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 June 30, 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.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-2428312
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10065 Red Run Boulevard, Owings Mills, MD 21117
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(Address of principal executive offices) (Zip Code)
(410) 998-8400
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(Registrant's telephone, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ X ] Yes [ ] No
Number of shares of common stock of the registrant outstanding as of August 7,
1998: 54,053,325 shares.
INTEGRATED HEALTH SERVICES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page
----
Item 1. - Condensed Financial Statements -
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations
for the three and six months ended
June 30, 1998 and 1997 4
Consolidated Statement of Changes in
holders' Equity for the six
months ended June 30, 1998 5
Consolidated Statements of Cash Flows
for the six months ended June 30, 1998
and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 27
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Matters 30
Item 6. Exhibits and Report on Form 8-K 30
2 of 31
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 94,968 $ 52,965
TEMPORARY INVESTMENTS 7,513 8,042
PATIENT ACCOUNTS AND THIRD-PARTY PAYOR SETTLEMENTS
RECEIVABLE, LESS ALLOWANCE FOR DOUBTFUL RECEIVABLES
OF $164,730 AT JUNE 30, 1998 AND $161,438 AT DECEMBER 31, 1997 716,564 603,432
SUPPLIES, INVENTORIES, PREPAID EXPENSES
AND OTHER CURRENT ASSETS 67,938 53,152
----------- -----------
TOTAL CURRENT ASSETS 886,983 717,591
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET 1,394,176 1,318,633
ASSETS HELD FOR SALE 69,560 111,629
INTANGIBLE ASSETS 2,929,501 2,815,272
INVESTMENTS IN AND ADVANCES TO AFFILIATES 28,157 19,527
OTHER ASSETS 90,206 80,492
----------- -----------
TOTAL ASSETS $ 5,398,583 $ 5,063,144
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT MATURITIES OF LONG-TERM DEBT $ 43,161 $ 36,081
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 587,477 615,967
INCOME TAX PAYABLE 30,215 2,426
----------- -----------
TOTAL CURRENT LIABILITIES 660,853 654,474
----------- -----------
LONG-TERM DEBT:
REVOLVING CREDIT AND TERM LOAN FACILITY LESS CURRENT MATURITIES 1,698,500 1,673,500
MORTGAGES AND OTHER LONG-TERM DEBT LESS CURRENT MATURITIES 196,446 167,606
SUBORDINATED DEBT 1,246,046 1,361,046
----------- -----------
TOTAL LONG-TERM DEBT 3,140,992 3,202,152
----------- -----------
OTHER LONG-TERM LIABILITIES 117,304 113,042
DEFERRED INCOME TAXES 5,073 --
DEFERRED GAIN ON SALE-LEASEBACK TRANSACTIONS 4,960 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 52,706,161 AT JUNE 30, 1998 AND 43,098,373
AT DECEMBER 31, 1997 52 43
ADDITIONAL PAID-IN CAPITAL 1,351,031 1,062,436
RETAINED EARNINGS 125,072 45,495
TREASURY STOCK AT COST (200,800 SHARES AT JUNE 30, 1998 AND 548,500
SHARES AT DECEMBER 31, 1997) (6,754) (19,813)
----------- -----------
NET STOCKHOLDERS' EQUITY 1,469,401 1,088,161
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,398,583 $ 5,063,144
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------- ---------- ---------- ----------
1998 1997 1998 1997
---------- ---------- ---------- ----------
NET REVENUES:
BASIC MEDICAL SERVICES $ 232,349 $ 88,055 $ 467,248 $ 176,810
SPECIALTY MEDICAL SERVICES 575,829 360,113 1,188,025 722,802
MANAGEMENT SERVICES AND OTHER 8,496 9,805 16,281 19,304
---------- ---------- ---------- ----------
TOTAL REVENUES 816,674 457,973 1,671,554 918,916
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
OPERATING, GENERAL AND ADMINISTRATIVE 607,739 356,871 1,257,876 727,299
DEPRECIATION AND AMORTIZATION 39,180 15,814 77,771 30,844
RENT 35,580 25,786 70,994 49,795
INTEREST, NET 64,025 23,224 130,490 44,645
NON-RECURRING CHARGES, NET (NOTE 7) -- 21,072 -- 20,047
---------- ---------- ---------- ----------
TOTAL COSTS AND EXPENSES 746,524 442,767 1,537,131 872,630
---------- ---------- ---------- ----------
EARNINGS BEFORE EQUITY IN EARNINGS
(LOSS) OF AFFILIATES, INCOME TAXES
AND EXTRAORDINARY ITEM 70,150 15,206 134,423 46,286
EQUITY IN EARNINGS (LOSS) OF AFFILIATES 184 (83) 454 98
---------- ---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 70,334 15,123 134,877 46,384
FEDERAL AND STATE INCOME TAXES 28,837 5,898 55,300 18,090
---------- ---------- ---------- ----------
EARNINGS BEFORE EXTRAORDINARY ITEM 41,497 9,225 79,577 28,294
EXTRAORDINARY ITEM (NOTE 8) -- 18,168 -- 18,168
---------- ---------- ---------- ----------
NET EARNINGS (LOSS) $ 41,497 $ (8,943) $ 79,577 $ 10,126
