SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) October 17, 1996
-----------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-12306 23-2428312
--------------------------- ----------- --------------
(State or other jurisdiction (Commission (IRS Employer
of corporation) File Number) Identification No.)
10065 Red Run Boulevard, Owings Mills, Maryland 21117
- ------------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 998-8400
--------------
Not Applicable
-----------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 2. Acquisition or Disposition of Assets
On October 17, 1996, Integrated Health Services, Inc. ("the Company")
acquired through merger First American Health Care of Georgia, Inc. ("First
American"), a provider of home health services in 21 states, principally
Alabama, California, Florida, Georgia, Michigan, Pennsylvania and Tennessee.
The purchase price for First American was $154.1 million in cash plus
contingent payments of up to $155 million. The contingent payments will be
payable if (1) legislation is enacted that changes the Medicare reimbursement
methodology for home health services to a prospectively determined rate
methodology, in whole or in part, or (2) in respect of any year in which the
percentage increase in the seasonally unadjusted Consumer Price Index for all
Urban Consumers for Medical Care expenditure category (the "Medical CPI") is
less than 8% or in any subsequent year prior to 2004, the percentage increase in
the Medical CPI is less than 8%. If payable, the contingent payments will be
paid as follows: $10 million for 1999 which must be paid on or before February
14, 2000; $40 million for 2000 which must be paid on or before February 14,
2001; $51 million for 2001 which must be paid on or before February 14, 2002;
$39 million for 2002 which must be paid on or before February 14, 2003; and $15
million for 2003 which must be paid on or before February 14, 2004. The Company
borrowed the cash purchase price paid at the closing under its $700 million
revolving credit facility with Citibank, N.A., as Administrative Agent, and
certain other lenders. $115 million of the $154.1 million paid at closing was
paid to the Health Care Financing Administration ("HCFA"), the Department of
Justice and the United States Attorney for the Southern District of Georgia in
settlement of claims by the United States government seeking repayment from
First American of certain disallowed reimbursements under Medicare, which claims
IHS believes relate to personal or corporate expenses, rather than care-related
expenses (the "HCFA Claims"). The total settlement with the United States
government was $255 million; the remaining $140 million will be paid only from
the contingent payments to the extent such payments become due. During the first
quarter of 1996, the Company loaned $18.1 million to First American to fund
certain of First American's pension and tax liabilities. The loan, which bore
interest at a rate per annum equal to the prime rate plus 4% and was due
December 31, 1996, was secured by a pledge of certain shares of First American
stock owned by First American's principal stockholder.
The resolution of the HCFA Claims has had a material adverse effect on First
American's historical financial statements for each of the years presented.
<PAGE>
Item 5. Other Events
Between January 1, 1996 and October 16, 1996, the Company completed a number
of acquisitions and divestitures, which are described below. In connection with
the acquisition of Signature Home Care, Inc. ("Signature"), the Company filed a
Current Report on Form 8-K dated September 25, 1996, as amended to reflect the
acquisition of Signature and all the acquisitions and divestitures, described
below. Under Rule 3-05 of regulation S-X, the acquisition of First American
qualified as a significant acquisition. As a result, the audited financial
statements of First American and the pro forma consolidated financial statements
of the Company reflecting the acquisition of First American and the following
additional transactions are included in Item 7 herein in compliance with Rule
3-05 and Article 11, respectively, of Regulation S-X.
SYMPHONY PHARMACY SERVICES, INC.
In July, 1996, the Company sold its pharmacy division, to Capstone Pharmacy
Services, Inc. ("Capstone")for a purchase price of $150 million, consisting of
cash of $125 million and shares of Capstone stock having a value of $25 million.
The Company used the net proceeds of the sale to repay borrowings under its
revolving credit facility. The Company had a pre-tax gain of $34.3 million
($300,000 gain after income taxes). See the Company's Current Report on Form
8-K, dated July 30, 1996.
Because the Company's investment in the common stock had a very small tax
basis, the taxable gain on the sale significantly exceeded the gain for
financial reporting purposes; accordingly, the income tax provision related to
the sale was $34.0 million.
The Company's investment in Capstone common stock of $14.6 million
represents less than 20% of the total Capstone shares. Accordingly, such
investments is recorded at carryover cost and classified as securities available
for sale. An unrealized gain of $11.5 million is reflected in stockholder's
equity with respect to such investment, as the market value of the Capstone
shares at September 30, 1996 is approximately $26.1 million.
INTEGRATED LIVING COMMUNITIES, INC.
On October 9, 1996, Integrated Living Communities, Inc. ("ILC"), a
wholly-owned subsidiary of the Company which provides assisted living and
related services to the private pay elderly market, completed its initial public
offering. Total proceeds to the Company were approximately $17.8 million,
including a $7.4 million loan repayment. The Company continues to own
approximately 37% of the outstanding common stock of ILC. The Company used the
net proceeds from the sale to repay borrowings under its revolving credit
facility. The Company expects to record a pre-tax loss of approximately $4.5
million in the fourth quarter of 1996 as a result of this transaction.
SIGNATURE HOME CARE, INC.
On September 25, 1996, the Company purchased Signature Home Care, Inc.
("Signature"), a full service home health care company, for approximately $9.2
million, of which $4.7 million represents the issuance of 196,374 shares of the
Company's common stock. The Company incurred direct costs of acquisition of
approximately $500,000. Total goodwill at the date of acquisition aggregated
$19.1 million. See the Company's Current Report on Form 8-K dated September 25,
1996, as amended.
CENTURY HOME SERVICES, INC.
On September 13, 1996, the Company purchased Century Home Services, Inc.
("Century"), a home health services company located in Murfreesboro, Tennessee.
Total purchase price was approximately $2.4 million. In addition, the Company
used borrowings under its revolving credit facility to repay approximately $1.5
million of debt of Century assumed in the acquisition. The Company incurred
direct costs of acquisition of approximately $200,000. Total goodwill at the
date of acquisition aggregated $12.1 million.
<PAGE>
EDGEWATER HOME INFUSION SERVICES, INC.
On August 19, 1996, the Company purchased Edgewater Home Infusion Services,
Inc. ("Edgewater"), a home infusion company in Miami, Florida, for approximately
$8.0 million. The Company incurred direct costs of acquisition of approximately
$300,000. Total goodwill at the date of acquisition aggregated $7.7 million.
EXTENDICARE OF TENNESSEE, INC.
On August 12, 1996, the Company purchased Extendicare of Tennessee, Inc.
("Exendicare"), a home health company located in Memphis, Tennessee, for
approximately $3.4 million. The Company incurred direct costs of acquisition of
approximately $200,000. Total goodwill at the date of acquisition aggregated
$1.9 million.
J. R. REHAB ASSOCIATES, INC.
On August 1, 1996, the Company purchased J.R. Rehab Associates, Inc. ("J.R.
Rehab"), an inpatient and outpatient rehabilitation center in Mooresville, North
Carolina, for approximately $2.1 million. The Company incurred direct costs of
acquisition of approximately $200,000. Total goodwill at the date of acquisition
aggregated $3.1 million.
HOSPICE OF THE GREAT LAKES, INC.
On May 1, 1996, the Company purchased Hospice of the Great Lakes, Inc.
("Hospice of the Great Lakes"), a hospice company in North Brook, Illinois, for
approximately $8.2 million representing the issuance of 304,822 shares of the
Company's common stock. The Company incurred direct costs of acquisition of
approximately $1.0 million. Total goodwill at the date of acquisition aggregated
$9.1 million.
REHAB MANAGEMENT SYSTEMS, INC.
On March 19, 1996, the Company acquired Rehab Management Systems, Inc.
("RMS"), a company that primarily operates rehabilitation clinics in central
Florida, for approximately $10.0 million, including $8.0 million representing
the issuance of 385,542 shares of the Company's common stock. In addition, the
Company incurred direct costs of acquisition of approximately $2.9 million.
Total goodwill at the date of acquisition aggregated $12.7 million.
VINTAGE HEALTH CARE CENTER
On January 29, 1996, the Company purchased Vintage Health Care Center
("Vintage"), a skilled nursing and assisted living center in Denton, Texas for
approximately $6.9 million. A condominium interest in the assisted living
portion of this facility was contributed to ILC on June 1, 1996, valued at $3.5
million.
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
a. Financial Statements of Businesses Acquired.
The consolidated balance sheets of First American as of December 31,
1994 and 1995, and the related consolidated statements of operations,
stockholders' deficit and cash flows for each of the years in the
three-year period ended December 31, 1995, and the notes thereto, audited
by KPMG Peat Marwick LLP, independent auditors, are included herein.
b. Pro Forma Financial Information.
The Company's unaudited pro forma consolidated balance sheet at
September 30, 1996 and the statements of operations for the year ended
December 31, 1995 and the nine months ended September 30, 1996, reflecting
the disposition of Symphony Pharmacy Services and a majority interest in
ILC, and the acquisition of Signature, Century, Edgewater, Extendicare,
J.R. Rehab, Hospice of the Great Lakes, RMS, Vintage, and First American
and the notes thereto are included herein.
c. Exhibits.
2.01 Merger Agreement, dated as of February 21, 1996 among Integrated
Health Services, Inc., IHS Acquisition XIV, Inc., and First
American Health Care of Georgia, Inc. and its principal
shareholders.*
2.02 Amendment to Merger Agreement, dated as of September 9, 1996, by
and among Integrated Health Services, Inc., IHS Acquisition XIV,
Inc., First American Health Care of Georgia, Inc., Robert J.
Mills and Margie B. Mills.*
10.1 Omnibus Settlement Agreement, dated as of September 9, 1996, by
and among First American Health Care of Georgia, Inc., the United
States Department of Health and Human Services through the Office
of Inspector General and the Health Care Financing
Administration, the United States of America through the United
States Department of Justice, and Integrated Health Services,
Inc.
23.01 Consent of KPMG Peat Marwick LLP, Baltimore, Maryland.
- ----------
* Previously filed in the Company's Current Report on Form 8-K, dated October
17, 1996.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Consolidated Financial Statements
December 31, 1995 and 1994
and years ended December 31, 1995, 1994 and 1993
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
First American Health Care of Georgia, Inc.
(f/k/a ABC Home Health Services, Inc.):
We have audited the accompanying consolidated balance sheets of First American
Health Care of Georgia, Inc. and subsidiaries (f/k/a ABC Home Health Services,
Inc.) (the Company) as of December 31, 1995 and 1994, and the related
consolidated statements of operations, changes in stockholders' deficit and cash
flows for each of the years in the three-year period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First American
Health Care of Georgia, Inc. and subsidiaries (f/k/a ABC Home Health Services,
Inc.) as of December 31, 1995 and 1994, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
1995 in conformity with generally accepted accounting principles.
(Continued)
<PAGE>
As discussed in notes 2 and 4, the Company filed a petition for bankruptcy under
Chapter 11 of the U.S. Bankruptcy Code in February 1996 and the plan of
reorganization was confirmed in October 1996. Such plan included the merger of
the Company with Integrated Health Services, Inc., which occurred on October 17,
1996,the settlement of Department of Justice fines in the amount of $20 million,
and the settlement with the Health Care Financing Administration (HCFA) of
Medicare reimbursement claims which had been disputed claims under the
bankruptcy proceedings. The settlement agreement with HCFA provides for a fixed
payment of $95.0 million and contingent payments of up to $140.0 million which,
if certain future contingencies are met, will be payable from 2000 through 2004.
At December 31, 1995 the Company has recorded an obligation for the fixed
payment and an estimate of $45.0 million for certain of the contingent payments.
The ultimate outcome of this matter cannot presently be determined.
Baltimore, Maryland
October 17, 1996
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Consolidated Balance Sheets
December 31, 1995 and 1994
<TABLE>
<CAPTION>
Assets 1995 1994
- ------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,646,301 6,895,608
Restricted cash 10,445,746 8,510,947
Accounts receivable from patients, less allowances
for doubtful accounts and contractual adjustments
of $3,871,000 in 1995 and $4,872,000 in 1994 48,269,522 45,104,942
Other accounts receivable, net 1,953,191 1,270,823
Inventories 5,010,033 4,297,941
Prepaid expenses and other current assets 1,683,976 1,037,587
---------------- ---------------
Total current assets 76,008,769 67,117,848
Property and equipment, net 27,106,803 25,029,443
Goodwill 6,428,432 7,196,597
Other assets, net 2,386,044 3,409,609
----------- -------------
Total assets $ 111,930,048 102,753,497
================ ===============
Liabilities and Stockholders' Deficit
- -------------------------------------
Current liabilities:
Current maturities of long-term debt and capital
lease obligations $ 25,607,743 6,149,083
Accounts payable and accrued expenses 145,142,885 101,730,750
Medicare settlement payable 95,000,000 1,541,203
Estimated third party settlements 1,036,369 751,790
Due to related parties 184,387 169,220
Income taxes payable 11,320,968 12,504,000
---------------- ---------------
Total current liabilities 278,292,352 122,846,046
Due to related parties 180,000 360,000
Long-term debt and capital lease obligations 10,134,430 17,918,236
Medicare settlement payable 17,920,615 53,002,104
---------------- ---------------
Total liabilities $ 306,527,397 194,126,386
---------------- ---------------
</TABLE>
(Continued)
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Consolidated Balance Sheets, continued
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Minority interest in consolidated subsidiaries $ (381,292) 5,617
Stockholders' deficit:
Preferred stock, no par value, 500,000 shares
authorized - -
Common stock, no par value, 20,000,000 shares
authorized, 5,000 issued in 1995, of which 4,000
shares are held in treasury in 1995 244,437 -
Common stock, Class B, no par value, 10,000,000
shares authorized, 3,078,700 and 3,003,700
issued in 1995 and 1994, respectively, of which
904,100 shares are held in treasury in 1995 and 1994 2,618,414 1,682,135
Stock options outstanding 12,259,373 4,901,732
Accumulated deficit (207,266,607) (96,081,211)
---------------- ---------------
(192,144,383) (89,497,344)
Less treasury stock, at cost -
(common stock: 904,100 shares in 1995 and 1994;
common stock, Class B: 4,000 shares in 1995) (2,071,674) (1,881,162)
---------------- ---------------
Total stockholders' deficit (194,216,057) (91,378,506)
---------------- ---------------
Commitments and contingent liabilities
Total liabilities and stockholders' deficit $ 111,930,048 102,753,497
================ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Consolidated Statements of Operations
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenue:
Net patient service revenue $ 558,199,384 446,466,509 335,708,839
Managed service revenue 5,547,720 5,696,236 5,187,765
----------------- ------------------ ------------------
Total revenue 563,747,104 452,162,745 340,896,604
Expenses:
Patient services 329,282,810 261,409,202 174,505,225
General and administrative 323,936,521 217,491,915 171,604,256
Depreciation and amortization 6,936,185 6,349,163 5,125,404
Interest 9,717,027 8,402,991 3,990,797
Provision for bad debts 3,785,566 2,993,667 1,161,056
----------------- ------------------ ------------------
Total expenses 673,658,109 496,646,938 356,386,738
Loss from operations (109,911,005) (44,484,193) (15,490,134)
Nonoperating gains, net 1,419,262 899,541 1,027,441
Minority interest in net loss (earnings)
of consolidated subsidiaries (290,239) (344,295) 24,225
----------------- ------------------ ------------------
Net loss before income taxes (108,781,982) (43,928,947) (14,438,468)
Income taxes 1,594,000 11,385,000 1,119,000
----------------- ------------------ ------------------
Net loss $ (110,375,982) (55,313,947) (15,557,468)
================= ================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Consolidated Statements of Changes in Stockholders' Deficit
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Common Stock Common
Common Stock Options Stock Accumulated
Stock Class B Outstanding Subscriptions Deficit
----- ------- ----------- ------------- -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $ - 1,682,135 - 14,530,644 (24,702,582)
Net loss for year ended December 31, 1993 - - - - (15,557,468)
Issuance of common stock subscription - - - 90,426 -
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1993 - 1,682,135 - 14,621,070 (40,260,050)
Net loss for year ended December 31, 1994 - - - - (55,313,947)
Issuance of common stock options - - 4,901,732 - -
Repurchase of common stock subscriptions - - - (14,621,070) -
Distributions to majority stockholders - - - - (507,214)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1994 - 1,682,135 4,901,732 - (96,081,211)
Net loss for year ended December 31, 1995 - - - - (110,375,982)
Issuance of common stock 244,437 - - - -
Issuance of common stock options - - 7,597,078 - -
Issuance of common stock, Class B - 936,279 - - -
Common stock options exercised - - (239,437) - -
Distributions to majority stockholders - - - - (809,414)
Repurchase of treasury stock - - - - -
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1995 $ 244,437 2,618,414 12,259,373 - (207,266,607)
============= ============= ============= ============= =============
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Consolidated Statements of Changes in Stockholders' Deficit
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Treasury
Treasury Stock
Stock Class B Total
----- ------- -----
<S> <C> <C>
Balance at December 31, 1992 - (1,881,162) (10,370,965)
Net loss for year ended December 31, 1993 - - (15,557,468)
Issuance of common stock subscription - - 90,426
-------------- ------------- -------------
Balance at December 31, 1993 - (1,881,162) (25,838,007)
Net loss for year ended December 31, 1994 - - (55,313,947)
Issuance of common stock options - - 4,901,732
Repurchase of common stock subscriptions - - (14,621,070)
Distributions to majority stockholders - - (507,214)
-------------- ------------- -------------
Balance at December 31, 1994 - (1,881,162) (91,378,506)
Net loss for year ended December 31, 1995 - - (110,375,982)
Issuance of common stock - - 244,437
Issuance of common stock options - - 7,597,078
Issuance of common stock, Class B - - 936,279
Common stock options exercised - - (239,437)
Distributions to majority stockholders - - (809,414)
Repurchase of treasury stock (190,512) - (190,512)
-------------- ------------- -------------
Balance at December 31, 1995 (190,512) (1,881,162) (194,216,057)
============== ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities and gains:
Expenses in excess of revenue and gains $ (110,375,982) (55,313,947) (15,557,468)
Adjustments to reconcile expenses in
excess of revenue and gains to cash
flow provided by operating activities:
Depreciation and amortization 6,936,185 6,349,163 5,125,404
Provision for bad debts 3,785,566 2,993,667 1,161,056
Stock compensation expense 8,538,357 4,901,732 -
Minority interest in net income of
consolidated subsidiaries 290,239 344,295 (24,225)
Pension expense for ESOP
stock subscription - - 90,426
(Increase) decrease in:
Accounts receivable (6,950,146) (22,757,182) (12,541,237)
Other accounts receivable (682,368) 59,050 278,565
Inventories (712,092) (1,919,616) (957,939)
Prepaid expenses 97,877 (553,679) (187,099)
Restricted cash (1,934,799) (1,035,225) (3,863,182)
Increase (decrease) in:
Accounts payable and accrued expenses 43,412,135 48,182,504 26,448,681
Estimated third party settlements 284,579 374,124 224,921
Medicare settlement payable 58,377,308 33,104,333 14,916,328
Income taxes payable (1,183,032) 11,385,000 1,119,000
----------------- ------------------ ------------------
Net cash (used in) provided by
operating activities and gains (116,173) 26,114,219 16,233,231
----------------- ------------------ ------------------
</TABLE>
(Continued)
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Consolidated Statement of Cash Flows, continued
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from investing activities:
Additions to property and equipment, net $ (7,671,438) (4,117,823) (8,731,860)
Cash paid for interest in ABC/
ContinueCare Ltd., net of cash received - - (1,460,423)
Increase in goodwill (723,919) (244,464) (179,863)
Increase in intangible and other assets (570,724) (1,490,588) (822,128)
Increase (decrease) in amounts due to
related parties (164,833) 107,034 (245,803)
Cash paid to minority partners (677,148) (355,189) 40,736
----------------- ------------------ ------------------
Net cash used in investing
activities $ (9,808,062) (6,101,030) (11,399,341)
----------------- ------------------ ------------------
Cash flows from financial activities:
Net payments under line of credit $ - - (1,000)
Principal payments on long-term
debt and capital lease obligations (8,327,356) (11,289,536) (3,690,425)
Proceeds from long-term debt 21,002,210 8,724,301 846,403
Repurchase of common stock subscriptions - (14,621,070) -
Purchase of treasury stock (190,512) - -
Distributions to majority stockholder (809,414) (507,214) -
----------------- ------------------ -----------------
Net cash provided by (used in)
financing activities 11,674,928 (17,693,519) (2,845,022)
----------------- ------------------ ------------------
Net increase in cash 1,750,693 2,319,670 1,988,868
Cash and cash equivalents, beginning of year 6,895,608 4,575,938 2,587,070
----------------- ------------------ ------------------
Cash and cash equivalents, end of year $ 8,646,301 6,895,608 4,575,938
================= ================== ==================
</TABLE>
(Continued)
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Consolidated Statement of Cash Flows, continued
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 5,169,370 1,904,616 2,850,255
================= ================== ==================
Cash paid during the year for taxes $ 2,777,032 - -
================= ================== =================
Supplemental disclosure of noncash investing and
financing activities:
Additions to equipment in exchange
for capital lease obligations payable $ 27,407 113,888 691,617
================= ================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
(1) Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
Organization
------------
Effective January 1, 1995, the company formerly known as ABC Home Health
Services, Inc. changed its name to First American Health Care of Georgia,
Inc. (the Company). This was a name change only and did not involve a
reorganization. The Company was incorporated in 1978 under the laws of
the State of Georgia. The Company and its subsidiaries provide skilled
nursing care, therapeutic services, health guidance and other
professional care services to patients in the home setting. During 1990,
the Company expanded its business line to provide home health management
services to hospital-based home health agencies. Such management services
include assistance with initial start-up of the agency, training and
supervision of agency employees, maintenance of accounting records and
general operating services for the managed facilities. In 1994, the
Company began developing software and a system to provide support
services to be franchised to home health agencies in Mexico. At December
31, 1995, the Company had operations in 23 states throughout the United
States.
