UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended March 31, 1997
--------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
------------- ---------------
Commission File Number: 1-12306
---------------
Integrated Health Services, Inc.
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(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 Boulevard, Owings Mills, MD 21117
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(Address of principal executive offices) (Zip Code)
(410) 998-8400
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(Registrant's telephone, including area code)
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.
[ X ] Yes [ ] No
Number of shares of common stock of the registrant outstanding as of
May 12, 1997: 24,882,292 shares.
INTEGRATED HEALTH SERVICES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. - Condensed Financial Statements -
----------------------------------
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996 3
Consolidated Statements of Earnings
for the three months ended March 31, 1997
and 1996 4
Consolidated Statement of Changes in
Stockholders' Equity for the three
months ended March 31, 1997 5
Consolidated Statements of Cash Flows
for the three months ended March 31, 1997
and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
PART II: OTHER INFORMATION
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Page 2 of 19
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
MARCH 31, DECEMBER 31,
1997 1996
------------------- -------------------
Assets
Current Assets:
Cash and cash equivalents $ 38,767 39,028
Temporary investments 1,737 2,044
Patient accounts and third-party payor settlements
receivable, less allowance for doubtful receivables
of $36,194 at March 31, 1997 and $41,527 at December 31, 1996 339,496 326,883
Inventories, prepaid expenses
and other current assets 31,887 26,243
Income taxes receivable 10,379 20,992
------------------- -------------------
Total current assets 422,266 415,190
------------------- -------------------
Property, plant and equipment, net 887,395 864,335
Intangible assets 605,487 572,159
Investments in and advances to affiliates 74,499 76,047
Other assets 68,431 65,376
------------------- -------------------
Total assets $ 2,058,078 1,993,107
=================== ===================
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt $ 15,738 16,547
Accounts payable and accrued expenses 322,642 341,094
------------------- -------------------
Total current liabilities 338,380 357,641
------------------- -------------------
Long-term Debt:
Convertible subordinated debentures 258,750 258,750
Revolving and long-term debt, less current maturities 822,201 779,450
------------------- -------------------
Total long-term debt 1,080,951 1,038,200
------------------- -------------------
Other long-term liabilities 34,562 33,851
Deferred income taxes 23,431 22,283
Deferred gain on sale-leaseback transactions 5,968 6,267
Stockholders' equity:
Preferred stock, authorized 15,000,000 shares; no shares
issued and outstanding - -
Common stock, $0.001 par value. Authorized 150,000,000
shares; issued 24,748,680 at March 31, 1997 and 23,628,250 at
December 31, 1996 25 24
Additional paid-in capital 475,878 445,667
Retained earnings 98,883 79,814
Unrealized gain on available for sale securities - 9,360
------------------- -------------------
Net stockholders' equity 574,786 534,865
------------------- -------------------
Total liabilities and stockholders' equity $ 2,058,078 1,993,107
=================== ===================
See accompanying Notes to Consolidated Financial Statements
Page 3 of 19
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(dollars in thousands)
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
1997 1996
---------------- ----------------
Net revenues:
Basic medical services $ 88,755 97,216
Specialty medical services 362,689 219,525
Management services and other 9,499 10,532
---------------- ----------------
Total revenues 460,943 327,273
---------------- ----------------
Costs and expenses:
Operating expenses 352,412 249,895
Corporate administrative and general 18,016 15,093
Depreciation and amortization 15,030 8,274
Rent 24,009 17,656
Interest, net 21,421 14,214
Other non-recurring income (1,025) -
---------------- ----------------
