UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 March 31, 1998
---------------
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
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Integrated Health Services, Inc.
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(Exact name of registrant as specified in its charter)
DELAWARE 23-2428312
--------------------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10065 Red Run Boulevard, Owings Mills, MD 21117
----------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(410) 998-8400
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(Registrant's telephone, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Number of shares of common stock of the registrant outstanding as of May 1,
1998: 45,606,346 shares.
INTEGRATED HEALTH SERVICES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page
----
Item 1. - Condensed Financial Statements -
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Earnings
for the three months ended March 31, 1998
and 1997 4
Consolidated Statement of Changes in
Stockholders' Equity for the three
months ended March 31, 1998 5
Consolidated Statements of Comprehensive
Earnings for the three months ended
March 31, 1998 and 1997 5
Consolidated Statements of Cash Flows
for the three months ended March 31, 1998
and 1997 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 and Use of Proceeds 18
Item 6. Exhibits and Reports on Form 8-K 18
2
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31,
1998 1997
------------------- -------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 52,134 $ 52,965
TEMPORARY INVESTMENTS 60,272 8,042
PATIENT ACCOUNTS AND THIRD-PARTY PAYOR SETTLEMENTS
RECEIVABLE, LESS ALLOWANCE FOR DOUBTFUL RECEIVABLES
OF $163,889 AT MARCH 31, 1998 AND $161,438 AT DECEMBER 31, 1997 693,172 603,432
INVENTORIES, PREPAID EXPENSES AND OTHER CURRENT ASSETS 73,728 53,152
------------------- -------------------
TOTAL CURRENT ASSETS 879,306 717,591
------------------- -------------------
PROPERTY, PLANT AND EQUIPMENT, NET 1,314,646 1,318,633
ASSETS HELD FOR SALE 64,642 111,629
INTANGIBLE ASSETS 2,874,867 2,815,272
INVESTMENTS IN AND ADVANCES TO AFFILIATES 30,814 19,527
OTHER ASSETS 82,633 80,492
------------------- -------------------
TOTAL ASSETS $ 5,246,908 $ 5,063,144
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT MATURITIES OF LONG-TERM DEBT $ 35,526 $ 36,081
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 596,297 615,967
INCOME TAX PAYABLE 23,243 2,426
------------------- -------------------
TOTAL CURRENT LIABILITIES 655,066 654,474
------------------- -------------------
LONG-TERM DEBT:
REVOLVING CREDIT AND TERM LOAN FACILITY LESS CURRENT MATURITIES 1,745,849 1,673,500
MORTGAGES AND OTHER LONG-TERM DEBT LESS CURRENT MATURITIES 160,454 167,606
SUBORDINATED DEBT 1,361,046 1,361,046
------------------- -------------------
TOTAL LONG-TERM DEBT 3,267,349 3,202,152
------------------- -------------------
OTHER LONG-TERM LIABILITIES 115,153 113,042
DEFERRED INCOME TAXES 2,630 -
DEFERRED GAIN ON SALE-LEASEBACK TRANSACTIONS 5,140 5,315
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, AUTHORIZED 15,000,000 SHARES; NO SHARES
ISSUED AND OUTSTANDING - -
COMMON STOCK, $0.001 PAR VALUE. AUTHORIZED 150,000,000
SHARES; ISSUED 45,221,385 AT MARCH 31, 1998 AND 43,098,373 AT
DECEMBER 31, 1997 (INCLUDING 548,500 TREASURY SHARES AT
MARCH 31, 1998 AND DECEMBER 31, 1997) 45 43
ADDITIONAL PAID-IN CAPITAL 1,137,763 1,062,436
RETAINED EARNINGS 83,575 45,495
TREASURY STOCK, AT COST (548,500 SHARES AT MARCH 31, 1998 AND
DECEMBER 31, 1997) (19,813) (19,813)
------------------- -------------------
NET STOCKHOLDERS' EQUITY 1,201,570 1,088,161
------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,246,908 $ 5,063,144
=================== ===================
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
--------------------------------------
1998 1997
---------------- ----------------
NET REVENUES:
BASIC MEDICAL SERVICES $ 234,899 $ 88,755
SPECIALTY MEDICAL SERVICES 612,196 362,689
MANAGEMENT SERVICES AND OTHER 7,785 9,499
---------------- ----------------
TOTAL REVENUES 854,880 460,943
---------------- ----------------
COSTS AND EXPENSES:
OPERATING, GENERAL AND ADMINISTRATIVE 650,137 370,428
DEPRECIATION AND AMORTIZATION 38,591 15,030
