UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-Q/A
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended June 30, 1996
-------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission File Number: 1-12306
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Integrated Health Services, Inc.
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(Exact name of registrant as specified in its charter)
DELAWARE 23-2428312
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10065 Red Run Boulevard, Owings Mills, MD 21117
- -------------------------------------------------------------------------------
(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 August 9,
1996: 22,979,066 shares.
INTEGRATED HEALTH SERVICES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page
----
Item 1. - Condensed Financial Statements -
----------------------------------
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995 3
Consolidated Statements of Earnings
for the three and six months ended
June 30, 1996 and 1995 4
Consolidated Statement of Changes in
Stockholders' Equity for the six
months ended June 30, 1996 5
Consolidated Statements of Cash Flows
for the six months ended June 30, 1996
and 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
Page 2 of 24
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
June 30, December 31,
1996 1995
------------------- -----------------------
Assets
Current Assets:
Cash and cash equivalents $ 44,399 38,917
Temporary investments 2,290 2,387
Patient accounts and third-party payor settlements
receivable, less allowance for doubtful receivables 263,203 230,282
of $18,544 at June 30, 1996 and $18,128 at December 31, 1995
Supplies, inventories, prepaid expenses
and other current assets 26,665 25,629
Income tax receivable 14,717 16,517
------------------- ----------------------
Total current assets 351,274 313,732
------------------- ----------------------
Property, plant and equipment, net 829,324 758,127
Intangible assets 325,257 288,033
Other assets 114,526 73,838
------------------- ----------------------
Total assets $ 1,620,381 1,433,730
=================== ======================
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt $ 4,907 5,404
Accounts payable and accrued expenses 158,748 172,013
------------------- ----------------------
Total current liabilities 163,655 177,417
------------------- ----------------------
Long-term Debt:
Convertible subordinated debentures 258,750 258,750
Other long-term debt, less current maturities 645,089 506,507
------------------- ----------------------
Total long-term debt 903,839 765,257
------------------- ----------------------
Deferred income taxes 54,730 52,279
Deferred gain on sale-leaseback transactions 6,733 7,249
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; outstanding 22,807,137 at June 30, 1996 and 21,785,334
at December 31, 1995 (including 400,600 treasury shares at
December 31, 1995) 22 22
Additional paid-in capital 429,804 410,345
Retained earnings 61,598 33,951
Treasury stock (400,600 at December 31, 1995) 0 (12,790)
------------------- ----------------------
Net stockholders' equity 491,424 431,528
------------------- ----------------------
Total liabilities and stockholders' equity $ 1,620,381 1,433,730
=================== ======================
See accompanying Notes to Consolidated Financial Statements
Page 3 of 24
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------- -------------------------------------
1996 1995 1996 1995
---------------- ---------------- ---------------- ----------------
Net revenues:
Basic medical services $ 98,063 87,365 195,279 176,701
Specialty medical services 226,868 188,331 446,393 364,489
Management services and other 10,849 10,685 21,381 19,826
---------------- ---------------- ---------------- ----------------
Total revenues 335,780 286,381 663,053 561,016
---------------- ---------------- ---------------- ----------------
Costs and expenses:
Operating expenses 254,274 214,404 504,169 421,708
Corporate administrative and general 14,854 14,174 29,947 26,576
Depreciation and amortization 8,505 9,682 16,779 18,642
Rent 17,879 16,454 35,535 32,520
Interest, net 15,888 8,585 30,102 15,915
---------------- ---------------- ---------------- ----------------
Total costs and expenses 311,400 263,299 616,532 515,361
---------------- ---------------- ---------------- ----------------
Earnings before equity in earnings
of affiliates, income taxes and
extraordinary items 24,380 23,082 46,521 45,655
Equity in earnings of affiliates 460 315 760 630
---------------- ---------------- ---------------- ----------------
Earnings before income taxes
and extraordinary items 24,840 23,397 47,281 46,285
Federal and state income taxes 9,563 9,008 18,203 17,820
---------------- ---------------- ---------------- ----------------
Earnings before extraordinary items 15,277 14,389 29,078 28,465