Total costs and expenses 429,863 305,132
---------------- ----------------
Earnings before equity in earnings
of affiliates and income taxes 31,080 22,141
Equity in earnings of affiliates 181 300
---------------- ----------------
Earnings before income taxes 31,261 22,441
Federal and state income taxes 12,192 8,640
---------------- ----------------
Net earnings $ 19,069 13,801
================ ================
Per Common Shares:
Net earnings-primary $ 0.74 0.62
Net earnings-fully diluted $ 0.63 0.54
================ ================
See accompanying Notes to Consolidated Financial Statements
Page 4 of 19
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
UNREALIZED
GAIN ON
ADDITIONAL AVAILABLE
COMMON PAID-IN RETAINED FOR SALE
STOCK CAPITAL EARNINGS SECURITIES TOTAL
-----------------------------------------------------------------------------------
Balance at December 31, 1996 $ 24 445,667 79,814 9,360 534,865
Issuance of 976,504 shares of
common stock in payment of earn-out
in connection with prior acquisition 1 26,438 -- -- 26,439
Issuance of 30,248 shares of common
stock in connection with employee
stock purchase plan -- 647 -- -- 647
Exercise of employee stock options
for 113,678 shares of common stock -- 3,126 -- -- 3,126
Realized gain on available for sale
securities -- -- -- (9,360) (9,360)
Net earnings -- -- 19,069 -- 19,069
-----------------------------------------------------------------------------
Balance at March 31, 1997 $ 25 475,878 98,883 -- 574,786
=============================================================================
See accompanying Notes to Consolidated Financial Statements
Page 5 of 19
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
1997 1996
--------------- ----------------
Cash flows from operating activities:
Net earnings $ 19,069 13,801
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Other non-recurring income (1,025) 0
Undistributed results of joint ventures 0 (55)
Depreciation and amortization 15,030 8,274
Deferred income taxes and other non-cash items 1,396 1,142
Amortization of gain on sale-leaseback transactions (299) (285)
Increase in patient accounts and third-party
payor settlements receivable, net (10,386) (15,260)
Increase in inventories, prepaid
expenses and other current assets (5,581) (788)
Decrease in accounts payable and accrued expenses (18,935) (22,493)
Decrease in income taxes receivable 10,613 2,950
--------------- ----------------
Net cash provided (used) by operating activities 9,882 (12,714)
--------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of capital stock, net 3,773 1,259
Proceeds from long-term borrowings 139,928 96,737
Repayment of long-term debt (97,639) (11,286)
Dividends paid (471) (435)
Deferred financing costs (698) (329)
--------------- ----------------
Net cash provided by financing activities 44,893 85,946
--------------- ----------------
Cash flows from investing activities:
Sale of temporary investments 355 67
Purchase of temporary investments (48) 0
Business acquisitions (10,975) (16,581)
Purchase of property, plant and equipment (41,096) (35,705)
Other assets (3,272) (30,370)
--------------- ----------------
Net cash used by investing activities (55,036) (82,589)
--------------- ----------------
Decrease in cash and cash equivalents (261) (9,357)
Cash and cash equivalents, beginning of period 39,028 38,917
--------------- ----------------
Cash and cash equivalents, end of period $ 38,767 29,560
=============== ================
See accompanying Notes to Consolidated Financial Statements
Page 6 of 19
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements included herein do not contain all
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles. For
further information, such as the significant accounting policies followed by
Integrated Health Services, Inc. ("IHS" or "Company"), refer to the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996. In the
opinion of management, the consolidated financial statements include all
necessary adjustments (consisting of only normal recurring accruals) for a
fair presentation of the financial position and results of operations for the
interim periods presented. The results of operations for the interim periods
presented are not necessarily indicative of the results that may be expected
for the full year.