RENT 35,414 24,009
INTEREST, NET 66,465 21,421
NON-RECURRING INCOME 0 (1,025)
---------------- ----------------
TOTAL COSTS AND EXPENSES 790,607 429,863
---------------- ----------------
EARNINGS BEFORE EQUITY IN EARNINGS
OF AFFILIATES AND INCOME TAXES 64,273 31,080
EQUITY IN EARNINGS OF AFFILIATES 270 181
---------------- ----------------
EARNINGS BEFORE INCOME TAXES 64,543 31,261
FEDERAL AND STATE INCOME TAXES 26,463 12,192
---------------- ----------------
NET EARNINGS $ 38,080 $ 19,069
================ ================
PER COMMON SHARE:
NET EARNINGS - BASIC $ 0.88 $ 0.81
NET EARNINGS - DILUTED $ 0.74 $ 0.64
================ ================
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(DOLLARS IN THOUSANDS)
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
--------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 43 $ 1,062,436 $ 45,495 $ (19,813) $ 1,088,161
EXERCISE OF EMPLOYEE STOCK OPTIONS
FOR 1,496,611 COMMON SHARES 1 26,076 - - 26,077
ISSUANCE OF 626,401 COMMON SHARES IN
CONNECTION WITH ACQUISITIONS (NOTE 3) 1 16,508 - - 16,509
VALUE OF 1,841,700 OPTIONS ISSUED IN
CONNECTION WITH ACQUISITION OF ROTECH
MEDICAL CORPORATION - 32,743 - - 32,743
NET EARNINGS - - 38,080 - 38,080
-------------------------------------------------------------------------
BALANCE AT MARCH 31, 1998 $ 45 $ 1,137,763 $ 83,575 $ (19,813) $ 1,201,570
=========================================================================
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
---- ----
NET EARNINGS PER CONSOLIDATED
STATEMENT OF EARNINGS $38,080 $19,069
OTHER COMPREHENSIVE EARNINGS,
NET OF TAX (NOTE 6) - (5,756)
------- -------
COMPREHENSIVE EARNINGS $38,080 $13,313
======= =======
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
1998 1997
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET EARNINGS $ 38,080 $ 19,069
ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
NON-RECURRING INCOME - (1,025)
UNDISTRIBUTED RESULTS OF JOINT VENTURES 83 0
DEPRECIATION AND AMORTIZATION 38,591 15,030
DEFERRED INCOME TAXES AND OTHER NON-CASH ITEMS 4,923 1,396
AMORTIZATION OF GAIN ON SALE-LEASEBACK TRANSACTIONS (175) (299)
INCREASE IN PATIENT ACCOUNTS AND THIRD-PARTY
PAYOR SETTLEMENTS RECEIVABLE, NET (97,558) (10,386)
INCREASE IN SUPPLIES, INVENTORY, PREPAID
EXPENSES AND OTHER CURRENT ASSETS (14,698) (5,581)
INCREASE (DECREASE) IN ACCOUNTS PAYABLE AND ACCRUED EXPENSES 12,153 (18,935)
DECREASE IN INCOME TAXES RECEIVABLE - 10,613
INCREASE IN INCOME TAXES PAYABLE 20,817 -
---------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,216 9,882
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM ISSUANCE OF CAPITAL STOCK, NET 26,077 3,773
PROCEEDS FROM LONG-TERM BORROWINGS 77,367 139,928
REPAYMENT OF LONG-TERM DEBT (11,482) (97,639)
DIVIDENDS PAID (814) (471)
DEFERRED FINANCING COSTS 0 (698)
---------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 91,148 44,893
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
SALE OF TEMPORARY INVESTMENTS 8,939 355
PURCHASE OF TEMPORARY INVESTMENTS (61,169) (48)
BUSINESS ACQUISITIONS (NOTE 3) (62,391) (10,975)
PURCHASE OF PROPERTY, PLANT AND EQUIPMENT (67,004) (41,096)
DISPOSITION OF ASSETS 99,926 -
OTHER ASSETS (12,496) (3,272)
---------------- ----------------
NET CASH USED BY INVESTING ACTIVITIES (94,195) (55,036)
---------------- ----------------
DECREASE IN CASH AND CASH EQUIVALENTS (831) (261)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 52,965 39,028
---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 52,134 $ 38,767
================ ================
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6
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 the "Company"), refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. 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
The Company adopted SFAS No. 128 during the fourth quarter of the year ended
December 31, 1997. SFAS No. 128 establishes revised standards for computing and
presenting earnings per share (EPS) data. It requires dual presentation of
"basic" and "diluted" EPS on the face of the statements of operations and a
reconciliation of the numerators and denominators used in the basic and diluted
EPS calculations. As required by SFAS No. 128, EPS data for prior periods
presented have been restated to conform to the new standard.