In 1996, as more fully described in note 2, the Company was convicted of
making improper Medicare reimbursement claims, filed a petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code and, in
connection with its confirmed plan of reorganization, was acquired
through merger by Integrated Health Services, Inc., a provider of
post-acute health care services with operations in 40 states.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. The
wholly-owned subsidiaries include: two Georgia corporations (First
American Home Care of Georgia and Valdosta); First American Home Care of
Alabama, Arkansas, California, Colorado, Florida, Illinois, Indiana,
Louisiana, Michigan, Mississippi, Missouri, Nebraska, Ohio, Oklahoma,
Pennsylvania, Tennessee, Texas, Virginia, New Mexico, North Carolina,
South Carolina, West Virginia, and Ft. Lauderdale, Inc.; ABC Home
Nursing, Inc.; Rural Health Clinic of Louisiana, Inc.; First American
International, Inc.; ABC Pharmaceuticals, Inc.; and ABC GP, Inc. (see
note 3). In addition, the Company has seven inactive corporations which
are wholly-owned subsidiaries.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
-----------------------------------------------------
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Acquisitions and Goodwill
-------------------------
The operations of entities acquired as purchases are included in the
consolidated statements of operations since their dates of acquisition.
These acquisitions are accounted for by the purchase method of
accounting, and accordingly, the purchase price is allocated to assets
acquired and liabilities assumed based on their relative fair values at
the date of acquisition. The costs of investments in purchased assets in
excess of the underlying fair market values at dates of acquisition are
recorded as goodwill and amortized over fifteen years on a straight-line
basis (see note 3).
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents are defined as highly liquid investments with
original maturities of three months or less and consist of amounts held
as bank deposits and bank money market accounts.
Revenue
-------
Net patient service revenue is reported at the estimated net realizable
amounts from patients, third-party payors, and others for services
rendered and include estimated retroactive adjustments under
reimbursement agreements with third-party payors. Estimates of
retroactive adjustments are accrued in the period the related services
are rendered and adjusted in future periods as final settlements are
determined (see note 4).
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
-----------------------------------------------------
Revenue, continued
------------------
As more fully discussed in note 4, the accompanying consolidated
financial statements include significant adjustments for a 1996
settlement with the Health Care Financing Administration (HCFA) related
to disallowed reimbursements under the Medicare program. Such adjustments
have been retroactively recorded in the years to which they relate due to
the nature of the disallowances and their materiality, so as not to
mislead the reader of these consolidated financial statements with regard
to the results of the Company's operations in any single year.
Management services revenue is recognized based on home health visits
performed during the given period.
Inventories
-----------
Inventories, consisting principally of medical and pharmaceutical
supplies, are stated at the lower of cost or market. Cost is determined
using the first-in first-out method of accounting.
Property and Equipment
----------------------
Property and equipment are recorded at historical cost. Depreciation is
recognized over the useful life of each asset and is computed on the
straight-line method for financial statement purposes and under the
modified accelerated cost recovery system for income tax purposes.
Property and equipment are depreciated under the American Hospital
Association guidelines which estimates useful lives as follows: computer
equipment and software under capital leases - three to five years;
furnishings, fixtures and equipment - three to twenty years; buildings -
thirty years; aircraft and transportation vehicles - five to ten years;
and building and leasehold improvements - five to thirty years or lease
term if shorter. Property and equipment under capital lease are
depreciated over the estimated useful life of the asset.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
-----------------------------------------------------
Other Assets
------------
Other assets subject to amortization include capitalized start-up costs,
costs incurred related to obtaining certificates of need, computer
license agreements, loan origination costs and noncompete agreements.
Capitalized start-up costs, including costs associated with obtaining any
necessary certificates of need, are capitalized and amortized over five
years on a straight-line basis. Costs incurred for computer license
agreements and noncompete agreements are amortized over the life of the
agreements which range from one to five years. Costs incurred in
connection with the origination of loans are amortized over the related
life of the loan using a method which approximates the effective interest
method.
Income Taxes
------------
The Company files a consolidated federal income tax return with its
subsidiaries. Income taxes are allocated among the Company and its
subsidiaries based upon their respective contributions to the
consolidated taxable income or loss.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No 109, "Accounting for Income Taxes" (SFAS No 109).
The adoption of SFAS No 109 changed the Company's method of accounting
for income taxes from the deferred method to an asset and liability
approach. Previously, the Company deferred the past tax effects of timing
differences between financial and taxable income. The asset and liability
approach requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between
the carrying amounts and the tax bases of assets and liabilities.
Temporary differences that give rise to the Company's deferred tax assets
and liabilities include depreciation and amortization and certain accrued
liabilities.
Under the provisions of SFAS No 109, the Company elected not to restate
prior years consolidated financial statements. The cumulative effect of
initial adoption on prior years accumulated deficit was not significant.
Additionally, the effect of adoption of SFAS No 109 on expenses in excess
of revenue and gains before income taxes for 1993 was not significant.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
-----------------------------------------------------
Internally Developed Software
-----------------------------
In accordance with generally accepted accounting principles and Medicare
reimbursement regulations, the Company expenses all costs associated with
internally developed computer software in the period in which they are
incurred. Costs incurred during 1995, 1994 and 1993 amounted to
approximately $1.2 million, $1.1 million and $5.1 million, respectively.
(2) Federal Indictments, Conviction, and Reorganization
---------------------------------------------------
In August 1995, the Company and its principal shareholders were indicted
on multiple counts alleging improper Medicare reimbursement claims. On
February 4, 1996, the Company and the principal shareholders were
convicted on most of the counts on which they were indicted and received
sentences consisting of imprisonment of the Company's two principal
shareholders and fines and restitution of $29.9 million assessed by the
Federal Court and the U.S. Department of Justice.
Subsequent to the convictions, the U.S. Department of Health & Human
Services (HHS) through its agency, HCFA, suspended the Company's periodic
interim payments (PIP) on the grounds that such suspension was necessary
to enable HHS to collect amounts due for alleged overpayments. With
substantially all of its cash flow suspended, the Company filed a
petition for reorganization under Chapter 11 of the Bankruptcy Code on
February 21, 1996 (the petition date). The bankruptcy court subsequently
ordered HHS to resume the PIP so that the Company could continue
operations during its reorganization. Concurrent with the filing of the
Company's petition for reorganization, the principal shareholders
resigned their positions as chief executive and chief operating officers,
and independent management of the Company was appointed by the bankruptcy
court.
The bankruptcy court requested and accumulated claims from the Company's
creditors, including claims by HCFA related to Medicare reimbursement
settlements for all pre-petition periods. The claim from HCFA was among
those disputed by the Company, and compromise with respect to the HCFA
claim was reached in connection with the plan of reorganization, as
described below.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(2) Federal Indictments, Conviction, and Reorganization, continued
--------------------------------------------------------------
Immediately preceding the Chapter 11 filing, the Company and its
principal shareholders entered into a merger agreement with Integrated
Health Services, Inc. (IHS). In connection with the bankruptcy
proceedings and the establishment and approval of the Company's plan of
reorganization, the merger agreement was amended and was confirmed by the
bankruptcy court on October 4, 1996 (the confirmation date).
Pursuant to the terms of the plan of reorganization, IHS acquired the
Company on October 17, 1996. The purchase price was $154.1 million in
cash plus contingent payments of up to $155 million. The contingent
payments will be payable (1) if legislation is enacted that changes the
Medicare reimbursement methodology for home health services to a
prospectively determined rate methodology, in whole or in part, or (2)
if, in respect to payments contingently payable for any single year
through 2003, the percentage increase for that year or in any subsequent
year through 2004 in the seasonally unadjusted Consumer Price Index for
all Urban Consumers for the Medical Care expenditure category (the
Medical CPI) is less than 8%. If payable, the contingent payments will be
paid as follows: $10 million for 1999; $40 million for 2000; $51 million
for 2001; $39 million for 2002 and $15 million for 2003. Payments would
be due to HCFA 45 days after the end of each year for which the
contingent payments become payable.
At the date of closing, and using the proceeds from the IHS merger, the
Company paid $95 million to HCFA in partial settlement of its claim and
$20 million to the U.S. Department of Justice (DOJ) in full settlement of
its fines levied in the conviction of the Company and its then principal
shareholders. Following the conviction, the Company also paid fines to
the Federal Court in the amount of $7 million. In addition, the Company
may be required to pay HCFA up to an additional $140 million which would
be paid only if the contingent purchase payments described above are made
by IHS.
Management of the Company has evaluated the probability that the
contingent purchase payments, and the corresponding settlement payments
to HCFA, will be made. Management believes it is probable that the
contingent payments for 1999 and 2000, totaling $50 million, will be
made, $45 million of which would be paid to HCFA under terms of the plan
of reorganization. Accordingly, these consolidated financial statements
reflect $140 million to be paid to HCFA in settlement of claims for all
pre-petition periods, but do not reflect $95 million in contingent
payments to which HCFA may be entitled. See note 4 for discussion of how
the HCFA settlement has been recorded.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(2) Federal Indictments, Conviction, and Reorganization, continued
--------------------------------------------------------------
The accompanying consolidated financial statements include all fines and
restitution assessed in relation to the above matters as an operating
expense in 1995 since the criminal activities to which they relate were
asserted in 1995 and transpired prior to December 31, 1995.
Also pursuant to the terms of the confirmed plan of reorganization:
o Employee claims are to be paid in full on or before the effective
date of the plan of reorganization or at the time payments
thereunder become due and payable.
o Priority tax claims and the claims of general unsecured creditors
are to be paid in full to the extent otherwise due 30 days after
the confirmation date.
o Claims of IHS related to amounts loaned to the Company prior to
the petition date are subordinated to all other creditor claims
under the plan of reorganization.
o All stock options of the Company are terminated in connection with
the merger with IHS. The holders of those options, other than the
principal shareholders and members of their family, are to receive
an amount which approximates $25.78 per option at the date the
merger closed, except for one individual who is to receive no
consideration and one individual who is to receive an amount which
approximates $20.00 per option. Options held by the principal
shareholders and members of their family are considered as equity
interests in the plan of reorganization, resolution of which is
discussed below.
o Holders of equity interests in the Company, including shareholders
and others with contractual rights to receive shares and option
holders not addressed above, are to receive distributions from the
merger consideration as follows:
o The principal shareholders are to receive an amount which
approximates $12.37 at the date the merger closed for each
share of stock and each stock option which they hold.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(2) Federal Indictments, Conviction, and Reorganization, continued
--------------------------------------------------------------
o Other members of the family of the principal shareholders
are to receive an amount which approximates $12.48 at the
date the merger closed for each share and option which they
hold.
o The principal shareholders and members of their family, as a
group, may receive up to an additional $15,000,000 which
would be paid only if the contingent purchase payments
described above are made by IHS.
o Claims of secured creditors are to be paid when due and payable.
o Claims for administrative expenses entitled to priority pursuant
to the U.S. Bankruptcy Code are to be paid in full on or before
the effective date of the plan of reorganization to the extent
that such amounts are then due and payable. Otherwise, such claims
are to be paid in full when payments become due.
o Obligations under executory contracts and unexpired leases, except
those that have been previously rejected, are to be complied with
in the ordinary course of business. To the extent allowed by the
bankruptcy court, claims related to rejected executory contracts
and unexpired leases are to be paid in full to the extent
otherwise due 30 days after the confirmation date.
o IHS will have no liability to HHS on account of events involving
the Company arising prior to December 31, 1996, because such
liabilities will have been provided for as part of the assumption
of the provider agreements with HHS.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(3) Acquisitions
------------
Purchases
---------
During 1995, the Company purchased a Tennessee home health agency for
$450,000, which included $5,000 in furniture and fixtures and $445,000 in
goodwill; a Missouri home health agency for $74,000, which included
$53,000 in furniture and fixtures and $21,000 in goodwill; a Louisiana
home health agency for $17,000, which included $15,000 in furniture and
fixtures and $2,000 in goodwill; two Texas home health agencies for
$211,000, which included $10,000 in furniture and fixtures and $201,000
in goodwill; two Michigan home health agencies for $8,000, which included
$5,000 in furniture and fixtures and $3,000 in goodwill and a New Mexico
home health agency for $59,000 representing goodwill.
