UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended September 30, 1999
------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission File Number: 1-12306
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Integrated Health Services, Inc.
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(Exact name of registrant as specified in its charter)
DELAWARE 23-2428312
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
910 Ridgebrook Road, Sparks, Maryland 21152
---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(410) 773-1000
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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
October 26, 1999: 53,163,687 shares.
INTEGRATED HEALTH SERVICES, INC.
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. - Condensed Financial Statements -
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations
for the three and nine months ended
September 30, 1999 and 1998 4
Consolidated Statement of Changes in
Stockholders' Equity for the nine
months ended September 30, 1999 5
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999
and 1998 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 5 Other Information 29
Item 6 Exhibits and Report on Form 8-K 29
Page 2 of 30
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 20,070 $ 31,391
Temporary investments 51,236 12,828
Patient accounts and third-party payor settlements
receivable, less allowance for doubtful receivables of $160,048
at September 30, 1999 and $165,260 at December 31, 1998 582,981 649,106
Inventories, prepaid expenses and other current assets 78,536 75,945
Income taxes receivable 22,938 39,320
Net assets of discontinued operations - 12,500
----------- -----------
Total current assets 755,761 821,090
----------- -----------
Property, plant and equipment, net 1,129,092 1,469,122
Assets held for sale - 7,500
Intangible assets 1,549,477 2,970,163
Other assets (Note 12) 161,284 125,253
----------- -----------
Total assets $3,595,614 $5,393,128
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt $3,332,434 $ 16,760
Accounts payable and accrued expenses 375,057 463,130
----------- -----------
Total current liabilities 3,707,491 479,890
----------- -----------
Long-term Debt:
Revolving credit and term loan facility, less current maturities - 1,893,000
Mortgages and other long term debt, less current maturities 203,174 227,269
Subordinated debt - 1,245,908
----------- -----------
Total long-term debt 203,174 3,366,177
----------- -----------
Other long-term liabilities 167,118 169,099
Deferred gain on sale-leaseback transactions 4,070 4,642
Deferred income tax payable 42,023 41,355
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 53,163,687 at September 30, 1999 and 52,416,527 shares at
December 31, 1998 (including 4,868,300 treasury shares at
September 30, 1999 and 602,476 treasury shares at December 31,
1998) 53 53
Additional paid-in capital 1,374,269 1,370,049
Deficit (1,853,320) (22,483)
Treasury stock, at cost (4,868,300 shares at September 30, 1999 and
602,476 shares at December 31, 1998) (49,264) (15,654)
----------- -----------
Total stockholders' equity (528,262) 1,331,965
----------- -----------
Total liabilities and stockholders' equity $3,595,614 $5,393,128
=========== ===========
See accompanying Notes to Consolidated Financial Statements
Page 3 of 30
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------- --------- ---------- ----------
Total revenues $ 659,900 $ 750,852 $1,904,386 $2,253,293
--------- --------- ---------- ----------
Costs and expenses:
Operating, general and administrative (including rent) 571,500 578,776 1,585,058 1,749,850
Depreciation and amortization 46,718 39,456 139,709 111,652
Interest, net 78,968 59,820 223,705 178,665
Loss on impairment of long-lived assets and other non-recurring charges 1,778,332 -- 1,778,332 --
--------- --------- ---------- ----------
Total costs and expenses 2,475,518 678,052 3,726,804 2,040,167
--------- --------- ---------- ----------
Earnings (loss) from continuing operations before equity in
earnings of affiliates and income taxes (1,815,618) 72,800 (1,822,418) 213,126
Equity in earnings of affiliates -- 161 1,345 615
--------- --------- ---------- ----------
Earnings (loss) from continuing operations before income taxes (1,815,618) 72,961 (1,821,073) 213,741
Federal and state income taxes 4,000 29,914 9,764 87,634
--------- --------- ---------- ----------
Earnings (loss) from continuing operations (1,819,618) 43,047 (1,830,837) 126,107
Loss from discontinued operations -- (200,889) -- (204,870)
--------- --------- ---------- ----------
Net loss (1,819,618) $(157,842) $(1,830,837) $ (78,763)
========= ========= ========== ==========
Per Common Share - Basic:
Earnings (loss) from continuing operations $ (37.64) $ 0.82 $ (36.40) $ 2.67
Net loss (37.64) (3.02) (36.40) (1.67)
========= ========= ========== ==========
Per Common Share - Diluted:
Earnings (loss) from continuing operations $ (37.64) $ 0.77 $ (36.40) $ 2.34
Net loss (37.64) (2.72) (36.40) (1.40)
========= ========= ========== ==========
See accompanying Notes to Consolidated Financial Statements
Page 4 of 30
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(DOLLARS IN THOUSANDS)
ADDITIONAL
COMMON PAID-IN TREASURY
STOCK CAPITAL DEFICIT STOCK TOTAL
-------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $ 53 1,370,049 (22,483) (15,654) 1,331,965
EXERCISE OF EMPLOYEE STOCK OPTIONS
FOR 2,446 COMMON SHARES -- 25 -- -- 25
ISSUANCE OF 95,307 COMMON SHARES IN
CONNECTION WITH EMPLOYEE STOCK PURCHASE
PLAN -- 734 -- -- 734
ISSUANCE OF 270,856 COMMON SHARES IN
CONNECTION WITH 1997 AND 1998 ACQUISITIONS(note 3) -- -- -- -- --
ISSUANCE OF 326,459 COMMON SHARES IN
CONNECTION WITH EMPLOYEE STOCK COMPENSATION LESS
UNAMORTIZED COST OF $1,431 -- 454 -- -- 454
ACQUISITION OF 3,607,000 COMMON SHARES OF
TREASURY STOCK (AT COST) -- -- -- (24,041) (24,041)
ISSUANCE OF 64,003 COMMON SHARES IN
CONNECTION WITH DEBT PAYMENTS -- 438 -- -- 438
CANCELLATION OF 658,824 COMMON SHARES OF TREASURY
STOCK TO FUND KEY EMPLOYEE SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN -- 2,569 -- (9,569) (7,000)
ISSUANCE OF 3,415,556 COMMON SHARES
OF TREASURY STOCK IN CONNECTION WITH
EMPLOYEE STOCK COMPENSATION OF $12,638
LESS UNAMORTIZED COST OF $11,175 -- (30,745) -- 32,208 1,463
CANCELLATION OF ISSUANCE OF 3,415,556 COMMON SHARES OF TREASURY
STOCK IN CONNECTION WITH EMPLOYEE STOCK COMPENSATION -- 30,745 -- (32,208) (1,463)
NET LOSS -- -- (1,830,837) -- (1,830,837)
-------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1999 $ 53 1,374,269 (1,853,320) (49,264) (528,262)
=========================================================================
See accompanying Notes to Consolidated Financial Statements
Page 5 of 30
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
NINE MONTHS ENDED
September 30,
------------------------------
1999 1998
--------- ---------
Cash flows from operating activities:
Net loss $(1,830,837) $ (78,763)
Adjustments to reconcile net loss to net
cash provided by (used by) operating activities:
Loss from impairment of long-lived
assets and other non-recurring charges 1,778,332 --
Loss from discontinued operations -- 204,870
Results of joint ventures (1,198) 43
Depreciation and amortization 139,709 111,652
Deferred income taxes and other non-cash items (1,213) 19,492
Amortization of gain on sale-leaseback transactions (572) (696)
(Increase) decrease in patient accounts and third-party
