and regular part-time service and
maintenance employees at 15 facilities, totaling approximately 1,420 employees,
are covered by collective bargaining agreements. The Company's corporate staff
consisted of approximately 700 people at such date. The Company believes its
relations with its employees are good.
The Company seeks the highest quality of professional staff within each
market. Competition in the recruitment of personnel in the health care industry
is intense, particularly with respect to nurses. Many areas are already facing
nursing shortages, and it is expected that the shortages will increase in the
future. Although the Company has, to date, been successful in hiring and
retaining nurses and rehabilitation professionals, the Company in the future may
experience difficulty in hiring and retaining nurses and rehabilitation
professionals. The Company believes that its future success and the success of
its MSU programs will depend in large part upon its continued ability to hire
and retain qualified personnel.
INSURANCE
Healthcare companies are subject to medical malpractice, personal injury and
other liability claims which are generally covered by insurance. The Company
maintains liability insurance coverage in amounts deemed appropriate by
management based upon historical claims and the nature and risks of its
business. There can be no assurance that a future claim will not exceed
insurance coverage or that such coverage will continue to be available. In
addition, any substantial increase in the cost of such insurance could have an
adverse effect on the Company's business.
14
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the
executive officers of the Company:
NAME AGE POSITION
- ----------------------- ------ -----------------------------------------------
Robert N. Elkins, M.D. 52 Chairman of the Board and
Chief Executive Officer
Lawrence P. Cirka .... 44 President, Chief Operating Officer
and Director
Dennis A. Cahill ...... 37 Executive Vice President--Chief Accounting
Officer
Brian K. Davidson .... 38 Executive Vice President--Development
Marshall A. Elkins ... 48 Executive Vice President and General Counsel
Edward J. Komp ........ 41 Executive Vice President--Corporate Operations
Marc B. Levin ......... 41 Executive Vice President--Investor Relations
Scott W. Robertson ... 41 Executive Vice President--Symphony Health
Services
C. Christian Winkle .. 33 Executive Vice President--Field Operations
Eleanor C. Harding .... 46 Senior Vice President--Finance
Gary W. Singleton .... 51 Senior Vice President--Strategic Planning and
Medical Specialty Units Development
- ----------------
The officers of the Company are elected annually and serve at the pleasure of
the Board of Directors.
Robert N. Elkins, M.D. has been Chairman of the Board, and Chief Executive
Officer of the Company since March 1986 and also served as President from March
1986 to July 1994. From 1980 until co-founding IHS with Timothy F. Nicholson, a
director of the Company, in 1986, Dr. Elkins was a co-founder and Vice President
of Continental Care Centers, Inc., an owner and operator of long-term healthcare
facilities. From 1976 through 1980, Dr. Elkins was a practicing physician. Dr.
Elkins is a graduate of the University of Pennsylvania, received his M.D. degree
from the Upstate Medical Center, State University of New York, and completed his
residency at Harvard University Medical Center. Dr. Elkins is the brother of
Marshall Elkins, General Counsel and Executive Vice President of the Company.
Lawrence P. Cirka has been President and Chief Operating Officer and a
director of the Company since July 1994, and served as Senior Vice President and
Chief Operating Officer of the Company from October 1987 to July 1994. Prior to
joining IHS, Mr. Cirka served in various operational capacities with Unicare
Healthcare Corporation, a long-term health care company, for 15 years, most
recently as Vice President-Western Division, where he had operational and
financial responsibility for 46 long-term healthcare facilities exceeding 5,000
beds. Mr. Cirka is a graduate of Clarion University and a Licensed Nursing Home
Administrator in Pennsylvania, Florida and Washington.
Dennis A. Cahill has been Executive Vice President--Chief Accounting Officer
of the Company since November 1995. From July 1992 to November 1995 he served as
Senior Vice President--Chief Accounting Officer and as Vice President-Chief
Accounting Officer of the Company from June 1991 to July 1992. For eleven years
prior to joining IHS, Mr. Cahill was with KPMG Peat Marwick LLP, Certified
Public Accountants, serving most recently as a Senior Manager in their Audit
Department. Mr. Cahill is a Certified Public Accountant and received a B.S.
degree from Boston College.
Brian K. Davidson has been Executive Vice President--Development of the
Company since November 1995. From January 1993 to November 1995 he served as
Senior Vice President--Development. From January 1991 to January 1993 he served
as Senior Vice President--Managed Operations of the Company. For more than five
years prior to joining IHS, Mr. Davidson served as Chief Operating Officer of
the Tutera Group, a management company operating skilled nursing beds and
retirement apartment units. Mr. Davidson received B.S. and M.S. degrees from
Central Missouri State University.
15
Marshall A. Elkins has been Executive Vice President and General Counsel of
the Company since November 1995. From July 1992 to November 1995 he served as
Senior Vice President and General Counsel of the Company and from January 1990
to July 1992 he served as General Counsel and Vice President of the Company.
From July 1987 until joining IHS, Mr. Elkins was in private practice in New York
City. Mr. Elkins served as General Counsel to US West Capital Corporation and
later as Assistant General Counsel of US West Financial Services Corporation
from July 1985 to July 1987. Prior thereto, Mr. Elkins was associate counsel at
CIT Corporation from 1980 to 1985. Mr. Elkins received a B.A. degree from the
University of Wisconsin and a J.D. from New York Law School. Mr. Elkins is the
brother of Robert N. Elkins, Chairman and Chief Executive Officer of the
Company.
Edward J. Komp has been Executive Vice President--Corporate Operations since
November 1995. From October 1993 to November 1995 he served as Senior Vice
President--Management Division. From 1979 until he joined IHS in October 1993
Mr. Komp served in various executive financial capacities with National Medical
Enterprises, Inc. ("NME"). As Senior Vice President and Divisional Chief
Financial Officer of NME, Mr. Komp had responsibility for all financial
operations of the Rehabilitation Division. Mr. Komp graduated from Indiana
University of Pennsylvania with a B.S. degree in Business Management.
Marc B. Levin has been Executive Vice President--Investor Relations since
November 1995. From March 1993 to November 1995 he served as Senior Vice
President--Investor Relations and from May 1991 to March 1993 he served as Vice
President-Investor Relations of the Company. From March 1989 until May 1991, Mr.
Levin served as Vice President--Corporate Controller/Administration of the
Company. Prior to joining IHS, Mr. Levin served in various capacities with
Beverly Enterprises for six years, most recently as Assistant to the
President--Eastern Division. Mr. Levin is a Certified Public Accountant and
received B.S. and M.B.A. degrees from the University of Maryland.
Scott W. Robertson has been Executive Vice President--Symphony Health
Services since November, 1995. From October 1993 to November 1995 he served as
Senior Vice President--Symphony Health Services. Prior to joining IHS in October
1993, Mr. Robertson was the founder of Health Care Consulting, Inc. which the
Company acquired effective September 30, 1993. Prior to founding HCC, Mr.
Robertson founded and served as president of Payne Robertson, a Medicare
consulting and nursing home management company. Mr. Robertson is a graduate from
the University of Utah (1977) with a B.S. in Sociology and a certificate in
Gerontology.
C. Christian Winkle has been Executive Vice President--Field Operations of
the Company's owned and leased facilities since November 1995. From March 1994
to November 1995 he served as Senior Vice President--Operations. Mr. Winkle
joined IHS in September of 1990 as Regional Vice President of Operations and
President MSU Product Development. Prior to joining IHS, Mr. Winkle was the
Executive Director of the Renaissance Rehabilitation & Diagnostic Hospital in
Chattanooga, Tennessee. Mr. Winkle is a graduate of Case Western Reserve
University in Cleveland, Ohio.
Eleanor C. Harding has been Senior Vice President--Finance and Treasurer
since November 1995. From August 1993 to November 1995 she served as Vice
President--Finance and Treasurer of the Company. From Janaury 1990 until she
joined IHS in August 1993, Ms. Harding served as Senior Vice President, Chief
Financial Officer and Treasurer of the Marcor Company. Prior to January 1990,
Ms. Harding served in similiar positions for Jiffy Lube International, Inc. and
The Black and Decker Corporation. Ms. Harding received a B.A. in Economics from
Mount Holyoke College and an M.S. in Finance from Loyola College.
Gary W. Singleton has been Senior Vice President--Strategic Planning and
Medical Specialty Units Development of the Company since July 1989. He is
responsible for development of the Company's Medical Specialty Units. For the
five years prior to joining IHS, Mr. Singleton was Executive Vice President and
Chief Operating Officer of Rehabilitation Institute, Inc., a 175-bed specialty
hospital located in Detroit. Mr. Singleton received B.S. and M.A. degrees from
the University of Illinois and received a Ph.D. from Wayne State University.
16
ITEM 2. PROPERTIES
The Company owns 46 geriatric care facilities with 6,138 licensed beds, and
leases 76 geriatric care facilities with 9,969 licensed beds. The leases for the
leased facilities have terms of four to 20 years, expiring on various dates
between 1996 and 2010. The leases generally can be renewed and the Company
generally has a right of first refusal to purchase the leased facility. The
Company leases ten facilities from Meditrust, a publicly-traded real estate
investment trust. With respect to all the facilities leased from Meditrust, the
Company is obligated to pay additional rent in an amount equal to a specified
percentage (generally five percent) of the amount by which the facility's gross
revenues exceed a specified amount (generally based on the facility's gross
revenues during its first year of operation). If an event of default occurs
under any Meditrust lease or any other agreement the Company has with Meditrust,
Meditrust has the right to require the Company to purchase the facility leased
from the partnership at a price equal to the higher of the then current fair
market value of the facility or the original purchase price of the facility paid
by Meditrust plus the cost of certain capital expenditures paid for by
Meditrust, an adjustment for the increase in the cost of living index since the
commencement of the lease and all rent then due and payable, all such amounts to
be determined pursuant to the prescribed formula contained in the lease. In
addition, each Meditrust lease provides that a default under any other Meditrust
lease or any other agreement the Company has with Meditrust constitutes a
default under such lease. Upon such a default, Meditrust has the right to
terminate the leases and to seek damages based upon lost rent. The lessor of the
Company's Green Briar facility in Miami, Florida has the right to require the
Company to purchase the facility upon a change in control of the Company (which
includes (i) any person becoming the beneficial owner of more than 30% of the
Company's outstanding Common Stock other than pursuant to an arrangement between
the Company and such person pursuant to which the Company's senior management
remains substantially unchanged and (ii) the Company's Chairman of the Board
dying or becoming disabled). The net purchase price for the facility is $4.0
million. The Company has also guaranteed approximately $6.6 million of the
indebtedness of the lessor of the Company's Green Briar facility in Miami,
Florida, which indebtedness was incurred to finance a portion of the cost of the
expansion and renovation of the facility and to refinance the mortgage thereon.
Any payment under such guaranty would reduce the Company's purchase price for
the facility if it elects or is required to purchase the facility. The lessor of
this facility has the right to require Messrs. Robert N. Elkins and Timothy F.
Nicholson to purchase all or any part of 13,944 shares of Common Stock owned by
it at a per share purchase price equal to the sum of $12.25 per share plus 9%
simple interest per annum from May 8, 1988 until the date of such purchase. The
Company has agreed to purchase such shares if Messrs. Elkins and Nicholson fail
to do so.
The Company leases its headquarters in Owings Mills, Maryland under an eight
year lease expiring in May 2001.
17
The following table presents certain information regarding the Company's
owned and leased facilities as of March 20, 1996.
AMOUNT OF
DATE LICENSED OWNERSHIP MORTGAGE ON
FACILITY/LOCATION ACQUIRED BEDS (LEASED/OWNED) PROPERTY
- -------------------------------------- ----------- ----------- --------------- --------------
Alexandria............................ 9/1/94 56 Leased
Alexandria, LA
Amarillo.............................. 9/1/94 160 Owned $1,317,000
Amarillo, TX
Atlanta at Briarcliff Haven .......... 9/15/92 156 Leased
Atlanta, GA
Auburndale............................ 12/l/93 120 Owned
Auburndale, FL
Avenel................................ 8/1/95 120 Owned
Plantation, FL
Beeville.............................. 12/1/93 101 Owned $ 821,977
Beeville, TX
Beneva Nursing Pavillion.............. 12/1/93 120 Owned
Sarasota, FL
Boise................................. 9/1/94 216 Leased
Boise, ID
Bradenton............................. 9/1/94 120 Leased
Bradenton, FL
Brandon............................... 12/1/93 120 Owned
Brandon, FL
Brentwood............................. 1/20/88 165 Owned
Burbank, IL
Briarcliff............................ 12/1/86 230 Leased
Alabaster, AL
Broomall.............................. 12/1/93 306 Owned $2,145,254
Broomall, PA
Carriage-by-the-Lake.................. 12/14/90 78 Leased
Bellbrook, OH
Carrington Pointe..................... 12/15/95 172 Owned
Fresno, CA
Central Florida -- Fort Pierce ....... 12/20/93 107 Owned (1)
Fort Pierce, FL
Central Florida -- Orlando............ 12/20/93 120 Owned (1)
Orlando, FL
Central Florida -- Vero Beach......... 12/20/93 110 Owned (1)
Vero Beach, FL
Central Park Village.................. 12/1/93 120 Owned
Orlando, FL
Charleston at Driftwood............... 7/1/92 160 Leased
Charleston, SC
Charlestown........................... 9/1/94 126 Leased
Charles Town, WV
Charlotte at Hawthorne................ 4/1/93 142 Leased
Charlotte, NC
Chateau Nursing & Rehabilitation ..... 7/1/94 156 Leased
Bryn Mawr, PA
Cherry Creek.......................... 8/1/95 190 Leased
Aurora, CO
Chestnut Hill......................... 12/1/93 200 Owned
Philadelphia, PA
18
AMOUNT OF
DATE LICENSED OWNERSHIP MORTGAGE ON
FACILITY/LOCATION ACQUIRED BEDS (LEASED/OWNED) PROPERTY
- -------------------------------------- ----------- ----------- --------------- --------------
Cheyenne Mountain Nursing............. 9/1/94 180 Leased
Colorado Springs, CO
Cheyenne Mountain Retirement.......... 9/1/94 110 Leased
Colorado Springs, CO
Church Lane Health Care Center ....... 7/1/94 126 Leased
Broomall, PA
Claiborne............................. 9/1/94 86 Leased
Shreveport, LA
Clara Burke Community................. 12/31/86 69 Owned $ 6,500,000
Plymouth Meeting, PA
Clearwater............................ 12/1/93 150 Owned
Clearwater, FL
Colorado Springs...................... 12/29/93 155 Owned $ 8,251,972
Colorado Springs, CO
Dallas at Treemont (Nursing).......... 6/30/94 114 Owned $14,845,151
Dallas, TX
Dallas at Treemont (Retirement
Living)............................... 6/30/94 232 Owned
Dallas, TX
Derry................................. 3/05/93 112 Owned
Derry, NH
Erie at Bayside....................... 9/2/86 141 Leased
Erie, PA
Fort Myers............................ 9/1/94 107 Leased
Fort Myers, FL
Gainesville........................... 12/1/93 120 Owned $ 1,460,051
Gainesville, FL
Gonzales.............................. 9/1/94 180 Leased
Gonzales, LA
Governor's Park....................... 11/1/95 150 Owned
Barrington, IL
Great Bend............................ 9/1/94 160 Leased
Great Bend, KS
Greater Pittsburgh.................... 4/25/91 120 Leased
Greensburg, PA
Green Briar........................... 5/8/88 203 Leased
Miami, FL
Hanover............................... 12/7/92 80 Leased
Birmingham, AL
Heritage.............................. 9/1/94 180 Leased
Atlanta, GA
Heritage North........................ 9/1/94 121 Leased
New Iberia, LA
Heritage South........................ 9/1/94 80 Leased
New Iberia, LA
Hershey at Woodlands.................. 2/9/89 213 Owned $ 5,722,382
Hershey, PA
Homestead Manor....................... 12/1/92 52 Owned
Denton, MD (Assisted Living)
Houston Hospital...................... 12/1/94 60 Owned $ 9,905,832
Houston, TX
Huber Heights at Spring Creek......... 12/14/90 100 Leased
Huber Heights, OH
19
AMOUNT OF
DATE LICENSED OWNERSHIP MORTGAGE ON
FACILITY/LOCATION ACQUIRED BEDS (LEASED/OWNED) PROPERTY
- -------------------------------------- ----------- ----------- --------------- --------------
Hurst Care Center..................... 12/1/93 116 Owned
Hurst, TX
Indianapolis at Cambridge............. 2/9/89 143 Leased
Indianapolis, IN
Iowa at Des Moines.................... 3/11/93 93 Owned
Des Moines, IA
Iowa Park............................. 9/1/94 77 Leased
Iowa Park, TX
Jacksonville.......................... 12/1/93 120 Owned
Jacksonville, FL
Julia Ribaudo Home.................... 7/1/94 120 Leased
Lake Ariel, PA
Kansas City at Alpine North........... 1/25/88 186 Leased
Kansas City, MO
Kaplan................................ 9/1/94 120 Leased
Kaplan, LA
Kent Convalescent Center.............. 7/1/94 152 Leased
Smyma, DE
Lafayette............................. 9/1/94 60 Leased
Lafayette,LA
Lakehouse East (Retirement)........... 12/1/93 164 Owned
Sarasota, FL
Las Vegas............................. 6/1/92 120 Owned
Las Vegas, NV
Maclen Rehabilitation Center.......... 12/1/93 120 Owned $1,743,778
Lake Worth, FL
Manchester at Hackett Hill............ 4/26/88 68 Owned
Manchester, NH
Many.................................. 9/1/94 128 Leased
Many, LA
Many South............................ 9/1/94 60 Leased
Many, LA
Marrero............................... 9/1/94 134 Leased
Marrero, LA
Mayfair Manor......................... 9/1/94 100 Leased
Lexington, KY
Mesa Manor............................ 9/1/94 98 Leased
Grand Junction, CO
Michigan at Riverbend................. 5/7/88 157 Leased
Grand Blanc, MI
Mill Hill............................. 9/1/95 101 Leased
Worcester, MA
Mimosa Manor.......................... 12/1/93 150 Leased
Keller, TX
Minden................................ 9/1/94 230 Leased
Minden, LA
Mountain View......................... 12/5/86 137 Leased
Greensburg, PA
Nashville............................. 9/l/94 124 Leased
Nashville, TN
New Hampshire at Claremont............ 3/05/93 62 Owned
Claremont, NH
New Jersey at Somerset Valley......... 12/20/86 58 Leased
Bound Brook, NJ
New London at Firelands............... 12/14/90 50 Leased
New London, OH
20
AMOUNT OF
DATE LICENSED OWNERSHIP MORTGAGE ON
FACILITY/LOCATION ACQUIRED BEDS (LEASED/OWNED) PROPERTY
- -------------------------------------- ----------- ----------- --------------- --------------
Northern Virginia..................... 12/15/94 114 Leased
Alexandria, VA
Oakbridge Village..................... 12/1/93 120 Owned
Lakeland, FL
Orange Hills.......................... 8/1/92 145 Leased
Orange, CA
Orange Park........................... 9/1/94 105 Leased
Orange Park, FL
Palestine Nursing Center.............. 12/1/93 120 Owned
Palestine, TX
Palm Bay.............................. 9/1/94 120 Leased
Palm Bay, FL
Pierremont............................ 9/1/94 196 Leased
Shreveport, LA
Pikes Peak............................ 9/1/94 210 Leased
Colorado Springs, CO
Pinellas Park......................... 12/1/93 120 Owned
Pinellas Park, FL
Plainview............................. 9/1/94 99 Leased
Plainview, TX
Plymouth House Rehabilitation......... 7/1/94 157 Leased
Norristown, PA
Port Charlotte........................ 9/1/94 164 Leased
Port Charlotte, FL
Pueblo Manor.......................... 9/1/94 151 Leased
Pueblo, CO
Raleigh at Crabtree Valley............ 12/31/91 138 Leased
Raleigh, NC
St. Louis at Big Bend Woods........... 7/27/87 176 Owned
Valley Park, MO
St. Louis at Gravois.................. 7/27/87 167 Leased
St. Louis, MO
St. Petersburg at William & Mary ..... 9/1/87 96 Owned
St. Petersburg, FL
Sarasota Nursing Pavilion............. 12/1/93 180 Owned $1,312,085
Sarasota, FL
Seattle............................... 5/25/90 210 Leased
Seattle, WA
Sebring............................... 9/1/94 104 Leased
Sebring, FL
Shady Oaks Nursing Center............. 12/1/93 195 Owned $2,270,486
Sherman, TX
Shoreham.............................. 9/1/94 154 Leased
Marietta, GA
The Shores............................ 9/1/94 260 Leased
Bradenton, FL
Shreveport............................ 9/1/94 101 Leased
Shreveport, LA
Southern California at Park Regency .. 2/1/92 99 Leased
La Habra, CA
Tarpon Springs........................ 12/1/93 120 Owned
Tarpon Springs, FL
Terrell............................... 9/1/94 129 Leased
Terrell, TX
Terrell Care Center................... 9/1/94 94 Leased
Terrell, TX
21
AMOUNT OF
DATE LICENSED OWNERSHIP MORTGAGE ON
FACILITY/LOCATION ACQUIRED BEDS (LEASED/OWNED) PROPERTY
- -------------------------------------- ----------- ----------- --------------- --------------
Theron Grainger Nursing Home.......... 12/1/93 69 Leased
Hughes Springs, TX
Thibodaux............................. 9/1/94 58 Leased
Thibodaux, LA
Trinity Hills Manor................... 12/1/93 133 Leased
Benbrook, TX
Venice Nursing Pavilion North......... 12/1/93 178 Owned $712,284
Venice, FL
Vivian................................ 9/1/94 80 Leased
Vivian, LA
Waterford Commons..................... 1/16/90 101 Owned
Toledo, OH
West Carrollton at Elm Creek.......... 12/14/90 100 Leased
West Carrollton, OH
West Palm Beach....................... 12/1/93 120 Owned
West Palm Beach, FL
West Palm Beach Retirement............ 12/1/93 34 Owned
West Palm Beach, FL
Whitemarsh............................ 12/1/93 247 Owned
Whitemarsh, PA
Wichita............................... 9/1/94 116 Leased
Wichita, KS
Wichita Falls......................... 9/1/94 120 Leased
Wichita Falls, TX
Winter Park........................... 9/1/94 103 Leased
Winter Park, FL
Winthrop.............................. 9/1/95 142 Leased
Medford, MA
Woodridge Convalescent Center......... 12/1/93 142 Leased
Grapevine, TX
- ------------
(1) Consolidated facilities mortgage of $9,507,258.
22
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings that are incidental to
the conduct of its business. The Company is not involved in any pending or
threatened legal proceedings which the Company believes could reasonably be
expected to have a material adverse effect on the Company's financial condition,
liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the New York Stock Exchange under the symbol
"IHS". The following table sets forth for the periods indicated the high and low
last reported sale prices for the Common Stock as reported by the New York Stock
Exchange.
HIGH LOW
--------- --------
Calendar year 1994
First Quarter ........ $38 1/4 $28 1/8
Second Quarter ....... 36 3/8 28 3/8
Third Quarter ........ 37 1/4 28 1/4
Fourth Quarter ....... 41 1/8 34 1/2
HIGH LOW
-------- ---------
Calendar year 1995
First Quarter.......... 42 1/2 34 1/2
Second Quarter......... 37 1/4 28 5/8
Third Quarter.......... 32 7/8 27 5/8
Fourth Quarter......... 29 3/4 20 3/8
As of March 26, 1996, there were approximately 606 record holders of the
Common Stock.
In 1994 and 1995 the Company declared a cash dividend of $0.02 per share;
prior to 1994, the Company had never declared or paid any cash dividends on its
Common Stock. The payment of any future dividends will be at the discretion of
the Company's Board of Directors and will depend upon, among other things,
future earnings, operations, capital requirements, the general financial
condition of the Company, contractual restrictions and general business
conditions. The Company's term loan and revolving credit facility prohibits the
payment of dividends without the consent of the lenders, and the indentures
under which the Company's 10 3/4% Senior Subordinated notes due 2004 and 9 5/8%
Senior Subordinated Notes due 2002, Series A, were issued limits the payment of
dividends unless certain financial tests are met.
24
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following tables summarize certain selected consolidated financial data,
which should be read in conjunction with the Company's Consolidated Financial
Statements and related Notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein. The
selected consolidated financial data set forth below for the five-year period
ended December 31, 1995 and as of the end of each of such periods have been
derived from the Consolidated Financial Statements of the Company which have
been audited by KPMG Peat Marwick LLP, independent certified public accountants.
The consolidated financial statements as of December 31, 1994 and 1995 and for
each of the years in the three year period ended December 31, 1995 and the
report thereon, are included elsewhere herein.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1991 (1) 1992 1993 1994 1995,
------------ ------------- ------------ ------------- ------------
AS RESTATED
(4)(5)
------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Statement of Operations Data(2)(3):
Net revenues:
Basic medical services ................ $ 82,411 $ 100,799 $ 113,508 $ 269,817 $ 368,569
Specialty medical services ............ 49,901 88,065 162,017 404,401 770,554
Management services and other ......... 11,403 13,232 20,779 37,884 39,765
------------ ------------- ------------ ------------- ------------
Total ............................... 143,715 202,096 296,304 712,102 1,178,888
Cost and expenses:
Operating expenses .................... 103,754 145,623 212,936 528,131 888,551
Corporate administrative and
general .............................. 7,965 11,927 16,832 37,041 56,016
Depreciation and amortization ......... 3,307 4,334 8,126 26,367 39,961
Rent .................................. 16,515 19,509 23,156 42,158 66,125
Interest, net ......................... 4,126 1,493 5,705 20,602 38,977
Loss from impairment of long lived
assets(4)............................. -- -- -- -- 83,321
Other non-recurring charges(5)......... -- -- -- -- 49,639
------------ ------------- ------------ ------------- ------------
Earnings (loss) before equity in
earnings (loss) of affiliates, income
taxes and extraordinary items ....... 8,048 19,210 29,549 57,803 (43,702)
Equity in earnings (loss) of affiliates (63) (36) 1,241 1,176 1,443
------------ ------------- ------------ ------------- ------------
Earnings (loss) before income taxes
and extraordinary items ............. 7,985 19,174 30,790 58,979 (42,259)
Income tax provision (benefit).......... 2,060 7,286 12,008 22,117 (16,270)
------------ ------------- ------------ ------------- ------------
Earnings (loss) before extraordinary
items ............................... 5,925 11,888 18,782 36,862 (25,989)
Extraordinary items(6) ................. -- 2,524 2,275 4,274 1,013
------------ ------------- ------------ ------------- ------------
Net earnings (loss) ................. $ 5,925 $ 9,364 $ 16,507 $ 32,588 $ (27,002)
============ ============= ============ ============= ============
Per Common Share (fully diluted)(7):
Earnings (loss) before extraordinary
items ................................ $ 0.79 $ 1.01 $ 1.35 $ 1.73 $ (1.21)
Net earnings (loss) ................... 0.79 .80 1.22 1.57 (1.26)
============ ============= ============ ============= ============
Weighted average number of common and
common equivalent shares outstanding(7) 7,456,793 11,996,815 17,261,079 27,154,153 21,463,464
============ ============= ============ ============= ============
25
DECEMBER 31,
---------------------------------------------------------
1991 1992 1993 1994 1995
---------- ----------- --------- ----------- ------------
(IN THOUSANDS)
Balance Sheet Data:
Cash and temporary investments ..... $ 16,083 $103,858 $ 65,295 $ 63,347 $ 41,304
Working capital ..................... 41,004 144,074 69,495 76,383 136,315
Total assets ........................ 156,191 313,671 776,324 1,255,989 1,433,730
Long-term debt, including current
portion ............................. 49,877 142,620 402,536 551,452 770,661
Stockholders' equity ................ 87,354 146,013 216,506 453,811 431,528
- --------------
(1) In 1991 the Company changed its fiscal year-end from June 30 to December 31.
(2) The Company has grown substantially through acquisitions and the opening of
MSUs, which acquisitions and MSU openings materially affect the
comparability of the financial data reflected herein.
(3) In 1995, the Company merged with IntegraCare, Inc. ("IntegraCare") in a
transaction accounted for as a pooling of interests. Accordingly the
Company's historical financial statements for all periods prior to the
effective date of the merger have been restated to include the results of
IntegraCare.
