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 September 30, 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.
--------------------------------------------------------
(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
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(410) 998-8400
--------------------------------------------
(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 October 20,
1997: 27,400,896 shares.
INTEGRATED HEALTH SERVICES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. - Condensed Financial Statements - (Unaudited)
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 3
Consolidated Statements of Earnings
for the three and nine months ended
September 30, 1997 and 1996 4
Consolidated Statement of Changes in
Stockholders' Equity for the nine
months ended September 30, 1997 5
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1997
and 1996 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 2. Changes in Securities 32
Item 6. Exhibits and Reports on Form 8-K 32
Page 2 of 35
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------------- ---------------------
(UNAUDITED)
Assets
------
Current Assets:
Cash and cash equivalents $ 58,915 39,028
Temporary investments 821,965 2,044
Patient accounts and third-party payor settlements
receivable, less allowance for doubtful receivables
of $47,223 at September 30, 1997 and $41,527 at
December 31, 1996 377,546 326,883
Inventories, prepaid expenses and other current
assets 36,457 26,243
Income tax receivable 25,630 20,992
--------------- ----------------
Total current assets 1,320,513 415,190
--------------- ----------------
Property, plant and equipment, net 948,120 864,335
Assets held for sale (Note 12) 12,109 --
Intangible assets 836,804 572,159
Investments in and advances to affiliates 31,437 76,047
Other assets 79,097 65,376
--------------- ----------------
Total assets $ 3,228,080 1,993,107
=============== ================
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 6,782 16,547
Accounts payable and accrued expenses 332,813 341,094
--------------- ----------------
Total current liabilities 339,595 357,641
--------------- ----------------
Long-term Debt:
Convertible subordinated debentures 258,750 258,750
Other long-term debt less current maturities 1,933,233 779,450
--------------- ----------------
Total long-term debt 2,191,983 1,038,200
--------------- ----------------
Other long-term liabilities 36,114 33,851
Deferred income taxes 27,501 22,283
Deferred gain on sale-leaseback transactions 5,463 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; outstanding 27,081,463 at September 30, 1997 and
23,628,250 at December 31, 1996 (including 324,800
treasury shares at September 30, 1997) 27 24
Additional paid-in capital 531,500 445,667
Retained earnings 108,221 79,814
Unrealized gain on available for sale securities 0 9,360
Treasury stock at cost (324,800 shares at September 30, 1997) (12,324) 0
--------------- ----------------
Net stockholders' equity 627,424 534,865
--------------- ----------------
Total liabilities and stockholders' equity $ 3,228,080 1,993,107
=============== ================
See accompanying Notes to Unaudited Consolidated Financial Statements
Page 3 of 35
INTEGRATED HEALTH SERVICES, INC.
CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ------------------------------
1997 1996 1997 1996
----------- ----------- ------------- -----------
Net revenues:
Basic medical services $ 91,458 $ 101,189 $ 268,268 $ 296,468
Specialty medical services 370,769 211,904 1,093,571 658,297
Management services and other 10,694 12,572 29,998 33,953
----------- ----------- ------------- -----------
Total revenues 472,921 325,665 1,391,837 988,718
----------- ----------- ------------- -----------
Costs and expenses:
Operating expenses 348,470 241,177 1,039,618 745,346
Corporate administrative and general 19,917 14,943 56,068 44,890
Depreciation and amortization 16,974 9,130 47,818 25,909
Rent 25,527 18,445 75,322 53,980
Interest, net 27,346 15,931 71,991 46,033
Non-recurring charges (income), net (Note 7) 0 (34,298) 20,047 (34,298)
----------- ----------- ------------- -----------
Total costs and expenses 438,234 265,328 1,310,864 881,860
----------- ----------- ------------- -----------
Earnings before equity in earnings
(loss) of affiliates, income taxes
and extraordinary items 34,687 60,337 80,973 106,858
Equity in earnings (loss) of affiliates (811) 323 (713) 1,083
----------- ----------- ------------- -----------
Earnings before income taxes
and extraordinary items 33,876 60,660 80,260 107,941
Federal and state income taxes 13,212 44,149 31,301 62,352
----------- ----------- ------------- -----------
Earnings before extraordinary items 20,664 16,511 48,959 45,589
Extraordinary items (Note 8) 2,384 0 20,552 1,431
----------- ----------- ------------- -----------
Net earnings $ 18,280 $ 16,511 $ 28,407 $ 44,158
=========== =========== ============= ===========
Per Common Share - primary
Earnings before extraordinary item $ 0.73 $ 0.69 $ 1.78 $ 1.95
Net earnings 0.65 0.69 1.03 1.89
=========== =========== =============== ===========
Per Common Share - fully diluted
Earnings before extraordinary items $ 0.65 $ 0.58 $ 1.57 $ 1.68
Net earnings 0.59 0.58 1.00 1.64
=========== =========== =============== ===========
See accompanying Notes to Unaudited Consolidated Financial Statements
Page 4 of 35
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(DOLLARS IN THOUSANDS)
UNREALIZED
GAIN ON
ADDITIONAL AVAILABLE
COMMON PAID-IN RETAINED FOR SALE TREASURY
STOCK CAPITAL EARNINGS SECURITIES STOCK 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 (Note 3) 1 26,438 -- -- -- 26,439
Issuance of 1,394,817 shares of
common stock in connection with 1997
acquisitions (Note 3) 1 44,753 -- -- -- 44,754
Issuance of 81,434 shares of common
stock in connection with employee
stock purchase plan -- 1,757 -- -- -- 1,757
Exercise of employee stock options
for 1,325,258 shares of common stock 1 12,885 -- -- -- 12,886
Repurchase of 324,800 shares of treasury
stock (Note 9) -- -- -- -- (12,324) (12,324)
Realized gain on available for sale
securities (Note 7) -- -- -- (9,360) -- (9,360)
Net earnings -- -- 28,407 -- -- 28,407
----------------------------------------------------------------------------------
Balance at September 30, 1997 $ 27 531,500 108,221 0 (12,324) 627,424
==================================================================================
See accompanying Notes to Unaudited Consolidated Financial Statements
Page 5 of 35
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1997 1996
-------------- -------------
Cash flows from operating activities:
Net earnings $ 28,407 44,158
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Extraordinary item (Note 8) 33,690 2,327
Non-recurring charges (income), net (Note 7) 20,047 (34,298)
Undistributed results of joint ventures 958 (348)
Depreciation and amortization 47,818 25,909
Deferred income taxes and other non-cash items 6,781 3,162
Amortization of gain on sale-leaseback transactions (804) (749)