payor settlements receivable, net 20,551 (117,180)
Increase in supplies, inventory, prepaid
expenses and other current assets (12,437) (16,067)
Decrease in accounts payable and accrued expenses (130,229) (112,183)
Decrease in income taxes receivable 16,382 --
Increase in income taxes payable -- 48,138
--------- ---------
Net cash (used) provided by operating activities of
continuing operations (21,512) 59,306
--------- ---------
Net cash used by discontinued operations (17,669) (68,882)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of capital stock, net 759 59,606
Proceeds from long-term borrowings 457,198 696,518
Repayment of long-term debt (293,659) (570,110)
Dividends paid -- (814)
Deferred financing costs (9,027) --
Purchase of treasury stock (24,041) (12,905)
--------- ---------
Net cash provided by financing activities 131,230 172,295
--------- ---------
Cash flows from investing activities:
Sale of temporary investments 292,236 67,923
Purchase of temporary investments (330,644) (61,170)
Business acquisitions (Note 3) (40,055) (127,337)
Purchase of property, plant and equipment (129,652) (190,980)
Disposition of assets (Notes 4, 7, 8 and 9) 141,537 180,704
Other assets (36,792) 3,660
--------- ---------
Net cash used by investing activities (103,370) (127,200)
--------- ---------
(Decrease) increase in cash and cash equivalents (11,321) 35,519
Cash and cash equivalents, beginning of period 31,391 52,965
--------- ---------
Cash and cash equivalents, end of period $ 20,070 $ 88,484
========= =========
See accompanying Notes to Consolidated Financial Statements
Page 6 of 30
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, 1998. 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: ISSUES AFFECTING LIQUIDITY AND GOING CONCERN ASSUMPTION
The Company reported a net loss from operations in 1999
aggregating $1,830.84 million resulting in certain financial covenant violations
under the Company's Revolving Credit and Term Loan Agreement ("Senior Credit
Agreement") and the Senior Subordinated debt covenants. Namely, the covenants
regarding minimum net worth, total leverage ratio, and fixed charge coverage
ratio were not satisfied at September 30, 1999. On November 1, 1999, the Company
elected not to make the interest payment of approximately $7.7 million due on
the $150 million 10.25% Senior Subordinated Notes ("Subordinated Notes") due
2006. The indenture under which the 10.25% Notes were issued provides for a 30
day grace period before an event of default will occur due to the nonpayment of
interest. On November 15, 1999, the Company elected not to make the interest
payment of approximately $17.0 million due under its Senior Credit Agreement.
The Credit Agreement provides for a three day grace period before an event of
default will occur due to nonpayment of interest. The Company does not intend to
make the payment at that time. If the interest payment is not made within the
grace periods, the Subordinated Notes and Senior Credit Facility may be declared
immediately due and payable.
There can be no assurances that the senior lenders or
bondholders will approve any amendment or restructuring of the Credit Agreement
or the Subordinated Notes or will not declare an event of default. If the senior
lenders or bondholders elect to exercise their rights, under certain provisions
in the agreement to accelerate the obligations under the agreements, such events
would have a material adverse effect on the Company's liquidity and financial
position. Under such circumstances, the financial position of the Company would
necessitate the development of an alternative financial structure. Considering
the limited financial resources and the existence of certain defaults, there can
be no assurance that the Company would succeed in formulating and consummating
an acceptable alternative financial structure.
As a result of the uncertainty related to the covenant defaults
and corresponding remedies described above, outstanding borrowings under the
Senior Credit Agreements ($2.07 million) and principal amount of the
Subordinated Notes ($1.25 million) are presented as current liabilities on the
Company's consolidated balance sheet at September 30, 1999. Accordingly, the
Company has a deficit in working capital aggregating $2.95 billion. The
financial statements do not include further adjustments reflecting the possible
future effects on the recoverability and classification of assets or the amount
and classification of liabilities that may result from the outcome of the
uncertainty related to the covenant defaults and corresponding remedies.
NOTE 3: EARNINGS (LOSS) PER SHARE
Basic EPS is calculated by dividing 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 earnings (loss) per
share of common stock is summarized as follows:
EARNINGS* SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For The Three Months Ended
September 30, 1998:
Basic EPS: $ 43,047 52,195 $ 0.82
Adjustment for interest on and incremental shares
from assumed conversion of the convertible
subordinated debentures: 1,310 4,457 --
Incremental shares from assumed
exercise of dilutive options
and warrants: -- 998 --
-------- ------ ------
Diluted EPS: $ 44,357 57,650 $ 0.77
======== ====== ======
For The Nine Months Ended
September 30, 1998:
Basic EPS: $126,107 47,272 $ 2.67
Adjustment for interest on and incremental shares
from assumed conversion of the convertible
subordinated debentures: 6,086 6,831 --
Incremental shares from assumed
exercise of dilutive options
and warrants: -- 2,271 --
-------- ------ ------
Diluted EPS: $132,193 56,374 $ 2.34
======== ====== ======
* Represents earnings from continuing operations.
For the three and nine months ended September 30, 1999, neither the exercise of
options and warrants nor the conversion of subordinated debt is assumed since
their effect is antidilutive. The weighted average number of common shares is
50,295,753 for the nine months ended September 30, 1999 and 48,345,387 for the
three months ended September 30, 1999.
Page 7 of 30
NOTE 4: NEW ACQUISITIONS
Acquisitions during the nine months ended September 30, 1999
and the manner of payment are summarized as follows:
NOTES PAYABLE
AND
TOTAL ACCRUED CASH
MONTH TRANSACTION COST LIABILITIES PAID
----- ----------- ---- ----------- ----
(Dollars in Thousands)
Jan. Assets of Suncoast of
Manatee, Inc. $ 11,920 $ 4,900 $ 7,020
Jan. Assets of Certified Medical
Associates, Inc. 2,760 810 1,950
March Stock of Medical Rental
Supply, Inc. and Andy Boyd's
Inhome Medical/Inhome
Medical, Inc. 4,897 1,583 3,314
May Management agreement for
Novacare, Inc. 2,548 -- 2,548
August Florida Convalescence
Centers, Inc. 2,500 2,500 --
Various 11 acquisitions, each with
total cost of less than $2,000 9,933 3,385 6,548
Various Cash payments of acquisition
costs accrued and acquiree
accrued liabilities -- (18,675) 18,675
-------- ------- --------
$ 34,558 $ (5,497) $ 40,055
======== ======= ========
The allocation of the total cost of the 1999 acquisitions to
the assets acquired and the liabilities assumed is summarized
as follows:
Property,
Current Plant & Other Intangible Current Total
Transaction Assets Equipment Assets Assets Liabilities Cost
----------- ------ --------- ------ ------ ----------- ----
(Dollars in Thousands)
Suncoast of Manatee, Inc. -- $ 11,920 -- -- -- $ 11,920
Certified Medical Assoc., Inc. $ 71 77 -- 2,612 -- 2,760
Medical Rental Supply, Inc.
