SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition Period from to
Commission File Number 1-12306
INTEGRATED HEALTH SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-2428312
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
10065 RED RUN BLVD.
OWINGS MILLS, MARYLAND 21117
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 410-998-8400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered:
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Common Stock, par value
$.001 per share New York Stock Exchange
9 5/8 % Senior Subordinated
Notes due 2002, Series A New York Stock Exchange
10 3/4 % Senior Subordinated
Notes due 2004 New York Stock Exchange
5 3/4 % Convertible Senior
Subordinated Debentures due 2001 New York Stock Exchange
6% Convertible Subordinated
Debentures due 2003 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
Aggregate market value of the Registrant's Common Stock held by
non-affiliates at March 26, 1997 (based on the closing sale price for such
shares as reported by the New York Stock Exchange): $689,941,688.
Common Stock outstanding as of March 26, 1997: 23,688,985 shares.
Documents Incorporated by Reference:
Portions of the Registrant's definitive proxy statement for its 1997 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
report.
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PART I
ITEM 1. BUSINESS
GENERAL OVERVIEW
Integrated Health Services, Inc. ("IHS" or the "Company") is one of the
nation's leading providers of post-acute healthcare services. Post-acute care is
the provision of a continuum of care to patients following discharge from an
acute care hospital. IHS' post-acute care services include subacute care, home
care, and inpatient and outpatient rehabilitation, hospice and diagnostic
services. The Company's post-acute care network is designed to address the fact
that the cost containment measures implemented by private insurers and managed
care organizations and limitations on government reimbursement of hospital costs
have resulted in the discharge from hospitals of many patients who continue to
require medical and rehabilitative care. IHS' post-acute healthcare system is
intended to provide cost-effective continuity of care for its patients in
multiple settings and enable payors to contract with one provider to provide all
of a patient's needs following discharge from acute care hospitals. The Company
believes that its post-acute care network can be extended beyond post-acute care
to also provide "pre-acute" care, i.e., services to patients which reduce the
likelihood of a need for a hospital stay. IHS' post-acute care network currently
consists of over 1,100 service locations in 40 states.
The Company's post-acute care network strategy is to provide cost-effective
continuity of care for its patients in multiple settings, including using
geriatric care facilities as platforms to provide a wide variety of subacute
medical and rehabilitative services more typically delivered in the acute care
hospital setting and using home healthcare to provide those medical and
rehabilitative services which do not require 24-hour monitoring. To implement
its post-acute care network strategy, IHS has focused on (i) expanding the range
of home healthcare and related services it offers to patients directly in order
to provide patients with a continuum of care throughout their recovery, to
better control costs and to meet the growing desire by payors for one-stop
shopping; (ii) developing market concentration for its post-acute care services
in targeted states due to increasing payor consolidation and the increased
preference of payors, physicians and patients for dealing with only one service
provider; (iii) developing subacute care units; and (iv) forming strategic
alliances with health maintenance organizations, hospital groups and physicians.
Given the increasing importance of managed care in the healthcare marketplace
and the continued cost containment pressures from Medicare and Medicaid, the
Company has been restructuring its operations to enable IHS to focus on
obtaining contracts with managed care organizations and to provide capitated
services. IHS' strategy is to become a preferred or exclusive provider to
managed care organizations.
In implementing its post-acute care network strategy, IHS has recently
focused on expanding its home healthcare services to take advantage of
healthcare payors' increasing focus on having healthcare provided in the
lowest-cost setting possible, recent advances in medical technology which have
facilitated the delivery of medical services in alternative sites and patients'
desires to be treated at home. Consistent with the Company's strategy, IHS in
October 1996 acquired First American Health Care of Georgia Inc. (First
American), a provider of home health services, principally home nursing, in 21
states, primarily Alabama, California, Florida, Georgia, Michigan, Pennsylvania
and Tennessee, and entered into an agreement to acquire Coram Healthcare
Corporation ("Coram"), a leading provider of alternate site (outside the
hospital) infusion therapy services in the United States, with approximately 110
locations in 43 states. There can be no assurance that the acquisition of Coram
will be consummated. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Acquisition and Divestiture
History." IHS intends to use the home healthcare setting and the delivery
franchise of the home healthcare branch and agency network to (i) deliver
sophisticated care, such as skilled nursing care, home infusion therapy and
rehabilitation, outside the hospital or nursing home; (ii) serve as a referral
base for IHS' other services and healthcare capabilities; and (iii) provide a
cost-effective site for case management and patient direction.
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The Company provides subacute care through medical specialty units ("MSUs"),
which are typically 20 to 75 bed specialty units with physical identities,
specialized medical technology and staffs separate from the geriatric care
facilities in which they are located. MSUs are designed to provide comprehensive
medical services to patients who have been discharged from acute care hospitals
but who still require subacute or complex medical treatment. The levels and
quality of care provided in the Company's MSUs are similar to those provided in
the hospital but at per diem treatment costs which IHS believes are generally
30% to 60% below the cost of such care in acute care hospitals. Because of the
high level of specialized care provided, the Company's MSUs generate
substantially higher net revenue and operating profit per patient day than
traditional geriatric care services. Total revenues generated from MSUs have
increased from $104.3 million for the year ended December 31, 1993 to $178.0
million for the year ended December 31, 1994, $290.2 million for the year ended
December 31, 1995 and $324.0 million for the year ended December 31, 1996. MSU
revenues as a percentage of total revenues were 35% in 1993, 25% in each of 1994
and 1995 and 23% in 1996. The percentage decrease in 1994 was primarily the
result of the acquisition of facilities which did not have MSUs at the time of
acquisition as well as the acquisition of rehabilitation, pharmacy, diagnostic,
respiratory therapy, home healthcare and related service companies in connection
with IHS' vertical integration strategy and the implementation of IHS'
post-acute care network. MSU revenue as a percentage of total revenues is
expected to continue to decrease as the Company implements its vertical
integration strategy and continues to expand its post-acute care network through
the acquisition of home healthcare, rehabilitation and similar service
companies.
IHS presently operates 174 geriatric care facilities (118 owned or leased and
56 managed) and 158 MSUs located within 84 of these facilities. Specialty
medical services revenues, which include all MSU charges, all revenue from
providing rehabilitative therapies, pharmaceuticals, medical supplies and
durable medical equipment to all its patients, all revenue from its Alzheimer's
programs and all revenue from its provision of pharmacy, rehabilitation therapy,
home healthcare, hospice care and similar services to third-parties, constituted
approximately 57%, 65% and 70% of net revenues during the years ended December
31, 1994, 1995 and 1996, respectively. IHS also offers a wide range of basic
medical services as well as a comprehensive array of respiratory, physical,
speech, occupational and physiatric therapy in all its geriatric care
facilities. For the year ended December 31, 1996, approximately 17% of IHS'
revenues were derived from home health and hospice care, approximately 53% were
derived from subacute and other ancillary services, approximately 27% were
derived from traditional basic nursing services, and approximately 3% were
derived from management and other services. On a pro forma basis after giving
effect to the acquisition of First American, for the year ended December 31,
1996, approximately 35% of IHS' revenues were derived from home health and
hospice care, approximately 41% were derived from subacute and other ancillary
services, approximately 21% were derived from traditional basic nursing home
services and the remaining approximately 3% were derived from management and
other services.
INDUSTRY BACKGROUND
In 1983, the Federal government acted to curtail increases in healthcare
costs under Medicare, a Federal insurance program under the Social Security Act
primarily for individuals age 65 or over. Instead of continuing to reimburse
hospitals on a cost plus basis (i.e., the hospital's actual cost of care plus a
specified return on investment), the Federal government established a new type
of payment system based on prospectively determined prices rather than
retrospectively determined costs, with payment for inpatient hospital services
based on regional and national rates established under a system of
diagnosis-related groups ("DRGs"). As a result, hospitals bear the cost risk of
providing care inasmuch as they receive specified reimbursement for each
treatment regardless of actual cost.
