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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
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
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(Former name or former address, if changed since last report)
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<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. The
unaudited consolidated balance sheet of First American as of September 30,
1996, and the related consolidated statements of operations, stockholders'
deficit and cash flows for the nine months ended September 30, 1995 and
1996, and the notes thereto, 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.
** Previously filed in the Company's Current Report on Form 8-K/A, 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
and has restated the accompanying 1993 and 1994 financial statements. The
ultimate outcome of this matter cannot presently be determined.
KPMG Peat Marwick LLP
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
<TABLE>
<CAPTION>
December 31, September 30,
--------------- ---------------
Assets 1995 1994 1996
- ------ ---- ---- ----
(Restated) (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 8,646,301 6,895,608 36,228,549
Restricted cash 10,445,746 8,510,947 10,445,788
Accounts receivable from patients, less allowances
for doubtful accounts of $3,093,000 in 1995, $4,331,982
in 1994 and $4,116,900 1n 1996 48,269,522 45,104,942 30,972,418
Other accounts receivable, net 1,953,191 1,270,823 1,386,645
Inventories 5,010,033 4,297,941 5,173,440
Prepaid expenses and other current assets 1,683,976 1,037,587 1,216,803
---------------- --------------- --------------
Total current assets 76,008,769 67,117,848 85,423,643
Property and equipment, net 27,106,803 25,029,443 23,559,207
Goodwill 6,428,432 7,196,597 2,233,031
Other assets, net 2,386,044 3,409,609 2,220,420
----------- ------------- --------------
Total assets $ 111,930,048 102,753,497 113,436,301
================ =============== ==============
Liabilities and Stockholders' Deficit
- -------------------------------------
Current liabilities:
Current maturities of long-term debt and capital
lease obligations $ 25,607,743 6,149,083 25,410,456
Accounts payable and accrued expenses 145,142,885 101,730,750 152,033,383
Medicare settlement payable 95,000,000 1,541,203 114,336,746
Estimated third party settlements 1,036,369 751,790 1,036,369
Due to related parties 184,387 169,220 389,526
Income taxes payable 11,320,968 12,504,000 14,233,856
---------------- --------------- -------------
Total current liabilities 278,292,352 122,846,046 307,440,336
Due to related parties 180,000 360,000 120,000
Long-term debt and capital lease obligations 10,134,430 17,918,236 6,556,567
Medicare settlement payable 17,920,615 53,002,104 30,026,754
---------------- --------------- -------------
Total liabilities $ 306,527,397 194,126,386 344,143,657
---------------- --------------- -------------
</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>
December 31, September 30,
-------------- ---------------
1995 1994 1996
---- ---- ----
(Restated) (Unaudited)
<S> <C> <C> <C>
Minority interest in consolidated subsidiaries $ (381,292) 5,617 (175,236)
Stockholders' deficit:
Preferred stock, no par value, 500,000 shares
authorized - - -
Common stock, no par value, 20,000,000 shares authorized,
5,000 shares and 6,391 shares issued in 1995 and
September 30, 1996, respectively, of which 4,000
shares and 6,391 shares are held in treasury in
1995 and September 30, 1996, respectively, 244,437 - 319,447
Common stock, Class B, no par value, 10,000,000
shares authorized, 3,078,700, 3,003,700 shares
and 3,078,700 shares issued in 1995, 1994 and
September 30, 1996, respectively, of which 904,100
shares are held in treasury in 1995, 1994 and
September 30 ,1996 2,618,414 1,682,135 2,618,414
Stock options outstanding 12,259,373 4,901,732 12,185,754
Accumulated deficit (207,266,607) (96,081,211) (243,455,126)
------------- --------------- -------------
(192,144,383) (89,497,344) (228,331,511)
Less treasury stock, at cost -
(common stock: 904,100 shares in 1995, 1994 and
September 30, 1996; common stock, Class B: 4,000
shares and 6,391 shares in 1995 and September
30,1996, respectively) (2,071,674) (1,881,162) (2,200,609)
------------- --------------- -------------
Total stockholders' deficit (194,216,057) (91,378,506) (230,532,120)
------------- --------------- -------------
Commitments and contingent liabilities
Total liabilities and stockholders' deficit $ 111,930,048 102,753,497 113,436,301
============= =============== =============