During 1994, the Company purchased a Louisiana home health agency for
$124,000, which included $37,000 in supplies and equipment and $87,000 in
goodwill; an Indiana home health agency for $26,000, which was for
supplies and equipment; a Texas home health agency for $35,000, which
included $4,000 in equipment and $31,000 in goodwill; an Oklahoma home
health agency for $53,000, which was for equipment; a Michigan home
health agency for $50,000, which included $49,000 for equipment and
$1,000 for goodwill; a West Virginia home health agency for $60,000,
which included $5,000 in equipment and $55,000 in goodwill; and four
agencies in Missouri for $75,000, which included $54,000 in equipment and
$21,000 in goodwill.
Effective September 17, 1993, a limited partnership agreement (the
Agreement) was executed between ABC GP, Inc. (GP), a newly formed
subsidiary of the Company, and ContinueCare, Ltd., an unrelated third
party. Prior to the execution of the Agreement, ContinueCare, Ltd.
changed its name to ABC/ContinueCare Ltd. (the Partnership). The
Partnership provides skilled nursing care, therapeutic services, health
guidance and other professional care services to patients in a home
health care setting, primarily in the Northeastern United States. GP
acquired a 52 percent ownership interest, 2 percent as general partner
and 50 percent as a limited partner. GP's capital contribution included
$1,500,000 in cash and a nonrecourse note for $5,000,000. GP has pledged
its partnership interests as collateral for the note payable, which has
been eliminated in consolidation. The remaining 48 percent limited
partnership interest is held by three unrelated investors, certain of
whom were shareholders of the acquired company. The Agreement defines the
respective roles and responsibilities of GP and the other owners,
including providing GP with the responsibility of conducting the business
affairs of the Partnership. GP has delegated direction and control of day
to day operations and all record keeping functions to management of the
Partnership.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(3) Acquisitions, continued
-----------------------
Purchases, continued
--------------------
Effective September 17, 1993, the Partnership executed an asset purchase
agreement whereby the Partnership acquired assets and liabilities for
$1,500,000 in cash and a note payable in the amount of $5,000,000. This
transaction was accounted for using the purchase method of accounting.
The execution of the $5,000,000 note payable was treated as a noncash
transaction in the accompanying consolidated statements of cash flows.
Accordingly, the assets acquired and liabilities assumed were recorded at
their fair market value on the date of acquisition, which approximated
their historical book value. The assets acquired included approximately
$40,000 in cash, $472,000 in accounts receivable, $93,000 in inventory
and $227,000 in property and equipment. Liabilities assumed amounted to
approximately $44,000 of accounts payable. The excess of cost over the
fair value of net assets acquired of $5,712,000 was recorded as goodwill
and is being amortized over 15 years. During 1995, the terms of the note
payable were renegotiated, which resulted in a $1,000,000 reduction in
the note payable and related goodwill.
Amortization expense of goodwill for the years ended December 31, 1995,
1994 and 1993 was approximately $492,000, $600,000 and $314,000,
respectively, and is included with depreciation and amortization in the
consolidated statements of operations.
Effective October 11, 1996, GP's general and limited partnership interest
were forfeited and deemed canceled as a result of a default on the
nonrecourse note.
Related Party Pooling of Interest
---------------------------------
Effective January 1, 1994, the Company entered into purchase and sale
agreements with M & J Leasing Company (M & J) for the acquisition of
various real estate and the assumption of related outstanding debt. M & J
is a partnership owned by certain officers that were also the principal
shareholders of the Company. The assets acquired had a net book value of
approximately $3,090,000 and the assumed debt on the assets amounted to
approximately $2,782,000. Because this transaction is between entities
under common control, it has been accounted for in a manner similar to a
pooling of interests. In conjunction with the transaction, the Company
entered into a $1,990,000 promissory note agreement, representing the
difference between the fair market value of the assets of $4,772,000 and
the assumed debt. The amounts are eliminated in consolidation and the
assets and liabilities are stated at historical cost. The promissory note
agreement, including interest at 8%, is to be paid in seven equal annual
installments beginning January 2, 1995. The debt is secured by the
acquired assets. The payments on the agreement are treated as
distributions to the principal shareholders.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(3) Acquisitions, continued
-----------------------
Related Party Pooling of Interest, continued
--------------------------------------------
Effective January 1, 1994, the Company entered into a stock purchase
agreement (the Agreement) with the majority stockholders of the Company
for the acquisition of 100% of the stock of ABC Pharmaceuticals, Inc.,
with a net book value of $577,000. ABC Pharmaceuticals, Inc.
independently operates a retail medical equipment and pharmacy company.
No intercompany operational overlap existed for the periods presented.
Because this transaction is between entities under common control, it has
been accounted for in a manner similar to a pooling of interests. In
conjunction with the stock purchase agreement, the Company entered into a
promissory note in the amount of $1,167,026, which was based on the fair
market value of ABC Pharmaceuticals, Inc. The note, including interest at
8%, is to be paid in seven equal annual installments of $224,203
beginning January 2, 1995. Due to the nature of this transaction, the
note is not reflected on the Company's consolidated financial statements.
In conjunction with the above transactions, payments were made in the
amount of $809,414 and $507,214 during 1995 and 1994, respectively, which
have been included as distributions to majority stockholder in the
accompanying consolidated financial statements.
Effective October 11, 1996 ABC Pharmaceuticals, Inc. entered into an
agreement to sell substantially all of the assets and certain liabilities
of its retail pharmacy and durable medical equipment divisions to an
unrelated party for cash and a note receivable.
(4) Third-Party Rate Adjustments and Revenue
----------------------------------------
Third-Party Rate Adjustments
----------------------------
Approximately 97% of patient service revenue was derived under the
Medicare and Medicaid programs during 1993 through 1995. As described in
note 2, the Company reached an agreement with HCFA related to the
settlement of Medicare overpayments for all pre-petition periods for a
fixed payment of $95 million in October 1996 and contingent payments up
to an additional $140 million. Management has determined that contingent
payments of $45 million are probable (see note 2). Accordingly, the
probable settlement liability has been recorded on a discounted basis in
the accompanying restated consolidated balance sheets and is reflected as
a reduction in net patient revenue in the consolidated statements of
operations.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(4) Third-Party Rate Adjustments and Revenue, continued
---------------------------------------------------
Third-Party Rate Adjustments, continued
---------------------------------------
The liability for estimated Medicare settlements at December 31, 1995 is
summarized as follows:
<TABLE>
<S> <C>
HCFA settlement:
Fixed payments $ 95,000,000
Contingent payments, excluding amounts not
considered to be probable of $95,000,000 45,000,000
---------------
140,000,000
Less amount related to 1996 (10,059,000)
Less interest imputed at 10% to probable
payment dates in 2000 and 2001 (17,020,000)
---------------
$ 112,921,000
</TABLE>
The probable amount of the settlement liability was discounted using an
interest rate estimated to be appropriate for similar debt instruments
which would have been available to IHS as the new exclusive shareholder
of the Company, since the merger with IHS was an integral component of
the plan of reorganization which HCFA accepted and because repayment of
the settlement was guaranteed by IHS. The estimated interest rate used
was 10% per annum and the settlement was discounted from the dates of
actual or probable payments, as determined by management.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(4) Third-Party Rate Adjustments and Revenue, continued
---------------------------------------------------
Third-Party Rate Adjustments, continued
---------------------------------------
The Medicare settlement has been applied to 1995 and prior years, based
on the undisputed portions of the claim made by HCFA to the bankruptcy
court, as follows:
1987-1992 $ 8,657,000
1993 11,406,000
1994 29,286,000
1995 54,618,000
---------------
$ 103,967,000
===============
The obligation for the Medicare settlement at December 31, 1995 includes
the recognition of $8,954,000 of accreted interest cost, including
$5,300,000, $2,156,000 and $923,000 in 1995, 1994 and 1993, respectively.
Revenue
-------
The components of net patient service revenue (including the effect of
the relevant portions of the 1996 HCFA settlement described above), for
the years ended December 31, are as follows:
<TABLE>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Medicare patient service revenue $ 751,471,646 623,516,645 404,929,518
Medicaid patient service revenue 9,475,555 14,135,592 8,061,868
Other patient service revenue 26,344,983 19,162,528 15,257,830
----------------- ------------------ ------------------
787,292,184 656,814,765 428,249,216
Contractual adjustments and other
deductions (229,092,800) (210,348,256) (92,540,377)
----------------- ------------------ ------------------
Net patient service revenue $ 558,199,384 446,466,509 335,708,839
================= ================== ==================
</TABLE>
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(4) Third-Party Rate Adjustments and Revenue, continued
---------------------------------------------------
Patient Receivables
-------------------
Medicare patient receivables approximated 86% and 82% of total patient
receivables as of December 31, 1995 and 1994, respectively.
(5) Property and Equipment
----------------------
Property and equipment, at December 31, are summarized as follows:
<TABLE>
1995 1994
---- ----
<S> <C> <C>
Computer equipment and software under
capital leases $ 15,320,913 13,824,904
Furnishings, fixtures, and equipment 16,412,941 12,792,141
Buildings 5,945,495 5,351,351
Aircraft and transportation vehicles 4,335,766 4,298,334
Building and leasehold improvements 3,614,555 1,870,057
Land 799,325 730,556
----------------- -----------------
46,428,995 38,867,343
Less accumulated depreciation (19,322,192) (13,837,900)
----------------- -----------------
Property and equipment, net $ 27,106,803 25,029,443
================= =================
</TABLE>
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(6) Other Assets
------------
Other assets, at December 31, are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Agency start-up costs $ 3,256,443 3,244,180
Computer license agreements 404,521 430,631
Certificates of need 428,390 405,684
Educational materials 170,345 240,222
Noncompete agreements 220,000 220,751
Deferred loan costs 744,266 151,064
Copy rights 9,981 -
---------------- ---------------
5,233,946 4,692,532
Less accumulated amortization (2,698,508) (2,225,159)
---------------- ---------------
Net intangible assets 2,535,438 2,467,373
Deposits 421,464 808,698
Cash surrender value - officer's life
insurance net of loans and accrued interest
to the Company of $360,000 and $356,000 173,408 133,538
---------------- ---------------
3,130,310 3,409,609
Less current portion (744,266) -
---------------- ---------------
Other assets, net $ 2,386,044 3,409,609
================ ===============
</TABLE>
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(7) Long-term Debt and Capitalized Lease Obligations
------------------------------------------------
Long-term debt and capitalized lease obligations, at December 31, are
summarized as follows:
<TABLE>
1995 1994
---- ----
<S> <C> <C>
Note payable to a vendor, due May 2000, principal plus interest at
12% payable in monthly installments
of $153,148, secured by computer equipment $ 6,186,293 6,884,776
Capitalized leases from a vendor, principal plus interest at varying
rates payable in monthly installments, secured by computer
equipment, net of interest and maintenance fees of $640,663
and $1,489,400, in 1995 and 1994, respectively 2,710,706 5,490,937
Note payable due in semi-annual installments of $500,000 on March 31
and September 30, plus interest at 7% through September 30,
1998. Secured by assets acquired and liabilities assumed
pursuant to the ABC/ CotinueCare, Ltd. partnership
agreement (see note 3) 2,547,124 4,000,000
Note payable to an institution, due August 1999, principal plus
interest payable monthly, with interest payable at varying
amounts with a maximum rate of prime plus 1%, secured by
an aircraft 1,260,670 1,541,816
Note payable to a bank, due December 2002, principal payments of
$6,000 plus interest at prime plus 2%,
due monthly, secured by real estate 1,050,700 1,154,000
Capitalized lease from a vendor, principal plus
interest at 5.725%, payable in monthly installments
of $22,830, secured by an aircraft 577,071 810,686
<PAGE>
<CAPTION>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(7) Long-term Debt and Capitalized Lease Obligations, continued
-----------------------------------------------------------
1995 1994
---- ----
Note payable to a bank, due December 1997, principal
plus interest at 8.75%, payable in monthly
installments of $7,033, secured by real estate $ - 561,389
Capitalized leases from a vendor, principal plus interest at varying
rates, payable in monthly installments, secured by equipment,
net of interest and maintenance fees of $76,441 and $106,187
in 1995 and 1994, respectively 288,733 486,607
Note payable to a bank, due November 2007, principal plus interest at
prime plus 2%, payable in monthly
installments of $5,278, secured by real estate 464,378 473,381
Note payable to a bank, due November 2003, principal
plus interest at 8.25%, payable in monthly
installments of $4,478, secured by real estate 309,665 336,640
Note payable to a bank, due May 1996, principal plus interest at
prime plus 2%, payable in monthly
installments of $4,080, secured by real estate 306,377 320,722
Capitalized lease from a vendor, principal plus interest at the 90
day commercial paper rate, payable in quarterly installments of
$25,556, secured by telephone equipment 227,657 305,729
Capitalized lease from a vendor, principal plus
interest at 7%, payable in monthly installments of
$8,457, secured by computer equipment 162,758 264,457
Note payable to a bank, due November 2002, principal plus interest at
prime plus 2%, payable in monthly
installments of $3,271, secured by real estate 218,080 229,699
<PAGE>
<CAPTION>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(7) Long-term Debt and Capitalized Lease Obligations, continued
-----------------------------------------------------------
1995 1994
---- ----
Note payable to a bank, due October 2004, principal plus interest at
prime plus 3%, payable in monthly
installments of $1,996, secured by real estate $ 132,582 139,734
Note payable to an individual, due July 1999,
principal payments of $2,500 due monthly, relating
to a noncompete agreement, non-interest bearing 108,306 138,306
Capitalized lease from a vendor, principal plus
interest at 9.50%, payable in monthly installments
of $1,589, secured by real estate 131,507 137,757
Note payable to a bank, due December 1996,
interest payable monthly at a rate of LIBOR
plus 1.5%, secured by IHS letter of credit 18,000,000 -
Note payable to acquired corporation, due January 1998, payable in
annual principal payments of $100,000 and $125,000 plus interest
bearing a fixed rate of 7.5%, secured by equipment and
intangibles 325,000 -
Note payable to acquired corporation, due
February 1996, principal plus interest at 8%
payable in one installment 100,000 -
Notes payable to banks and others with interest varying from 8% to
20%, due in varying monthly installments through October 2004,
secured by certain real estate, furniture, fixtures, inventory
and equipment $ 634,566 790,683
--------------- ----------------
35,742,173 24,067,319
Less current maturities (25,607,743) (6,149,083)
--------------- ----------------
Total long-term debt and capitalized lease
obligations $ 10,134,430 17,918,236
=============== ================
</TABLE>
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(7) Long-term Debt and Capitalized Lease Obligations, continued
-----------------------------------------------------------
Payments on debt and capitalized lease obligations for the years
subsequent to December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996 $ 26,460,898
1997 3,591,598
1998 2,544,853
1999 2,333,284
2000 1,197,805
Thereafter 768,262
---------------
Total outstanding debt and minimum lease
payments on capitalized lease obligations 36,896,700
Less amount representing interest and
maintenance (1,154,527)
---------------
Total outstanding debt and present value of
minimum lease payments 35,742,173
Less current portion (25,607,743)
---------------
Total debt and present value of minimum
lease payments, noncurrent $ 10,134,430
===============
</TABLE>
As a result of the Company filing for bankruptcy on February 21, 1996,
$830,692 of long-term debt has been reclassified as current in the
accompanying consolidated financial statements.
Subsequent to December 31, 1995, the $18 million dollar note payable to
bank was called and paid by IHS.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(8) Accounts Payable and Accrued Expenses
-------------------------------------
Accounts payable and accrued expenses at December 31, 1995 and 1994 are
summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Accounts payable $ 11,240,131 11,472,762
Accrued payroll and related liabilities 18,118,419 18,060,154
Accrued pension costs 19,446,713 31,084,592
Accrued vacation 21,135,081 19,871,983
Accrued workers' compensation and other claims 11,302,295 9,168,787
Accrued penalties and fines 33,110,710 5,949,630
Accrued interest 3,850,408 2,036,375
Other accrued expenses 26,939,128 4,086,467
---------------- ---------------
$ 145,142,885 101,730,750
================ ===============
</TABLE>
(9) Pension Plans
-------------
Employee Stock Ownership Plan and Stock Subscriptions Receivable
----------------------------------------------------------------
The Company established the ABC Employee Stock Ownership Plan (the Plan)
which covers substantially all employees. The amount of contributions is
established by the Board of Directors annually based on the compensation
of eligible plan participants. Pension expense related to the plan
recognized in the accompanying consolidated financial statements
approximates $17,790,000, $12,563,000 and $8,426,000 based on 7% of
participants' compensation in 1995, 1994 and 1993, respectively. All
legal and accounting costs of the Plan are paid by the Company. See note
11 for a discussion of certain tax matters relating to the Plan.
The Department of Labor of the federal government challenged the basis
for valuation of certain stock transactions between the Company, the
majority stockholders, and the Plan. The Department of Labor contended
that the valuation assigned to the stock at the dates of the transactions
was in excess of a reasonable fair market value. Pending resolution of
this matter, the Company recorded cash amounts received from the Plan
during 1989 through 1993 as common stock subscriptions.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(9) Pension Plans, continued
------------------------
Employee Stock Ownership Plan and Stock Subscriptions Receivable,
-------------------------------------------------------------------------
continued
---------
In July 1992, the litigation was settled for all years prior to 1989. The
settlement required the Company and the majority stockholders to
repurchase the Company stock from the Plan for $1,881,162, plus 7% annual
interest from the judgment date, payable in quarterly installments of
$250,000. The Company paid this obligation in full during the period from
October 1992 through July 1994.