(4) In December 1995, the Company elected early implementation of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of, resulting in a non-cash charge of $83,321,000 (See Note
17 to Consolidated Financial Statements).
(5) Consists primarily of loss on termination of management contract, costs
incurred in connection with the merger with IntegraCare and write-off of
deferred pre-opening costs. In the fourth quarter of 1995, the Company
terminated a contract, entered into in January 1994, to manage 23 long-term
care and psychiatric facilities owned by Crestwood Hospital and, as a
result, incurred a loss of $21,915,000 on the termination of this contract.
Such loss consists of the write-off of $8,496,000 of accrued management
fees, $11,097,000 of loans made to Crestwood Hospital and the owners of
Crestwood Hospital, as well as the interest thereon, and $2,322,000 of
contract acquisition costs. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year Ended
December 31, 1995 Compared to the Year Ended December 31, 1994." In
connection with the merger with IntegraCare, the Company incurred $1,939,000
of accounting, legal, and other costs in 1995. In the fourth quarter of
1995, the Company changed its accounting estimate regarding the future
benefit of deferred pre-opening costs. As a result, the Company wrote-off
$25,785,000 of deferred pre-opening costs in 1995 (See Note 17 to
Consolidated Financial Statements).
(6) In 1992 the Company recorded a loss on extinguishment of debt of $4,072,000
relating primarily to prepayment charges and the write-off of deferred
financing costs. Such loss, reduced by the related income tax effects of
$1,548,000, is presented for the year ended December 31, 1992 as an
extraordinary loss of $2,524,000. In 1993 the Company recorded a loss on
extinguishment of debt of $3,730,000 relating primarily to the write-off of
deferred financing costs. Such loss, reduced by the related income tax
effects of $1,455,000, is presented for the year ended December 31, 1993 as
an extraordinary loss of $2,275,000. In 1994 the Company recorded a loss on
extinguishment of debt of $6,839,000 relating primarily to the write-off of
deferred financing costs. Such loss, reduced by the related income tax
effects of $2,565,000, is presented for the year ended December 31, 1994 as
an extraordinary item loss of $4,274,000. In 1995, the Company recorded a
loss on extinguishment of debt of $1,647,000 relating primarily to
prepayment charges and the write-off of deferred financing costs. Such loss,
reduced by the related income tax effect of $634,000, is presented for the
year ended December 31, 1995 as an extraordinary loss of $1,013,000.
(7) The weighted average number of common and common equivalent shares
outstanding for the years ended December 31, 1992, 1993 and 1994 includes
the assumed conversion of the convertible subordinated debentures into
common stock. Additionally, interest expense and amortization of
underwriting costs related to such debentures are added, net of tax, to
income for the purpose of calculating fully-diluted earnings per share. Such
amounts aggregated $183,000, $4,516,000 and $10,048,000 for the years ended
December 31, 1992, 1993 and 1994, respectively. The weighted average number
of common and common equivalent shares outstanding for the year ended
December 31, 1995, does not include the assumed conversion of the
convertible subordinated debentures or the related interest expense and
underwriting costs, as such conversion would be anti-dilutive.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Company's strategy generally has been to acquire geriatric care
facilities and to implement in such facilities specialty medical services
programs, such as MSUs, to treat the more medically complex patient. Beginning
in 1993, the Company began to expand the range of related services it offers to
its patients directly in order to serve the full spectrum of patient needs
following acute hospitalization.
In the past decade, the number of people over the age of 65 began to grow
significantly faster than the overall population. At the same time, advances in
medical technology have increased the life expectancies of an increasingly large
number of medically complex patients. This trend, combined with the
implementation of healthcare cost containment measures by private insurers and
government reimbursement programs, has created a need for a more cost efficient
alternate site for the provision of a wide range of medical and rehabilitative
services which traditionally have been provided in an acute care hospital. To
address this need, the Company has developed medical specialty units within its
geriatric care facilities. The Company opened its first MSU in April 1988 in
conjunction with HEALTHSOUTH Rehabilitation Corporation, and as of December 31,
1995 operated 139 MSUs totaling 3,172 beds. The Company is now able to offer
directly to its patients, rather than through third party providers, pharmacy
home healthcare, rehabilitation (physical, occupational and speech), mobile
x-ray and electrocardiogram and similar services.
In June 1991 the Company changed its fiscal year-end from June 30 to December
31.
GENERAL
BASIC MEDICAL SERVICES
The Company includes in basic medical services revenues all room and board
charges for its geriatric care patients (other than patients in its MSU and
Alzheimer's programs) at its owned and leased geriatric care and assisted living
facilities.
The following table sets forth the Company's sources of basic medical
services revenues by payor type for the periods indicated:
YEARS ENDED DECEMBER 31,
----------------------------------------------
1991 1992 1993 1994 1995
--------- --------- -------- -------- --------
Private Pay(1) 61.1% 54.4% 52.9% 40.8% 37.4%
Medicare ...... 12.5 17.1 12.6 9.9 11.5
Medicaid ...... 26.4 28.5 34.5 49.3 51.1
--------- --------- -------- -------- --------
Total ....... 100.0% 100.0% 100.0% 100.0% 100.0%
========= ========= ======== ======== ========
- ----------
(1) The Company classifies revenues from commercial insurers, health maintenance
organizations (HMOs) and other charge-based sources and from individuals
(including the co-insurance portion of Medicare paid by individuals) as
private pay.
The decrease in the percentage of basic medical services revenues received
from private pay sources and Medicare from year to year and the commensurate
increase in the percentage received from Medicaid was primarily the result of
the higher level of Medicaid patients in the geriatric care facilities in which
the Company acquired ownership or leasehold interests. The Company seeks to
increase the percentage of basic medical services revenues received from private
pay sources and Medicare.
Changes in the mix of the Company's patients among the private pay, Medicare
and Medicaid categories can significantly affect the profitability of the
Company's operations. Generally, private pay patients constitute the most
profitable category of patients and Medicaid patients the least profitable.
The occupancy percentages for those beds from which basic medical services
revenues are derived are shown in the table below. The percentages are
calculated both on the basis of the weighted average number of beds licensed
(regardless of whether such beds are actually available for the provision of
basic medical services) and the weighted average number of beds in service for
the period. In certain facilities the Company temporarily operates fewer beds
than it is licensed to operate so as to permit
27
routine maintenance and to accommodate patients desiring private rooms. In
addition, the Company has removed beds from service for extended periods as
certain facilities have undergone construction projects for expansion purposes
and to implement its medical specialty units. All revenues derived from licensed
beds located in MSUs or used in the Renaissance Program are included in
specialty medical services revenues; accordingly, such beds are not considered
beds licensed or beds in service for purposes of determining occupancy for those
beds from which basic medical services revenues are derived.
YEARS ENDED DECEMBER 31,
-----------------------------------------
1991 1992 1993 1994 1995
-------- -------- ------- ------- -------
Beds Licensed . 81.9% 80.5% 80.6% 83.2% 81.7%
Beds in Service 87.1 85.2 87.4 92.2 92.7
======== ======== ======= ======= =======
SPECIALTY MEDICAL SERVICES
Specialty medical services revenues include all charges to the Company's MSU
patients for room and board as well as all revenues from providing
rehabilitative therapies, pharmaceuticals, medical supplies and durable medical
equipment to all its patients. The Company also includes in this classification
all revenues from its Alzheimer's programs and all revenue from its provision of
pharmacy, rehabilitative, home healthcare, mobile x-ray and electrocardiogram
and similar services.
The following table sets forth the Company's sources of specialty medical
services revenues by payor type for the periods indicated:
YEARS ENDED DECEMBER 31,
--------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
Private Pay(1) 57.8% 51.8% 51.6% 47.6% 48.2%
Medicare ...... 39.7 45.7 45.4 48.2 44.8
Medicaid ...... 2.5 2.5 3.0 4.2 7.0
-------- -------- -------- -------- --------
Total ....... 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
- -----------
(1) The Company classifies revenues from commercial insurers, health maintenance
organizations (HMOs) and other charge-based sources and from individuals
(including the co-insurance portion of Medicare paid by individuals) as
private pay.
The decrease in the percentage of specialty medical services revenues
received from private pay sources during the year ended December 31, 1992 and
the commensurate increase in the percentage received from Medicare in each of
those years was primarily the result of opening five new MSUs during 1991 and
the opening of thirteen new MSUs in 1992. The decrease in the percentage of
specialty medical services revenues received from private pay sources and
Medicare during the year ended December 31, 1993 and the commensurate increase
in Medicaid was primarily the result of the higher level of Medicaid patients
serviced by the rehabilitative services company acquired in December 1993 and
the pharmacy company acquired in June 1993. The decrease in the percentage of
specialty medical services revenues received from private pay sources during the
year ended December 31, 1994 and the commensurate increase in Medicare and
Medicaid was primarily the result of the higher level of Medicare and Medicaid
patients serviced by the related services companies acquired in 1994, as well as
the opening of 49 MSU programs and the expansion of 18 MSU programs. The
decrease in the percentage of specialty medical service revenues from Medicare
and the commensurate increase in Medicaid for the year ended December 31, 1995
was primarily the result of the higher level of Medicaid patients serviced by
the 41 facilities leased in August 1994. The Company's experience has been that
Medicare patients constitute a higher percentage of an MSU program's initial
occupancy.
The average occupancy rate of the Company's MSU beds (on a weighted average
basis) was 72.0% in the year ended December 31, 1995 as compared with 71.4% in
the year ended December 31, 1994 and 69.4% in the year ended December 31, 1993.
Average occupancy in the Alzheimer's programs in the Company's owned and leased
facilities, which had an average of 394 beds in the year ended December 31,
1995, 314 beds in the year ended December 31, 1994 and 219 beds in the year
ended December 31, 1993, was 77.9%, 83.4% and 86.1%, respectively.
28
The following table sets forth the percentage of specialty medical services
revenues generated by the Company's MSU programs, rehabilitation and other
services and Alzheimer's programs for the periods indicated:
YEARS ENDED DECEMBER 31,
---------------------------------------------
1991 1992 1993 1994 1995
-------- --------- -------- -------- --------
MSU Programs ........ 52.4% 63.6% 71.1% 47.5% 37.7%
Other Ancillaries(1). 37.3 29.6 25.1 50.8 61.0
Alzheimer's Programs 10.3 6.8 3.8 1.7 1.3
-------- --------- -------- -------- --------
100.0% 100.0% 100.0% 100.0% 100.0%
======== ========= ======== ======== ========
- -----------
(1) Consists of pharmacy, rehabilitative, home healthcare, mobile x-ray and
electrocardiogram and similar services.
The percentage decrease in MSU revenue in 1994 and 1995 was primarily the
result of the acquisition of rehabilitation, pharmacy, home healthcare and
similar service companies in connection with the Company's vertical integration
strategy and the implementation of the Company's post-acute care network. MSU
revenue as a percentage of total revenues and as a percentage of specialty
medical revenues is expected to continue to decrease as the Company implements
its vertical integration strategy and continues to expand its post-acute care
network through the acquisition of rehabilitation, pharmacy, home healthcare and
similar service companies.
MANAGEMENT SERVICES AND OTHER
The Company's management agreements for its geriatric care and assisted
living facilities provide for a management fee to the Company generally equal to
4% to 8% of the gross revenues of the facility. In addition, certain of such
agreements contain a provision wherein the Company may earn an incentive fee
based on certain levels of performance. See "Item 1--Business--Management
Services." At December 31, 1995, the Company was managing 73 geriatric care
facilities with a total of 8,721 beds, including two assisted living facilities
with 222 beds. Until April 1994, the Company also managed residential
condominium units in retirement communities in Southern California, for which it
received a specified monthly fee per unit managed plus reimbursement of certain
expenses, as well as a brokerage commission upon the sale of each such
condominium unit it manages. The Company classifies all fees received pursuant
to these contracts in this revenue category. Also, all revenue derived from
Health Care Consulting, Inc., a specialty reimbursement and consulting company
with expertise in subacute rehabilitation programs which was acquired effective
September 30, 1993, is included in this revenue category.
The revenues derived from certain activities relating to the operation of the
Company's facilities such as patient laundry, vending sales, guest meals, and
beauty and barber services are classified in this category as other revenue.
Other revenue constituted approximately 17.0% and 16.9%, respectively, of
management services and other revenues during the years ended December 31, 1994
and 1995. The Company expects other revenue to continue to decrease as a
percentage of management services and other revenues.
ACQUISITION AND DIVESTITURE HISTORY
FACILITY EXPANSION
The Company commenced operations on March 25, 1986. From inception to June
30, 1988, the Company acquired seven geriatric care facilities with a total of
900 beds and acquired leasehold interests in seven geriatric care facilities
having a total of 1,050 beds. The Company initiated its MSU program in April
1988, in conjunction with HEALTHSOUTH Rehabilitation Corporation, with a 16 bed
unit serving patients with traumatic brain injury at its Gravois facility.
During the fiscal year ended June 30, 1989 the Company acquired leasehold
interests in six geriatric care facilities having 974 beds and entered into an
agreement to manage one geriatric care facility having 121 beds. One of the six
leased facilities, having 143 beds, was subject to a sublease to a third party
and
29
was managed by the Company for such third party. The sublease terminated
February 2, 1991 and the facility was treated as a leased, rather than a
managed, facility. In addition, the Company opened two MSU programs totalling 35
beds.
During fiscal year ended June 30, 1990 the Company acquired one geriatric
care facility having 101 beds, a leasehold interest in one facility having 210
beds, and a 49% joint venture interest in a 160 bed geriatric care facility
which was managed by the Company until its purchase in September 1994. IHS also
entered into agreements to manage three other geriatric care facilities having
468 beds and acquired 90% (assuming the exercise of all options and related
exchange rights) of the stock of Professional Community Management
International, Inc. ("PCM"), which manages residential retirement community
living units in Southern California. The Company sold PCM in 1994. The Company
also opened six MSU programs totalling 77 beds.
In December 1990 the Company acquired leasehold interests in four geriatric
care facilities having 328 beds and received by assignment management agreements
covering 12 facilities having 1,403 beds. On July 24, 1990, the Company assumed
the management of 14 of these 16 facilities and, subsequent to July 24, 1990,
assumed the management of the remaining two facilities, pending the consummation
of the acquisition. In 1991 the owners of four of these managed facilities
terminated the Company's management agreement for those facilities. During the
six months ended December 31, 1990 the Company opened four MSU program totalling
71 beds.
In December 1991 the Company leased two geriatric care facilities having a
total of 258 beds. The leasehold interest in the 138 bed facility was acquired
for a total purchase price of $589,000 including a $250,000 purchase option
deposit. No material acquisition costs were incurred to lease the 120 bed
facility. The Company also opened six MSU programs totalling 106 beds.
On July 11, 1991, the Company sold its audiology business to Hearing Health
Services, Inc., a newly-formed affiliate of privately-held Foster Management
Company. The sale involved all customer lists, license agreements, store leases,
property and equipment, accounts receivable and merchandise inventory. The
Audiology Division's products and services, which were offered at 34 retail
outlets (of which 12 were located in speech pathologist/professional/doctor
offices) in Florida and Illinois, included hearing aids, protective and
assistive listening devices, and hearing, testing and aural rehabilitation
services. The Company received $5 million for substantially all the assets of
the Audiology Division as follows: $1 million in cash and a combination of
common and preferred stock valued by independent financial advisors at $4
million. The common stock is subject to mandatory repurchase for approximately
$2 million, plus interest, within five years and the preferred stock is
convertible under certain conditions and has a liquidation preference of $2
million. Approximately $450,000 of the cash proceeds were paid to NovaCare,
Inc., an affiliate of Foster Management Company, representing amounts owed by
IHS to NovaCare, Inc. for services rendered. The Company determined to
discontinue the audiology business in June 1990 because it could not be
integrated effectively into its primary business. A substantial portion of the
audiology business had been acquired from Dr. Thomas F. Frist, Jr., who was a
director of the Company until June 1993.
During 1992 the Company expanded its MSU focus by opening thirteen MSU
programs totaling 250 beds at its facilities, expanding seven MSU programs by 61
beds and converting its neuro-rehabilitation MSU program for the treatment of
patients with traumatic brain injury, which was operated in conjunction with
HEALTHSOUTH Rehabilitation Corporation, to a 16 bed complex care MSU program.
Also the Company expanded by acquiring one geriatric care facility with a total
of 120 beds, leasing five facilities having a total of 640 beds and entering
into thirteen management contracts having a total of 1,481 beds. The total cost
of the aforementioned acquisitions was approximately $13.9 million which
includes all costs to secure the facility or leasehold interest. None of the
acquisitions were individually significant and all were financed with cash flow
from operations and borrowings under the Company's line of credit.
During 1993, the Company expanded its MSU focus by opening 30 MSU programs
totaling 442 beds (including four MSU programs totalling 84 beds at its managed
facilities) and expanding 24 MSU programs by 140 beds. On December 1, 1993 the
Company acquired substantially all of the United States operations of Central
Park Lodges, Inc. ("CPL"), consisting of 30 geriatric care facilities (24 owned
and 6 leased) and nine retirement facilities, totaling 5,210 beds, a division
which provides phar-
30
macy consulting services and supplies prescription drugs and intravenous
medications to geriatric care facilities through five pharmacies in Florida,
Pennsylvania and Texas, and a division which provides healthcare personnel and
support services to home healthcare and institutional markets through five
branch locations located in Florida and Pennsylvania. The Company disposed of
seven retirement facilities and five of the geriatric care facilities acquired
from CPL which the Company did not consider to fit within its post-acute care
strategy. The total cost of the CPL acquisition was approximately $185.3
million, including $20.1 million in assumption of indebtedness, warrants to
purchase 100,000 shares of common stock of the Company at a purchase price per
share of $28.92 (valued at $1.4 million), and other direct acquisition costs.
The $163.8 million cash paid to purchase CPL was financed using the Company's
term loan and revolving credit facility with Citicorp. The number of shares and
price per share are subject to adjustment under certain circumstances. In
addition, the Company agreed to provide consulting services to Trizec for the
development of subacute care programs at its Canadian facilities. The Company
received a consulting fee of $4.0 million and $3.0 million in 1994 and 1995,
respectively.
During 1993, the Company also acquired eight geriatric care facilities (two
of which had previously been leased by IHS), leased one facility and entered
into nine management contracts.
During 1994, the Company continued to expand its MSU focus by opening 49 MSU
programs totalling 998 beds (including four MSU programs totalling 102 beds at
its managed facilities which includes 33 beds located at a facility no longer
managed by the Company as of August 1994) and expanding 18 MSU programs by 100
beds. During the same period, the Company acquired five geriatric care
facilities (two of which had been previously leased and three of which had been
managed by IHS), leased 49 (three of which had been previously owned and seven
of which had been previously managed) and entered into 42 management contracts
(five of which have become leased facilities, one of which has become an owned
facility and one of which was terminated).
Effective January 1, 1994, the Company entered into an agreement to manage 23
facilities in California, consisting of 14 geriatric care facilities having
1,875 beds and nine psychiatric facilities having 1,265 beds (the "Crestwood
Facilities"), owned by certain affiliated partnerships (the "Crestwood
Partnerships") and leased by Crestwood Hospitals, Inc. ("Crestwood"). The
management agreement had a term of ten years and provides for payments to IHS
based upon a percentage of the gross revenues of the Crestwood Facilities.
Pursuant to this transaction, IHS had agreed to loan Crestwood up to $11
million, including a $7 million line of credit. IHS was granted purchase options
whereby it had the option upon expiration of its management agreement to
purchase certain partnership interests of the partnerships which own 19 of the
23 Crestwood Facilities at a purchase price equal to the product determined by
multiplying (i) the sum of (a) ten times the net cash flow of the 19 facilities
for the year ended December 31, 2003, plus (b) the amount of the outstanding
mortgages on the 19 facilities, by (ii) a percentage equal to the percentage
ownership of the partners whose interests IHS chooses to purchase. IHS also had
an option to purchase Crestwood on the expiration of the management agreement at
a purchase price equal to fair market value determined by an appraisal. If IHS
elected to purchase Crestwood prior to the expiration of the management
agreement, it was obligated to pay Crestwood a break-up fee of $6 million. The
Company was obligated to purchase Crestwood if it elected to purchase the
partnership interests of the partnerships which own the Crestwood Facilities.
IHS paid the stockholders of Crestwood a non-refundable purchase option deposit
consisting of $3 million in cash and 168,067 shares of IHS Common Stock. This
agreement was terminated in 1995 and, as a result, the Company incurred a loss
of $21,915,000. See Note 17 to consolidated financial statements.
In February 1994 the Company entered into management agreements to manage, on
an interim basis, eight geriatric care facilities, aggregating 1,174 beds, in
Delaware, Massachusetts, New Jersey and Pennsylvania previously operated by
IFIDA Health Care Group Ltd. ("IFIDA"). Upon the earlier of the completion by
the owners of the eight facilities of the refinancing of certain debt or May 18,
1995, IHS was obligated to lease and operate these facilities, and was granted
an option to purchase any or all of these facilities. The annual lease payments
for these facilities is $3.9 million. The purchase price per facility is equal
to the greater of its fair market value or its allocable percentage (as agreed
to by the parties) of $59.5 million ($57 million if the option is exercised
prior to the seventh year of the lease). The
31
Company has to date made purchase option deposits aggregating $6,600,000 with
respect to these facilities, and is obligated to make additional purchase option
deposits aggregating $500,000 during each year of the agreement. IHS has agreed
to loan the owners of the eight facilities an aggregate of up to $3.5 million
for working capital purposes, and issued to the owners of the eight facilities
an aggregate of 90,000 shares of Common Stock. Five of these facilities were
subsequently leased by the Company in July 1994 and one management agreement for
a facility was terminated in August 1994. The remaining two facilities were
leased in 1995.
In May 1994 the Company sold its 49% interest in two separate joint ventures
formed with Sunrise Terrace, Inc. ("Sunrise") to develop and operate two
assisted living facilities. Each facility was to be managed by Sunrise; Sunrise
had a 51% interest in, and the Company had a 49% interest in, the venture's
capital, earnings and losses. Sunrise had an option to purchase the Company's
interest in either venture at any time, and the Company had a right to require
Sunrise to purchase the Company's interest in the Fairfax, Virginia venture. The
assisted living facility in Fairfax, Virginia opened in October 1990; the second
facility is currently being constructed in Bound Brook, New Jersey.
In May 1990, a wholly owned subsidiary of IHS, Integrated of Amarillo, Inc.
("IAI"), purchased a geriatric care facility in Amarillo, Texas, and contributed
the facility to a joint venture in exchange for a 49% interest therein. The
Company managed the facility, for which it received a management fee equal to 6%
of gross revenues. The venturers shared in the venture's capital, earnings and
losses in accordance with their respective interests in the venture except that
net taxable operating losses were borne 100% by the other venturer. In September
1994, the Company purchased the remaining 51% interest in this joint venture.
As of August 31, 1994 the Company entered into a Facilities Agreement, Lease
Agreement and certain other agreements with Litchfield Asset Management Corp.
("LAM") pursuant to which it leased, effective September 1, 1994, on a triple
net basis, 43 geriatric care facilities (consisting of 41 skilled nursing
facilities and two retirement centers), including two facilities previously
leased and two facilities previously managed by the Company (the "LPIMC
Facilities"), aggregating approximately 5,400 beds located in 12 states. The
Company's initial annual lease payments are approximately $18.8 million, based
upon the annual debt service of monies borrowed by LAM to purchase the LPIMC
Facilities and repay approximately $150 million in existing indebtedness of such
facilities. In addition, the Company made refundable lease deposits aggregating
$25 million, and will make additional refundable deposits during the initial
term (including any extension thereof) of the leases aggregating approximately
$4 million per annum. Rent payments are subject to escalation commencing after
the third year in an amount equal to two percent (three percent if the Company
elects to pay such increase in shares of the Company's Common Stock) of the net
annual incremental revenues of the LPIMC Facilities (subject to certain
maximums). The leases have initial terms of seven years (subject to extension of
up to five years under certain circumstances), subject to renewal by the Company
for one additional period of seven years and three additional periods of five
years each, and the Company has guaranteed all lease payments. The Company has
also received options to purchase each of the LPIMC Facilities, at any time
after nine months prior to the end of the seventh year, for a purchase price
that will represent (i) during the seventh through eleventh years following the
lease commencement date, such facility's allocable percentage of the total
amount of $343 million (to be increased annually after the seventh year by the
rate of increase in the consumer price index) and (ii) beginning in the twelfth
year following the lease commencement date, the greater of (a) fair market
value, (b) 125% of the release cost of the monies borrowed by LAM which are
applicable to such facility or (c) five times the contribution margin of such
facility. The Company loaned LAM's principal stockholders an aggregate of $3
million. In addition, the Company issued LAM warrants to purchase 300,000 shares
of the Company's Common Stock at an exercise price of $31.33 per share, and has
granted LAM "piggy-back" registration rights with respect to the shares of
Common Stock issuable upon exercise of such warrants. The Company has agreed to
issue up to an additional 50,000 shares of Common Stock if the leases are
terminated prior to September 1, 2006. The agreement with LAM requires that the
Company meet certain financial tests.
In February 1995, the Company entered into a management agreement to manage a
190 bed geriatric care facility located in Aurora, Colorado.
32
In March 1995, the Company entered into a management agreement to manage 34
geriatric care facilities in Texas, California, Florida, Nevada and Mississippi
(the "Preferred Care Facilities"). The management agreement has a term of ten
years and provides for payments to the Company based upon a percentage of
adjusted gross revenues and adjusted earnings before interest, taxes,
depreciation, and amortization of the Preferred Care Facilities. The Company has
also been granted an option to purchase the Preferred Care Facilities, between
March 29, 1996 and the date of the termination of the management agreement, for
$80 million plus adjustments for inflation. The Company paid a non-refundable
purchase option deposit of $10.2 million which will be applied against the
purchase price if the Company elects to acquire the facilities.
During 1995, the Company purchased five geriatric care facilities (two of
which were previously leased). Also, the Company leased three facilities, all of
which were previously managed. The total cost of these acquisitions was
approximately $42.9 million which includes legal fees and other costs incurred
to secure the facilities or leasehold interests in the facilities.
During 1995, the Company continued to expand its MSU focus by opening 31 MSU
programs totalling 691 beds (including 2 MSU programs totalling 63 beds at its
managed facilities) and expanding existing programs by 177 beds (including 17
beds at managed facilities).
VERTICAL INTEGRATION
During 1993 the Company began to implement its strategy of expanding the
range of related services it offers directly to its patients in order to serve
the full spectrum of patient needs following acute hospitalization. As a result
of the acquisitions in 1993, 1994, and 1995 the Company is now able to offer
directly to its patients, rather than through third-party providers, pharmacy,
home healthcare, rehabilitation (physical, occupational and speech), and mobile
x-ray and electrocardiogram and similar services. See "Item 1--Business--Company
Strategy."
In June 1993, the Company acquired all of the outstanding stock of Patient
Care Pharmacy, Inc. ("PCP"), a California corporation engaged in the business of
providing pharmacy services to geriatric care facilities and other healthcare
providers in Southern California. The Company has combined the operations of PCP
with CPL's pharmacy operations. The total cost for PCP was $10,400,000 including
$9,840,000 representing the issuance of 425,674 of the Company's Common Stock.
In addition, the Company had agreed to make contingent payments in the shares of
the Company's Common Stock following each of the next three years based upon the
earnings of PCP. On March 3, 1995, the Company and the PCP stockholders
terminated all rights to contingent payments in consideration for a payment of
$3.5 million in the form of 92,434 shares of IHS Common Stock.
In July 1993, Comprehensive Post Acute Services, Inc. ("CPAS"), a newly
formed subsidiary 80% owned by the Company and 20% owned by Chi Systems, Inc.,
formerly Chi Group, Inc. ("Chi"), acquired joint ventures and contracts to
develop and manage subacute programs from Chi. Chi is a healthcare consulting
company in which John Silverman, a director of the Company, is President and
Chief Financial Officer and an approximately 16% stockholder. The purchase price
was $200,000 and IHS had made available a loan commitment of $300,000 for
working capital purposes, which loan bore interest at a rate equal to Citicorp's
base rate plus four percent. Chi granted the Company the option to purchase, and
Chi had the right to require the Company to purchase, at any time between July
1, 1997 and September 1, 1997, Chi's 20% equity interest in CPAS for a purchase
price equal to 20% of the greater of (i) three times the pre-tax net income of
CPAS for the year then ended or (ii) five times the after-tax net income of CPAS
for the year then ended. In connection with this transaction, the Company
engaged Chi to act as consultant with respect to the Company's transitional care
units. The consulting agreement, which expires June 30, 1997, provides for the
payment, in four equal installments, of a $100,000 annual consulting fee. As of
July 21, 1994 the Company purchased the remaining 20% of CPAS from Chi for 5,200
shares of IHS Common Stock valued at $159,900.