and Andy Boyd's Inhome
Medical/Inhome Medical, Inc. 270 374 -- 4,253 -- 4,897
Management agreement for
Novacare, Inc. -- -- 30,000 42,548 (70,000) 2,548
Florida Convalescent
Centers, Inc. -- 2,500 -- -- -- 2,500
11 acquisitions, each with
total costs of less than
$2,000 654 752 (421) 9,079 (131) 9,933
----- -------- ------- -------- --------- --------
$ 995 $ 15,623 $29,579 $ 58,492 (70,131) $ 34,558
===== ======== ======= ======== ========= ========
Page 8 of 30
During 1999, the Company issued an additional 162,998, 69,585,
18,097, 9,677 and 10,499 shares to stockholders of Medicare
Convalescent Aids of Pinnellas Inc., Hialeah Convalescent Home,
Premier Medical, Plateau Medical Equipment and Indian
Respiratory Care Inc., respectively, in connection with share
price adjustments on prior business acquisitions.
The Company, at the acquisition date of Novacare, recorded $110
million in current liabilities in accordance with EITF 95-3.
Such amounts have been reduced, along with corresponding
goodwill, by $40 million in the third quarter as certain
potential litigation no longer appears likely. The remaining
accruals will continue to be modified in light of Novacare's
ability to honor its indemnifications to the Company.
Page 9 of 30
NOTE 5: TRANSACTIONS WITH LYRIC HEALTH CARE LLC
In 1997, the Company began to explore various options to
deleverage the Company without adversely affecting earnings. As
part of its delveraging strategy, in each of January and April
1998, (but effective March 31, 1998 in the case of the April
1998 sale), the Company sold five long-term care facilities to
Omega Healthcare Investors, Inc. for $44.5 million and $50.5
million, respectively, which facilities were leased back by
Lyric Health Care LLC ("Lyric"), a newly formed subsidiary of
IHS, at an annual rent of approximately $4.5 million and $4.9
million, respectively. IHS also entered into management and
franchise agreements with Lyric. 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 Lyric the authority to use the Company's trade
names and proprietary materials. In a related transaction, TFN
Healthcare Investors, Inc. ("TFN") purchased a 50% interest in
Lyric for $1.0 million, an amount equal to the Company's initial
investment in Lyric, and IHS' interest in Lyric was reduced to
50%. Lyric will dissolve on December 31, 2047 unless extended
for an additional 12 months. The transactions with Lyric were
approved by the disinterested members of the Board of Directors.
The Company believes that the terms of the arrangement with
Lyric are as advantageous as those that could have been obtained
from an unrelated third party. The Company believes that the
long-term growth of Lyric through facility acquisitions from
third parties will allow IHS to increase management fee
revenues.
On February 1, 1998 Lyric 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
Lyric's operating agreement, Mr. Nicholson will serve as
Managing Director of Lyric and will have the day-to-day
authority for the management and operation of Lyric 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 accounts for its investment in Lyric using the
equity method of accounting since IHS no longer controls Lyric.
Effective January 1, 1999, as part of its deleveraging strategy,
the Company and various wholly owned subsidiaries of the Company
(the "Lyric Subsidiaries") sold 32 long-term care facilities to
Monarch Properties LP ("Monarch LP") for approximately $135.0
million plus contingent earn-out payments of up to a maximum of
$67.6 million. Net proceeds from the sale were approximately
$114.3 million. The contingent earn-out payments will be paid to
the Company by Monarch LP upon a sale, transfer or refinancing
of any or all of the facilities or upon a sale, consolidation or
merger of Monarch LP, with the amount of the earn-out payments
determined in accordance with a formula described in the
Facilities Purchase Agreement among the Company, the Lyric
Subsidiaries and Monarch
Page 10 of 30
LP. After the sale of the facilities to Monarch LP, the Company
transferred the stock of each of the Lyric Subsidiaries to
Lyric. Monarch LP then leased all of the facilities back to the
Lyric Subsidiaries under the long-term master lease and the
Company is managing these facilities for Lyric. Dr. Robert N.
Elkins, Chairman of the Board, Chief Executive Officer and
President of the Company, beneficially owns 30% of Monarch LP
and is the Chairman of the Board of Managers of Monarch
Properties, LLC, the parent company of Monarch LP.
In March 1999, the Company sold, effective April 1, 1999, three
additional facilities to Monarch LP for $33 million, which
purchase price was paid by a 10% promissory note due March 2000.
Monarch LP then leased these facilities to subsidiaries of
Lyric. The Company is managing these facilities for Lyric
pursuant to the above-described agreements. The transactions
with Monarch LP and Lyric were approved by the disinterested
members of the Board of Directors. The Company believes that the
terms of the arrangements with Monarch LP are as advantageous to
the Company as could be obtained from an unrelated third party.
In September 1999 the Company reversed the transaction effective
April 1, 1999 because of Monarch's inability to obtain adequate
financing and restored the assets to the Company's balance
sheet.
On September 23, 1999, the Company sold it's Jacksonville,
Florida nursing facility to Monarch LP for $4.3 million. Monarch
LP then leased this facility to a subsidiary of Lyric, which the
Company is currently managing. The sale resulted in a $8.4
million non-recurring loss (see note 11).
NOTE 6: CREDIT FACILITY AMENDMENT
In March 1999, the Company amended its Credit Facility, which
amendments loosened the financial convenants, increased interest
rates and accelerated the reduction in the availability under
the Credit Facility. As amended:
o The Term Facility bears interest at a rate equal to, at
the option of IHS, either (i) in the case of Eurodollar
loans, the sum of (x) between two and three quarters
percent and three and one quarter percent (depending on
the ratio of the Company's debt) (as defined in the New
Credit Facility) to earnings before interest, taxes,
depreciation, amortization and rent pro forma for any
acquisitions or divestitures during the measurement
period (the "Debt/EBITDAR Ratio")) and (y) the interest
rate in the London interbank market for loans in an
amount substantially equal to the amount of borrowing
and for the period of borrowing selected by IHS or (ii)
the sum of (a) the higher of (1) Citibank, N.A.'s base
rate or (2) one percent plus the latest overnight
federal funds rate plus (b) a margin of between one and
one half percent and two percent (depending on the
Debt/EBITDAR Ratio).
o The Additional Term Facility bears interest at a rate
equal to, at the option of IHS, either (i) in the case
of Eurodollar loans, the sum of (x) between three
percent and three and one half percent (depending on
the Debt/EBITDAR Ratio) and (y) the interest rate in
the London interbank market for loans in an amount
substantially equal to the amount of borrowing and for
the period of borrowing selected by IHS or (ii) the sum
of (a) the higher of (1) Citibank, N.A.'s base rate or
(2) one percent plus the latest overnight federal funds
rate plus (b) a margin of
Page 11 of 30
between one and three quarters percent and two and one
quarter percent (depending on the Debt/EBITDAR Ratio).