In December 1994, the litigation was settled for all years after 1988.
The settlement required the Company, on December 29, 1994, to amend and
restate the Plan into a tax-qualified money purchase plan known as the
First American Health Care of Georgia, Inc. Pension Plan (the Restated
Pension Plan). In addition, on March 15, 1995, the Company made a payment
to the Restated Pension Plan for the repurchase of the common stock
subscriptions in the amount of $14,530,644 plus $2,566,586 representing
compensation for foregone interest earnings. The foregone interest
earnings are included in other accrued liabilities at December 31, 1994
and interest expense for 1994 in the accompanying consolidated financial
statements.
Deferred Compensation Plan
--------------------------
The Company has a 401(k) savings plan (the Savings Plan) available to
substantially all employees which was established in 1993. The Company
matches certain percentages of its employees' contributions, and expense
related to the Savings Plan amounted to approximately $4,560,000,
$3,070,000 and $2,165,000 for the years ended December 31, 1995, 1994,
and 1993, respectively. The related liability at December 31, 1995 and
1994 is approximately $2,984,000 and $1,262,000, respectively, and is
included as accrued pension costs in the accompanying consolidated
financial statements.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(10) Stockholders' Deficit
---------------------
The Company has 500,000 shares of preferred stock authorized. No
preferred shares have been issued. Common stock consists of shares of
common stock and Class B common stock as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Common Stock - no par value
Authorized 20,000,000 20,000,000
Issued 5,000 -
Held in Treasury 4,000 -
Class B Common Stock - no par value
Authorized 10,000,000 10,000,000
Issued 3,078,700 3,003,700
Held in Treasury 904,100 904,100
</TABLE>
In July 1994, the Company authorized a 100 for 1 stock split of Class B
common stock. Class B common stock and common stock have voting rights of
10 and 1 per share, respectively. In 1995, the Company recognized
approximately $936,000 of expense related to the issuance of 75,000
shares of Class B common stock, which has been included in general and
administrative expenses in the accompanying consolidated financial
statements.
Nonqualified Stock Option Plan
------------------------------
The Company's stockholders adopted a Nonqualified Stock Option Plan in
1994 (the 1994 Plan). The 1994 Plan allowed the Board to grant stock
options to purchase the Company's common stock at an exercise price of $1
per share. Options issued under the 1994 Plan were vested immediately
upon issuance and were generally scheduled to expire on July 25, 2005.
The 1994 Plan provided for the granting of 1,000,000 options. The Company
granted 376,771 and 258,671 options under the 1994 Plan during 1995 and
1994, respectively, to owners, directors, key employees and consultants,
some of which are related to the majority shareholders. Accordingly, at
December 31, 1995 and 1994, there were 364,558 and 741,329, respectively,
of options available for future grant under the 1994 Plan.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(10) Stockholders' Deficit, continued
--------------------------------
Nonqualified Stock Option Plan, continued
-----------------------------------------
The fair value of the options and the related compensation expense
recognized by the Company under the 1994 Plan were determined based on
the amounts to be paid to the option holders by IHS upon the closing of
the merger in 1996. Management believes such fair value of options is the
most meaningful and informative measure for inclusion in the accompanying
consolidated financial statements. Accordingly, the Company has
recognized approximately $7,597,000 and $4,902,000 of expense in 1995 and
1994, respectively, which has been included in general and administrative
expenses in the accompanying consolidated financial statements.
During 1995, a total of 5,000 options were exercised at prices ranging
from $47 to $53 per option for the purchase of Class B common stock.
Subsequently, 4,000 shares were repurchased by the Company back into
treasury at a price of $54 per share.
(11) Income Taxes
------------
The provision (benefit) for income tax for the years ended December 31,
are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 1,342,000 9,585,000 942,000
State 252,000 1,800,000 177,000
------------- ------------- -------------
1,594,000 11,385,000 1,119,000
Deferred:
Federal - - -
State - - -
------------- ------------- -------------
- - -
------------- ------------- -------------
Total income tax expense $ 1,594,000 11,385,000 1,119,000
============= ============= =============
</TABLE>
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(11) Income Taxes, continued
-----------------------
Income tax expense differed from the amount computed by applying the
statutory federal income tax rate of 34% to income taxes as a result of
the following:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense $ (36,986,000) (14,936,000) (4,909,000)
State income tax, net of federal benefit (2,957,000) (1,494,000) (535,000)
Non-deductible penalties 10,581,000 1,860,000 191,000
Goodwill amortization 71,000 71,000 69,000
Non-deductible meals and entertainment 175,000 172,000 54,000
Other, net 771,000 6,000 -
Increase in valuation allowance 29,939,000 25,706,000 6,249,000
------------- ------------- -------------
Income tax expense $ 1,594,000 11,385,000 1,119,000
============= ============= =============
</TABLE>
The components of the net deferred tax asset at December 31, are as
follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Accelerated depreciation $ (2,558,000) (2,590,000)
Accrued third party settlement liability 394,000 285,000
Accrued Medicare payable 41,758,000 20,705,000
Accrued pension cost - 4,779,000
Other accruals not yet deductible for tax 24,313,000 13,243,000
Non-qualified stock options granted 4,654,000 1,860,000
Accounts receivable valuation allowance 1,828,000 2,168,000
--------------- ---------------
Net deferred tax asset before valuation
allowance 70,389,000 40,450,000
Less valuation allowance (70,389,000) (40,450,000)
--------------- ---------------
Net deferred tax asset $ - -
=============== ==============
</TABLE>
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(11) Income Taxes, continued
-----------------------
The consolidated financial statements include no cumulative effect of
initial adoption of SFAS 109 on 1993 income as the net deferred tax asset
as of the adoption date in the amount of $8,495,000 was fully offset by a
valuation allowance. As of December 31, 1993, a valuation allowance fully
offset the December 31, 1993 net deferred tax asset of $14,744,000.
Accordingly, no deferred tax asset has been recorded at December 31,
1993.
The Company did not fund its 1994 Plan contribution of $12,588,000 by
September 15, 1995 as required by federal and state income tax
regulations. Accordingly, the 1994 expense for the Plan is not currently
deductible for both federal and state income tax purposes. In accordance
with Department of Labor regulations, the Company incurred an excise tax
of approximately $1,384,000 as a result of not funding its contribution
to the Plan by the required date which is included with other accrued
liabilities in the accompanying consolidated financial statements.
(12) Related Party Transactions and Relationships
--------------------------------------------
Summary of amounts due from (to) related parties at December 31, are as
follows:
<TABLE>
<CAPTION>
1995 1994
Due from Due from
(to) related (to) related
parties parties
------- -------
<S> <C> <C>
Current
Majority Stockholders $ (4,387) 10,780
Officers and others for ABC Home
Nursing, Inc. (180,000) (180,000)
------------- --------------
Total current portion $ (184,387) (169,220)
============= ==============
Long-term
Officers and others for ABC Home
Nursing, Inc. $ (180,000) (360,000)
============= ==============
</TABLE>
The Company entered into the following related party transactions and
maintains the following related party relationships:
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(12) Related Party Transactions and Relationships, continued
-------------------------------------------------------
ABC Home Nursing, Inc.
----------------------
On March 23, 1992, the Company acquired 100% of the stock (82.5 shares)
of ABC Home Nursing, Inc., which had a net asset value of approximately
$570,000, comprised primarily of accounts receivable, for a purchase
price of $1,200,000, resulting in goodwill of approximately $630,000.
Payment was made in the form of $300,000 in cash and issuance of
promissory notes aggregating $900,000. The promissory notes are being
paid in annual installments of $180,000. The total outstanding balance on
the notes was $360,000 and $540,000 at December 31, 1995 and 1994,
respectively, and is included in amounts due to officers and others in
the schedule above.
The acquisition was accounted for under the purchase method of
accounting. At the date of acquisition, the majority stockholders of the
Company owned a one-third interest in ABC Home Nursing, Inc. and two
members of Company management owned the remaining two-thirds interest.
ABC Home Nursing, Inc. provided private duty nursing, homemaker and
sitter services. In addition, ABC Home Nursing, Inc. had a 75% ownership
interest in Atlanta Home Care, a joint venture with a hospital located in
Atlanta. Subsequent to the date of acquisition, the operations of ABC
Home Nursing, Inc. were transferred to existing operating divisions of
the Company. Atlanta Home Care is consolidated with the Company in the
accompanying consolidated financial statements.
Effective January 1, 1994, ABC Home Nursing, Inc. acquired the remaining
25% of Atlanta Home Care, which was accounted for as a pooling of
interest. In conjunction with the acquisition, the Company forgave a
receivable balance of approximately $77,000 relating to the minority
partner's cumulative share of the losses of Atlanta Home Care. The
forgiveness of this note receivable was treated as a noncash transaction
in the accompanying consolidated statements of cash flows.
Majority Stockholders
---------------------
Occasionally, the Company pays certain expenses and makes advances to the
majority stockholders. Interest accrues at 8% per annum on such advances
until repaid. These receivables are included in amounts due from related
parties in the accompanying consolidated financial statements and are
summarized above.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(13) Operating Leases
----------------
At December 31, 1995, the Company had numerous noncancelable operating
leases, primarily for home health agency buildings and equipment,
expiring on various dates through 2004.
Expenses for these operating lease agreements were approximately
$22,422,000, $17,555,000 and $14,358,000 for 1995, 1994 and 1993,
respectively.
Future minimum rental payments on noncancelable operating leases as of
December 31, 1995 are as follows:
1996 $ 21,610,927
1997 16,902,077
1998 10,439,901
1999 5,951,453
2000 2,400,665
Thereafter 5,988,349
-------------
$ 63,293,372
===============
(14) Commitments and Litigation
--------------------------
Health Insurance
----------------
The Company is self-insured for group health insurance. The Company
maintains reinsurance through a commercial excess-coverage policy which
covers annual individual claims in excess of $100,000 for the plan year
ending July 31, 1995. Amounts expensed under the group health insurance
program amounted to approximately $22,968,000, $14,204,000 and
$10,040,000 in 1995, 1994 and 1993, respectively.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(14) Commitments and Litigation, continued
-------------------------------------
Workers Compensation Insurance
------------------------------
The Company is self-insured for the first layer of its workers
compensation insurance. The Company has secured commercial coverage on an
occurrence basis for individual claims in excess of $350,000. The
estimated liability related to this exposure, including incurred but not
reported claims, has been estimated based on the Company's historical
data and is included in other accrued liabilities in the accompanying
consolidated financial statements. Restricted cash, which is on deposit
with the third party administrator, is restricted to pay these claims and
is reflected in the accompanying consolidated financial statements.
Malpractice Insurance
---------------------
The Company insures its malpractice risk on a claims-occurrence basis.
The Company secured claims-occurrence coverage through December 31, 1995
and management has renewed this coverage through fiscal 1996.
The Company is involved in litigation arising from the ordinary course of
business. Claims alleging malpractice have been asserted against the
Company and are currently in various stages of litigation. It is the
opinion of management, however, that estimated malpractice costs accrued
at December 31, 1995, are adequate to provide for potential losses
resulting from pending or threatened litigation.
Management Contracts
--------------------
Under the terms of some management contracts with third-party clients,
the Company is contingently liable for a limited portion of any costs
ultimately determined to be in excess of limits established by the
Medicare program.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(14) Commitments and Litigation, continued
-------------------------------------
Other Litigation
----------------
In 1993, the Company commenced litigation against a vendor for damages
arising from an alleged breach of contract. The vendor filed a
counterclaim against the Company. In May 1995, a settlement was reached
and because the conditions surrounding the settlement existed at December
31, 1994, the details of the settlement have been recorded in the
accompanying consolidated financial statements as of December 31, 1994.
The settlement included certain financing and a credit of $3,000,000 for
future equipment purchases. As a result of the settlement, approximately
$7,000,000 relating to amounts payable to the vendor which were included
in accounts payable at December 31, 1993 have been reclassed to notes
payable at December 31, 1994, in accordance with the settlement payment
plan.
The Company is also involved in various litigation and investigations
arising in the ordinary course of business including certain acquisitions
and employment matters. It is the opinion of management, however, that
the estimated accrued expenses at December 31, 1995, are adequate to
provide for potential losses resulting from pending or threatened
litigation.
(15) Clinic Sale
-----------
On April 19, 1995, the Company sold 100% of the common stock of the Rural
Health Clinic of Louisiana, Inc. to an unrelated third party for
$313,000. The third party subsequently defaulted on the promissory note
that was issued in connection with this sale. The Company is in the
process of foreclosing on the promissory note in order to secure their
interest in the common stock which was pledged by the third party as
security on the note.
During 1996, the company entered into a Stock Purchase Agreement with
another third party to sell the Company's interest in all of the common
stock of the Rural Health Clinic of Louisiana, Inc. for $120,000.
The unpaid balance on the original promissory note as of December 31,
1995 has been reduced to an estimated net realizable value of $120,000,
and is included in accounts receivable-other in the accompanying
consolidated financial statements.
<PAGE>
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC. AND SUBSIDIARIES
f/k/a ABC HOME HEALTH SERVICES, INC.
Notes to Consolidated Financial Statements
(16) Fair Value of Financial Instruments
-----------------------------------
The carrying amounts reported in the consolidated balance sheet at
December 31, 1995 for financial instruments approximate fair value as
determined by management.
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma condensed financial information gives effect to
(i) the sale by the Company of its pharmacy division in July 1996 (the "Pharmacy
Sale"), (ii) the sale of a majority interest in its assisted living services
subsidiary in October 1996 (the "ILC Offering") and (iii) the acquisition of (a)
Vintage Health Care Center, a skilled nursing and assisted living facility, in
January 1996 (the "Vintage Acquisition"), (b) Rehab Management Systems, Inc., an
outpatient rehabilitation company in March 1996 (the "RMS Acquisition"), (c)
Hospice of the Great Lakes, Inc., a hospice company, in May 1996 (the "Hospice
Acquisition"), (d) J.R. Rehab Associates, Inc. an inpatient and outpatient
rehabilitation center, in August 1996 (the "J.R. Rehab Acquisition"), (e)
Extendicare of Tennessee, Inc., a home health company, in August 1996 (the
"Extendicare Acquisition"), (f) Edgewater Home Infusion Services, Inc., a home
infusion company, in August 1996 (the "Edgewater Acquisition"), (g) Century Home
Services, Inc., a home health services company, in September 1996 (the "Century
Acquisition"), (h) Signature Home Care, Inc., a home health company, in
September 1996 (the "Signature Acquisition"), and (i) First American Health Care
of Georgia, Inc., a home health company, in October 1996 ("the First American
Acquisition").
The pro forma balance sheet at September 30, 1996 was prepared as if
the ILC Offering and the First American Acquisition were consummated at
September 30, 1996. The Pharmacy Sale, the Vintage Acquisition, the RMS
Acquisition, the Hospice Acquisition, the J.R. Rehab Acquisition, the
Extendicare Acquisition, the Edgewater Acquisition, the Century Acquisition and
the Signature Acquisition were all consummated prior to September 30, 1996 and
are therefore reflected in the actual September 30, 1996 balance sheet. The pro
forma statements of operations for the year ended December 31, 1995 and the nine
months ended September 30, 1996 were prepared as if (i) the Pharmacy Sale, (ii)
the ILC Offering, (iii) the Vintage Acquisition, (iv) the RMS Acquisition, (v)
the Hospice Acquisition, (vi) the J.R. Rehab Acquisition, (vii) the Extendicare
Acquisition, (viii) the Edgewater Acquisition, (ix) the Century Acquisition, (x)
the Signature Acquisition, and (xi) the First American Acquisition were
consummated on January 1, 1995.
The pro forma adjustments are based upon available information and
certain assumptions that management believes are reasonable. The unaudited pro
forma financial information set forth below is not necessarily indicative of the
Company's financial position or the results of operations that actually would
have occurred if the transactions had been consummated on the dates shown. In
addition, they are not intended to be a projection of results that may be
obtained by the Company in the future.