In October 1993, the Company acquired, effective as of September 30, 1993,
Health Care Systems, Inc., which owns Health Care Consulting, Inc. ("HCC") and
RMi, Inc., a Rehabilitation Company ("RMI"), for $1,850,000 in cash and a
five-year earnout, up to a maximum of $3,750,000, based upon
33
achievement of pre-tax earnings targets. HCC is a specialty reimbursement and
consulting company with expertise in subacute rehabilitation programs. RMI
provides direct therapy services, including physical therapy, occupational
therapy and speech pathology, to healthcare facilities. RMI also provides
management and consulting services in the oversight and training of therapists
employed by geriatric care facilities to facilitate higher quality patient care.
The Company has agreed to issue warrants to purchase 20,000 shares of Common
Stock at a purchase price per share of $37.88 to each of Scott Robertson, Gary
Kelso and Grantly Payne in exchange for their rights under the five-year
earn-out agreement.
In December 1993, the Company purchased all of the capital stock of
Associated Therapists Corporation, d/b/a Achievement Rehab ("Achievement"), a
provider of rehabilitation therapy services on a contract basis to various
geriatric facilities in Minnesota, Indiana and Florida. The purchase price of
$22.5 million consists of 839,865 shares of the Company's common stock (based on
the average price of the stock of $26.79), plus a contingent earn-out payment,
also payable in shares of common stock, based upon increases in Achievement's
earnings in 1994, 1995 and 1996 over a base amount. The total cost was applied
primarily to intangible assets.
On April 27, 1994, the Company sold its approximate 92% interest in
Professional Community Management International, Inc. ("PCM") to PCM at its book
value of $4.3 million. The Company accepted a promissory note for the full
amount of the purchase price, which note bears interest at 6.36% per annum and
is payable by PCM in installments over a 40 year period. The promissory note is
secured by a pledge of PCM stock held by certain PCM stockholders and a security
interest in all tangible and intangible assets of PCM. Certain stockholders of
PCM also executed personal guarantees with respect to the payment of $1.2
million over a period of six years, subject to reduction in an amount equal to
the amortization of the principal amount of the note. PCM manages approximately
41,000 residential condominium units in retirement communities in Southern
California.
On July 7, 1994, the Company acquired all the outstanding capital stock of
Cooper Holding Corporation ("Cooper"), a Delaware corporation engaged in the
business of providing mobile x-ray and electrocardiogram services to long-term
care and subacute care facilities in California, Florida, Georgia, Indiana,
Nebraska, Ohio, Oklahoma, Texas and Virginia. The purchase price for Cooper was
approximately $44.5 million, including $19.9 million representing the issuance
of 593,953 shares of the Company's Common Stock and options to acquire 51,613
shares of Common Stock (based on the average closing price of the Common Stock
of $30.81 over the 30 day period prior to June 2, 1994, the date on which the
Cooper acquisition was publicly announced).
On August 8, 1994, the Company acquired substantially all the assets of Pikes
Peak Pharmacy, Inc., a company which provides pharmacy services to patients at
nine facilities in Colorado Springs, Colorado which have an aggregate of 625
beds, for $600,000.
On September 23, 1994 the Company acquired substantially all of the assets of
Pace Therapy, Inc., a company which provides physical, occupational, speech and
audiology therapy services to approximately 60 facilities in Southern California
and Nevada. The purchase price for Pace was $5.8 million, representing the
issuance of 181,569 shares of the Company's Common Stock.
On October 7, 1994 the Company acquired all of the outstanding stock of
Amcare, Inc., an institutional pharmacy serving approximately 135 skilled
nursing facilities in California, Minnesota, New Jersey and Pennsylvania. The
purchase price for Amcare was $21.0 million, including $10.5 million
representing the issuance of 291,101 shares of the Company's Common Stock.
On October 11, 1994 the Company acquired substantially all of the assets of
Pharmaceutical Dose Service of La., Inc., an institutional pharmacy serving 14
facilities. The purchase price for PDS was $4.2 million, including $3.9 million
representing the issuance of 122,117 shares of the Company's Common Stock.
On November 2, 1994 the Company acquired all of the outstanding stock of
CareTeam Management Services, Inc., a home health company serving Arizona,
Kansas, Missouri, New Mexico, North Carolina and Texas. The purchase for
CareTeam was $5.9 million, including $5.2 million representing the issuance of
147,068 shares of the Company's Common Stock.
34
On November 3, 1994 the Company acquired all of the outstanding stock of
Therapy Resources, a company which provides physical, occupational, speech and
audiology services to approximately 22 geriatric care facilities and operates
seven out-patient rehabilitation facilities. The purchase price was $1.6
million.
On November 3, 1994 the Company acquired all of the outstanding stock of
Rehab People, Inc., a company which provides physical, occupational and speech
therapy services to approximately 38 geriatric care facilities in Delaware, New
York, North Carolina and Pennsylvania. The purchase price for Rehab People was
$10 million representing the issuance of 318,471 shares of Common Stock.
On November 3, 1994, the Company acquired certain assets of Portable X-Ray
Service of Rhode Island, Inc., a mobile x-ray company, for a purchase price of
$2.0 million including $700,000 representing the issuance of 19,739 shares of
the Company's Common Stock.
On November 18, 1994 the Company acquired substantially all of the assets of
Medserv Corporation's Hospital Services Division, which provides respiratory
therapy. The purchase price was $21 million.
On December 9, 1994, the Company acquired all rights of Jule Institutional
Supply, Inc. under a management agreement with Samaritan Care, Inc. ("Samaritan
Care"), an entity which provides hospice services, for a purchase price of $14
million, representing the issuance of 375,134 shares of the Company's Common
Stock. In addition, the Company acquired the membership interests in Samaritan
Care for no additional consideration.
On December 23, 1994, the Company acquired all of the outstanding stock of
Partners Home Health, Inc., a home health infusion Company operating in seven
states. The purchase price was $12.4 million, representing the issuance of
332,810 shares of the Company's Common Stock.
Between August 1994 and January 1995, the Company acquired six additional
radiology and diagnostic service providers for an aggregate consideration of
$3.8 million. These entities provide radiology and diagnostic services in
Indiana, Louisiana, North Carolina, Pennsylvania and Texas.
In January 1995, the Company acquired four ancillary services companies which
provide mobile x-ray and electrocardiogram services to long-term care and
subacute care facilities. The total purchase price was $3.6 million, including
$300 representing the issuance of 7,935 shares of the Company's Common Stock.
Total goodwill at the date of acquisition was $3.2 million.
In February 1995, the Company acquired all of the assets of ProCare Group,
Inc. ("ProCare") and its affiliated entities, which provide home health services
in Broward, Dade and Palm Beach counties, Florida. The total purchase price was
$3.9 million, including $3.6 million representing the issuance of 95,062 of the
Company's Common Stock. In addition, the Company incurred direct costs of
acquisition of $675,000. Total goodwill at the date of acquisition was $4.4
million.
In February 1995, the Company purchased the assets of Epsilon Equipment
Corporation ("Epsilon"), which provides mobile video fluoroscopy procedures to
skilled nursing facilities for the diagnosis of dysphasia for the aspiration of
foods and liquids causing pneumonia. The total purchase price was $200,000, plus
an earnout based on the future earnings of the business, payable in the shares
of the Company's Common Stock. In addition, the Company incurred direct costs of
acquisition of $500,000 and repaid debt of Epsilon of $961,000. The total
goodwill at the date of acquisition was $1.9 million.
In February 1995, the Company entered into a management agreement to manage
Total Home Health Care, Inc. and Total Health Service, Inc. (collectively "Total
Home Health"), which are private-duty and Medicare certified home health
agencies in the Dallas/Ft. Worth, Texas market, pursuant to which a subsidiary
of the Company received a management fee of $10 per home visit by Total Home
Health personnel. The Company was also granted a five-year option to purchase
Total Home Health for a purchase price of $5.0 million.
In March 1995, the Company purchased Samaritan Management, Inc., which
provides hospice services in Michigan. Total purchase price was $5.5 million. In
addition, the Company incurred direct costs of acquisition of $1.0 million.
Total goodwill at the date of acquisition was $6.8 million.
35
In March 1995, the Company acquired substantially all of the assets of
Fidelity Health Care, Inc., a company which provides home healthcare services,
temporary staffing services and infusion services in Ohio. Total purchase price
was $2.1 million. In addition, the Company incurred direct costs of acquisition
of $350,000. Total goodwill at the date of acquisition was $2.3 million.
In April 1995, the Company purchased the assets of Hometown Nurses Registry,
which provides home healthcare in Tennessee. The total purchase price of
$500,000. In addition, the Company incurred direct costs of acquisition of
$150,000. Total goodwill at the date of acquisition was $646,000.
In April 1995, the Company purchased the assets of Bernard's X-Ray Mobile
Service, which provides x-ray services to long-term care and subacute care
facilities. The total purchase price was $100,000. Total goodwill at date of
acquisition was $90,000.
In May 1995, the Company purchased the assets of Stewart's Portable X-Ray,
Inc., which provides x-ray services to long-term care and subacute care
facilities. The total purchase price was $1.9 million. In addition, the Company
incurred direct costs of $100,000. Total goodwill at the date of acquisition was
$1.8 million.
In May 1995, the Company purchased Immediate Care Clinic, an emergency clinic
in Amarillo, Texas for approximately $225,000.
In June 1995, the Company acquired three ancillary services companies which
provide mobile x-ray and electrocardiogram services to long-term and subacute
care facilities. The total purchase price was $2.2 million. Total goodwill at
the date of acquisition was $2.5 million.
In August 1995, the Company acquired all of the outstanding stock of Senior
Life Care Enterprises, Inc. ("SLC"), which provides home health, supplemental
staffing, and management services. The total purchase price was $6.0 million
representing the issuance of 189,785 shares (the "SLC" Shares) of the Company's
Common Stock. The acquisition agreement provided for the issuance of additional
shares of Common Stock, if at the time a registration statement covering the
resale of the SLC Shares is declared effective the fair market value of the SLC
shares is less than $6.0 million. In addition, the Company incurred direct costs
of acquisition of $700,000. The total goodwill at the date of acquisition was
$5.6 million.
In September 1995, the Company merged with IntegraCare, Inc. ("IntegraCare"),
which provides physical, occupational, and speech therapy to skilled nursing
facilities in Florida and operated seven physician practices, in a transaction
that was accounted for as a pooling of interests. Accordingly, the Company's
historical financial statements for all periods prior to the effective date of
the merger have been restated to include the results of IntegraCare. In
addition, the Company incurred $1.9 million of costs as a result of the
IntegraCare merger. This amount is included as a non-recurring charge in the
Company's Statement of Operations.
In September 1995, the Company purchased Mobile X-Ray Limited Partnership, a
provider of electrocardiogram services in Maryland, Virginia, West Virginia, and
the District of Columbia. The total purchase price was $1.4 million. The total
goodwill at the date of purchase was $1.2 million.
In September 1995, the Company purchased Southern Nevada Physical Therapy
Associates, which provides outpatient physical therapy for $500,000.
In November 1995, the Company purchased Chesapeake Health, which provides
electrocardiogram services. The total purchase price was $1.1 million. In
addition, the Company incurred direct costs of acquisition of $75,000. The total
goodwill at the date of acquisition was $1.02 million.
In December 1995, the Company purchased Miller Portable X-Ray. The total
purchase price was $295,000. The total goodwill at the date of purchase was
$275,000.
In February, 1996, the Company entered into an agreement to acquire First
American Health Care of Georgia, Inc., which provides home health services in
twenty-three states. The purchase price is $150 million plus an additional
earn-out payment based on operational experience in the years 1999 through 2002.
First American has filed for protection from creditors under Chapter 11 of the
Federal Bankruptcy
36
Code. The acquisition is subject to the successful completion of a
reorganization in bankruptcy court, various regulatory approvals, bank approval,
and Board of Directors approval. There can be no assurance that the acquisition
will be consummated on these terms or at all.
In February 1996, the Company acquired Vintage Health Care Center in Denton,
Texas. The purchase price was approximately $7 million.
In March 1996, the Company acquired Rehab Management Services, Inc., an
outpatient rehabilitation company in central Florida for approximately $10
million.
The Company has reached agreements in principle to purchase a hospice company
in Chicago, Illinois, for approximately $8 million, and a home health agency in
Memphis, Tenessee, for approximately $2 million.
RESULTS OF OPERATIONS
The following table sets forth for the fiscal periods indicated the
percentage of net revenues represented by certain items reflected in the
Company's statement of operations and the percentage change in such items from
the prior corresponding fiscal periods.
PERCENTAGE OF NET PERIOD TO PERIOD
REVENUES INCREASE (DECREASE)
------------------------- -----------------------
YEAR YEAR
ENDED ENDED
DECEMBER DECEMBER
31, 1994 31, 1995
YEARS ENDED DECEMBER 31, COMPARED COMPARED
-------------------------
1993 1994 1995 TO 1993 TO 1994
Restated
-------- -------- -------- ----------- -----------
Net revenues:
Basic medical services ............. 38.3% 37.9% 31.3% 137.7% 36.6%
Specialty medical services ......... 54.7 56.8 65.4 149.6 90.5
Management services and other ...... 7.0 5.3 3.3 82.3 5.0
-------- -------- ------- ----------- -----------
Total Revenues .................... 100.0 100.0 100.0 140.3 65.6
-------- -------- ------- ----------- -----------
Costs and Expenses:
Operating expenses ................. 71.9 74.2 75.4 148.0 68.2
Corporate administrative and general 5.7 5.2 4.8 120.1 51.2
Depreciation and amortization ...... 2.7 3.7 3.4 224.5 51.6
Rent ............................... 7.8 5.9 5.6 82.1 56.9
Interest, net ...................... 1.9 2.9 3.3 261.1 89.2
Loss from impairment of long-lived
assets............................. -- -- 7.0 * *
Other non-recurring charges......... -- -- 4.2 * *
-------- -------- ------- ----------- -----------
Earnings (loss) before equity in
earnings of affiliates, income
taxes and extraordinary items .... 10.0 8.1 (3.7) 95.6 (175.6)
Equity in earnings of affiliates ... 0.4 0.2 0.1 (5.2) 22.7
-------- -------- ------- ----------- -----------
Earnings (loss) before income taxes
and extraordinary items .......... 10.4 8.3 (3.6) 91.6 (171.7)
Federal and state income taxes ..... 4.1 3.1 (1.4) 84.2 (173.6)
-------- -------- ------- ----------- -----------
Earnings (loss) before
extraordinary items .............. 6.3 5.2 (2.2) 96.3 (170.5)
Extraordinary items ................. 0.8 0.6 .1 87.9 (76.3)
-------- -------- ------- ----------- -----------
Net earnings (loss) ............... 5.5 4.6 (2.3) 97.4 (182.9)
======== ======== ======= =========== ===========
- ----------
* Not meaningful.
YEAR ENDED DECEMBER 31, 1995 (RESTATED) COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net revenues for the year ended December 31, 1995 increased $466.79 million
or 65.6% to $1,178.89 million from the comparable period in 1994. Such increase
was attributable to (1) growth in revenues from facilities and ancillary
companies in operation in both periods and facilities and ancillary companies
acquired during 1994, as well as the conversion of MSU beds at existing
facilities of $410.50 million (2) the addition of
37
new facilities acquired or leased and ancillary service business acquired in
1995 which increased revenue by $54.41 million, and (3) increased management
services and other revenue of $1.88 million. Basic medical services revenue
increased $98.75 million, or 36.6%, from $269.82 million in 1994 to $368.57
million in 1995. Of the $98.75 million increase, $7.67 million, or 7.8%, was
attributable to the addition of 433 leased and 442 owned beds in 1995. The
remainder of the increases was due to the addition of facilities during 1994,
partially offset by the conversion of existing Basic Medical Services beds to
MSU beds. Specialty medical services revenue increased from $404.40 million to
$770.55 million. Of the $366.15 million increase, $46.44 million, or 12.7%,
attributable to revenue from acquisitions subsequent to December 31, 1994. The
remainder of the increase is due to increased revenue at facilities in operation
in both periods, facilities and ancillary companies acquired during 1994, and
the conversion of Basic Medical Services beds to MSU beds in 1995. Management
services and other revenues increased from $37.88 million to $39.77 million. The
increase was due to the addition of 43 management contracts and improved
operating results at facilities managed in both periods partially offset by (1)
the purchase of facilities that were previously managed, (2) the reduction in
the Trizec consulting fee from $4 million to $3 million, (3) the cancellation of
the 29 management contracts (including 23 from Crestwood) during 1995.
Total expenses for the period increased from $654.30 million to $1,222.59
million, an increase of 86.9%. Of the $568.29 million increase, $360.42 million,
or 63.4%, was due to an increase in operating expenses. Salaries, wages, and
benefits paid to personnel increased $216.95 million, or 65.2%, from the year
ended December 31, 1994. Of the $216.95 million increase, $34.39 million was
attributable to facilities and ancillary companies acquired subsequent to
December 31, 1994. The remaining increase resulted from salary increases for
existing employees, increases in salaries due to facilities and ancillary
companies acquired during 1994, as well as additional personnel needed due to
increased census and the increased medical acuity level of the Company's
patients. Other operating expenses, which include physician fees and fees paid
to independent contractors providing rehabilitative therapy, utilities, food
supplies and facility maintenance, increased $143.47 million, or 73.5%, as
compared to December 31, 1994. Of this increase, $12.67 million was attributable
to the aforementioned facilities and ancillary companies acquired in 1995.
Corporate administrative and general expenses for the year ended December 31,
1995 increased by $18.98 million, or 51.2%, over the comparable period in 1994.
This increase primarily represents additional operations, information systems,
finance, accounting and other personnel to support the growth of owned, leased,
and managed facilities and related services businesses. Depreciation and
amortization increased to $39.96 million during the year ended December 31,
1995, a 51.6% increase as compared to $26.37 million in the comparable period of
1994. Of the $13.59 million increase, $852,000 was attributable to depreciation
and amortization at facilities and ancillary businesses acquired in 1995. The
remaining increase was primarily due to the amortization and depreciation
related to increased routine and capital expenditures at existing facilities,
increased amortization of deferred pre-opening costs for newly opened MSUs,
increased debt issue costs and increases in depreciation and amortization of
facilities and ancillary companies acquired during 1994. Rent expense increased
by $23.97 million, or 56.9%, over the comparable period in 1994, primarily the
result of the full year effect of fifty leaseholds acquired in 1994, the
acquisition of three leaseholds acquired in 1995, and increases in contingent
rentals based on gross revenues, partially offset by the purchase of two
geriatric care facilities previously leased by the Company. Net interest expense
increased $18.38 million during the year ended December 31, 1995 to $38.98
million. The increase was primarily the result of the full year effect of 10
3/4% Senior Subordinated Notes due 2004 issued in July 1994, the 9 5/8% Senior
Subordinated Notes issued in May 1995, and increased borrowings under the
Company's $500 million credit and term loan facility which closed in May 1995.
In the fourth quarter of 1995, the Company, as well as industry analysts,
concluded that Medicare and Medicaid reform was imminent. Both the House and
Senate balanced budget proposals proposed a reduction in future growth in
Medicare and Medicaid spending from 10% a year to approximately 4-6% a year.
While Medicare and Medicaid reform had been discussed prior to the fourth
quarter, the Company came to believe that a future reduction in the growth of
Medicare and Medicaid spending was virtually a certainty. Such reforms include,
in the near term, a continued freeze in the Medicare routine costs limit
("RCL"), followed by reduced increases in later years, more stringent
documentation requirements for Medicare RCL exception requests, reductions in
the growth in Medicaid reimbursement in most states, as well as salary
equivalency in rehabilitative services, and, in the longer term (2-3 years),
38
a switch to a prospective payment system for home care and nursing homes, and
repeal of the "Boren Amendment", which requires that states pay hospitals
"reasonable and adequate" rates. The Company estimated the effect of the
aforementioned reforms on each nursing and subacute facility, as well as on its
rehabilitative services, respiratory therapy, home care, mobile diagnostic and
pharmacy divisions by reducing (or in some cases increasing) the future revenues
and expense growth rates for the impact of each of the aforementioned factors.
Accordingly, these events and circumstances triggered the early adoption of
Statement of Financial Accounting Standards No. 121 in the fourth quarter of
1995. In accordance with SFAS No. 121, the Company estimated the future cash
flows expected to result from those assets to be held and used.
In estimating the future cash flows for determining whether an asset is
impaired and if expected future cash flows used in measuring assets are
impaired, the Company grouped its assets at the lowest level for which there are
identifiable cash flows independent of other groups of assets. These levels were
each of the individual nursing/subacute facilities, and each of the home health,
rehabilitative therapy, respiratory therapy, pharmacy and mobile diagnostics
divisions. The results of comparing future undiscounted cash flows to historical
carrying value were that some individual nursing facilities and one assisted
living facility were identified for an impairment charge. None of the remaining
facilities or business units were identified since only those facilities or
business units where the carrying value exceeded the undiscounted cash flows are
considered impaired. Prior to adoption of SFAS 121, the Company evaluated
impairment on the entity level. Such an evaluation yielded no impairment as of
September 30, 1995.
After determining the facilities identified for an impairment charge the
Company determined the estimated the fair value of such facilities. Also, the
Company obtained valuation estimates prepared by independent appraisers or had
received offers from potential buyers on 6 of the facilities identified for
impairment, comprising 72.4% of the total charge. Such valuation estimates were
obtained to corroborate the Company's estimate of value. The excess carrying
value of goodwill, buildings and improvements, leasehold improvements and
equipment above the fair value was $83.32 million (of which $1.53 million
represents goodwill and $81.79 million represents property and equipment) and is
included in the statement of operations for 1995 as loss on impairment of
long-lived assets.
During the fourth quarter of 1995, the Company terminated the Crestwood
management contract, a 10 year contract entered into in January 1994 to manage
23 long-term care and psychiatric facilities in California owned by Crestwood
Hospital. The terms of the contract required the payment of a management fee to
IHS and a preferred return to the Crestwood owners. IHS terminated the
management contract with Crestwood Hospital due primarily to changes in
California Medicaid rates which no longer provided sufficient cash flow at the
facilities to support both IHS' management fee and the preferred return to the
owners. As a result, the Company incurred a loss of $21.92 million. Such loss
consists of the write-off of $8.50 million of management fees, $11.10 million of
loans made to Crestwood Hospital and the owners of Crestwood, as well as the
interest thereon, and $2.32 million of contract acquisition costs. During the
third quarter of 1995, the Company merged with IntegraCare, Inc. in a
transaction accounted for as a pooling of interests. In connection with this
transaction, the Company incurred merger costs of $1.94 million for accounting,
legal and other costs. In addition, in the fourth quarter of 1995 IHS changed
its accounting estimate regarding the future benefit of deferred pre-opening
costs. This change was made in recognition of the change in estimated future
benefit on such costs resulting from the effects of the aforementioned Medicare
and Medicaid reforms. As a result, the Company wrote-off $25.78 million of
deferred pre-opening costs. These costs are included as an other non-recurring
charge on the statement of operations and are included as a component of income
from continuing operations.
Equity in earnings of affiliates increased by 22.7% to $1.44 million from
$1.18 million in the comparable period of 1994.
Earnings before income taxes and extraordinary item decreased by 171.7% to a
loss of $42.26 million for the year ended December 31, 1995, as compared to
income of $58.98 million for the comparable period in 1994. The decrease was
primarily due to certain non-cash charges discussed above. The provision for
state and federal income taxes decreased from expense of $22.12 million in 1994
to a
39
benefit of $16.27 million in 1995. Net loss and fully diluted loss per share for
1995 were $27.00 million and $1.26 per share respectively, compared to net
earnings and fully diluted earnings per share for 1994 of $32.59 million and
$1.57 per share. During the year ended December 31, 1995, the Company incurred a
$1.01 million (net of tax benefit) or 5 cents a share extraordinary loss on the
extinguishment of debt, as compared to $4.27 million or 16 cents a share
(fully-diluted) in 1994. Weighted average shares decreased from 27,154,153
(fully-diluted) in 1994 to 21,463,464 in 1995. The weighted average shares
decreased because the impact of the convertible debentures and options
outstanding are not included in weighted average shares because they are
antidillutive in 1995.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR ENDED DECEMBER 31, 1993
Net revenues for the year ended December 31, 1994 increased $415.80 million,
or 140.3%, to $712.1 million from the comparable period in 1993. Such increase
was attributable to (1) growth in revenues from those facilities and MSU beds in
operation during both years of $58.28 million; (2) the addition of new
facilities acquired or leased, MSU beds opened in 1994 and ancillary service
businesses acquired in 1994 which increased revenue by $340.41 million; and (3)
growth in management services and other revenues of $17.11 million resulting
from the addition of new management agreements and increased revenues at
facilities managed by the Company in both periods. Basic medical services
revenue increased from $113.51 million to $269.82 million. Of the $269.82
million in basic medical services revenue in 1994, $164.91 million, or 61.1%,
was attributable to the addition of 6,422 leased and 3,757 owned beds
representing fifty leased and twenty-seven owned facilities, respectively,
subsequent to December 1, 1993 (excluding 15 facilities acquired in December
1993 which were being held for sale). Basic medical services revenue of
facilities in operation during both periods decreased during the year ended
December 31, 1994 as a result of skilled nursing beds being converted to MSU
beds after December 31, 1993. Specialty medical services revenue increased from
$162.0 million to $404.4 million. Of the $242.4 million increase, $68.26
million, or 28.2%, was attributable to increases in occupancy and beds in
operation at the MSUs operating in both periods and increases in other specialty
medical services, which includes rehabilitation and other services provided at
the long-term care level, as well as the expansion of existing MSUs by 100 beds.
The remaining $174.14 million, or 71.8%, was attributable to forty-six MSUs
opened during 1994 (not including MSUs opened at its managed care facilities)
and revenues from companies acquired subsequent to December 1, 1993 which
provide pharmacy, rehabilitation, home healthcare, mobile x-ray and
electrocardiogram and similar services. Management services and other revenues
increased from $20.78 million to $37.88 million. The increase was attributable
to forty-two new management contracts entered into in 1994 as well as the $4.0
million management fee from Trizec. The remaining increase is due to the
improved operating results at the facilities under management at December 31,
1993, which resulted in higher managements fees at facilities which the Company
managed in both periods partially offset by decreases due to the Company
entering into operating leases with facilities which were previously managed and
the sale of PCM.
Total expenses for the period increased to $654.30 million from $266.76
million, an increase of 145.3%. Of the $387.54 million increase, $315.20
million, or 81.3%, was due to an increase in operating expenses. Salaries, wages
and benefits paid to personnel increased $201.11 million, or 152.7%, from the
year ended December 31, 1993. Of the $201.11 million increase, $152.07 million
was attributable to the opening of 46 new MSUs in 1994, the acquisition of
twenty-seven facilities (excluding thirteen facilities held for sale), and the
leasing of fifty facilities (excluding two facilities held for sale), including
28 facilities added in December 1993. and the companies acquired subsequent to
December 1, 1993 which provide pharmacy, rehabilitation, home healthcare, mobile
x-ray and electrocardiogram and similar services. The remaining increase
resulted from salary increases for existing employees as well as additional
personnel needed due to increased census and the increased medical acuity level
of the Company's patients. Other operating expenses, which include physician
fees and fees paid to independent contractors providing rehabilitative therapy,
utilities, food supplies and facility maintenance, increased $114.09 million, or
140.5%, over the period ended December 31, 1993. Of this increase, $105.32
million was attributable to the aforementioned MSU openings in 1994 and the
aforementioned acquisitions since December 1, 1993.
Corporate administrative and general expenses for the year ended December 31,
1994 increased by $20.21 million, or 120.1%, over the comparable period in 1993.