Extraordinary items 1,431 508 1,431 508
---------------- ---------------- ---------------- ----------------
Net earnings $ 13,846 13,881 27,647 27,957
================ ================ ================ ================
Per Common Shares:
Earnings before extraordinary
item-primary $ 0.64 0.62 1.26 1.23
Earnings before extraordinary
item-fully diluted 0.56 0.54 1.10 1.07
Net Earnings-primary 0.58 0.60 1.20 1.21
Net Earnings-fully diluted 0.51 0.52 1.05 1.05
================ ================ ================ ================
See accompanying Notes to Consolidated Financial Statements
Page 4 of 24
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in Thousands)
Additional
Common Paid-In Retained Treasury
Stock Capital Earnings Stock Total
-------------------------------------------------------------------------------
Balance at December 31, 1995 $ 22 410,345 33,951 (12,790) 431,528
Issuance of 908,604 shares of
common stock in connection with
acquisitions - 21,252 - - 21,252
Re-issuance of 400,600 shares of
treasury stock in connection with
acquisitions - (3,592) - 12,790 9,198
Issuance of 34,287 shares of common
stock in connection with employee
stock purchase plan - 771 - - 771
Exercise of employee stock options
for 78,912 shares of common stock - 1,028 - - 1,028
Net earnings - - 27,647 - 27,647
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Balance at June 30, 1996 $ 22 429,804 61,598 0 491,424
===========================================================================
See accompanying Notes to Consolidated Financial Statements
Page 5 of 24
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Six Months Ended
June 30,
-----------------------------------
1996 1995
---------------- ----------------
Cash flows from operating activities:
Net earnings $ 27,647 27,957
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Extraordinary item 2,327 826
Undistributed results of joint ventures (390) (287)
Depreciation and amortization 16,779 18,642
Deferred income taxes and other non-cash items 2,095 1,869
Amortization of gain on sale-leaseback transactions (516) (499)
Increase in patient accounts and third-party
payor settlements receivable, net (31,399) (28,093)
Decrease (increase) in supplies, inventory, prepaid
expenses and other current assets (986) 2,022
Decrease in accounts payable and accrued expenses (17,151) (15,932)
Decrease in income taxes receivable 1,800 -
Increase in income taxes payable - 4,165
------------ ----------------
Net cash provided by operating activities 206 10,670
------------ ----------------
Cash flows from financing activities:
Proceeds from issuance of capital stock, net 1,799 5,730
Proceeds from long-term borrowings 627,675 385,979
Repayment of long-term debt (490,761) (282,536)
Deferred financing costs (8,090) (5,216)
Purchase of treasury stock - (12,517)
Proceeds from sale of facilities - 29,303
------------ ----------------
Net cash provided by financing activities 130,623 120,743
------------ ----------------
Cash flows from investing activities:
Sale of temporary investments 97 2,057
Purchase of temporary investments - (3,208)
Business acquisitions (18,159) (39,455)
Purchase of property, plant and equipment (67,355) (47,943)
Intangible assets - (6,047)
Other assets (39,930) (36,957)
------------ ----------------
Net cash used by investing activities (125,347) (131,553)
------------ ----------------
Increase (Decrease) in cash and cash equivalents 5,482 (140)
Cash and cash equivalents, beginning of period 38,917 60,689
------------ ----------------
Cash and cash equivalents, end of period $ 44,399 60,549
============ ================
See accompanying Notes to Consolidated Financial Statements
Page 6 of 24
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
footnotes thereto included in the Company's Annual Report on
Form 10-K, as amended for the year ended December 31, 1995. 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. Certain amounts
presented in 1995 have been reclassified to conform with the
presentation for 1996.
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 six months ended June 30, 1996 and 1995,
respectively:
1996 1995
---- ----
Net earnings $27,647 27,957
Adjustment for interest and underwriting
costs on convertible debentures 4,944 4,944
--------- -------
Net earnings for fully diluted EPS $32,591 32,901
========= =======
Weighted average shares-Primary 23,039 23,161
Weighted average shares-Fully Diluted 31,028 31,150
========= =======
Page 7 of 24
Note 3: New Acquisitions and Management Contracts
In January 1996, the Company entered into agreements to manage
four assisted living facilities in California and Ohio having a
total of 234 beds.
On January 29, 1996, the Company purchased Vintage Health Care
Center, a 220 bed skilled nursing and assisted living facility
in Denton, Texas for $6.9 million.