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
PRO FORMA CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ILC
IHS Adjustment(1)
Actual -------------
Assets ------ Increase/(Decrease)
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 41,127 $ (144) (a)
Restricted Cash
Temporary investments 1,896
Patient accounts and third-party payor settlements
receivable, less allowance for doubtful receivables 261,563 (280) (a)
Supplies, inventories, prepaid expenses
and other current assets 22,415 (248) (a)
------------- -------------
Total current assets 327,001 (672)
------------- -------------
Property, plant and equipment, net 851,533 (53,393) (a)
Intangible assets 330,167
Investments 55,142 24,772 (b)
Other assets 93,342 (5,918) (a)(c)
------------- -------------
Total assets $ 1,657,185 $ (35,211)
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 3,612 $
Accounts payable and accrued expenses 207,880 (14,586) (a)
------------- -------------
Total current liabilities 211,492 (14,586)
------------- -------------
Long-term Debt:
Convertible subordinated debentures 258,750
Other long-term debt less current maturities 596,152 (17,851) (d)
------------- -------------
Total long-term debt 854,902 (17,851)
------------- -------------
Other-long term liabilities
Deferred income taxes 55,797
Deferred gain on sale-leaseback transactions 6,500
Stockholders' equity:
Common stock, $0.001 par value. Authorized
150,000,000 shares 23
Additional paid-in capital 438,880
Retained earnings (deficit) 78,108 (2,774) (e)
Unrealized gain on available for sale securities 11,483
------------- -------------
Net stockholders' equity 528,494 (2,774)
------------- -------------
Total liabilities and stockholders' equity $ 1,657,185 $ (35,211)
============= =============
</TABLE>
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
PRO FORMA CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996
(continued)
<TABLE>
<CAPTION>
First American
-------------- Pro Forma
Actual(2) Adjustments Consolidated
--------- ----------- ------------
<S> <C> <C> <C>
Assets
------
Current Assets:
Cash and cash equivalents $ 36,229 77,212
Restricted Cash 11,946 11,946
Temporary investments 1,896
Patient accounts and third-party payor settlements
receivable, less allowance for doubtful receivables 32,359 293,642
Supplies, inventories, prepaid expenses
and other current assets 6,390 28,557
------------ ---------------
Total current assets 86,924 413,253
------------ ---------------
Property, plant and equipment, net 23,559 821,699
Intangible assets 2,233 245,356 (f) 577,756
Investments 79,914
Other assets 2,220 (18,000)(g) 71,644
------------ -------------- ---------------
Total assets $ 114,936 227,356 1,964,266
============ ============== ===============
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 25,410 (18,000)(g) 11,022
(164,676)(h)
Accounts payable and accrued expenses 281,938 15,000 (i) 325,556
------------ -------------- ---------------
Total current liabilities 307,348 (167,676) 336,578
------------ -------------- ---------------
Long-term Debt:
Convertible subordinated debentures 0 258,750
Other long-term debt less current maturities 6,557 165,000 (j) 749,858
------------ -------------- ---------------
Total long-term debt 6,557 165,000 1,008,608
------------ -------------- ---------------
Other-long term liabilities 31,063 0 31,063
Deferred income taxes 0 55,797
Deferred gain on sale-leaseback transactions 6,500
Stockholders' equity:
Common stock, $0.001 par value. Authorized
150,000,000 shares 2,938 (2,938)(k) 23
Additional paid-in capital 9,985 (9,985)(k) 438,880
Retained earnings (deficit) (242,955) 242,955 (k) 75,334
Unrealized gain on available for sale securities 0 11,483
------------ -------------- ---------------
Net stockholders' equity (230,032) 230,032 525,720
------------ -------------- ---------------
Total liabilities and stockholders' equity $ 114,936 227,356 1,964,266
============ ============== ===============
</TABLE>
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
PRO FORMA STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
IHS Pharmacy ILC
Actual Adjustments(3) Adjustments(1)
------ -------------- --------------
<S> <C> <C> <C>
Net revenues:
Basic medical services $ 296,468 0 0
Specialty medical services 658,297 (52,331)(l) (16,101)(l)
Management services and other 33,953 0 (1,020)(l)
Gain on sale of assets 34,298 (34,298)(m) 0
----------- ------------ -----------
Total revenues 1,023,016 (86,629) (17,121)
Costs and expenses:
Operating, general and administrative expenses 787,510 (43,279)(l) (12,453)(l)
Depreciation and amortization 28,635 (1,785)(l) (833)(l)
Rent 53,980 (838)(l) (1,885)(l)
Interest, net 46,033 (3,695)(n) (932)(q)
----------- ------------ -----------
Total costs and expenses 916,158 (49,597) (16,103)
Earnings(loss) before equity in earnings of 106,858 (37,032) (1,018)
affiliates and income taxes
Equity in earnings of affiliates 1,083 0 0
----------- ------------ -----------
Earnings (loss) before income taxes 107,941 (37,032) (1,018)
============ ===========
Federal and state income taxes 62,353
-----------
Earnings before extraordinary items 45,588
Extraordinary items 1,431
-----------
Net Earnings 44,157
===========
Per Common Share:
Earnings before extraordinary items - primary $ 1.95
Earnings before extraordinary items - fully diluted 1.68
Net Earnings - primary 1.89
Net Earnings - fully diluted 1.64
Weighted Average Shares:
Primary 23,393
Fully-diluted 31,477
</TABLE>
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
PRO FORMA STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(continued)
<TABLE>
<CAPTION>
First American Other Acquisitions
-------------- ------------------ Pro
Actual (2) Adjustments Actual (4) Adjustments Forma
---------- ----------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
Net revenues:
Basic medical services 0 292 296,760
Specialty medical services 367,698 87,109 1,044,672
Management services and other 2,956 3 35,892
Gain on sale of assets 0 0 0
------------ ---------- ------------
Total revenues 370,654 87,404 1,377,324
Costs and expenses:
Operating, general and administrative expenses 387,970 88,112 1,207,860
Depreciation and amortization 4,990 4,600 (o) 565 848 (o) 37,020
Rent 0 1,770 53,027
Interest, net 5,770 8,613 (p) 1,720 1,002 (p) 58,511
------------ ---------- ---------- --------- ------------
Total costs and expenses 398,730 13,213 92,167 1,850 1,356,418
Earnings (loss)before equity in earnings (28,076) (13,213) (4,763) (1,850) 20,906
of affiliates and income taxes
Equity in earnings of affiliates (173) 1,032 1,942
------------ ---------- ---------- --------- ------------
Earnings (loss) before income taxes (28,249) (13,213) (3,731) (1,850) 22,848
============ ========== ========== =========
Federal and state income taxes 8,796 (r)
------------
Earnings before extraordinary items 14,052
Extraordinary items 1,431
------------
Net Earnings 12,621
============
Per Common Share:
Earnings before extraordinary items - primary 0.59
Earnings before extraordinary items - fully diluted 0.67
Net Earnings - primary 0.53
Net Earnings - fully diluted 0.63
Weighted Average Shares:
Primary 23,831
Fully-diluted 31,915
</TABLE>
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
PRO FORMA STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
First American
IHS Pharmacy ILC --------------
Actual Adjustments (3) Adjustments(1) Actual(2)
------ --------------- -------------- ---------
<S> <C> <C> <C> <C>
Net revenues:
Basic medical services $ 368,569 0 0 0
Specialty medical services 770,554 (73,566)(l) (15,123)(l) 558,199
Management services and other 39,765 0 (1,146)(l) 5,548
------------ ------------ ----------- ----------
Total revenues 1,178,888 (73,566) (16,269) 563,747
Costs and expenses:
Operating, general and administrative expenses 944,567 (63,082)(l) (12,285)(l) 657,005
Depreciation and amortization 39,961 (2,681)(l) (414)(l) 6,936
Rent 66,125 (1,227)(l) (2,430)(l) 0
Interest, net 38,977 (6,798)(n) (1,333)(q) 9,717
Loss on impairment 109,106 0 (5,126)(l) 0
Other non-recurring charges 23,854 0 0 0
------------ ------------ ----------- ----------
Total costs and expenses 1,222,590 (73,788) (21,588) 673,658
Earnings(loss) before equity in earnings of
affiliates and income taxes (43,702) 222 5,319 (109,911)
Equity in earnings of affiliates 1,443 0 0 1,129
------------ ------------ ----------- ----------
Earnings(loss) before income taxes (42,259) 222 5,319 (108,782)
============ =========== ==========
Federal and state income tax benefit (16,270)
------------
Loss before extraordinary items (25,989)
Extraordinary items 1,013
------------
Net Loss (27,002)
============
Per Common Share:
Loss before extraordinary items - primary $ (1.21)
Loss before extraordinary items - fully diluted (1.21)
Net Loss - primary (1.26)
Net Loss - fully diluted (1.26)
Weighted Average Shares:
Primary 21,463
Fully-diluted 21,463
</TABLE>
<PAGE>
INTEGRATED HEALTH SERVICES,INC.
PRO FORMA STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(continued)
<TABLE>
<CAPTION>
First American Other Acquisitions
-------------- ------------------ Pro
Adjustments Actual(4) Adjustments Forma
----------- --------- ----------- -----
<S> <C> <C> <C> <C>
Net revenues:
Basic medical services 3,505 372,074
Specialty medical services 128,349 1,368,413
Management services and other 37 44,204
----------
-------------
Total revenues 131,891 1,784,691
Costs and expenses:
Operating, general and administrative expenses 131,335 1,657,540
Depreciation and amortization 6,134 (o) 1,804 1,561 (o) 53,301
Rent 1,326 63,794
Interest, net 12,326 (p) 1,585 2,192 (p) 56,666
Loss on impairment 0 103,980
Other non-recurring charges 0 23,854
----------- ---------- --------- -------------
Total costs and expenses 18,460 136,050 3,753 1,959,135
Earnings(loss) before equity in earnings of
affiliates and income taxes (18,460) (4,159) (3,753) (174,444)
Equity in earnings of affiliates 942 3,514
----------- ---------- --------- -------------
Earnings(loss) before income taxes (18,460) (3,217) (3,753) (170,930)
=========== ========== =========
Federal and state income tax benefit (65,808)(r)
-------------
Loss before extraordinary items (105,122)
Extraordinary items 1,013
-------------
Net Loss (106,135)
=============
Per Common Share:
Loss before extraordinary items - primary (4.70)
Loss before extraordinary items - fully diluted (4.70)
Net Loss - primary (4.75)
Net Loss - fully diluted (4.75)
Weighted Average Shares:
Primary 22,350
Fully-diluted 22,350
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(1) In Octber 1996, Integrated Living Communities, Inc. ("ILC"), a wholly-owned
subsidiary of the Company which provides assisted living and related services to
the private pay elderly market, completed its initial public offering. Total
proceeds to the Company were approximately $17.8 million, including a $7.4
million loan repayment. The Company continues to own approximately 37% of the
outstanding common stock of ILC. The Compamy used the net proceeds from the sale
to repay borrowings under its revolving credit facility. The Company expects to
record a pre-tax loss of approximately $4.5 million in the fourth quarter of
1996 as a result of this transaction.
(2) In October 1996, the Company acquired through merger First American. The
purchase price was $154.1 million in cash, which the Company borrowed under its
revolving credit facility, plus contingent payments of up to $155 million.
(3) In July 1996, the Company sold its pharmacy division to Capstone Pharmacy
Services, Inc. ("Capstone") for a purchase price of $150 million, consisting of
$125 million in cash and shares of Capstone stock having a value of $25 million.
The Company used the net proceeds of the sale to repay borrowings under its
revolving credit facility. The company had a pre-tax gain of $34.3 million
($300,000 gain after income taxes). See the Company's Current Report on Form
8-K, dated July 30, 1996.
(4) Consists of the following Acquisitions:
VINTAGE ACQUISITION
In January 1996, the Company purchased Vintage Health Care Center, a
220 skilled nursing and assisted living facility in Denton, Texas for $6.9
million. A condominium interest in the assisted living portion of this facility
was contributed to ILC on June 1, 1996, valued at $3.5 million.
RMS ACQUISITION
In March 1996, the Company acquired Rehab Management Systems, Inc.
("RMS"), which operates rehabilitation therapy clinics in central Florida. RMS
also managed one therapy and one physician clinic. Total purchase price was
$10.0 million, including $8.0 million representing the issuance of 385,542
shares. In addition, the Company incurred direct costs of acquisition of $2.9
million. Total goodwill at the date of acquisition was $12.7 million.
HOSPICE OF THE GREAT LAKES ACQUISITION
In May 1996, the Company purchased Hospice of the Great Lakes, Inc., a
hospice company in North Brook, Illinois. Total purchase price was $8.2 million
representing the issuance of 304,822 shares. The Company incurred direct costs
of acquisition of approximately $1.0 million. Total goodwill at the date of
acquisition aggregated $9.1 million.
J. R. REHAB ACQUISITION
In August 1996, the Company purchased J. R. Rehab Associates, Inc., an
inpatient and outpatient rehabilitation clinic in Mooresville, North Carolina.
Total purchase price was approximately $2.1 million. The Company incurred direct
costs of acquisition of appoximately $200,000. Total goodwill at the date of
acquisition aggregated $3.1 million.
EXTENDICARE ACQUISITION
In August 1996, the Company acquired Extendicare of Tennessee, Inc., a
home health care company in Memphis, Tennessee. Total purchase price was
approximately $3.4 million. The Company incurred direct costs of acquisition of
approximately $200,000. Total goodwill at the date of acquisition aggregated
$1.9 million.
EDGEWATER ACQUISITION
In August 1996, the Company purchased Edgewater Home Infusion Services,
Inc., a home infusion company in Miami, Florida. Total purchase price was
approximately $8.0 million. The Company incurred direct costs of acquisition of
approximately $300,000. Total goodwill at the date of acquisition aggregated
$7.7 million.
<PAGE>
CENTURY ACQUISITION
In August 1996, the Company acquired Century Health Services, Inc., a
home health company in Murfreesboro, Tennessee. Total purchase price was
approximately $2.4 million. In addition, the Company used borrowings under its
revolving credit facility to repay approximately $1.5 million of debt of Century
assumed in the acquisition. The Company incurred direct costs of acquisition of
approximately $200,000. Total goodwill at the date of acquisition aggregated
$12.1 million.
SIGNATURE ACQUISITION
In September 1996, the Company acquired Signature Home Care, Inc., a
home health care company in Dallas, Texas. Total purchase price was
approximately $9.2 million, including $4.7 million representing the issuance of
196,374 shares. The Company incurred direct costs of acquisition of
approximately $500,000. Total goodwill at the date of acquisition aggregated
$19.1 million. See the Company's Current Report on Form 8-K dated September 25,
1996, as amended.
<PAGE>
NOTES TO PRO FORMA ADJUSTMENTS
(AMOUNT IN THOUSANDS)
For the purposes of determining the effects on the acquisitions and
divestitures described in Notes 1 through 4 above, including those events which
are (i) directly attributable to the transaction, (ii) expected to have a
continuing impact on the Company, and (iii) factually supportable, the following
estimates and adjustments have been made:
(a) Represents actual carrying values of assets and liabilities sold.
(b) Represents carryover basis in shares of ILC retained by the Company.
(c) Represents loan repayment by ILC to the Company.
(d) Represents net proceeds from the ILC offering applied to reduce long-term
debt.
(e) Represents loss on sale of shares of ILC of $4,512 less income tax effect
of $1,738.
(f) Represents the purchase price of First American in excess of the
estimated fair value of the net assets acquired, as follows:
Merger consideration for First American $ 39,100
Other liabilities assumed 2,486
Direct costs of acquisitions 15,000
------
$ 56,586
Stockholders' deficit of First American 230,032
Less income tax benefit 41,262
-------
$245,356
========
(g) Represents the elimination of the $18,000 loan the Company made to First
American in the first quarter of 1996 to fund certain pension and tax
liabilities of First American.
(h) Represents the following:
(i) Payment of liabilities recorded by First American
in conjunction with its settlement for disallowed
Medicare reimbursement claims. $115,000
(ii) The Company's recognition of certain current
tax benefits resulting from the acquisition of
First American. $ 41,262
(iii) Payments made by the Company at closing
for certain liabilities which were recorded on
the books of First American. $ 8,414
--------
$164,676
========
<PAGE>
(i) Represents the accrual of $15,000 for direct costs resulting from the
acquisition of First American.
(j) Represents borrowings under the Company's revolving credit facility.
(k) Represents elimination of stockholders' equity section of the First
American acquisition.
(l) Represents actual revenues and expenses of divisions sold.
(m) Represents gain on the sale of the pharmacy division recorded in July 1996.
(n) Represents reduction of interest expense resulting from repayment of
$91,000 outstanding under the Company's revolving credit facility based on
the Company's average interest rate of 7.47% in 1995 and 6.96% in 1996,
under the revolving credit facility.
(o) Represents additional amortizaiton relating to goodwill recorded as a
result of the acquisitions, amortized using the straight line method over
40 years.
(p) Represents additional interest expense resulting from borrowings of
$194,325 to finance acquisitions under the Company's revolving credit
facility based on the Company's average interest rate of 7.47% in 1995 and
6.96% in 1996, under the revolving credit facility.
(q) Represents reduction of interest expense resulting from repayment of
$17,851 outstanding under the Company's revolving credit facility based on
the Company's average interest rate of 7.47% in 1995 and 6.96% in 1996,
under the revolving credit facility.
(r) Represents 38.5% effective tax rate.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this amendment to be signed on its behalf
by the undersigned thereunto duly authorized.
INTEGRATED HEALTH SERVICES, INC.
Date: November 25, 1996 By: /s/ W. Bradley Bennett
------------------------ -----------------------------------
Name: W. Bradley Bennett
Title: Executive Vice President and
Chief Accounting Officer
In re First American Health Care of Georgia, Inc. and
its wholly owned subsidiaries, Case No. 96-20188
through Case No. 96-20218 (Bankruptcy Court, S.D.Ga.)
OMNIBUS SETTLEMENT AGREEMENT
----------------------------
(US/First American/IHS)
I. PARTIES
-------
This Omnibus Settlement Agreement ("Agreement") is entered into as of
September 9, 1996, by and among First American Health Care of Georgia, Inc.