The Term Facility and the Additional Term Facility can
be prepaid at any time in whole or in part without
penalty.
o The Revolving Facility will reduce to $800,000,000 on
January 1, 2001, $600,000,000 on January 1, 2002,
$500,000,000 on September 30, 2002 and $400,000,000 on
January 1, 2003, with a final maturity on September 15,
2003; however, the $100,000,000 letter of credit
subfacility and $10,000,000 swing line subfacility will
remain at $100,000,000 and $10,000,000, respectively,
until final maturity. The Revolving Credit Facility
bears interest at a rate equal to, at the option of
IHS, either (i) in the case of Eurodollar loans, the
sum of (x) between two percent and two and three
quarters percent (depending on the Debt/EBITDAR Ratio)
and (y) the interest rate in the London interbank
market for loans in an amount substantially equal to
the amount of borrowing and for the period of borrowing
selected by IHS or (ii) the sum of (a) the higher of
(1) Citibank, N.A.'s base rate or (2) one percent plus
the latest overnight federal funds rate plus (b) a
margin of between three quarters of one percent and one
and one-half percent (depending on the Debt/EBITDAR
Ratio).
o The Credit Facility prohibits IHS from purchasing or
redeeming IHS stock. The Company acquired certain
common shares of treasury stock prior to amending its
Credit Facility.
NOTE 7: SEGMENT REPORTING
After giving effect to the discontinuance of its home health
nursing segment in 1998, IHS has four primary reportable segments:
inpatient services, home respiratory/infusion/DME, diagnostic
services and lithotripsy services. Inpatient services include:
(a) inpatient facilities which provide basic medical services
primarily on an inpatient basis at skilled nursing facilities,
as well as hospice services, (b) contract services that provide
specialty medical services (e.g., rehabilitation and respiratory
services), primarily on an inpatient basis at skilled nursing
facilities, (c) contract services that provide specialty medical
services under contract to other healthcare providers, and (d)
management of skilled nursing
Page 12 of 30
facilities owned by third parties. Home respiratory/infusion/DME
provides respiratory and infusion therapy, as well as the sale
and/or rental of home medical equipment. Diagnostic services
provide mobile x-ray and electrocardiogram services on an
inpatient basis at skilled nursing facilities. Lithotripsy
services is a non-invasive technique that uses shock waves to
disintegrate kidney stones, primarily on an outpatient basis.
Certain services with similar economic characteristics 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,
earnings of affiliates, depreciation and amortization and
non-recurring charges.
THREE MONTHS ENDED SEPTEMBER 30, 1999
HOME
INPATIENT RESPIRATORY/ DIAGNOSTIC LITHOTRIPSY
SERVICES INFUSION/DME SERVICES SERVICES CONSOLIDATED
-------- ------------ -------- -------- ------------
(DOLLARS IN THOUSANDS)
Revenues $ 452,067 $ 162,414 $ 29,928 $ 15,491 $ 659,900
Operating, general and administrative
expenses (including rent) 407,713 126,125 29,050 8,612 571,500
---------- ---------- ---------- ---------- ----------
Earnings from continuing operations
before non-recurring charges, equity in
earnings of affiliates, interest, taxes,
depreciation and amortization $ 44,354 $ 36,289 $ 878 $ 6,879 $ 88,400
========== ========== ========== ========== ==========
Total Assets $1,884,556 $1,303,558 $ 201,592 $ 205,908 $3,595,614
========== ========== ========== ========== ==========
NINE MONTHS ENDED SEPTEMBER 30, 1999
HOME
INPATIENT RESPIRATORY/ DIAGNOSTIC LITHOTRIPSY
SERVICES INFUSION/DME SERVICES SERVICES CONSOLIDATED
-------- ------------ -------- -------- ------------
(DOLLARS IN THOUSANDS)
Revenues $1,298,222 $ 492,585 $ 68,643 $ 44,936 $1,904,386
Operating, general and administrative
expenses (including rent) 1,135,224 367,390 57,215 25,229 1,585,058
---------- ---------- ---------- ---------- ----------
Earnings from continuing operations
before non-recurring charges, equity in
earnings of affiliates, interest, taxes,
depreciation and amortization $ 162,998 $ 125,195 $ 11,428 $ 19,707 $ 319,328
========== ========== ========== ========== ==========
Total Assets $1,884,556 $1,303,558 $ 201,592 $ 205,908 $3,595,614
========== ========== ========== ========== ==========
Page 13 of 30
THREE MONTHS ENDED SEPTEMBER 30, 1998
HOME
INPATIENT RESPIRATORY/ DIAGNOSTIC LITHOTRIPSY
SERVICES INFUSION/DME SERVICES SERVICES CONSOLIDATED
-------- ------------ -------- -------- ------------
(DOLLARS IN THOUSANDS)
Revenues $ 551,350 $ 157,104 $ 26,021 $ 16,377 $ 750,852
Operating, general and administrative
expenses (including rent) 435,397 116,257 17,861 9,261 578,776
---------- ---------- ---------- ---------- ----------
Earnings from continuing operations
before non-recurring charges, equity in
earnings of affiliates, interest, taxes,
depreciation and amortization $ 115,953 $ 40,847 $ 8,160 $ 7,116 $ 172,076
========== ========== ========== ========== ==========
Total Assets $3,204,527 $1,628,687 $ 214,668 $ 209,903 $5,257,785
========== ========== ========== ========== ==========
NINE MONTHS ENDED SEPTEMBER 30, 1998
HOME
INPATIENT RESPIRATORY/ DIAGNOSTIC LITHOTRIPSY
SERVICES INFUSION/DME SERVICES SERVICES CONSOLIDATED
-------- ------------ -------- -------- ------------
(DOLLARS IN THOUSANDS)
Revenues $1,666,402 $ 459,554 $ 86,213 $ 41,124 $2,253,293
Operating, general and administrative
expenses (including rent) 1,322,095 341,424 63,425 22,906 1,749,850
---------- ---------- ---------- ---------- ----------
Earnings from continuing operations
before non-recurring charges, equity in
earnings of affiliates, interest, taxes,
depreciation and amortization $ 344,307 $ 118,130 $ 22,788 $ 18,218 $ 503,443
========== ========== ========== ========== ==========
Total Assets $3,204,527 $1,628,687 $ 214,668 $ 209,903 $5,257,785
========== ========== ========== ========== ==========
There are no material inter-segment revenues or receivables.
Revenues derived from private pay sources and various government
reimbursement programs represented 41% and 59%, respectively,
Page 14 of 30
for the three and nine months ended September 30, 1999 and 40%
and 60%, respectively, for the three and nine months September
30, 1998. The Company does not evaluate its operations on a
geographic basis.
NOTE 8: SALE OF OUTPATIENT CLINICS
In February 1998, the Companys sold its outpatient clinics to
Continucare Rehabilitation Services, Inc. for $10.0 million.