========== ========== ========== ==========
PER COMMON SHARE - BASIC:
EARNINGS BEFORE EXTRAORDINARY ITEM $ 0.90 $ 0.37 $ 1.78 $ 1.17
NET EARNINGS (LOSS) 0.90 (0.36) 1.78 0.42
========== ========== ========== ==========
PER COMMON SHARE - DILUTED:
EARNINGS BEFORE EXTRAORDINARY ITEM $ 0.76 $ 0.32 $ 1.50 $ 0.95
NET EARNINGS (LOSS) 0.76 (0.18) 1.50 0.43
========== ========== ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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 3,482,236 COMMON SHARES 3 55,721 -- -- 55,724
ISSUANCE OF 1,980,940 COMMON SHARES IN
CONNECTION WITH ACQUISITIONS (NOTE 3) 2 63,407 -- -- 63,409
RE-ISSUANCE OF 347,700 TREASURY SHARES
IN CONNECTION WITH ACQUISITIONS -- -- -- 13,059 13,059
ISSUANCE OF 223,466 COMMON SHARES IN
CONNECTION WITH DEBT PAYMENTS -- 8,554 -- -- 8,554
VALUE OF 1,841,700 OPTIONS ISSUED IN
CONNECTION WITH ACQUISITION OF ROTECH
MEDICAL CORPORATION -- 32,743 -- -- 32,743
TAX BENEFIT ARISING FROM EXERCISE OF
EMPLOYEE STOCK OPTIONS -- 16,981 -- -- 16,981
ISSUANCE OF 3,573,446 COMMON SHARES IN
CONNECTION WITH THE CONVERSION OF THE
COMPANY'S 6% CONVERTIBLE SUBORDINATED
DEBENTURES, LESS ISSUANCE COSTS OF $3,606 4 111,189 -- -- 111,193
NET EARNINGS -- -- 79,577 -- 79,577
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BALANCE AT JUNE 30, 1998 $ 52 1,351,031 125,072 (6,754) 1,469,401
==========================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
--------------------------------
1998 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET EARNINGS $ 79,577 $ 10,126
ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
EXTRAORDINARY ITEM (NOTE 8) -- 29,784
NON-RECURRING CHARGES, NET -- 20,047
RESULTS OF JOINT VENTURES 389 328
DEPRECIATION AND AMORTIZATION 77,771 30,844
DEFERRED INCOME TAXES AND OTHER NON-CASH ITEMS 9,734 2,090
AMORTIZATION OF GAIN ON SALE-LEASEBACK TRANSACTIONS (355) (536)
INCREASE IN PATIENT ACCOUNTS AND THIRD-PARTY
PAYOR SETTLEMENTS RECEIVABLE, NET (119,996) (10,109)
INCREASE IN SUPPLIES INVENTORY, PREPAID
EXPENSES AND OTHER CURRENT ASSETS (17,035) (2,483)
DECREASE IN ACCOUNTS PAYABLE AND ACCRUED EXPENSES (44,720) (59,439)
INCREASE IN INCOME TAXES RECEIVABLE -- (9,644)
INCREASE IN INCOME TAXES PAYABLE 44,770 --
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 30,135 11,008
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM ISSUANCE OF CAPITAL STOCK, NET 55,724 9,327
PROCEEDS FROM LONG-TERM BORROWINGS 389,735 1,083,219
REPAYMENT OF LONG-TERM DEBT (373,110) (919,514)
PAYMENT OF PRE-PAYMENT PREMIUMS AND FEES OF DEBT
EXTINGUISHMENT (NOTE 8) -- (23,598)
DEFERRED FINANCING COSTS -- (13,840)
DIVIDENDS PAID (814) (471)
PURCHASE OF TREASURY STOCK -- (1,538)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 71,535 133,585
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
SALE OF TEMPORARY INVESTMENTS 61,698 119
PURCHASE OF TEMPORARY INVESTMENTS (61,169) (442)
BUSINESS ACQUISITIONS (NOTE 3) (95,524) (34,543)
PAYMENT OF TERMINATION FEES AND OTHER COSTS
OF TERMINATED MERGER (NOTE 7) -- (27,555)
PURCHASE OF PROPERTY, PLANT AND EQUIPMENT (115,663) (67,588)
DISPOSITION OF ASSETS (NOTES 4,5,AND 6) 156,594 --
OTHER ASSETS (5,603) (10,507)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (59,667) (140,516)
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 42,003 4,077
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 52,965 39,028
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 94,968 $ 43,105
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6 of 31
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements included herein do not contain all
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles. For
further information, such as the significant accounting policies followed by
Integrated Health Services, Inc. ("IHS" or "Company"), refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K/A 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 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 of 31
EARNINGS BEFORE
EXTRAORDINARY
ITEM SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
For The Three Months Ended
June 30, 1998:
Basic EPS: $41,497 46,233 $0.90
Adjustment for interest on
convertible debentures: 2,388 --- ---
Incremental shares from
assumed exercise of dilutive
options and warrants: --- 3,408 ---
Incremental shares from assumed
conversion of the convertible
subordinated debentures: --- 8,037 ---
------ ------- ----
Diluted EPS: $43,885 57,678 $0.76
======= ====== =====
For The Three Months Ended
June 30, 1997:
Basic EPS: $9,225 24,873 $0.37
Adjustment for interest on
convertible debentures: 2,452 --- ---
Incremental shares from
assumed exercise of dilutive