Basic EPS is calculated by dividing net earnings (loss) by the weighted average
number of common shares outstanding for the applicable period. Diluted EPS is
calculated after adjusting the numerator and the denominator of the basic EPS
calculation for the effect of all potential dilutive common shares outstanding
during the period. Information related to the calculation of net earnings per
share of common stock is summarized as follows:
7
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
For the three months ended March 31, 1998:
Basic EPS ................................................ $38,080 43,229 $ 0.88
Adjustment for interest on
convertible debentures .................................. 2,388 -- --
Incremental shares from
assumed exercise of dilutive
options and warrants .................................... -- 3,195 --
Incremental shares from assumed
conversion of the convertible
subordinated debentures ................................. -- 8,037 --
------- ------ ------------
Diluted EPS ............................................... $40,468 54,461 $ 0.74
======= ====== ============
For the three months ended March 31, 1997:
Basic EPS ................................................ $19,069 23,660 $ 0.81
Adjustment for interest on
convertible debentures .................................. 2,452 -- --
Incremental shares from
assumed exercise of dilutive
options and warrants ..................................... -- 2,173 --
Incremental shares from assumed
conversion of the convertible
subordinated debentures ................................. -- 7,989 --
------- ------ ------------
Diluted EPS ............................................... $21,521 33,822 $ 0.64
======= ====== ============
NOTE 3: NEW ACQUISITIONS
Acquisitions during the three months ended March 31, 1998 and the
manner of payment are summarized as follows:
TOTAL COMMON ACCRUED CASH
MONTH TRANSACTION COSTS STOCK ISSUED LIABILITIES PAID
- ----- ----------- -------- ------------ ----------- --------
(DOLLARS IN THOUSANDS)
Jan. Stock of Paragon
Rehabilitative
Service, Inc. $ 11,183 $ 10,758 $ 425 --
Feb. Assets of Health
Star, Inc. $ 3,115 -- $ 260 $ 2,855
Feb. Stock of Medicare
Convalescent Aids
of Pinellas d/b/a
Medaids, RxStat,
Prime Medical
Services $ 4,671 $ 3,654 $ 187 $ 830
Feb. Stock of Michigan
Medical Supply $ 2,115 -- $ 215 $ 1,900
Feb. Assets of Nutmeg
Respiratory
Homecare $ 2,547 -- $ 207 $ 2,340
March Assets of Chancy
Healthcare Services,
Inc., Chancy Oxygen
Services, Inc., CHS
Home Infusion Co.,
Chancy Healthcare
Services of
Waynesboro $ 5,670 -- $ 335 $ 5,335
Various 20 acquisitions,
8
TOTAL COMMON ACCRUED CASH
MONTH TRANSACTION COSTS STOCK ISSUED LIABILITIES PAID
- ----- ----------- -------- ------------ ----------- --------
(DOLLARS IN THOUSANDS)
each with total
costs of less
than $2,000 $ 21,070 $ 2,097 $ 1,764 $ 17,209
Various Cash payments of
acquisition costs
accrued -- -- ($ 31,922) $ 31,922
-------- --------- ---------- --------
$ 50,371 $ 16,509 ($ 28,529) $ 62,391
======== ========= ========== ========
The allocation of the total cost of the 1998 acquisitions to the
assets acquired and the liabilities assumed is summarized as follows:
PROPERTY,
CURRENT PLANT & OTHER INTANGIBLE CURRENT LONG-TERM TOTAL
TRANSACTION ASSETS EQUIPMENT ASSETS ASSETS LIABILITIES LIABILITIES COSTS
- ----------- ------ --------- ------ ------ ----------- ----------- -----
(DOLLARS IN THOUSANDS)
Paragon Rehab.