This increase primarily represents additional operations, information systems,
finance, accounting and other personnel to support the growth of
40
owned, leased and managed facilities and related services businesses.
Depreciation and amortization increased to $26.37 million during the year ended
December 31, 1994, a 224.5% increase as compared to $8.13 million in the same
period in 1993. Of this increase, $10.60 million was attributable to the
depreciation of facilities and related service companies acquired since December
1, 1993. The remaining increase was primarily due to the amortization and
depreciation related to increased routine and capital expenditures at existing
facilities as well as an increase in amortization of deferred pre-opening costs
for newly opened MSUs and increased debt issue costs. Rent expense increased by
$19.0 million, or 82.1%, over the comparable period in 1993, primarily as a
result of the acquisition of leasehold interests in fifty facilities subsequent
to December 1, 1993, rent expense from the sale and leaseback of three geriatric
care facilities (Mountain View, Gravois and Northern Virginia), and increases in
contingent rentals which are based on gross revenue of certain leased
facilities. Net interest expense increased by $14.90 million during the year
ended December 31, 1994 to $20.60 million. The increase in interest expense was
primarily a result of the Company's 5 3/4 % convertible subordinated debentures
due 2001 issued in December 1993 and January 1994, increased borrowings under
its credit and term loan facility which closed in September 1994, the 10 3/4 %
Senior Subordinated Notes due 2004 issued in July 1994 and interest expense on
debt assumed in the CPL acquisition.
Equity in earnings of affiliates decreased by 5.2% to $1.18 million for the
year ended December 31, 1994 as compared to $1.24 million for the comparable
period in prior year.
Earnings before income taxes and extraordinary item increased by 91.6% to
$58.98 million for the year ended December 31, 1994, as compared to $30.79
million for the comparable period in the prior year. The provision for federal
and state taxes was $22.12 million for the year ended December 31, 1994, and
$12.01 million for the same period in the prior year. Net earnings and fully
diluted earnings per share for 1994 were $32.59 million and $1.57 per share,
respectively, as compared to $16.51 million or $1.22 per share, respectively for
1993. During the year ended December 31, 1994 the Company incurred a $4.27
million (net of tax benefit) or 16 cents per share (fully-diluted) extraordinary
loss on the extinguishment of debt, as compared to $2.28 million (net of tax
benefit) or 13 cents per share (fully-diluted) in the prior year. Interest
expense and amortization of underwriting costs related to the convertible
subordinated debentures are added, net of tax, to income for the purpose of
calculating fully diluted earnings per share. Weighted average shares (fully
diluted) increased 9,893,074 shares or 57.3% to 27,154,153 shares from the
comparable period in 1993, primarily as a result of the convertible subordinated
debentures issued in December 1993 and January 1994 and the issuance of
approximately 3.5 million shares of Common Stock in an underwritten equity
offering in July 1994, as well as shares issued in connection with acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED DECEMBER 31, 1995
At December 31, 1995, the Company had net working capital of $136.32 million,
as compared with $76.38 million at December 31, 1994. There are no material
capital commitments for capital expenditures as of the date of this filing.
Patient accounts receivable and third-party payor settlements receivable
increased $66.94 million to $230.28 million at December 31, 1995, as compared to
$163.34 million at December 31, 1994. Of the $66.94 million increase, $13.40
million related primarily to acquisitions of new facilities and related service
businesses in 1995; the remainder of $53.54 million related to activities in
operations during both years and was consistent with the growth in revenues of
such activities in 1995. Gross patient accounts receivable were $226.82 million
at December 31, 1995 as compared with $165.88 million at December 31, 1994.
Third-party payor settlements receivable from federal and state governments
(i.e. Medicare and Medicaid cost reports) were $33.03 million at December 31,
1995 as compared to $22.63 million at December 31, 1994. Approximately $7.6
million, or 23.0%, of the third-party payor settlements receivable at December
31, 1995 represent the costs for its MSU patients which exceed regional
reimbursement limits established under Medicare, as compared to approximately
$6.2 million, or 27.4%, at December 31, 1994. The Company's cost of care for its
MSU patients generally exceeds regional reimbursement limits established under
Medicare. The success of the Company's MSU strategy will depend in part on its
ability to obtain reimbursement for those costs which exceed the Medicare
established reimbursement limits by obtaining waivers of these cost limitations.
The Company has submitted waiver requests for 133 cost reports, covering all
cost report periods
41
through December 31, 1994. To date, final action has been taken by the Health
Care Financing Administration ("HFCA") on 131 waiver requests covering cost
report period through December 31, 1994. The Company's final rates as approved
by HCFA represent approximately 96% of the requested rates as submitted in the
waiver requests. There can be no assurance, however, that the Company will be
able to recover its excess costs under any waiver requests which may be
submitted in the future. The Company's failure to recover substantially all
these excess costs would adversely affect its results of operations and could
adversely affect its MSU strategy.
All remaining balance sheet increases were due to acquisitions and normal
growth in operations in both years which was consistent with the growth in
revenues of such operations in 1995.
On May 18, 1995, IHS issued $115,000,000 aggregate principal amount of its 9
5/8 % Senior Subordinated Notes due 2002, which it subsequently exchanged for
its 9 5/8 % Senior Subordinated Notes due 2002, Series A, which were identical
in all respects except that they have been registered under the Securities Act
of 1933, as amended, and listed on the New York Stock Exchange (the "Senior
Notes"). Interest on the Senior Notes is payable semi-annually on May 30 and
November 30, commencing November 30, 1995. The Senior Notes are not redeemable
prior to maturity. In the event of a change in control of IHS, each holder of
Senior Notes may require IHS to repurchase such holder's Senior Notes, in whole
or in part, at 101% of the principal amount thereof, plus accrued interest to
the repurchase date. The Indenture under which the Senior Notes were issued
contains covenants, including, but not limited to, covenants with respects to
the following matters: (i) limitations on additional indebtedness unless certain
ratios are met; (ii) limitations on other subordinated debt; (iii) limitations
on liens; (iv) limitations on the issuance of preferred stock by IHS's
subsidiaries; (v) limitations on transactions with affiliates; (vi) limitations
on certain payments, including dividends; (vii) application of the proceeds of
certain asset sales; (viii) restrictions on mergers, consolidations and the
transfer of all or substantially all of the assets of IHS to another person, and
(ix) limitations on investments and loans. The Company used $78.0 million of the
net proceeds from the sale of the Senior Notes to repay a portion of the $188.0
million then outstanding under its credit facility, and used the remaining
approximately $33.3 million for general corporate purposes, including working
capital.
In May 1995, the Company closed a $500 million revolving credit and term loan
agreement with Citicorp USA, Inc., the agent and certain other lenders which
replaced the $250 million revolving credit and term loan facility. Amounts
outstanding under the revolving loan on April 30, 1997 are to be converted to a
term loan with a final maturity date of March 31, 2001. The revolving credit and
term loan agreement is secured by a pledge of all the stock of substantially all
of the Company's subsidiaries and bears interest based upon the LIBOR plus 1.5%
which was 6.94% at December 31, 1995. The facility will be used to finance the
Company's working capital requirements, to make acquisitions and for general
corporate purposes.
The credit agreement evidencing the Facility limits the Company's ability to
incur indebtedness or contingent obligations, to make additional acquisitions,
to create or incur liens on assets, to pay dividends and to purchase or redeem
the Company's stock. Also, the credit agreement requires that the Company meet
certain financial tests, and provides the banks with the right to require the
payment of all of the amounts outstanding under the credit agreement if any
person other than Dr. Robert N. Elkins owns more that 40% of the Company's
capital stock. Amounts repaid under the revolving loan facility may be
reborrowed until April 30, 1997. The Facility replaces the Company's $250
million revolving credit facility which closed in September 1994.
Net cash provided by operating activities was $31,599,000 for the year ended
Decenber 31, 1995 as compared to $27,139,000 provided by operating activities
for the comparable period in 1994. Cash provided by operating activities for the
year ended December 31, 1995 increased from the comparable period in 1994
primarily as a result of an increase in net earnings before non-cash charges,
offset by an increase in patient accounts and third-party payor settlements
receivable.
Net cash provided by financing activities was $192,918,000 for the year ended
December 31, 1995 as compared to $243,866,000 for the comparable period in 1994.
In both periods, the Company received proceeds from long-term borrowings. In
addition, the Company repurchased 400,600 of its common shares for $12,790,000.
42
Net cash used by investing activities was $246,289,000 for the year ended
December 31, 1995 as compared to $219,158,000 for the year ended December 31,
1994. Cash used for the purchase of property, plant and equipment was
$131,080,000 for the year ended December 31, 1995 and $91,354,000 in the
comparable period in fiscal 1994. During 1995, the Company sold 10 of its
facilities for $33,153,000. Cash used for business acquisitions was $96,671,000
for 1995 as compared to $152,791,000 for 1994.
The Company's contingent liabilities (other than liabilities in respect of
litigation) aggregated approximately $51.2 million as of December 31, 1995. The
Company is obligated to purchase its Greenbriar facility upon a change in
control of the Company. The net purchase price of the facility is approximately
$4.0 million. The lessor of this facility has the right to require Messrs.
Robert Elkins and Timothy Nicholson to purchase all or any part of 13,944 shares
of Common Stock owned by it at a per share purchase price equal to the sum of
$12.25 per share plus 9% simple interest per annum from May 8, 1988 until the
date of such purchase. The Company has agreed to purchase such shares if Messrs.
Elkins and Nicholson fail to do so. This amount aggregated approximately
$331,000 at December 31, 1995. The Company has guaranteed approximately $6.6
million of the lessor's indebtedness. The Company is required, upon certain
defaults under the lease, to purchase its Orange Hills facility at a purchase
price equal to the greater of $7.1 million or the facility's fair market value.
The Company has jointly and severally guaranteed a $1.2 million construction
loan made to River City Limited Partnership in which the Company has a 30%
general partnership interest. IHS entered into an agreement with Tutera Group,
Inc. whereby IHS guaranteed all debt owed by Tutera Group to Continental Bank.
The amount guaranteed at December 31, 1995 is $4.1 million. The Company has
guaranteed approximately $4.0 million of a construction loan for Trizec, the
entity from which the Company purchased the Central Park Lodges facilities. The
Company has established an irrevocable standby letter of credit with the Bank of
Nova Scotia to provide for the Company's self-insured worker's compensation
obligation. The maximum obligation was $14.0 million at December 31, 1995. The
Company has established a $1.0 milion irrevocable standby letter of credit with
the Bank of Nova Scotia to secure its performance under two management
contracts. The Company has established a $170,000 irrevocable standby letter of
credit with the Bank of Nova Scotia to provide for the Company's health benefits
obligation. The Company has guaranteed approximately $8.7 million owed by
Litchfield Asset Management Corporation to National Health Investors. In
addition, the Company has obligations under operating leases aggregating
approximately $267.0 million at December 31, 1995.
The liquidity of the Company will depend in large part on the timing of
payments by private third-party and governmental payors. In addition, the
Company's liquidity is dependent upon the timing of the approvals, if any, of
waivers of Medicare regional cost reimbursement limitations which exceed the
limits established under Medicare. Costs in excess of the regional reimbursement
limits relate to the delivery of services and patient care to the Company's MSU
patients.
The Company anticipates that working capital from operations and borrowings
under revolving credit facilities will be adequate to cover its scheduled debt
payments and future anticipated capital expenditure requirements throughout 1996
through its existing operations, continued implementation of its MSU programs at
existing facilities as well as newly acquired facilities and by the acquisition
of additional facilities or agreements to manage additional facilities. The
Company will fund future acquisitions with a combination of cash flow from
operations, bank borrowings and debt and equity offerings.
43
QUARTERLY RESULTS (UNAUDITED)
Set forth below is certain summary information with respect to the Company's
operations for the last eight fiscal quarters.
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------
1994 1995
-------------------------------------------- -----------------------------------------------
DEC. 31,
AS
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 RESTATED(2)
--------- --------- --------- --------- --------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues:
Basic medical services $ 54,371 $ 54,735 $ 69,042 $ 91,669 $ 89,336 $ 87,365 $ 95,482 $ 96,386
Specialty medical
services 73,634 81,524 106,806 142,437 176,158 188,331 193,604 212,461
Management services and
other 10,116 9,603 9,282 10,059 9,456 11,000 10,440 10,312
--------- --------- --------- --------- --------- --------- --------- ---------
Total 138,121 145,862 185,130 244,165 274,950 286,696 299,526 319,159
Cost and Expenses:
Operating expenses 102,049 107,275 136,469 182,338 207,304 214,404 224,457 242,386
Corporate administrative
and general 7,686 8,566 9,675 11,114 12,402 14,174 14,262 15,178
Depreciation and
amortization 5,117 5,357 6,832 9,061 8,960 9,682 9,867 11,452
Rent 8,022 8,210 10,859 15,067 16,066 16,454 16,726 16,879
Interest, net 4,405 5,127 4,796 6,274 7,330 8,585 10,955 12,107
Loss from impairment of
long-lived assets -- -- -- -- -- -- -- 83,321
Other non-recurring charges . -- -- -- -- -- -- 1,939 47,700
--------- --------- --------- --------- --------- --------- --------- ---------
Earnings (loss) before income
taxes and extraordinary
items 10,842 11,327 16,499 20,311 22,888 23,397 21,320 (109,864)
Income tax provision
(benefit) 4,066 4,248 6,187 7,616 8,812 9,008 8,208 (42,298)
--------- --------- --------- --------- --------- --------- --------- ---------
Earnings (loss) before
extraordinary items(1) 6,776 7,079 10,312 12,695 14,076 14,389 13,112 (67,566)
Extraordinary items -- -- 4,274 -- -- 508 -- 505
--------- --------- --------- --------- --------- --------- --------- ---------
Net earnings (loss) $ 6,776 $ 7,079 $ 6,038 $ 12,695 $ 14,076 $ 13,881 $ 13,112 $ (68,071)
========= ========= ========= ========= ========= ========= ========= =========
Per Common Share-fully
dilluted:
Earnings (loss) before
extraordinary items $ .39 $ .40 $ .44 $ .50 $ .53 $ .54 $ .52 $ (3.03)
Net earnings (loss) .39 .40 .28 .50 .53 .52 .52 (3.06)
========= ========= ========= ========= ========= ========= ========= =========
- ---------
(1) Extraordinary items relate to extinguishments of debt. See note 14 to
Consolidated Financial Statements.
(2) Restatement represents the Company's recalculation of its loss on impairment
of long-lived assets, as well as the Company's write-off of deferred
pre-opening costs in connection with its change in estimate as it relates to
such costs. See note 17 to Consolidated Financial Statements.
44
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-------
Independent Auditors' Report ...................................... 46
Consolidated Balance Sheets at December 31, 1994 and 1995 ........ 47
Consolidated Statements of Operations for the years ended
December 31, 1993, 1994 and 1995 .................................. 48
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1993, 1994 and 1995 ............................ 49
Consolidated Statements of Cash Flows for the years ended
December 31, 1993, 1994 and 1995 .................................. 50
Notes to Consolidated Financial Statements ........................ 51
Schedule II--Valuation and Qualifying Accounts .................... 80
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted because
they are not required under the related instructions, are inapplicable or the
information has been provided in the Consolidated Financial Statements or the
Notes thereto.
45
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Integrated Health Services, Inc.:
We have audited the accompanying consolidated financial statements of
Integrated Health Services, Inc. and subsidiaries (the Company) as listed in the
accompanying index. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule listed in the
accompanying index. These consolidated financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Integrated
Health Services, Inc. and subsidiaries at December 31, 1994 and 1995 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in notes 1 and 17 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," in 1995.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
March 22, 1996
46
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
--------------------
1995,
AS RESTATED
1994 (NOTE 17)
------ --------------
Assets
Current Assets:
Cash and cash equivalents ..................................... $ 60,689 $ 38,917
Temporary investments ......................................... 2,658 2,387
Patient accounts and third-party payor settlements
receivable, net (note 3) ..................................... 163,341 230,282
Supplies, inventories, prepaid expenses and other current
assets ....................................................... 25,470 25,629
Income tax receivable.......................................... -- 16,517
------------ --------------
Total current assets ........................................ 252,158 313,732
Property, plant and equipment, net (note 5) .................... 628,182 758,127
Assets held for sale (note 2) .................................. 66,106 --
Intangible assets (notes 2 and 6) .............................. 260,688 288,033
Investments in and advances to affiliates (note 4) ............ 15,593 29,362
Other assets ................................................... 33,262 44,476
------------ --------------
Total assets ................................................ $1,255,989 $1,433,730
============ ==============
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt (note 8) ................. $ 8,972 $ 5,404
Accounts payable and accrued expenses (note 7) ................ 161,117 172,013
Income taxes .................................................. 5,686 --
------------ --------------
Total current liabilities ................................... 175,775 177,417
------------ --------------
Long-term debt (note 8):
Convertible subordinated debentures ........................... 258,750 258,750
Other long-term debt less current maturities .................. 283,730 506,507
------------ --------------
Total long-term debt ........................................ 542,480 765,257
------------ --------------
Deferred income taxes (note 11) ................................ 75,656 52,279
Deferred gain on sale-leaseback transactions (note 2) ......... 8,267 7,249
Commitments and contingencies (notes 4, 9, 10 and 12)
Stockholders' equity (note 10):
Preferred stock, authorized 15,000,000 shares; no shares issued
and outstanding in 1994 and 1995 ............................. -- --
Common stock, $0.001 par value. Authorized 150,000,000 shares;
issued 20,917,623 shares in 1994 and 21,785,334 in 1995
(including 400,600 treasury shares in 1995) .................. 21 22
Additional paid-in capital .................................... 392,402 410,345
Retained earnings ............................................. 61,388 33,951
Treasury stock, at cost (400,600 shares in 1995)(note 10)...... -- (12,790)
------------ --------------
Total stockholders' equity .................................. 453,811 431,528
------------ --------------
Total liabilities and stockholders' equity .................. $1,255,989 $1,433,730
============ ==============
See accompanying notes to consolidated financial statements.
47
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
----------------------------------
1995,
AS RESTATED
1993 1994 (NOTE 17)
-------- ---------- -------------
Net revenues:
Basic medical services ................................ $113,508 $269,817 $ 368,569
Specialty medical services ............................ 162,017 404,401 770,554
Management services and other ......................... 20,779 37,884 39,765
---------- ---------- -------------
Total revenues ...................................... 296,304 712,102 1,178,888
---------- ---------- -------------
Costs and expenses:
Operating expenses:
Salaries, wages, and benefits ........................ 131,705 332,812 549,766
Other operating expenses ............................. 81,231 195,319 338,785
Corporate administrative and general .................. 16,832 37,041 56,016
Depreciation and amortization ......................... 8,126 26,367 39,961
Rent (note 9) ......................................... 23,156 42,158 66,125
Interest (net of investment income of $2,669, $1,121
and $1,876 for the years ended December 31, 1993, 1994
and 1995, respectively)(note 8) ...................... 5,705 20,602 38,977
Loss from impairment of long-lived assets (note 17).... -- -- 83,321
Other non-recurring charges (notes 6 and 17)........... -- -- 49,639
---------- ---------- -------------
Total costs and expenses ............................ 266,755 654,299 1,222,590
---------- ---------- -------------
Earnings (loss) before equity in earnings of
affiliates, income taxes and extraordinary items .. 29,549 57,803 (43,702)
Equity in earnings of affiliates (note 4)............... 1,241 1,176 1,443
---------- ---------- -------------
Earnings (loss) before income taxes and
extraordinary items ............................... 30,790 58,979 (42,259)
Federal and state income taxes (note 11) ............... 12,008 22,117 (16,270)
---------- ---------- -------------
Earnings (loss) before extraordinary items ......... 18,782 36,862 (25,989)
Extraordinary items (note 14) .......................... 2,275 4,274 1,013
---------- ---------- -------------
Net earnings (loss).................................. $ 16,507 $ 32,588 $ (27,002)
========== ========== =============
Per Common Share--primary:
Earnings (loss) before extraordinary item ............. $ 1.39 $ 1.99 $ (1.21)
Net earnings (loss) ................................... 1.22 1.75 (1.26)
========== ========== =============
Per Common Share--fully diluted:
Earnings (loss) before extraordinary item ............. $ 1.35 $ 1.73 $ (1.21)
Net earnings (loss) ................................... 1.22 1.57 (1.26)
========== ========== =============
See accompanying notes to consolidated financial statements.
48
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
ADDITIONAL
PREFERRED COMMON PAID-IN RETAINED TREASURY
STOCK STOCK CAPITAL EARNINGS STOCK TOTAL
------------ --------- ------------ ----------- ---------- -----------
Balance at December 31, 1992 $ -- $ 12 $ 133,310 $ 12,691 $ -- $146,013
Issuance of 1,265,539 shares of common stock in
connection with acquisitions -- 1 32,339 -- -- 32,340
Issuance of warrants in connection with acquisitions -- -- 2,100 -- -- 2,100
Exercise of warrants for 72,259 shares of common stock -- -- 677 -- -- 677
Issuance of 13,447 shares of common stock in
connection with the employee stock purchase plan -- -- 285 -- -- 285
Exercise of employee stock options for 795,008 shares
of common stock -- 1 12,128 -- -- 12,129
Tax benefit arising from exercise of employee stock
options -- -- 740 -- -- 740
Issuance of shares in connection with IntegraCare,
Inc.'s initial public offering -- -- 5,715 -- -- 5,715
Net earnings -- -- -- 16,507 -- 16,507
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1993 -- 14 187,294 29,198 -- 216,506
Issuance of 2,620,309 shares of common stock in
connection with acquisitions -- 2 92,429 -- -- 92,431
Issuance of warrants in connection with acquisitions .. -- -- 3,000 -- -- 3,000
Exercise of warrants for 113,848 shares of common
stock -- -- 2,508 -- -- 2,508
Issuance of 21,670 shares of common stock in
connection with employee stock purchase plan -- -- 551 -- -- 551
Issuance of 3,477,384 shares of common stock in
connection with a public offering, less issuance
costs -- 4 98,634 -- -- 98,638
Exercise of employee stock options for 521,992 shares
of common stock -- 1 7,986 -- -- 7,987
Declaration of cash dividend, $0.02 per share of
common stock -- -- -- (398) -- (398)
Net earnings -- -- -- 32,588 -- 32,588
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1994 -- 21 392,402 61,388 -- 453,811
Issuance of 385,216 shares of common stock in
connection with acquisitions -- 1 9,794 -- -- 9,795
Issuance of warrants in connection with acquisitions .. -- -- 339 -- -- 339
Issuance of 49,377 shares in connection with employee
stock purchase plan -- -- 1,339 -- -- 1,339
Acquisition of 400,600 shares of treasury stock -- -- -- -- (12,790) (12,790)
Exercise of employee stock options for 340,244 shares
of common stock -- -- 5,676 -- -- 5,676
Exercise of warrants for 44,181 shares of common stock -- -- 795 -- -- 795
Declaration of cash dividend, $0.02 per share of
common stock -- -- -- (435) -- (435)
Net loss -- -- -- (27,002) -- (27,002)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1995 $ -- $ 22 $ 410,345 $ 33,951 $ (12,790) $ 431,528
========= ========= ======== ======== ========= =========
See accompanying notes to consolidated financial statements.
49
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------------------
1995,
AS RESTATED
1993 1994 (NOTE 17)
--------- --------- -------------
Cash flows from operating activities:
Net earnings (loss) $ 16,507 $ 32,588 $ (27,002)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Extraordinary items 3,730 6,839 1,647
Loss from impairment of long-lived assets -- -- 83,321
Loss from termination of management contract, write-off
of deferred pre-opening costs and other -- -- 47,700
Undistributed results of joint ventures (83) (142) (431)
Depreciation and amortization 8,126 26,367 39,961
Deferred income taxes and other non-cash items 3,289 2,628 (22,920)
Amortization of deferred gain on sale-leaseback (308) (680) (1,018)
Increase in patient accounts and third-party payor
settlements receivable (20,443) (42,998) (62,512)
Increase in supplies, inventories, prepaid expenses and
other current assets (69) (349) (6,121)
Increase (decrease) in accounts payable and accrued
expenses (3,098) 1,205 1,177
Increase in income taxes receivable -- -- (16,517)
Increase (decrease) in income taxes payable 2,657 1,681 (5,686)
--------- --------- ---------
Net cash provided by operating activities 10,308 27,139 31,599
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of capital stock, net 18,745 109,683 8,399
Proceeds from long-term borrowings 383,389 308,467 510,659
Repayment of long-term borrowings (151,239) (191,338) (307,440)
Proceeds from sale-leaseback transactions, net -- 28,210 --
Deferred financing costs (8,142) (11,156) (5,512)
Purchase of treasury stock -- -- (12,790)
Dividends paid -- -- (398)
--------- --------- ---------
Net cash provided by financing activities 242,753 243,866 192,918
--------- --------- ---------
Cash flows from investing activities:
Purchases of temporary investments (241,758) (48,909) (401)
Sales of temporary investments 251,904 102,498 672
Business acquisitions (209,214) (152,791) (82,686)
Purchases of property, plant, and equipment (59,959) (91,354) (145,065)
Disposition of assets held for sale -- -- 33,153
Intangible assets (6,435) (7,201) (14,183)
Investment in affiliates and other assets (16,016) (21,401) (37,779)
--------- --------- ---------
Net cash used by investing activities (281,478) (219,158) (246,289)
--------- --------- ---------
Increase (decrease) in cash and equivalents (28,417) 51,847 (21,772)
Cash and cash equivalents, beginning of period 37,259 8,842 60,689
--------- --------- ---------
Cash and cash equivalents, end of period $ 8,842 $ 60,689 $ 38,917
========= ========= =========
See accompanying notes to consolidated financial statements.
50
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Basis of Presentation
Integrated Health Services, Inc. (IHS), a Delaware corporation, was formed on
March 25, 1986. The consolidated financial statements include the accounts of
IHS and its majority-owned and controlled subsidiaries (the Company). In
consolidation, all significant intercompany balances and transactions have been
eliminated. Investments in affiliates in which the Company has less than
majority ownership and control are accounted for by the equity method (see note
4).
(b) Medical Services Revenues
Medical services revenues are recorded at established rates and adjusted for
differences between such rates and estimated amounts reimbursable by third-party
payors when applicable. Estimated settlements under third-party payor
retrospective rate setting programs (primarily Medicare and Medicaid) are
accrued in the period the related services are rendered. Settlements receivable
and related revenues under such programs are based on annual cost reports
prepared in accordance with Federal and state regulations, which reports are
subject to audit and retroactive adjustment in future periods. In the opinion of
management, adequate provision has been made therefor, and such adjustments in
determining final settlements will not have a material effect on financial
position or results of operations. Basic medical services revenues represent
routine service (room and board) charges of geriatric and assisted living
facilities, exclusive of medical specialty units. Specialty medical services
revenues represent ancillary service charges of geriatric and assisted living
facilities, revenues generated by medical specialty units and revenues of
pharmacy, rehabilitation, diagnostic, respiratory therapy, home health, hospice
and similar service operations.
(c) Cash Equivalents and Temporary Investments
Cash equivalents consist of highly liquid debt instruments with original
maturities of three months or less at the date of investment by the Company.
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," which superseded SFAS No.
12. The Company's temporary investments, consisting primarily of preferred
stocks and municipal bonds, are classified as a trading security portfolio and
is recorded at their fair value of $2,658 and $2,387, at December 31, 1994 and
1995 respectively, with net unrealized gains or losses included in earnings.
Unrealized holding gains (losses) aggregated ($400) and $245 at December 31,
1994 and 1995, respectively. Realized gains and losses are recorded using the
specific identification basis to determine cost.
(d) Property, Plant and Equipment
The Company capitalizes costs associated with acquiring health care
facilities and related interests therein. Pre-acquisition costs represent direct
costs of the investigation and negotiation of the acquisition of operating
facilities; indirect and general expenses related to such activities are
expensed as incurred. Pre-construction costs represent direct costs incurred to
secure control of the development site, including the requisite certificate of
need and other approvals, and to perform other initial tasks which are essential
to the development and construction of a facility. Pre-acquisition and
pre-construction costs are transferred to construction in progress and
depreciable asset categories when the related tasks are completed. Interest cost
incurred during construction is capitalized. Non-refundable purchase option fees
related to operating leases are generally accounted for as leasehold interests
and treated as deposits until (1) the option is exercised, whereupon the deposit
is applied as a credit against the purchase price, or (2) the option period
expires, whereupon the deposit is written off as lease termination expense.