("First American"), all of the subsidiaries and affiliates of First American,
defined as those entities listed on the attached Exhibit A ("Subsidiaries")
(collectively the "Company"), the United States Department of Health and Human
Services through the Office of Inspector General ("OIG") and the Health Care
Financing Administration ("HCFA"), the United States of America through the
United States Department of Justice ("DOJ"), and Integrated Health Services,
Inc. ("IHS").
II. RECITALS
--------
A. Company. The Company participates in both the Medicare and certain
Medicaid programs by providing home health care and other services to Medicare
beneficiaries and to Medicaid recipients through many agencies located in many
states.
B. Principal Shareholders. Robert J. Mills and Margie B. Mills (the
"Principal Shareholders") and their children own all of the common stock of
First American, and certain of
<PAGE>
these individuals, served as directors, officers, and employees of the Company
prior to February 22, 1996.
C. Submission of Medicare Claims by Company. The Company submitted
claims for payment to the Medicare Program ("Medicare"), 42 U.S.C. ss. 1395 et
seq. and will continue to do so following consummation of this Settlement
Agreement.
D. Conviction of First American and Principal Shareholders. On
February 4, 1996, First American and the Principal Shareholders were convicted
of Medicare fraud and other federal crimes. The Principal Shareholders are
appealing their convictions. First American has filed a notice of appeal, is
evaluating its position, and has preserved the right to appeal its conviction.
E. Bankruptcy Cases. On February 21, 1996, the Company filed petitions
under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court
for the Southern District of Georgia, Brunswick Division (the "Chapter 11
Bankruptcy Cases"), which are currently pending.
F. Merger Agreement. Immediately prior to filing of the Chapter 11
Bankruptcy Cases, First American and its Principal Shareholders entered into a
Merger Agreement dated February 21, 1996 with IHS. Such Merger Agreement was
amended pursuant to an amendment dated as of September 9, 1996 (such Merger
Agreement, as so amended, is hereinafter referred to as the "Merger Agreement").
The Merger Agreement provides for the merger of an
-2-
<PAGE>
IHS subsidiary, IHS Acquisition XIV, Inc., a Delaware corporation, with and into
First American (the "Merger"), after which Merger First American will be
liquidated and the separate existence of First American will cease and the
assets of First American shall be transferred to an IHS affiliate, IHS of
Brunswick, Inc., a Delaware corporation ("IHS-Sub"), which affiliate shall
succeed to and assume all liabilities of First American arising under this
Settlement Agreement.
G. Independent Management. Effective upon the filing of the Chapter 11
Bankruptcy Cases, the Principal Shareholders resigned as officers and directors
of the Company and Frank M. Chamberlain and Charles L. Cansler, of the firm of
Chamberlain & Cansler, Inc., became, respectively, President and Chief Executive
Officer and Chief Financial Officer. On February 22, 1996, the Bankruptcy Court
entered an interim order that approved Chamberlain & Cansler, Inc., and Messrs.
Chamberlain and Cansler as independent managers for the Company. The interim
order further designated them as the persons with the fiduciary responsibilities
and authority to exercise and perform, as the independent, exclusive, and
fiduciary management of the Company, and ordered that they shall exercise the
powers and authority of, and shall have the exclusive authority to act on behalf
of, the Company in all matters involving administration of the Chapter 11
Bankruptcy Cases, without the necessity of any approval of the Board of
Directors or shareholders of the Company, said authority
-3-
<PAGE>
having been expressly relinquished by the Directors and shareholders of the
Company.
H. Alleged Claims and Causes of Action Against Company by the United
States. The United States contends that it has civil and administrative monetary
claims and causes of action against the Company under the False Claims Act, 31
U.S.C. ss.ss. 3729 et seq., as amended, under the exclusion provisions of 42
U.S.C. ss. 1320a-7(b), under the Civil Monetary Penalties Law, 42 U.S.C. ss.ss.
1320a-7a, under the Program Fraud Civil Remedies Act, 31 U.S.C. ss.ss.
3801-3812, under 42 U.S.C. ss. 1395g, under common law, and under all statutory
and/or regulatory provisions over which HHS (including HCFA and/or OIG) and the
Civil Division of DOJ has authority: (1) for allegedly, submitting false and
fraudulent claims to the Medicare Program for unallowable costs or unallowable
claims relating to: (a) personal expenses (unrelated to the provision of patient
care) for Jack and Margie Mills and other Company officers, employees, and
family members; (b) excessive and unnecessary home health care visits; (c)
expenses for lobbying, recruiting, public relations/promotion, contributions,
and consulting; (d) fuel rebates; (e) marketing, meetings, education,
entertainment, and travel expenses; (f) legal accounting, and audit expenses;
(g) case management field directors, patient care coordinators, and intake
coordinators; (h) medical and office supply charges; (i) pension plans; (j)
phones, beepers, and communication expenses; (k) computer
-4-
<PAGE>
hardware, software, and data processing; (l) media, video, and publishing; (m)
taxes, licenses, penalties, insurance, interest, and dues; (n) officer,
director, shareholder, and employee salaries and remuneration; (o) related
organization costs and expense allocation; (p) depreciation and amortization;
(q) home health care agency acquisitions; (r) agency and branch certification;
(s) equipment purchase and equipment expenses; and (t) lease expenses;(2) in
addition, the United States allegedly has monetary claims for overpayments
arising from Medicare cost reports filed by the Company in cost years 1989
through and including 1996, and/or arising from Medicare payments received by
the Company in cost years 1989 through and including 1996, and/or Medicare costs
reported or Medicare payments made for non-reimbursable costs to the Company
during those years; and (3) from 1990 through 1996, the OIG conducted audits and
investigations of the Company and its Principal Shareholders, with respect to
the above matters, including the submission of claims for non-patient related
expenses. A criminal investigation was conducted by the United States Attorney's
Office for the Southern District of Georgia during the same time period, the
alleged conduct of which is more fully described in the indictment, which
resulted in the conviction of First American and its Principal Shareholders as
described in Paragraph D above. HCFA, directly and through its Medicare fiscal
intermediaries, conducted audits of the Company's Medicare cost
-5-
<PAGE>
reports and payments as described above, its certification status, the provision
of services through branch and/or sub-unit offices, and the coverage and payment
for services furnished to Medicare beneficiaries for Medicare cost report years
1989 through and including 1996. As part of the above described HCFA audits, a
civil fraud investigation was conducted by the Special Attorney to the United
States Attorney General to the United States Attorney General during 1995 and
1996.
I. Purpose and Intent. This Settlement Agreement is being entered into
for the purpose and intent of implementing the terms and conditions in the Term
Sheet for Omnibus Settlement Agreement among the Company, HCFA, DOJ, and as
agreed to by IHS, dated August 13, 1996 (the "Term Sheet"). The United States,
the Company, and IHS desire to reach this Settlement Agreement to fully and
finally settle, compromise, and resolve all criminal, civil and administrative
monetary claims, causes of action and issues between the United States and the
Company, and the discharge, as of the date of the Merger, of all civil
penalties, fines and assessments against the Company, except as expressly
provided herein.
J. Disclosures. First American has provided a report to HCFA
disclosing all matters of which it possesses any knowledge, after reasonable
investigation, relating to any direct or indirect interests of the Principal
Shareholders, jointly or individually, in any property leased by First American
and its
-6-
<PAGE>
Subsidiaries, and any direct or indirect interest in any vendor doing business
with such parties.
NOW, THEREFORE, for and in consideration of the mutual premises, mutual
promises, covenants, and obligations set forth below, and for other good and
valuable consideration as stated herein, the sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
III. AGREEMENTS
----------
1. Payments Due. Subject to the Closing of the Merger, First American
and its successors shall pay the following amounts with funds provided to it by
IHS and/or funds generated from operations, in accordance with the terms of this
Agreement:
<TABLE>
<CAPTION>
Payee/Character
Payment Date Amount of Payment
- ------------ ------ ----------
<S> <C> <C>
Payable on the day $20,000,000.00 Department of Justice
following the Merger $92,085,470.90 HCFA
of First American and $2,914,529.10 (restitution) US Attorney S.D. Ga.
IHS Acquisition XIV, Inc.
1999 - payable on or $10,000,000.00 HCFA/Contingent
before February 14, Payment
2000 as provided below
2000 - payable on or $35,000,000.00 HCFA/Contingent
before February 14, Payment
2001 as provided below
2001 - payable on or $45,000,000.00 HCFA/Contingent
before February 14, Payment
2002 as provided below
2002 - payable on or $35,000,000.00 HCFA/Contingent
before February 14, Payment
2003 as provided below
-7-
<PAGE>
2003 - payable on or $15,000,000.00 HCFA/Contingent
before February 14, Payment
2004 as provided below
TOTAL $255,000,000.00
</TABLE>
Contingent Payments set forth above shall be subject to the following
conditions: For each year for which a Contingent Payment is payable as provided
above (i.e., calendar years 1999 to 2003, referred to as a "Payment Year"), the
entireContingent Payment will become due and payable for the year then ended
subject to the following condition: the year-to-year percentage increase from
December of the second prior year to December of the year then ended in the
seasonally unadjusted Consumer Price Index for all urban consumers (CPI-U) for
the Medical Care expenditure category (as reported in Table 1 of the CPI
Detailed Report, prepared by the Bureau of Labor Statistics in the U.S.
Department of Labor) ("CPI") does not exceed 8%. Notwithstanding the foregoing,
if legislation is enacted which changes the Medicare reimbursement methodology
for home health services to a prospectively determined rate methodology, in
whole or in part, the contingent payments will become due and payable for the
year then ended and each year thereafter, as provided above without regard to
the CPI factor. The foregoing tests are referred to as the "Payment Condition."
The Contingent Payments, to the extent not paid, will accumulate and
be payable in subsequent years, as follows:
-8-
<PAGE>
If the Payment Condition is not satisfied for any one (1) or more Payment Years,
then in each case, the entire Contingent Payment which is not paid will roll
forward and be added to the Contingent Payment scheduled for the next Payment
Year; thus when the Payment Condition is satisfied in a subsequent year, the
Contingent Payment scheduled for that year, plus all ContingentPayments for
prior years which have not been paid, will be paid in full. Following the end of
the last Payment Year (i.e., calendar year 2003), if any Contingent Payments
have not been paid in full, then the Payment Condition will apply for one (1)
final calendar year, so that all unpaid Contingent Payments will be paid
following the end of the 2004 calendar year if the Payment Condition can be
satisfied for the 2004 calendar year. Payment will be made as soon as
practicable following the end of each year for which the Payment Condition is
satisfied, but in any case no later than forty-five (45) days after the last day
of that year.
Thus, for example, if the CPI determined for the period of December
1999 to December 2000 exceeds eight percent (8%), the Contingent Payment of
Thirty-Five Million Dollars ($35,000,000) otherwise accruing in the year 2000
and due to be paid on or before February 14, 2001, would not be paid; then, if
the CPI determined for the period of December 2000 to December 2001 does not
exceed eight percent (8%), the Contingent Payment of Forty-Five Million Dollars
($45,000,000) otherwise accruing in
-9-
<PAGE>
the year 2001, plus the Contingent Payment of Thirty-Five Million Dollars
($35,000,000) in respect of the year 2000 would be due and payable on or before
February 14, 2002.
Indemnification and offset rights which Buyer may have against
Contingent Payments under the terms of the Merger Agreement shall be exercised
only against the Contingent Payments to be received by the shareholders and
optionholders, as provided in the Merger Agreement.
Except for the amount of $20,000,000 paid to DOJ in settlement of all
civil false claims liabilities, civil damages and penalties, all amounts paid to
HCFA shall be treated as repayments of disputed amounts for Medicare services
rendered to Medicare beneficiaries.
All amounts paid in satisfaction and/or settlement of any civil fines
or assessments, or criminal penalties, will be deemed to have been paid by the
Company or its successors or assigns, as indicated herein.
2. Guaranty. Subject to the Closing of the Merger, IHS shall guaranty,
subject to applicable contingencies, the collection of payments to HCFA, DOJ,
shareholders and Option- holders. Simultaneously with the Closing of the Merger,
IHS shall execute and deliver to the United States its Guaranty of the
collection of the obligations of the Company and IHS-Sub pursuant to this
Settlement Agreement, in the form of Exhibit B hereto.
-10-
<PAGE>
3. Default. In the event of payment default by IHS- Sub, its
successors or assigns, the United States may exercise, at its sole option, one
or more of the following rights after giving thirty (30) days prior written
notice to IHS-Sub and IHS, or their successors and assigns: (1) declare this
Agreement breached, and avail itself of any and all claims arising from such
breach against the Company or its successor after the merger, recovering any
Settlement Amount in default under this Agreement, and recovering any reasonable
expenses, interest and legal fees incurred in collecting the amount due and
payable under this Agreement; (2) file an action for specific performance of the
terms of this Agreement; and (3) exercise any other right granted by law, or
under the terms of this Agreement, or recognizable at common law or in equity,
other than the right of recision, if any. This Agreement does not waive or limit
any right that the Company or its successor or assigns after the Merger
otherwise has to dispute the existence or extent of any default alleged by the
United States.
4. No Admission of Liability. This Settlement Agreement settles and
resolves all disputed claims and other matters, except as otherwise provided
herein. This Agreement and any proceedings taken pursuant to this Agreement, are
not, and shall not in any event be construed as or deemed evidence of, oroffered
or received as evidence of, a presumption, concession or admission by the
parties of the truth of any fact alleged or the
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<PAGE>
validity of the claim or deficiency of any defense, in each case which has or
could have been asserted in any litigation, or of any liability of any parties
of any kind whatsoever, or in any way referred to for any other reason by any
party in any civil, criminal or administrative action or proceeding other than
such proceedings as may be necessary to effectuate the provisions of this
Agreement.
5. Civil and Administrative Releases. Subject only to the exceptions
in Section 13 below, the United States, for itself and on behalf of its
officials, employees, agents, departments, and assigns, hereby releases and
forever discharges First American, the Company (defined to include the entities
set forth on Exhibit A), IHS and IHS-Sub, their respective employees, officers,
directors and agents, and the successors and assigns of any of them, and
Chamberlain & Cansler, Inc., its successor and assigns, and Frank M. Chamberlain
and Charles L. Cansler, individually, and Robert J. Mills, Margie B. Mills, Joel
V. Mills, David G. Mills, Angela Mills Dobson and Lee F. Dobson (collectively
the "Released Parties"), from any and all civil or administrative monetary
claims, actions, demands, proceedings, and causes of action (collectively
"Causes of Action") under the False Claims Act, the Civil Monetary Penalties
Act, the Program Fraud Civil Remedies Act, the exclusion provisions of 42 U.S.C.
ss. 1320a-7(b), (all as previously defined), common law, or under any statutory
or regulatory provisions over which HHS (including HCFA
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<PAGE>
and/or OIG) and/or the Civil Division of DOJ has authority, that the United
States has or may have, which relate to acts or omissions occurring prior to the
date of Merger, arising with respect to the conduct and/or Causes of Action
alleged in Section H, above. (collectively "Released Acts").
The general releases included herein are intended to settle all prior
claims up to the date of Merger with respect to the Company conducting business
through branch offices that may not qualify as branch offices, that may not have
been separately certified as sub-units, that may be at locations beyond those
authorized by CON, and/or that may have been operated without ever having
obtained CON approval. Any HCFA post-closing requirements that branch offices be
transitioned to agency/sub-unit locations or obtain CONs required by applicable
law, if any, shall be subject to implementation over a reasonable period of time
(including consideration of HCFA's certification priorities), and any services
otherwise reimbursable, rendered during the transition period by branch offices
shall be reimbursable, regardless of whether the branch status was proper.
6. Criminal Releases. First American and all of the entities listed on
Exhibit A and their successors and assigns are hereby released from all claims,
proceedings and causes of action based upon violations of federal criminal
statutes and from criminal prosecution for any acts or omissions occurring
before
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<PAGE>
the Closing date of the Merger, except for First American's criminal conviction
in Case No. 295-042-05 on February 4, 1996.
7. Dismissal of Criminal Appeal by First American. First American
shall seek dismissal of the appeal of its criminal conviction under the Federal
Rules of Appellate Procedure on or about the Closing date of the Merger.
8. Dismissal of Pending Litigation and Releases. The Company, and its
subsidiaries and their successors and assigns shall take such actions as to
cause the dismissal, with prejudice, as of the date of the Merger, of all
alleged monetary and/or other pending claims of the Company, and its
subsidiaries, relating to amounts of Medicare reimbursement due before the
Provider Reimbursement Review Board in respect of periods ending on or prior to
the Merger date, and such other claims against the United States and/or its
agents acting as Medicare fiscal intermediaries, including the pending qui tam
action against Aetna (United States ex rel. ABC Home Health Services, Inc. v.
Aetna, No. CV294-167, United States District Court, SDGA), provided that the qui
tam action shall be dismissed without prejudice as to the United States. The
Company, its subsidiaries, successors, and assigns release and forever discharge
the United States, its agents, officers, and employees, from any and all claims
or causes of action which the Company, its successors, and assigns may have
against them arising from or relating in any way to the Company's participation
in the
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<PAGE>
Medicare program, and from any and all liability based upon those claims or
causes of action, including but not limited to, releasing the Company's Medicare
fiscal intermediaries, their agents, officers, and employees, from any and all
claims or causes of action, and from liability arising from or related in any
way to their functions, duties, responsibilities, and service as fiscal
intermediaries with respect to periods ending on or before the Closing date of
the Merger.