Concurrent with the change in government reimbursement of healthcare costs, a
"managed care" segment of the healthcare industry emerged based on the theme of
cost containment. The health maintenance organizations and preferred provider
organizations, which constitute the managed care segment, are able to limit
hospitalization costs by giving physicians incentives to reduce hospital
utilization and by negotiating discounted fixed rates for hospital services. In
addition, traditional third party indemnity insurers began to limit
reimbursement to pre-determined amounts of "reasonable charges," regardless
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of actual cost, and to increase the amount of co-payment required to be paid by
patients, thereby requiring patients to assume more of the cost of hospital
care. These changes have resulted in the earlier discharge of patients from
acute care hospitals.
At the same time, the number of people over the age of 65 began to grow
significantly faster than the overall population. Further, advances in medical
technology have increased the life expectancies of an increasingly large number
of medically complex patients, many of whom require a high degree of monitoring
and specialized care and rehabilitative therapy that is generally not available
outside the acute care hospital. However, the changes in government and
third-party reimbursement and growth of the managed care segment of the
healthcare industry, when combined with the fact that the cost of providing care
to these patients in an acute care hospital is higher than in a non-acute care
hospital setting, provide economic incentives for acute care hospitals and
patients or their insurers to minimize the length of stay in acute care
hospitals. The early discharge from hospitals of patients who are not fully
recovered and still require medical care and rehabilitative therapy has
significantly contributed to the rapid growth of the home healthcare industry,
as have recent advances in medical technology, which have facilitated the
delivery of services in alternate sites, demographic trends, such as an aging
population, and a preference for home healthcare among patients. As a result,
home healthcare is among the fastest growing areas in healthcare.
However, for some of these patients home healthcare is not a viable
alternative because of their continued need for a high degree of monitoring,
more intensive and specialized medical care, 24-hour per day nursing care and a
comprehensive array of rehabilitative therapy. As a result, IHS believes there
is an increasing need for non-acute care hospital facilities which can provide
the monitoring, specialized care and comprehensive rehabilitative therapy
required by the growing population of subacute and medically complex patients.
The traditional nursing home, despite its skilled care license and eligibility
for Medicare certification, has focused on providing custodial care to Medicaid
eligible persons until they die. The state Medicaid reimbursement program
reinforces this focus by typically setting "cost ceilings" on reimbursement for
each patient based on overall average state costs for all patients. Since the
"average" patient is a long-stay, non-medically complex patient, nursing homes
face an economic disincentive to treat medically complex patients because
Medicaid reimburses the nursing home as if it had provided only custodial care
to a non-medically complex patient regardless of the type of care actually
provided. In addition, state laws impose substantial restrictions on or
prohibitions against the ability of a facility to reduce the number of Medicaid
certified beds in a facility, thus making the process of converting to the
treatment of more medically complex non-Medicaid eligible persons a long and
financially risky process. As a result, most traditional nursing homes, with
high Medicaid census and earnings and cash flow under pressure, are reluctant to
spend the capital required to upgrade staff, implement medical procedures (such
as infection control) and equip a nursing home to treat subacute and medically
complex patients and provide the comprehensive rehabilitative therapy required
by many of these patients.
Moreover, recent healthcare reform proposals, which have focused on
containment of healthcare costs, together with the desire of third party payors
to contract with one service provider for all post-acute care services, the
increasing complexity of medical services provided, growing regulatory and
compliance requirements and increasingly complicated reimbursement systems, have
resulted in a trend of consolidation of smaller, local operators who lack the
sophisticated management information systems, operating efficiencies and
financial resources to compete effectively into larger, more established
regional or national operators that offer a broad range of services, either
through its own network or through subcontracts with other third party service
providers.
There are numerous initiatives on the federal and state levels for
comprehensive reforms affecting the payment for and availability of healthcare
services. It is not clear at this time what proposals, if any, will be adopted
or, if adopted, what effect such proposals would have on IHS' business. Aspects
of certain of these healthcare proposals, such as cutbacks in the Medicare and
Medicaid programs, containment of healthcare costs on an interim basis by means
that could include a short-term freeze on prices charged by healthcare
providers, and permitting greater state flexibility in the administration of
Medicaid, could adversely affect IHS. See "-- Sources of Revenue." There can be
no assurance that currently
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proposed or future healthcare legislation or other changes in the administration
or interpretation of governmental healthcare programs will not have an adverse
effect on IHS. Ongoing consolidation in the healthcare industry could also
impact IHS' business and results of operations. See " -- Government Regulation."
COMPANY STRATEGY
The Company's post-acute care network strategy is to provide cost-effective
continuity of care for its patients in multiple settings, including using
geriatric care facilities as platforms to provide a wide variety of subacute
medical and rehabilitative services more typically delivered in the acute care
hospital setting and using home healthcare to provide those medical and
rehabilitative services which do not require 24-hour monitoring. IHS believes
that the success of its post-acute care network strategy will depend in large
part on its ability to control each component of the post-acute care delivery
system in order to provide low-cost, high quality outcomes. The central elements
of the Company's business strategy are:
Vertical Integration of Post-acute Care Services. IHS is expanding the range
of home healthcare and related services it offers to its patients directly in
order to serve the full spectrum of patient needs following acute
hospitalization. In addition to subacute care, the Company is now able to offer
directly to its patients, rather than through third-party providers, home
healthcare, rehabilitation (physical, occupational and speech), hospice care and
mobile x-ray and electrocardiogram services. As a full service provider, IHS
believes that it is better able to respond to the needs of its patients and
referral sources. In addition, the Company believes that by offering managed
care organizations and insurance companies a single source from which to obtain
a full continuum of care to patients following discharge from the acute care
hospital, it will attract healthcare payors seeking to improve the management of
healthcare quality as well as to reduce servicing and administrative expenses.
IHS also believes that offering a broad range of services will allow it to
better control certain costs, which will provide it with a competitive advantage
in contracting with managed care companies and offering capitated rates, whereby
the Company assumes the financial risk for the cost of care.
Expansion of Home-Based Services. The Company's strategy is to expand its
home healthcare services to take advantage of healthcare payors' increasing
focus on having healthcare provided in the lowest-cost setting possible and
patients' desires to be treated at home. IHS believes that the nation's aging
population, when combined with advanced technology which allows more healthcare
procedures to be performed at home, has resulted in an increasingly large number
of patients with long-term chronic conditions that can be treated effectively in
the home. In addition, a significant number of patients discharged from the
Company's MSUs require home healthcare. IHS also believes that it can expand its
home healthcare services to cover pre-acute, as well as post-acute, patients by
having home healthcare nurses provide preventive care services to home-bound
senior citizens. In addition, the Company believes that home healthcare will
help IHS contain costs, thereby providing it with a competitive advantage in
contracting with managed care companies and offering capitated rates. IHS
believes that the changing healthcare reimbursement environment, with the focus
on cost containment, will require healthcare providers to go "at risk" under
capitated service agreements, and that home healthcare will be a critical
component of its ability to do so.
IHS believes that the acquisition of First American and if consummated (of
which there can be no assurance) the acquisiton of Coram will be an important
component in the implementation of its post-acute healthcare system. First
American, when combined with IHS' existing home healthcare operations will give
IHS a significant home healthcare presence in 21 states, including those states
IHS has targeted for its post-acute healthcare system. The Company believes that
its expanded home healthcare network will assist it in meeting the desire of
payors for one stop shopping, as well as offering capitated rates to managed
care providers. Additionally, IHS expects that Medicare will implement a
prospective payment system for home nursing services in the next several years.