51
(d) Property, Plant and Equipment--(Continued)
Total costs of facilities acquired are allocated to land, land improvements,
equipment and buildings (or leasehold interests therein) based on their
respective fair values determined generally by independent appraisal. Cost in
excess of such identified fair values is classified as intangible assets of
businesses acquired.
(e) Depreciation
Depreciation is provided on the straight-line basis over the estimated useful
lives of the assets, generally 25 years for land improvements, 10 years for
equipment, 40 years for buildings and the term of the lease for costs of
leasehold interests and improvements.
(f) Deferred Financing Costs
The Company defers financing costs incurred to obtain long-term debt and
amortizes such costs over the term of the related obligation. Debt discount is
amortized using the debt outstanding (interest) method over the term of the
related debt.
(g) Deferred Pre-opening Costs
Prior to December 1995, direct costs incurred to initiate and implement new
medical specialty service units at nursing facilities (e.g., respiratory
therapy, rehabilitation and Alzheimer units) were deferred during the
pre-opening period and amortized on a straight-line basis over five years, which
corresponded to the period over which the Company receives reimbursement from
Medicare. Effective January 1, 1996, the Company changed its policy to expense
such costs when incurred. (See note 17).
(h) Intangible Assets Acquired
Goodwill and other intangible assets of businesses acquired are amortized by
the straight-line method over periods ranging from 10 to 40 years. At December
31, 1995, the Company had $286,895 of goodwill acquired between July 1993 and
December 1995, which goodwill is being amortized primarily over 40 years, the
period over which such amounts are recoverable from operating cash flows. (see
Note 6).
(i) Deferred Gains on Sale-Leaseback Transactions
Gains on the sales of nursing facilities which are leased back under
operating leases are initially deferred and amortized over the terms of the
leases in proportion to and as a reduction of related rental expense.
(j) Impairment of Long-Lived Assets
Management regularly evaluates whether events or changes in circumstances
have occurred that could indicate an impairment in the value of long-lived
assets. In December 1995, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In
accordance with the provisions of SFAS No. 121, if there is an indication that
the carrying value of an asset is not recoverable, the Company estimates the
projected undiscounted cash flows, excluding interest, of the related individual
facilities and business units (the lowest level for which there are identifiable
cash flows independent of the other groups of assets) to determine if an
impairment loss should be recognized. The amount of impairment loss is
determined by comparing the historical carrying value of the asset to its
estimated fair value. Estimated fair value is determined through an evaluation
of recent financial performance and projected discounted cash flows of its
facilities and business units using standard industry valuation techniques,
including the use of independent appraisals when considered necessary. If an
asset tested for recoverability was acquired in a business combination accounted
for using the purchase method, the related goodwill is included as part of the
carrying value and evaluated as described above in determining the
recoverability of that asset.
52
(j) Impairment of Long-Lived Assets--(Continued)
In addition to consideration of impairment upon the events or changes in
circumstances described above, management regularly evaluates the remaining
lives of its long-lived assets. If estimates are changed, the carrying value of
affected assets is allocated over the remaining lives.
Prior to adoption of SFAS No. 121 in 1995, the Company performed its analyses
of impairment of long-lived assets by consideration of the projected
undiscounted cash flows on an entity-wide basis. The effect of the adoption of
SFAS 121 in December 1995 required the Company to perform this analysis on a
facility-by-facility and individual business unit basis. This resulted in the
recognition of a loss on impairment of long-lived assets (see note 17). If the
facility-by-facility and individual business unit analysis had been adopted
prior to December 1995, the Company may have incurred the loss on impairment of
long-lived assets prior to December 1995.
(k) Income Taxes
Deferred income taxes are recognized for the tax consequences of temporary
differences between financial statement carrying amounts and the related tax
bases of assets and liabilities. Such tax effects are measured by applying
enacted statutory tax rates applicable to future years in which the differences
are expected to reverse, and the effect of a change in tax rates is recognized
in the period that includes the date of enactment.
(l) Earnings Per Share
Primary earnings per share is computed based on the weighted average number
of common and common equivalent shares outstanding during the periods. Common
stock equivalents include options and warrants to purchase common stock, assumed
to be exercised using the treasury stock method. Fully diluted earnings per
share is computed as described above, except that the weighted average number of
common equivalent shares is determined assuming the dilution resulting from the
issuance of the aforementioned options and warrants at the end-of-period price
per share, rather than the weighted average price for the period, and the
issuance of common shares upon the assumed conversion of the convertible
subordinated debentures. An adjustment for interest expense and amortization of
underwriting costs related to such debentures is added, net of tax, to earnings
for the purpose of calculating fully diluted earnings per share. Such adjustment
and the weighted average number of common and common equivalent shares used in
the computations of earnings per share were as follows:
YEARS ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995
------------ ------------ -------------
Weighted Average Shares:
Primary ................................ 13,478,683 18,568,599 21,463,464
Fully diluted .......................... 17,261,079 27,154,153 21,463,464
Adjustment for interest on convertible
debentures .............................$ 4,516 $ 10,048 $ --
============ ============ =============
(m) Business and Credit Concentrations
The Company's medical services revenues are provided through 122 owned and
leased facilities located in 30 states throughout the United States. The Company
generally does not require collateral or other security in extending credit to
patients; however, the Company routinely obtains assignments of (or is otherwise
entitled to receive) benefits receivable under the health insurance programs,
plans or policies of patients (e.g., Medicare, Medicaid, commercial insurance
and managed care organizations) (see note 3).
53
(n) Merger with IntegraCare, Inc.
In August 1995, the Company merged with IntegraCare, Inc. (Integra) which
provides physical, occupational and speech services to skilled nursing
facilities, hospitals, outpatient clinics, home health agencies and schools in
Florida. The Company exchanged 681,723 shares of its Common Stock for all of the
outstanding stock of Integra. The merger was accounted for using the pooling of
interests method and the accompanying financial statements have been presented
as though the merger had occurred effective December 31, 1992. Accordingly, the
consolidated financial statements and financial information included in these
notes to the consolidated financial statements for 1993 and 1994 have been
restated to combine the financial data of the Company and Integra for those
periods. The accounting practices of the Company and Integra were comparable;
therefore no adjustments to net assets of either enterprise were required to
effect the combination.
The accompanying consolidated statements of operations for 1993 and 1994 have
been restated to include revenues of $15,385 and $29,650, respectively, and net
earnings of $1,036 and $1,648, respectively, related to Integra's operations.
The consolidated statement of operations for 1995 includes $17,886 and $891 of
revenues and net earnings, respectively, related to the operations of Integra
prior to the date of the merger.
(o) Management Agreements
IHS manages geriatric care facilities under contract for others for a fee
which generally is equal to 4% to 8% of the gross revenue of the geriatric care
facility. Under the terms of the contract, IHS is responsible for providing all
personnel, marketing, nursing, resident care, dietary and social services,
accounting and data processing reports and services for these facilities,
although such services are provided at the facility owner's expense. In
addition, certain management agreements also provide IHS with an incentive fee
based on the amount of the facility's operating income which exceeds stipulated
amounts. Management fee revenues are recognized when earned and billed,
generally on a monthly basis. Incentive fees are recognized when operating
results of managed facilities exceed amounts required for incentive fees in
accordance with the terms of the management agreement. Management agreements
generally have an initial term of ten years, with IHS having a right to renew in
most cases. Contract acquisition costs for legal and other direct costs incurred
by IHS to acquire long-term management contracts are capitalized and amortized
over the term of the related contract. Management periodically evaluates its
deferred contract costs for recoverability by assessing the projected
undiscounted cash flows, excluding interest, of the managed facilities; any
impairment in the financial condition of the facility will result in a writedown
by IHS of its deferred contract costs.
(p) Reclassifications
Certain amounts presented in 1993 and 1994 have been reclassified to conform
with the presentation for 1995.
54
(2) BUSINESS ACQUISITIONS
ACQUISITIONS DURING THE YEAR ENDED DECEMBER 31, 1995
During the year ended December 31, 1995, the Company acquired the following
geriatric care facilities:
MONTH TRANSACTION TYPE FACILITY NAME LOCATION BEDS
- ----------- ----------------- ----------------- ---------------- -------
August..... Purchase Avenel Plantation, FL 120
August..... Operating Lease Cherry Creek Aurora, CO 190
September . Operating Lease Mill Hill Worcester, MA 101
September . Operating Lease Winthrop Medford, MA 142
November .. Purchase Governor's Park Barrington, IL 150
December .. Purchase Carrington Pointe Fresno, CA 172
The total cost of these acquisitions was approximately $28,600 which includes
legal fees and other costs incurred to secure the facilities or leasehold
interests in the facilities. In addition, the Company purchased Hershey at
Woodlands and Clara Burke facilities, which had previously been leased, at a
total cost of approximately $14,700.
In January 1995, the Company acquired four ancillary services companies which
provide mobile x-ray and electrocardiogram services to long-term care and
subacute care facilities. The total purchase price was $3,600, including $300
representing the issuance of 7,935 shares of the Company's Common Stock. Total
goodwill at the date of acquisition was $3,200.
In February 1995, the Company acquired all of the assets of ProCare Group,
Inc. ("ProCare") and its affiliated entities, which provide home health services
in Broward, Dade and Palm Beach counties, Florida. The total purchase price was
$3,900, including $3,600 representing the issuance of 95,062 of the Company's
Common Stock. In addition, the Company incurred direct costs of acquisition of
$675. Total goodwill at the date of acquisition was $4,400.
In February 1995, the Company purchased the assets of Epsilon Medical
Equipment Corporation ("Epsilon"), which provides mobile video fluoroscopy
procedures to skilled nursing facilities for the diagnosis of dysphasia for the
aspiration of foods and liquids causing pneumonia. The total purchase price was
$200 plus an earn-out based on the future earnings of the business, payable in
shares of the Company's Common Stock. In addition, the Company incurred direct
costs of acquisition of $500 and repaid debt of Epsilon of $961. Total goodwill
at the date of acquisition was $1,900.
In February 1995, the Company entered into a management agreement to manage
Total Home Health Care, Inc. and Total Health Services, Inc. (collectively
"Total Home Health"), which are private-duty and Medicare certified home health
agencies in the Dallas/Ft. Worth, Texas market, pursuant to which a subsidiary
of the Company receives a management fee of ten dollars per home visit by Total
Home Health personnel. The Company was also granted a five-year option to
purchase Total Home Health for a purchase price of $5,000.
In March l995, the Company entered into a management agreement to manage 34
geriatric care facilities in Texas, California, Florida, Nevada and Mississippi
(the "Preferred Care Facilities"). The management agreement has a term of ten
years and provides for payments to the Company based upon a percentage of
adjusted gross revenues and adjusted EBITDA of the Preferred Care Facilities.
The Company has also been granted a purchase option whereby the Company has the
right to purchase the Preferred Care Facilities, between March 29, 1996 and the
date of the termination of the management agreement, for $80,000 plus
adjustments for inflation. The Company paid a non-refundable purchase option
deposit of $10,200 which will be applied against the purchase price if the
Company elects to acquire the facilities.
55
In March 1995, the Company purchased Samaritan Management, Inc., which
provides hospice services in Michigan. Total purchase price was $5,500. In
addition, the Company incurred direct costs of acquisition of $1,000. Total
goodwill at the date of acquisition was $6,800.
In March 1995, the Company acquired substantially all the assets of Fidelity
Health Care, Inc., a company which provides home healthcare services, temporary
staffing services and infusion services in Ohio. Total purchase price was
$2,100. In addition, the Company incurred direct costs of acquisition of $350.
Total goodwill at the date of acquisition was $2,300.
In March 1995, the Company and the stockholders of Patient Care Pharmacy,
Inc., which the Company acquired in June 1993, terminated all rights to
contingent payments in consideration of a payment to such stockholders of $3,500
in the form of 92,434 shares of the Company's Common Stock.
From January through April 1995, Integra, prior to its merger with IHS,
acquired five physician practices for $545 and $589 of Integra common stock.
Total goodwill at the date of acquisition was $873.
In April 1995, the Company purchased the assets of Hometown Nurses Registry,
which provides home healthcare in Tennessee. The total purchase price was $500.
In addition, the Company incurred direct costs of acquisition of $150. Total
goodwill at the date of acquisition was $646.
In April 1995, the Company purchased the assets of Bernard's X-Ray Mobile
Service which provides x-ray services to long-term care and subacute care
facilities. The total purchase price was $100. Total goodwill at the date of
acquisition was $90.
In May 1995, the Company purchased the assets of Stewart's Portable X-Ray,
Inc. which provides x-ray services to long-term care and subacute care
facilities. The total purchase price was $1,900. In addition, the Company
incurred direct costs of $100. Total goodwill at the date of acquisition was
$1,800.
In May 1995, the Company purchased Immediate Care Clinic, an emergency clinic
in Amarillo, Texas for approximately $225.
In June 1995, the Company acquired three ancillary services companies which
provide mobile x-ray and electrocardiogram services to long-term and subacute
care facilities. The total purchase price was $2,200. Total goodwill at the date
of acquisition was $2,500.
In August 1995, the Company acquired all of the outstanding stock of Senior
Life Care Enterprises, Inc. ("SLC") which provides home health, supplemental
staffing, and management services. The total purchase price was $6,000
representing the issuance of 189,785 shares (the "SLC shares") of the Company's
Common Stock. The acquisition agreement provides for the issuance of additional
shares of Common Stock, if at the time a registration statement covering the
resale of the SLC shares is declared effective the fair market value of the SLC
shares is less than $6,000. In addition, the Company incurred direct costs of
acquisition of $700. The total goodwill at the date of acquisition was $5,600.
In September 1995, the Company purchased Mobile X-Ray Limited Partnership, a
provider of electrocardiogram services in Maryland, Virginia, West Virginia, and
the District of Columbia. The total purchase price was $1,400, The total
goodwill at the date of acquisition was $1,200.
In September 1995, the Company purchased Southern Nevada Physical Therapy
Associates, which provides outpatient physical therapy for $500.
In November 1995, the Company purchased Chesapeake Health, which provides
electrocardiogram services. The total purchase price was $1,100. In addition,
the Company incurred direct costs of acquisition of $75. The total goodwill at
the date of acquisition was $1,015.
56
In December 1995, the Company purchased Miller Portable X-Ray. The total
purchase price was $295. The total goodwill at the date of purchase was $275.
ACQUISITIONS DURING THE YEAR ENDED DECEMBER 31, 1994
During the year ended December 31, 1994, the Company acquired the following
geriatric care facilities:
MONTH TRANSACTION TYPE FACILITY NAME LOCATION BEDS
- ----------- ----------------- ---------------------- ---------------- --------
April ..... Purchase Homestead Denton, MD 52
July ...... Operating Lease IFIDA Pennsylvania & 71
Delaware
August .... Operating Lease Litchfield Facilities * 5,212
September . Purchase Amarillo Amarillo, TX 160
December . Purchase Houston Hospital Houston, TX 60
- ------------
* Alabama, Colorado, Florida, Georgia, Idaho, Kansas, Kentucky, Louisiana,
North Carolina, Tennessee, Texas and West Virginia.
The total cost of these acquisitions was approximately $42,186 which includes
purchase option deposits on the operating leases, legal fees and other costs
incurred to secure the facilities or leasehold interest in the facilities. In
addition to the acquisitions above, in June 1994 the Company acquired the real
property of the Dallas at Treemont facility, which had previously been leased by
the Company since February 1989, at a total cost of approximately $22,625. Also,
in June 1994, the Company sold and leased back two of its geriatric care
facilities (Mountain View and St. Louis at Gravois) in a transaction with
affiliates of Capstone Capital Corporation, a newly formed real estate
investment trust ("Capstone"). The net proceeds received by the Company were
approximately $18,230. In December 1994, the Company sold and leased back its
Northern Virginia facility from Capstone with net proceeds of approximately
$9,980 (see note 16). In connection with these three transactions with Capstone,
the Company had deferred gains of $7,900 and will recognize such gains over the
lives of the leases (10 to 15 years) on a straight-line basis.
On April 27, 1994 the Company sold its approximate 92% interest in
Professional Community Management ("PCM") to PCM at its book value of $4,300.
In June 1994, the Company acquired USMM, a company engaged in the management
of physician practices for $30 and $1,093 in stock. Total goodwill at the date
of acquisition was $1,940.
On July 7, 1994, the Company acquired all of the outstanding capital stock of
Cooper Holding Corporation ("Cooper"), a Delaware corporation in the business of
providing mobile x-ray and electrocardiogram services to long-term care and
subacute care facilities in California, Florida, Georgia, Indiana, Nebraska,
Ohio, Oklahoma, Texas and Virginia. The total purchase price was approximately
$44,500, including $19,890 through the issuance of 593,953 shares of the
Company's Common Stock and options to acquire 51,613 shares of the Company's
Common Stock. In addition, the Company incurred direct costs of acquisition of
$7,400 and repaid debt of Cooper of $27,158. Total goodwill from this
transaction was $73,945.
In August 1994, the Company acquired five outpatient clinics, four physician
practices, and a home healthcare agency for $2,454 and $1,165 of stock. Total
goodwill at the date of acquisition was $3,014.
On August 1, 1994, the Company acquired certain assets of Fort Wayne
Radiology, a mobile x-ray company servicing Texas. The total purchase price was
fifteen thousand dollars.
57
On August 8, 1994 the Company acquired substantially all the assets of Pikes
Peak Pharmacy, Inc., a company which provides pharmacy services to patients at
nine facilities in Colorado Springs, Colorado which have an aggregate of 625
beds. The total purchase price was $600. Total goodwill at the date of
acquisition was $417.
On September 23, 1994 the Company acquired substantially all of the assets of
Pace Therapy, Inc., ("Pace"), a company which provides physical, occupational,
speech and audiology therapy services to approximately 60 facilities in Southern
California and Nevada. The total purchase price was $5,800, representing the
issuance of 181,569 shares of the Company's Common Stock. In addition, the
Company incurred direct costs of acquisition of $1,300 and repaid debt of Pace
of $1,568. Total goodwill at the date of acquisition was $6,672.
On October 4, 1994, the Company acquired certain assets of Home X-Ray of
Philadelphia ("Home X-Ray"), a mobile x-ray company. The total purchase price
was $150. Total goodwill at the date of acquisition was $111.
On October 7, 1994 the Company acquired all of the outstanding stock of
Amcare, Inc. ("Amcare"), an institutional pharmacy serving approximately 135
skilled nursing facilities in California, Minnesota, New Jersey and
Pennsylvania. The total purchase price was $21,000, including $10,500
representing the issuance of 291,101 shares of the Company's Common Stock. In
addition, the Company incurred direct costs of acquisition of $3,700. Total
goodwill at the date of acquisition was $20,300.
On October 11, 1994 the Company acquired substantially all of the assets of
Pharmaceutical Dose Service of La., Inc. ("PDS"), an institutional pharmacy
serving 14 facilities. The total purchase price was $4,190, including $3,900
representing the issuance of 122,117 shares of the Company's Common Stock. In
addition, the Company incurred direct costs of acquisition of $1,375. Total
goodwill at the date of acquisition was $5,696.
On November 2, 1994 the Company acquired all of the outstanding stock of
CareTeam Management Services, Inc. ("CareTeam"), a home healthcare company
serving Arizona, Kansas, Missouri, New Mexico, North Carolina and Texas. The
total purchase price was $5,900, including $5,200 representing the issuance of
147,068 shares of the Company's Common Stock. In addition, the Company incurred
direct costs of acquisition of $675. Total goodwill at the date of acquisition
was $7,651.
On November 3, 1994 the Company acquired all of the outstanding stock of
Therapy Resources, Inc., a company which provides physical, occupational, speech
and audiology services to approximately 22 geriatric care facilities and
operates seven outpatient rehabilitation facilities. The total purchase price
was $1,600. In addition, the Company incurred direct costs of acquisition of
$300. Total goodwill at the date of acquisition was $3,776.
On November 3, 1994 the Company acquired all of the outstanding stock of The
Rehab People, Inc. ("Rehab People"), a company which provides physical,
occupational and speech therapy services to approximately 38 geriatric care
facilities in Delaware, New York, North Carolina and Pennsylvania. The total
purchase price was $10,000, representing the issuance of 318,471 shares of the
Company's Common Stock. In addition, the Company incurred direct costs of
acquisition of $1,875. Total goodwill at the date of acquisition was $13,693.
On November 3, 1994, the Company acquired certain assets of Portable X-Ray
Service of Rhode Island, Inc. ("PXSRI"), a mobile x-ray company. The total
purchase price was $2,000, including $700 representing the issuance of 19,739
shares of the Company's Common Stock. Total goodwill at the date of acquisition
was $1,892.
On November 18, 1994 the Company acquired substantially all of the assets of
Medserv Corporation's Hospital Service Division ("Primedica"), which provides
respiratory therapy services. The total purchase price was $21,000. In addition,
the Company incurred direct costs of acquisition of $4,600. Total goodwill at
the date of acquisition was $21,348.
58
On December 9, 1994, the Company acquired all rights of Jule Institutional
Supply, Inc. under a management agreement with Samaritan Care, Inc. ("Samaritan
Care"), an entity which provides hospice services. The total purchase price was
$14,000. In addition, the Company incurred direct costs of acquisition of $720.
The Company also acquired the membership interests in Samaritan Care for no
additional consideration. Total goodwill at the date of acquisition was $18,632.
On December 23, 1994, the Company acquired all of the outstanding stock of
Partners Home Health, Inc. ("Partners"), a home health infusion company
operating in seven states. The total purchase price was $12,400, representing
the issuance of 332,810 shares of the Company's Common Stock. In addition, the
Company incurred direct costs of acquisition of $1,025. Total goodwill at the
date of acquisition was $17,146.
ACQUISITIONS DURING THE YEAR ENDED DECEMBER 31, 1993
During the year ended December 31, 1993, the Company acquired the following
geriatric care facilities:
MONTH TRANSACTION TYPE FACILITY NAME LOCATION BEDS
- ----------- ----------------- --------------------- ------------------------ --------
March ..... Purchase Grandview Des Moines, IA 93
April ..... Operating Lease Hawthorne Charlotte, NC 142
June ...... Purchase Oakwood Alexandria, VA 114
December . Purchase Central Park Florida, Pennsylvania
Lodges Facilities and Texas 5,210
December . Purchase Southmark Facilities Vero Beach, Fort Pierce 337
and Orlando, FL
December . Purchase Colorado Springs Colorado Springs, CO 155
The total cost of these acquisitions was approximately $245,900 which
includes a purchase option deposit on the operating lease, legal fees and other
costs incurred to secure the facilities or leasehold interest in the facility.
The total purchase price of the Central Park Lodges, Inc. ("CPL") acquisition
was $185,300, and was financed by the Company's term loan and revolving credit
line facility (see note 8). In addition to the acquisitions above, in March
1993, the Company acquired the real property of the Alpine Claremont and Alpine
Derry facilities, which had previously been leased by the Company since June
1989, at a total cost of approximately $13,000.
In December 1993, the Company acquired the capital stock of CPL, a
wholly-owned subsidiary of Trizec Corporation, Ltd. ("Trizec"), a publicly-held
Canadian real estate company. The Company acquired substantially all of the
United States operations of CPL, consisting of 30 geriatric care facilities (24
owned and six leased) located in Florida, Pennsylvania and Texas and nine
retirement facilities (all owned) located in Florida, which facilities have an
aggregate of 5,210 beds; a division which provides pharmacy consulting services
and supplies prescription drugs and intravenous medications to geriatric care
facilities through five pharmacies in Florida, Pennsylvania and Texas; and a
division which provides healthcare personnel and support services to home
healthcare and institutional markets through five branch locations in Florida
and Pennsylvania. The total purchase price was $185,300, which was allocated
primarily to property, plant and equipment, based on the appraised value of the
properties, with the remaining purchase price allocated to current assets and
liabilities.
In connection with the purchase of the Southmark facilities, the Company
obtained a loan of $9,750, which bears interest at 8.094%, matures on December
20, 2001, and is secured by a lien on all assets (excluding receivables) of such
facilities. Also, the Company issued a five year warrant to purchase 50,000
shares of common stock at a price of $26.65 per share (valued at $700).
59
In connection with the purchase of the Colorado Springs facility, the Company
obtained a loan of $8,500, which bears interest at prime plus 125 basis points
floating, matures on December 31, 2000 and is secured by a lien on the facility.
In June 1993, the Company acquired all of the outstanding capital stock of
Patient Care Pharmacy, Inc. ("PCP"), a business providing pharmacy services to
geriatric care facilities and other healthcare providers in Southern California.
The total cost for PCP was $10,400, including $9,840 paid through the exchange
of 425,674 shares of the Company's Common Stock. In addition, the Company had
agreed to make contingent payments in shares of common stock following each of
the next three years based upon the earnings of PCP. In March 1995, the Company
and the PCP stockholders terminated all rights to contingent payments in
consideration for a payment of $3,500 in the form of 92,434 shares of the
Company's Common Stock.
In July 1993, Comprehensive Post Acute Services, Inc. ("CPAS"), a newly
formed subsidiary, 80% owned by the Company and 20% owned by Chi Systems, Inc.,
formerly Chi Group, Inc. ("Chi"), acquired joint ventures and contracts to
develop and manage subacute programs from Chi. Chi is a healthcare consulting
company in which John Silverman, a director of the Company, is President and
Chief Financial Officer and an approximate 16% stockholder. The purchase price
was $200, and the Company made available a loan commitment of $300 for working
capital purposes, which bore interest at a rate equal to Citicorp's base rate
plus 4%. In July 1994, the Company purchased the remaining 20% of CPAS from Chi
for $160, paid through the issuance of 5,200 shares of the Company's Common
Stock.
In September 1993, the Company acquired all of the capital stock of Health
Care Systems, Inc., which owns Health Care Consulting, Inc. ("HCC") and RMI Inc.
("RMI"), for $1,850 in cash and a five-year earn-out, based upon achievement of
pre-tax earnings targets, not to exceed $3,750. HCC is a reimbursement and
consulting company specializing in subacute rehabilitation programs. RMI
provides direct therapy services, including physical therapy, occupational
therapy and speech pathology, to healthcare facilities. The Company has agreed
to issue warrants to purchase 20,000 shares of Common Stock at a purchase price
per share of $37.85 in exchange for cancellation of the earn-out.
In December 1993, the Company purchased all of the capital stock of
Associated Therapists Corporation, d/b/a Achievement Rehab ("Achievement"), a
provider of rehabilitation therapy services on a contract basis to various
geriatric facilities in Minnesota, Indiana and Florida. The purchase price of
$22,500 consists of 839,865 shares of the Company's Common Stock plus a
contingent earn-out payment, also payable in shares of the Company's Common
Stock, based upon increases in Achievement's earnings in 1994, 1995 and 1996
over a base amount.
All business acquisitions described above have been accounted for by the
purchase method.
Unaudited pro forma combined results of operations of the Company for the
years ended December 31, 1994 and 1995 are presented below. Such pro forma
presentation has been prepared assuming that the acquisitions had been made as
of January 1, 1994.
YEARS ENDED
DECEMBER 31,
-------------------------
1994 1995
------------ ------------
Revenues .................................. $1,069,695 $1,237,777
Earnings (loss) before extraordinary items 17,555 (32,852)
Net earnings (loss)........................ 13,281 (33,865)
Per common share--primary:
Earnings (loss) before extraordinary items .86 (1.52)
Net earnings (loss)....................... $ .65 $ (1.57)
========== ============
60
The unaudited pro forma results include the historical accounts of the
Company and the historical accounts for the acquired businesses adjusted to
reflect (1) depreciation and amortization of the acquired identifiable tangible
and intangible assets based on the new cost basis of the acquisitions, (2) the
interest expense resulting from the financing of the acquisitions, (3) the new
cost basis for the allocation of corporate overhead expenses and (4) the related
income tax effects. The pro forma results are not necessarily indicative of
actual results which might have occurred had the operations and management teams
of the Company and the acquired companies been combined in prior years.