9. 1996 Medicare Payments. Periodic interim payments for services
rendered by First American or its subsidiaries and their respective successors
and assigns (collectively the "Companies") from August 27, 1996 through and
including December 31, 1996 (including any PIP lag, i.e., payments due after
December 31, 1996 for services rendered through and including December 31, 1996)
shall be maintained at a bi-weekly amount of $18,587,032 notwithstanding actual
costs incurred in such period and without adjustment for any liability,
overpayment or underpayment. Such payments reflect the approximate costs of the
Companies' operations and the parties acknowledge that documentation of such
costs would be extremely difficult due to the documentary gaps and transition of
ownership. The parties, however, acknowledge that the cost reports for the
period from the Merger date through and including December 31, 1996 shall be
filed for purposes other than determining any liability, overpayment or
underpayment applicable to such period.
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The Companies shall during the remaining months of calendar year 1996
use reasonable efforts to maintain the level of operations without any material
decline in visits.
The United States, for itself and on behalf of its officials,
employees, agents, departments, and assigns, hereby releases and forever
discharges the Released Parties from, and irrevocably agrees that it shall not,
and waives any right it may have to bring or join against any Released Party,
any and all civil or administrative monetary claims, actions, demands,
proceedings or causes of action, that the United States has or may have, whether
known or unknown, for Medicare overpayments under 42 U.S.C. ss. 1395g, received
by the Company or any of its direct or indirect subsidiaries or any of their
respective successors or assigns for all cost reports through and including
December 31, 1996.
10. Reimbursement Audit Policies. Subject to the provisions of Section
9 above, the parties further acknowledge that Medicare reimbursement following
the Merger will be determined based solely upon the facts and circumstances, and
applicable statutory, regulatory, and program policies, that may apply to the
operations of IHS and the Company's successors and assigns at the time, and that
IHS shall be audited in accordance with usual and customary Medicare audit
policies and procedures. Settlement of all pre-closing Medicare cost report
issues by the Company and its subsidiaries and their successors and assigns
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<PAGE>
shall be without prejudice to and shall not be binding upon or establish
precedent with respect to IHS or the Company or its successors or assigns
post-Closing cost reporting periods.
11. Term Sheet for Omnibus Settlement Agreement. The terms and
conditions of that certain Term Sheet for Omnibus Settlement Agreement among the
Company, HCFA, DOJ and as agreed by IHS, dated August 13, 1996 is hereby
incorporated herein by reference as if said Term Sheet were fully set forth
herein, provided, however, that the parties shall use their best efforts to
complete the Merger prior to November 15, 1996.
12. Further Documents. Each party to this Settlement Agreement agrees
to execute and deliver any further documents that may be reasonably necessary to
carry out the provisions of this Agreement.
13. Exceptions. Notwithstanding Section 5, above, the United States
does not release the Company or any individual associated with the Company from:
(1) any civil claims arising under Title 26 of the United States Code (Internal
Revenue Code); (2) any claims based upon such obligations as are expressly
created by this Settlement Agreement; (3) respecting individuals only, from
prosecution for violations of federal criminal statutes; or (4) civil claims
made by federal agencies other than the Department of Health and Human Services,
including HCFA, or (5) any claims by an individual Medicare beneficiary for
defective or deficient services by the Company.
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14. Third Parties. The terms of this Settlement Agreement are not
intended to, nor are they to be construed to, work a release of liability or in
any way create a benefit in favor of any person or entity (including physicians
or other individuals or entities that referred patients to the Company or used
the Company's services) other than for persons and/or entities specifically
identified, the Company and IHS, together with each of their direct and indirect
subsidiaries, affiliates and divisions, including, without limitation, the
entities listed on Exhibit A hereto and the successors and assigns of any of
them.
15. Binding Effect. The provisions of this Settlement Agreement shall
be binding upon the parties to it, their affiliates, entities and their
collective successors and assigns.
16. Costs. Each party to this Settlement Agreement agrees to bear its
own legal and other costs.
17. Governing Law. This Settlement Agreement shall be governed by the
laws of the United States. The parties agree that the exclusive jurisdiction and
venue for any dispute arising under this Agreement shall be the United States
District Court for the Southern District of Georgia.
18. Entire Agreement. This Settlement Agreement and the Terms for
Omnibus Settlement Agreement constitutes the complete agreement between the
parties, and cannot be amended,
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<PAGE>
except in writing and signed by all signatories to this Settlement Agreement.
19. Authorized Representatives. The persons signing this Settlement
Agreement represent that they are duly authorized to execute the Settlement
Agreement on behalf of the parties listed.
20. Counterparts. This Settlement Agreement may be executed in
counterparts, each of which shall constitute an original and all of which shall
constitute one and the same agreement.
21. Notices. All notices, requests, waivers, consents, and other
communications hereunder shall be in writing and shall be mailed first class
certified mail or by nationally recognized overnight courier service or by
personal delivery, with postage or other applicable delivery fees prepaid and
addressed as follows:
The Company: 10065 Red Run Blvd.
Owings Mills, MD 21117
Attn: President
With copy to: 10065 Red Run Blvd.
Owings Mills, MD 21117
Attn: General Counsel
With copy to: 10065 Red Run Blvd.
Owings Mills, MD 21117
Attn: Brian K. Davidson
IHS: 10065 Red Run Blvd.
Owings Mills, MD 21117
Attn: President
With copy to: 10065 Red Run Blvd.
Owings Mills, MD 21117
Attn: General Counsel
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<PAGE>
With copy to: 10065 Red Run Blvd.
Owings Mills, MD 21117
Attn: Brian K. Davidson
IHS-Sub: 10065 Red Run Blvd.
Owings Mills, MD 21117
Attn: President
DOJ: U.S. Attorney for the Northern
District of Georgia
U.S. Court House
75 Spring Street, S.W.
Atlanta, GA 30335
Attn: Nina L. Hunt, Esq.
HCFA: Associate General Counsel
Office of General Counsel
HCFA, Wilbur J. Cohen Building
330 Independence Avenue, S.W.
Room 5309
Washington, DC 20201
Attn: Darrel J. Grinstead, Esq.
OIG: Assistant Inspector General
for Litigation Coordination
Office of Inspector General
Wilbur J. Cohen Building
330 Independence Avenue, S.W.
Room 330
Washington, D.C. 20201
Attn: Lewis Morris, Esq.
or to such other address as any party may request by notice given as aforesaid.
Notices sent as provided herein shall be deemed given on the date received by
the recipient or, if sooner three (3) days after mailing and one (1) business
day after shipment by overnight courier. Rejection or other refusal to accept or
the inability to deliver because of a changed address of which no notice was
given in accordance with the provisions hereof, shall be deemed to be received
three (3) days after such notice was mailed in accordance with the terms hereof.
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<PAGE>
22. Effective Date. This Settlement Agreement is effective as of the
Closing of the Merger.
UNITED STATES OF AMERICA
DATED:_____________________ BY:______________________________
Nina L. Hunt
Special Attorney to the
United States Attorney General
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<PAGE>
OFFICE OF THE INSPECTOR GENERAL
DATED:_____________________ BY:______________________________
Lewis Morris, Esq.
Assistant Inspector General
for Litigation Coordinator
HCFA-HHS
DATED:_____________________ BY:______________________________
Judith Berek
Health Care Financing
Administration
DATED:_____________________ THE COMPANY
BY:______________________________
Frank M. Chamberlain
President and Chief
Executive Officer
DATED:_____________________ INTEGRATED HEALTH SERVICES
BY:_______________________________
Marshall A. Elkins
Executive Vice President and
General Counsel
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<PAGE>
Exhibit A
FIRST AMERICAN HEALTH CARE OF GEORGIA, INC.
09-Aug-96
Name of Corporation
ABC GP, Inc.
ABC Home Health and Hospice of Albany, Inc.
ABC Home Health and Hospice of Athens, Inc.
ABC Home Health and Hospice of Brunswick, Inc.
ABC Home Health and Hospice of Dublin, Inc.
ABC Home Health and Hospice of Macon, Inc.
ABC Home Health and Hospice of Savannah, Inc.
ABC Home Health and Hospice of Titus, Inc.
ABC Home Health and Hospice of Vidalia, Inc.
ABC Home Health and Hospice of Waycross, Inc.
ABC Home Health Care de Latino America, S.A. deCV
ABC Home Nursing, Inc.
ABC Newco, Inc.
ABC Pharmaceuticals, Inc.
First American Health Care of Georgia, Inc.
First American Home Care of Alabama, Inc.
First American Home Care of Arkansas, Inc.
First American Home Care of California, Inc.
First American Home Care of Colorado, Inc.
First American Home Care of Florida, Inc.
First American Home Care of Ft. Lauderdale, Inc.
First American Home Care of Georgia, Inc.
First American Home Care of Illinois, Inc.
First American Home Care of Indiana, Inc.
First American Home Care of Louisiana, Inc.
First American Home Care of Michigan, Inc.
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Name of Corporation
First American Home Care of Mississippi, Inc.
First American Home Care of Missouri, Inc.
First American Home Care of Naples, Inc.
First American Home Care of Nebraska, Inc.
First American Home Care of New Mexico, Inc.
First American Home Care of North Carolina, Inc.
First American Home Care of Ohio, Inc.
First American Home Care of Oklahoma, Inc.
First American Home Care of Pennsylvania, Inc.
First American Home Care of South Carolina, Inc.
First American Home Care of Tennessee, Inc.
First American Home Care of Texas, Inc.
First American Home Care of Valdosta, Inc.
First American Home Care of Virginia, Inc.
First American Home Care of West Virginia, Inc.
First American International, Inc.
Professionals in Health Care de Mexico, S.A. de CV
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Exhibit B
GUARANTY
THIS GUARANTY ("Guaranty"), dated as of September___, 1996, is made by
Integrated Health Services, Inc., a Delaware corporation (the "Guarantor"), in
favor of the United States of America ("Obligee"), acting through the U.S.
Department of Justice and the Health Care Financing Administration of the United
States Department of Health and Human Services.
Recitals:
A. Guarantor, Obligee and First American Health Care of Georgia, Inc.,
a Georgia corporation (the "Company") are each party to a certain settlement
agreement bearing even date herewith (the "Settlement Agreement").
B. Pursuant to a merger agreement dated as of February 21, 1996, as
amended September _, 1996, (the "Merger Agreement"), among Guarantor, IHS
Acquisition XIV, Inc., a Delaware corporation ("Newco", Robert J. Mills, Margie
B. Mills and the Company, the Company has agreed, subject to the terms and
conditions set forth therein, to merge with Newco (the "Merger"), after which
Merger the Company shall be liquidated into a new corporation, IHS of Brunswick,
Inc., a Delaware corporation ("IHS Sub") which will be a wholly-owned subsidiary
of Guarantor.
C. Pursuant to the Settlement Agreement, the Company (and, after the
Merger, IHS Sub) is obligated to pay certain amounts to the United States, and
to perform certain obligations, as set forth therein.
D. Guarantor agreed in the Settlement Agreement to execute and deliver
this Guaranty to Obligee. Guarantor acknowledges that Obligee has relied and
will rely upon this Guaranty in entering into the Settlement Agreement, and
executes and delivers this Guaranty to induce Obligee to enter into the
Settlement Agreement.
NOW, THEREFORE, in consideration of the premises, and intending to be
legally bound, Guarantor hereby agrees as follows:
1. Definitions of Certain Terms.
In addition to the other terms defined elsewhere in this Guaranty, as
used herein the following terms shall have the following meanings:
"Guaranteed Obligations" shall mean all obligations from time
to time of the Company, Newco, IHS Sub or any of their respective
successors (collectively, "Obligors") to Obligee under the Settlement
Agreement, including all obligations to pay amounts pursuant to
Paragraph I thereof, in each case whether such obligations are direct
or indirect, joint or several, absolute or contingent, due or to
become due, now existing or hereafter arising (including interest and
other obligations arising or accruing after the commencement of any
bankruptcy, insolvency, reorganization, dissolution or similar
proceeding with respect to Obligors or any other Person, or which
would have arisen or accrued but for the commencement of such
proceeding, even if such obligation or the claim therefor is not
enforceable or allowable in such proceeding).
<PAGE>
"Person" shall mean an individual, corporation, partnership,
limited liability company, trust, unincorporated association, joint
venture, joint-stock company, government (including political
subdivisions), governmental authority or regulatory body, or any other
legal entity whatsoever.
2. Guaranty. The Guarantor hereby absolutely, unconditionally and
irrevocably guarantees the collection of the Guaranteed Obligations in
accordance with the terms of the Settlement Agreement, subject only to the
provisions of Section 3 below. This Guaranty is a guarantee of collectibility
and is conditioned upon an attempt to collect from or proceed against the
Obligor.
3. Requirement of Written Notice of Non-Payment. Notwithstanding any
other provision of this Guaranty to the contrary, Guarantor shall not be
obligated to pay or perform any of the Guaranteed Obligations unless and until
(i) Obligors shall have failed to pay or perform such Guaranteed Obligation when
and as due pursuant to the Settlement Agreement, (ii) Obligee shall have given
written notice of such failure to Obligors and Guarantor in accordance with
Section 10 below, and (iii) Obligors' failure to pay or perform the Guaranteed
Obligations shall have continued for a period of [thirty (30)] days after the
giving of such notice. The requirements of the preceding sentence shall be the
only conditions to Guarantor's obligations pursuant to this Guaranty;
accordingly, upon the expiration of such [thirty (30)] day period, Guarantor
shall be absolutely and unconditionally obligated to pay and perform the
Guaranteed Obligations in accordance with the terms hereof without any
obligation of Obligee to pursue or exhaust remedies of any nature whatsoever
available against any or all Obligors.
4. Obligations Absolute. Except as otherwise expressly set forth in
Section 3 above, the obligations of the Guarantor under this Guaranty shall be
absolute, unconditional and irrevocable, irrespective of any of the following:
(a) any lack of legality, validity, enforceability or
allowability (in a bankruptcy, insolvency, reorganization, dissolution
or similar proceeding, or otherwise), or any avoidance or
subordination, in whole or in part, of any of the Guaranteed
Obligations;
(b) any impairment by the Obligee or any other Person of any
recourse of the Guarantor against any Obligor or any other Person; any
failure to assert any breach of or default under the Settlement
Agreement or any of the Guaranteed Obligations; or any exercise or
non-exercise, or any failure, omission, breach, default, delay or
wrongful action in connection with any exercise or non-exercise, of
any right or remedy against any Obligor or any other Person or in
connection with the Settlement Agreement or any of the Guaranteed
Obligations;
(c) any merger, consolidation, liquidation, dissolution,
winding-up, charter revocation or forfeiture, or other change in,
restructuring or termination of the corporate structure or existence
of, any Obligor, the Guarantor or any other Person; any bankruptcy,
insolvency, reorganization, dissolution or similar proceeding with
respect to any Obligor, the Guarantor or any other Person; or any
action taken or election made by the Obligee (including any election
under Section 1111(b)(2) of the United States Bankruptcy Code), any
Obligor, the Guarantor or any other Person in connection with any such
proceeding;
(d) any defense, setoff or counterclaim (excluding only the
defense of full, strict and indefeasible payment and performance)
which may at any time be available to any Obligor, the Guarantor or
any other Person with respect to the Settlement Agreement or any of
the Guaranteed
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<PAGE>
Obligations; or any discharge by operation of law of any Obligor or
any other Person from the performance or observance of the Settlement
Agreement or any of the Guaranteed Obligations; or
(e) any other event or circumstance, whether similar or
dissimilar to the foregoing, and whether known or unknown, which might
otherwise constitute a defense available to, or limit the obligations
of, the Obligors, the Guarantor, a guarantor or a surety, excepting
only full, strict and indefeasible payment and performance of the
Guaranteed Obligations.
5. Waivers, etc. The Guarantor hereby irrevocably waives any defense
to or limitation on its obligations under this Guaranty arising out of or based
on any matter referred to in Section 4. Without limiting the generality of the
foregoing, the Guarantor hereby irrevocably waives each of the following:
(a) all notices (other than any notice required by Section 3
above), disclosures and demands of any nature which otherwise might be
required from time to time to preserve intact any rights against the
Guarantor, including (i) any notice of any event or circumstance
described in Section 4, (ii) any notice required by any law,
regulation or order now or hereafter in effect in any jurisdiction,
(iii) any notice of nonpayment, nonperformance, dishonor, or protest
under the Settlement Agreement or any of the Guaranteed Obligations,
(iv) any notice of any default or any failure on the part of any
Obligor or any other Person to comply with the Settlement Agreement or
any of the Guaranteed Obligations, and (v) any notice of any
information pertaining to the business, opertions, condition
(financial or other) or prospects of any Obligor or any other Person;
(b) any requirement of promptness or diligence on the part of
the Obligee or any other Person; and
(c) any defense or other right arising by reason of any law
now or hereafter in effect in any jurisdiction pertaining to election
of remedies(including anti-deficiency laws, "one action" laws or
similar laws), or by reason of any election of remedies or other
action or inaction by any Obligee which otherwise discharges or
impairs any of the Guaranteed Obligations or any recourse of the
Guarantor against any Obligor or any other person.