options and warrants: --- 3,199 ---
Incremental shares from assumed
conversion of the convertible
subordinated debentures: --- 7,989 ---
------ ------- ----
Diluted EPS: $11,677 36,061 $0.32
======= ====== =====
For The Six Months Ended
June 30, 1998:
Basic EPS: $79,577 44,770 $1.78
Adjustment for interest on
convertible debentures: 4,776 --- ---
Incremental shares from
assumed exercise of dilutive
options and warrants: --- 3,274 ---
Incremental shares from assumed
conversion of the convertible
subordinated debentures: --- 8,037 ---
------ ------- ----
Diluted EPS: $84,353 56,081 $1.50
======= ====== =====
For The Six Months Ended
June 30, 1997:
Basic EPS: $28,294 24,273 $1.17
Adjustment for interest on
convertible debentures: 4,904 --- ---
Incremental shares from
assumed exercise of dilutive
options and warrants: --- 2,689 ---
Incremental shares from assumed
conversion of the convertible
subordinated debentures: --- 7,989 ---
------ ------- ----
Diluted EPS: $33,198 34,951 $0.95
======= ====== =====
8 of 31
NOTE 3: NEW ACQUISITIONS
ACQUISITIONS DURING THE SIX MONTHS ENDED JUNE 30, 1998
Acquisitions for the six months ended June 30, 1998 and the manner of payment
are summarized as follows:
TOTAL COMMON ACCRUED CASH
MONTH TRANSACTION COST 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
April Stock of Magnolia
Group, Inc., an
operator of skilled
nursing facilities $16,118 $15,118 $1,000 ---
April Assets of First
Community Care, Inc.,
a respiratory
therapy company $8,820 $2,282 $908 $5,630
May Stock of American
Mobile Health
Systems, Inc. $2,800 $2,800 --- ---
May Assets of Eastern
Home Care & Oxygen,
Inc. Mira Assoc.,
Altoona Medox
Enterprises, Profess-
ional Home Health
Centers, Keystone
Home Oxygen Services $4,155 --- $335 $3,820
June Assets of Downstate
Lithotripter, LLC,
Metro/Litho LP,
Long Island
Lithotripter, LLC
& Lithotripter Corp. $11,182 $10,901 $281 ---
June Stock of Premiere
Associates, Inc.,
an operator of
skilled nursing
facilities; Assets of
Hialeah facility $40,891 $29,264 $5,127 $6,500
June Assets of Apex Home
Care, Inc. $2,926 --- $260 $2,666
June Assets of Osborne
Medical, Inc. $2,050 --- $90 $1,960
Various 40 acquisitions,
each with total
costs of less
than $2,000 $32,674 $1,691 $2,554 $28,429
Various Cash payments of
acquisition costs
accrued --- --- ($33,259) $33,259
-------- ------- -------- -------
$150,917 $76,468 ($21,075) $95,524
======== ======= ======== =======
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The allocation of the total cost of the 1998 acquisitions to the assets acquired
and liabilities assumed is summarized as follows:
PROPERTY,
CURRENT PLANT & OTHER INTANGIBLE CURRENT LONG-TERM TOTAL
TRANSACTION ASSETS EQUIPMENT ASSETS ASSETS LIABILITIES LIABILITIES COST
----------- ------ --------- ------ ------ ----------- ----------- -----
(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
Magnolia Group, Inc. $4,962 $21,753 $734 --- ($8,989) ($2,342) $16,118
First Community
Care, Inc. $1,700 $1,493 --- $7,127 --- ($1,500) $8,820
American Mobile Health
Systems, Inc. $1,112 --- $ 1 $2,575 ($888) --- $2,800
Eastern Home Care &
Oxygen, Inc., Mira
Associates, Altoona
Medox Enterprises,
Professional Home
Health Centers,
Keystone Home
Oxygen Services $714 $1,718 --- $1,723 --- --- $4,155
Downstate Lithotripter,
LLC, Metro/Litho LP,
Long Island Lithotripter,
LLC &
of Lithotripter Corp. $2,485 $1,860 $ 431 $18,846 ($11,500) ($940) $11,182
Premiere Associates,
Inc. $2,986 $73,837 --- $39,030 ($35,819) ($39,143) $40,891
Apex Home Care,
Inc. $417 $785 --- $2,024 --- ($300) $2,926
Osborne Medical,
Inc. $355 $564 --- $1,131 --- --- $2,050
40 acquisitions,
each with total
costs of less
than $2,000 $3,061 $4,741 --- $25,517 ($119) ($526) $32,674
------- -------- ------ -------- -------- -------- --------
$22,472 $108,751 $1,170 $124,460 ($61,150) ($44,786) $150,917
======= ======== ====== ======== ========= ========= ========
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NOTE 4: TRANSACTIONS WITH LYRIC HEALTH CARE LLC
In January 1998, the Company sold five long-term care facilities to Omega
Healthcare Investors, Inc. 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 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
earnings 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 in anticipation of the sale of these
facilities.
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
11 of 31
borrowings under new debt arrangements, (3) obtaining additional capital
contributions from IHS and TFN, the existing members of the LLC, although such
contributions are not required, and (4) admission of new members to LLC.