(3) PATIENT ACCOUNTS AND THIRD-PARTY PAYOR SETTLEMENTS RECEIVABLE
Patient accounts and third-party payor settlements receivable consist of the
following as of December 31, 1994 and 1995:
1994 1995
---------- -----------
Patient accounts ...................................... $165,880 $226,821
Allowance for doubtful accounts ....................... 16,630 18,128
---------- -----------
149,250 208,693
Third-party payor settlements, less allowance for
contractual adjustments of $8,535 and $11,442.......... 14,091 21,589
---------- -----------
$163,341 $230,282
============ ===========
Gross patient accounts receivable and third-party payor settlements
receivable from the Federal government (Medicare) were $49,551 and $73,726 at
December 31, 1994 and 1995, respectively. Medicare receivables include pending
requests for exceptions to the Medicare established routine cost limitations for
the reimbursement of costs exceeding these limitations (before related
allowances for contractual adjustments) of $6,161 and $7,611 at December 31,
1994 and 1995, respectively. Amounts receivable from various states (Medicaid)
were $38,212 and $57,723 respectively, at such dates, which relate primarily to
the states of Ohio, Florida, Pennsylvania, Louisiana and Texas.
(4) INVESTMENTS IN AND ADVANCES TO AFFILIATES
The Company's investments in and advances to affiliates at December 31, 1994
and 1995 are summarized as follows:
1994 1995
--------- ----------
Investments accounted for by the equity method:
HPC............................................ $ -- $ 7,967
Tutera ........................................ 5,961 7,788
Speciality .................................... 4,377 9,250
Other ......................................... 1,018 898
--------- ----------
11,356 25,903
Other investments, accounted for at cost ...... 4,237 3,459
--------- ----------
$15,593 $29,362
========= ==========
Investments in significant unconsolidated affiliates accounted for by the
equity method are summarized below.
HPC AMERICA, INC.
In September 1995, a wholly owned subsidiary of IHS, Southwood invested
$8,200 for a 40% interest in HPC America, Inc. ("HPC"), a Delaware corporation
that operates home infusion and home health care companies, in addition to
owning physician practices. Subject to certain material transactions
61
requiring the approval of Southwood, the business is conducted under the
direction of the Chief Executive Officer and President of HPC. Southwood has a
right of first refusal to purchase the remaining 60% interest in HPC at any time
through March 1997 and the exclusive right to purchase the remaining 60%
interest in HPC for the six month period beginning March 1997, in each case
based upon a multiple of HPC's earnings.
TUTERA HEALTH CARE MANAGEMENT, L.P. (TUTERA)
In January, 1993, a wholly-owned subsidiary of IHS, Integrated Health
Services of Missouri, Inc. ("IHSM"), invested $4,650 for a 49% interest in
Tutera Health Care Management, L.P. (the"Partnership" or"Tutera"), a partnership
newly formed to manage and operate approximately 8,000 geriatric care and
assisted retirement beds. Cenill, Inc., a wholly owned subsidiary of Tutera
Group, Inc., is the sole general partner of the Partnership and owns a 51%
interest therein. Subject to certain material transactions requiring the
approval of IHSM, the business of the Partnership is conducted by its general
partner. IHSM has the right to become a 51% owner and sole general partner of
the Partnership, or to purchase the general partner's entire interest in the
Partnership, in each case for a price based upon a multiple of the Partnership's
earnings, under the following circumstances: (a) if earnings decline and the
general partner fails to implement operational changes recommended by IHS; (b)
if the general partner discontinues its relationship with the partnership and
the general partner fails to accept IHS' suggested replacement; or (c) if the
general partner defaults on its revolving credit and security agreement with
Continental Bank and fails to pay obligations within 36 months of the default.
Also, the Company has guaranteed the debt of the Partnership up to $4,200, which
bears interest at prime plus 1 3/4 % and matures in October 1998.
SPECIALITY CARE PLC (SPECIALITY)
In April 1993, a wholly owned subsidiary of IHS, Southwood, acquired a 21.28%
interest in the common stock and a 47.64% interest in the 6% cumulative
convertible preferred stock of Speciality Care PLC, an owner and operator of
geriatric care facilities in the United Kingdom. The total cost of the
investment was $748 for the common stock and $2,245 for the preferred stock. The
preferred stock contains certain preferences as to liquidation. In 1994,
Southwood loaned an additional $1,000 to Speciality Care bearing interest at 9%.
In January 1995 Southwood applied $627 of the loan to pay for additional shares
of common and preferred stock of Speciality Care PLC subscribed for in November
1994.
In June 1995 the Company loaned an additional $8,575 to Speciality Care
bearing interest at 12%, this loan was subsequently repaid in August 1995. In
addition the Company invested an additional $4,384 in Speciality Care. As a
result of the Company's additional investment, the Company's interest in the
Common Stock is 21.30% and 63.65% for the 6% cumulative convertible preferred
stock.
ASSISTED LIVING GROUP VENTURE (ALG)
IHS Assisted Living Group-Fairfax, Inc. (IFI), a wholly-owned subsidiary of
IHS and Sunrise Partners, L.P. (Sunrise) had 49% and 51% joint venture
interests, respectively, in Assisted Living Group-Fairfax Associates, a Delaware
general partnership operating an assisted living center in Fairfax, Virginia.
Each venturer shared in the venture's capital, earnings and losses in accordance
with their respective joint venture interests. Sunrise manages the operations of
the venture and had the option to purchase IFI's interest at any time. In May
1994, the Company sold its 49% interest in both joint ventures at its book value
of approximately $1,600 to Assisted Living Group--Fairfax Associates.
WESTCLIFF MANOR VENTURE (WESTCLIFF)
Integrated of Amarillo, Inc. (IAI), a wholly-owned subsidiary of IHS, and
Integrated of Westcliff Park, Inc. (IWP) had 49% and 51% joint venture
interests, respectively, in a Delaware general partnership operating Westcliff
Manor Nursing Home, a 160 bed facility in Amarillo, Texas. The Company
62
managed the operations of the venture for a management fee of 6% of gross
revenues. The venturers shared in the venture's capital, earnings and losses in
accordance with their respective interests in the venture, except that net
taxable operating losses were allocated 100% to IWP. In September 1994, the
Company purchased the remaining 51% interest in this joint venture at a cost of
$586.
The Company's equity in earnings (loss) of affiliates for the years ended
December 31, 1993, 1994 and 1995 is classified as other revenue and is
summarized as follows:
1993 1994 1995
-------- -------- --------
HPC.......... $ -- $ -- $ (185)
ALG ......... 72 54 --
Westcliff .. (289) (226) --
Tutera ...... 1,310 1,181 960
Speciality . 148 167 668
-------- -------- --------
$1,241 $1,176 $1,443
======== ======== ========
At December 31, 1995 the Company's investment in Tutera and HPC exceeded its
equity in the underlying net assets by $3,750 and $5,261 respectively, which are
being amortized over 15 years. The Company received cash disbursements from its
affiliates of $1,034 and $1,012 during the years ended December 31, 1994 and
1995, respectively.
Selected financial information for the combined affiliates is as follows:
DECEMBER 31, DECEMBER 31,
1994 1995
------------ --------------
Working capital $ 251 $ 5,904
Total assets .. 51,867 74,065
Long-term debt 30,766 34,000
Equity ......... $17,269 $28,555
========= ===========
YEARS ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
--------- --------- ---------
Revenues ..... $19,895 $25,906 $64,294
Net earnings . 3,461 3,381 1,316
========= ========= =========
The 1995 net earnings included in the selected financial information above
include the full year results of operations for HPC, whereas the Company's
equity in the loss of this affiliate only reflects its share of HPC's losses
since the formation of the joint venture in September 1995.
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1994 and 1995 are summarized as
follows:
1994 1995
---------- ----------
Land .......................................... $ 31,757 $ 39,158
Buildings and improvements .................... 327,591 381,447
Leasehold improvements and leasehold interests 144,726 172,025
Equipment ..................................... 98,871 153,918
Construction in progress ...................... 52,136 57,809
Pre-construction and pre-acquisition costs ... 2,165 10,120
---------- ----------
657,246 814,477
Less accumulated depreciation and amortization 29,064 56,350
---------- ----------
Net property, plant and equipment ........... $628,182 $758,127
========== ==========
63
Included in leasehold improvements and leasehold interests are purchase
option deposits on 89 facilities of $57,147 of which $25,357 is refundable at
December 31, 1995.
(6) INTANGIBLE ASSETS
Intangible assets are summarized as follows at December 31, 1994 and 1995:
1994 1995
---------- -----------
Intangible assets of businesses acquired $235,848 $287,439
Deferred pre-opening costs............... 24,049 --
Deferred financing costs................. 12,925 17,461
---------- -----------
272,822 304,900
Less accumulated amortization............ 12,134 16,867
---------- -----------
Net intangible assets.................. $260,688 $288,033
========== ===========
The Company primarily amortizes goodwill over 40 years. Management regularly
evaluates whether events or circumstances have occurred that would indicate an
impairment in the value or the life of goodwill. In December 1995, the Company
adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." In accordance with the provisions of
SFAS No. 121, if there is an indication that the carrying value of an asset,
including goodwill, is not recoverable, the Company estimates the projected
undiscounted cash flows, excluding interest, of the related business unit to
determine if an impairment loss should be recognized. Such impairment loss is
determined by comparing the carrying amount of the asset, including goodwill, to
its estimated fair value. With its adoption of SFAS 121 in December 1995, the
Company performed the impairment analysis at the individual business unit basis.
Prior to the adoption of SFAS 121 the Company performed the analysis on an
entity-wide basis.
In addition, in the fourth quarter of 1995 IHS adopted a change in accounting
estimate and wrote-off $25,785 of deferred pre-opening costs (see note 17).
Effective January 1, 1996, the Company changed its accounting method from
deferring and amortizing pre-opening costs to recording them as an expense when
incurred.
(7) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1994 and 1995 are
summarized as follows:
1994 1995
---------- ----------
Accounts payable .............................. $ 95,536 $102,999
Accrued salaries and wages .................... 28,807 32,093
Accrued workers' compensation and other claims 12,544 10,715
Accrued interest .............................. 13,910 15,921
Other accrued expenses ........................ 10,320 10,285
---------- ----------
$161,117 $172,013
========== ==========
64
(8) LONG-TERM DEBT
Long-term debt at December 31, 1994 and 1995 is summarized as follows:
1994 1995
---------- ----------
Revolving credit facility notes due March 31, 2001 ..................... -- $220,500
Revolving credit facility notes due September 2001 ..................... $121,600 --
7.65% note payable in monthly installments of $42, including interest,
with final payment in July 2002 ........................................ -- 2,625
10.125% mortgage note payable in monthly installments of $64, including
interest due August 1997 ............................................... -- 5,723
6% note payable in monthly installments of $52, including interest,
with final payment of $639 in October 1998 ............................. 2,612 2,129
8.094% note payable, due December 2001 ................................. 9,638 9,508
Prime plus 1.25% note payable (9.75% at December 31, 1995), due
December 2000 .......................................................... 8,386 8,252
Mortgages payable in monthly installments of $62, interest rates
ranging from 9% to 14%.................................................. 14,699 10,512
9.75% mortgage note payable in monthly installments of $144, including
interest with final payment of $13,976 in October 1998.................. 15,108 14,845
Prime plus 1% (9.50% at December 31, 1995) note payable in monthly
installments of $89 including interest with final payment in January
2020.................................................................... 10,000 9,905
Seller notes, interest rates ranging from 10% to 14%, with final
payment of $2,971 in July 2000.......................................... 4,151 3,585
LIBOR plus 1.75%, (7.19% at December 31, 1995) mortgage note payable in
monthly installments of $51, including interest with final payment due
December 2000........................................................... -- 6,500
4% note payable, principal due annually with final payment due October
1998.................................................................... 1,609 1,317
Other .................................................................. 4,899 1,510
Subordinated debt:
5 3/4 % convertible senior subordinated debentures due January 1, 2001,
with interest payable semi-annually on January 1 and July 1. ......... 143,750 143,750
6% convertible subordinated debentures due December 31, 2003, with
interest payable semi-annually on January 1 and July 1 ............... 115,000 115,000
10 3/4 % Senior Subordinated Notes due July 15, 2004, with interest
payable semi-annually on January 15 and July 15....................... 100,000 100,000
9 5/8 % Senior Subordinated Notes due May 31, 2002, Series A, with
interest payable semi-annually on May 31 and November 30 ............. -- 115,000
---------- ----------
551,452 770,661
Less current portion .................................................. 8,972 5,404
---------- ----------
$542,480 765,257
========== ==========
In May 1995, the Company entered into a $500,000 revolving credit and term
loan agreement with Citicorp USA, Inc., the agent and certain other lenders
which replaced the $250,000 revolving credit and term loan facility, described
below, which the Company entered into during September 1994. Amounts outstanding
under the revolving loan on April 30, 1997 are to be converted to a term loan
with a final maturity date of March 31, 2001. The revolving credit and term loan
agreement is secured by a pledge of all of the stock of substantially all of the
Company's subsidiaries and bears interest based upon the LIBOR plus 1.5% which
was 6.94% at December 31, 1995. The $500,000 revolving credit and term loan
facility will be used to finance the Company's working capital requirements, to
make acquisitions and for general corporate purposes.
65
On May 18, 1995, the Company issued $115,000 aggregate principal amount of
its 9 5/8 % Senior Subordinated Notes due 2002 (the "Senior Notes"). Interest on
the Senior Notes is payable semi-annually on May 31 and November 30, commencing
November 30, 1995. The Senior Notes are not redeemable prior to maturity. In the
event of a change in control of IHS, each holder of Senior Notes may require IHS
to repurchase such holder's Senior Notes, in whole or in part, at 101% of the
principal amount thereof, plus accrued interest to the repurchase date. The
Indenture under which the Senior Notes were issued contains certain covenants,
including, but not limited to, covenants with respect to the following matters;
(i) limitations on additional indebtedness unless certain ratios are met; (ii)
limitations on other subordinated debt; (iii) limitations on liens; (iv)
limitations on the issuance of preferred stock by IHS's subsidiaries; (v)
limitations on transactions with affiliates; (vi) limitations on certain
payments, including dividends; (vii) application of the proceeds of certain
asset sales; (viii) restrictions on mergers, consolidations and the transfer of
all or substantially all of the assets of IHS to another person, and (ix)
limitations on investments and loans. The Company used $78,000 of the net
proceeds from the sale of the Senior Notes to repay a portion of the $188,000
then outstanding under its credit facility, and used the remaining approximately
$33,300 for general corporate purposes, including working capital.
In October 1995, the Company exchanged $115,000 aggregate principal amount of
its 9 5/8% Senior Notes due 2002, Series A (the "Series A Senior Notes") for the
Senior Notes which were issued in May 1995. The Series A Senior Notes are
identical to the Senior Notes, except that the Series A Senior Notes have been
registered under the Securities Act of 1933, as amended, and are listed on the
New York Stock Exchange.
On July 7, 1994, the Company issued 10 3/4% Senior Subordinated Notes due
2004 (the "1994 Senior Notes"). The net proceeds from this offering were
approximately $96,750, of which $52,700 was used to repay the then remaining
outstanding balance under the term loan facility and $44,050 outstanding under
the revolving credit facility notes.
The 1994 Senior Notes are redeemable in whole or in part at the option of the
Company at any time on or after July 15, 1999, at a price, expressed as a
percentage of the principal amount, initially equal to 105.375% and declining to
100% on July 15, 2002, plus accrued interest thereon. In the event of a change
in control of the Company, each holder of 1994 Senior Notes may require the
Company to repurchase such holder's 1994 Senior Notes, in whole or in part, at
101% of the principal amount thereof, plus accrued interest to the repurchase
date. The Indenture under which the 1994 Senior Notes were issued contains
certain covenants, including, but not limited to, the following matters: (i)
limitations on additional indebtedness unless certain coverage ratios are met;
(ii) limitations on liens; (iii) limitations on the issuance of preferred stock
by the Company's subsidiaries; (iv) limitations on transactions with affiliates;
(v) limitations on certain payments, including dividends; (vi) application of
the proceeds of certain asset sales; (vii) restrictions on mergers,
consolidations and the transfer of all or substantially all of the assets of the
Company to another person; and (viii) limitations on investments and loans.
On September 20, 1994 the Company entered into a $250,000 revolving credit
and term loan agreement (the "Facility") with Citicorp USA, Inc., as agent and
certain other lenders. The Facility, which included a $50,000 letter of credit
subfacility, initially consisted of a $250,000 three year revolving loan.
Amounts outstanding under the revolving loan on September 30, 1997 were to
convert to a term loan with a final maturity date of September 30, 2001. The
$50,000 letter of credit subfacility was to remain in place, although the total
amount available was to be reduced by 25% each year from September 30, 1997
through September 30, 2001. The Facility was secured by a pledge of all of the
stock of substantially all of the Company's subsidiaries and bears interest
based upon various market indices. At December 31, 1994, the interest rate on
the facility was 7.97%.
66
On December 27, 1993 and January 10, 1994, the Company issued 5 3/4 %
convertible senior subordinated debentures due 2001 (the "5 3/4 % Debentures")
in the aggregate principal amount of $125,000 and $18,750, respectively.
Interest on the 5 3/4 % Debentures is payable semi-annually commencing July 1,
1994. The 5 3/4 % Debentures are redeemable in whole or in part at the option of
the Company at any time on or after January 2, 1997 at a price, expressed as a
percentage of the principal amount, ranging from 103.29% in 1997 to 100.82% in
2000, plus accrued interest. In the event of a change in control of the Company,
each holder of the 5 3/4 % Debentures may require the Company to repurchase the
5 3/4 % Debentures, in whole or in part, at 100% of the principal amount
thereof, plus accrued interest to the repurchase date. At any time prior to
redemption or final maturity, the 5 3/4 % Debentures are convertible into Common
Stock of the Company, at $32.60 per share.
On December 16, 1992, the Company issued $115,000 principal amount of 6%
convertible subordinated debentures (the "6% Debentures") due December 31, 2003.
Interest on the 6% Debentures is payable semi-annually on January 1 and July 1,
commencing July 1, 1993. The 6% Debentures are redeemable in whole or in part at
the option of the Company at any time on or after January 1, 1996 at a price,
expressed as a percentage of the principal amount, ranging from 104.2% in 1996
to 100.6% in 2002, plus accrued interest. In the event of a change in control of
the Company, each holder of the 6% debentures may require the Company to
repurchase the Debentures, in whole or in part at 100% of the principal amount
thereof, plus accrued interest to the repurchase date. Prior to redemption, the
6% Debentures are convertible into Common Stock of the Company, at the option of
the holder, at any time at or before maturity at $32.125 per share, subject to
adjustment upon the occurrence of certain events.
At December 31, 1995, the aggregate maturities of long-term debt for the five
years ending December 31, 2000 and thereafter are as follows:
1996....................... $ 5,404
1997 ...................... 45,092
1998 ...................... 74,571
1999 ...................... 57,601
2000....................... 66,973
Thereafter .............. . 521,020
----------
$770,661
==========
Interest capitalized to construction in progress was $1,402, $3,030 and
$5,155 for the years ended December 31, 1993, 1994 and 1995, respectively.
(9) LEASES
The Company has entered into operating leases as lessee of 76 health care
facilities and certain office facilities expiring at various dates through June
2010. Minimum rent payments due under operating leases in effect at December 31,
1995 are summarized as follows:
1996 ..................... $ 43,763
1997 ..................... 42,555
1998 ..................... 39,661
1999 ..................... 39,176
2000...................... 35,916
Subsequent to 2000........ 65,890
----------
Total .................. $266,961
==========
67
The Company also leases equipment under short-term operating leases having
rentals of approximately $13,702 per year.
The leases of health care facilities provide renewal options for various
terms at fair market rentals at the expiration of the initial term, except for
leases of five facilities which have no renewal options. The Company generally
has the option or right of first refusal to purchase the facilities at fair
market value determined by independent appraisal (or by formula based upon the
cash flow of the facility, as defined) or, with respect to certain leases, at a
fixed price representing the fair market value at the inception of the lease.
Under certain conditions, the Company may be required to exercise the options to
buy the facilities. In connection with 55 leases the Company has paid purchase
option deposits aggregating $46,947, of which $25,357 is refundable. In
connection with one lease expiring September 30, 2002, the lessor has the right
to require two officers of the Company to repurchase up to 13,944 shares of the
Company's Common Stock owned by the lessor at the original issue price increased
at the annual rate of 9%. The Company has guaranteed this obligation of the
officers and has also guaranteed approximately $6,600 of the lessor's
indebtedness.
Minimum rentals are generally subject to adjustment based on the consumer
price index or the annual rate of five year U.S. Treasury securities. Also, the
leases generally provide for contingent rentals, based on gross revenues of the
facilities in excess of base year amounts, and additional rental obligations for
real estate taxes, utilities, insurance and repairs. Contingent rentals were
$426, $2,596 and $2,777 for the years ended December 31, 1993, 1994 and 1995,
respectively.
(10) CAPITAL STOCK
The Company is authorized to issue up to 150,000,000 shares of Common Stock
and 15,000,000 shares of Preferred Stock. The issuance of such preferred stock
may have the effect of delaying, deferring or preventing a change in control of
the Company without further action by the stockholders and may adversely affect
the voting and other rights of the holders of Common Stock, including the loss
of voting control to others. As of December 31, 1994 and 1995, there were no
shares of Preferred Stock outstanding.
The Company declared a $0.02 per share cash dividend in 1994 and 1995.
At December 31, 1994 and 1995 the Company had outstanding stock options as
follows:
1994 1995
----------- -----------
Stock options outstanding pursuant to:
Equity Incentive Plan ...................... 16,068 14,969
1990 Employee Stock Option Plan ............ 923,746 889,956
1992 Employee Stock Option Plan ............ 1,034,895 905,120
Stock Option Plan for Non-Employee Directors 300,000 300,000
1994 Stock Incentive Plan .................. 1,469,770 1,439,080
Senior Executives' Stock Option Plan ....... 1,800,000 2,100,000
Stock Option Compensation Plan for
Non-Employee Directors .................... 275,000 250,000
1995 Board of Director's Plan .............. -- 300,000
Other options .............................. 60,353 178,429
----------- -----------
Total stock options outstanding............ 5,879,832 6,377,554
=========== ===========
The Equity Incentive Plan provides that options may be granted to certain
employees at a price per share not less than the fair market value at the date
of grant. The 1990 Employee Stock Option Plan and the 1992 Employee Stock Option
Plan provide for issuance of options with similar terms as well as
68
non-qualified options. In 1993, the Company adopted the Senior Executives' Stock
Option Plan and the 1994 Stock Incentive Plan which provide for the issuance of
options with terms similar to the 1992 plan. In addition, the Company adopted
two Stock Option Plans for Non-Employee Directors and a Stock Option
Compensation Plan for Non-Employee Directors. The Board of Directors has
authorized the issuance of 7,974,015 shares of common stock under the plans.
Such options have been granted with exercise prices equal to or greater than the
estimated fair market value of the common stock on the date of grant;
accordingly, the Company has recorded no compensation expense related to such
grants. In addition, the Company provides an Employee Stock Purchase Plan
whereby employees have the right to purchase the Company's Common Stock at 90%
of the quoted market price, subject to certain limitations.
Stock option transactions are summarized as follows:
YEARS ENDED DECEMBER 31,
---------------------------------------------
1993 1994 1995
-------------- -------------- ---------------
Options outstanding--beginning of period 2,870,131 5,658,789 5,879,832
Granted ................................. 3,833,500 873,300 1,059,146
Exercised ............................... (795,008) (521,992) (340,244)
Cancelled ............................... (249,834) (130,265) (221,180)
-------------- -------------- ---------------
Options outstanding--end of period ..... 5,658,789 5,879,832 6,377,554
============== ============== ===============
Options price range during period:
Options granted ......................... $20.50-29.88 $28.63-38.00 $20.88-37.50
Options exercised ....................... $7.00-25.25 $10.50-28.88 $10.80-28.88
Options exercisable at end of period ... 760,696 1,839,015 2,731,876
650,000 options granted in 1995 are subject to approval by the Company's
shareholders.
Warrant transactions are summarized as follows:
YEARS ENDED DECEMBER 31,
---------------------------------------------
1993 1994 1995
-------------- -------------- ---------------
Warrants outstanding--beginning of period 156,187 311,029 497,181
Granted to lenders and sellers ........... 253,000 300,000 65,000
Exercised ................................ (72,259) (113,848) (44,181)
Cancelled ................................ (25,899) -- --
-------------- -------------- ---------------
Warrants outstanding--end of period ..... 311,029 497,181 518,000
============== ============== ===============
Warrants price range during period:
Warrants granted ........................ $20.00-28.92 $ 31.33 $37.88-38.75
Warrants exercised ...................... $ 12.25 $12.25-26.00 $12.25-23.50
Each outstanding warrant entitles the holder to purchase one share of Common
Stock at a price ranging from $12.25 to $38.75.
As discussed in note 9, the Company is contingently obligated to repurchase
up to 13,944 shares of its Common Stock, aggregating approximately $331 at
December 31, 1995.
The Company's Board of Directors has authorized the repurchase in the open
market, of up to $50,000 of the Company's Common Stock. The purpose of the
repurchase program is to have available treasury shares of Common Stock to
satisfy contingent earn-out payments under prior business combinations accounted
for by the purchase method. The repurchases will be funded from cash from
operations and drawings under the Company's revolving credit facility. During
the twelve months ended December 31, 1995, the Company repurchased 400,600
shares of Common Stock for an aggregate purchase price of approximately $12,800.
During 1996 the Company reissued all 400,600 shares in partial satisfaction of
earn-out payments.
69
(11) INCOME TAXES
The provision for income taxes on earnings before income taxes and
extraordinary items is summarized as follows:
YEARS ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
---------- --------- ------------
Federal .. $10,090 $18,388 $(13,341)
State ..... 1,918 3,729 (2,929)
---------- --------- ------------
$12,008 $22,117 $(16,270)
========== ========= ============
Current .. $ 9,623 $19,905 $ 7,732
Deferred . 2,385 2,212 (24,002)
---------- --------- ------------
$12,008 $22,117 $(16,270)
========== ========= ============
The amount computed by applying the Federal corporate tax rate of 35% in
1993, 1994 and 1995 to earnings before income taxes and extraordinary items is
summarized as follows:
1993 1994 1995
---------- --------- -----------
Income tax computed at statutory rates ....... $10,777 $20,643 $(14,791)
State income taxes, net of Federal tax benefit 1,247 2,424 (1,904)
Amortization of intangibles.................... 132 993 1,975
Valuation allowance adjustment ................ -- (1,675) (2,111)
Other ......................................... (148) (268) 561
---------- --------- -----------
$12,008 $22,117 $(16,270)
========== ========= ===========
Deferred income tax (assets) liabilities at December 31, 1994 and 1995 are
as follows:
1994 1995
--------- -----------
Excess of book over tax basis of assets ................ $90,573 $ 76,097
Deferred pre-opening costs ............................. 314 199
Accrued workers compensation............................ (2,091) (3,769)
Deferred gain on sale-leaseback ........................ (3,192) (2,775)
Allowance for doubtful accounts ........................ (9,125) (11,384)
Prepaid expenses ....................................... 908 --
Pre-acquisition separate company net operating loss
carryforwards .......................................... (5,220) (7,612)
Other .................................................. 25 170
--------- -----------
$72,192 $ 50,926
Valuation allowance .................................... 3,464 1,353
--------- -----------
$75,656 $ 52,279
========= ===========
The decrease in the valuation allowance for deferred tax assets of $2,111 is
attributable to the utilization of pre-acquisition separate company net
operating loss carryforwards in the year ended December 31, 1995.
At December 31, 1995, certain subsidiaries of the Company had pre-acquisition
net operating loss carryforwards available for Federal and state income tax
purposes of approximately $19,770 which expire in the years 1996 through 2008.
The annual utilization of these net operating loss carryforwards is subject to
certain limitations under the Internal Revenue Code.
(12) OTHER COMMITMENTS AND CONTINGENCIES
The Company is obligated to purchase its Green Briar facility upon a change
in control of the Company. The net purchase price of the facility is
approximately $4,014. The Company has guaranteed approximately $6,600 of the
lessor's indebtedness. The lessor of this facility has the right to require
Messrs. Robert Elkins and Timothy Nicholson to purchase all or any part of
13,944 shares of Common Stock owned by it at a per share purchase price equal to
the sum of $12.25 per share plus 9% simple interest per annum from May 8, 1988
until the date of such purchase. The Company has agreed to repurchase such
shares if Messrs. Elkins and Nicholson fail to do so. The amount aggregated
approximately $331 at December 31, 1995.