NOTE 2: 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
higher of the end-of-period price per share, or the weighted average price for
the period, and the issuance of common shares upon the assumed conversion of
the convertible subordinated debentures. 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 and the resulting net earnings for fully diluted earnings per
share purposes are summarized as follows for the three months ended March 31,
1997 and 1996, respectively:
1997 1996
-------- ------
Net earnings $19,069 13,801
Adjustment for interest and underwriting
costs on convertible debentures 2,452 2,472
-------- ------
Net earnings for fully diluted EPS $21,521 16,273
======== ======
Weighted average shares-Primary 25,783 22,257
Weighted average shares-Fully Diluted 34,044 30,317
======== ======
Page 7 of 19
NOTE 3: NEW ACQUISITIONS
ACQUISITIONS DURING THE THREE MONTHS ENDED MARCH 31, 1997
Acquisitions for the three months ended March 31, 1997 and the
manner of payment are summarized as follows:
COMMON
TOTAL STOCK ACCRUED CASH
MONTH TRANSACTION DESCRIPTION COST ISSUED LIABILITIES PAID
- ----- ----------------------- ---- ------ ----------- ----
January Stock of In-Home Health
Care, Inc. $ 3,450 $ -- $ 250 $ 3,200
February Assets of Professional
Health Services, Inc. 350 -- 100 250
February Assets of Portable X-Ray
Labs, Inc. 6,200 -- 1,300 4,900
March Assets of Laboratory
Corporation of America 35 -- -- 35
March Assets of Doctor's Home
Health Agency, Inc. 445 -- 95 350
March Payment of earnout in
connection with Achievement
Rehab acquisition in December
1993 26,439 26,439 -- --
Cash payments of
acquisitions costs
accrued in 1995 and 1996 -- -- (2,240) 2,240
------ ------- ------- ------
$ 36,919 $26,439 $ (495) $10,975
====== ======= ======= ======
Page 8 of 19
The allocation of the total cost of the 1997 acquisitions to
the assets acquired and the liabilities assumed is summarized
as follows:
PROPERTY
CURRENT PLANT & OTHER INTANGIBLE CURRENT LONG-TERM TOTAL
TRANSACTION ASSETS EQUIPMENT ASSETS ASSETS LIABILITIES LIABILITIES COSTS
- ----------- ------ --------- ------ ------ ----------- ----------- -----
In-Home Health
Care, Inc. $ 989 $ 229 $ 7 $ 3,856 ($ 797) ($ 834) $ 3,450
Professional
Health Services,
Inc. -- 20 9 321 -- -- 350
Portable X-Ray
Labs, Inc. 1,309 -- 11 5,653 (297) (476) 6,200
Laboratory Corp.
of America,
Indianapolis -- 10 -- 25 -- -- 35
Doctors's Home
Health Agency,
Inc. -- 6 -- 439 -- -- 445
Achievement Rehab -- -- -- 26,439 -- -- 26,439
-------- -------- -------- -------- -------- -------- --------
$ 2,298 $ 265 $ 27 $ 36,733 ($ 1,094) ($ 1,310) $ 36,919
======== ======== ======== ======== ======== ======== ========
NOTE 4: PHARMACY GAIN
In July 1996, the Company sold its pharmacy division to Capstone
Pharmacy Services, Inc. ("Capstone") for a purchase price of $150
million, consisting of cash of $125 million, and shares of Capstone
stock having a value of $25 million. At the date of sale the Company's
investment in the shares of Capstone's common stock was recorded at
its carry over cost of $14.7 million, which represented less than 20%
of the total Capstone shares. During the first quarter 1997, the
Company realized a gain of $7.6 million on its investment in the
Capstone shares.
NOTE 5: RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," ("SFAS 128"), which
simplifies the standards for computing earnings per share ("EPS").
SFAS 128 is effective for the Company's fourth quarter and year ending
December 31, 1997. Early application is not permitted and prior period
EPS data will be restated.
Under SFAS 128, primary EPS will be replaced with basic EPS. Basic EPS
excludes the dilutive effect of common stock equivalents. Also, under
SFAS 128, fully-diluted EPS will be replaced by diluted EPS. Diluted
EPS is calculated similarly to fully-diluted EPS pursuant to
Accounting Principles Board Opinion 15.
The change in calculation method is not expected to have a material
impact on previously reported earnings per common share data.
NOTE 6: SUBSEQUENT EVENTS
Acquisitions
------------
In April 1997, the Company acquired the assets of Coastal
Rehabilitation, Inc., a rehabilitation company in Florida, for
approximately $1.25 million, and the assets of Mobile Diagnostics,
Inc., a mobile x-ray company in North Carolina for $225,000. In
addition, the Company has reached agreements in principle to acquire a
mobile x-ray company in New Jersey for approximately $1.2 million, a
mobile x-ray company in Maryland for approximately $300,000, a
contract rehabilitation company in the Midwest for approximately $19.7
million, a home healthcare services company in Indiana for
approximately $330,000, a home healthcare services company for
approximately $7.5 million, and a home healthcare services company in
the Southeast for approximately $37.5 million. There can be no
assurance that any of these pending acquisitions will be consummated
on the proposed terms, on different terms, or at all.