In March 1998, the Company sold an additional five long-term care facilities to
Omega Healthcare Investors, Inc. 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.
The net proceeds from the sale of these facilities were approximately $89.9
million.
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 1997,
the Company wrote down its basis 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: SALE OF FACILITIES
In June 1998, the Company sold eleven long-term care facilities for
approximately $56.7 million, which approximated the Company's basis. Therefore,
the Company recognized no gain or loss during the second quarter of 1998.
NOTE 7: NON-RECURRING CHARGES
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's common stock having a value of $25 million. 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 of 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
12 of 31
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 right 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 of 1997. 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.
NOTE 8: EXTRAORDINARY ITEM
In the second quarter of 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 of the
Company's $115 million of outstanding 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 operations as an extraordinary loss of
$18.2 million.
NOTE 9: RECENT ACCOUNTING PRONOUNCEMENTS
In 1998 the Company adopted Statement of Financial Standards No. 130, "Reporting
Comprehensive Income." 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
---------------------------------------------------------
MAR. 31 JUN. 30
SEPT. 30 DEC. 31 ------------- --------------
1996 1996 1997 1998 1997 1998
---- ---- ---- ---- ---- ----
(In Thousands)
Net Earnings (loss) $16,511 $2,176 $19,069 $38,080 $(8,943) $41,497
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 $(8,943) $41,497
======= ==== ======= ======= ======= =======
There were no differences between net earnings and comprehensive earnings prior
to July 1, 1996.
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NOTE 10: 6% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
On May 29, 1998, the Company called for redemption on June 29, 1998 all of its
outstanding 6% Convertible Subordinated Debentures due 2003 (the "6%
Debentures"). Of the $115,000,000 principal amount of 6% Debentures outstanding,
holders of $114,799,000 principal amount of the 6% Debentures converted their 6%
Debentures into an aggregate of 3,573,446 shares of Common Stock. Holders of the
remaining $201,000 principal amount of 6% Debentures received a cash redemption
aggregating $213,026 ($1,059.83 per $1,000 principal amount of the 6%
Debentures), equal to approximately $34.05 per underlying share of Common Stock
in lieu of conversion.
NOTE 11: SEGMENT REPORTING
IHS has three primary reportable segments: Home Nursing, Home
Respiratory/Infusion/DME and Inpatient Services. The Home Nursing segment
provides home nursing services which range from skilled nursing care to services
delivered by home health aides for activities of daily living. The Home
Respiratory/Infusion/DME provides respiratory and infusion therapy, as well as
the sale and/or rental of home medical equipment. Inpatient Services include
basic and specialty medical services (e.g. rehabilitation and diagnostic
services) provided primarily on an inpatient basis at skilled nursing
facilities, as well as lithotripsy, hospice and contract management services.
These business units have similar economic characteristics and have been
aggregated pursuant to SFAS No. 131. No other individual business segment
exceeds the 10% quantitative thresholds of SFAS No. 131.
IHS management evaluates the performance of its operating segments on the basis
of earnings before interest, income taxes, depreciation and amortization and
non-recurring charges:
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Six Months Ended Six Months Ended
June 30, 1997 June 30, 1998
------------------------------------------------------- ------------------------------------------------------
Home Home Respiratory/ Inpatient Home Home Respiratory/ Inpatient
Nursing Infusion/DME Services Consolidated Nursing Infusion/DME Services Consolidated
------------------------------------------------------- ------------------------------------------------------
(In thousands)
Revenues $ 281,001 $ 5,084 $ 632,831 $ 918,916 $ 209,828 $ 292,167 $1,169,559 $1,671,554
Operating, general
and administrative
(including rent) 262,851 3,338 510,905 777,094 194,885 208,179 925,806 1,328,870
Earnings before
interest, taxes,
depreciation and
amortization and
non-recurring
charges 18,150 1,746 121,926 141,822 14,943 83,988 243,753 342,684
Total Assets 465,498 9,759 1,667,390 2,142,647 541,249 1,227,442 3,629,892 5,398,583
There are no inter-segment revenue or receivables. Revenue derived from Medicare
and various state Medicaid reimbursement programs represented 49.5% and 17.0%,
respectively, for six months ended June 30, 1997 and 44.5% and 18.0%,
respectively, for six months ended June 30, 1998. The Company does not evaluate
its operations on a geographic basis.
NOTE 12: 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 Lyric, and that Lyric will engage the Company to manage the
facilities pursuant to the arrangements described in Note 4. The transactions
with Monarch and Lyric are subject to completion of definitive documentation and
completion of Monarch's initial public offering of common stock, 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. If Monarch is unable to purchase some or all of the facilities
from the Company, the Company intends to explore other alternatives with respect
to these facilities, including sale/leaseback transactions with other real
estate investment trusts and sale of the facilities.
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OTHER ACQUISITIONS
In July 1998, IHS acquired nine respiratory companies for approximately $8.8
million.
In addition, the Company has reached agreements in principle to purchase 24
respiratory companies for a total purchase price of approximately $57.3 million,
a lithotripsy operation for approximately $10.2 million, and a skilled nursing
facility for approximately $12.2 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.