Currently, Medicare provides reimbursement for home nursing care on a cost basis
which includes a rate of return, subject to a cap. There is no reward for
efficiency, provided that costs are below the cap. Under current prospective
payment proposals, a healthcare provider would receive a predetermined rate for
a given service. Providers with costs below the predetermined rate will be
entitled
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to keep some or all of this difference. Under prospective pay, the efficient
operator will be rewarded. Since the largest component of home nursing care
costs is labor, which is basically fixed, IHS believes the differentiating
factor in profitability will be administrative costs. As a result of the First
American acquisition, IHS, as a large provider of home nursing services, should
be able to achieve administrative efficiencies compared with the small providers
which currently dominate the home healthcare industry, although there can be no
assurance it will be able to do so. There can be no assurance that Medicare will
implement a prospective payment system for home nursing services in the next
several years or at all. See " -- Government Regulation." There can be no
assurance that IHS will consummate the acquisition of Coram.
Focus on Managed Care. Given the increasing importance of managed care in the
healthcare marketplace and the continued cost containment pressures from
Medicare and Medicaid, IHS has, over the past year, begun to restructure its
operations to position IHS to focus on obtaining contracts with managed care
organizations and to provide capitated services. IHS' strategy is to become a
preferred or exclusive provider to managed care organizations. Although to date
there has been limited demand among managed care organizations for post-acute
care services, IHS believes demand will increase as HMOs continue to attempt to
control healthcare costs and to penetrate the Medicare market. As part of its
focus on managed care and capitated rates, IHS spent several years collecting
outcome data for more than 25,000 patients. To date, the Company has service
agreements with approximately 350 managed care organizations. In January 1996,
IHS was chosen as the exclusive capitated provider for five years of long-term
care, subacute care and therapy services to Sierra Health Plan's Health Plan of
Nevada ("Sierra Health"), the largest HMO in Nevada with approximately 26,000
Medicare enrollees and 116,000 commercial enrollees. As the exclusive provider,
IHS provides all contracted services to the HMOs members; as a capitated
provider, the Company accepts full risk of patient care in exchange for a flat
fee per enrollee. The agreement with Sierra Health provides for bi-annual price
resets, stop-loss agreements and cancellation clauses, although there can be no
assurance that these provisions will be effective to protect IHS. In addition,
in October 1996 the Company entered into a three-year agreement to provide, on
an exclusive basis, long-term and sub-acute care to patients of Foundation
Health Corporation, an HMO located in Florida, on a capitated basis. Foundation
Health currently has 26,000 Medicare and 60,000 commercial enrollees. The
agreement provides for increased revenues to IHS for reduced hospital
utilization. Although IHS has attempted to minimize its risk under the contract,
there can be no assurance that safeguards it implemented will be effective. See
"-- Sources of Revenue."
Subacute Care Through Medical Specialty Units. The Company's strategy is
designed to take advantage of the need for early discharge of many patients from
acute care hospitals by using MSUs as subacute specialty units within its
geriatric care facilities. MSUs provide the monitoring and specialized care
still required by these persons after discharge from acute care hospitals at per
diem treatment costs which IHS believes are generally 30% to 60% below the cost
of care in acute care hospitals. IHS also intends to continue to use its
geriatric care facilities to meet the increasing need for cost-efficient,
comprehensive rehabilitation treatment of these patients. The primary MSU
programs currently offered by IHS are complex care programs, ventilator
programs, wound management programs and cardiac care programs; other programs
offered include subacute rehabilitation, oncology and HIV. The Company opened
its first MSU program in April 1988 and currently operates 158 MSU programs in
84 facilities. IHS also emphasizes the care of medically complex patients
through the provision of a comprehensive array of respiratory, physical, speech,
occupational and physiatric therapy. The Company intends that its MSUs be a
lower cost alternative to acute care or rehabilitation hospitalization of
subacute or medically complex patients. IHS intends to expand its specialty
medical services at its existing and newly acquired facilities. The Company
believes that its subacute care programs will also serve as an important
referral base for its home healthcare and ancillary services. In expanding its
post-acute care network, IHS expects to place less emphasis on subacute care
through MSUs and more emphasis on home healthcare. While IHS added 1,098 MSU
beds in 1994 and 938 MSU beds in 1995, it added only an additional 383 MSU beds
in 1996 and it anticipates that it will add only an additional 300 to 400 MSU
beds in each of 1997 and 1998.
Concentration on Targeted Markets. The Company has implemented a strategy
focused on the development of market concentration for its post-acute care
services in targeted states due to increasing
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payor consolidation. IHS also believes that by offering its services on a
concentrated basis in targeted markets, together with the vertical integration
of its services, it will be better positioned to meet the needs of managed care
payors. The Company now has approximately 1,100 service locations in 40 states,
including 174 geriatric care facilities in 30 states (56 of which IHS manages),
with 61 service locations, including 23 geriatric care facilities (21 of which
IHS manages), in California, 165 service locations, including 32 geriatric care
facilities (five of which IHS manages), in Florida, 79 service locations,
including 14 geriatric care facilities (two of which IHS manages), in
Pennsylvania, and 150 service locations, including 22 geriatric care facilities
(six of which IHS manages), in Texas.
Expansion Through Acquisition. IHS has grown substantially through
acquisitions and the opening of MSUs and the acquisition of home healthcare and
related service providers, and expects to continue to expand its business by
expanding the amount of home healthcare and related services it offers directly
to its patients rather than through third-party providers, by establishing
additional MSUs and rehabilitation programs in its existing geriatric care
facilities, by acquiring additional geriatric care facilities in which to
establish MSUs and rehabilitation programs and by expanding the number of MSU
programs offered. From January 1, 1991 to date, IHS has increased the number of
geriatric care facilities it owns or leases from 25 to 118, has increased the
number of facilities it manages from 18 to 56 and has increased the number of
MSU programs it operates from 13 to 158. In addition, the Company now offers
certain related services, such as home healthcare, rehabilitation, x-ray and
electrocardiogram, directly to its patients rather than relying on third-party
providers.
The Company's growth strategy involves growth through acquisitions and
internal development and, as a result, IHS is subject to various risks
associated with its growth strategy. IHS' planned expansion and growth require
that IHS expand its home healthcare services through the acquisition of
additional home healthcare providers and that IHS acquire, or establish
relationships with, third parties which provide post-acute care services not
currently provided by IHS, that additional MSUs be established in IHS' existing
facilities and that IHS acquire, lease or acquire the right to manage for others
additional facilities in which MSUs can be established. Such expansion and
growth will depend on the Company's ability to create demand for its post-acute
care programs, the availability of suitable acquisition, lease or management
candidates and IHS' ability to finance such acquisitions and growth. The
successful implementation of IHS' post-acute healthcare system, including the
capitation of rates, will depend on the Company's ability to expand the amount
of post-acute care services it offers directly to its patients rather than
through third-party providers. There can be no assurance that suitable
acquisition candidates will be located, that acquisitions can be consummated,
that acquired facilities and companies can be successfully integrated into IHS'
operations, that MSUs can be successfully established in acquired facilities or
that the Company's post-acute healthcare system, including the capitation of
rates, can be successfully implemented. The post-acute care market is highly
competitive, and IHS faces substantial competition from hospitals, subacute care
providers, rehabilitation providers and home healthcare providers, including
competition for acquisitions. See "-- Competition."
The successful integration of acquired businesses, including First American
and, if the acquisition of Coram is consummated, Coram, is important to IHS'
future financial performance. The anticipated benefits from any of these
acquisitions may not be achieved unless the operations of the acquired
businesses are successfully combined with those of IHS in a timely manner. The
process of integrating the various businesses could cause the interruption of,
or a loss of momentum in, the activities of some or all of these businesses,
which could have a material adverse effect on IHS' operations and financial
results. There can be no assurance that the Company will realize any of the
anticipated benefits from its acquisitions. The acquisition of service companies
that are not profitable, or the acquisition of new facilities that result in
significant integration costs and inefficiencies, could also adversely affect
IHS' profitability.
IHS' current and anticipated future growth has placed, and will continue to
place, significant demands on the management, operational and financial
resources of IHS. The Company's ability to manage its growth effectively will
require it to continue to improve its operational, financial and management
information systems and to continue to attract, train, motivate, manage and
retain key employees. There can be no assurance that IHS will be able to manage
its expanded operations effectively.