70
The Company has guaranteed repayment of a construction loan of River City
Limited Partnership, a partnership in which the Company has a 30% general
partnership interest and which owns and operates a geriatric care facility. At
December 31, 1995 the loan had a balance of $1,231.
The lessor of one facility has the right, if the Company defaults under the
lease, to require the Company to purchase the facility at a price equal to the
greater of $7,130 or the facility's fair market value.
The Company has guaranteed approximately $3,944 of a construction loan for
Trizec, the entity from which the Company purchased the Central Park Lodges
facilities.
The Company entered into a guaranty agreement whereby the Company guaranteed
up to $4,200 owed by Tutera Group Inc. and Sunset Plaza Limited Partnership, a
partnership interest of Cenill, Inc., to Bell Atlantic Tricon Leasing
Corporation. The amount guaranteed at December 31, 1995 was $4,070.
The Company has established several irrevocable letter of credit obligations
with the Bank of Nova Scotia totalling $23,833 at December 31, 1995
The Company and its subsidiaries are from time to time subject to claims and
suits arising in the ordinary course of business. In the opinion of management,
the ultimate resolution of pending legal proceedings will not have a material
effect on the Company's financial statements.
(13) SUPPLEMENTAL CASH FLOW INFORMATION
Significant non-cash investing and financing activities related to
acquisitions for the year ended December 31, 1993, 1994 and 1995, were as
follows:
1993 1994 1995
---------- ---------- -----------
Current assets................ $ 20,521 $ 38,602 $ 5,588
Property, plant, and
equipment..................... 280,414 110,726 59,316
Assets held for sale.......... 60,180 -- --
Other assets.................. 980 (1,326) (295)
Intangible assets............. 38,047 192,933 33,150
Current liabilities........... (66,746) (54,988) 9,709
Deferred income taxes......... (65,000) (3,756) (505)
Long-term liabilities......... (24,742) (29,571) (14,144)
Equity........................ (34,440) (99,829) (10,133)
---------- ---------- -----------
Cash paid for acquisitions ... $209,214 $152,791 $ 82,686
========== ========== ===========
o The PCP acquisition in 1993 resulted in increases in net current assets
of $2,225; property, plant and equipment of $1,001; other assets of $443
and goodwill of $12,225; offset by accounts payable and accrued expenses
of $3,621; long-term debt of $2,433 and the increase in common stock and
additional paid-in capital of $9,840.
o The Health Care Systems, Inc. acquisition in 1993 resulted in increases
in net current assets of $347; property, plant and equipment of $189;
other assets of $498 and goodwill of $4,747; offset by accounts payable
and accrued expenses of $4,872 and long-term debt of $909.
o The CPL acquisition in 1993 resulted in increases in current assets of
$10,290; property, plant and equipment of $231,412 and assets held for
sale of $60,180; offset by increases in accounts payable and accrued
expenses of $51,582; long-term debt of $20,100; deferred income taxes of
$65,000; and common stock and additional paid-in capital of $1,400. Cash
paid for the acquisition was $163,800.
71
o The Achievement acquisition in 1993 resulted in increases in net current
assets of $7,659; property, plant and equipment of $548; other assets of
$39; and goodwill of $21,075; offset by increases in accounts payable
and accrued expenses of $5,521; long-term debt of $1,300; and common
stock and additional paid-in capital of $22,500.
o The Southmark acquisition in 1993 resulted in increases in property,
plant and equipment of $11,600; offset by increases in accounts payable
and accrued expenses of $1,150; and common stock and additional paid-in
capital of $700. Cash paid for acquisition was $9,750.
o The Cooper acquisition in 1994 resulted in increases in net current
assets of $8,962; property, plant and equipment of $826; other assets of
$922 and goodwill of $73,945; offset by current liabilities of $5,156;
long-term debt of $4,233; deferred income taxes of $3,608 and common
stock and additional paid-in capital of $19,890. Total cash paid for the
acquisition, including repayment of debt of $27,158, was $51,768.
o The Pace acquisition in 1994 resulted in increases in net current assets
of $1,869; other assets of $148 and goodwill of $6,672; offset by
current liabilities of $723; deferred income taxes of $600; and common
stock and additional paid-in capital of $5,798. The Company repaid debt
of $1,568.
o The PDS acquisition in 1994 resulted in increases in net current assets
of $549; property, plant and equipment of $90; deferred tax receivable
$533; and goodwill of $5,696; offset by current liabilities of $2,678
and common stock and additional paid-in capital of $3,896. Total cash
paid for the acquisition was $294.
o The Therapy Resources acquisition in 1994 resulted in increases in net
current assets of $576; property, plant and equipment of $506; other
assets of $39 and goodwill of $3,776; offset by current liabilities of
$3,297. Total cash paid for the acquisition was $1,600.
o The CareTeam acquisition in 1994 resulted in increases in net current
assets of $2,094; property, plant and equipment of $472; other assets of
$628; deferred tax receivable of $806 and goodwill of $7,651; offset by
current liabilities of $5,001; debt of $749 and common stock and
additional paid-in capital of $5,221. Total cash paid for the
acquisition was $680.
o The Rehab People acquisition in 1994 resulted in increases in net
current assets of $1,542; property, plant and equipment of $380; other
assets of $734 and goodwill of $13,693; offset by current liabilities of
$4,477; debt of $496; deferred taxes of $1,376 and common stock and
additional paid-in capital of $10,000.
o The Primedica acquisition in 1994 resulted in increases in net current
assets of $3,797; property, plant and equipment of $8,530; other assets
of $84; deferred tax receivable of $863 and goodwill of $21,348; offset
by current liabilities of $13,622. Total cash paid for the aquisition
was $21,000.
o The Samaritan Care acquisition in 1994 resulted in increases in net
current assets of $1,106; property, plant and equipment of $1,028;
deferred tax receivable of $1,001 and goodwill of $18,632; offset by
current liabilities of $7,767 and common stock and additional paid-in
capital of $14,000.
o The Partners acquisition in 1994 resulted in increases in net current
assets of $836; property, plant and equipment of $1,788; other assets of
$1,256; deferred tax receivable of $625 and goodwill of $17,146; offset
by current liabilities of $7,072; debt of $2,176 and common stock and
additional paid-in capital of $12,403.
72
o The Houston Hospital acquisition in 1994 resulted in increases in net
current assets of $662, property, plant and equipment $10,000 and other
assets of $12; offset by current liabilities of $674. Total cash paid
for the acquisition was $10,000.
o The Amcare acquisition in 1994 resulted in increases in net current
assets of $7,295; property, plant and equipment of $3,819; and goodwill
of $20,300; offset by current liabilities of $7,356; debt of $797;
deferred income taxes of $2,000; other assets of $261 and common stock
and additional paid-in capital of $10,500. Total cash paid for the
acquisition was $10,500.
o The Treemont of Dallas acquisition in 1994 resulted in increases in
property, plant and equipment of $22,625; offset by debt of $15,230.
Cash paid for the acquisition was $7,395.
o The Amarillo acquisition in 1994 resulted in increases in net current
assets of $1,675; other assets of $108 and property, plant and equipment
of $10,886; offset by current liabilities of $1,547; debt of $5,490 and
the Company's 49% interest in the joint venture at the date of
acquisition of $5,046. Total cash paid for the acquisition was $586.
o The Company consummated certain other acquisitions in 1994, which
resulted in increases to other current assets of $139; property, plant
and equipment of $5,565; other assets of $50; and goodwill of $4,074;
offset by other current liabilities of $16; debt of $400 and common
stock and additional paid-in capital of $7,366. Cash paid for these
acquisitions was $2,046.
o In 1994, the Company made purchase option deposits through the issuance
of its Common Stock and warrants of $10,755, resulting in net current
assets of $7,500 increase in property, plant and equipment of $44,211;
offset by common stock and additional paid-in capital of $10,755. Cash
paid on the Purchase Option Deposits was $40,956.
o The January 1995 acquisitions of four diagnostic service companies
resulted in increases in property of $501, increases in goodwill of
$3,155; offset by increases in long term debt of $32, and increases in
additional paid-in capital of $300. Total cash paid for the acquisition
was $3,324.
o The acquisiton of Epsilon in 1995 resulted in an increase in current
assets of $109, increase in property of $78, increase in goodwill of
$1,865, decrease in other assets of $140; offset by increase in current
liabilities of $651, and an increase in deferred income taxes of $100.
Total cash paid for the acquisition was $1,161.
o The acquisition of ProCare in 1995 resulted in an increase in current
assets of $57, an increase in property of $154, an increase in goodwill
of $4,434; increases in other assets of $47; offset by increase in
current liabilities of $600, increase in deferred taxes of $75, an
increase in long term debt of $117, and an increase in additional
paid-in capital of $3,600. Total cash paid for the acquisition was $300.
o The acquisition of Samaritan of Michigan in 1995 resulted in an increase
in current assets of $265, an increase in goodwill of $6,775; offset by
an increase in current liabilities of $1,340, and an increase of
deferred income taxes of $200. Total cash paid for the acquisition was
$5,500.
o The acquisition of Fidelity in 1995 resulted in an increase in current
assets of $8, increase in property of $183, increase in goodwill of
$2,299; offset by increase in current liabilities of $300, and an
increase in deferred taxes of $50. Total cash paid for the acquisition
was $2,140.
o The acquisition of Hometown Nursing in 1995 resulted in an increase in
current assets of $3, increase in property of $1, increase in goodwill
of $646; offset by increase in current liabilities of $120, and an
increase in deferred taxes of $30. Total cash paid for the acquisition
was $500.
73
o The acquisition of Bernard's in 1995 resulted in an increase in property
of $10 and an increase in goodwill of $90. Total cash paid for the
acquisition was $100.
o The acquisition of Stewart's in 1995 resulted in an increase in property
of $190, increase in goodwill of $1,810; offset by increase in current
liabilities of $100. Total cash paid for the acquisition was $1,900.
o The June 1995 acquisition of four diagnostic service companies resulted
in an increase in property of $190, increase in goodwill of $2,799;
offset by an increase in current liabilities of $434. Total cash paid
for these acquisitions was $2,555.
o The acquisition of Mobile X of Maryland in 1995 resulted in an increase
in property of $230, increase in goodwill of $1,170; offset by an
increase in current liabilities of $600. Total cash paid for the
acquisition was $1,400.
o The acquisition of SLC in 1995 resulted in an increase in current assets
of $4,314, increase in property of $103, increase in goodwill of $5,638,
decrease in other assets of $202; offset by an increase in current
liabilities of $2,217, and an increase in deferred income tax of $50,
and an increase in long-term debt of $1,725 and an increase in
additional paid in capital of $5,861.
o The acquisition of Hershey in 1995 resulted in increases in property of
$7,870 and long term debt of $5,770. Total cash paid for the acquisition
was $2,100.
o The acquisition of Clara Burke in 1995 resulted in an increase in
property of $6,830 and long-term debt of $6,500. Total cash paid for the
acquisition was $330.
o Other asset acquisitions and purchase option deposits in 1995 resulted
in an increase in other current assets of $832; property, plant and
equipment of $31,997; and intangibles of $1869; of offset by an
increase in current liabilities of $185. Cash paid for these
acquisitions was $34,513.
o Payment of previous acquisitions' earnout agreements in 1995 resulted in
an increase in intangible assets and equity of $3,864.
Other significant non-cash investing and financing activities are as follows.
o An increase in additional paid in capital of $740 in 1993 resulted from
the exercise of stock options granted under the Company's 1990 and 1992
Stock Option Plan and the Company's Equity Incentive Plan, which reduced
the Company's current tax payable by $740 at December 31, 1993.
o The sale of Professional Community Management, Inc., which manages
residential retirement community living units in Southern California, in
1994 resulted in decreases in net current assets of $716; property,
plant and equipment of $200; other assets of $746 and intangible assets
of $3,899; net current liabilities of $1,226 and debt of $31; offset by
the $4,304 purchase price paid in the form of a note receivable.
o The Company declared cash dividends, which resulted in increases in
current liabilities offset by decreases in retained earnings of $398 in
1994 and $435 in 1995.
o The write off of the Crestwood management agreement in 1995 resulted in
a decrease in current assets of $5,969, a decrease in property of
$2,322, a decrease in other assets of $13,624, and a non-cash charge to
income of $21,915 (see note 17).
o In 1995, the write-off of long-lived assets in connection with SFAS No.
121 resulted in a decrease in property of $81,788, a decrease in
intangible assets of $1,533, and a non-cash charge to income of $83,321.
Also, the write-off of deferred pre-opening costs resulted in a decrease
in intangible assets and a non-cash charge to income of $25,785 (see
note 17).
74
Cash payments for interest were $6,786, $20,728 and $49,863 for the years
ended December 31, 1993, 1994 and 1995, respectively. Cash payments for income
taxes were $5,867, $13,761 and $27,549 for such periods.
(14) EXTRAORDINARY ITEMS
In the second quarter of 1995, the Company replaced its $250,000 revolving
credit and term loan facility with a $500,000 revolving credit and term loan
facility. This event has been accounted for as an extinguishment of debt and the
Company has recorded a loss on extinguishment of debt of $826 representing the
write-off of deferred financing costs. In the fourth quarter of 1995, the
Company incurred prepayment penalties on debt in the amount of $821. Such
losses, reduced by the related income tax effect of $634, is presented in the
statement of earnings as an extraordinary item of $1,013.
In September 1994, the Company replaced its $260,000 revolving credit and
term loan facility (see note 8) with a $250,000 revolving credit and term loan
facility. Such event has been accounted for as an extinguishment of debt and the
Company has recorded a loss on extinguishment of debt of $6,839, representing
the write-off of deferred financing costs. Such loss, reduced by the related
income tax effect of $2,565, is presented in the statement of earnings as an
extraordinary item of $4,274.
In December 1993, the Company replaced its $100,000 revolving credit facility
with a $260,000 revolving credit and term loan facility. Such event has been
accounted for as an extinguishment of debt and the Company has recorded a loss
on extinguishment of debt of $3,730, representing the write-off of deferred
financing costs. Such loss, reduced by the related income tax effect of $1,455,
is presented in the statement of earnings as an extraordinary item of $2,275.
(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, patient accounts
receivable, other current assets, accounts payable, and accrued expenses
approximates fair value because of the short-term maturity of these instruments.
The fair value of temporary investments is estimated based on quoted market
prices for these or similar investments. The fair value of third-party payor
settlements receivable is estimated by discounting anticipated cash flows using
estimated market discount rates to reflect the time value of money. The fair
value of the Company's long-term debt is estimated based on current rates
offered to the Company for similar instruments with the same remaining
maturities. Management of the Company believes the carrying amount of the above
financial instruments approximates the estimated fair value. The Company has
investments in unconsolidated affiliates described in note 4, which are untraded
companies and joint ventures, including an investment in a combination of common
and preferred stock of Hearing Health Services, Inc. (HHS), which is carried at
its original cost basis less writedowns of $4,000 and $2,608 at December 31,
1994 and 1995 respectively. The Company has notes receivable from unaffiliated
individuals and untraded companies totaling $24,667 and $26,115 at December 31,
1994 and 1995 respectively. Also, the Company has guaranteed the indebtedness of
two of its leased facilities and has purchase option deposits of $54,402 and
$57,147 on 86 and 89 leased and managed facilities of which $21,000 and $25,357
is refundable at December 31, 1994 and 1995 respectively. It is not practicable
to estimate the fair value of these investments, notes and guarantees since they
are not traded, no quoted values are readily available for similar financial
instruments and the Company believes it is not cost-effective to have valuations
performed. However, management believes that there has been no permanent
impairment in the value of such investments and no indication of probable loss
on such guarantees.
(16) RELATED PARTY TRANSACTIONS
In 1994, the Company sold and leased back three of its geriatric care
facilities in a transation with affiliates of Capstone, a newly formed real
estate investment trust. Robert N. Elkins, Chairman of the Board
75
and Chief Executive Officer of the Company, is a Director of Capstone and
Richard M. Scrushy, at the time a director of the Company, is Chairman of the
Board of Capstone. The proceeds received by the Company were $28,210.
In April 1993, a wholly-owned subsidiary of the Company acquired a 21.28%
interest in the common stock and a 47.64% interest in the 6% cumulative
preferred stock of Speciality Care PLC, an owner and operator of geriatric care
facilities in the United Kingdom. Robert N. Elkins, Chairman of the Board and
Chief Executive Officer of the Company, is a director of Speciality Care PLC,
and Timothy Nicholson, a director of the Company, is Chairman and Managing
Director of Speciality Care. Mr. Nicholson was formerly Executive Vice President
of the Company. In 1995 the Company invested an additional $4,384 in Speciality
Care PLC. As a result of the Company's additional investment, the Company's
interest in the Common Stock is 21.30% and 63.65% for the 6% cumulative
convertible preferred stock. The Company's equity in Speciality Care PLC was
$9,250 at December 31, 1995.
(17) LOSS FROM IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER NON-RECURRING
CHARGES
In the fourth quarter of 1995, the Company, as well as industry analysts,
concluded that Medicare and Medicaid reform was imminent. Both the House and
Senate balanced budget proposals proposed a reduction in future growth in
Medicare and Medicaid spending from 10% a year to approximately 4-6% a year.
While Medicare and Medicaid reform had been discussed prior to the fourth
quarter, the Company came to believe that a future reduction in the growth of
Medicare and Medicaid spending was virtually a certainty. Such reforms include,
in the near term, a continued freeze in the Medicare routine costs limit
("RCL"), followed by reduced increases in later years, more stringent
documentation requirements for Medicare RCL exception requests, reduction in the
growth in Medicaid reimbursement in most states, as well as salary equivalency
in rehabilitative services, and, in the longer-term (2-3 years), a switch to a
prospective payment system for home care and nursing homes, and repeal of the
"Boren Amendment", which requires that states pay hospitals "reasonable and
adequate" rates. The Company estimated the effect of the aforementioned reforms
on each nursing and subacute facility, as well as on its rehabilitative
services, respiratory therapy, home care, mobile diagnostic and pharmacy
divisions by reducing (or in some cases increasing) the future revenues and
expense growth rates for the impact of each of the aforementioned factors.
Accordingly, these events and circumstances triggered the early adoption of
Statement of Financial Accounting Standards No. 121 in the fourth quarter of
1995. In accordance with SFAS No. 121, the Company estimated the future cash
flows expected to result from those assets to be held and used.
In estimating the future cash flows for determining whether an asset is
impaired, and if expected future cash flows used in measuring assets are
impaired, the Company grouped its assets at the lowest level for which there are
identifiable cash flows independent of other groups of assets. These levels were
each of the individual nursing/subacute facilities, and each of the home health,
rehabilitative therapy, respiratory therapy, pharmacy and mobile diagnostics
divisions. The results of comparing future undiscounted cash flows to historical
carrying value were that some individual nursing facilities and one assisted
living facility were eligible for an impairment charge. None of the remaining
facilities or business units were eligible since only those facilities or
business units where the carrying value exceeded the undiscounted cash flows are
considered impaired. The business units having significant goodwill were not
identified for an impairment charge because projected undiscounted cash flows
were sufficient to recover goodwill over the remainder of the 40 year estimated
useful life. Prior to adoption of SFAS 121, the Company evaluated impairment on
the entity level. Such an evaluation yielded no impairment as of September 30,
1995.
After determining the facilities eligible for an impairment charge, the
Company determined the estimated fair value of such facilities. Also, the
Company obtained valuation estimates prepared by independent appraisers or had
received offers from potential buyers on six of the facilities identified for
impairment. Such valuation estimates were obtained to corroborate the Company's
estimate of value. The Company determined that the carrying value of certain
long-lived assets, including goodwill, build
76
ings and improvements, leasehold improvements, equipment and deferred
pre-opening costs exceeded their fair values. The excess carrying value above
the fair value of $109,106 was written off and was included in the statement of
operations for 1995 as loss on impairment of long-lived assets.
During the fourth quarter of 1995, the Company terminated the Crestwood
management contract, a 10 year contract entered into in January 1994 to manage
23 long-term care and psychiatric facilities in California owned by Crestwood
Hospital. The terms of the contract required the payment of a management fee to
IHS and a preferred return to the Crestwood owners. IHS terminated the
management contract with Crestwood Hospital due primarily to changes in
California Medicaid rates which no longer provided sufficient cash flow at the
facilities to support both IHS' management fee and the preferred return to the
owners. As a result, the Company incurred a $21,915 loss on the termination of
this contract. Such loss consists of the write-off of $8,496 of management fees,
$11,097 of loans made to Crestwood Hospital and the owners of Crestwood, as well
as the interest thereon, and $2,322 of contract acquisition costs.
During the third quarter of 1995, the Company merged with IntegraCare, Inc.
in a transaction accounted for as a pooling of interests. In connection with
this transaction, the Company incurred merger costs of $1,939 for accounting,
legal, and other costs. These costs are included as an other non-recurring
charge on the statement of operations.
RESTATEMENT
The Company subsequently determined that deferred pre-opening costs, which
were included in the carrying value of long-lived assets as described above,
should not be included for purposes of determining the loss on impairment of
long-lived assets. Accordingly, the Company recalculated such loss excluding
deferred pre-opening costs from the carrying value, and adopted a change in
accounting estimate to write-off in 1995 all deferred pre-opening costs. This
change was made in recognition of the circumstances, discussed above, which
raised doubt and thereby triggered the assessment of recoverability of
long-lived assets in 1995. These circumstances also raised doubt as to the
estimated future benefit and recoverability of deferred pre-opening costs,
resulting in the Company's decision to write-off $25,785 of deferred pre-opening
costs. The Company's loss on impairment of long-lived assets and other
non-recurring charges, as previously reported in 1995 and as restated, are
summarized as follows:
AS PREVIOUSLY AS
REPORTED RESTATED
--------------- ----------
Loss on impairment of long-lived assets:
Goodwill (assisted living facility)....................... $ 1,533 $ 1,533
Property, plant and equipment............................. 92,092 81,788
Deferred pre-opening costs................................ 15,481 --
----------- ---------
Total loss on impairment of long-lived assets.............. 109,106 83,321
Other non-recurring charges:
Write-off of deferred pre-opening costs in connection with
change in accounting estimate............................ -- 25,785
Loss on Crestwood management contract termination......... 21,915 21,915
IntegraCare merger costs.................................. 1,939 1,939
----------- ----------
Total other non-recurring charges.......................... 23,854 49,639
----------- ----------
Total loss on impairment of long-lived assets and other
non-recurring charges..................................... $132,960 $132,960
=========== ==========
77
The effect of these changes on operating results in 1995 are summarized as
follows:
INCREASE (DECREASE) IN
LOSS BEFORE
EXTRAORDINARY ITEMS AND
NET LOSS
-----------------------
AMOUNT PER SHARE
----------- -----------
Reduction of loss on impairment of long-lived assets ..... $(15,858) $(0.74)
Increase in other non-recurring charges for write-off of
deferred pre-opening costs in connection with change in
accounting estimate....................................... $ 15,858 $ 0.74
=========== ===========
In connection with the change in accounting estimate regarding the future
benefits and recoverability of deferred pre-opening costs, the Company has
changed its accounting method beginning in 1996 from deferring and amortizing
pre-opening costs to recording them as an expense when incurred.
(18) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
The following infomation is provided in accordance with the AICPA Statement
of Position No. 94-6, "Disclosure of Certain Significant Risks and Uncertanties"
which is effective for the year ended December 31, 1995.
The Company's strategy is to use geriatric care-facilities as a platform to
provide a wide variety of post-acute medical and rehabilitative services more
typically delivered in the acute care hospital setting and to use home
healthcare to provide those medical and rehabilitative services which do not
require 24-hour monitoring. Post-acute care includes subacute care, outpatient
and home care, inpatient and outpatient rehabilitation, diagnostic, respiratory
therapy and pharmacy services. The Company's post-acute health care system is
intended to provide continuity of care for its patients following discharge from
acute care hospitals. The Company also manages such operations for other owners
for a fee, which is generally based on a percentage of the gross revenue. The
Company and others in the health care business are subject to certain inherent
risks, including the following:
o Substantial dependence on revenues derived from reimbursement by the
Federal Medicare and state Medicaid programs;
o Ability to obtain per diem rates approvals for costs which exceed the
Federal Medicare established per diem rates;
o Government regulations, government budgetary constraints and proposed
legislative and regulatory changes; and
o Lawsuits alleging malpractice and related claims.
Such inherent risks require the use of certain management estimates in the
preparation of the Company's financial statements and it is reasonably possible
that a change in such estimates may occur.
The Company receives payment for a significant portion of services rendered
to patients from the Federal government under Medicare and from the states in
which its facilities are located under Medicaid. Revenue derived from Medicare
and various state Medicaid reimbursement programs represented 32.8% and 20.6%,
respectively, of the Company's revenue for the year ended December 31, 1995, and
the Company's operations are subject to a variety of other Federal, state and
local regulatory requirements. Failure to maintain required regulatory approvals
and licenses and/or changes in such regulatory requirements could have a
significant adverse effect on the Company. Changes in Federal and state
reimbursement funding mechanism, related government budgetary constraints and
differences between final settlements and estimate settlements receivable under
Medicare and Medicaid retrospective reimbursement programs, which are
78
subject to audit and retroactive adjustment, could have a significant adverse
effect on the Company. The Company's cost of care for its MSU patients generally
exceeds regional reimbursement limits established under Medicare. The success of
the Company's MSU strategy will depend in part on its ability to obtain per diem
rate approvals for costs which exceed the Medicare established per diem rate
limits and by obtaining waivers of these limitations. Also, the Company is from
time to time subject to malpractice and related claims and lawsuits, which arise
in the normal course of business and which could have a significant effect on
the Company. The Company believes that adequate provision for these items has
been made in the accompanying consolidated financial statements and that their
ultimate resolution will not have a material effect on the consolidated
financial statements.
Since its inception, the Company has grown through acquisitions, and
realization of acquisition costs, including intangible assets of businesses
acquired, is dependent initially upon the consummation of the acquisitions and
subsequently upon the Company's ability to successfully integrate and manage
acquired operations. Also, the Company's development of post-acute network
health care networks is dependent upon successfully effecting economics of
scale, the recruitment of skilled personnel and the expansion of services and
related revenues.
(19) SUBSEQUENT EVENTS
In February, 1996, the Company entered into an agreement to acquire First
American Health Care of Georgia, Inc., ("First American") which provides home
health services in twenty-three states. The agreement provides for a purchase
price of $150,000 plus an additional earn-out payment based on operational
experience in the years 1999 through 2002. First American has filed for
protection from creditors under Chapter 11 of the Federal Bankruptcy Code. The
acquisition is subject to the successful completion of a reorganization plan in
bankruptcy court, various regulatory approvals, bank approval, and Board of
Directors approval. There can be no assurance that the transaction will be
consummated under the described terms or at all.
In February 1996, the Company acquired Vintage Health Care Center in Denton,
Texas. The purchase price was approximately $7 million.
In March 1996, the Company acquired Rehab Management Services, Inc., an
outpatient rehabilitation company in central Florida for approximately $10
million.
The Company has reached agreements in principle to purchase a hospice company
in Chicago, Illinois, for approximately $8 million, and a home health agency in
Memphis, Tenessee, for approximately $2 million. There can be no assurance that
the transaction will be consummated on these terms or at all.
79
INTEGRATED HEALTH SERVICES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
--------------- -------------- ---------------
Allowance for doubtful accounts:
Balance at beginning of period ....... $ 3,900 $ 4,592 $ 16,630
Provisions for bad debts ............. 4,331 16,359 19,359
Acquired companies ................... 7,237 16,760 993
Accounts receivable written-off (net
of recoveries) ...................... (10,876) (21,081) (18,854)
----------- ----------- -----------
Balance at end of period ............. $ 4,592 $ 16,630 $ 18,128
=========== =========== ===========
80
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
81
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section entitled "Proposal No. 1--Elections of Directors" in the
Company's Proxy Statement for the Annual Meeting of stockholders is incorporated
herein by reference.
EXECUTIVE OFFICERS
See "Part I--Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the Company's Proxy
Statement for the Annual Meeting of Stockholders is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Beneficial Ownership of Common Stock" in the
Company's Proxy Statement for the Annual Meeting of Stockholders is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Executive Compensation--Compensation Committee
Interlocks and Insider Participation" and "Certain Transactions" in the
Company's Proxy Statement for the Annual Meeting of Stockholders is incorporated
herein by reference.