Services, Inc. $ 1,505 $ 85 $ 4 $ 13,036 ($ 3,427) ($ 20) $ 11,183
Health Star, Inc. $ 399 $ 221 -- $ 2,495 -- -- $ 3,115
Medicare Convale-
scent Aids of
Pinellas d/b/a
Medaids, RxStat,
Prime Medical
Services $ 1,040 $ 732 -- $ 3,176 ($ 277) -- $ 4,671
Michigan Medical
Supply $ 550 $ 591 -- $ 1,120 ($ 131) ($ 15) $ 2,115
Nutmeg Respiratory
Homecare $ 536 $ 291 -- $ 1,720 -- -- $ 2,547
Chancy Healthcare
Services, Inc.,
Chancy Oxygen
Services, Inc.,
CHS Home Infusion
Co., Chancy Health-
care Services of
Waynesboro $ 650 $ 80 -- $ 4,940 -- -- $ 5,670
20 acquisitions,
each with total
costs of less
than $2,000 $ 1,975 $ 2,738 -- $ 16,357 -- -- $ 21,070
------- --------- ------ -------- ----------- ----------- --------
$ 6,655 $ 4,738 $ 4 $ 42,844 ($ 3,835) ($ 35) $ 50,371
======= ========= ====== ======== =========== =========== ========
NOTE 4: TRANSACTIONS WITH LYRIC HEALTH CARE LLC
In January 1998, the Company sold five long-term care facilities to
Omega Healthcare Investors, Inc.("Omega") for $44.5 million, which
facilities were leased back by Lyric Health Care LLC ("LLC"), a newly
formed subsidiary of IHS, at an annual rent of approximately $4.5
million. In a related transaction, TFN Healthcare Investors, LLC
("TFN", an entity in which Timothy F. Nicholson, a director of IHS, is
the principal member) purchased a 50% interest in LLC for $1.0 million
and IHS' interest in LLC was reduced to 50%. IHS also entered into
management and franchise agreements with LLC. The management and
franchise agreements' initial terms are 13 years with two renewal
options of 13 years each. The base management fee is 3% of gross
revenues, subject to increase if gross revenues exceed $350.0 million.
In addition, the agreement provides for an incentive management fee
equal to 70% of annual net cash flow (as defined in the management
agreement). The duties of
9
IHS as manager include the following: accounting, legal, human
resources, operations, materials and facilities management and
regulatory compliance. The annual franchise fee is 1% of gross
revenues, which grants LLC the authority to use the Company's trade
names and proprietary materials.
The LLC will dissolve on December 31, 2047 unless extended for an
additional 12 months. On February 1, 1998 LLC also entered into a
five-year employment agreement with Timothy F. Nicholson, the
principal stockholder of TFN and a director of the Company. Pursuant
to LLC's operating agreement, Mr. Nicholson will serve as Managing
Director of LLC and will have the day-to-day authority for the
management and operation of LLC and will initiate policy proposals for
business plans, acquisitions, employment policy, approval of budgets,
adoption of insurance programs, additional service offerings,
financing strategy, ancillary service usage, change in material terms
of any lease and adoption/amendment of employee health, benefit and
compensation plans. As a result of the aforementioned transactions,
IHS will account for its investment in LLC using the equity method of
accounting since IHS no longer controls LLC. Under the equity method
of accounting for LLC, IHS will record 50% of LLC's profit and losses
pursuant to the amended operating agreement. The equity method will be
applied to the Company's investment in LLC, including outstanding
management and franchise fees. The Company recorded a $2.5 million
loss on the sale of these facilities in 1997.
Cash flow deficiencies, if any, of LLC may be satisfied by (1)
available working capital loans under a $10.0 million revolving credit
facility from Copelco/American Healthfund, Inc., (2) obtaining
additional borrowings under new debt arrangements, (3) obtaining
additional capital contributions from IHS and TFN, the existing
members of LLC, although such contributions are not required, and (4)
admission of new members of LLC.
In March 1998, the Company sold an additional five long-term care
facilities to Omega for approximately $50 million, which facilities
were leased back to LLC at an annual rent of approximately $4.9
million. IHS also entered into management and franchise agreements
with LLC with terms similar to those described above. The Company
recorded no gain or loss on this transaction.
NOTE 5: SALE OF OUTPATIENT CLINICS
In February 1998, the Company sold its outpatient clinics to
Continucare Rehabilitation Services, Inc.for $10.0 million. During the
fourth quarter of 1997, the Company wrote down its investment in its
outpatient clinics to net realizable value. Accordingly, no gain or
loss was recognized by the Company during the first quarter of 1998.