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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. In addition,
when used in this quarterly report on Form 10-Q, the words "estimate",
"project", "believe", "anticipate", "intend", "expect", and similar expressions
are intended to identify forward-looking statements which reflect the current
views of IHS with respect to future events. Forward-looking statements are
subject to risks, uncertainties and other factors that 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 the other risks detailed in the
Company's filings with the Securities and Exchange Commission, including the
Company's Annual Report on Form 10-K/A for the year ended December 31, 1997.
The Company continues to evaluate the impact of the Balanced Budget Act of
1997 ("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.
In addition to implementing a Medicare prospective payment system for
skilled nursing facilities, the BBA also provided for a prospective payment
system for home nursing to be implemented for cost reporting periods beginning
on or after October 1, 1999 (which date the Health Care Financing Administration
("HCFA") has indicated it is attempting to delay) and a reduction in current
cost reimbursement for Medicare home nursing care pending implementation of a
prospective payment system. Until a prospective
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payment system for home nursing services is implemented, of which there can be
no assurance, IHS anticipates that margins for home nursing will remain low and
may adversely impact its financial performance. As a result of the delay in
implementation of a prospective payment system for home nursing and the current
reduction in cost reimbursement for Medicare home nursing and its impact on the
Company's financial performance, the Company is currently evaluating whether
home nursing will remain an integral part of the Company's post-acute care
strategy. The Company is currently exploring ways to reduce the impact of its
home nursing business on its financial performance, which may include a
"spin-off" of, sale of all or a portion of, or discontinuation of such
operations.
THREE MONTHS ENDED JUNE 30, 1998
COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Net revenues for the three months ended June 30, 1998 increased $358.7
million, or 78%, to $816.7 million from the comparable period in 1997. The
increase in revenues was primarily a result of acquisitions consummated
subsequent to June 30, 1997, as well as increased revenues from companies in
operation during both periods, partially offset by the sale of five long-term
care facilities in January 1998, the sale of the Company's outpatient clinics in
February 1998, the sale of five long-term care facilities in March 1998 and the
sale of eleven long-term care facilities in June 1998. The growth in revenues
was primarily the result of increased occupancy in the Company's Medical
Specialty Units ("MSUs") and additional service contracts entered into
subsequent to June 30, 1997.
Basic medical services revenue increased 164% from $88.1 million to
$232.3 million. This increase primarily resulted from the acquisition of
long-term care facilities subsequent to June 30, 1997, partially offset by the
conversion of skilled nursing beds to MSU beds after June 30, 1997 and the sales
of long-term care facilities in January, March and June 1998 referred to above.
Specialty medical services revenue increased $215.7 million, or 60%, from
$360.1 million to $575.8 million. This increase was attributable to revenue from
acquisitions subsequent to June 30, 1997, as well as increased revenue from
facilities and ancillary companies in operation during both periods and skilled
nursing beds being converted to
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MSU beds after June 30, 1997, which results in higher revenue per day, partially
offset by the sales of long-term care facilities in January, March and June 1998
and the sale of the Company's outpatient clinics in February 1998 referred to
above.
Management services and other revenues decreased 13% from $9.8 million to
$8.5 million primarily as a result of the termination of 12 facility management
agreements subsequent to June 30, 1997, partially offset by management fees from
the ten facilities which the Company began to manage on behalf of Lyric Health
Care LLC in the first quarter of 1998. (See Note 4: Transactions With Lyric
Health Corporation, LLC)
Total expenses for the period increased 69% to $746.5 million from $442.8
million in the comparable period of 1997. Of the $303.8 million increase, $250.9
million, or 83%, resulted from an increase in operating, general and
administrative expenses. Substantially all of the increase in operating, general
and administrative expenses was due to acquisitions consummated subsequent to
June 30, 1997.
Depreciation and amortization increased to $39.2 million during the three
months ended June 30, 1998, a 148% increase as compared to $15.8 million in the
same period in 1997. This increase is primarily the result of acquisitions
consummated subsequent to June 30, 1997. Rent expense increased by $9.8 million,
or 38%, over the comparable period in 1997. This increase is primarily a result
of acquisitions consummated subsequent to June 30, 1997 and increases in
contingent rentals, which are based on gross revenues of certain leased
facilities. Interest expense, net, increased $40.8 million, or 176%, during the
three months ended June 30, 1998 to $64.0 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, the issuance
of $500 million of 9-1/4% Senior Subordinated Notes due 2008 in September 1997
and increased borrowings under the Company's $1.0 billion revolving credit
facility, partially offset by a reduction of interest expense resulting from the
repurchase of substantially all of the Company's 9-5/8% Senior Subordinated
Notes due 2001 and 10-3/4% Senior Subordinated Notes due 2004 in May 1997, the
payoff of the Company's prior $700 million revolving credit facility, and lower
interest rates. During the second quarter of 1997, the Company incurred a $21.1
million non-recurring charge related to the settlement of the terminated merger
with Coram Healthcare Corporation. (See Note 7: Non-recurring Charge)
Earnings before equity in earnings of affiliates and income taxes and
extraordinary items increased 361% to $70.2 million for the three months ended
June 30, 1998, as compared to $15.2 million for the comparable period in the
prior year.