Increase in patient accounts and third-party
payor settlements receivable, net (28,379) (21,724)
Increase in supplies inventory, prepaid
expenses and other current assets (4,047) (979)
Decrease in accounts payable and accrued expenses (73,127) (26,591)
(Increase) decrease in income taxes receivable (4,638) 23,479
-------------- -------------
Net cash provided by operating activities 26,706 14,346
-------------- -------------
Cash flows from financing activities:
Proceeds from issuance of capital stock, net 14,643 3,150
Proceeds from long-term borrowings 2,544,918 832,653
Repayment of long-term debt (1,419,179) (766,450)
Payment of pre-payment premiums and fees on debt
extinguishment (Note 8) (23,598) --
Deferred financing costs (33,085) (8,128)
Dividends paid (471) (435)
Purchase of treasury stock (12,324) 0
-------------- -------------
Net cash provided by financing activities 1,070,904 60,790
-------------- -------------
Cash flows from investing activities:
Sale of pharmacy division (Note 7) -- 125,000
Sale of temporary investments 639 5,086
Purchase of temporary investments (820,560) (4,595)
Business acquisitions (Note 3) (166,822) (46,106)
Payment of termination fees and other costs of
terminated merger (Note 7) (27,555) --
Purchase of property, plant and equipment (86,656) (104,647)
Sale of investments in affiliates 54,137 --
Other assets (30,906) (47,664)
-------------- -------------
Net cash used by investing activities (1,077,723) (72,926)
-------------- -------------
Increase in cash and cash equivalents 19,887 2,210
Cash and cash equivalents, beginning of period 39,028 38,917
-------------- -------------
Cash and cash equivalents, end of period $ 58,915 41,127
============== =============
See accompanying Notes to Unaudited Consolidated Financial Statements
Page 6 of 35
NOTES
TO
UNAUDITED 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 principals. 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 nine months ended September 30, 1997 and 1996,
respectively:
1997 1996
------- ------
(in 000's)
Net earnings $28,407 $44,158
Adjustment for interest and underwriting
costs on convertible debentures 7,356 7,416
------- ------
Net earnings for fully diluted EPS $35,763 $51,574
======= =======
Weighted average shares-Primary 27,512 23,393
Weighted average shares-Fully Diluted 35,803 31,477
======= =======
Page 7 of 35
NOTE 3: NEW ACQUISITIONS
ACQUISITIONS DURING THE NINE MONTHS ENDED SEPTEMBER 30, 1997
Acquisitions for the nine months ended September 30,1997 and the manner
of payment are summarized as follows:
COMMON
TOTAL STOCK ACCRUED CASH
MONTH TRANSACTION DESCRIPTION COST ISSUED LIABILITIES PAID
- ----- ----------------------- ---- ------ ----------- ----
(in 000's)
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 Achieve-
ment Rehab acquisition
in December 1993 26,439 26,439 ---- ----
April Assets of Coastal
Rehabilitation, Inc. 1,450 ---- 200 1,250
April Assets of Mobile
Diagnostics, Inc. 225 ---- 75 150
June Stock of Health Care
Industries, Inc. 2,325 ---- 500 1,825
June Assets of The Nursing
Connection, Inc. 330 ---- ---- 330
June Assets of Rehab Dynamics,
Inc. and Restorative
Therapy, Ltd. 22,163 11,460 2,500 8,203
Page 8 of 35
COMMON
TOTAL STOCK ACCRUED CASH
MONTH TRANSACTION DESCRIPTION COST ISSUED LIABILITIES PAID
- ----- ----------------------- ---- ------ ----------- ----
July Assets of Darkroom
Engineering 300 ---- 125 175
August Assets of Healthcare
Personnel, Inc. 785 ---- 110 675
August Assets of Portable
Radiology Services 1,200 ---- 600 600
August Stock of Ambulatory
Pharmaceutical Services,
Inc. & APS American,
Inc. 36,200 16,125 1,950 18,125
August Stock of Arcadia
Services, Inc. 30,016 17,169 3,000 9,847
September Stock and assets of
Barton Creek Healthcare,
Inc. 5,137 ---- 280 4,857
September Stock of Community Care
of America, Inc. 103,900 ---- 5,900 98,000
Various Cash payments of
acquisition costs
accrued ---- ---- (14,050) 14,050
------ ------ -------- ------
$240,950 $71,193 $2,935 $166,822
======== ======= ======= ========
Page 9 of 35
The allocation of the total cost of the 1997 acquisitions to the assets acquired
and liabilities assumed is summarized as follows:
ASSETS
PROPERTY, HELD
CURRENT PLANT & FOR OTHER INTANGIBLE CURRENT LONG-TERM TOTAL
TRANSACTION ASSETS EQUIPMENT SALE ASSETS ASSETS LIABILITIES LIABILITIES COSTS
- ----------- ------- --------- ---- ------ ------ ----------- ----------- -----
(in 000's)
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 -- 10 -- -- 25 -- -- 35
Doctor's Home
Health Agency,
Inc. -- 6 -- -- 439 -- -- 445
Achievement
Rehab -- -- -- -- 26,439 -- -- 26,439
Coastal
Rehabilitation,
Inc. 257 85 -- -- 1,764 (576) (80) 1,450
Mobile
Diagnostics,
Inc. -- 38 -- -- 187 -- -- 225
Health Care
Industries,
Inc. 805 204 -- 41 2,505 (1,080) (150) 2,325
The Nursing
Connection,
Inc. 14 62 -- -- 254 -- -- 330
Rehab Dynamics,
Inc. & Restorative
Therapy, Ltd. 4,140 954 -- 107 21,478 (3,204) (1,312) 22,163
Darkroom
Engineering -- 45 -- -- 255 -- -- 300
Healthcare
Personnel, Inc. 6 2 -- 25 752 -- -- 785
Portable Radiology
Services -- 90 -- -- 1,110 -- -- 1,200
Ambulatory
Pharmaceutical
Services, Inc. &
APS America, Inc. 1,987 48 -- 8 39,624 (5,467) -- 36,200
Arcadia Services,
Inc. 3,980 348 -- 2,464 39,233 (16,009) -- 30,016
Barton Creek
Healthcare, Inc. 884 96 -- -- 7,293 (3,136) -- 5,137
Community Care of
America, Inc. 12,342 36,090 12,109 870 97,009 (27,520) (27,000) 103,900
------- ------ ------ ------- -------- -------- -------- -------
$26,713 $38,327 $12,109 $ 3,542 $248,197 $(58,086) $(29,852) $240,950
======= ====== ====== ======= ======== ======== ======== =======
Page 10 of 35
NOTE 4: 9-1/2% SENIOR SUBORDINATED NOTES DUE 2007
In May 1997, the Company issued $450 million aggregate principal
amount of its 9-1/2% Senior Subordinated Notes due 2007 (the "9-
1/2% Senior Notes"). Interest on the 9-1/2% Senior Notes is
payable semiannually on March 15 and September 15, commencing
September 15, 1997. The 9-1/2% Senior Notes are redeemable for
cash at any time on or after September 15, 2002, at the option of
the Company, in whole or in part, initially at the redemption
price equal to 104.75% of principal amount, declining to 100% of
principal amount on September 15, 2005, plus accrued interest
thereon to the date fixed for redemption. In addition, IHS may
redeem up to $150 million aggregate principal amount of the 9-1/2%
Senior Notes at any time and from time to time prior to September
15, 2000, at a redemption price equal to 108.50% of the aggregate
principal amount thereof, plus accrued interest thereon, out of
the net cash proceeds of one or more Public Equity Offerings (as
defined in the indenture under which the 9-1/2% Senior Notes were
issued (the "9-1/2% Senior Notes Indenture")), provided that at
least $300 million in aggregate principal amount of the 9-1/2%
Senior Notes remain outstanding after such redemption. In the
event of a change in control of IHS (as defined in the 9-1/2%
Senior Notes Indenture), each holder of 9-1/2% Senior Notes may