</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
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
-------------------------- -----------------
1995 1994 1993 1996 1995
---- ---- ---- ---- ----
(Restated) (Restated) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Net patient service revenue $ 558,199,384 446,466,509 335,708,839 367,698,047 435,722,682
Managed service revenue 5,547,720 5,696,236 5,187,765 2,955,900 4,150,255
--------------- -------------- -------------- ------------ ------------
Total revenue 563,747,104 452,162,745 340,896,604 370,653,947 439,872,937
Expenses:
Patient services 329,282,810 261,409,202 174,505,225 204,570,541 252,349,933
General and administrative 323,936,521 217,491,915 171,604,256 181,107,789 248,548,610
Depreciation and amortization 6,936,185 6,349,163 5,125,404 4,989,675 5,118,480
Interest 9,717,027 8,402,991 3,990,797 5,769,508 7,264,309
Provision for bad debts 3,785,566 2,993,667 1,161,056 2,291,592 2,050,495
Non-recurring charges (Note 2) - - - 3,376,946 -
--------------- -------------- -------------- ----------- ------------
Total expenses 673,658,109 496,646,938 356,386,738 402,106,051 515,331,827
Loss from operations (109,911,005) (44,484,193) (15,490,134) (31,452,104) (75,458,890)
Nonoperating gains (losses), net 1,419,262 899,541 1,027,441 (714,501) 1,213,690
Minority interest in (earnings) losses
of consolidated subsidiaries (290,239) (344,295) 24,225 41,077 (335,100)
--------------- -------------- -------------- ----------- -----------
Net loss before income taxes (108,781,982) (43,928,947) (14,438,468) (32,125,528) (74,580,300)
Income taxes 1,594,000 11,385,000 1,119,000 4,062,991 1,195,500
--------------- -------------- -------------- ----------- -----------
Net loss $ (110,375,982) (55,313,947) (15,557,468) (36,188,519) (75,775,800)
=============== ============== ============== =========== ===========
</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
and Nine Months Ended September 30, 1996
<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 (Restated) $ - 1,682,135 - 14,530,644 (24,702,582)
Net loss for year ended December 31, 1993
(Restated) - - - - (15,557,468)
Issuance of common stock subscription
(Restated) - - - 90,426 -
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1993 (Restated) - 1,682,135 - 14,621,070 (40,260,050)
Net loss for year ended December 31, 1994
(Restated) - - - - (55,313,947)
Issuance of common stock options (Restated) - - 4,901,732 - -
Repurchase of common stock subscriptions
(Restated) - - - (14,621,070) -
Distributions to majority stockholders
(Restated) - - - - (507,214)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1994 (Restated) - 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)
Net loss for the nine months
ended September 30, 1996 (Unaudited) - - - - (36,188,519)
Issuance of common stock (Unaudited) 75,010 - - - -
Common stock options exercised (Unaudited) - - (73,619) - -
Repurchase of treasury stock (Unaudited) - - - - -
------------- ------------- ------------- ------------- -------------
Balance at September 30, 1996 (Unaudited) $ 319,447 2,618,414 12,185,754 - (243,455,126)
============= ============= ============= ============= =============
</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
and Nine Months Ended September 30, 1996
<TABLE>
<CAPTION>
Treasury
Treasury Stock
Stock Class B Total
----- ------- -----
<S> <C> <C>
Balance at December 31, 1992 (Restated) - (1,881,162) (10,370,965)
Net loss for year ended December 31, 1993
(Restated) - - (15,557,468)
Issuance of common stock subscription
(Restated) - - 90,426
-------------- ------------- -------------
Balance at December 31, 1993 (Restated) - (1,881,162) (25,838,007)
Net loss for year ended December 31, 1994
(Restated) - - (55,313,947)
Issuance of common stock options (Restated) - - 4,901,732
Repurchase of common stock subscriptions
(Restated) - - (14,621,070)
Distributions to majority stockholders
(Restated) - - (507,214)
-------------- ------------- -------------
Balance at December 31, 1994 (Restated) - (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)
Net loss for the nine months
ended September 30, 1996 (Unaudited) - - (36,188,519)
Issuance of common stock (Unaudited) - - 75,010
Common stock options exercised (Unaudited) - - (73,619)
Repurchase of treasury stock (Unaudited) (128,935) - (128,935)
-------------- ------------- -------------
Balance at September 30, 1996 (Unaudited) (319,447) (1,881,162) (230,532,120)
============= ============= ==============
</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