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There can be no assurance that IHS will be successful in implementing its
strategy or in responding to ongoing changes in the healthcare industry which
may require adjustments to its strategy. If the Company fails to implement its
strategy successfully or does not respond timely and adequately to ongoing
changes in the healthcare industry, IHS' business, financial condition and
results of operations will be materially adversely affected.
PATIENT SERVICES
Basic Medical Services
IHS provides a wide range of basic medical services at its geriatric care
facilities which are licensed as skilled care nursing homes. Services provided
to all patients include required nursing care, room and board, special diets,
and other services which may be specified by a patient's physician who directs
the admission, treatment and discharge of the patient.
SPECIALTY MEDICAL SERVICES
Medical Specialty Units
IHS' MSUs are typically 20 to 75 bed subacute specialty care units located
within discrete areas of IHS' facilities, with physical identities, specialized
medical technology and medical staffs separate from the geriatric care
facilities in which they are located. An intensive care unit nurse, or a nurse
with specialty qualifications, serves as clinical coordinator of each unit,
which generally is staffed with nurses having experience in the acute care
setting. The operations of each MSU are generally overseen by a Board certified
specialist in that unit's area of treatment. The patients in each MSU are
provided with a high degree of monitoring and specialized care similar to that
provided by acute care hospitals. The physiological monitoring equipment
required by the MSU is equivalent to that found in the acute care hospital. IHS
opened its first MSU program during April 1988 and currently operates 158 MSUs
at 84 facilities. Approximately one-third of all of the Company's MSU patients
are under the age of 70.
Although each MSU has most of the treatment capabilities of an acute care
hospital in the MSU's area of specialization, IHS believes the per diem
treatment costs are generally 30% to 60% less than in acute care hospitals.
Additionally, the MSU is less "institutional" in nature than the acute care
hospital, families may visit MSU patients whenever they wish and family
counseling is provided. In marketing its MSU programs to insurers and healthcare
providers, IHS emphasizes the cost advantage of its treatment as compared to
acute care hospitals. IHS also emphasizes the improved "quality of life"
compared to acute care and long-term care hospitals in marketing its MSU
programs to hospital patients and their families. The primary MSU programs
currently offered by IHS are complex care programs, ventilator programs, wound
management programs and cardiac care programs; other programs offered include
subacute rehabilitation, oncology and HIV.
Complex Care Program. This program is designed to treat persons who are
generally subacute or chronically ill and sick enough to be treated in an acute
care hospital. Persons requiring this care include post-surgical patients,
cancer patients and patients with other diseases requiring long recovery
periods. This program is designed to provide the monitoring and specialized care
these patients require but in a less institutional and more cost efficient
setting than provided by hospitals. Some of the monitoring and specialized care
provided to these patients are apnea monitoring, continuous peripheral
intravenous therapy with or without medication, continuous subcutaneous
infusion, chest percussion and postural drainage, gastrostomy or naso-gastric
tube feeding, ileostomy or fistula care (including patient teaching),
post-operative care, tracheostomy care, and oral, pharyngeal or tracheal
suctioning. Patients in this program also typically undergo intensive
rehabilitative services to allow them to return home.
Ventilator Program. This program is designed for persons who require
ventilator assistance for breathing because of respiratory disease or
impairment. Persons requiring ventilation include sufferers of chronic
obstructive pulmonary disease, muscular atrophy and respiratory failure,
pneumonia, cancer, spinal cord or traumatic brain injury and other diseases or
injuries which impair respiration. Ventilators assist or effect respiration in
patients unable to breathe adequately for themselves by injecting heated,
humidified, oxygen-enriched air into the lungs at a pre-determined volume per
breath and number of
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breaths per minute and by controlling the relationship of inhalation time to
exhalation time. Patients in this program undergo respiratory rehabilitation to
wean them from ventilators by teaching them to breathe on their own once they
are medically stable. Patients are also trained to use the ventilators on their
own.
Wound Management Programs. These programs are designed to treat persons
suffering from post operative complications and persons infected by certain
forms of penicillin and other antibiotic resistant bacteria, such as methicillin
resistant staphylococcus aureus ("MRSA"). Patients infected with these types of
bacteria must be isolated under strict infection control procedures to prevent
the spread of the resistant bacteria, which makes MSUs an ideal treatment site
for these patients. Because of the need for strict infection control, including
isolation, treatment of this condition in the home is not practical.
Cardiac Care Program. This program is designed to treat persons suffering
from congestive heart failure, severe cardiac arrhythmia, pre/post transplants
and other cardiac diagnoses. The monitoring and specialized care provided to
these patients includes electrocardiographic monitoring/telemetry, continuous
hemodynamic monitoring, infusion therapy, cardiac rehabilitation, stress
management and dietary counseling, planning and education.
The Company believes that MSU programs can be developed to address a wide
variety of medical conditions which require specialized care. In addition, IHS
has developed MSU programs for subacute rehabilitation, oncology and HIV. IHS
intends to establish additional MSUs in its existing facilities and in
facilities which it acquires or manages for others to address the various market
needs for MSU programs in the markets in which it operates.
Rehabilitation
IHS provides a comprehensive array of rehabilitative services for patients at
all of its geriatric care facilities, including those in its MSU programs, in
order to enable those persons to return home. These services include respiratory
therapy with licensed respiratory therapists, physical therapy with a particular
emphasis on programs for the elderly, speech therapy, particularly for the
elderly recovering from cerebral vascular disorders, occupational therapy, and
physiatric care. A portion of the rehabilitative service hours are provided by
independent contractors. In order to reduce the number of rehabilitative
services hours provided by independent contractors, IHS began in late 1993 to
acquire companies which provide physical, occupational and speech therapy to
healthcare facilities.
The Company also offers a rehabilitation program to stroke victims and
persons who have undergone hip replacement.
Home Healthcare Services
IHS provides a broad spectrum of home healthcare services to the recovering,
disabled, chronically ill or terminally ill person. Home healthcare services may
be as basic as assisting with activities of daily living or as complex as cancer
chemotherapy. Care involves either or both a service component (provided by
registered nurses, home health aides, therapists and technicians through
periodic visits) and a product component (drugs, equipment and related
supplies). Time spent with a patient may range from one or two visits to
around-the-clock care. Patients may be treated for several weeks, several months
or the remainder of their lives.
The home healthcare market is generally divided into four segments: nursing
services; infusion therapy; respiratory therapy; and home medical equipment. On
a pro forma basis after giving effect to the acquisition of First American and
the sale of a majority interest in its assisted living division, IHS had home
healthcare revenues of approximately $457 million, $646 million and $622 million
during the years ended December 31, 1994, 1995 and 1996, respectively,
representing approximately 41.1%, 38.4% and 35.3%, respectively, of total pro
forma patient revenues. On a pro forma basis after giving effect to the
acquisition of First American, home nursing services account for approximately
97.1%, 97.3% and 97.6% of IHS' home healthcare revenues in 1994, 1995 and 1996,
respectively. On a pro forma basis after giving effect to the acquisition of
Coram (of which there can be no assurance) and the acquisition of First
American, home nursing services accounted for approximately 48.9%, 50.3% and
53.0% of IHS' home healthcare revenues in
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1994, 1995 and 1996, respectively, infusion therapy accounted for approximately
50.2%, 48.7% and 46.0%, respectively, of IHS' home healthcare revenues during
such periods, and respiratory therapy and home medical equipment each accounted
for approximately one-half percent of IHS' home healthcare revenues during such
periods.
Home Nursing. Home nursing is the largest component of home healthcare, the
most labor-intensive and generally the least profitable. Home nursing services
range from skilled care provided by registered and other nurses, typically for
those recently discharged from hospitals, to unskilled services delivered by
home health aides for those needing help with the activities of daily living.
Home nursing also includes physical, occupational and speech therapy, as well as
social worker services. IHS substantially expanded its home nursing services
through the acquisition of First American, and currently provides home nursing
services at nearly 500 locations in 24 states.