6. Payments. All payments to be made by the Guarantor pursuant to
this Guaranty shall be made as provided herein.
7. Continuing Agreement. This Guaranty is a continuing agreement and
shall continue in full force and effect until all Guaranteed Obligations and all
other amounts payable under this Guaranty have been paid in cash performed in
full.
8. Amendments, etc. No amendment to or waiver of any provision of this
Guaranty, and no consent to any departure by the Guarantor herefrom, shall in
any event be effective unless in a writing manually signed by or on behalf of
the Obligee. Any such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
9. No Implied Waiver; Remedies Cumulative. No delay or failure of the
Obligee in exercising any right or remedy under this Guaranty shall operate as a
waiver thereof; nor shall any single or partial exercise of any such right or
remedy preclude any other or further exercise thereof or the exercise of any
other right or remedy. The rights and remedies of the Obligee under this
Guaranty are cumulative and
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<PAGE>
not exclusive of any other rights or remedies available hereunder, under any
other agreement, at law, or otherwise.
10. Notices. Except to the extent, if any, otherwise expressly
provided herein, all notices and other communications (collectively, "notices")
under this Guaranty shall be in writing (including facsimile transmission) and
shall be sent by first-class certified mail, by nationally-recognized overnight
courier, by personal delivery, or by facsimile transmission, in all cases with
charges prepaid. All notices shall be sent to the following addresses, or, in
any case, to such other address as shall have been designated by the applicable
party by notice to the other party hereto:
If to Guarantor:
Integrated Health Services, Inc.
10065 Red Run Blvd.
Owings Mills, Maryland 21117
Attention: President
Facsimile: (410) 998-8747
With a copy to:
Integrated Health Services, Inc.
10065 Red Run Blvd.
Owings Mills, Maryland 21117
Attention: General Counsel
Facsimile: (410) 998-8747
If to any Obligor:
IHS of Brunswick, Inc.
10065 Red Run Blvd.
Owings Mills, Maryland 21117
Attention: President
Facsimile: (410) 998-8747
If to Obligee:
Attention:
Facsimile:
Any properly given notice shall be effective when received, except that properly
given notices to the Guarantor or Obligors shall be effective at the following
time, if earlier: if by first-class mail, three business days after deposit in
the mail; if by overnight courier, one business day after pickup by such
courier; and if by facsimile transmission, upon transmission.
11. Expenses. The Guarantor agrees to pay upon demand all reasonable
expenses (including reasonable fees and expenses of counsel) which the Obligee
may incur from time to time in connection with the any actions or proceedings to
enforce this Guaranty.
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12. Entire Agreement. This Guaranty constitutes the entire agreement
of the parties hereto with respect to the subject matter hereof and supersedes
all prior and contemporaneous understandings and agreements.
13. Successors; Delegation of Obligations Prohibited. This Guaranty
shall be binding upon the Guarantor and its successors. Guarantor may not
delegate its obligations hereunder to any other Person.
14. Time of the Essence. Time is of the essence with regard to the
payment and performance by Guarantor of its obligations hereunder.
IN WITNESS WHEREOF, the Guarantor has executed and delivered this
Guaranty as of the date first above written.
INTEGRATED HEALTH SERVICES, INC.
By______________________________
Name:___________________________
Title:__________________________
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In re First American Health Care of Georgia, Inc. and
its wholly owned subsidiaries, Case No. 96-20188
through Case No. 96-20218 (Bankruptcy Court, S.D.Ga.)
SETTLEMENT AGREEMENT
--------------------
(US/First American/Mills)
I. PARTIES
This Settlement Agreement is entered into as of September 9, 1996, by
and among the United States of America, acting through the Department of Justice
("DOJ"), First American Health Care of Georgia, Inc. ("First American"), its
subsidiaries and related entities (hereinafter collectively described as the
"Company"), and Robert J. Mills, and Margie B. Mills (the "Principal
Shareholders").
II. RECITALS
1. Company. The Company participates in both the Medicare and Medicaid
programs by providing home health care services to Medicare beneficiaries and to
Medicaid recipients through many agencies located in many states. Robert J.
Mills and Margie B. Mills were formerly officers and directors in the Company,
and are also the Principal Shareholders in the Company.
2. Submission of Medicare Claims by Company. The Company submitted
claims for payment to the Medicare Program ("Medicare"), 42 U.S.C. ss. 1395 et
seq., and will continue to do so following consummation of this Settlement
Agreement.
<PAGE>
3. Conviction of First American and Principal Shareholders. On
February 4, 1996, First American and the Principal Shareholders were convicted
of Medicare fraud and other federal crimes. The Principal Shareholders are
appealing their convictions. First American has filed a notice of appeal, is
evaluating its position, and has preserved the right to appeal its conviction.
4. Bankruptcy Cases. On February 21, 1996, the Company filed petitions
under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court
for the Southern District of Georgia, Brunswick Division (the "Chapter 11
Bankruptcy Cases"), which are currently pending.
5. Merger Agreement. Immediately prior to filing of the Chapter 11
Bankruptcy Cases, First American and its Principal Shareholders entered into a
Merger Agreement dated February 21, 1996 with IHS. Such Merger Agreement was
amended pursuant to an amendment dated as of September 9, 1996 (such Merger
Agreement, as so amended, is hereinafter referred to as the "Merger Agreement").
The Merger Agreement provides for the merger of an IHS subsidiary, IHS
Acquisition XIV, Inc., a Delaware corporation, with and into First American (the
"Merger"), after which Merger First American will be liquidated and the separate
existence of First American will cease and the assets of First American shall be
transferred to an IHS affiliate, IHS of Brunswick, Inc., a Delaware corporation,
("IHS-Sub") which
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affiliate shall succeed to and assume all liabilities of First American arising
under this Settlement Agreement.
6. Independent Management. Effective upon the filing of the Chapter 11
Bankruptcy Cases, the Principal Shareholders resigned as officers and directors
of the Company and Frank M. Chamberlain and Charles L. Cansler, of the firm of
Chamberlain & Cansler, Inc., became, respectively, President and Chief Executive
Officer and Chief Financial Officer. On February 22, 1996, the Bankruptcy Court
entered an interim order that approved Chamberlain & Cansler, Inc., and Messrs.
Chamberlain and Cansler as independent managers for the Company. The interim
order further designated them as the persons with the fiduciary responsibilities
and authority to exercise and perform, as the independent, exclusive, and
fiduciary management of the Company, and ordered that they shall exercise the
powers and authority of, and shall have the exclusive authority to act on behalf
of, the Company in all matters involving administration of the Bankruptcy Cases,
without the necessity of any approval of the Board of Directors or shareholders
of the Company, said authority having been expressly relinquished by the
Directors and shareholders of the Company.
7. Alleged Claims and Causes of Action Against Company by the United
States. The United States contends that it has civil and administrative monetary
claims and causes of action against the Company under the False Claims Act, 31
U.S.C. ss.ss. 3729
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et seq., as amended, under the exclusion provisions of 42 U.S.C. ss. 1320a-7(b),
under the Civil Monetary Penalties Law, 42 U.S.C. ss.ss. 1320a-7a, under the
Program Fraud Civil Remedies Act, 31 U.S.C. ss.ss. 3801-3812, and under common
law, for allegedly, submitting false and fraudulent claims to the Medicare
Program for unallowable costs or unallowable claims relating to: (a) personal
expenses (unrelated to the provision of patient care) for Jack and Margie Mills
and other Company officers, employees, and family members; (b) excessive and
unnecessary home health care visits; (c) expenses for lobbying, recruiting,
public relations/promotion, contributions, and consulting; (d) fuel rebates; (e)
marketing, meetings, education, entertainment, and travel expenses; (f) legal
accounting, and audit expenses; (g) case management field directors, patient
care coordinators, and intake coordinators; (h) medical and office supply
charges; (i) pension plans; (j) phones, beepers, and communication expenses; (k)
computer hardware, software, and data processing; (l) media, video, and
publishing; (m) taxes, licenses, penalties, insurance, interest, and dues; (n)
officer, director, shareholder, and employee salaries and remuneration; (o)
related organization costs and expense allocation; (p) depreciation and
amortization; (q) home health care agency acquisitions; (r) agency and branch
certification; (s) equipment purchase and equipment expenses; and (t) lease
expenses. In addition, the United States has monetary claims for overpayments
under 42 U.S.C. ss. 1395g all arising from
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Medicare costs reports filed by the Company in cost years 1989 through and
including 1996, and/or arising from Medicare payments received by the Company in
cost years 1989 through and including 1996, and/or Medicare costs reported or
Medicare payments made for non-reimbursable costs to the Company during those
years. From 1990 through 1996, the OIG conducted audits and investigations of
the Company and its Principal Shareholders, with respect to the above matters,
including the submission of claims for non-patient related expenses. A criminal
investigation was conducted by the United States Attorney's Office for the
Southern District of Georgia during the same time period, the alleged conduct of
which is more fully described in the indictment, which resulted in the
conviction of First American and its Principal Shareholders as described in
Paragraph D above. HCFA, directly and through its Medicare fiscal
intermediaries, conducted audits of the Company's Medicare cost reports and
payments as described above, its certification status, the provision of services
through branch and/or sub-unit offices, and the coverage and payment for
services furnished to Medicare beneficiaries for Medicare cost report years 1989
through and including 1996. As part of the above described HCFA audits, a civil
fraud investigation was conducted by the Special Attorney to the United States
Attorney General during 1995 and 1996.
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8. Purpose and Intent. This Settlement Agreement is being entered into
for the purpose and intent of implementing the Term Sheet for Omnibus Settlement
Agreement among the Company, HCFA-HHS, DOJ, and as agreed to by IHS, dated
August 13, 1996 (the "Term Sheet"), as it applies to the Principal Shareholders.
The United States, the Company, and Robert J. Mills, and Margie B. Mills desire
to reach this Settlement Agreement to fully and finally settle, compromise, and
resolve the civil and administrative monetary claims set forth below.
9. No Admission of Liability. This Settlement Agreement settles and
resolves disputed claims. This Settlement Agreement does not constitute an
admission by any party of any liability or wrongful conduct or an admission by
any party of any disputed claim or fact.
III. TERMS AND CONDITIONS
NOW, THEREFORE, in consideration of the mutual promises, covenants,
and obligations set forth below, and for good and valuable consideration as
stated herein, the parties have agreed as follows:
10. Payment of the Criminal Fine of Robert J. Mills from Merger
Payments. Robert J. Mills agrees that at the closing, IHS shall convert
$10,167,170.50 of the proceeds payable to Robert J. Mills from the Merger
payments into a cashier's check payable to the United States District Court,
Southern
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District of Georgia, bearing a memorandum indicating that this amount is in
payment of the criminal fine and costs of imprisonment and supervision of Robert
J. Mills, referencing case number CR-295-42 and requesting that it be held in an
interest bearing account with the highest rate of interest prudent with the
amount of the fine. IHS shall deliver this cashier's check to a representative
of the United States Attorney for the Southern District of Georgia who shall
deposit the cashier's check into the registry of the United States District
Court for the Southern District of Georgia to be held in an interest bearing
account, and at a rate of interest to be set by the District Court, pending
modification of such fine by the District Court or the conclusion of Robert J.
Mills's appeal, and pursuant to further order of the District Court.
11. Civil and Administrative Releases. Subject only to the exceptions
in Paragraph 14 below, the United States, for itself and on behalf of its
officials, employees, agents, departments, and assigns, hereby releases and
forever discharges Robert J. Mills, Margie B. Mills, Joel V. Mills, David G.
Mills, Angela Mills Dobson and Lee F. Dobson (collectively the "Released
Parties"), from any and all civil or administrative monetary claims, actions,
demands, proceedings, and causes of action under the False Claims Act, the Civil
Monetary Penalties Act, the Program Fraud Civil Remedies Act, the exclusion
provisions of 42 U.S.C. ss. 1320a-7(b), (all as previously defined), common law,
or
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under any statutory or regulatory provisions over which HHS (including HCFA
and/or OIG) has authority, that the United States has or may have, which relate
to acts or omissions occurring prior to the date of Merger, for claim, arising
with respect to the conduct alleged in Paragraph 7, above. (collectively
"Released Acts").
12. Dismissal of Pending Litigation and Releases. In consideration for
the releases to be provided in Paragraph 11 above, the Principal Shareholders
shall consent to such actions as to cause the dismissal, with prejudice, as of
the date of the Merger, of all alleged monetary and/or other pending claims of
the Company, and its subsidiaries, relating to amounts of Medicare reimbursement
due before the Provider Reimbursement Review Board in respect to periods ending
on or prior to the Merger date, and such other claims against the United States
and/or its agents acting as Medicare fiscal intermediaries, including the
pending qui tam action against Aetna (United States ex rel. ABC Home Health
Services, Inc. v. Aetna, No. CV294-167, United States District Court, SDGA,
provided that the qui tam action shall be dismissed without prejudice as to the
United States. Robert J. Mills and Margie B. Mills, in their individual
capacities and in their representative capacities as Principal Shareholders and
as former officers and directors of the Company, release and forever discharge
the United States, its agents, officers, and employees, from any and all claims
or causes of action which they may have against them arising from or relating in
any way to the Company's participation in the Medicare program, and from any and
all liability based upon those claims or causes of action, including, but not
limited to, releasing the Company's Medicare fiscal intermediaries, their
agents, officers, and employees, from any and all claims or causes of
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action, and from liability arising from or related in any way to their
functions, duties, responsibilities, and service as fiscal intermediaries with
respect to periods ending before the Closing date of the Merger.
13. Further Documents. Each party to this Settlement Agreement agrees
to execute and deliver any further documents that may be reasonably necessary to
carry out the provisions of this Settlement Agreement.
14. Exceptions. Notwithstanding Paragraph 11, above, the United States
does not release the Released Parties from: (1) any civil claims arising under
Title 26 of the United States Code (Internal Revenue Code); (2) any claims based
upon such obligations as are created by this Settlement Agreement; (3)
respecting the Released Parties, from prosecution for violations of federal
criminal statutes; or (4) civil claims made by federal agencies other than
HCFA-HHS.
15. Binding Effect. The provisions of this Settlement Agreement shall
be binding upon the parties to it, their affiliates, entities and their
collective successors and assigns.
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16. Costs. Each party to this Settlement Agreement agrees to bear its
own legal and other costs.
17. Governing Law. This Settlement Agreement shall be governed by the
laws of the United States. The parties agree that the exclusive jurisdiction and
venue for any dispute arising under this Agreement shall be the United States
District Court for the Southern District of Georgia.
18. Complete Agreement. This Settlement Agreement constitutes the
complete agreement between the parties, and cannot be amended, except in writing
and signed by all signatories to this Settlement Agreement.
19. Authorized Representative. The persons signing this Settlement
Agreement represent that they are duly authorized to execute the Settlement
Agreement on behalf of the parties listed.
20. Counterparts. This Settlement Agreement may be executed in
counterparts, each of which shall constitute an original and all of which shall
constitute one and the same agreement.
21. Effective Date. This Settlement Agreement is effective as of the
Closing of the Merger.
UNITED STATES OF AMERICA
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DATED:_____________________ BY:______________________________
Nina L. Hunt
Special Attorney to the
United States Attorney General
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DATED:_____________________ THE COMPANY
BY:______________________________
Frank M. Chamberlain
President and Chief
Executive Officer
______________________________
Robert J. Mills
______________________________
Margie B. Mills
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EXHIBIT 23.01
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Integrated Health Services, Inc.:
We consent to incorporation by reference in the registration statements on Forms
S-3 or S-4 (Nos. 33-87890, 33-66126, 33-68302, 33-77380, 33-81378, 33-98764,
333-4053 and 333-12685) and on Forms S-8 (Nos. 33-44648, 33-44649, 33-44650,
33-44651, 33-44653, 33-53912, 33-53914, 33-53916, 33-86684, 33-97190 and
333-1432) of Integrated Health Services, Inc. of our report dated October 17,
1996, relating to the consolidated balance sheets of First American Health Care
of Georgia, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of earnings, stockholders' deficit and cash
flows for each of the years in the three-year period ended December 31, 1995,
which report appears in the Form 8-K/A of Integrated Health Services, Inc. dated
October 17, 1996.
Our report contains an explanatory paragraph that states that the Company filed
a petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in
February 1996 and its plan of reorganization was confirmed in October 1996. Such
plan included the merger of the Company with Integrated Health Services, Inc.,
which occurred on October 17, 1996, the settlement of Department of Justice
fines in the amount of $20 million, and the settlement with the Health Care
Financing Administration (HCFA) of Medicare reimbursement claims which had been
disputed claims under the bankruptcy proceedings. The settlement agreement with
HCFA provides for a fixed payment of $95 million and contingent payments of up
to $140 million which, if certain future contingencies are met, will be payable
from 2000 through 2004. The Company has recorded an obligation for the fixed
payment and an estimate of $45 million for certain of the contingent payments.
The ultimate outcome of this matter cannot presently be determined.
KPMG Peat Marwick LLP
Baltimore, Maryland
November 25, 1996