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
-------------------------- ------------------
1995 1994 1993 1996 1995
---- ---- ---- ---- ----
(Restated) (Restated) (Unaudited) (Unaudited)
<S> <C> <C> <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) (36,188,519) (75,775,800)
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 4,989,675 5,118,480
Provision for bad debts 3,785,566 2,993,667 1,161,056 2,291,592 2,050,495
Stock compensation expense 8,538,357 4,901,732 - - -
Loss on forfeiture of partnership
interests - - - 2,559,217 -
Minority interest in net income of
consolidated subsidiaries 290,239 344,295 (24,225) (41,077) 335,100
Pension expense for ESOP
stock subscription - - 90,426 - -
(Increase) decrease in:
Accounts receivable (6,950,146) (22,757,182) (12,541,237) 14,240,504 (904,575)
Other accounts receivable (682,368) 59,050 278,565 531,546 (511,776)
Inventories (712,092) (1,919,616) (957,939) (213,407) (1,180,184)
Prepaid expenses 97,877 (553,679) (187,099) 454,173 (502,265)
Increase (decrease) in:
Accounts payable and accrued expenses 43,412,135 48,182,504 26,448,681 7,127,845 45,673,650
Estimated third party settlements 284,579 374,124 224,921 - 213,434
Medicare settlement payable 58,377,308 33,104,333 14,916,328 31,442,885 43,782,981
Income taxes payable (1,183,032) 11,385,000 1,119,000 2,912,888 (887,274)
---------------- -------------- -------------- ----------- ------------
Net cash (used in) provided by
operating activities and gains 1,818,626 27,149,444 20,096,413 30,107,322 17,412,266
---------------- -------------- -------------- ----------- ------------
</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>
Nine Months Ended
Years Ended December 31, September 30,
-------------------------- --------------------
1995 1994 1993 1996 1995
---- ---- ---- ---- ----
(Restated) (Restated) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from investing activities:
Additions to property and equipment, net $ (7,671,438) (4,117,823) (8,731,860) (866,182) (4,931,813)
Cash paid for interest in ABC/
ContinueCare Ltd., net of cash received - - (1,460,423) - -
Business acquisitions (723,919) (244,464) (179,863) - (723,919)
Increase in intangible and other assets (570,724) (1,490,588) (822,128) (386,910) 102,272
Increase (decrease) in amounts due to
related parties (164,833) 107,034 (245,803) 145,139 15,463
Cash paid to minority partners (677,148) (355,189) 40,736 (52,867) (299,995)
Decrease (increase) in restricted cash (1,934,799) (1,035,225) (3,863,182) (42) (1,451,099)
------------- ------------ ------------ ---------- ----------
Net cash used in investing
activities $ (11,742,861) (7,136,255) (15,262,523) (1,160,862) (7,289,091)
------------- ------------ ------------ ---------- ----------
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) (1,893,034) (5,245,517)
Proceeds from long-term debt 21,002,210 8,724,301 846,403 656,366 1,631,050
Repurchase of common stock subscriptions - (14,621,070) - - -
Purchase of treasury stock (190,512) - - (128,935) (190,512)
Distributions to majority stockholder (809,414) (507,214) - - (607,060)
Proceeds from exercising stock options - - - 1,391 -
------------- ------------ ----------- ---------- -----------
Net cash provided by (used in)
financing activities 11,674,928 (17,693,519) (2,845,022) (1,364,212) (4,412,039)
------------- ------------ ------------ ---------- -----------
Net increase in cash 1,750,693 2,319,670 1,988,868 27,582,248 5,711,136
Cash and cash equivalents, beginning of year 6,895,608 4,575,938 2,587,070 8,646,301 6,895,608
------------- ------------ ------------ ---------- -----------
Cash and cash equivalents, end of year $ 8,646,301 6,895,608 4,575,938 36,228,549 12,606,744
============= ============ ============ ========== ===========
</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>
Nine Months Ended
Years Ended December 31, Septmber 30,
-------------------------- -------------------
1995 1994 1993 1996 1995
---- ---- ---- ---- ----
(Restated) (Restated) (Unaudited) (Unaudited)
<S> <C> <C> <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 4,218,654 3,877,027
=============== ============== =========== ========== ==========
Cash paid during the year for taxes $ 2,777,032 - - 1,367,097 1,091,604
=============== ============== ========== ========== ==========
Supplemental disclosure of noncash investing and
financing activities:
Additions to equipment in exchange
for capital lease obligations payable $ 27,407 113,888 691,617 100,000 27,407
=============== ============== =========== ========= =========
</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.