On March 19, 1996, the Company acquired Rehab Management
Systems, Inc. ("RMS"), which operates rehabilitation therapy
clinics in central Florida. RMS also managed one therapy and
one physician clinic. Total purchase price was $10.0 million,
including $8.0 million representing the issuance of 385,542
shares. In addition, the Company incurred direct costs of
acquisition of $2.9 million. Total goodwill at the date of
acquisition was $12.7 million.
In addition, during the first quarter, the Company acquired two
mobile x-ray companies. Total purchase price aggregated
approximately $1.3 million. Total goodwill at the date of
acquisition aggregated $1.2 million.
In April 1996, the Company assumed a lease for two facilities
in Las Vegas, Nevada, one a 98 bed skilled nursing facility and
the other a 240 bed residential facility.
On May 1, 1996, the Company purchased Hospice of the Great
Lakes, Inc., a hospice company in Northbrook, Illinois. Total
purchase price was $8.2 million representing the issuance of
304,822 shares. The Company incurred direct costs of
acquisition of $1.0 million. Total goodwill at the date of
acquisition aggregated $9.1 million.
During the six months ended June 30, 1996 the Company paid
purchase option deposits of $6.3 million, including $4.3
million through the issuance of 183,300 shares of the Company's
Common Stock
During the six months ended June 30, 1996 the Company incurred
approximately $4.9 million of pre-acquisition costs.
Note 4: Revolving Credit Facility
In May 1996, the Company entered into a $700 million revolving
credit and term loan agreement with Citicorp USA, Inc., the
agent and certain other lenders which replaced its $500 million
revolving credit and term loan facility which closed in April
1995. The $700 million 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. As a result of this agreement, the Company recorded
an extraordinary loss of $1.4 million.
Note 5: 10-1/4% Senior Subordinated Notes due 2006
On May 23, 1996, IHS issued $150,000,000 aggregate principal
amount of its 10-1/4% Senior Subordinated Notes due 2006 (the
"Senior Notes"). Interest on the Senior Notes is payable
semi-annually on April 30 and October 30, commencing October
30, 1996. The Senior Notes are redeemable for cash at any time
on or after April 30, 2001, at the option of the Company, in
whole or in part, at a price expressed as a percentage of the
principal amount, initially equal to 105.125% and declining to
100% on April 30, 2004, plus accrued interest to the repurchase
date. In the event of a change in
Page 8 of 24
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 the
net proceeds from the sale of the Senior Notes to repay a
portion of the $338.0 million then outstanding under its credit
facility.
Note 6: Extraordinary Item
In the second quarter 1996, the Company replaced its $500
million revolving credit and term loan facility with the $700
million 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 $2,327,000,
relating primarily to the write off of deferred financing
costs. Such loss, reduced by the related income tax effect of
$896,000, is presented in the statement of earnings as an
extraordinary item of $1,431,000.
In the second quarter of 1995, the Company replaced its $250
million revolving credit and term loan facility with a $500
million 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 $826,000
relating primarily to the write off of deferred financing
costs. Such loss, reduced by the related income tax effect of
$318,000 is presented in the statement of earnings as an
extraordinary item of $508,000.
Note 7: Sale of Pharmacy Division
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. The
Company expects to record an after tax gain of approximately
$12.0 million. In addition, the Company will periodically value
its $25 million investment in Capstone's Common Stock.
Note 8: Proposed Sale of Assisted Living Services Division
On June 13, 1996, Integrated Living Communities, Inc. ("ILC"),
a wholly-owned subsidiary of the Company which provides
assisted living and related services to the private pay elderly
market, filed a registration statement relating to a proposed
public offering of ILC common stock. It is currently
anticipated that the Company will sell 3,430,000 shares of ILC
common stock in the offering, for which it will receive
aggregate net proceeds of approximately $52.6 million (assuming
an initial public offering price of $16.50 per share, the
midpoint of the estimated offering price range and after
deducting estimated underwriting discounts.) Following the
offering, it is anticipated that IHS will continue to own
1,531,000 shares of ILC common stock, representing 19.0% of the
outstanding ILC common stock (16.9% if the underwriters'
over-allotment option, which is being provided by ILC, is
exercised in full.) There can be no assurance that the offering
will be consummated on these terms, on different terms, or at
all.