Infusion Therapy. Infusion therapy, the second largest home healthcare
market, involves the intravenous administration of anti-infective, biotherapy,
chemotherapy, pain management, nutrition and other therapies. Infusion therapy
generally requires patient training, specialized equipment and periodic
monitoring by skilled nurses. Technological advances such as programmable pumps
that control frequency and intensity of delivery are increasing the percentage
of infections and diseases that are treatable in the home; previously these
infections and diseases generally required patients to be hospitalized. Home
infusion therapy is more skilled-labor-intensive than other home healthcare
segments. The acquisition of Coram, if consummated, will expand significantly
IHS' infusion therapy services.
Respiratory Therapy. Respiratory therapy is provided primarily to older
patients with chronic lung diseases (such as chronic obstructive pulmonary
disease, asthma and cystic fibrosis) or reduced respiratory function. The most
common therapy is home oxygen, delivered through oxygen gas systems, oxygen
concentration or liquid oxygen systems. Respiratory therapy is monitored by
licensed respiratory therapists and other clinical staff under the direction of
physicians.
Home Medical Equipment. Home medical equipment consists of the sale or rental
of medical equipment such as specialized beds, wheelchairs, walkers,
rehabilitation equipment and other patient aides.
Alzheimer's Program
IHS also offers a specialized treatment program for persons with Alzheimer's
disease. This program, called "The Renaissance Program," is located in a
specially designed wing separated from the remainder of the facility. The
physical environment is designed to address the problems of disorientation and
perceptual confusion experienced by Alzheimer's sufferers. The Renaissance
Program is designed to help reduce the stress and agitation of Alzheimer's
disease by addressing the problems of short attention spans and hyperactivity.
The staff for this program is specially recruited and staff training is highly
specialized. This program is designed not only to provide care to persons
suffering from Alzheimer's disease, but also to work with the patient's family.
IHS currently offers The Renaissance Program at 12 of its geriatric care
facilities with a total of 345 beds. Patients pay a small premium to IHS' per
diem rate for basic medical care to participate in this program.
Hospice Services
IHS provides hospice services, including medical care, counseling and social
services, to the terminally ill in the greater Chicago metropolitan area,
Michigan and Pennsylvania. Hospice care is a coordinated program of support
services providing physical, psychological, social and spiritual care for dying
persons and their families. Services are provided in the home and/or inpatient
settings. The goal of hospice care is typically to improve a terminal patients'
quality of life rather than trying to extend life. IHS also provides hospice
care to the terminally ill at its facility in Miami, Florida.
MANAGEMENT AND OTHER SERVICES
The Company manages geriatric care facilities under contract for others to
capitalize on its specialized care programs without making the capital outlay
generally required to acquire and renovate a facility. IHS currently manages 56
geriatric care facilities with 6,337 licensed beds. IHS is responsible for
providing all personnel, marketing, nursing, resident care, dietary and social
services, accounting and
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data processing reports and services for these facilities, although such
services are provided at the facility owner's expense. The facility owner is
also obligated to pay for all required capital expenditures. The Company manages
these facilities in the same manner as the facilities it owns or leases, and
provides the same geriatric care services as are provided in its owned or leased
facilities. Contract acquisition costs for legal and other direct costs incurred
to acquire long-term management contracts are capitalized and amortized over the
term of the related contract.
IHS receives a management fee for its services which generally is equal to 4%
to 8% of gross revenues of the geriatric care facility. Certain management
agreements also provide the Company with an incentive fee based on the amount of
the facility's operating income which exceeds stipulated amounts. Management fee
revenues are recognized when earned and billed generally on a monthly basis.
Incentive fees are recognized when operating results of managed facilities
exceed amounts required for incentive fees in accordance with the terms of the
management agreements. The management agreements generally have an initial term
of ten years, with IHS having a right to renew in most cases. The management
agreements expire at various times between July 1997 and May 2005 although all
can be terminated earlier under certain circumstances. The Company generally has
a right of first refusal in respect of the sale of each managed facility. IHS
believes that by implementing its specialized care programs and services in
these facilities, it will be able to increase significantly the operating income
of these facilities and thereby increase the management fees the Company will
receive for managing these facilities.
IHS also manages private duty and Medicare certified home health agencies in
the Dallas/Fort Worth, Texas market.
QUALITY ASSURANCE
The Company has developed a comprehensive Quality Assurance Program to verify
that high standards of care are maintained at each facility operated or managed
by IHS. The Company requires that its facilities meet standards of care more
rigorous than those required by Federal and state law. Under the Company's
Quality Assurance Program standards for delivery of care are set and the care
and services provided by each facility are evaluated to insure they meet IHS'
standards. A quality assurance team evaluates each facility bi-annually,
reporting directly to IHS' Chief Executive Officer and to the Chief Operating
Officer, as well as to the administrator of each facility. Facility
administrator bonuses are dependent in part upon their facility's evaluation.
The Company also maintains an 800 number, called the "In-Touch Line," which is
prominently displayed above telephones in each facility and placed in patients'
bills. Patients and staff are encouraged to call this number if they have any
problem with nursing or administrative personnel which cannot be resolved
quickly at the facility level. This program provides IHS with an early-warning
of problems which may be developing at the facility. IHS has also developed a
specialized Quality Assurance Program for its MSU programs.
IHS has begun a program to obtain accreditation by the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO") for each of its facilities.
At March 24, 1997, 62 of the Company's facilities had been fully accredited by
the JCAHO.
OPERATIONS
The day-to-day operations of each facility are managed by an on-site state
licensed administrator, and an on-site business office manager monitors the
financial operations of each facility. The administrator of each facility is
supported by other professional personnel, including the facility's medical
director, social workers, dietician and recreation staff. Nursing departments in
each facility are under the supervision of a director of nursing who is
state-registered. The nursing staffs are composed of registered nurses and
licensed practical nurses as well as nursing assistants.
The Company's home healthcare businesses are conducted through nearly 500
branches which are managed through three geographic area offices. The area
office provides each of its branches with key management direction and support
services. IHS' organizational structure is designed to create operating
efficiencies associated with certain centralized services and purchasing while
also promoting local decision making.
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IHS' corporate staff provides services such as marketing assistance,
training, quality assurance oversight, human resource management, reimbursement
expertise, accounting, cash management and treasury functions, internal auditing
and management support. Financial control is maintained through fiscal and
accounting policies that are established at the corporate level for use at each
facility and branch location. The Company has standardized operating procedures
and monitors its facilities and branch locations to assure consistency of
operations. IHS emphasizes frequent communications, the setting of operational
goals and the monitoring of actual results. The Company uses a financial
reporting system which enables it to monitor, on a daily basis, certain key
financial data at each facility such as payor mix, admissions and discharges,
cash collections, net revenue and staffing.
Each facility and branch location has all necessary state and local licenses.
Most facilities are certified as providers under the Medicare and Medicaid
programs of the state in which they are located.
JOINT VENTURES
The Company has a 49% interest in a partnership formed in 1993 to manage and
operate approximately 8,000 geriatric care and assisted retirement beds
("Tutera"), and a 40% interest in HPC America, Inc., a Delaware corporation
("HPC") that operates home infusion and home healthcare companies in addition to
owning and managing physician practices. IHS does not participate in the
day-to-day operations of Tutera or HPC, although its consent is required for
certain material transactions. Under certain circumstances, IHS has the right to
purchase the remaining interest in these entities, based upon a multiple of such
entity's earnings, although the Company's right to purchase the remaining
interest in HPC expires in September 1997.
SOURCES OF REVENUE
IHS receives payments for services rendered to patients from private insurers
and patients themselves, from the Federal government under Medicare, and from
the states in which certain of its facilities are located under Medicaid. The
sources and amounts of the Company's patient revenues are determined by a number
of factors, including licensed bed capacity of its facilities, occupancy rate,
the mix of patients and the rates of reimbursement among payor categories
(private, Medicare and Medicaid). Changes in the mix of IHS' patients among the
private pay, Medicare and Medicaid categories can significantly affect the
profitability of the Company's operations. Generally, private pay patients are
the most profitable and Medicaid patients are the least profitable.