Earnings before income taxes and extraordinary items increased by 365% to
$70.3 million for the three months ended June 30, 1998, as compared to $15.1
million for the comparable period in the prior year. The provision for federal
and state income taxes was $28.8 million for the three months ended June 30,
1998, and $5.9 million for the same period in the prior year. Net earnings and
diluted earnings per share for the quarter were $41.5 million in 1998, or 76
cents per share, as compared to net loss and diluted loss per share of $8.9
million or 18 cents per share for the same period in 1997. The 1997 amounts
reflect the non-recurring charge of $21.1 million referred to above. During the
three months ended June 30, 1997, the Company incurred extraordinary losses on
the extinguishment of debt of $18.2 million (net of tax), or 50 cents per share
(diluted), representing the payment of premium and consent fees and the
write-off of deferred financing costs in connection with the repurchase of
substantially all of the Company's 9-5/8% and 10-3/4% Senior Subordinated Notes
(See Note 8: Extraordinary Items). Weighted average shares (diluted) for the
quarter increased 21.6 million shares, or 60% to 57.7 million from the
comparable period in 1997, primarily as a result of the issuance of
approximately 15.6 million shares in October 1997 in connection with the
acquisition of RoTech Medical Corporation.
19 of 31
SIX MONTHS ENDED JUNE 30, 1998
COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net revenues for the six months ended June 30, 1998 increased $752.6
million, or 82%, to $1,671.6 million from the comparable period in 1997. The
increase in revenues was primarily a result of acquisitions consummated
subsequent to June 30, 1997, as well as increased revenues from companies in
operation during both periods, partially offset by the aforementioned sales of
long-term care facilities in January, March and June 1998 and the sale of its
outpatient clinics in February 1998. The growth in revenues was primarily the
result of increased occupancy in the Company's MSU's and additional service
contracts entered into subsequent to June 30, 1997.
Basic medical services revenue increased 164% from $176.8 million to
$467.2 million. This increase resulted from the acquisition of long-term care
facilities subsequent to June 30, 1997, partially offset by the conversion of
skilled nursing beds to MSU beds after June 30, 1997 and the aforementioned
sales of long-term care facilities in January, March and June 1998.
Specialty medical services revenue increased $465.2 million, or 64%, from
$722.8 million to $1,188.0 million. This increase was primarily attributable to
revenue from acquisitions subsequent to June 30, 1997, as well as increased
revenue from facilities and ancillary companies in operation in both periods and
skilled nursing beds being converted to MSU beds after June 30, 1997, which
results in higher revenue per day, partially offset by the aforementioned sale
of long-term care facilities in January, March and June 1998 and the sale of its
outpatient clinics in February 1998.
Management services and other revenues decreased 16% from $19.3 million to
$16.3 million primarily as a result of the termination of 12 facility
20 of 31
management agreements subsequent to June 30, 1997, partially offset by
management fees from ten facilities which the Company began to manage on behalf
of Lyric Healthcare LLC in the first quarter of 1998. (See Note 4: Transactions
with Lyric Health Care LLC)
Total expenses for the period increased to $1,537.1 million from $872.6
million, an increase of 76%. Of the $664.5 million increase in total expenses,
$530.6 million, or 80%, 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 acquisitions consummated subsequent to
June 30, 1997. Depreciation and amortization increased to $77.8 million during
the three months ended June 30, 1998, an increase of 152% as compared to $30.8
million in the same period in 1997. This increase is the result of acquisitions
consummated subsequent to June 30, 1997. Rent expense increased by $21.2
million, or 43%, over the comparable period in 1997. This increase is primarily
a result of acquisitions consummated subsequent to June 30, 1997, and increases
in contingent rentals that are based on gross revenues of certain leased
facilities. Interest expense, net increased 192%, or $85.8 million, during the
six months ended June 30, 1998 to $130.5 million. The increase in interest
expense is primarily a result of the aforementioned additional borrowings under
term loans and the revolving credit facility and the issuance of the 9-1/2%
Senior Subordinated Notes and 9-1/4% Senior Subordinated Notes, partially offset
by a reduction in interest resulting from the aforementioned repurchase of
substantially all of the Company's 9-5/8% and 10-3/4% Senior Subordinated Notes,
the payoff of the Company's prior $700 million revolving credit facility and
lower interest rates. During the first six months 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 $27.6 million of settlement and
other costs related to the terminated merger with Coram Healthcare Corporation.
As a result, the Company has recorded in its statement of earnings $20.0 million
of non-recurring charges, net for the six months ended June 30, 1997. (See Note
7: Non-recurring Charge)
Earnings before equity in earnings of affiliates and income taxes
increased 190% to $134.4 million for the six months ended June 30, 1998, as
compared to $46.3 million for the comparable period in the prior year.
Earnings before income taxes and extraordinary items increased 191% to
$134.9 million for the six months ended June 30, 1998, as compared to $46.4
million for the comparable period in the prior year. The provision for federal
and state income taxes was $55.3 million for the six months ended June 30, 1998,
and $18.1 million for the same period in the prior year. Net earnings and
diluted earnings per share for the period were $79.6 million in 1998, or $1.50
per share, as compared to $10.1 million, or 43 cents per share, for the same
period in 1997. The 1997 amounts reflect the non-recurring charge of $20.0
million referred to above. During the six months ended June 30, 1997, the
Company incurred extraordinary losses on the early extinguishment of debt of
$18.2 million (net of tax), or 52 cents per share (diluted), representing the
payment of premium and consent fees and the write-off of deferred financing
costs in connection with the repurchase of substantially all of the Company's
9-5/8% and 10-3/4% Senior Subordinated Notes (See Note 8: Extraordinary Item).