NOTE 6: RECENT ACCOUNTING PRONOUNCEMENTS - COMPREHENSIVE INCOME
In 1998 the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." The term
"Comprehensive Earnings" is defined as the change in stockholders'
equity from transactions and other events and circumstances from
non-stockholder sources. Comprehensive earnings include earnings as
reported in the Consolidated Statement of Earnings and other
comprehensive earnings. "Other Comprehensive Earnings" refers to
revenues, expenses, gains and losses that are included in
comprehensive earnings but excluded from net earnings under current
accounting standards, such as unrealized gains on available-for-sale
securities. SFAS No. 130 establishes standards for reporting and
display of comprehensive earnings and its components in a full set of
general purpose financial statements. A reconciliation of the
Company's net earnings and comprehensive earnings follows:
THREE MONTHS ENDED
SEPT.30 DEC. 31 MAR.31 MAR.31
1996 1996 1997 1998
---- ---- ---- ----
NET EARNINGS 16,511 2,176 19,069 38,080
INCREASE (DECREASE) IN
UNREALIZED GAIN ON AVAILABLE
FOR SALE SECURITIES 11,483 (2,123) (9,360) -
INCOME TAX EFFECT (4,421) 817 3,604 -
COMPREHENSIVE EARNINGS 23,573 870 13,313 38,080
====== ======= ====== ======
There were no differences between net earnings and comprehensive earnings
prior to July 1, 1996.
10
NOTE 7: SUBSEQUENT EVENTS
AGREEMENT WITH MONARCH PROPERTIES, INC.
In April 1998 the Company reached an agreement in principle to sell 44
facilities to Monarch Properties, Inc., a newly-formed real estate
investment trust ("Monarch"), for an aggregate purchase price of
approximately $371 million. It is currently contemplated that Monarch
will lease 42 of these 44 facilities to LLC, and that LLC will engage
the Company to manage the facilities pursuant to the arrangements
described in Note 4. The transactions with Monarch and LLC are subject
to completion of definitive documentation and completion of Monarch's
initial public offering, and there can be no assurance that the
transaction will be completed on these terms, on different terms, or
at all. Dr. Robert N. Elkins, the Company's Chairman of the Board,
Chief Executive Officer and President, is Chairman of the Board of
Directors of Monarch, and it is currently contemplated that he will
beneficially own between five and ten percent of Monarch following
completion of Monarch's public offering.
OTHER ACQUISITIONS
In April 1998, IHS acquired a company operating 13 skilled nursing
facilities for approximately $15.9 million. Also in April 1998, the
Company purchased seven respiratory companies for approximately $5.5
million.
In addition, the Company has reached agreements in principle to
purchase a skilled nursing facility company for approximately $53.2
million, two lithotripsy operations for approximately $20.4 million,
and six respiratory companies for approximately $19.5 million.
There can be no assurance that any of these pending acquisitions will
be consummated on the proposed terms, on different terms, or at all.
11
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 and 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 the other
risks detailed in the Company's filings with the Securities and Exchange
Commission, including the Annual Report on Form 10-K.
The Company continues to evaluate the impact of the Balanced Budget Act
("BBA") upon future operating results. While the BBA was passed in August 1997,
specific interpretative regulations for various service providers will continue
to be released until the year 2000. The assumptions used by the Company to
evaluate the impact of the BBA on the Company's business lines are based upon
the most accurate information available at each quarter end. Presently the
Company is responding to all of the known changes created by the BBA, however,
it cannot predict the impact future regulations may have on anticipated rates,
service usage and operating costs.
THREE MONTHS ENDED MARCH 31, 1998
COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Net revenues for the three months ended March 31, 1998 increased $393.9
million, or 85%, to $854.9 million from the comparable period in 1997. The
increase in revenues was primarily a result of acquisitions consummated
subsequent to March 31, 1997 and increased revenues from
12
facilities and ancillary companies in operation during both periods partially
offset by the sale of five long-term care facilities in January 1998 and the
sale of its outpatient clinics to Continucare Rehabilitation Services, Inc. in
February 1998. The growth in revenues from facilities was primarily the result
of increased occupancy in the Company's Medical Specialty Units ("MSUs") and the
growth in revenues from ancillary companies was primarily the result of
additional service contracts entered into subsequent to March 31, 1997.
Basic medical services revenue increased 165% from $88.8 million to $234.9
million. This increase resulted from the acquisition of 136 owned or leased
long-term care facilities subsequent to March 31, 1997, partially offset by the
conversion of skilled nursing beds to MSU beds after March 31, 1997 and the sale
of five long-term care facilities in January 1998.
Specialty medical services revenue increased $249.5 million, or 69%, from
$362.7 million to $612.2 million. This increase was attributable to revenue from
acquisitions subsequent to March 31, 1997, increased revenue from facilities and
ancillary companies in operation in both periods, as well as skilled nursing
beds being converted to MSU beds after March 31, 1997, which results in higher
revenue per day, partially offset by the sale of five long-term care facilities
in January 1998 and the sale of its outpatient clinics in February 1998.