require IHS to repurchase such holder's 9-1/2% Senior Notes, in
whole or in part, at 101% of the principal amount thereof, plus
accrued interest to the repurchase date. The 9-1/2% Senior Notes
Indenture contains covenants, including but not limited to,
covenants with respect to the following matters: (1) limitations
on additional indebtedness unless certain coverage ratios are met;
(2) limitations on other subordinated debt; (3) limitations on
liens; (4) limitations on the issuance of preferred stock by the
Company's subsidiaries; (5) limitations on transactions with
affiliates; (6) limitations on restricted payments and
investments; (7) application of the proceeds of certain asset
sales; (8) limitations on restrictions on subsidiary dividends;
and (9) restrictions on mergers, consolidations and the transfer
of all or substantially all of the assets of the Company to
another person. The Company used approximately $247.2 million of
the net proceeds from the sale of the 9-1/2% Senior Notes to
repurchase substantially all of its 9- 5/8% Senior Subordinated
Notes due 2002 and its 10-3/4% Senior Subordinated Notes due 2004
and to pay pre-payment premiums, consent fees and accrued interest
related to the repurchase; the remaining approximately $191.0
million was used to repay a portion of the $436.0 million then
outstanding under its revolving credit facility. In connection
with the repurchase, the Company recorded an extraordinary loss of
$18.2 million (net of tax). (See Note 8: Extraordinary Item)
NOTE 5: 9-1/4% SENIOR SUBORDINATED NOTES DUE 2008
In September 1997, the Company issued $500 million aggregate
principal amount of its 9-1/4% Senior Subordinated Notes due 2008
(the "9-1/4% Senior Notes"). Interest on the 9-1/4% Senior Notes is
payable semi-annually on January 15 and July 15, commencing January
15, 1998. The 9-1/4% Senior Notes are redeemable for cash
Page 11 of 35
at any time on or after January 15, 2003, at the option of the
Company, in whole or in part, initially at a redemption price equal
to 104.625% of principal amount, declining to 100% of principal
amount on January 15, 2006, plus accrued interest thereon to the
date fixed for redemption. In addition, the Company may redeem up to
$166,667,000 aggregate principal amount of the 9-1/4% Senior Notes
at any time and from time to time prior to January 15, 2001, at a
redemption price equal to 109.25% of the aggregate principal amount
thereof, plus accrued interest thereon to the date fixed for
redemption, out of the net cash proceeds of one or more Public
Equity Offerings (as defined in the indenture under which the 9-1/4%
Senior Notes were issued (the "9-1/4% Senior Notes Indenture")),
provided that at least $333,333,000 in aggregate principal amount of
the 9-1/4% Senior Notes remain outstanding after such redemption. In
the event of a change in control of IHS (as defined in the 9-1/4%
Senior Notes Indenture), each holder of 9-1/4% Senior Notes may
require IHS to repurchase such holder's 9-1/4% Senior Notes, in
whole or in part, at 101% of the principal amount thereof, plus
accrued interest to the repurchase date. The 9-1/4% Senior Notes
Indenture contains covenants, including but not limited to,
covenants with respect to the following matters: (1) limitations on
additional indebtedness unless certain coverage ratios are met; (2)
limitations on other subordinated debt; (3) limitations on liens;
(4) limitations on the issuance of preferred stock by the Company's
subsidiaries; (5) limitations on transactions with affiliates; (6)
limitations on restricted payments and investments; (7) application
of the proceeds of certain asset sales; (8) limitations on
restrictions on subsidiary dividends; and (9) restrictions on
mergers, consolidations and the transfer of all or substantially all
of the assets of the Company to another person. The Company used the
proceeds from the sale of the 9-1/4% Senior Notes to repay
outstanding indebtedness under the Company's revolving credit
facility and for general corporate purposes.
NOTE 6: REVOLVING CREDIT AND TERM LOAN FACILITY
On September 15, 1997, the Company entered into a $1.75 billion
revolving credit and term loan facility with Citibank, N.A., as
Administrative Agent, and certain other lenders (the "New Credit
Facility") to replace its existing $700 million revolving credit
facility. The New Credit Facility consists of a $750 million term
loan facility (the "Term Facility") and a $1 billion revolving
credit facility, including a $100 million letter of credit
subfacility and a $10 million swing line subfacility (the "Revolving
Facility"). The Term Facility, all of which was borrowed on
September 17, 1997, matures on September 30, 2004 and will be
amortized beginning December 31, 1998 as follows: 1998 - $7.5
million; each of 1999, 2000, 2001 and 2002 - $7.5 million (payable
in equal quarterly installments); 2003 - $337.5 million (payable in
equal quarterly installments); and 2004 - $375 million (payable in
equal quarterly installments). Any unpaid balance will be due on the
maturity date. The Term Facility will bear interest at a rate equal
to, at the option of the Company, either (i) in the case of
Eurodollar loans, the sum of (x) one and three-quarters percent or
two percent (depending on the ratio of IHS'
Page 12 of 35
Debt (as defined in the New Credit Facility) to earnings before
interest, taxes, depreciation, amortization and rent, pro forma for
any acquisitions or divestitures during the measurement period (the
"Debt/EBITDAR Ratio")) and (y) the interest rate in the London
interbank market for loans in an amount substantially equal to the
amount of borrowing and for the period of borrowing selected by IHS
or (ii) the sum of (a) the higher of (1) Citibank, N.A.'s base rate
or (2) one percent plus the latest overnight federal funds rate plus
(b) a margin of one-half percent or three-quarters of one percent
(depending on the Debt/EBITDAR Ratio). The Term Facility can be
prepaid at any time in whole or in part without penalty.
The Revolving Facility will reduce to $800 million on September 30,
2001 and $500 million on September 30, 2002, with a final maturity
on September 15, 2004; however, the $100 million letter of credit
subfacility and $10 million swing line subfacility will remain at
$100 million and $10 million, respectively, until final maturity.
The Revolving Facility will bear interest at a rate equal to, at the
option of IHS, either (i) in the case of Eurodollar loans, the sum
of (x) between three-quarters of one percent and one and
three-quarters (depending on the Debt/EBITDAR Ratio) and (y) the
interest rate in the London interbank market for loans in an amount
substantially equal to the amount of borrowing and for the period of
borrowing selected by IHS or (ii) the sum of (a) the higher of (1)
Citibank, N.A.'s base rate or (2) one percent plus the latest
overnight federal funds rate plus (b) a margin of between zero
percent and one-half percent (depending on the Debt/EBITDAR Ratio).