82
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
(1) and (2) See "Index to Consolidated Financial Statements and Supplemental
Schedules" at Item 8 of this Annual Report on Form 10-K.
(b) The following exhibits are filed or incorporated by reference as part of
this Annual Report (Exhibit Nos. 10.60, 10.61, 10.62, 10.63, 10.64, 10.65,
10.66, 10.67, 10.68, 10.69, 10.70, 10.71, 10.72, 10.73, 10.74, 10.75, 10.76,
10.77, 10.78, 10.97 and 10.98 are management contracts, compensatory plans or
arrangements):
3.1 -- Third Restated Certificate of Incorporation, as amended. (1)
3.2. -- Amendment to the Third Restated Certificate of Incorporation, dated
May 26, 1995. (2)
3.3 -- Certificate of designation of Series A Junior Participating
Cumulative Preferred Stock (3)
3.4 -- By-laws, as amended. (24) -- Indenture, dated as of December 1, 1992,
between Integrated Health Services, Inc. and Signet Trust Company, as
Trustee, relating to the Company's 6% Convertible Subordinated 4.1
Debentures. (5)
4.2 -- Form of 6% Debenture (included in 4.1). (5)
4.3 -- Indenture, dated as of December 15, 1993, from Integrated 4,3 Health
Services, Inc., as Issuer, to The Bank of New York (as successor in
interest) to NationsBank of Virginia, N.A., as Trustee, 4.3 ......
relating to the Company's 5 3/4 % Convertible Senior Subordinated
Debentures due 2001. (6)
4.4 -- Form of 5 3/4 % Debenture (included in 4.3) (6)
4.5 -- Registration Rights Agreement, dated as of December 17, 1993, between
Integrated Health Services, Inc. and Smith Barney Shearson Inc. relating
to the Company's 5 3/4 % Convertible Senior Subordinated Debentures due
2001. (6)
4.6 -- Supplemental Indenture dated as of September 15, 1994 between
Integrated Health Services, Inc. and The Bank of New York (as successor
in interest) to NationsBank of Virginia N.A. (7)
4.7 -- Indenture, dated as of July 1, 1994, between Integrated Health
Services, Inc. and Signet Trust Company, Inc. relating to the Company's
10 3/4 % Senior Subordinated Notes due 2004 (8)
4.8 -- Form of Note (included in 4.7)(8)
4.9 -- Amended and Restated Supplemental Indenture, dated as of May 15,
1995, from Integrated Health Service, Inc. to Signet Trust Company, as
trustee, relating to the Company's 9 5/8 % Senior Subordinated Notes due
2002 and 9 5/8 % Senior Subordinated Notes due 2002, Series A. (24)
4.10 -- Form of 9 5/8 % Senior Subordinated Notes (included in 4.9). (24)
10.1 -- Letter dated March 28, 1991 from Integrated Health Services of
Brentwood, Inc., Integrated Health Services, Inc., Alpine Manor, Inc.,
Briarcliff Nursing Home, Inc., Cambridge Group, Inc., Integrated Health
Services of Riverbend, Inc., Integrated Health Services of Cliff Manor,
Inc., Integrated Health Group, Elm Creek of IHS, Inc., Spring Creek of
IHS, Inc., Carriage-By-The-Lake of IHS, Inc. and Firelands of IHS, Inc.
to Meditrust Mortgage Investments, Inc. (9)
10.2 -- Loan and Security Agreement dated as of May 1, 1990 by and between
Sovran Bank/Central South and Integrated of Amarillo, Inc. (9)
83
10.3 -- Amended and Restated Promissory Note dated April 8, 1991 made by
Integrated of Amarillo, Inc. in favor of Sovran Bank/Tennessee in the
aggregate principal amount of $300,000. (9)
10.4 -- Construction Loan Agreement dated November, 1990 by and between First
National Bank of Vicksburg and River City Limited Partnership. (9)
10.5 -- Guaranty and Suretyship Agreement, dated as of January 1, 1992,
between Integrated Health Services, Inc. and Nationsbank of Tennessee.
(9)
10.6 -- Deed of Trust Note from Integrated Health Services at Alexandria,
Inc. to Oakwood Living Centers of Virginia, Inc., dated June 4, 1993.
(10)
10.7 -- Loan Agreement dated as of December 30, 1993, by and among Integrated
Health Services at Colorado Springs, Inc. as Borrower, Integrated Health
Services, Inc., as Guarantor, and Bell Atlantic Tricon Leasing Corp. (6)
10.8 -- Promissory Note, dated December 30, 1993 made by Integrated Health
Services at Colorado Springs, Inc. in favor of Bell Atlantic Tricon
Leasing Corp. (6)
10.9 -- Guaranty Agreement, dated as of December 30, 1993, made by Integrated
Health Services, Inc. in favor of Bell Atlantic Tricon Leasing Corp. (6)
10.10 -- Revolving Credit and Term Loan Agreement dated as of April 20, 1995
among Integrated Health Services, Inc., Citicorp USA, Inc. and the
lenders named herein. (23)
10.11 -- First Amendment to revolving credit and term loan agreement dated as
of May 11, 1995 among Integrated Health Services, Inc., and Citicorp
USA, Inc., et al. (24)
10.12 -- Guaranty by Integrated Health Services, Inc. dated December 16, 1993
to IFIDA Healthcare Group, Ltd., Morris Manor Associates, Plymouth House
Health Care Center, Inc., Chateau Associates, Broomall Associates, Lake
Ariel Associates, Winthrop House Associates, Limited Partnership, Mill
Hill Associates, Limited Partnership, Hillcrest Associates and Kent
Associates, L.P. (13)
10.13 -- Loan Agreement, dated December 20, 1993, by and between Integrated
Health Services at Central Florida, Inc. and Southtrust Bank of Alabama,
National Association. (6)
10.14 -- Mortgage and Security Agreement, dated December 20, 1993, between
Integrated Health Services of Central Florida, Inc. and Southtrust Bank
of Alabama, National Association. (13)
10.15 -- Guaranty Agreement, dated December 20, 1993, by Integrated Health
Services, Inc. in favor Of Southtrust Bank of Alabama, National
Association. (13)
10.16 -- Assignment and Pledge of Deposit Account, dated December 20, 1993,
from Integrated Health Services at Central Florida, Inc. in favor of
Southtrust Bank of Alabama, National Association. (13)
10.17 -- Lease Agreement dated as of July 11, 1985 (Cambridge Health Care
Center, Indianapolis, IN) by and between Cambridge Group of Indiana,
Inc. and The Mediplex Group, Inc., as amended by the First Amendment to
Lease Agreement dated as of December 19, 1985 and Second Amendment to
Lease Agreement dated as of October 24, 1990. (9)
10.18 -- Lease Guaranty dated February 10, 1989 by Integrated Health Services,
Inc. to and for the benefit of Mediplex of Indiana, Inc. (9)
10.19 -- Facility Lease dated as of December 30, 1986 (Somerset Nursing Home,
Bound Brook, NJ) by . and between Integrated Health Services, Inc. and
Meditrust. (9)
10.20 -- Facility Lease and Security Agreement dated as of August 13, 1987
(Briarcliff Nursing Home, Alabaster, AL) by and between Briarcliff
Nursing Home, Inc. and Meditrust of Alabama, Inc., as amended by First
Amendment of Lease dated December 30, 1987 and Second Amendment of Lease
agreement dated March 23, 1989. (9)
84
10.21 -- Facility Lease and Security Agreement dated as of December 30, 1987
(Alpine Manor Nursing Home, Erie, PA) by and between Alpine Manor, Inc.
and Meditrust at Alpine, Inc., as amended by the First Amendment of
Lease Agreement dated as of March 23, 1989. (9)
10.22 -- Facility Lease and Security Agreement dated as of March 24, 1988
(Cliff Manor Nursing Home, Riverside, Missouri) by and between
Integrated Health Services of Cliff Manor, Inc. and Meditrust of
Missouri, Inc. (9)
10.23 -- Pledge Agreement dated March 24, 1988 by and between Integrated
Health Services, Inc. and Meditrust of Missouri, Inc., relating to Cliff
Manor Nursing Home, Riverside, Missouri. (9)
10.24 -- Facility Lease and Security Agreement dated as of May 5, 1988
(Riverbend Nursing Home, Grand Blanc, MI) by and between Integrated
Health Services of Riverbend, Inc. and Meditrust of Michigan, Inc. (9)
10.25 -- Amendment of Lease Agreement dated as of March 28, 1991 by and
between Integrated Health Services of Riverbend, Inc. and Meditrust of
Michigan, Inc. (8)
10.26 -- Pledge Agreement dated May 5, 1988 by and between Integrated Health
Services, Inc. and Meditrust of Michigan, Inc. (9)
10.27 -- Amended and Restated Lease dated as of May 24, 1990 (Ballard
Convalescent Center, Seattle, WA) by and between Integrated Ballard,
Inc. and Liberty Retirement Housing Limited Partnership. (9)
10.28 -- Facility Lease and Security Agreement dated as of December 7, 1990
(Elm Creek Nursing Center) by and between Elm Creek of IHS, Inc. and
Meditrust of Ohio, Inc. Facility Lease and Security Agreements dated as
of December 7, 1990 by and between Meditrust of Ohio, Inc. and each of
Spring Creek of IHS, Inc., Carriage-By-The-Lake of IHS Inc. and
Firelands of IHS, Inc. have been omitted because such agreements are
substantially identical to the aforementioned agreement. (9)
10.29 -- Letter Agreement dated December 7, 1990 by and between Integrated
Health Services, Inc., for itself and certain subsidiaries and
affiliates and Meditrust, for itself and its subsidiaries that are
parties to certain lease documents. (9)
10.30 -- Letter Agreement dated December 7, 1990 by and among Integrated
Health Services, Inc., Integrated Health Services of Cliff Manor, Inc.,
Meditrust, Meditrust of Missouri, Inc. and Meditrust of Ohio, Inc. (9)
10.31 -- Letter Agreement dated December 7, 1990 by and among Integrated
Health Services, Inc., Elm Creek of IHS, Inc., Spring Creek of IHS,
Inc., Carriage-By-The-Lake of IHS, Inc., Firelands of IHS, Inc. and
Meditrust of Ohio, Inc. (9)
10.32 -- Letter Agreement dated December 7, 1990 by and among Integrated
Health Services, Inc., Alpine Manor, Inc., Briarcliff Nursing Home,
Inc., Cambridge Group, Inc., Integrated Health Services of Riverbend,
Inc., Integrated Health Services of Cliff Manor, Inc., Integrated Health
Group and Meditrust. (9)
10.33 -- Letter Agreement dated March 28, 1991 by and among Integrated Health
Services, Inc., Alpine Manor, Inc., Briarcliff Nursing Home, Inc.,
Cambridge Group, Inc., Integrated Health Services of Riverbend, Inc.,
Integrated Health Services of Cliff Manor, Inc., Integrated Health
Group, Elm Creek of IHS, Inc., Spring Creek of IHS, Inc.,
Carriage-By-The-Lake of IHS, Inc., Firelands of IHS, Inc. and Meditrust.
(9)
10.34 -- Letter of Amendment dated December 7, 1990 between Integrated Health
Services, Inc. and Jack S. Semelsberger, Sr. (9)
10.35 -- Letter dated December 7, 1990 among Integrated Health Services, Inc.,
Elm Creek of IHS, Inc., Spring Creek of IHS, Inc., Carriage-By-The-Lake
of IHS, Inc., Firelands of IHS, Inc. and Meditrust of Ohio, Inc. (9)
85
10.36 -- Memorandum of Facility Lease and Security Agreement dated December 7,
1990 by and between Meditrust of Ohio, Inc. and Elm Creek of IHS, Inc .
Memorandum of Facility Lease and Security Agreement dated December 7,
1990 by and between Meditrust of Ohio, Inc. and each of Spring Creek of
IHS, Inc., Firelands of IHS, Inc. and Carriage-By-The-Lake of IHS, Inc.
have been omitted because such agreements are substantially identical to
the aforementioned agreement. (9)
10.37 -- Letter dated December 11, 1990 between Integrated Health Services,
Inc., Elm Creek of IHS, Inc. Spring Creek of IHS, Inc.,
Carriage-By-The-Lake of IHS, Inc., Firelands of IHS, Inc., and Meditrust
of Ohio, Inc. (9)
10.38 -- Letter Agreement dated December 17, 1991, among Integrated Health
Services, Inc., certain of its subsidiaries and Meditrust for itself and
its subsidiaries that are parties to agreements with Integrated Health
Services and its subsidiaries. (15)
10.39 -- Purchase Option Agreement, dated December 31, 1991, by and among
Darrel C. Watson, William W. Webb and Darrel C. Watson as executors
under the Last Will and Testament of Rachel A. Brantley, deceased, and
Integrated Health Services at Blue Ridge Manor, Inc. (15)
10.40 -- Purchase Option Agreement dated as of July 1, 1992, between Driftwood
Health Care Managers, Inc. and Integrated Health Services at Driftwood,
Inc. (5)
10.41 -- Purchase Option Agreement, Amendment dated as of April 15, 1995,
between Briarcliff Haven, Inc. and Integrated Health Services at
Briarcliff Haven, Inc. (24)
10.42 -- Amended and Restated Lease Agreement, dated as of October 1, 1992, by
and among Skilled Rehabilitative Services, Inc., Integrated Health
Services of Green Briar, Inc. and Integrated Health Services, Inc. (5)
10.43 -- Amended and Restated Purchase Option, dated as of October 1, 1992, by
and between Integrated Health Services of Green Briar, Inc. and Skilled
Rehabilitative Services, Inc. (5)
10.44 -- Receivables Purchase Agreement, dated as of September 30, 1992, by
and between Skilled Rehabilitative Services, Inc. and Integrated Health
Services of Green Briar, Inc. (5)
10.45 -- Promissory Note, dated October 1, 1992, made by Integrated Health
Services of Green Briar, Inc. to the order of Skilled Rehabilitative
Services, Inc. (5)
10.46 -- Third Amendment to Facility Lease and Security Agreement, dated as of
October 29, 1992, by and between Briarcliff Nursing Home, Inc. and
Meditrust of Alabama, Inc. (5)
10.47 -- Lease and Security Agreement, dated August 17, 1992, by and between
Nationwide Health Properties, Inc. and Integrated Health Services at
Orange Park, Inc. (5)
10.48 -- Guaranty of Lease, dated as of August 17, 1992, by Integrated Health
Services, Inc. in favor of Nationwide Health Services, Inc. (5)
10.49 -- Purchase Option Agreement, dated December 7, 1992, by and between
Heritage/Highlands Health Care Associates Limited Partnership and
Integrated Health Services at Hanover House, Inc. (5)
10.50 -- Letter dated February 18, 1994, to IFIDA Health Care Group, Ltd. from
Integrated Health Services, Inc. (13)
10.51 -- Facilities Agreement dated as of August 31, 1994 by and among
Litchfield Asset Management Corp., Integrated Health Services of Lester,
Inc and Integrated Health Services, Inc. (16)
10.52 -- Lease dated as of August 31, 1994 between Litchfield Asset Management
Corp. and Integrated Health Services of Lester, Inc. As permitted by the
instructions to Item 601 of Regulation S-K, the 42 additional Lease
Agreements between subsidiaries of Integrated Health Services, Inc. and
Litchfield Asset Management Corp. have been omitted because each such
agreement is substantially identical in all material respects to the
aforementioned Lease Agreement (16)
86
10.53 -- Purchase Option Agreement dated as of August 31, 1994 between
Litchfield Asset Management Corp. and Integrated Health Services of
Lester, Inc. As permitted by the instructions of Item 601 of Regulation
S-K, the 42 additional Purchase Option Agreements between subsidiaries
of Integrated Health Services, Inc. and Litchfield Asset Management
Corp. have been omitted because each such agreeement is substantially
identical in all material respects to the aforementioned Purchase
Option. (16)
10.54 -- Guaranty dated as of August 31, 1994 by Integrated Health Services,
Inc. for the benefit of Litchfield Asset Management Corp. (16)
10.55 -- Warrant to Purchase Shares of Common Stock of Integrated Health
Services, Inc. dated as of August 31, 1994 issued to Litchfield Asset
Management Corp. (16)
10,56 -- Participation Agreement dated as of August 31, 1994 between
Litchfield Asset Management Corp. and Integrated Health Services of
Lester, Inc. (16)
10.57 -- Agreement of Limited Partnership of River City Limited Partnership
dated December 6, 19896 by and between Sydney House, Inc., Delco, Inc.
and the limited partners named therein. (9)
10.58 -- Stock Issue Agreement dated May 18, 1988, as amended on December 21,
1990 by and among Integrated Health Services, Inc., Robert N. Elkins,
Timothy F. Nicholson and Skilled Rehabilitation Services, Inc. (9)
10.59 -- Form of Indemnity Agreement. (9)
10.60 -- Integrated Health Services, Inc. Equity Incentive Plan, as amended.
(17)
10.61 -- Integrated Health Services, Inc. 1990 Employee Stock Option Plan, as
amended. (17)
10.62 -- Integrated Health Services, Inc. 1992 Stock Option Plan (17)
10.63 -- Integrated Health Services, Inc. Employee Stock Purchase Plan (17)
10.64 -- Senior Executives' Stock Option Plan. (18)
10.65 -- 1994 Stock Incentive Plan. (18)
10.66 -- Stock Option Plan for Non-Employee Directors. (18)
10.67 -- Stock Option Compensation Plan for Non-Employee Directors. (18)
10.68 -- Cash Bonus Replacement Plan (22)
10.69 -- Integrated Health Services, Inc. Key Employee Supplemental Executive
Retirement Plan ("Plan A")(24)
10.70 -- Integrated Health Services, Inc. Supplemental Executive Retirement
Plan ("Plan B")(24)
10.71 -- Integrated Health Services, Inc. Supplemental Deferred Compensation
Plan ("Plan Z")(24)
10.72 -- Option Agreement dated January 25, 1988 by and between Timothy F.
Nicholson and Integrated Health Services, Inc. (9)
10.73 -- Amendment 1 to Employment Agreement effective January 1, 1995 between
Integrated Health 10.73 Services, Inc. and Robert N. Elkins. (24)
10.74 -- Amendment 1 to Employment Agreement effective January 1, 1995 between
Integrated Health Services, Inc. and Lawrence P. Cirka. (24)
10.75 -- Employment Agreement effective January 1, 1994 between Integrated
Health Services, Inc. and Dennis Cahill. (4)
10.76 -- Employment Agreement effective July 1, 1994 between Integrated Health
Services, Inc. and 6 Brian Davidson. (4)
10.77 -- Employment Agreement effective July 1, 1994 between Integrated Health
Services, Inc. and Edward J. Komp. (4)
10.78 -- Employee Agreement dated June 5, 1995 between Asia Care, Inc. and
John L. Silverman (22)
87
10.79 -- Stock Exchange Agreement dated as of May 24, 1990 between Integrated
Health Services, Inc. and Jeffrey Olsen. A Stock Exchange Agreement
dated as of May 24, 1990 between Integrated Health Services, Inc. and
Russell Disbro has been omitted because such agreement is substantially
identical to the aforementioned agreement. (9)
10.80 -- Consultation Agreement, dated as of February 1, 1992, between
Integrated Health Services, Inc. and Park Regency Ltd. I. (15)
10.81 -- Pledge Agreement and Amendment No 1 to Agreement for Consulting and
Management Services and Personal Services Agreement, dated January 4,
1993, among the Company, Health Care Consulting, Inc., Health Care
Systems, Inc., Grantly Payne, and Scott Robertson. (19)
10.82 -- Revolving Credit and Security Agreements, dated as of December 30,
1992, between Integrated Health Services, Inc. and Morgan Hill Health
Care Investors, Inc. (19)
10.83 -- Purchase Option, dated as of December 1, 1992, between Integrated
Health Services at Denton, Inc. and Wesleyan Home Care, Inc. (19)
10.84 -- Purchase Option and Right of First Refusal Agreement, dated January
20, 1993, among Integrated Health Services of Missouri, Inc., Dominic F.
Tutera, Joseph C. Tutera, and Michael J. Tutera. (19)
10.85 -- Purchase Option and Right of First Refusal Agreement dated January
20, 1993, between Integrated Health Services of Missouri, Inc. and
Dominic F. Tutera. (19)
10.86 -- Revolving Credit and Security Agreement dated January 20, 1993,
between Integrated Health Services of Missouri, Inc. and Cenill, Inc.
(19)
10.87 -- Purchase Option Agreement, dated December 28, 1992, between
Briarcliff Nursing Home, Inc. and Meditrust of Alabama, Inc. (19)
10.88 -- Warrant to Purchase Shares of Common Stock dated July 1, 1992 issued
to Driftwood Health Care Managers, Inc. (19)
10.89 -- Guaranty dated July 1, 1992 made by Integrated Health Services, Inc.
(19)
10.90 -- Guaranty dated September 15, 1992 made by Integrated Health Services,
Inc. (19)
10.91 -- Share Purchase Agreement, effective as of September 30, 1993, among
Integrated Health Services, Inc., Gary M. Kelso, Grantly R. Payne, Scott
W. Robertston, Robert C. Brozowski, Mark C. Himmel, and Health Care
Systems, Inc. (20)
10.92 -- Sale and Purchase Agreement, effective as of September 30, 1993,
among Integrated Health Services, Inc., Vero Beach Associates Limited
Partnership, Fort Pierce Associates Limited Partnership and Orlando
Associates Limited Partnership. (20)
10.93 -- Agreement and Plan of Reorganization, dated as of May 28, 1993, among
Integrated Health Services, Inc., IHS Acquisition, Inc., and Eileen
Goodis, Earl Racine and Patient Care Pharmacy, Inc. (10)
10.94 -- (i) Aircraft Purchase Agreement between Steve Allen Aircraft Sales,
Inc. and Integrated Health Services, Inc., dated as of May 27, 1993, and
(ii) Bill of Sale between Integrated Health Services, Inc. and
Integrated Health Services of Skyview, Inc., dated June 30, 1993. (10)
10.95 -- Assignment Agreement dated May 28, 1993 among Square D Company,
Integrated Health Services, Inc., Manekin at Owings Mills I Limited
Partnership, and McDonough School, Inc. (10)
10.96 -- Assignment dated June 1, 1993 among Integrated Health Services, Inc.,
Rouse-Teachers Properties, Inc., Rouse Office Management, Inc. and
Square D Company. (10)
10.97 -- Consulting Agreement dated as of April 26, 1993 between Integrated
Health Services, Inc. and Timothy F. Nicholson. (11)
10.98 -- Loan and Security Agreement, dated July 7, 1993, among Health Care
Industries Corporation, Integrated Health Services, Inc., and Jack
Semelsberger, Sr. (20)
88
10.99 -- Agreement and Plan of Reorganization, dated as of December 1, 1993,
among Integrated Health Services, Inc., IHS Acquisition II, Inc., Larry
Garatoni, Scott Frazier, Anthony Wright and Associated Therapists
Corporation d/b/a Achievement Rehab. (21)
10.100 -- Stock Subscription Agreement, dated December 16, 1993, by and between
Integrated Health Services, Inc. and Plymouth House Health Care Center,
Inc. As permitted by the Instructions to Item 601 of Regulation S-K, the
Stock Subscription Agreements entered into by Integrated Health
Services, Inc. with Mill Hill Associates, Limited Partnership, Hillcrest
Associates, Broomall Associates, Lake Ariel Associates, Ltd., Winthrop
House Associates, Limited Partnership, Chateau Associates, and Kent
Associates have been omitted because each such agreement is
substantially identical in all material respects to the aforementioned
stock subscription agreement. (13)
10.101 -- Amended and Restated Purchase and Sale Agreement dated as of October
27, 1993 by and among Trizec Properties Inc., Triangle Realty
Investments, Inc. and Integrated Health Services, Inc. (21)
10.102 -- Purchase Option Agreement, made and entered into January 2, 1994 by
and among James M. Dobbins, Sr., James M. Dobbins, Jr., Bryan D. Burr,
George Lytal, Mary Lou Glantz, Crestwood Hospitals, Inc., West Coast
Cambridge, Inc. and Integrated Health Services, Inc. (6)
10.103 -- Partnership Purchase Option Agreements, made and entered to January
1, 1994, by and among James M. Dobbins, Sr., James M. Dobbins, Jr.,
Bryan D. Burr and West Coast Cambridge, Inc. (6)
10.104 -- Facilities Credit Agreement, dated January 1, 1994, between Crestwood
Hospitals, Inc. and West Coast Cambridge, Inc. (6)
10.105 -- Management Agreement, made and entered into (and effective as of)
January 1, 1994, between and among Crestwood Hospitals, Inc., West Coast
Cambridge, Inc., James M. Dobbins, Sr., James M. Dobbins, Jr., and Bryan
D. Burr. (6)
10.106 -- Loan Agreement, dated December 16, 1993, between Mill Hill
Associates, Limited Partnership and Integrated Health Services at
Eastern Massachusetts, Inc. As permitted by the Instructions to Item 601
of Regulation S-K, seven additional Loan Agreements entered into
subsidiaries of the Registrant have been omitted because each such
agreement is substantially identical to the aforementioned loan
agreement. (6)
10.107 -- Purchase and Sale Agreement, effective as of September 30, 1993, by
and between Vero Beach Associates Limited Partnership, Fort Pierce
Associates Limited Partnership and Integrated Health Services at Central
Florida, Inc. (6)
10.108 -- Stock Purchase Agreement, dated as of March 19, 1996 among Integrated
Health Services Inc. and James Hough, Summitt Ventures III, L.P.,
Summitt Investors II, L.P., Frank Foster, Jamie Ellertson and Rehab
Management Systems, Inc. (24)
10.109 -- Merger Agreement, dated as of February 21, 1996 between Integrated
Health Services, Inc., IHS Acquisition XIV, Inc. and First American
Health Care of Georgia, Inc. (24)
10.110 -- Asset Purchase Agreement, dated as of December 30, 1993, between MTC
West, Inc. and Integrated Health Services at Colorado Springs, Inc. (6)
10.111 -- Purchase Option Agreement, dated December 16, 1993, between Mill Hill
Associates, Limited Partnership and Integrated Health Services at
Eastern Massachusetts, Inc. As permitted by the Instructions to Item 601
of Regulation S-K, seven additional Purchase Option Agreements entered
into by subsidiaries of the Registrant have been omitted because each
such agreement is substantially identical in all material aspects to the
aforementioned purchase option agreement. (6)
10.112 -- Investment Agreement for Speciality Care PLC dated July 26, 1995 (24)
21 -- Subsidiaries of Registrant. (24)
23.1 -- Consent of KPMG Peat Marwick LLP.
89
- -----------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-3, Nos 33-77754, effective June 29, 1994.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-4, No. 33-94130, effective September 15, 1995.
(3) Incorporated by reference to the Company's Current Report on Form 8-k
dated September 27, 1995.
(4) Incorporated by reference to the Company's Annual Report on Form 10-k for
the year ended December 31, 1994.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 33-54458, effective December 9, 1992.
(6) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 33-76322, effective June 29, 1994.
(7) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 33-81378, effective September 21, 1994.
(8) Incorporated by reference to the Company's Quarterly Report on From 10-Q
for the period ended June 30, 1994.
(9) Incorporated by reference to the Company's Registration Statement on Form
S-1, No. 33-39339, effective April 25, 1991.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1993.
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1993.
(12) Incorporated by reference to the Company's Current Report on Form 8-K/A,
dated December 1, 1993.
(13) Incorporated by reference the Company's Annual Report on Form 10-K for the
year ended December 31, 1993.
(14) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1994.
(15) Incorporated by reference to the Company's Registration Statement on Form
S-1, No. 33-46134, effective April 1, 1992.
(16) Incorporated by reference to the Company's Current Report on Form 8-K
dated August 31, 1994.
(17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1992.
(18) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1994.
(19) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.
(20) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1993.
(21) Incorporated by reference to the Company's Current Report on Form 8-K,
dated December 1, 1993.
(22) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1995.
(23) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1995.
(24) Filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
INTEGRATED HEALTH SERVICES, INC.
(Registrant)
By: /s/ W. Bradley Bennett
------------------------------------
W. Bradley Bennett
Executive Vice President-
Chief Accounting Officer
(Principal Accounting Officer)
March 31, 1997