Page 9 of 19
Settlement with Coram
---------------------
On October 19, 1996, IHS and Coram entered into a definitive agreement
and plan of merger (the "Merger Agreement") providing for the merger
of a wholly-owned subsidiary of IHS into Coram, with Coram becoming a
wholly-owned subsidiary of IHS. Under the terms of the Merger
Agreement, holders of Coram common stock were to receive for each
share of Coram common stock 0.2111 of a share of the Company's Common
Stock. As a result of the merger, IHS would have assumed approximately
$375 million of indebtedness. On April 4, 1997, IHS notified Coram
that it had exercised its rights to terminate the Merger Agreement.
IHS also terminated the March 30, 1997 letter amendment, setting forth
proposed revisions to the terms of the merger (which included a
reduction in the exchange ratio to 0.15 of a share of IHS Common Stock
for each share of Coram common stock), prior to the revisions becoming
effective at the close of business on April 4, 1997. On May 5, 1997,
IHS and Coram entered into a settlement agreement pursuant to which
the Company paid Coram $21 million in full settlement of all claims
Coram might have against IHS pursuant to the Merger Agreement, which
the Company will recognize in the second quarter. In addition, during
the first quarter the Company incurred $6.6 million of accounting,
legal and other costs related to the merger.
Tender Offer for Senior Subordinated Notes
------------------------------------------
On April 30, 1997, the Company announced that it had commenced cash
tender offers, subject to certain conditions including, without
limitation, obtaining financing from debt or equity offerings or
borrowings under its credit facility, to purchase all its outstanding
9-5/8% Senior Subordinated Notes due 2002 Series A (the "9-5/8%
Notes"), its 10-3/4% Senior Subordinated Notes due 2004 (the "10-3/4%
Notes" and together with the 9-5/8% Notes, the "Tender Notes") and
related consent solicitations to eliminate certain restrictive
covenants and other provisions in the indentures pursuant to which the
Tender Notes were issued in order to improve the operating and
financial flexibility of the Company.
The total consideration payable pursuant to the tender offer and
consent solicitation to holders of the 9-5/8% Notes who tender their
notes (and thereby deliver consents to the proposed amendments to the
indenture pursuant to which the 9 5/8% Notes were issued) is $1,094
plus accrued and unpaid interest to, but not including, the payment
date, consisting of $1,089 plus accrued and unpaid interest as tender
offer consideration and $5 as a consent payment. Total consideration
payable pursuant to the tender offer and consent solicitation to
holders of the 10-3/4% Notes who tender their notes (and thereby
deliver consents to the proposed amendments to the indenture pursuant
to which the 10 3/4% Notes were issued) is $1,119.50 plus accrued and
unpaid interest to but not including the payment date, consisting of
$1,114.50 plus accrued and unpaid interest as tender offer
consideration and $5 as a consent payment.
The tender offer and consent solicitation for each of the 9 5/8% Notes
and the 10 3/4% Notes expires at 12:00 midnight, New York City time,
on May 29, 1997, unless extended (the "Expiration Date"). Holders must
validly tender their Tender Notes prior to 12:00 midnight on the
Expiration Date in order to receive the tender offer consideration. In
order to receive the consent payment, holders must validly tender ther
Tender Notes (and thereby deliver their consent to the proposed
amendments to the indenture pursuant to which their Tender Notes were
issued) prior to 12:00 midnight, New York City time, on the Consent
Date. The Consent Date for each of the 9 5/8% Notes and the 10 3/4%
Notes is the later of May 14, 1997 or the Consent Achievement Date for
such Tender Notes. The Consent Achievement Date for each of the 9 5/8%
Notes and the 10 3/4% Notes is the date that the Company receives duly
executed consents from holders representing a majority in principal
amount of such Tender Notes outstanding.