Interim Financial Information
------------------------------
The unaudited consolidated financial information as of September 30, 1996
and for the nine months ended September 30, 1996 and 1995 has been
prepared in conformity with the accounting principles and practices
reflected in the annual audited financial statements included herein. In
the opinion of the Company, the unaudited consolidated financial
information contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the Company's financial positon,
results of operations and cash flows for the periods indicated.
(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.
First American accrued the present value of the payments contingently
payable to HCFA of $10 million in 2000 and $35 million in 2001. The
present value of these payments of $27.9 million, reduced by the amount
related to 1996 of $10 million, or $17.9 million, is recorded at December
31, 1995. Management is presently studying the likelihood of the
remaining contigent payments which, if payable, will be due in the years
2002, 2003 and 2004. The entire amount is not considered probable because
the legislative and/or regulatory changes which would trigger the full
amount to be payable cannot be considered probable at this time. The
contingent payments due in 2000 and 2001 are considered probable at this
time because management believes the anticipated Medical CPI in those
years will probably trigger the required payments. However, management is
unable to predict what the Medical CPI will be in years subsequent to
2001. Accordingly, these consolidated financial statements reflect $95
million paid to HCFA in settlement of claims for all pre-petition periods
and $45 million which is probable of payment to HCFA 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.
Management will continue to evaluate the likelihood of the contingencies
being met, and will accrue the additional payments within one year as
purchase price adjustment or will expense such amounts if such
probability is determined subsequent to one year in accordance with FASB
No. 38. 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.
During the nine months ended September 30, 1996, the Company recorded
non-recurring charges of $3,376,946 consisting of bankruptcy and merger
costs.
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. A loss of $2.5 million was recognized in September 1996
related to such forfeiture
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.
In October 1996 ABC Pharmaceuticals, Inc. sold 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.
The assets and liabilities totalled $427,093 and $92,841, respectively,
as of September 30, 1996.
(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 of computer equipment, principal plus interest at
varying rates payable in monthly installments through May 2000,
secured by the 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 of an aircraft, principal plus interest at 5.725%,
payable in monthly installments of $22,830 through March 1998,
secured by the 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 of office equipment, principal plus interest at
varying rates, payable in monthly installments through February
1998, secured by the 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 of communications equipment, principal plus
interest at the 90 day commercial paper rate, payable in
quarterly installments of $25,556 through May 1998, secured by
the telephone equipment 227,657 305,729
Capitalized lease of computer equipment, principal plus interest at
7%, payable in monthly installments of $8,457 through July 1998,
secured by the 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 of a building, principal plus interest at 9.50%,
payable in monthly installments of $1,589 through March 2007,
secured by the 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
Accrued litigation settlements 20,000 000 -
Other accrued expenses 6,939,128 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.
Stock option transactions are summarized as follows:
1995 1994
---- ----
Options outstanding - beginning of period 258,671 -
Granted 376,771 258,671
Execised (5,000) -
Cancelled - -
------- -------
Options outstanding - end of period 630,442 258,671
======= =======
<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 because the previous valuations of the
Company, which were prepared as of the approximate dates on which the
options were granted, did not reflect the effects on the Company's value
of the Federal indictments, conviction, and resulting reorganization, nor
the effects of the Medicare settlement described in note 2 which related
to these years. Management does not believe it to be practicable or cost
beneficial to have new valuations performed as of the historical dates,
giving effect to such matters. 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. In January 1994, ABC Home Nursing, Inc. acquired the
remaining 25% of Atlanta Home Care. 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.