During the fourth quarter of 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 on
such sale.
NOTE 9: 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. As a result, the Company recognized no gain or
loss during the second quarter of 1998.
NOTE 10: DISCONTINUED OPERATIONS
In October 1998, the Company adopted a plan to discontinue its
home health nursing business segment. Accordingly, during 1998,
the operating results of the home health nursing segment have
been segregated from continuing operations and reported as a
separate line item on the condensed statement of operations.
The loss from this discontinued operation of $204.87 million
represents the operating loss for the nine month period ended
September 30, 1998. The operating loss includes the effects of
interest expense incurred in connection with acquisition
financing. During the nine months ended September 30, 1999, the
Company sold this business segment for approximately $26.0
million.
NOTE 11: NON-RECURRING CHARGES
Loss on impairment of long lived assets............. $1,353,345
Estimated loss on sale of infusion business unit.... 367,398
Loss on closure of certain diagnostic operations.... 23,336
Loss on abandoned and terminated computer systems... 10,865
Loss on termination of sale of Rotech .............. 10,020
Loss on sale of Jacksonville facility............... 8,380
Other .............................................. 4,988
----------
$1,778,332
As mentioned in previous reports, the Company has continued to
evaluate the impact of the 1997 Balanced Budget Act (BBA) upon
future operating results of each business line, particularly the
impact of the prospecting payment system (PPS). Utilizing the
Company's experience with PPS since January 1, 1999 (June 1,
1999 with respect to the Horizon facilities), the Company
performed a preliminary analysis of such impact in the third
quarter of 1999. PPS has had a dramatic impact on the operating
results and financial condition of the company. The PPS system
has significantly reduced the revenues, cash flow and liquidity
of the Company and the industry in 1999. As a result of the
negative impact of the provisions of PPS and the loss incurred
on the sale of the infusion business unit, the Company applied
Statement of Financial Accounting Standards No. 121 in the third
quarter of 1999. In accordance with SFAS No. 121, the Company
estimated the future cash flows expected to result from those
assets to be held and used.
In estimating the future cash flows for determining whether an
asset is impaired, and if expected future cash flows used in
measuring assets are impaired, the Company grouped its assets at
the lowest level for which there are identifiable cash flows
independent of other groups of assets. These levels were each of
the individual nursing/subacute facilities, and each of the
rehabilitative therapy, respiratory therapy, pharmacy,
diagnostics and hospice business units.
After determining the facilities and divisions eligible for an
impairment charge, the Company determined the estimated fair
value of such facilities and divisions. The carrying value of
buildings and improvements, leasehold improvements, equipment,
goodwill and other intangible assets exceeded the fair value by
$1.35 billion (of which $1.08 billion represented goodwill). The
loss on impairment applied to the following business units:
nursing/subacute of facilities $760,400, rehabilitative therapy
of $433,660, respiratory therapy of $25,962, diagnostic of
$106,273, and hospice of $27,050.
On October 1, 1999, the Company sold its infusion business units
to APS Enterprises Holding Company ("APS") for a purchase price
of $17,350 and a 20% equity interest in APS valued at $1. The
Company had determined that the business was significantly
impaired due to decreasing demand for the products and services
offered. In anticipation of the sale, the company recorded a
pretax loss of $367,398 in the third quarter of 1999.
In the third quarter of 1999, the Company recorded a $23.34
million charge to exit certain diagnostic businesses of
Symphony.
Page 15 of 30
The Company recorded a $10.9 million loss as a result of the
conversion of computer systems, the termination of certain
systems development projects and related relocation costs.
On October 19, 1999 the Company suspended its efforts to sell
its Rotech division. The Company had incurred significant costs
in legal, consulting and accounting fees related to this
transaction estimated at approximately $10.0 million. Such costs
were not considered recoverable and were written off in the
third quarter of 1999.
On September 23, 1999, the Company sold it's Jacksonville,
Florida nursing facility to Monarch LP for $4.3 million. Monarch
LP then leased this facility to a subsidiary of Lyric, which the
Company is currently managing. The sale resulted in a
non-recurring loss of $8.4 million.
The Company recorded a loss of $4.3 million representing certain
receivables from Medshares, the company that acquired the
Homecare nursing division. Such loss represents health benefits
and other employer costs paid on Medshares behalf subsequent to
the sale of Homecare. These costs are no longer deemed
collectible as a result of Medshares filing chapter 11.
NOTE 12: SUBSEQUENT EVENTS
On October 1, 1999, the Company terminated the Merit Care
Management Contract, a 10 year contract entered into in June
1995 to manage 8 geriatric care facilities in California.
On October 1, 1999 the Company sold its infusion divisions to
APS Enterprises Holding Company ("APS") for a purchase price of
$17,350 and a 20% equity interest in APS valued at $1. The
Company had determined that the business was significantly
impaired due to a decreasing demand for the goods and services
offered, and it was in the Company's best interest to sell the
division. As a result of the sale the company recorded a pretax
loss of $367,398.
Page 16 of 30
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 business segment
growth, together with other statements that are not historical facts, are
"forward-looking statements" as that term is defined under Federal Securities
Laws. Forward-looking statements are subject to risks, uncertainties and other
factors which could cause actual results to differ materially from those stated
in such statements. Such risks, uncertainties and factors include, but are not
limited to, the Company's substantial indebtedness, growth strategy, capital
requirements and recent acquisitions as well as the Company's ability to operate
profitably under the newly implemented Medicare Prospective Payment System
("PPS"), 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 for the year ended December
31, 1998.
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, specifics relating to each business line will continue to be
released until the year 2000. The assumptions used by the Company to evaluate
the BBA are based upon the most accurate information available at each quarter
end. At present the Company believes it is reacting to all of the known changes
created by the BBA, however, it cannot predict the impact of unforeseen
reductions in anticipated rates issued by the government.
After giving effect to the discontinuance of its home health
nursing segment, IHS has four primary reportable segments: inpatient services,
home respiratory/infusion/DME, diagnostic services and lithotripsy services.
Inpatient services include: (a) inpatient facilities which provide basic medical
services primarily on an inpatient basis at skilled nursing facilities, as well
as hospice services, (b)
Page 17 of 30
contract services that provide specialty medical services (e.g., rehabilitation
and respiratory services), primarily on an inpatient basis at skilled nursing
facilities, (c) contracted services that provide specialty medical services
under contract to other healthcare providers, and (d) management of skilled
nursing facilities owned by third parties. Home respiratory/infusion/DME
provides respiratory and infusion therapy, as well as the sale and/or rental of
home medical equipment. Diagnostic services provide mobile x-ray and
electrocardiogram services on an inpatient basis at skilled nursing facilities.
Lithotripsy services is a non-invasive technique that uses shock waves to
disintegrate kidney stones, primarily on an outpatient basis. Certain services
with similar economic characteristics have been aggregated pursuant to SFAS No.
131. No other individual business segment exceeds the 10% quantitative
thresholds of SFAS No. 131.