An aggregate of $115 million principal amount of 9-5/8% Notes is
presently outstanding. An aggregate of $100 million principal amount
of 10-3/4% Notes is presently outstanding. Each tender offer and
consent solicitation is conditioned upon, among other things, the
availability to the Company of funds sufficient to pay the aggregate
consideration and related costs and expenses of the offers on terms
and conditions satisfactory to the Company in its sole discretion. The
Company intends to pay the aggregate consideration due in connection
with the tender offer and consent solicitations with the proceeds of a
private debt financing.
Page 10 of 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Net revenues for the three months ended March 31, 1997 increased $133.7
million, or 41%, to $460.9 million from the comparable period in 1996. Of the
$133.7 million increase, $119.0 million, or 89%, was due to the acquisition of
companies providing home health, mobile x-ray, rehabilitation therapy,
respiratory therapy and electrocardiogram services subsequent to March 31, 1996,
partially offset by a reduction in revenue resulting from the sale of the
Company's pharmacy division in July 1996 and the sale of a majority interest in
its assisted living services division in October 1996. Revenues in the first
quarter of 1996 include revenues of $22.4 million for the pharmacy division and
revenues of $5.6 million from its assisted living services division. The
remaining increase was due primarily to facilities and ancillary companies
acquired during the first quarter of 1996, subsequent to the first quarter of
1996 and increased revenues from facilities and ancillary companies in operation
during both periods.
Basic medical services revenue decreased 9% from $97.2 million to $88.8
million. This decrease primarily results from the conversion by the Company of
its skilled nursing beds to Medical Specialty Unit (MSU) beds after March 31,
1996, and the sale of a majority interest in its assisted living services
division in October 1996.
Specialty medical services revenue increased $143.2 million from $219.5
million to $362.7 million. Of the $143.2 million increase, $124.6 million, or
87%, was attributable to revenue from acquisitions subsequent to March 31, 1996,
partially offset by a reduction in specialty medical services revenue as a
result of the sale of the Company's pharmacy division in July 1996. The
remaining increase is due to increased revenue from facilities and ancillary
companies in operation in both periods, facilities and ancillary companies
acquired during the first quarter of 1996, facilities and ancillary companies
acquired subsequent to the first quarter of 1996, as well as skilled nursing
beds being converted to MSU beds after March 31, 1996.
Management services and other revenues decreased 10% from $10.5 million
to $9.5 million.
Page 11 of 19
Total expenses for the period increased to $429.9 million from $305.1
million, an increase of 41%. Of the $124.8 million increase in total expenses,
$102.5 million, or 82%, was due to an increase in operating expenses. A
substantial portion of the increase in operating expenses was due to
acquisitions consummated subsequent to March 31, 1996, partially offset by the
disposal of the Company's pharmacy division in July 1996 and the sale of a
majority interest in its assisted living services division in October 1996.
During the first quarter 1997, the Company realized a $7.6 million gain
on its investment in Capstone Shares, offset by $6.6 million of accounting,
legal and other costs resulting from the Coram transaction. As a result, the
Company has recorded in its statement of earnings $1.0 million of non-recurring
income.
Corporate administrative and general expenses for the three months
ended March 31, 1997 increased by $2.9 million, or 19%, over the comparable
period in 1996. This increase primarily represents additional operations,
information systems, accounting, finance and other personnel to support the
growth through acquisition of ancillary businesses. Depreciation and
amortization increased to $15.0 million during the three months ended March 31,
1997, an 82% increase as compared to $8.3 million in the same period in 1996.
This increase is primarily the result of acquisitions consummated subsequent to
the first quarter of 1996. Rent expense increased by $6.4 million, or 36%, over
the comparable period in 1996, primarily as a result of an increase in
contingent rentals which are based on gross revenues of certain leased
facilities and rent at ancillary companies acquired subsequent to March 31,
1996, partially offset by a reduction resulting from the sale of the pharmacy
division and the sale of a majority interest in its assisted living services
division. Interest expense, net increased 51%, or $7.2 million, during the three
months ended March 31, 1997 to $21.4 million in the first quarter of 1997. The
increase in interest expense was primarily due to the Company's issuance of $150
million principal amount of 10-1/4% Senior Subordinated Notes issued in May 1996
and increased borrowings under the Company's current $700 million revolving
credit facility.