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, which is not recorded in the financial
statements presented. 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 865,556 (53,393) (a)
Intangible assets 316,144
Investments 55,142 24,019 (b)
Other assets 93,342 (5,918) (a)(c)
------------- -------------
Total assets $ 1,657,185 $ (35,964)
============= =============
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 (3,527) (e)
Unrealized gain on available for sale securities 11,483
------------- -------------
Net stockholders' equity 528,494 (3,527)
------------- -------------
Total liabilities and stockholders' equity $ 1,657,185 $ (35,964)
============= =============
</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 10,446 10,446
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 85,424 411,753
------------ ---------------
Property, plant and equipment, net 23,559 835,722
Intangible assets 2,233 245,856 (f) 564,233
Investments 79,161
Other assets 2,220 (18,000)(g) 71,644
------------ -------------- ---------------
Total assets $ 113,436 227,856 1,962,513
============ ============== ===============
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 281,974 15,000 (i) 325,592
------------ -------------- ---------------
Total current liabilities 307,384 (167,676) 336,614
------------ -------------- ---------------
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 30,027 30,027
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) (243,455) 243,455 (k) 74,581
Unrealized gain on available for sale securities 0 11,483
------------ -------------- ---------------
Net stockholders' equity (230,532) 230,532 524,967
------------ -------------- ---------------
Total liabilities and stockholders' equity $ 113,436 227,856 1,962,513
============ ============== ===============
</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
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 790,236 (43,279)(l) (12,453)(l)
Depreciation and amortization 25,909 (1,785)(l) (833)(l)
Rent 53,980 (838)(l) (1,885)(l)
Interest, net 46,033 (3,817)(n) (963)(q)
Non-recurring charges 0 0
----------- ------------ -----------
Total costs and expenses 916,158 (49,719) (16,134)
Earnings(loss) before equity in earnings of 106,858 (36,910) (987)
affiliates and income taxes
Equity in earnings (loss) of affiliates 1,083 722
----------- ------------ -----------
Earnings (loss) before income taxes 107,941 (36,910) (265)
============ ===========
Federal and state income taxes 62,353
-----------
Earnings before extraordinary items 45,588
============
Per Common Share:
Earnings before extraordinary items - primary $ 1.95
Earnings before extraordinary items - fully diluted 1.68
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 1,210,586
Depreciation and amortization 4,990 4,610 (o) 565 848 (o) 34,304
Rent 0 1,770 53,027
Interest, net 5,770 8,823 (p) 1,720 1,042 (p) 58,608
Non-recurring charges 3,377 0 3,377
------------ ------------- ---------- ------------ -----------
Total costs and expenses 402,107 13,433 92,167 1,890 1,359,902
Earnings (loss)before equity in earnings (31,453) (13,433) (4,763) (1,890) 17,422
of affiliates and income taxes
Equity in earnings (loss) of affiliates (673) 1,032 2,164
------------ ---------- ---------- --------- ------------
Earnings (loss) before income taxes (32,126) (13,433) (3,731) (1,890) 19,586
============ ========== ========== =========
Federal and state income taxes 10,645 (r)
------------
Earnings before extraordinary items 8,941
============
Per Common Share:
Earnings before extraordinary items - primary 0.38
Earnings before extraordinary items - fully diluted 0.51
Weighted Average Shares:
Primary 438(s) 23,831
Fully-diluted 438(s) 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
Specialty medical services 770,554 (73,566)(l) (15,123)(l) 558,199
Management services and other 39,765 (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 (6,543)(n) (1,283)(q) 9,717
Loss on impairment 83,321 (5,126)(l) 0
Non-recurring charges 49,639 0
------------ ------------ ----------- ----------
Total costs and expenses 1,222,590 (73,533) (21,538) 673,658
Earnings(loss) before equity in earnings of
affiliates and income taxes (43,702) (33) 5,269 (109,911)
Equity in earnings (loss) of affiliates 1,443 (1,475) 1,129
------------ ------------ ----------- ----------
Earnings(loss) before income taxes (42,259) (33) 3,794 (108,782)
============ =========== ==========
Federal and state income tax benefit (16,270)
------------
Loss before extraordinary items (25,989)
============
Per Common Share:
Loss before extraordinary items - primary $ (1.21)
Loss before extraordinary items - fully diluted (1.21)
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 6,146 (o) 1,804 1,561 (o) 53,313
Rent 1,326 63,794
Interest, net 11,765 (p) 1,585 2,102 (p) 56,320
Loss on impairment 0 78,195
Other non-recurring charges 0 49,639
----------- ---------- --------- -------------
Total costs and expenses 17,911 136,050 3,663 1,958,801
Earnings(loss) before equity in earnings of
affiliates and income taxes (17,911) (4,159) (3,663) (174,110)
Equity in earnings (loss) of affiliates 942 2,039
----------- ---------- --------- -------------
Earnings(loss) before income taxes (17,911) (3,217) (3,663) (172,071)
=========== ========== =========
Federal and state income tax benefit (46,456)(r)
-------------
Loss before extraordinary items (125,615)
=============
Per Common Share:
Loss before extraordinary items - primary (5.62)
Loss before extraordinary items - fully diluted (5.62)
Weighted Average Shares:
Primary 887(s) 22,350
Fully-diluted 887(s) 22,350
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(1) In October 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. The
Company has determined that $45 million of the $155 million of contingent
payments are probable. Accordingly, the probable settlement liability has been
recorded at a discounted basis in the consolidated balance sheets and is
reflected as a reduction of net patient service revenue in the consolidated
statement of operations. Management will continue to evaluate the likelihood of
the contingencies being met, and will accrue the additional payments within one
year as purchase price adjustment or will expense such amounts if such
probability is determined subsequent to one year in accordance with FASB No. 38.