Amounts repaid under the Revolving Facility may be reborrowed prior
to the maturity date.
The New Credit Facility limits the Company's ability to incur
indebtedness or contingent obligations, to make additional
acquisitions, to sell or dispose of assets, to create or incur liens
on assets, to pay dividends, to purchase or redeem IHS' stock and to
merge or consolidate with any other person. In addition, the New
Credit Facility requires that the Company meet certain financial
ratios, and provides the banks with the right to require the payment
of all amounts outstanding under the facility and to terminate all
commitments under the facility, if there is a change in control of
IHS or if any person other than Dr. Robert N. Elkins, IHS' Chairman
and Chief Executive Officer, or a group managed by Dr. Elkins, owns
more than 40% of IHS' stock. The New Credit Facility is guaranteed
by all of IHS' subsidiaries (other than inactive subsidiaries) and
secured by a pledge of all of the stock of substantially all of IHS'
subsidiaries.
The New Credit Facility replaced the Company's $700 million credit
facility ("Prior Credit Facility"). As a result, the Company
recorded an extraordinary loss on extinguishment of debt of $2.4
million (net of related tax benefit of approximately $1.5 million)
in the third quarter of 1997 resulting from the write-off of
deferred financing costs of $3.9 million related to the Prior Credit
Facility. (See Note 8: Extraordinary Item)
Page 13 of 35
NOTE 7: NON-RECURRING CHARGES (INCOME)
PHARMACY GAIN:
In July 1996, the Company sold its pharmacy division to Capstone
Pharmacy, 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 recorded a pre-tax gain
related to the sale of $34.3 million during the three months ended
September 30, 1996 ($300,000 gain after tax). At the date of the
sale the Company's investment in the shares of Capstone's common
stock was recorded at its carryover cost of $14.7 million, which
represented less than 20% of the total Capstone shares. During the
first quarter 1997, the Company recorded the remaining gain of $7.6
million on its investment in the Capstone shares. Previously, such
gain was accounted for as an unrealized gain on available for sale
securities.
SETTLEMENT WITH CORAM:
On October 19, 1996, the Company and Coram Healthcare Corporation
("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, and 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
recognized as a non-recurring charge in the second quarter. In
addition, during the first quarter of 1997 the Company incurred a
non-recurring charge of $6.6 million relating to accounting, legal
and other costs related to the merger.
SALE OF REMAINING INTEREST IN INTEGRATED LIVING COMMUNITIES, INC.
In July 1997, the Company sold its remaining 37.3% ownership
interest in Integrated Living Communities, Inc. ("ILC")
(representing 2,498,000 shares of ILC) to Living Centers of America,
Inc. for approximately $28.7 million. This sale resulted in a
non-recurring gain of approximately $4.6 million which the Company
recorded in the third quarter of 1997.
Page 14 of 35
EXIT COSTS RELATED TO ROTECH MEDICAL CORPORATION
In September 1997, the Company recorded an approximately $4.6
million non-recurring charge resulting from the closure of certain
redundant activities in connection with its fourth quarter merger
with RoTech Medical Corporation.
NOTE 8: EXTRAORDINARY ITEM
In the second quarter 1997, the Company recorded a pre-tax loss of
$29.8 million representing (1) approximately $23.6 million of cash
payments for pre-payment premium and tender and consent fees
relating to the early extinguishment of debt resulting from the
Company's repurchase pursuant to cash tender offers of $99,893,000
principal amount of the Company's $100 million of outstanding 10-
3/4% Senior Subordinated Notes due 2004 and $114,975,000 principal
amount of the Company's 9-5/8% Senior Subordinated Notes due 2002
and (2) approximately $6.2 million relating to the write-off of
deferred financing costs. Such loss, reduced by the related income
tax effect of $11.6 million, is presented in the statement of
earnings as an extraordinary loss of $18.2 million.
In the third quarter of 1997, the Company replaced its $700 million
revolving credit facility with the $1.75 billion revolving credit
and term loan facility (See Note 6: 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 $3.9 million, relating primarily to the write-off of deferred
costs. Such loss, reduced by the related income tax effect of $1.5
million, is presented in the statement of earnings as an
extraordinary item of $2.4 million.
In the second quarter of 1996, the Company replaced its $500 million
revolving credit and term loan facility with a $700 million
revolving credit facility. This event has been accounted for as an
extinguishment of debt and the Company has recorded a loss on
extinguishment of debt of $2.3 million, relating primarily to the
write-off of deferred 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 $1.4 million.
NOTE 9: STOCK REPURCHASE
The Company's Board of Directors has authorized the repurchase in
the open market of up to $20 million of the Company's Common Stock.
The purpose of the repurchase program is to have available treasury
shares of Common Stock to (i) satisfy contingent earn-out payments
under prior business combinations accounted for by the purchase
method, (ii) issue in connection with acquisitions, and (iii) issue
upon exercise of outstanding options. The repurchases will be funded
from cash flow from operations and drawings under the Company's
revolving credit facility. During the nine months ended September
30, 1997, the Company repurchased 324,800 shares
Page 15 of 35
of Common Stock for an aggregate purchase price of approximately
$12.3 million.
NOTE 10: 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 11: MERGER WITH COMMUNITY CARE OF AMERICA, INC.
On September 25, 1997, the Company acquired through a cash tender
offer and subsequent merger Community Care of America, Inc. ("CCA")
for a purchase price of approximately $34.3 million in cash ("CCA
Acquisition"). In addition, in connection with the CCA Acquisition
the Company repaid approximately $58.5 million of indebtedness
assumed in the CCA Acquisition with the proceeds from the term loans
under its new credit facility, assumed approximately $27.0 million
of indebtedness and incurred costs of the transaction of
approximately $5.2 million. CCA develops and operates skilled
nursing facilities in medically underserved rural communities. CCA
currently operates 54 licensed long-term care facilities with 4,450
licensed beds (of which 19 facilities are being held for sale), one
rural healthcare clinic, two outpatient rehabilitation centers, one
child day care center and 124 assisted living units within seven of
the facilities which CCA operates. CCA currently operates in
Alabama, Colorado, Florida, Georgia, Iowa, Kansas, Louisiana, Maine,
Missouri, Nebraska, Texas and Wyoming. According to CCA's filings
with the Securities and Exchange Commission, CCA had revenues of
$127.5 million, earnings before interest, taxes, depreciation and
amortization ("EBITDA") of $2.1 million and a net loss of $18.9
million for the year ended December 31, 1996 and revenues of $65.5
million, EBITDA of $4.0 million and a net loss of $2.4 million for
the six months ended June 30, 1997. Dr. Robert N. Elkins, Chairman
of the Board and Chief Executive Officer of IHS, beneficially owned
approximately 21.0% of CCA's outstanding common stock (excluding
warrants to purchase approximately 13.5% of CCA's common stock owned
by IHS).