Page 9 of 24
Note 9: Subsequent Events
In July 1996, the Company leased a 55 bed skilled nursing
facility in Burbank, Illinois. In August 1996, the Company
purchased an inpatient and outpatient rehabilitation provider
in Mooresville, North Carolina for approximately $2.1 million
and a mobile x-ray company in Denver, Colorado for
approximately $422,000. In addition, the Company has reached
agreements in principle to purchase a 191 bed skilled nursing
facility in West Palm Beach, Florida for approximately $6.4
million, a home infusion company in Miami, Florida for
approximately $8.0 million, two mobile x-ray companies for
approximately $5.2 million, a contract therapy and respiratory
rehabilitation company for approximately $8.0 million, and
three home health companies for approximately $23.0 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.
Note 10: Proposed Acquisition of First American
In February 1996, the company entered into an agreement to
acquire First American Health Care of Georgia, Inc., a provider
of home health services in 23 states, principally Alabama,
California, Florida, Georgia, Michigan, Pennsylvania and
Tennessee. The Company believes First American is the fourth
largest (and largest privately-held) provider of home
healthcare services in the United States.
The proposed purchase price for First American is $150 million
plus an earn-out of up to $127.5 million based on the home
healthcare operations of the Company in the years 1999 through
2002. The Company intends to finance the acquisition through
borrowings under its credit facility. During the first quarter
of 1996, the Company loaned $18.1 million to First American to
fund certain of First American's pension liabilities. The loan,
which bears interest at a rate per annum equal to the prime
rate plus 4% and is due December 31, 1996, is secured by a
pledge of certain shares of First American stock owned by First
American's principal stockholder. Subsequent to the execution
of the acquisition agreement, First American filed for
protection under the federal bankruptcy laws. Consummation of
the acquisition is subject to a number of conditions, some of
which are beyond the Company's control, including approval of
the acquisition by the bankruptcy court, resolution of certain
claims by the Health Care Financing Administration seeking
repayment from First American of certain disallowed
reimbursements under Medicare (the "HCFA Claims"), which claims
IHS believes relate to personal or corporate, rather than
care-related expenses, regulatory approvals and approval from
the Company's lenders and other third parties. There can be no
assurance that these conditions will be satisfied. Under the
acquisition agreement, the HCFA Claims will be satisfied with
proceeds of the sale, and will result in a restatement of the
financial statements of First American. There can be no
assurance that the First American acquisition will be
consummated on the proposed terms, on different terms, or at
all.
Note 11: The Rehab People Earnout
During the second quarter of 1996, the Company paid an earn-out
to The Rehab People of $10 million, representing the issuance
of 435,540 shares of the Company's common stock, including the
400,600 shares of the Company's treasury stock.
Page 10 of 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Three Months Ended June 30, 1996
Compared to Three Months Ended June 30, 1995
Net revenues for the three months ended June 30, 1996 increased $49.4
million, or 17%, to $335.8 million from the comparable period in 1995.
Approximately 26% of the increase in revenues was attributable to the addition
of 13 facilities (4 owned, 5 leased and 4 managed facilities) since June 30,
1995 and approximately 30% due to the acquisition of companies providing
pharmacy, rehabilitation, home health, mobile x-ray and electrocardiogram
services.
Basic medical services revenue increased 12% from $87.4 million to
$98.1 million. Of the $98.1 million in basic medical services revenue in 1996,
$10.4 million, or 11%, was attributable to the acquisition of 433 leased beds
and 662 owned beds representing 5 leased and 4 owned facilities, respectively,
subsequent to June 30, 1995.
Specialty medical services revenue increased 20% from $188.3 million to
$226.9 million. Of the $38.5 million increase, $17.2 million, or 45%, was
attributable to revenue from acquisitions subsequent to June 30, 1995 (see Note
3 to Financial Statements: New Acquisitions and Management Contracts). The
remaining increase was due to increased revenue from facilities in operation in
both periods as well as skilled nursing beds being converted to MSU beds after
June 30, 1995 and increases in ancillary revenue.
Management services and other revenues increased 2% from $10.7 million
to $10.8 million. This increase was primarily due to the Company entering into 4
new management contracts subsequent to June 30, 1995 and the improved operating
results which resulted in increased management fees at facilities which the
Company managed in both periods. This increase was partially offset by the
termination in the fourth quarter of 1995 of a contract to manage 23 facilities.