Weighted average shares (diluted) increased 21.1 million shares, or 60%, to 56.1
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.
21 of 31
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had working capital of $226.1 million, as
compared with $63.1 million at December 31, 1997. The increase in working
capital was primarily due to an increase in patient accounts and third party
payor settlements receivable, cash and cash equivalents and other current assets
and a decrease in accounts payable and accrued expenses. There were no material
commitments for capital expenditures as of June 30, 1998. Net patient accounts
and third-party payor settlements receivable increased $113.1 million to $716.6
million at June 30, 1998, as compared to $603.4 million at December 31, 1997. Of
the $113.1 million increase in accounts receivable, $14.8 million was
attributable to related service businesses acquired subsequent to December 31,
1997 and $98.3 million was due to increased accounts receivable at facilities in
operation and related service businesses owned at both December 31, 1997 and
June 30, 1998. Gross patient accounts receivable were $800.9 million at June 30,
1998, as compared to $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 $80.4 million at June 30, 1998, as compared to $38.7
million at December 31, 1997. Approximately $20.9 million, or 26%, of the
third-party payor settlements receivable from federal and state governments at
June 30, 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 exceed 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 exceptions to these cost limitations. The Company has submitted
exception requests for 451 cost reports, covering all cost report periods
through
22 of 31
December 31, 1997. To date, final action has been taken by HCFA on 325 exception
requests covering cost report periods through December 31, 1997. The Company's
final rates as approved by HCFA represent approximately 95% of the requested
rates as submitted in the exception requests. There can be no assurance,
however, that the Company will be able to recover its excess costs under any
exception requests which may be submitted in the future. The Company's failure
to recover substantially all these excess costs would adversely affect its
results of operations and could adversely affect its MSU strategy.
The other asset and liability increases were due to acquisitions and
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 six months ended June
30, 1998, was $30.1 million as compared to $11.0 million for the comparable
period in 1997.
Net cash provided by financing activities was $71.5 million for the six
month period in 1998 as compared to $133.6 million for the comparable period in
1997. In both periods, the Company received net proceeds from long-term
borrowings and made repayments on certain debt. In addition, in the 1997 period
the Company paid $23.6 million of prepayment premiums and consent fees and
incurred $13.8 million of deferred financing costs in connection with the
issuance of the 9-1/2% Senior Subordinated Notes due 2007 in May 1998.
Net cash used by investing activities was $59.7 million for the six month
period ended June 30, 1998 as compared to $140.5 million for the six month
period ended June 30, 1997. Cash used for the acquisition of facilities and
ancillary companies was $95.5 million in 1998 as compared to $34.5 million for
1997. Cash used for the purchase of property, plant and equipment was $115.7
million in 1998 and $67.6 million in 1997. During the six months ended June 30,
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
23 of 31
Care LLC), $10.0 million from the sale of its outpatient clinics to Continucare
Rehabilitation Services, Inc. (See Note 5: Sale of Outpatient Clinics) and $56.7
million from the sale of eleven long-term care facilities in June 1998 (See Note
6: Sale of Facilities).
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 June 30, 1998 is $117.3 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 $92.4 million as of June 30, 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 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 $33.6 million at June
30, 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
letters of credit with the Bank of Nova Scotia for approximately $2.4 million
for credit support of Lyric Health Care LLC financing. IHS also has established
a letter of credit with
24 of 31
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 of the acquired business 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 $687.0 million at June 30, 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 expects its systems to be
year 2000 compliant by the middle of 1999. The Company will incur 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
operations.
25 of 31
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.
26 of 31
PART II: OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 10, 1998, the Company issued 50,256 shares of Common Stock (the
"Additional Shares") to the stockholders of Arcadia Services, Inc., which was
acquired in August 1997, 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 of 1933, as amended (the "Securities Act"). The number of
Additional Shares is equal to the difference between (i) the number of shares
determined by dividing the merger consideration of $18.7 million by the average
closing price of the Common Stock on the New York Stock Exchange ("NYSE") for
the 30 trading days ending on the date immediately preceding the date of the
registration statement covering the resale of the Original Shares was declared
effective and (ii) the number of shares determined by dividing the 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 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 (based on the average closing price of the Company's Common Stock
on the NYSE for a 30 day trading period prior to the closing date).
On March 13, 1998, the Company issued an aggregate of 101,646 shares of Common
Stock to five law firms for legal services rendered to the Company and to a real
estate consulting subsidiary of one such law firm for consulting services
rendered to the Company.
On March 13, 1998, the Company acquired all the stock of the Med-Services, Inc.,
which provides home respiratory services. The purchase price for the stock was
$3.7 million of which $1.0 million was paid through the issuance of 37,717
shares of the Company's Common Stock.
On April 8, 1998, the Company acquired substantially all the assets of Regional
Medical Supply, Inc., which operates a home respiratory and durable medical
equipment business in the State of New Mexico. The purchase price for the assets
and certain restrictive covenants agreed to by the seller and its shareholders
was $725,000, of which $575,000 was paid through the issuance of 14,751 shares
of the Company's Common Stock (based on the average closing price of the
Company's Common Stock on the NYSE for a 30 trading day period prior to the
closing date).