Management services and other revenues decreased 18% from $9.5 million to
$7.8 million primarily as a result of the termination of 12 management
agreements subsequent to March 31, 1997, partially offset by management fees
from five facilities which the Company began to manage on behalf of Lyric Health
Care LLC, an entity 50% owned by the Company which is leasing the facilities
sold to Omega.
Total expenses for the period increased to $790.6 million from $429.9
million, an increase of 84%. Of the $360.7 million increase in total expenses,
$279.7 million, or 78%, was due to an increase in operating, general and
administrative expenses. Substantially all of the increase in operating, general
and administrative expenses was due to
13
acquisitions consummated subsequent to March 31, 1997. Depreciation and
amortization increased to $38.6 million during the three months ended March 31,
1998, an increase of 157%, compared to $15.0 million recorded in the same period
in 1997. This increase is the result of acquisitions consummated subsequent to
the first quarter of 1997. Rent expense increased by $11.4 million, or 48%, over
the comparable period in 1997. This increase is primarily a result of
acquisitions consummated subsequent to the first quarter of 1997, and increases
in contingent rentals which are based on gross revenues of certain leased
facilities. Interest expense, net increased 210%, or $45.0 million, during the
three months ended March 31, 1998 to $66.5 million. The increase in interest
expense is primarily a result of additional term loan borrowings of $400 million
in December 1997 and $750 million in September 1997, the issuance of $450
million of 9-1/2% Senior Subordinated Notes due 2007 in May 1997, and $500
million of the 9-1/4% Senior Subordinated Notes due 2008 in September 1997, and
increased borrowings under its $1.0 billion revolving credit facility; partially
offset by a reduction in interest resulting from the repurchase of substantially
all of the Company's 9-5/8% Senior Subordinated Notes due 2002 and the 10-3/4%
Senior Subordinated Notes due 2004, the payoff of the Company's $700 million
previous revolving credit facility and lower interest rates. During the first
quarter of 1997, the Company realized a $7.6 million gain on its investment in
shares of common stock of Capstone Pharmacy Services, Inc., received in
connection with the sale of its pharmacy division to Capstone in July 1996,
offset by $6.6 million of accounting, legal and other costs related to the
failed merger with Coram Healthcare Corporation. As a result, the Company has
recorded in its statement of earnings $1.0 million of non-recurring income for
the first quarter of 1997.
Earnings before equity in earnings of affiliates and income taxes increased
107% to $64.3 million for the three months ended March 31, 1998, as compared to
$31.1 million for the comparable period in the prior year.
Earnings before income taxes increased 106% to $64.5 million for the three
months ended March 31, 1998, as compared to $31.3 million for the comparable
period in the prior year. The provision for federal and state income taxes was
$26.5 million for the three months ended March 31, 1998, and $12.2 million for
the same period in the prior year. Net earnings and diluted earnings per share
for the quarter were $38.1 million in 1998, or 74 cents per share, as compared
to $19.1 million, or 64 cents per share, for the same period in 1997. Weighted
average shares (diluted) increased 20.6 million shares, or 61%, to 54.5 million
shares from the comparable period in 1997, primarily as the result of the
issuance of approximately 15.6 million shares in October 1997 in connection with
the acquisition of RoTech Medical Corporation.
14
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had working capital of $224.2 million, as
compared with $63.1 million at December 31, 1997. The increase in working
capital was primarily due to an increase in temporary investments, an increase
in patient accounts and third party payor settlements receivable and other
current assets and a decrease in accounts payable and accrued expenses. There
were no material capital commitments for capital expenditures as of March 31,
1998. Net patient accounts and third-party payor settlements receivable
increased $89.7 million to $693.2 million at March 31, 1998, as compared to
$603.4 million at December 31, 1997. Of the $89.7 million increase in accounts
receivable, $7.2 million was attributable to related services businesses
acquired subsequent to December 31, 1997 and $94.1 million was due to increased
accounts receivable at facilities in operation and related services businesses
owned at both December 31, 1997 and March 31, 1998, partially offset by
approximately $11.5 million attributable to patient accounts receivable and
third party payor settlements at December 31, 1997 of facilities sold in 1998.
Patient accounts receivable were $804.2 million at March 31, 1998, as compared
with $726.1 million at December 31, 1997. Net third-party payor settlements
receivable from federal and state governments (i.e., Medicare and Medicaid cost
reports) was $52.9 million at March 31, 1998, as compared to $38.7 million at
December 31, 1997. Approximately $15.3 million, or 29%, of the third-party payor
settlements receivable from federal and state governments at March 31, 1998
represent the costs for its MSU patients which exceed regional reimbursement
limits established under Medicare.