(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. 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 and
adjustments to reflect the Company's equity in ILC's earnings.
(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, and adjustments to reflect the Company's equity in ILC's
earnings.
(f) Represents the purchase price of First American in excess of the
estimated fair value of the net assets acquired, as follows:
Purchase price $ 39,100*
Costs and liabilities paid (2,486)
Direct costs of acquisition (15,000)
Stockholders' deficit of First
American (230,532)
Tax benefit realizable 41,262
-----
Total basis (206,756)
-----------
Total goodwill $ 245,856
===========
- ----------
* Represents total payments of $154,100 less Government settlements of $115,000.
(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 interest rate of 7.19% under the revolving credit facility on
July 30, 1996. The indentures under which IHS' senior subordinated notes
were issued require that IHS use the proceeds of asset sales (as defined in
the indentures) to either (i) invest in healthcare businesses, (ii) repay
senior indebtedness or (iii) repurchase the senior subordinated notes.
(o) Represents additional amortization relating to goodwill recorded as a
result of the acquisitions, amortized using the straight line method over
40 years, as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1996
Less Previosly
Annual Recorded Annual Months
Company Goodwill Life Amortization Amortization Amortization In 1996 Adjustment
- ------- -------- ---- ------------ -------------- ------------ ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
First American $ 245,856 40 $ 6,146 $ 0 $ 6,146 9.0 $ 4,610
--------- -- ------- --- ------- --- -------
Other Acquisitions:
Century 11,919 40 298 (5) 293 8.5 208
Signature 17,182 40 430 (24) 406 9.0 304
Edgewater 7,685 40 192 (1) 191 7.5 119
Extendicare 1,945 40 49 0 49 7.5 30
J.R. Rehab 3,159 40 79 (2) 77 7.0 45
Hospice of Great
Lakes 9,031 40 226 (2) 224 4.0 75
RMS 12,832 40 321 0 321 2.5 67
Vintage 0 40 0 0 0 1.0 0
------- --- ------- ----- ------- ---- -------
63,753 40 1,595 (34) 1,561 848
------- === ------- ----- ------- -------
Total $ 309,609 $ 7,741 $ (34) $ 7,707 $ 5,458
========= ======= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1995
Less Previosly
Annual Recorded
Company Goodwill Life Amortization Amortization Adjustment
- ------- -------- ---- ------------ -------------- ----------
<S> <C> <C> <C> <C> <C>
First American $ 245,856 40 $ 6,146 $ 0 $ 6,146
--------- -- ------- --- -------
Other Acquisitions:
Century 11,919 40 298 (5) 293
Signature 17,182 40 430 (24) 406
Edgewater 7,685 40 192 (1) 191
Extendicare 1,945 40 49 0 49
J.R. Rehab 3,159 40 79 (2) 77
Hospice of Great
Lakes 9,031 40 226 (2) 224
RMS 12,832 40 321 0 321
Vintage 0 40 0 0 0
------- --- ------- ----- -------
63,753 40 1,595 (34) 1,561
------- === ------- ----- -------
Total $ 309,609 $ 7,741 $ (34) $ 7,707
========= ======= ====== =======
</TABLE>
<PAGE>
(p) Represents additional interest expense resulting from borrowings of
$194,325 to finance acquisitions under the Company's revolving credit
facility, as follows:
Nine Months Ended September 30, 1996
Months Interest Interest
Debt In 1996 Rate Adjustment
---- ------- ------- ----------
First American $ 165,000 9.0 7.13% $ 8,823
Pharmacy (91,000) 7.0 7.19% (3,817)
ILC (17,851) 9.0 7.19% (963)
--------- --- ------ -------