During the years ended December 31, 1994, 1995 and 1996, IHS derived
approximately $297.8 million, $509.3 million and $562.5 million, respectively,
or 44.2%, 44.7% and 40.5%, respectively, of its patient revenues from private
pay sources and approximately $376.4 million, $629.8 million and $826.4 million,
respectively, or 55.8%, 55.3% and 59.5%, respectively, of its patient revenues
from government reimbursement programs. Patient revenues from government
reimbursement programs during these periods consisted of approximately $225.6
million, $387.2 million and $516.7 million, or 33.5%, 34.0% and 37.2% of total
patient revenues, respectively, from Medicare and approximately $150.8 million,
$242.6 million and $309.7 million, respectively, or 22.3%, 21.3% and 22.3% of
total patient revenues, respectively, from Medicaid. The increase in the
percentage of revenue from government reimbursement programs is due to the
higher level of Medicare and Medicaid patients serviced by the respiratory
therapy, rehabilitative therapy, home healthcare and mobile diagnostic companies
acquired in 1994, 1995 and 1996.
On a pro forma basis after giving effect to the acquisition of First American
and the sale of a majority interest in its assisted living division, during the
years ended December 31, 1995 and 1996, IHS derived approximately $514.8 million
and $561.1 million, respectively, or 30.6% and 31.9%, respectively, of its
patient revenues from private pay sources and approximately $1.2 billion and
$1.2 billion, respectively, or 69.4% and 68.1%, respectively, of its patient
revenues from government reimbursement programs. Pro forma patient revenues from
government reimbursement programs during these periods consisted of
approximately $919.2 million and $885.7 million, or 54.6% and 50.3%,
respectively, from Medicare and approximately $248.2 million and $313.6 million,
respectively, or 14.8% and 17.8%, respectively, from Medicaid.
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The Company's experience has been that Medicare patients constitute a higher
percentage of an MSU program's initial occupancy than they do once the program
matures. However, as IHS' marketing program to private pay patients is
implemented in the new MSUs, the number of private pay patients in those
programs has traditionally increased. In addition, IHS received payments from
third parties for its management and other services, which constituted
approximately 5.3%, 3.3% and 3.2% of total net revenues for the years ended
December 31, 1994, 1995 and 1996, respectively .
Gross third party payor settlements receivable, primarily from Federal and
state governments (i.e., Medicare and Medicaid cost reports), were $42.6 million
at December 31, 1996, as compared to $33.0 million at December 31, 1995 and
$22.6 million at December 31, 1994. Approximately $15.6 million, or 36.7%, of
the third party payor settlements receivable, primarily from Federal and state
governments, at December 31, 1996 represent the costs for its MSU patients which
exceed regional reimbursement limits established under Medicare, as compared to
approximately $7.6 million, or 23%, at December 31, 1995 and approximately $6.2
million, or 27%, at December 31, 1994.
The Company's cost of care for its MSU patients generally exceeds regional
reimbursement limits established under Medicare. The success of IHS' MSU
strategy depends in part on its ability to obtain per diem rate approvals for
costs which exceed the Medicare established per diem rate limits and by
obtaining waivers of these limitations. IHS has submitted waiver requests for
225 cost reports, covering all cost report periods through December 31, 1995. To
date, final action has been taken by HCFA on 221 waiver requests covering cost
report periods through December 31, 1995. The Company's final rates as approved
by HCFA represent approximately 95% of the requested rates as submitted in the
waiver requests. There can be no assurance, however, that IHS will be able to
recover its excess costs under any waiver requests which may be submitted in the
future. IHS' failure to recover substantially all these excess costs would
adversely affect its results of operations and could adversely affect its MSU
strategy.
Both private third party and governmental payors have undertaken cost
containment measures designed to limit payments made to healthcare providers
such as IHS. Furthermore, government programs are subject to statutory and
regulatory changes, retroactive rate adjustments, administrative rulings and
government funding restrictions, all of which may materially increase or
decrease the rate of program payments to facilities managed and operated by IHS.
There can be no assurance that payments under governmental programs will remain
at levels comparable to present levels or will, in the future, be sufficient to
cover the costs allocable to patients participating in such programs. In
addition, there can be no assurance that facilities owned, leased or managed by
IHS now or in the future will initially meet or continue to meet the
requirements for participation in such programs. The Company could be adversely
affected by the continuing efforts of governmental and private third party
payors to contain the amount of reimbursement for healthcare services. In an
attempt to limit the Federal and state budget deficits, there have been, and IHS
expects that there will continue to be, a number of proposals to limit Medicare
and Medicaid reimbursement for healthcare services. The Company cannot at this
time predict whether this legislation or any other legislation will be adopted
or, if adopted and implemented, what effect, if any, such legislation will have
on IHS. See "--Government Regulation."
Managed care payors and traditional indemnity insurers have experienced
pressure from their policyholders to curb or reduce the growth in premiums paid
to such organizations for healthcare services. This pressure has resulted in
demands on healthcare service providers to reduce their prices or to share in
the financial risk of providing care through alternate fee structures such as
capitation or fixed case rates. Given the increasing importance of managed care
in the healthcare marketplace and the continued cost containment pressures from
Medicare and Medicaid, IHS has been restructuring its operations to enable IHS
to focus on obtaining contracts with managed care organizations and to provide
capitated services. The Company believes that its home healthcare capabilities
will be an important component of its ability to provide services under
capitated and other alternate fee arrangements. However, to date there has been
limited demand among managed-care organizations for post-acute care network
services, and there can be no assurance that demand for such services will
increase. Further, IHS has limited experience in providing services under
capitated and other alternate fee arrangements and setting the applicable rates.
Accordingly, there can be no assurance that the fees received by IHS will cover
the cost of services provided. If revenue for capitated services is insufficient
to cover the treatment costs, IHS'
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operating results could be adversely affected. As a result, the success of IHS'
managed care strategy will depend in large part on its ability to increase
demand for post-acute care services among managed care organizations, to obtain
favorable agreements with managed care organizations and to manage effectively
its operating and healthcare delivery costs through various methods, including
utilization management and competitive pricing for purchased services.
Additionally, there can be no assurance that pricing pressures faced by
healthcare providers will not have a material adverse effect on the Company's
business, results of operations and financial condition.
Further, pursuing a strategy focused on risk sharing fee arrangements entails
certain regulatory risks. Many states impose restrictions on a service
provider's ability to provide capitated services unless it meets certain
financial criteria, and may view capitated fee arrangements as an insurance
activity, subjecting the entity accepting the capitated fee to regulation as an
insurance company rather than merely a licensed healthcare provider accepting a
business risk in connection with the manner in which it is charging for its
services. The laws governing risk sharing fee arrangements for healthcare
service providers are evolving and are not certain at this time. If the risk
sharing activities of IHS require licensure as an insurance company, there can
be no assurance that IHS could obtain or maintain the necessary licensure, or
that IHS would be able to meet any financial criteria imposed by a state. If the
Company was precluded from providing services under risk sharing fee
arrangements, its managed care strategy would be adversely affected. See "--
Government Regulation."
Managed care organizations and other third party payors have continued to
consolidate to enhance their ability to influence the delivery of healthcare
services. Consequently, the healthcare needs of a large percentage of the United
States population are provided by a small number of managed care organizations
and third party payors. These organizations generally enter into service
agreements with a limited number of providers for needed services. To the extent
such organizations terminate IHS as a preferred provider and/or engage IHS'
competitors as a preferred or exclusive provider, the business of IHS could be
materially adversely affected.