Earnings before equity in earnings of affiliates and income taxes
increased 40% to $31.1 million for the three months ended March 31, 1997, as
compared to $22.1 million for the comparable period in the prior year.
Page 12 of 19
Earnings before income taxes increased 39% to $31.3 million for the
three months ended March 31, 1997, as compared to $22.4 million for the
comparable period in the prior year. The provision for federal and state income
taxes was $12.2 million for the three months ended March 31, 1997, and $8.6
million for the same period in the prior year. Net earnings and fully diluted
earnings per share for the quarter were $19.1 million in 1997, or 63 cents per
share, as compared to $13.8 million or 54 cents per share for the same period in
1996. Weighted average shares (fully-diluted) increased 3.7 million shares, or
12%, to 34.0 million shares from the comparable period in 1996.
Page 13 of 19
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had working capital of $83.9 million, as
compared with $57.5 million at December 31, 1996. The increase in working
capital was primarily due to an increase in patient accounts and third party
payor settlements receivable and other current assets and a decrease in accounts
payable and accrued expenses. There were no material capital commitments for
capital expenditures as of March 31, 1997. Net patient accounts and third-party
payor settlements receivable increased $12.6 million to $339.5 million at March
31, 1997, as compared to $326.9 million at December 31, 1996. Of the $12.6
million increase in accounts receivable, $2.2 million was attributable to
related services businesses acquired subsequent to December 31, 1996 and $10.4
million was due to increased accounts receivable at facilities and services
businesses owned at both December 31, 1996 and March 31, 1997. Patient accounts
receivable were $356.1 million at March 31, 1997, as compared with $340.8
million at December 31, 1996. Third-party payor settlements receivable from
federal and state governments (i.e., Medicare and Medicaid cost reports) was
$19.6 million at March 31, 1997, as compared to $27.6 million at December 31,
1996. Approximately $10.3 million, or 52%, of the third-party payor settlements
receivable from federal and state governments at March 31, 1997 represent the
costs for its MSU patients which exceed regional reimbursement limits
established under Medicare.
The Company's cost of care for its MSU patients generally exceeds
regional reimbursement limits established under Medicare. The Company's ability
to obtain reimbursement for those costs which exceed the Medicare established
reimbursement limits will depend on obtaining waivers of these cost limitations.
The Company has submitted waiver requests for 225 cost reports, covering all
cost report periods through December 31, 1995. To date, final action has been
taken by the Health Care Financing Administration ("HCFA") on all 221 waiver
requests covering cost report periods through December 31, 1995. The Company's
final rates as approved
Page 14 of 19
by HCFA represent approximately 95% 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.
Net cash provided by operating activities for the three months ended
March 31, 1997, was $9.9 million as compared to $12.7 million used by operating
activities for the comparable period in 1996.
Net cash provided by financing activities was $44.9 million for the
three month period in 1997 as compared to $85.9 million for the comparable
period in 1996. In both periods, the Company received net proceeds from
long-term borrowings and issuance of common stock and made repayments on certain
debt.
Net cash used by investing activities was $55.0 million for the three
month period ended March 31, 1997 as compared to $82.6 million for the three
month period ended March 31, 1996. Cash used for the acquisition of facilities
and service businesses was $11.0 million in 1997 as compared to $16.6 million
for 1996. Cash used for the purchase of property, plant and equipment was $41.1
million in 1997 and $35.7 million in 1996.