The Company's cost of care for its MSU patients generally exceeds regional
reimbursement limits established under Medicare. The Company's ability to obtain
reimbursement for those costs which exceed the Medicare established
reimbursement limits will depend on obtaining waivers of these cost limitations.
The Company has submitted waiver requests for 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 all 325 waiver
requests covering cost report periods through December 31, 1996. The Company's
final rates as approved by HCFA represent approximately 95% of the
15
requested rates as submitted in the waiver requests. There can be no assurance,
however, that the Company will be able to recover its excess costs under any
waiver requests which may be submitted in the future. The Company's failure to
recover substantially all these excess costs would adversely affect its results
of operations and could adversely affect its MSU strategy.
Net cash provided by operating activities for the three months ended March
31, 1998, was $2.2 million as compared to $9.9 million for the comparable period
in 1997.
Net cash provided by financing activities was $91.1 million for the three
month period in 1998 as compared to $44.9 million provided by financing
activities for the comparable period in 1997. 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 $94.2 million for the three month
period ended March 31, 1998 as compared to $55.0 million used by investing
activities for the three month period ended March 31, 1997. Cash used for the
acquisition of facilities and ancillary company acquisitions was $62.4 million
in 1998 as compared to $11.0 million for 1997. Cash used for the purchase of
property, plant and equipment was $67.0 million in 1998 and $41.1 million in
1997. In the first quarter of 1998, the Company received $89.9 million related
to the sale of ten long-term care facilities to Omega Healthcare Investors, Inc.
(See Note 4: Transactions with Lyric Health Care LLC)and $10.0 million from the
sale of its Outpatient Clinics to Continucare Rehabilitation Services, Inc. (See
Note 5: Sale of Outpatient Clinics). The net proceeds from such sales were used
to repay debt outstanding under the revolving credit facility and other
corporate purposes, including acquisitions.
As a result of the BBA's implementation of a prospective payment system for
home nursing beginning with cost report periods beginning on or after October 1,
1999, contingent payments in respect of the acquisition of First American Health
Care of Georgia, Inc. in October 1996, aggregating $155 million, became payable
over five years beginning in 2000. The present value of such payments at March
31, 1998 is $115.2 million and is recorded on the balance sheet under the
caption other long-term liabilities.
IHS' contingent liabilities (other than liabilities in respect of
litigation) aggregated approximately $89.4 million as of March 31, 1998. The
Company is obligated to purchase its Greenbriar facility upon a change in
control of IHS. The net price of the facility is approximately $4.0 million. The
Company has guaranteed approximately $6.6 million of the lessor's indebtedness.
IHS is required, upon certain defaults under the lease, to purchase its Orange
Hills facility at a
16
purchase price equal to the greater of $7.1 million or the facility's fair
market value. The Company has guaranteed approximately $4.0 million owed by
Tutera Group, Inc. and Sunset Plaza Limited Partnership, a partnership
affiliated with a partnership in which IHS has a 49% interest, to Finova Capital
Corporation. IHS has established several irrevocable standby letters of credit
with the Bank of Nova Scotia totaling $33.0 million at March 31, 1998 to secure
certain of the Company's workers' compensation obligations, health benefits and
other obligations. In addition, IHS has several surety bonds in the amount of
$32.5 million to secure certain of the Company's health benefits, patient trust
funds and other obligations. IHS also has established a letter of credit with
NationsBank in the amount of $2.2 million for credit enhancement to an
industrial development bond issued for construction of a facility in Amarillo,
Texas. In addition, with respect to certain acquired businesses IHS is obligated
to make certain contingent payments if earnings targets of the acquired
businesses are met. 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. In addition, IHS has
obligations under operating leases aggregating approximately $684.0 million at
March 31, 1998.
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
1998. The Company expects to continue to be growth oriented in 1998 through the
expansion of its existing operations, continued implementation of its MSU
programs and by the acquisition of additional facilities, ancillary companies
and management agreements.
YEAR 2000 COMPLIANCE
The Company has conducted a comprehensive review of its computer systems to
identify the systems that are affected by the "Year 2000" issue and has
substantially completed an implementation plan to resolve this issue. This issue
affects computer systems that have date sensitive programs that may not properly
recognize the year 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail, resulting in business
interruption. In 1997, the Company commenced a year 2000 conversion project for
all of its locations to address necessary software upgrades, training, data
conversion, testing and implementation. The Company will incure internal staff
costs as well as consulting and other expenses to complete the project by the
middle of 1999. Costs related to the year 2000 issue are being expensed as
incurred. The Company does not expect the amounts required to be expensed during
the project to have a material effect on its financial position or results of
operation.