In connection with the CCA Acquisition, IHS, CCA and Health and
Retirement Properties Trust ("HRPT"), CCA's principal landlord and a
significant lender to CCA, restructured the lease and loan
Page 16 of 35
agreements between CCA and HRPT. Under the agreement, (i) CCA
purchased for $33.5 million 14 facilities, aggregating 1,238 beds,
previously owned by HRPT and leased to CCA, (ii) approximately $12.2
million principal amount of loans from HRPT to CCA was prepaid and
the collateral security released, (iii) three facilities mortgage
financed by HRPT were sold to HRPT and leased to CCA, and (iv) the
leases and mortgages were modified to reduce future rent and
mortgage interest rate increases and release cash security deposits.
IHS has guaranteed all lease and mortgage obligations to HRPT, which
received a $3.7 million modification fee.
NOTE 12: ASSETS HELD FOR SALE
Assets held for sale represent the assets of nineteen geriatric care
facilities acquired in connection with the acquisition of CCA which
are intended to be sold within one year. Such amounts are carried at
estimated net realizable value, less estimated carrying costs to be
incurred during the holding period.
NOTE 13: SUBSEQUENT EVENTS
MERGER WITH ROTECH MEDICAL CORPORATION
On October 21, 1997, the Company acquired RoTech Medical Corporation
("RoTech") through merger of a wholly-owned subsidiary of IHS into
RoTech (the "Merger"), with RoTech becoming a wholly-owned
subsidiary of IHS. RoTech provides home healthcare products and
services, with an emphasis on home respiratory, home medical
equipment and infusion therapy, primarily in non-urban areas. RoTech
currently operates 631 home health locations in 36 states and
approximately 26 primary care physicians practices. According to
RoTech's filings with the Securities and Exchange Commission, RoTech
had revenues of $422.7 million and net earnings of $30.8 million for
the year ended July 31, 1997.
Under the terms of the Merger, holders of RoTech Common Stock
received for each share of RoTech Common Stock 0.5806 of a share of
IHS Common Stock (the "Exchange Ratio"), having a market value of
$19.16 based on the $33.00 closing price of the IHS Common Stock on
October 21, 1997, the effective date of the Merger. Options to
purchase RoTech Common Stock (the "RoTech Options") were converted
at the closing date into options to purchase IHS Common Stock based
on the Exchange Ratio. IHS issued approximately 15,350,670 shares of
IHS Common Stock in the Merger, and reserved for issuance
approximately 1,841,700 shares of IHS Common Stock issuable upon
exercise of RoTech Options. In addition, RoTech's outstanding 5-1/4%
convertible subordinated debentures in the principal amount of $110
million become convertible into approximately 2,433,000 shares of
IHS Common Stock at a conversion price of $45.21 per share of IHS
Common Stock (the "RoTech Debentures"). The Merger consideration
aggregated approximately $514.8 million, substantially all of which
will be recorded as goodwill. The transaction will be treated as a
purchase for accounting and financial reporting
Page 17 of 35
purposes. IHS repaid the $199.7 million of RoTech bank debt assumed
in the transaction with the proceeds of the term loan under its new
revolving credit and term loan facility. Pursuant to the terms of
the indenture under which the RoTech Debentures were issued, RoTech
has offered to repurchase all such debentures for a price of 100% of
the principal amount thereof.
PROPOSED ACQUISITION OF LONG-TERM FACILITIES AND OTHER ASSETS FROM
HEALTHSOUTH CORPORATION
On November 3, 1997, IHS signed a definitive purchase agreement
pursuant to which the Company will acquire 139 long-term care
facilities, 12 specialty hospitals, a contract therapy business
holding over 1,000 contracts and an institutional pharmacy business
serving approximately 38,000 beds from HEALTHSOUTH Corporation
("HEALTHSOUTH"). Under the terms of the agreement, IHS will pay
$1.15 billion in cash and assume approximately $100 million in debt.
The Company will fund the purchase price with available cash from
term loan borrowings under its $1.75 billion revolving credit and
term loan facility, the sale of its 9-1/4% Senior Subordinated Notes
due 2008 and borrowings under the revolving credit portion of its
new credit facility. Consummation of the transaction is subject to
certain regulatory approvals, bank approvals and satisfaction of
certain other conditions. IHS has deposited with HEALTHSOUTH $50
million, which amount will be credited against the purchase price at
the closing or retained by HEALTHSOUTH under certain circumstances
if the transaction is not consummated. There can be no assurance
that this transaction will be consummated on these terms, on
different terms, or at all.
ACQUISITION OF CORAM HEALTHCARE CORPORATION LITHOTRIPSY DIVISION
IHS acquired substantially all of the assets of Coram's Lithotripsy
Division, which operates 20 mobile lithotripsy units and 13
fixed-site machines in 180 locations in 18 states. The Coram
Lithotripsy Division also provides maintenance services to its own
and third-party equipment. Lithotripsy is a non-invasive technique
that utilizes shock waves to disintegrate kidney stones. The closing
occurred on October 2, 1997.
The Company paid approximately $131.0 million in cash for the Coram
Lithotripsy Division, and assumed $1.0 million of intercompany debt
to Coram. The Coram Lithotripsy Division had revenues of $49.0
million and earnings before interest, taxes, depreciation and
amortization ("EBITDA") of $28.8 million (before minority interest)
for the year ended December 31, 1996 and revenues of $23.9 million
and EBITDA of $14.3 million (before minority interest) for the six
months ended June 30, 1997.
The Company has assumed Coram's agreements with its lithotripsy
partners, which contemplate that IHS will acquire the remaining
interest in each partnership at a defined price in the event that
legislation is passed or regulations are adopted or interpreted that
would prevent the physician partners from owning an interest in the
partnership and using the partnership's lithotripsy equipment for
the treatment of his or her patients. Coram has represented to IHS
that its partnership arrangements with
Page 18 of 35
physicians in its lithotripsy business are in compliance with
current law.
OTHER ACQUISITIONS
IHS has reached a definitive agreement to purchase a home infusion
company for approximately $15.6 million.
The Company has reached agreements in principle to purchase three
mobile diagnostic companies for approximately $8.2 million, four
home healthcare companies for approximately $48.3 million, a
rehabilitation company for approximately $11.1 million, and a
lithotripsy company for approximately $11.2 million. The Company has
also reached agreements in principle to lease three skilled nursing
facilities.
There can be no assurance that these acquisitions will be
consummated on these terms, on different terms, or at all.
Page 19 of 35
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Statements in this Quarterly Report on Form 10-Q concerning the Company's
business outlook or future economic performance anticipated profitability,
revenues, expenses or other financial items, and product line growth, together
with other statements that are not historical facts, are "forward looking
statements" as that term is defined under Federal Securities Laws.