IHS has retained Warburg Dillon Read, LLC as its advisors and
KPMG LLP as its consultants to analyze strategic alternatives including
restructuring the company's debt, selling assets other than Rotech and raising
additional capital, among other things. The Company has begun preliminary
discussions with its senior lenders, and is working with its advisors and
consultants in pursuing these and other strategic alternatives. However, there
can be no assurance that any of the alternatives will be completed.
THREE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998
Net revenues for the three months ended September 30, 1999
decreased $90.95 million, or 12.1%, to $659.90 million from the comparable
period in 1998. Such decrease was attributable to (i) a $134.66 million decrease
from (a) the sale, subsequent to September 30, 1998, of 35 facilities (the
"Lyric facilities") to real estate investment trusts, which leased such
facilities to Lyric Health Care LLC, which is 50% owned by IHS and which
facilities are now managed by IHS, (b) a decrease in the Company's rates for
inpatient services provided as a result of the implementation of a BBA mandated
prospective payment system ("PPS") for the Company's nursing facilities during
the first half of 1999 and (c) a decrease in demand for therapy services
Page 18 of 30
in the Company's contract rehabilitation division as a result of PPS, (ii) a
decrease of $1.39 million from lithotripsy services in operations in both
periods (iii) a decrease of $1.23 million from home respiratory/infusion/DME
companies in operations in both periods partially offset by (iv) an increase of
$3.91 million from diagnostic services in operations in both periods, and (v)
$42.42 million in revenue from companies acquired subsequent to September 30,
1998, including an increase of $35.38 million from inpatient services, $6.54
million from home respiratory/infusion/DME, and $500,000 from lithotripsy
services. Customers of the Company's contract rehabilitation division are
admitting fewer Medicare patients and are reducing utilization of rehabilitation
services to a far greater degree than the Company had expected.
Operating, general and administrative expense (including rent)
decreased $7.28 million, or 1.26%, in the three months ended September 30, 1999
compared to the three months ended September 30, 1998. Such decrease was
attributable to (i) a $61.71 million decrease from (a) the sale of the Lyric
facilities, (b) a decrease in the Company's inpatient services provided, and (c)
a decrease in therapy services in the Company's contract rehabilitation
division, (ii) a $1.05 million decrease from lithotripsy services in operations
in both periods, partially offset by (iii) an increase of $11.19 million from
diagnostic services in operations in both periods, (iv) an increase of $4.69
million from home respiratory/infusion/DME companies in operations in both
periods and (v) an increase of 39.6 million in expenses of operations acquired
subsequent to September 30, 1998, including $34.02 million from inpatient
services, $5.18 million from home respiratory/infusion/DME services, and
$400,000 from lithotripsy services. In response to the reduced demand for
therapy services provided to third parties by the Company's contract
rehabilitation division, the Company began in the fourth quarter of 1998 to
reduce staff and changed the method of compensation to its remaining therapists.
Depreciation and amortization increased to $46.72 million for
the three months ended September 30, 1999, an 18.41% increase as compared to
$39.46 million in 1998. Of the $7.26 million increase, $1.02 million or
Page 19 of 30
14.05%, was attributable to depreciation and amortization of businesses acquired
subsequent to September 30, 1998. The remaining increase was primarily due to
depreciation and amortization related to increased routine and capital
expenditures at existing facilities and depreciation and amortization of
inpatient services and home respiratory companies acquired during the third
quarter of 1998, partially offset by the sale of the Lyric facilities.
Net interest expense increased $19.15 million, or 32.01%, during
the three months ended September 30, 1999. The increase was primarily the result
of increased borrowings under the revolving credit facility, higher interest
rates on outstanding borrowings under the term loan and revolving credit
facility as a result of amendments to the facility, and other debt assumed
related to acquisitions subsequent to September 30, 1998.
The Company recorded a loss on impairment of long lived assets
and other non-recurring charges of $1,778.33 million in the three months ended
September 30, 1999. The loss was primarily related to the loss on the impairment
of long lived assets caused by the implementation of Medicare's Prospective
Payment System and the estimated loss from the sale of the infusion business
unit. (See note 11)
Earnings (loss) from continuing operations decreased from
earnings of $43.05 million in the three months ended September 30, 1998 to a
loss of $1,819.62 million for the three months ended September 30, 1999. The
decrease is primarily due to the decrease in therapy services in the Company's
contract rehabilitation division within the inpatient services segment and the
non-recurring charge of $1,778.33 million recorded in the third quarter.
The Company's effective tax rate in 1998 was approximately 41%,
which included certain amortization cost that are not deductible for income tax
purposes. The tax provision in 1999 represents state taxes for certain
subsidiaries having taxable income. No Federal or state tax benefits have been
recorded in 1999.
In October 1998, the Company's Board of Directors adopted a
plan to discontinue operations of the home health nursing segment. Accordingly,
during 1998, the operating results of the home nursing segment have been
segregated from continuing operations and reported as a separate line item on
the statement of operations. The operating loss (net of tax) during the three
months ended September 30, 1998 was $200.89 million.
Net loss and loss per share for 1999 were $1,819.62 million and
$37.64 per share, respectively, compared to net loss and diluted loss per share
for 1998 of $157.84 million and $2.72 per share. Weighted average shares
decreased from 57,650,000 (diluted) in 1998 to 48,345,000 in 1999. In 1999, no
exercise of options and warrants nor conversion of subordinated debt is assumed
since their effect is antidilutive. Subsequent to September 30, 1998, the
Company issued an aggregate of 925,628 shares of Common Stock, including 437,413
shares for acquisitions 2,446 shares upon exercise of options and 95,307 shares
for the employee stock purchase plan and 326,459 shares for current and deferred
compensation.
Page 20 of 30
NINE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998
Net revenues for the nine months ended September 30, 1999
decreased $348.91 million, or 15.48%, to $1,904.39 million from the comparable
period in 1998. Such decrease was attributable to (i) a $474.20 million decrease
from (a) the sale, subsequent to September 30, 1998, of 36 facilities ("the
Lyric facilities") to real estate investment trusts, which leased such
facilities to Lyric Health Care LLC, which is 50% owned by IHS and which
facilities are now managed by IHS, (b) a decrease in the Company's rates for
inpatient services provided as a result of PPS, and (c) a decrease in demand for
therapy services in the Company's contract rehabilitation division as a result
of PPS, (ii) a decrease of $17.57 million from diagnostic services in operations
in both periods, partially offset by (iii) an increase of $15.48 million from
home respiratory/infusion/DME companies in operations in both periods, (iv) an
increase of $2.50 million from lithotripsy services in operations in both
periods and (v) an increase of $124.88 million in revenue from acquisitions
subsequent to September 30, 1998, including $106.02 million from inpatient
services, $17.55 million from home respiratory/infusion/DME, and $1.31 million
from lithotripsy services. Customers of the Company's contract rehabilitation
division are admitting fewer Medicare patients and are reducing utilization of
rehabilitation services to a far greater degree than the Company had expected.