The year 2000 issue is expected to affect the systems of various entities
with which the Company interacts, including payors, suppliers and vendors. There
can be no assurance that the systems of other companies on which the Company's
systems rely will be timely converted, or that a failure by another company's
systems to be year 2000 compliant would not have a material adverse effect on
the Company.
17
PART II: OTHER INFORMATION
Item 2. - Changes in Securities
TRANSACTIONS INVOLVING SELLING STOCKHOLDERS
On August 29, 1997, the Company acquired through merger all of the
outstanding stock of Arcadia Services, Inc.("ARCADIA") , which provides home
health care services, medical staffing services and clerical and light
industrial staffing services. The merger consideration was $17.2 million (after
giving effect to post-closing adjustments), which was paid though the issuance
of 581,451 shares of the Company's Common Stock 531,198 shares were issued to
the Stockholders of Arcadia in August 1997; the remaining 50,253 shares (the
"additional shares") were issued in February 1998. Because the average price of
the 531,198 shares of Common Stock issued to the Arcadia stockholders at the
time of closing of the acquisition (the "Original Shares") was higher than the
average price of the Common Stock at the time such shares were registered for
resale under the Securities Act, the number of additional shares is equal to the
difference between (i) the number of shares determined by dividing the original
merger consideration of $18.7 million by the average closing price of the Common
Stock on the NYSE for the 30 trading days ending on the date immediately
preceding the date the registration statement covering the resale of the
Original Shares was declared effective and (ii) the number of shares determined
by dividing the original merger consideration of $18.7 million by the average
closing price of the Common Stock on the NYSE for the 30 trading day period
immediately preceding the date which was two trading days prior to the closing
date of the acquisition.
On January 31, 1998, the Company acquired all the outstanding capital stock
of Paragon Rehabilitative Services, Inc. ("PARAGON"), which provides contract
rehabilitation services to nursing homes, long-term care facilities and other
healthcare facilities. The merger consideration was $10.8 million, which was
paid through the issuance of 361,851 shares of the Company's Common Stock. To
the stockholder of Paragon (based on the average closing price of the Common
Stock for the 30 day trading period immediately preceding the date which is
two days prior to the closing date).
On February 28, 1998, the Company acquired an 18% limited partnership
interest in Southwest Lithotripter Partners, Ltd. The purchase price for the
interest was $630,000, which was paid through the issuance of 19,700 shares of
the Company's Common Stock to a Partner (based on the average closing price of
the Common Stock for the 30 day trading period immediately preceding the date
which is two days prior to the closing date).
On February 11, 1998, the Company acquired all of the outstanding capital
stock of Medicare Convalescent Aids of Pinellas, Inc. d/b/a Medaids, RxStat and
Prime Medical Services, Inc. The purchase price was $3.7 million, which was paid
through the issuance of 122,376 shares of the Company's common stock (based on
the average closing price of the Common Stock for the 30 day trading period
immediately preceeding the date which is two days prior to the closing date.
On March 16, 1998, the Company acquired all the assets of Jersey Shore
Portable X-Ray, Inc.("JSP") The purchase price for the assets was $400,000,
which was paid through the issuance of 12,082 shares of the Company's Common
Stock to the stockholder of JSP based on the average closing price of the Common
Stock for the 30 day trading period immediately preceding the date which is two
days prior to the closing date).
The Common Stock issued by the Company in these transactions was not
registered under the Securities Act of 1933, as amended, in reliance upon
exemtions 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 1933, as amended.
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Integrated Health Services, Inc., Supplemental Executive Retirement
Plan ("Plan B")
10.2 Integrated Health Services, Inc., Deferred Compensation Plan for
Senior Vice Presidents and Highly Compensated Employees
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated December 31, 1997, as
amended, Reporting the Acquisition of 139 owned, leased or managed
long-term care facilities, 12 specialty hospitals and certain other
businesses from HEALTHSOUTH Corporation.
The Company filed a Current Reprt on Form 8-K Date March 4, 1998 reporting
The Company's Reviews and operationg Results For the Fourth Quarter and
Year Ended Decmember 31, 1997.
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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
Executive Vice President and
Chief Accounting Officer
By: /s/ C. Taylor Pickett
-----------------------------------------
C. Taylor Pickett
Executive Vice President-Chief Financial
Officer
Dated: May 29, 1998