Also, the
Page 11 of 24
Company entered into operating leases with three facilities which were
previously managed during the three months ended June 30, 1995.
Total expenses for the period increased to $311.4 million from $263.3
million, an increase of 18%. Of the $48.1 million increase, $39.9 million, or
83%, was due to an increase in operating expenses. The increase in operating
expenses resulting from acquisitions consummated subsequent to June 30, 1995 was
$23.7 million, or 59% of the increase in operating expenses, for the three
months ended June 30, 1996. The remainder of the increase in operating expenses
primarily resulted from costs related to the increased medical acuity level of
the Company's patients.
Corporate administrative and general expenses for the three months
ended June 30, 1996 increased by $680,000, or 5%, over the comparable period in
1995. This increase primarily represents additional operations, information
systems, accounting, finance and other personnel to support the growth resulting
from the acquisition of owned, leased and managed facilities and ancillary
businesses. Depreciation and amortization decreased to $8.5 million during the
three months ended June 30, 1996, a 12% decrease as compared to $9.7 million in
the same period in 1995. Rent expense increased by $1.4 million, or 9%, over the
comparable period in 1995, primarily as a result of the addition of 5 leased
facilities subsequent to June 30, 1995, and increases in contingent rentals
which are based on gross revenues of certain leased facilities. These increases
were partially offset by the reduction in rent expense resulting from the
acquisitions subsequent to June 30, 1995 of two facilities, which were
previously leased by the Company. Interest expense, net, increased $7.3 million,
or 85% during the three months ended June 30, 1996 to $15.9 million. The
increase in interest expense was primarily a result of the Company's 9-5/8%
Senior Subordinated Notes issued in May 1995, the 10-1/4% Senior Subordinated
Notes issued in May 1996, and increased borrowings under its $700 million credit
and term loan facility which closed in May 1996.
Page 12 of 24
Earnings before equity in earnings of affiliates, income taxes and
extraordinary item increased by 6% to $24.4 million for the three months ended
June 30, 1996, as compared to $23.1 million for the comparable period in the
prior year.
Earnings before income taxes and extraordinary item increased by 6% to
$24.8 million for the three months ended June 30, 1996, as compared to $23.4
million for the comparable period in the prior year. The provision for federal
and state income taxes was $9.6 million for the three months ended June 30,
1996, and $9.0 million for the same period in the prior year. Net earnings and
fully diluted earnings per share for the quarter were $13.8 million in 1996, or
51 cents per share, as compared to $13.9 million or 52 cents per share for the
same period in 1995. During the three months ended June 30, 1995 and 1996, the
Company incurred a $508,000 (net of tax), or 2 cents per share (fully diluted),
and a $1,431,000 (net of tax), or 5 cents per share (fully-diluted),
respectively, extraordinary loss on the extinguishment of debt.
Page 13 of 24
Six Months Ended June 30, 1996
Compared to Six Months Ended June 30, 1995
Net revenues for the six months ended June 30, 1996 increased $102.0
million, or 18%, to $663.1 million from the comparable period in 1995.
Approximately 23% of the increase in revenues was attributable to the addition
of 13 facilities (4 owned, 5 leased and 4 managed facilities) since June 30,
1995 and approximately 23% due to the acquisition of companies providing
pharmacy, rehabilitation, home health, mobile x-ray and electrocardiogram
services.
Basic medical services revenue increased 11% from $176.7 million to
$195.3 million. Of the $195.3 million in basic medical services revenue in 1996,
$18.4 million, or 9%, was attributable to the acquisition of 433 leased beds and
662 owned beds representing 5 leased and 4 owned facilities, respectively,
subsequent to June 30, 1995.
Specialty medical services revenue increased 22% from $364.5 million to
$446.4 million. Of the $81.9 million increase, $27.6 million, or 34%, was
attributable to revenue from acquisitions subsequent to June 30, 1995 (see Note
3 to Financial Statements: New Acquisitions and Management Contracts). The
remaining increase was due to increased revenue from facilities in operation in
both periods as well as skilled nursing beds being converted to MSU beds after
June 30, 1995 and increases in ancillary revenue.