Forward-looking statements are subject to risks, uncertainties and other factors
which could cause actual results to differ materially from those stated in such
statements. Such risks, uncertainties and factors include, but are not limited
to, the Company's substantial indebtedness, growth strategy, managed care
strategy, capital requirements and recent acquisitions, as well as competition,
government regulation, general economic conditions and other risks detailed in
the Company's filings with the Securities and Exchange Commission, including the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Net revenues for the three months ended September 30, 1997 increased $147.3
million, or 45%, to $472.9 million from the comparable period in 1996.
Approximately 82% of the increase is attributable to the acquisition of
companies providing rehabilitation, home health, mobile x-ray and
electrocardiogram services subsequent to September 30, 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 three months ended September
30, 1996 included revenues of $9.1 million from the pharmacy division and
revenues of $5.8 million from its assisted living services division. The
remaining increase was due primarily to
Page 20 of 35
facilities and ancillary companies acquired during the third quarter of 1996 and
increased revenues from facilities and ancillary companies in operation during
both periods. The Company derived approximately 49% and 17% of its patient
revenues from Medicare and Medicaid, respectively, in the three months ended
September 30, 1997, compared to 34% and 23%, respectively, in the comparable
period in 1996.
Basic medical services revenue decreased 10% from $101.2 million to $91.5
million. This decrease primarily resulted from the conversion by the Company of
certain skilled nursing beds to Medical Specialty Unit (MSU) beds after
September 30, 1996 and the sale of a majority interest in its assisted living
services division in October 1996.
Specialty medical services revenue increased 75% from $211.9 million to $370.8
million. Of the $158.9 million increase, $120.5 million, or 76%, was
attributable to revenue from acquisitions subsequent to September 30, 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 was due to increased revenue from facilities and ancillary
companies in operation in both periods, ancillary companies acquired during the
third quarter of 1996, as well as skilled nursing beds being converted to MSU
beds after September 30, 1996.
Management services and other revenues decreased 15% from $12.6 million to $10.7
million.
Total expenses for the period increased 65% to $438.2 million from $265.3
million in the comparable period of 1996. Of the $172.9 million increase, $107.3
million, or 62%, resulted from an increase in operating expenses. A substantial
portion of the increase in operating expenses was due to acquisitions
consummated subsequent to September 30, 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.
Page 21 of 35
Corporate administrative and general expenses for the three months ended
September 30, 1997 increased by $5.0 million, or 33%, over the comparable period
in 1996. This increase primarily represents additional operations, information
systems, accounting, finance and other personnel to support the growth resulting
from the acquisition of ancillary businesses. Depreciation and amortization
increased to $17.0 million during the three months ended September 30, 1997, an
increase of 86% as compared to $9.1 million in the same period in 1996,
primarily as a result of increases in goodwill amortization and depreciation
related to ancillary company acquisitions consummated during 1996 and 1997. Rent
expense increased by $7.1 million, or 38%, over the comparable period in 1996,
primarily as a result of increases in contingent rentals, which are based on
gross revenues of certain leased facilities, increased equipment rentals and
rent at ancillary companies acquired subsequent to September 30, 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 $11.4 million, or 72%, during the three months ended
September 30, 1997 to $27.3 million. The increase in interest expense was
primarily a result of $750 million of term loan borrowings under the Company's
new $1.75 billion revolving credit and term loan facility entered into in
September 1997, the Company's $500 million principal amount of 9-1/4% Senior
Subordinated Notes issued in September 1997, the Company's $450 million
principal amount of 9-1/2% Senior Subordinated Notes issued in May 1997, as well
as increased borrowings under the Company's prior $700 million revolving credit
facility, partially offset by a reduction in interest resulting from the
repurchase in May 1997 of substantially all of the Company's 9-5/8% and 10-3/4%
Senior Subordinated Notes, and the payoff of the Company's prior $700 million
revolving credit facility with the proceeds from the sale of the 9-1/4% Senior
Subordinated Notes.
Earnings before equity in earnings (loss) of affiliates, income taxes and
extraordinary items decreased by 43% to $34.7 million for the three months ended
September 30, 1997, as compared to $60.3 million for the comparable period in
the prior year. This decrease primarily resulted
Page 22 of 35
from the gain the Company recognized from the sale of the pharmacy division
during the three months ended September 30, 1996 (See Note 7: Non-Recurring
Charges (Income)). Excluding non-recurring income in 1996, earnings before
equity in earnings (loss) of affiliates, income taxes and extraordinary items in
1997 increased $8.6 million, or 33%, over the comparable prior period in 1996.
Earnings before income taxes and extraordinary items decreased by 44% to $33.9
million for the three months ended September 30, 1997, as compared to $60.7
million for the comparable period in the prior year. This decrease resulted
primarily from the non-recurring income described above. Excluding the
non-recurring income in 1996, earnings before income taxes and extraordinary
items in 1997 increased $7.5 million, or 29%, over the comparable prior period
in 1996. The provision for federal and state income taxes was $13.2 million for
the three months ended September 30, 1997, and $44.1 million for the same period
in the prior year. Because the Company's investment in the common stock received
in the sale of the Company's pharmacy division had a very small tax basis, the
taxable gain on the sale significantly exceeded the gain for financial reporting
purposes, thereby resulting in a disproportionately higher income tax provision
related to the sale in 1996. During the three months ended September 30, 1997,
the Company incurred an extraordinary loss on the extinguishment of debt of $2.4
million (net of tax), or 6 cents per share (fully-diluted), representing the
write-off of deferred financing fees in connection with the replacement of its
$700 million revolving credit facility with its $1.75 billion revolving credit
and term loan facility as discussed in Note 8. Net earnings and fully-diluted
earnings per share for the quarter was $18.3 million in 1997, or 59 cents per
share, as compared to net earnings and fully diluted earnings per share of $16.5
million or 58 cents per share for the same period in 1996.
Page 23 of 35
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Net revenues for the nine months ended September 30, 1997 increased $403.1
million, or 41%, to $1,391.8 million from the comparable period in 1996.
Approximately 83% of the increase is attributable to the acquisition of
companies providing rehabilitation, home health, mobile x-ray and
electrocardiogram services subsequent to September 30, 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 nine months ended September
30, 1996 include revenues of $56.5 million for the pharmacy division and
revenues of $17.1 million from its assisted living services division. The
remaining increase was due primarily to facilities and ancillary companies
acquired during the nine months ended September 30, 1996 and increased revenues
from facilities and ancillary companies in operation during both periods. The
Company derived approximately 49% and 17% of its patient revenues from Medicare
and Medicaid, respectively, in the nine months ended September 30, 1997,
compared to 34% and 23%, respectively, in the comparable period in 1996.
Basic medical services revenue decreased 10% from $296.5 million to $268.3
million. This decrease primarily resulted from the conversion by the Company of
certain skilled nursing beds to Medical Specialty Unit (MSU) beds after
September 30, 1996 and the sale of a majority interest in its assisted living
services division in October 1996.
Specialty medical services revenue increased 66% from $658.3 million to $1,093.6
million. Of the $435.3 million increase, $335.2 million, or 77%, was
attributable to revenue from acquisitions subsequent to September 30, 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 was due to increased revenue from facilities in operation in
both periods and ancillary companies
Page 24 of 35
acquired during the nine months ended September 30, 1996, as well as skilled
nursing beds being converted to MSU beds after September 30, 1996.