On April 24, 1998, the Company acquired all the outstanding stock of the
Magnolia Group, Inc., which operates 12 skilled nursing facilities. The merger
consideration was $16.0 million, which was paid through the issuance of 435,886
shares of Common Stock
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(based on the average closing price of the Company's Common Stock on the NYSE
for a 30 trading day period prior to the closing date). Upon the opening of the
New Greenville facility, the merger consideration was increased by $400,000,
which was paid through the issuance of 11,533 shares of Common Stock (based on
the average closing price of the Company's Common Stock on the NYSE for a 30
trading day period ending on and including April 14, 1998).
On April 30, 1998, the Company acquired substantially all the assets of First
Community Care, Inc., which operates a home respiratory and durable medical
equipment business in the State of New York. The purchase price for the assets
and certain restrictive covenants agreed to by the seller and its shareholders
was $8.6 million, of which $2,282,000 was paid through the issuance of 59,376
shares of the Company's Common Stock (based on the average closing price of the
Company's Common Stock on the NYSE for a 30 trading days period prior to the
closing date). The agreement provides for the issuance of additional shares of
Common Stock under certain circumstances.
On May 12, 1998, the Company acquired through merger all the outstanding capital
stock of American Mobile Health Systems, Inc., which provides mobile x-ray, EKG,
ultrasound, holter monitor, vision and audiology services and other fixed site
examinations. The merger consideration was $2.8 million, which was paid through
the issuance of 72,699 shares of the Company's Common Stock (based on the
average closing price of the Company's Common Stock on the NYSE for a 30 trading
day period prior to the closing date). The agreement provides for the issuance
of additional shares of Common Stock under certain circumstances.
On June 18, 1998, the Company acquired all the assets of Downstate Lithotripter
LLC, Metro/Litho L.P., Long Island Lithotripter, LLC and Lithotripter
Corporation, which provide office facilities, equipment and management services
to Metropolitan Lithotripter Associates, PC, a professional corporation composed
of approximately 200 urologists that provide renal lithotripsy and other
services in the Greater New York metropolitan area. The purchase price for the
assets was
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paid through the issuance of 40% of the membership interests of Allied
Urological Services, LLC, a subsidiary of the Company which acquired the assets,
and the issuance of 287,662 shares of the Company's Common Stock having a value
of $10.9 million (based on the average closing price of the Company's Common
Stock on the NYSE for a 30 trading day period prior to the closing date). The
agreement provides for the issuance of additional shares of Common Stock under
certain circumstances.
On June 25, 1998, the Company acquired all the outstanding stock of Premiere
Associates Inc., which operates 30 skilled nursing facilities. The merger
consideration was $53.0 million, of which $26.2 million represents net assumed
liabilities and $26.8 million was paid through the issuance of 706,189 shares of
Common Stock (based on the average closing price of the Company's Common Stock
on the NYSE for a 60 trading day period prior to the closing date). The
agreement provides for the issuance of additional shares of Common Stock under
certain circumstances.
On June 30, 1998, the Company acquired the Hialeh Convalescent Home, a 276 bed
skilled nursing facility in Hialeh, Florida. The purchase price for the facility
was $12.0 million, of which $2.5 million was paid through the issuance 68,259
shares of the Company's Common Stock (based on the average closing price of the
Company's Common Stock on the NYSE for a 20 trading day period prior to the
closing date), $6.5 million was paid in cash and $3.0 million was paid through
the issuance of promissory notes due in five equal annual installments beginning
January 1, 1999. The Company may, at its election, pay such notes in cash or
through the issuance of shares of Common Stock.
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 persons acquiring shares of
Common Stock 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; and (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.
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ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a)The Annual Meeting of Stockholders of Integrated Health Services, Inc. was
held on May 22, 1998.
(c)(i) The following persons, comprising the entire Board of Directors, were
elected at the Annual Meeting pursuant to the following vote tabulations:
Votes For Votes Withheld
--------- --------------
Robert N. Elkins 36,732,972 981,757
Edwin M. Crawford 33,229,465 4,485,264
Kenneth M. Mazik 36,734,805 979,924
Robert M. Mitchell 36,735,153 979,576
Charles W. Newhall III 36,733,819 980,910
Timothy F. Nicholson 36,735,023 979,706
John L. Silverman 36,734,434 980,295
George H. Strong 36,734,272 980,457
ITEM 5: OTHER MATTERS
Pursuant to newly adopted rules of the Securities and Exchange Commission, any
stockholder who intends to present a proposal at the Company's 1999 Annual
Meeting of Stockholders without requesting the Company to include such proposal
in the Company's proxy statement should be aware that he must notify the Company
not later than January 1, 1999 of his intention to present the proposal.
Otherwise, the Company may exercise discretionary voting with respect to such
stockholder proposal pursuant to authority conferred on the Company by proxies
to be solicited by the Board of Directors of the Company and delivered to the
Company in connection with the meeting.
ITEM 6: EXHIBITS
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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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/ W. Bradley Bennett
--------------------------------
W. Bradley Bennett
Executive Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
Dated: August 20, 1998
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