Other Acquisitions:
Century 2,390 8.5 7.25% 123
Signature 4,519 9.0 7.19% 244
Edgewater 7,974 7.5 7.25% 361
Extendicare 3,410 7.5 7.25% 155
J.R. Rehab 2,100 7.0 7.25% 89
Hospice of Great Lakes 0 4.0 6.94% 0
RMS 2,000 2.5 6.88% 29
Vintage 6,932 1.0 7.06% 41
--------- --- ------ -------
29,325 - 1,042
--------- ------ -------
Total $ 85,474 7.07% (1) $ 5,085
========= ====== =======
Effect of 1/8% reduction in
interest rate $ 85,474 6.95% (1) $ 4,995
Effect of 1/8% increase in
interest rate $ 85,474 7.20% (1) $ 5,174
- ----------
(1) Pecentage is weighted average based on purchase price
Year Ended December 31, 1995
Interest Interest
Debt Rate Adjustment
---- ------- ----------
First American $ 165,000 7.13% $ 11,765
Pharmacy (91,000) 7.19% (6,543)
ILC (17,851) 7.19% (1,283)
--------- ----- --------
Other Acquisitions:
Century 2,390 7.25% 173
Signature 4,519 7.19% 325
Edgewater 7,974 7.25% 578
Extendicare 3,410 7.25% 247
J.R. Rehab 2,100 7.25% 152
Hospice of Great Lakes 0 6.94% 0
RMS 2,000 6.88% 138
Vintage 6,932 7.06% 489
--------- ----- ---------
29,325 - 2,102
--------- ----- ---------
Total $ 85,474 7.07% (1) $ 6,041
========= ===== =========
Effect of 1/8% reduction in
interest rate $ 85,474 6.95% (1) $ 5,940
Effect of 1/8% increase in
interest rate $ 85,474 7.20% (1) $ 6,154
- ----------
(1) Pecentage is weighted average based on purchase price
(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 interest rate of 7.19% under the revolving credit facility on
October 9, 1996. The indentures under which IHS' senior subordinated notes
were issued require that IHS use the proceeds of asset sales (as defined in
the indentures) to either (i) invest in healthcare businesses, (ii) repay
senior indebtedness or (iii) repurchase the senior subordinated notes.
(r) The amount computed by applying the Federal tax rate of 35% to earnings
before income taxes and extraordinary items for the periods ended December
31, 1995 and September 30, 1996 is summarized as follows:
Dec. 31, Sept. 30,
1995 1996
---- ----
Income tax computed at statutory rate (60,225) 6,855
State income taxes, net of Federal tax benefit (6,035) 689
Amortization of intangibles 4,507 3,486
Merger costs 1,426 --
Penalties 8,185 300
Valuation allowance adjustment -- (1,353)
Other 5,686 668
----- ------
(46,456) 10,645
(s) Represents the additional weighted average number of shares of Company
Common Stock that would have been outstanding during the period had all
shares issued in the aquisitions presented during the period been issued on
the first day of the period.
<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: July 8, 1997 By: /s/ W. Bradley Bennett
-------------------------------------
Name: W. Bradley Bennett
Title: Executive Vice President and
Chief Accounting Officer
EXHIBIT 23.01
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Integrated Health Services, Inc.:
We consent to the 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,
333-1432, 333-28289, 333-28293, 333-28317 and 333-28321) 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 Amendment No.1 to Form 8-K/A dated October 17, 1996 of Integrated Health
Services, Inc.
Our report contains an explanatory paragraph regarding the uncertainty with
respect to certain contingent payments which may be payable under a settlement
agreement with the Health Care Financing Administration.
/s/ KPMG Peat Marwick LLP
Baltimore, Maryland
July 10, 1997