Page 21 of 30
Operating, general and administrative expense (including rent)
decreased $164.79 million, or 9.4%, in the nine months ended September 30, 1999
compared to the nine months ended September 30, 1998. Such decrease was
attributable to (i) a $288.38 million decrease from (a) the sale of the Lyric
facilities, (b) a decrease in the Company's inpatient services provided, and (c)
a decrease in therapy services in the Company's contract rehabilitation
division, (ii) a $6.21 million decrease from diagnostic services in operations
in both periods, partially offset by (iii) a $13.66 million increase from home
respiratory/infusion/DME companies in operations in both periods, (iv) an
increase of $1.88 million from lithotripsy services in operations in both
periods and (v)an increase of $114.26 million in expenses of operations acquired
subsequent to September 30, 1998, including $101.51 million from inpatient
services, $12.31 million from home respiratory/infusion/DME services, and
$440,000 from lithotripsy services. In response to the reduced demand for
therapy services provided to third parties by the Company's contract
rehabilitation division, the Company began in the fourth quarter of 1998 to
reduce staff and changed the method of compensation to its remaining therapists.
Depreciation and amortization increased to $139.71 million for the
nine months ended September 30, 1999, an 25.13% increase as compared to $111.65
million in 1998. Of the $28.06 million increase, $2.54 million, or 9.05%, was
attributable to depreciation and amortization of businesses acquired subsequent
to September 30, 1998. The remaining increase was primarily due to depreciation
and amortization related to increased routine and capital expenditures at
existing facilities and depreciation and amortization of inpatient services and
home respiratory companies acquired during the third quarter of 1998 partially
offset by the sale of the Lyric facilities.
Page 22 of 30
Net interest expense increased $45.04 million, or 25.21%, during
the nine months ended September 30, 1999. The increase was primarily the result
of increased borrowings under the revolving credit facility and, higher interest
rates on outstanding borrowings under the term loan and revolving credit
facility as a result of amendments to the facility other debt assumed related to
acquisitions subsequent to September 30, 1998.
The Company recorded a loss on impairment of long lived assets
and other non-recurring charges of $1,778.33 million in the nine months ended
September 30, 1999. The loss was primarily related to the loss on the impairment
of long lived assets caused by the implementation of Medicare's Prospective
Payment System and the estimated loss from the sale of the infusion business
unit. (See note 11)
Earnings (loss) from continuing operations decreased from
earnings of $126.11 million in the nine months ended September 30, 1998 to a
loss of $1,830.84 million for the nine months ended September 30, 1999. The
decrease is primarily due to the decrease in therapy services in the Company's
contract rehabilitation division and the non recurring charge of $1,778.33
million recorded in the third quarter.
The Company's effective tax rate in 1998 was approximately 41%,
which included certain amortization cost that are not deductible for income tax
purposes. The tax provision in 1999 represents state taxes for certain
subsidiaries having taxable income. No Federal or state tax benefits have been
recorded in 1999.
In October 1998, the Company's Board of Directors adopted a
plan to discontinue operations of the home health nursing segment. Accordingly,
during 1998, the operating results of the home nursing segment have been
segregated from continuing operations and reported as a separate line item on
the statement of operations. The operating loss (net of tax) during the nine
months ended September 30, 1998 was $204.87 million.
Net loss and loss per share for 1999 were $1,830.84 million and
$36.40 per share, respectively, compared to net loss and diluted loss per share
for 1998 of $78.76 million and $1.40 per share. Weighted average shares
decreased from 56,374,000 (diluted) in 1998 to 50,296,000 in 1999. In 1999, no
exercise of options and warrants nor conversion of subordinated debt is assumed
since their effect is antidilutive. Subsequent to September 30, 1998, the
Company issued an aggregate of 925,628 shares of Common Stock, including 437,413
shares for acquisitions, 2,446 shares upon exercise of options 95,307 shares
issued for the employee stock purchase plan and 326,459 shares for current and
deferred compensation.
Page 23 of 30
LIQUIDITY AND CAPITAL RESOURCES
The Company reported a net loss from operations in 1999
aggregating $1,830.84 million resulting in certain financial covenant violations
under the Company's Revolving Credit and Term Loan Agreement ("Senior Credit
Agreement") and the Senior Subordinate debt covenants. Namely, the covenants
regarding minimum net worth, total leverage ratio, and fixed charge coverage
ratio were not satisfied at September 30, 1999. On November 1, 1999, the Company
elected not to make the interest payment of approximately $7.7 million due on
the $150 million 10.25% Senior Subordinated Notes ("Subordinated Notes") due
2006. The indenture under which the 10.25% Notes were issued provides for a 30
day grace period before an event of default will occur due to the nonpayment of
interest. On November 15, 1999, the Company elected not to make the interest
payment of approximately $17.0 million due under its Senior Credit Agreement.
The Credit Agreement provides for a three day grace period before an event of
default will occur due to nonpayment of interest. The Company does not intend to
make the payment at that time. If the interest payment is not made within the
grace periods, the Subordinated Notes and Senior Credit Facility may be declared
immediately due and payable.
There can be no assurances that the senior lenders or
bondholders will approve any amendment or restructuring of the Credit Agreement
or the Subordinated Notes or will not declare an event of default. If the senior
lenders or bondholders elect to exercise their rights, under certain provisions
in the agreement to accelerate the obligations under the agreements, such events
would have a material adverse effect on the Company's liquidity and financial
position. Under such circumstances, the financial position of the Company would
necessitate the development of an alternative financial structure. Considering
the limited financial resources and the existence of certain defaults there can
be no assurance that the Company would succeed in formulating and consummating
an acceptable alternative financial structure.
As a result of the uncertainty related to the covenant defaults
and corresponding remedies described above, outstanding borrowings under the
Senior Credit Agreements ($2.07 million) and principal amount of the
Subordinated Notes ($1.25 million) are presented as current liabilities on the
Company's consolidated balance sheet at September 30, 1999. Accordingly, the
Company has a deficit in working capital aggregating $2.95 billion. The
financial statements do not include further adjustments reflecting the possible
future effects on the recoverability and classification of assets or the amount
and classification of liabilities that may result from the outcome of the
uncertainty related to the covenant defaults and corresponding remedies.
At September 30, 1999, the Company had working capital deficit
of $2.95 billion, as compared with working capital of $341.2 million at December
31, 1998. The decrease in working capital was primarily due to the
reclassification of the revolving credit and term loan and senior subordinated
debt totaling $3.3 billion, decreases in patient accounts and third party payor
settlements receivable, income taxes receivable and cash and cash equivalents
and an increase in current maturities of long term debt, partially offset by an
increase in temporary investments and a decrease in accounts payable and accrued
expenses. There were no material capital commitments for capital expenditures as
of September 30, 1999. Net patient accounts and third-party payor settlements
receivable decreased $66.1 million to $582.98 million at September 30, 1999, as
compared to $649.1 million at December 31, 1998. The decrease was primarily
attributable to the sale of the infusion business unit, exit of certain
Diagnostic divisions and reduced revenue resulting from lower rates for the
Company's inpatient services and decreased demand for contract rehab services
provided to third parties. Gross patient accounts receivable were $677.9 million
at September 30, 1999, as compared with $735.2 million at December 31, 1998. Net
third-party payor settlements receivable from federal and state governments
(i.e., Medicare and Medicaid cost reports) was $65.1 million at September 30,
1999, as compared to $79.2 million at December 31, 1998.