Management services and other revenues decreased 12% from $34.0 million to $30.0
million.
Total expenses for the period increased to $1,310.9 million from $881.9 million,
an increase of 49%. Of the $429.0 million increase, $294.3 million, or 69%, was
due to an increase in operating expenses. A substantial portion of the increase
in operating expenses was due to acquisitions consummated subsequent to
September 30, 1996, partially offset by 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.
Corporate administrative and general expenses for the nine months ended
September 30, 1997 increased by $11.2 million, or 25%, over the comparable
period in 1996. This increase primarily represents additional operations,
information systems, accounting, finance and other personnel to support the
growth resulting from the acquisition of ancillary businesses. Depreciation and
amortization increased 85% to $47.8 million during the nine months ended
September 30, 1997 as compared to $25.9 million for the nine months ended
September 30, 1996. This increase is primarily the result of increased goodwill
amortization and depreciation related to ancillary company acquisitions
consummated during 1996 and 1997. Rent expense increased by $21.3 million, or
40%, over the comparable period in 1996, as a result of increases in contingent
rentals, which are based on gross revenues of certain leased facilities,
increased equipment rentals and rent at ancillary companies acquired subsequent
to September 30, 1996, partially offset by a reduction in rent resulting from
the sale of the pharmacy division and the sale of majority interest in the
Company's assisted living services division. Interest expense, net increased
$26.0 million, or 56%, during the nine months ended September 30, 1997 to $72.0
million. This increase in interest
Page 25 of 35
expense was primarily a result of $750 million of term loan borrowings under the
Company's new $1.75 billion revolving credit and term loan facility, entered
into in September 1997, the Company's $500 million principal amount of 9-1/4%
Senior Subordinated Notes issued in September 1997, the Company's $450 million
principal amount of 9-1/2% Senior Subordinated Notes issued in May 1997, the
Company's $150 million principal amount of 10-1/4% Senior Subordinated Notes
issued in May 1996, as well as increased borrowings under the Company's prior
$700 million revolving credit facility, partially offset by a reduction in
interest resulting from the repurchase of substantially all of the Company's
9-5/8% and 10-3/4% Senior Subordinated Notes in May 1997, and the paydown on the
Company's prior $700 million revolving credit facility with the proceeds from
the sale of the 9-1/2% Senior Subordinated Notes and the 9-1/4% Senior
Subordinated Notes.
Earnings before equity in earnings (loss) of affiliates, income taxes and
extraordinary items decreased by 24% to $81.0 million for the nine months ended
September 30, 1997, as compared to $106.9 million for the comparable period in
the prior year. This decrease is primarily the result of non-recurring charges
which were incurred during the nine months ended September 30, 1997 and
non-recurring income the Company recognized during the nine months ended
September 30, 1996 (See Note 7: Non-Recurring Charges (Income)). Excluding the
non-recurring charges and income in both years, earnings before equity in
earnings (loss) of affiliates, income taxes and extraordinary items in 1997
increased $28.5 million, or 39%, over the comparable period in 1996.
Earnings before income taxes and extraordinary items decreased by 26% to $80.3
million for the nine months ended September 30, 1997, as compared to $107.9
million for the comparable period in the prior year. This decrease is primarily
the result of the non-recurring charges and income discussed above. Excluding
the non-recurring charges and income, earnings before income taxes and
extraordinary items in 1997 increased by $26.7 million, or 36%, over the
comparable prior period in 1996. The provision for federal and state income
taxes was $31.3 million for the nine months ended September 30, 1997, and $62.4
million for the same period in the prior year. Taxes in the 1996 period were
substantially higher because of the sale of the pharmacy division as discussed
above under the three month results of operations. During the nine months
Page 26 of 35
ended September 30, 1997 and 1996, the Company incurred extraordinary losses of
$20.6 million (net of tax), or 57 cents per share (fully-diluted) and $1.4
million (net of tax), or 4 cents per share (fully-diluted), respectively,
representing in 1997 the payment of premium and consent fees and the write-off
of deferred financing costs in connection with the repurchase of substantially
all the Company's 9-5/8% and 10-3/4% Senior Subordinated Notes and the write-off
of deferred financing costs in connection with the replacement of its $700
million revolving credit facility with a $1.75 billion revolving credit and term
loan facility and in 1996 the write-off of deferred financing costs related to
replacement of the Company's $500 million revolving credit and term loan
facility with the $700 million revolving credit facility (See Note 8:
Extraordinary Item). Net earnings and fully diluted earnings per share for the
nine months were $28.4 million in 1997, or $1.00 per share, as compared to $44.2
million or $1.64 per share for the same period in 1996. Weighted average shares
(fully-diluted) increased by 14%, from 31,447,000 at September 30, 1996 to
35,803,000 at September 30, 1997.
Page 27 of 35
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had working capital of $980.9 million, as
compared with $57.5 million at December 31, 1996. The increase in working
capital was a result of an increase in cash, as well as 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 September 30, 1997. Net patient
accounts and third-party payor settlements receivable increased $50.7 million to
$377.5 million at September 30, 1997, as compared to $326.9 million at December
31, 1996. Of the $50.7 million increase in accounts receivable, $22.9 million
was attributable to related service businesses acquired subsequent to December
31, 1996 and $27.8 million was due to increased accounts receivable at
facilities in operation and related service businesses owned at both December
31, 1996 and September 30, 1997. Gross patient accounts receivable were $398.6
million at September 30, 1997, as compared to $340.8 million at December 31,
1996. Net third-party payor settlements receivable from federal and state
governments (i.e., Medicare and Medicaid cost reports) was $26.1 million at
September 30, 1997, as compared to $27.6 million at December 31, 1996.
Approximately $11.8 million, or 45%, of the third-party payor settlements
receivable from federal and state governments at September 30, 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 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 325 cost reports, covering all cost report periods through December
31, 1996. To date, final action has been taken by the Health Care Financing
Administration ("HCFA") on 232 waiver requests covering cost report periods
through December 31, 1996. The Company's final rates as approved by HCFA
represent approximately 95% of the requested rates as submitted in the waiver
requests. There
Page 28 of 35
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.
As discussed in Note 4, in May 1997, the Company issued $450 million principal
amount of 9-1/2% Senior Subordinated Notes. The Company used the net proceeds to
repurchase substantially all of its 9- 5/8% Senior Subordinated Notes due 2002
and its 10-3/4% Senior Subordinated Notes due 2004, to pay pre-payment premiums,
consent fees and accrued interest related to the repurchase, as well as to repay
a portion of the $436.0 million then outstanding under its $700 million
revolving credit facility. In connection with the repurchase, the Company
recorded an extraordinary loss of $18.2 million (net of tax).