Management services and other revenues increased 8% from $19.8 million
to $21.4 million. This increase was primarily due to the Company entering into 4
new management contracts subsequent to June 30, 1995 and the improved operating
results which resulted in increased management fees at facilities which the
Company managed in both periods. This increase was partially offset by the
termination in the fourth quarter of 1995 of a managed contract to manage 23
facilities. Also, the Company entered into operating leases with three
facilities which were previously managed during the six months ended June 30,
1995.
Page 14 of 24
Total expenses for the period increased to $616.5 million from $515.4
million, an increase of 20%. Of the $101.2 million increase, $82.5 million, or
82%, was due to an increase in operating expenses. The increase in operating
expenses resulting from acquisitions consummated subsequent to June 30, 1995 was
$39.0 million, or 47% of the increase in operating expenses, for the six months
ended June 30, 1996. The remainder of the increase in operating expenses
primarily resulted from costs related to the increased medical acuity level of
the Company's patients.
Corporate administrative and general expenses for the six months ended
June 30, 1996 increased by $3.4 million, or 13%, over the comparable period in
1995. This increase primarily represents additional operations, information
systems, accounting, finance and other personnel to support the growth resulting
from the acquisition of owned, leased and managed facilities and ancillary
businesses. Depreciation and amortization was $16.8 million during the six
months ended June 30, 1996 as compared to $18.6 million during the six months
ended June 30, 1995. Rent expense increased by $3.0 million, or 9%, over the
comparable period in 1995, primarily as a result of the addition of 5 leased
facilities subsequent to June 30, 1995, and increases in contingent rentals
which are based on gross revenues of certain leased facilities. These increases
were partially offset by the reduction in rent expense resulting from the
acquisition subsequent to June 30, 1995 of two facilities which were previously
leased by the Company. Interest expense, net, increased $14.2 million, or 89%,
during the six months ended June 30, 1996 to $30.1 million. The increase in
interest expense was primarily a result of the Company's 9-5/8% Senior
Subordinated Notes issued in May 1995, 10-1/4% Senior Subordinated Notes issued
in May 1996, and increased borrowings under its $700 million credit and term
loan facility which closed in May 1996.
Earnings before equity in earnings of affiliates, income taxes and
extraordinary item increased by 2% to $46.5 million for the six months ended
June 30, 1996, as compared to $45.7 million for the comparable period in the
prior year.
Page 15 of 24
Earnings before income taxes and extraordinary item increased by 2% to
$47.3 million for the six months ended June 30, 1996, as compared to $46.3
million for the comparable period in the prior year. The provision for federal
and state income taxes was $18.2 million for the six months ended June 30, 1996,
and $17.8 million for the same period in the prior year. Net earnings and fully
diluted earnings per share for the six months were $27.6 million in 1996, or
$1.05 per share, as compared to $28.0 million or $1.05 per share for the same
period in 1995. During the six months ended June 30, 1995 and 1996, the Company
incurred a $508,000 (net of tax), or 2 cents per share (fully-diluted) and a
$1,431,000 (net of tax), or 5 cents per share (fully-diluted), respectively,
extraordinary loss on the extinguishment of debt.
Page 16 of 24
Liquidity and Capital Resources
At June 30, 1996, the Company had working capital of $187.6 million, as
compared with $136.3 million at December 31, 1995. 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 commitments for capital
expenditures as of June 30, 1996. Net patient accounts and third-party payor
settlements receivable increased $32.9 million to $263.2 million at June 30,
1996, as compared to $230.3 million at December 31, 1995. Of the $32.9 million
increase in accounts receivable, $6.0 million was attributable to new facilities
and related services businesses acquired subsequent to December 31, 1995 and
$26.9 million was due to increased accounts receivable at facilities in
operation and related services businesses owned at both December 31, 1995 and
June 30, 1996. Gross patient accounts receivable were $250.6 million at June 30,
1996, as compared to $226.8 million at December 31, 1995. Third-party payor
settlements receivable from federal and state governments (i.e., Medicare and
Medicaid cost reports) was $31.1 million at June 30, 1996, as compared to $21.6
million at December 31, 1995. Approximately $16.0 million, or 51%, of the
third-party payor settlements receivable from federal and state governments at
June 30, 1996 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 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 205 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 205 waiver requests
covering cost report periods through December 31, 1995. The Company's final
rates as approved by HCFA represent approximately 95% of the requested rates as
submitted in the waiver requests. There can be no assurance, however, that the
Page 17 of 24
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.