The Company's contingent liabilities (other than liabilities in respect
of litigation and the contingent payments in respect of the First American
acquisition) aggregated approximately $72.3 million as of March 31, 1997. 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 Company has guaranteed approximately
Page 15 of 19
$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 entered into a guaranty agreement whereby the Company guaranteed
approximately $4.0 million owed by Tutera Group, Inc. and Sunset Plaza Limited
Partnership, a partnership affiliated with a partnership in which the Company
has a 49% interest, to Finova Capital Corporation. The Company has guaranteed
approximately $8.9 million owed by Litchfield Asset Management Corporation to
National Health Investors, Inc. The Company has established several irrevocable
letters of credit with the Bank of Nova Scotia totalling $15.7 million at March
31, 1997 to secure certain of the Company's workers' compensation, health
benefits and other obligations. The Company has guaranteed a maximum of $539,062
owed by Dunns Creek to National Health Investors. The Company entered into a
guaranty agreement whereby the Company has guaranteed a maximum of $49,900 owed
by Newco Management to First Union National Bank of Florida. The Company has
guaranteed approximately $4.8 million owed by Community Care of America ("CCA"),
a related party company to which IHS provides certain management services, to
Daiwa Health Company. The Company has also guaranteed approximately $10.0
million owed by CCA to Health and Retirement Properties Trust under a loan and
lease financing agreement. In addition, the Company has established an
irrevocable standby line of credit with CCA with a maximum amount of $500,000
available to CCA at March 31, 1997. The Company has also established three
Irrevocable Standby Letter of Credit in the total amount of $10.0 million. In
addition, the Company has obligations under operating leases aggregating
approximately $224.0 million at March 31, 1997. The Company owns warrants to
purchase approximately 14.9% of CCA, and the Company's Chairman and Chief
Executive Officer beneficially owns approximately 21.1% of CCA's outstanding
common stock. In addition, with respect to certain acquired businesses the
Company is obligated to make certain contingent payments if earnings of the
acquired business increase or earnings targets are met. The Company is also
obligated under certain circumstances to make contingent payments of up to $155
million in respect of its acquisition of First American.
The liquidity of the Company will depend in large part on the timing of
payments by private third-party and governmental payors, including payments in
excess of regional cost reimbursement limitations established under Medicare.
Costs in excess of the regional reimbursement limits relate primarily to the
delivery of services and patient care to the Company's MSU patients.
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The Company anticipates that cash from operations and borrowings under
revolving credit facilities will be adequate to cover its scheduled debt
payments and future anticipated capital expenditure requirements throughout
1997. The Company expects to continue to be growth oriented in 1997 by expanding
acquiring its existing operations, continuing to implement its MSU programs and
by the acquisition of additional facilities and ancillary service companies, and
obtaining agreements to manage additional facilities.
PART II: OTHER INFORMATION
Item 5. - Other Information
-----------------
Settlement with Coram
---------------------
On October 19, 1996, IHS and Coram entered into a definitive
agreement and plan of merger (the "Merger Agreement") providing for
the merger of a wholly-owned subsidiary of IHS into Coram, with
Coram becoming a wholly-owned subsidiary of IHS. Under the terms of
the Merger Agreement, holders of Coram common stock were to receive
for each share of Coram common stock 0.2111 of a share of the
Company's Common Stock. As a result of the merger, IHS would have
assumed approximately $375 million of indebtedness. On April 4,
1997, IHS notified Coram that it had exercised its rights to
terminate the Merger Agreement. IHS also terminated the March 30,
1997 letter amendment, setting forth proposed revisions to the terms
of the merger (which included a reduction in the exchange ratio to
0.15 of a share of IHS Common Stock for each share of Coram common
stock), prior to the revisions becoming effective at the close of
business on April 4, 1997. On May 5, 1997, IHS and Coram entered
into a settlement agreement pursuant to which the Company paid Coram
$21 million in full settlement of all claims Coram might have
against IHS pursuant to the Merger Agreement which the Company will
recognize in the second quarter. In addition, during the first
quarter the Company incurred $6.6 million of accounting, legal and
other costs related to the merger.
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Tender Offer for Senior Subordinated Notes
------------------------------------------
On April 30, 1997, the Company announced that it had commenced cash
tender offers, subject to certain conditions including, without
limitation, obtaining financing from debt or equity offerings or
borrowings under its credit facility, to purchase all its
outstanding 9-5/8% Senior Subordinated Notes due 2002 Series A (the
"9-5/8% Notes"), and its 10-3/4% Senior Subordinated Notes due 2004
(the "10-3/4% Notes" and together with the 9-5/8% Notes, the "Tender
Notes") and related consent solicitations to eliminate certain
restrictive covenants and other provisions in the indentures
pursuant to which the Tender Notes were issued in order to improve
the operating and financial flexibility of the Company.