As discussed in Note 5, in September 1997, the Company issued $500 million
principal amount of 9-1/4% Senior Subordinated Notes. The Company used the
proceeds to repay outstanding indebtedness under the Company's $700 million
revolving credit facility and for general corporate purposes.
As discussed in Note 6, in September 1997, the Company replaced its $700 million
credit facility with a $1.75 billion revolving credit and term loan facility.
Upon the closing of the facility, the Company borrowed $750 million of term
loans. In connection with this transaction, the Company recorded an
extraordinary loss of $2.4 million (net of tax) on the extinguishment of debt
related to the prior credit facility.
The Company intends to use substantially all cash proceeds remaining from the
sale of the 9-1/4% Senior Subordinated Notes and term loan borrowings and
borrowings under its revolving credit facility to pay the $1.15 billion cash
purchase price for the assets which the Company has agreed to purchase from
HEALTHSOUTH. (See Note 13)
The other asset and liability increases were due to acquisitions and
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normal growth in operations which was consistent with the growth in revenues of
such operations in 1997.
Net cash provided by operating activities for the nine months ended September
30, 1997, was $26.7 million as compared to $14.3 million for the comparable
period in 1996.
Net cash provided by financing activities was $1,070.9 million for the nine
month period in 1997 as compared to $60.8 million for the comparable period in
1996. 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 $1,077.7 million for the nine month
period ended September 30, 1997 as compared to $72.9 million for the nine month
period ended September 30, 1996. Cash used for business acquisitions was $166.8
million in 1997 as compared to $46.1 million for 1996. Cash used for the
purchase of property, plant and equipment was $86.7 million in 1997 and $104.6
million in 1996. Cash used for the purchase of temporary investments was $820.6
million in 1997 compared to $4.6 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 $48.0 million as of September 30, 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 $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 the 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 established several
irrevocable letters of credit with the Bank of Nova Scotia totaling $26.3
million at September 30, 1997 to secure
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certain of the Company's workers' compensation, health benefits and other
obligations. 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. In addition, the Company has obligations under
operating leases aggregating approximately $200.3 million at September 30, 1997.
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
of which $36.1 million was recorded on the balance sheet at September 30, 1997.
The Company is obligated to purchase the remaining interests in its lithotripsy
partnerships at a defined price in the event legislation is passed or
regulations adopted that would prevent the physician partners from owning an
interest in the partnership and using the partnership's lithotripsy equipment
for the treatment of his or her patients.
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.
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 and 1998.
The Company expects to continue to be growth oriented in 1997 and 1998 through
the expansion of its existing operations, by the acquisition of additional
facilities and ancillary companies and the entry into agreements to manage
additional facilities.
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PART II: OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES
(C) On August 29, 1997, the Company acquired substantially
all of the outstanding stock of Ambulatory
Pharmaceutical Services, Inc. ("APSI") and APS American,
Inc. ("APSA"), which provide blood factoring services.
The purchase price was approximately $34.3 million, of
which $18.1 million was paid in cash at closing and
$16.2 million was paid through the issuance of 532,240
shares of the Company's common stock to the stockholders
of APSI and APSA (based on the average closing price for
the thirty day trading period immediately preceding the
date which is two trading days before the closing date
of the acquisition).
On August 28, 1997, the Company acquired substantially
of the outstanding stock of Arcadia Services, Inc.
("Arcadia"), which provides home health services. The
purchase price was approximately $27.0 million, of which
$9.8 million was paid in cash at closing and $17.2
million was paid through the issuance of 531,198 shares
of the Company's common stock to the stockholder of
Arcadia (based on the average closing price for the
thirty day trading period immediately preceding the date
which is two trading days before the closing of the
acquisition).
The Common Stock issued by the Company in these
transactions was not registered under the Securities Act
of 1933, as amended, in reliance upon exemptions
contained in Section 4(2) thereof. Each of the
stockholders made representations to the effect that (i)
the shares were being acquired for its own account and
not with a view to, or for sale in connection with, any
distribution; (ii) acknowledging that the shares were
restricted securities under Rule 144; (iii) that it had
knowledge and experience in business matters, was
capable of evaluating the merits and risks of the
investment, and was able to bear the risk of loss; (iv)
had the opportunity to make inquiries of and obtain
information from IHS. The Company is obligated to
register the Common Stock for resale under the
Securities Act of 1993, as amended.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
4.1 Indenture, dated as of September 11, 1997, between
Integrated Health Services, Inc. And First Union
National Bank of Virginia, as Trustee, relating to
the Company's 9-1/4% Senior Subordinated Notes due
2008.
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10.1 Credit Agreement, dated as of September 15, 1997,
by and among Integrated Health Services, Inc., the
lenders named therein, and Citibank, N.A., as
administrative agent (incorporated by reference
from the Company's Current Report on 8-K dated
September 15, as amended).
10.2 Purchase Agreement, dated September 8, 1997,
between Integrated Health Services, Inc. and Smith
Barney, Inc., Morgan Stanley & Co. Incorporated,
Donaldson, Lufkin & Jenrette Securities
Corporation and Citicorp Securities, Inc.,
relating to the Company's 9-1/4% Senior
Subordinated Notes due 2008.
10.3 Registration Rights Agreement, dated September 8,
1997, between Integrated Health Services, Inc.,
and Smith Barney, Inc., Morgan Stanley & Co.
Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation and Citicorp Securities,
Inc., relating to the Company's 9-1/4% Senior
Subordinated Notes due 2008.
10.4 Purchase and Sale Agreement, dated as of November
3, 1997, between Integrated Health Services, Inc.,
HEALTHSOUTH Corporation and Horizon/CMS Healthcare
Corporation (incorporated by reference from the
Company's Current Report on Form 8-K dated
November 3, 1997).
B. REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K dated July 6, 1997
reporting the execution of the Agreement and Plan of Merger among
the Company, IHS Acquisition XXIV, Inc., and RoTech Medical
Corporation ("RoTech") relating to the Company's proposed
acquisition of RoTech.
The Company filed a Current Report on Form 8-K dated September 9,
1997 relating to the private issuance of $500,000,000 aggregate
principal amount 9-1/4% Senior Subordinated Notes due 2008.
The Company filed a Current Report on Form 8-K dated September
15, 1997 reporting the agreement with Citibank, N.A. and certain
other lenders relating to the $1.75 billion revolving credit and
term loan facility.
The Company filed a Current Report on Form 8-K dated September
25, 1997 reporting the cash tender and subsequent merger of
Community Care of America, Inc and the acquisition of the
lithotripsy division of Coram Healthcare Corporation.
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The Company filed a Current Report on Form 8-K dated October 21,
1997 reporting the completion of the RoTech Medical Corporation
acquisition.
The Company filed a Current Report on Form 8-K dated November 3,
1997, reporting the execution of an agreement to acquire certain
assets from HEALTHSOUTH Corporation.
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- 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
Senior Vice President and
Chief Accounting Officer
By: /s/ Eleanor C. Harding
------------------------
Eleanor C. Harding
Senior Vice President Finance
Dated: November 13, 1997
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