The balance sheet increases were due to acquisitions and normal growth
in operations which was consistent with the growth in revenues of such
operations in 1996.
Net cash provided by operating activities for the six months ended June
30, 1996, was $206,000 as compared to $10.7 million provided by operating
activities for the comparable period in 1995. Net cash provided by operating
activities for the six months ended June 30, 1996 decreased from the comparable
period in 1995 primarily as a result of increases in patient accounts and
third-party payor settlements receivable in 1996 and a $4.2 million increase in
income taxes payable in the six months ended June 30, 1995.
Net cash provided by financing activities was $130.6 million for the
six month period in 1996 as compared to $120.7 million provided by financing
activities for the comparable period in 1995. In both periods, the Company
received net proceeds from long-term borrowings and made repayments on certain
debt.
Net cash used by investing activities was $125.3 million for the six
month period ended June 30, 1996 as compared to $131.6 million used by investing
activities for the six month period ended June 30, 1995. Cash used for the
acquisition of facilities and ancillary company acquisitions was $18.2 million
in 1996 as compared to $39.5 million for 1995. Cash used for the purchase of
property, plant and equipment was $67.4 million in 1996 and $47.9 million in
1995.
The Company's contingent liabilities (other than liabilities in respect
of litigation) aggregated approximately $54.7 million as of June 30, 1996. 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
Page 18 of 24
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 shares if Messrs. Elkins and Nicholson fail to do
so. The amount aggregated approximately $345,000 at June 30, 1996. The Company
has guaranteed approximately $6.6 million of 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. The Company has guaranteed
approximately $3.9 million 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 approximately
$4.2 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 $8.7 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 June
30, 1996 to secure certain of the Company's workers' compensation, health
benefits and other obligations. The Company has guaranteed a maximum of $3.0
million owed by Dunns Creek and Morgan Hill to National Health Investors. In
addition, the Company has obligations under operating leases aggregating
approximately $245.5 million at June 30, 1996. 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 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.
Page 19 of 24
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
1996. The Company expects to continue to be growth oriented in 1996 through the
expansion of its existing operations, continued implementation of its MSU
programs and by the acquisition of additional facilities and ancillary companies
and the entry into agreements to manage additional facilities.
On May 15, 1996, the Company entered into a $700 million revolving
credit facility, including a $100 million letter of credit subfacility, with
Citibank, N.A., as Administrative Agent, and certain other lenders (the "New
Credit Facility"). The New Credit Facility consists of a $700 million revolving
loan which reduces to $560 million on June 30, 2000 and $315 million on June 30,
2001, with a final maturity on June 30, 2002. The $100 million subcommittment
for letters of credit will remain at $100 million until final maturity. The New
Credit Facility is guaranteed by the Company's subsidiaries and secured by a
pledge of all of the stock of substantially all of the Company's subsidiaries.
At the option of the Company, loans under the New Credit Facility bear interest
at a rate equal to either (i) the sum of (a) the higher of (1) the bank's base
rate or (2) one percent plus the latest overnight federal funds rate plus (b)
margin of between zero percent and one and one-quarter percent (depending on
certain financial ratios); or (ii) in the case of Eurodollar loans, the sum of
between three quarters of one percent and two and one-half percent (depending on
certain financial ratios) and the interest rate in the London inter-bank market
for loans in an amount substantially equal to the amount of borrowing and for
the period of the borrowing selected by the Company.
The New Credit 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. In addition, the New Credit Facility requires that the Company
meet certain financial tests, and provides the banks with the right to require
the payment of all of the amounts
Page 20 of 24
outstanding under the New Credit Facility if there is a change in control of the
Company or if any person other than Dr. Robert N. Elkins or a group managed by
Dr. Elkins owns more than 40% of the Company's capital stock. Amounts repaid
under the New Credit Facility may be reborrowed until June 30, 2002. The new
$700 million credit facility replaced the Company's $500 million revolving
credit facility (the "Prior Credit Facility"). As a result, the Company recorded
a loss on extinguishment of debt, net of related tax benefits, of approximately
$1.4 million in the second quarter of 1996. On May 15, 1996, the Company
borrowed $328.2 million under the New Credit Facility to repay amounts
outstanding under the Prior Credit Facility. At June 30, 1996 $210.7 million was
outstanding under the new credit facility.