GOVERNMENT REGULATION
The healthcare industry is subject to extensive federal, state and local
statutes and regulations. The regulations include licensure requirements,
reimbursement rules and standards and levels of services and care. Changes in
applicable laws and regulations or new interpretations of existing laws and
regulations could have a material adverse effect on licensure of IHS'
facilities, eligibility for participation in Federal and state programs,
permissible activities, costs of doing business, or the levels of reimbursement
from governmental, private and other sources. Political, economic and regulatory
influences are subjecting the healthcare industry in the United States to
fundamental change. It is not possible to predict the content or impact of
future legislation and regulations affecting the healthcare industry.
Most states in which IHS operates or is studying expansion possibilities have
statutes which require that prior to the addition or construction of new beds,
the addition of new services or certain capital expenditures in excess of
defined levels, the Company must obtain a certificate of need ("CON") which
certifies that the state has made a determination that a need exists for such
new or additional beds, new services or capital expenditures. These state
determinations of need or CON programs are designed to comply with certain
minimum Federal standards and to enable states to participate in certain Federal
and state health related programs. Elimination or relaxation of CON requirements
may result in increased competition in such states and may also result in
increased expansion possibilities in such states. Of the states in which the
Company operates, the following require CONs for the facilities that are owned,
operated or managed by IHS: Alabama, Colorado, Delaware, Florida, Georgia,
Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Michigan,
Mississippi, Missouri, Nevada, New Hampshire, New Jersey, North Carolina, Ohio,
South Carolina, Tennessee, Texas, Virginia, Washington, West Virginia and
Wisconsin. To date the conversion of geriatric care beds to MSU beds has not
required a CON.
The Company's facilities are also subject to licensure regulations. Each of
IHS' geriatric care facilities is licensed as a skilled care facility and is
certified as a provider under the Medicare program and
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most are also certified by the state in which they are located as a provider
under the Medicaid program of that state. IHS believes it is in substantial
compliance with all material statutes and regulations applicable to its
business. In addition, all healthcare facilities are subject to various local
building codes and other ordinances.
State and local agencies survey all geriatric care centers on a regular basis
to determine whether such centers are in compliance with governmental operating
and health standards and conditions for participation in government medical
assistance programs. Such surveys include reviews of patient utilization of
healthcare facilities and standards for patient care. IHS endeavors to maintain
and operate its facilities in compliance with all such standards and conditions.
However, in the ordinary course of its business the Company's facilities receive
notices of deficiencies for failure to comply with various regulatory
requirements. Generally, the facility and the reviewing agency will agree upon
the measures to be taken to bring the facility into compliance with regulatory
requirements. In some cases or upon repeat violations, the reviewing agency may
take adverse actions against a facility, including the imposition of fines,
temporary suspension of admission of new patients to the facility, suspension or
decertification from participation in the Medicare or Medicaid programs, and, in
extreme circumstances, revocation of a facility's license. These adverse actions
may adversely affect the ability of the facility to operate or to provide
certain services and its eligibility to participate in the Medicare or Medicaid
programs. In addition, such adverse actions may adversely affect other
facilities operated by IHS. See "-- Federal and State Assistance Programs."
Effective July 1, 1995, the Health Care Financing Administration ("HCFA")
implemented stricter guidelines for annual state surveys of long-term care
facilities. These guidelines eliminate the ability of operators to appeal the
scope and severity of any deficiencies and grant state regulators the authority
to impose new remedies, including monetary penalties, denial of payments and
termination of the right to participate in the Medicare and/or Medicaid
programs. The Company believes these new guidelines may result in an increase in
the number of facilities that will not be in "substantial compliance" with the
regulations and, as a result, subject to increased disciplinary actions and
remedies, including admission holds and termination of the right to participate
in the Medicare and/or Medicaid programs. In ranking facilities, survey results
subsequent to October 1990 are considered. As a result, IHS' strategy of
acquiring poorly performing facilities could adversely affect IHS' business to
the extent remedies are imposed at such facilities.
The operations of the Company's home healthcare branches are subject to
numerous Federal and state laws governing pharmacies, nursing services, therapy
services and certain types of home health agency activities. Certain of IHS'
employees are subject to state laws and regulations governing the professional
practice of respiratory therapy, physical, occupational, and speech therapies,
pharmacy and nursing. The failure to obtain, to renew or to maintain any of the
required regulatory approvals or licenses could adversely affect the Company's
home healthcare business and could prevent the branch involved from offering
products and services to patients. Generally, IHS is required to be licensed as
a home health agency in those states in which it provides traditional home
health or home nursing services. IHS' ability to expand its home healthcare
services will depend upon its ability to obtain licensure as a home health
agency, which may be restricted by state CON laws.
Various Federal and state laws regulate the relationship between providers of
healthcare services and physicians or others able to refer medical services,
including employment or service contracts, leases and investment relationships.
These laws include the fraud and abuse provisions of Medicare and Medicaid and
similar state statutes (the "Fraud and Abuse Laws"), which prohibit the payment,
receipt, solicitation or offering of any direct or indirect remuneration
intended to induce the referral of Medicare or Medicaid patients or for the
ordering or providing of Medicare or Medicaid covered services, items or
equipment. Violations of these provisions may result in civil and criminal
penalties and/or exclusion from participation in the Medicare and Medicaid
programs and from state programs containing similar provisions relating to
referrals of privately insured patients. The Department of Health and Human
Services ("HHS") and other federal agencies have interpreted these provisions
broadly to include the payment of anything of value to influence the referral of
Medicare or Medicaid business. HHS has issued regulations which set forth
certain "safe harbors," representing business relationships and payments
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that can safely be undertaken without violation of the Fraud and Abuse Laws. In
addition, certain Federal and state requirements generally prohibit certain
providers from referring patients to certain types of entities in which such
provider has an ownership or investment interest or with which such provider has
a compensation arrangement, unless an exception is available. The Company
considers all applicable laws in planning marketing activities and exercises
care in an effort to structure its arrangements with healthcare providers to
comply with these laws. However, IHS is unable to provide assurance that all of
its existing or future arrangements will withstand scrutiny under the Fraud and
Abuse Laws, safe harbor regulations or other state or federal legislation or
regulations, nor can it predict the effect of such rules and regulations on
these arrangements in particular or on IHS' operations in general.
The Company's healthcare operations generate medical waste that must be
disposed of in compliance with Federal, state and local environmental laws,
rules and regulations. IHS' operations are also subject to compliance with
various other environmental laws, rules and regulations. Such compliance has not
materially affected, and IHS anticipates that such compliance will not
materially affect, the Company's capital expenditures, earnings or competitive
position, although there can be no assurance to that effect.
In addition to extensive existing government healthcare regulation, there are
numerous initiatives on the Federal and state levels for comprehensive reforms
affecting the payment for and availability of healthcare services. It is not
clear at this time what proposals, if any, will be adopted or, if adopted, what
effect such proposals would have on IHS' business. Aspects of certain of these
healthcare proposals, such as cutbacks in the Medicare and Medicaid programs,
containment of healthcare costs on an interim basis by means that could include
a short-term freeze on prices charged by healthcare providers, and permitting
greater state flexibility in the administration of Medicaid, could adversely
affect IHS. In addition, there have been proposals to convert the current cost
reimbursement system for home nursing services covered under Medicare to a
prospective payment system. The prospective payment system proposals generally
provide for prospectively established per visit payments to be made for all
covered services, which are then subject to an annual aggregate per episode
limit at the end of the year. Home health agencies that are able to keep their
total expenses per visit during the year below their per episode annual limits
will be able to retain a specified percentage of the difference, subject to
certain aggregate limitations. Such changes could have a material adverse effect
on the Company and its growth strategy. The implementation of a prospective
payment system will require the Company to make contingent payments related to
the acquisition of First American of $155 million over a period of five years.