Net cash used by operating activities of continuing operations
for the nine months ended September 30, 1999, was $21.51 million as compared to
net cash provided by operating activities of $59.31 million for the comparable
period in 1998. Cash was used in operating activities in the first nine months
of 1999 as compared to cash provided by operating activities in the comparable
period in 1998 primarily because of a decrease in operations due to the impact
of PPS, while in the comparable period in 1998 the Company had operating income
(before giving effect to the loss from discontined operations.)
The discontinued operation resulted in cash used of $17.67
million for the nine months ended September 30, 1999 as compared to cash used of
$68.88 million for the nine months ended September 30, 1998.
Net cash provided by financing activities was $131.23 million
for the nine month period in 1999 as compared to $172.30 million provided by
financing activities for the comparable period in 1998. In both periods, the
Company received net proceeds from long-term borrowings and made repayments on
certain debt. During the nine months ended September 30, 1999, the Company
repurchased 3.6 million shares of its stock for
Page 24 of 30
approximately $24.04 million and incurred $9.03 million in financing costs
related to the amendments to the Credit Facility.
Net cash used by investing activities was $103.37 million for
the nine month period ended September 30, 1999 as compared to $127.20 million
used by investing activities for the nine month period ended September 30, 1998.
Cash used for acquisitions was $40.06 million in 1999 as compared to $127.34
million for 1998. Cash used for the purchase of property, plant and equipment
was $129.65 million in 1999 and $190.98 million in 1998. Cash used for the
purchase of other assets was $36.79 million in 1999 as compared to cash provided
by the disposition of other assets of $3.66 million in 1998 . The $36.79 million
in cash disbursements for other assets was used primarily for $25.0 million of
loans to employees. As disclosed in Schedule 14A dated April 30, 1999, the
Company has loaned certain officers approximately $54 million as of September
30, 1999. Substantially all of these loans are recorded as deferred compensation
costs and are amortized over the terms of the loans. Compensation expense,
reflecting the amortization of deferred compensation costs as well as
forgiveness of the loans, was $7.9 million for the nine months ended September
30, 1999. In 1999, the Company received $114.3 million related to the sale of 32
long-term care facilities to Monarch LP (See Note 5) and sold its discontinued
home nursing segment for approximately $26.0 million. In 1998, the Company
received $89.9 million related to the sale of ten long-term care facilities to
Omega Healthcare Investors, Inc. (See Note 5), sold its outpatient clinics for
approximately $10.0 million (See Note 8) and received $56.7 million from the
sale of eleven long-term care facilities (See Note 9). 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, 1998, 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 September 30, 1999 is $129.3 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 $105.35 million as of September 30, 1999.
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. IHS has established several irrevocable standby
letters of credit with the Bank of Nova Scotia totaling $32.23 million at
September 30, 1999 to secure certain of the Company's workers' compensation
obligations, health benefits and
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other obligations. In addition, IHS has several surety bonds in the amount of
$66.02 million to secure certain of the Company's health benefits, patient trust
funds and other obligations. In addition, with respect to certain acquired
businesses IHS is obligated to make certain contingent payments if earnings of
the acquired business increase or earnings targets 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 and synthetic
leases aggregating approximately $883.71 million at September 30, 1999.
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. As part of the Company's Year 2000
Project, the Company has completed its initial evaluation of current computer
systems, software and embedded technologies. IHS began implementation of its
Year 2000 plan in January 1997 and all business segments have been examined. An
inventory of all equipment and systems supported by IHS' Information Technology
department has been compiled and compliance has been verified. The Year 2000
Project is approximately 96% complete and it is anticipated that the project
will be substantially implemented by December 1999. Periodic meetings are being
held with the Board of Directors and senior management to ensure that the
project stays on schedule.
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Through September 30, 1999, expenditures related to the Year
2000 issue totaled approximately $10.6 million. The Company currently estimates
that an additional $400,000 will be spent to complete the project, although
additional amounts may be required. The costs will be funded through cash from
operations and borrowings under the Revolving Facility and are being expensed as
incurred.
One of the biggest risks to the Company is that regulatory
payors (i.e., Medicare and Medicaid), suppliers and other entities with which
the Company has a material relationship will not be compliant by Year 2000 and
therefore unable to pay claims. The Company has initiated a program to determine
whether the computer programs of its significant payors and suppliers will be
upgraded in a timely manner. This program consists of obtaining verification of
compliance, arranging contingency pay out agreements, testing electronic
transactions and necessary business interruption insurance. The Company has not
completed this review; however initial responses indicate that no significant
issues are expected to arise.
The failure to correct a material Year 2000 problem could
result in an interruption in, or a failure of, certain normal business
activities or operations. The Company has not established a formal contingency
plan to put into effect in the event of a failure to correct a material Year
2000 problem. Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of third party
payors and suppliers, there can be no assurance that the Company's assessment is
correct or that the assessment of materiality of any failure is correct.
Completion of the Year 2000 Project is expected to significantly reduce the
Company's level of uncertainty over the Year 2000 issue and the Company believes
that upon completion of the Project, the possibility of significant
interruptions of normal operations should be minimal.
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PART II: OTHER INFORMATION
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Item 5. Other Information
On October 8, 1999 the Company announced the resignation of George H. Strong and
Edwin M. Crawford from the Board of Directors. The Company intends to appoint
Directors to replace these individuals.
On Nov. 1 1999 the Company elected not to make the interest payment of
approximately $7.7 million due on the Company's $150 million 10.25% Senior
Subordinated Notes due 2006. The Medicare Prospective Payment System has had a
dramatically negative impact on the industry and Integrated Health Services
revenues, cash flow and liquidity. IHS has retained Warburg Dillon Read, LLC as
its advisors and KPMG LLP as its consultants to analyze strategic alternatives
including restructuring the Company's debt, selling assets other than Rotech,
and raising additional capital, among other things. The Company anticipates
beginning preliminary discussions with its senior lenders shortly. Its advisors
and consultants will be assisting in these discussions, as well as, in pursuing
other strategic alternatives.
On November 15, 1999, the Company elected not to make the interest payment of
approximately $17 million due under the bank credit facility. The credit
agreement provides for a three day grace period before an event of default will
occur due to nonpayment of interest. The Company does not intend to make the
payment at that time. If the interest payment is not made within the grace
periods, the Notes and Revolving Credit Facility may be declared immediately due
and payable.
Item 6. - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
10.1 Revolver Amendment
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/ Robert N. Elkins
------------------------------------
Robert N. Elkins
Chief Executive Officer
By: /s/ C. Taylor Pickett
------------------------------------
C. Taylor Pickett
Executive Vice President-Chief Financial
and Accounting Officer
Date: November 15, 1999
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