The total consideration payable pursuant to the tender offer and
consent solicitation to holders of the 9-5/8% Notes who tender their
notes (and thereby deliver consents to the proposed amendments to
the indenture pursuant to which the 9 5/8% Notes were issued) is
$1,094 plus accrued and unpaid interest to, but not including, the
payment date, consisting of $1,089 plus accrued and unpaid interest
as tender offer consideration and $5 as a consent payment. Total
consideration payable pursuant to the tender offer and consent
solicitation to holders of the 10-3/4% Notes who tender their notes
(and thereby deliver consents to the proposed amendments to the
indenture pursuant to which the 10 3/4% Notes were issued) is
$1,119.50 plus accrued and unpaid interest to but not including the
payment date, consisting of $1,114.50 plus accrued and unpaid
interest as tender offer consideration and $5 as a consent payment.
The tender offer and consent solicitation for each of the 9 5/8%
Notes and the 10 3/4% Notes expires at 12:00 midnight, New York City
time, on May 29, 1997, unless extended (the "Expiration Date").
Holders must validly tender their Tender Notes prior to 12:00
midnight on the Expiration Date in order to receive the tender offer
consideration. In order to receive the consent payment, holders must
validly tender ther Tender Notes (and thereby deliver their consent
to the proposed amendments to the indenture pursuant to which their
Tender Notes were issued) prior to 12:00 midnight, New York City
time, on the Consent Date. The Consent Date for each of the 9 5/8%
Notes and the 10 3/4% Notes is the later of May 14, 1997 or the
Consent Achievement Date for such such Tender Notes. The Consent
Acheivement Date for each of the 9 5/8% Notes and the 10 3/4% Notes
is the date that the Company receives duly executed consents from
holders representing a majority in principal amount of such Tender
Notes outstanding.
An aggregate of $115 million principal amount of 9-5/8% Notes is
presently outstanding. An aggregate of $100 million principal amount
of 10-3/4% Notes is presently outstanding. Each tender offer and
consent solicitation is conditioned upon, among other things, the
availability to the Company of funds sufficient to pay the aggregate
consideration and related costs and expenses of the offers on terms
and conditions satisfactory to the Company in its sole discretion.
The Company intends to pay the aggregate consideration due in
connection with the tender offer and consent solicitation with the
proceeds of a private debt financing.
Item 6. - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
10.1 Settlement Agreement and Mutual Release, made and entered
into as of Monday, May 5, 1997, by and between Integrated
Health Services, Inc. and Coram Healthcare Corporation
10.2 Amendment No. 3 to Revolving Credit Agreemment, dated as of
May 15, 1996, as amended, among Integrated Health Services,
Inc., Citibank N.A., as administrative agent thereunder and
the other financial institutions party thereto.
10.3 Guaranty dated as of April 14, 1997 made by Integrated
Health Services, Inc. in favor of Daiwa Healthco 2 LLC
10.4 Guaranty dated as of April 14, 1997 made by Integrated
Health Services, Inc. and Health and Retirement Properties
Trust
10.5 Reimbursement agreement dated April 14, 1997 between
Community Care of America, Inc. and Integrated Health
Services, Inc.
10.6 Subordination agreement, dates as of April 30, 1997 between
Integrated Living Communities, Integrated Health Services
and Nations Bank.
Page 18 of 19
- SIGNATURES -
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRATED HEALTH SERVICES, INC.
By: /s/ Robert N. Elkins
-----------------------------
Robert N. Elkins
Chief Executive Officer
By: /s/ W. Bradley Bennett
------------------------------
W. Bradley Bennett
Executive Vice President and
Chief Accounting Officer
By: /s/ Eleanor C. Harding
-------------------------------
Eleanor C. Harding
Executive Vice President Finance
Dated: May 15, 1997
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