On May 23, 1996, IHS issued $150,000,000 aggregate principal amount of
its 10-1/4% Senior Subordinated Notes due 2006 (the "Senior Notes"). Interest on
the Senior Notes is payable semi-annually on April 30 and October 30, commencing
October 30, 1996. The Senior Notes are redeemable for cash at any time on or
after April 30, 2001, at the option of the Company, in whole or in part, at a
price expressed as a percentage of the principal amount, initially equal to
105.125% and declining to 100% on April 30, 2004, plus accrued interest to the
repurchase date. 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 the net
proceeds from the sale of the Senior Notes to repay a portion of the $338.0
million then outstanding under its credit facility.
Page 21 of 24
Part II: Other Information
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of Integrated
Health Services, Inc. was held on May 24, 1996.
(c) (i) The following persons, comprising the entire Board of
Directors, were elected at the Annual Meeting pursuant to the following vote
tabulations:
Votes
Votes For Against
--------- -------
Robert N. Elkins 15,194,381 1,798,254
Lawrence P. Cirka 15,309,208 1,683,427
E. Mac Crawford 15,307,912 1,684,723
Kenneth M. Mazik 15,309,312 1,683,323
Robert A. Mitchell 15,308,129 1,684,506
Charles W. Newhall 15,309,457 1,683,178
Timothy F. Nicholson 15,309,557 1,683,078
John L. Silverman 15,308,732 1,683,903
George H. Strong 15,309,382 1,683,253
(ii) In addition to the election of directors, (a) a proposal
to consider and vote on repricing options under the Stock Option Plan for New
Non-Employee Directors and the Stock Option Compensation Plan for Non-Employee
Directors was approved, with 10,414,998 votes cast in favor, 6,393,099 shares
voted against, 184,537 shares abstained and 0 broker nonvotes; (b) a proposal to
adopt the 1995 Stock Option Plan for Non-Employee Directors was approved with,
7,603,537 votes cast in favor, 5,880,672 shares voted against, 183,808 shares
abstained and 3,324,618 broker nonvotes, (c) a proposal to approve a stock
option grant to John L. Silverman was approved, with 10,423,315 votes cast in
favor, 3,096,287 shares voted against, 148,415 shares abstained and 3,324,618
broker nonvotes; and (d) a proposal to approve an amendment to the 1994 Stock
Incentive Plan was approved, with 7,390,330 votes cast in favor, 6,089,787
shares voted against, 187,900 shares abstained and 3,324,618 broker nonvotes.
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
(a) Exhibits
--------
4.01 Indenture, dated as of May 15, 1996 between the Company
and Signet Trust Company, as Trustee. (1)
4.02 Supplemental Indenture, dated as of June 13, 1996,
Indenture dated as of July 1, 1994, between the Company
and Signet Trust Company, as Trustee. (1)
4.03 Supplemental Indenture, dated as of June 13, 1996,
amended and restated Supplemental Indenture, dated as of
May 15, 1995 between the Company and Signet Trust
Company, as Trustee. (1)
10.01 Purchase Agreement, dated May 23, 1996, among the
Company, Smith Barney, Inc., Donaldson, Lufkin and
Jenrette Securities Corporation, and Citicorp
Securities, Inc. (1)
10.02 Registration Rights Agreement, dated as of May 23, 1996
among the Company, Smith Barney, Inc., Donaldson, Lufkin
and Jenrette Securities Corporation, and Citicorp
Securities, Inc. (1)
27. Financial Data Schedule
(1) Previously Filed in the Company's report on Form
10-Q for the six months ended June 30, 1996.
Page 22 of 24
(b) Reports on Form 8-K
--------------------
The Company filed a Current Report on Form 8-K dated May 24,
1996 relating to the private offering of its 10-1/4% Senior
Subordinated Notes due 2006 in the aggregate principal amount
of $150,000,000.
The Company filed a Current Report on Form 8-K dated July 30,
1996 relating to the sale of its pharmacy division, for a total
of $150 million.
Page 23 of 24
- 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/ W. Bradley Bennett
-----------------------------------
W. Bradley Bennett
Executive Vice President and
Chief Accounting Officer
Dated: June 4, 1997
-------------------------
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