The inability of IHS to provide home healthcare services at a cost below the
established Medicare fee schedule could have a material adverse effect on its
home healthcare operations and the Company's post-acute care network. See "--
Sources of Revenue." There can be no assurance that currently proposed or future
healthcare legislation or other changes in the administration or interpretation
of governmental healthcare programs will not have an adverse effect on the
Company. Concern about the potential effects of the proposed reform measures has
contributed to the volatility of prices of securities of companies in healthcare
and related industries, including IHS, and may similarly affect the price of the
Company's securities in the future. IHS cannot predict the ultimate timing or
effect of such legislative efforts and no assurance can be given that any such
efforts will not have a material adverse effect on the Company's business,
results of operations and financial condition.
FEDERAL AND STATE ASSISTANCE PROGRAMS
Substantially all of IHS' geriatric care facilities are currently certified
to receive benefits as a skilled nursing facility provided under the Health
Insurance for the Aged and Disabled Act (commonly referred to as "Medicare"),
and substantially all are also certified under programs administered by the
various states using federal and state funds to provide medical assistance to
qualifying needy individuals ("Medicaid"). Both initial and continuing
qualification of a skilled nursing care facility to participate in such programs
depend upon many factors including, among other things, accommodations,
equipment, services, patient care, safety, personnel, physical environment, and
adequate policies, procedures and controls.
Services under Medicare consist of nursing care, room and board, social
services, physical and occupational therapies, drugs, biologicals, supplies,
surgical, ancillary diagnostic and other necessary
15
<PAGE>
services of the type provided by extended care or acute care facilities. Under
the Medicare program, the federal government pays the reasonable direct and
indirect allowable costs (including depreciation and interest) of the services
furnished and, through September 30, 1993, provided a rate of return on equity
capital (as defined under Medicare). However, IHS' cost of care for its MSU
patients generally exceeds regional reimbursement limits established under
Medicare. The Company has submitted waiver requests to recover these excess
costs. See "-- Sources of Revenue." There can be no assurance, however, that IHS
will be able to recover its excess costs under the pending waiver requests or
under any waiver requests which may be submitted in the future. IHS' failure to
recover substantially all these excess costs would adversely affect its results
of operations and could adversely affect its MSU strategy. Even though the
Company's cost of care for its MSU patients generally exceeds regional
reimbursement limits established under Medicare for nursing homes, IHS' cost of
care is still lower than the cost of such care in an acute care hospital.
The Medicare program reimburses for home healthcare services under two basic
systems: cost-based and charge-based. Under the cost-based system, IHS is
reimbursed at the lowest of IHS' reimbursable costs (based on Medicare
regulations), cost limits established by HCFA or IHS' charges. While a small
amount of corporate level overhead is permitted as part of reimbursable costs
under Medicare regulations, such costs consist predominantly of expenses and
charges directly incurred in providing the related services, and cannot include
any element of profit or net income to IHS. Under the charge-based system,
Medicare reimburses the Company on a "prospective payment" basis, which consists
in general of either a fixed fee for a specific service or a fixed per diem
amount for providing certain services. As a result, IHS can generate profit or
net income from Medicare charge-based revenues by providing covered services in
an efficient, cost-effective manner. All nursing services (including related
products) are Medicare cost-based reimbursed, except for nursing services
provided to hospice patients. Hospice care and all other home healthcare
services (including non-nursing related products) are Medicare charge-based
reimbursed.
IHS expects that Medicare will implement a prospective payment system for
home nursing services in the next several years, and implementation of a
prospective payment system will be a critical element to the success of the
Company's expansion into home nursing services. Based upon prior legislative
proposals, IHS believes that a prospective payment system would most likely
provide a healthcare provider a predetermined rate for a given service.
Providers with costs below the predetermined rate will be entitled to keep some
or all of this difference. Under such a prospective payment system, the
efficient operator will be rewarded. Since the largest component of home
healthcare costs is labor, which is basically fixed, IHS believes the
differentiating factor in profitability will be administrative costs. As a
result of the First American acquisition, the Company, as a large provider of
home nursing services, should be able to achieve administrative efficiencies
compared with the small providers which currently dominate the home healthcare
industry, although there can be no assurance it will be able to do so. There can
be no assurance that Medicare will implement a prospective payment system for
home nursing services in the next several years or at all. The inability of IHS
to provide home healthcare services at a cost below the established Medicare fee
schedule could have a material adverse effect on the Company's home healthcare
operations and its post-acute care network.
Under the various Medicaid programs, the federal government supplements funds
provided by the participating states for medical assistance to qualifying needy
individuals. The programs are administered by the applicable state welfare or
social service agencies. Although Medicaid programs vary from state to state,
typically they provide for the payment of certain expenses, up to established
limits. The majority of the MSU programs are not required to participate in the
various state Medicaid programs. However, should the Company's MSU programs be
required to admit Medicaid patients as a condition to continued participation in
such programs by the facility in which the MSU program is located, IHS' results
of operations could be adversely affected since IHS' cost of care in its MSU
programs is substantially in excess of state Medicaid reimbursement rates.
Funds received by the Company under Medicare and Medicaid are subject to
audit with respect to the proper preparation of annual cost reports upon which
reimbursement is based. Such audits can result in retroactive adjustments of
revenue from these programs, resulting in either amounts due to the government
agency from IHS or amounts due IHS from the government agency.
16
<PAGE>
Both the Medicare and Medicaid programs are subject to statutory and
regulatory changes, administrative rulings, interpretations of policy
determinations by insurance companies acting as Medicare fiscal intermediaries
and governmental funding restrictions, all of which may materially increase or
decrease the rate of program payments to healthcare facilities. Since 1985,
Congress has consistently attempted to limit the growth of Federal spending
under the Medicare and Medicaid programs. IHS can give no assurance that
payments under such programs will in the future remain at a level comparable to
the present level or be sufficient to cover the operating and fixed costs
allocable to such patients. Changes in reimbursement levels under Medicare or
Medicaid and changes in applicable governmental regulations could significantly
affect IHS' results of operations. It is uncertain at this time whether
legislation on healthcare reform will ultimately be implemented or whether other
changes in the administration or interpretation of governmental healthcare
programs will occur. There can be no assurance that future healthcare
legislation or other changes in the administration or interpretation of
governmental healthcare programs will not have an adverse effect on the results
of operations of IHS. The Company cannot at this time predict whether any
healthcare reform legislation will be adopted or, if adopted and implemented,
what effect, if any, such legislation will have on IHS. See "-- Goverment
Regulation."
COMPETITION
The healthcare industry is highly competitive and is subject to continuing
changes in the provision of services and the selection and compensation of
providers. IHS competes on a local and regional basis with other providers on
the basis of the breadth and quality of its services, the quality of its
facilities and, to a limited extent, price. The Company also competes with other
providers in the acquisition and development of additional facilities and
service providers. IHS' current and potential competitors include national,
regional and local operators of geriatric care facilities, acute care hospitals
and rehabilitation hospitals, extended care centers, retirement centers and
community home health agencies and similar institutions, many of which have
significantly greater financial and other resources than IHS. In addition, the
Company competes with a number of tax-exempt nonprofit organizations which can
finance acquisitions and capital expenditures on a tax-exempt basis or receive
charitable contributions unavailable to IHS. New service introductions and
enhancements, acquisitions, continued industry consolidation and the development
of strategic relationships by the Company's competitors could cause a
significant decline in sales or loss of market acceptance of the Company's
services or intense price competition, or make IHS' services noncompetitive.
Further, technological advances in drug delivery systems and the development of
new medical treatments that cure certain complex diseases or reduce the need for
healthcare services could adversely impact the business of IHS. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors or that competitive pressures will not have a material
adverse effect on the Company's business, financial condition and results of
operations. IHS also competes with various healthcare providers with respect to
attracting and retaining qualified management and other personnel. Any
significant failure by IHS to attract and retain qualified employees could have
a material adverse effect on its business, results of operations and financial
condition.
The geriatric care facilities operated and managed by IHS primarily compete
on a local and regional basis with other skilled care providers. The Company's
MSUs primarily compete on a local basis with acute care and long-term care
hospitals. In addition, some skilled nursing facilities have developed units
which provide a greater level of care than the care traditionally provided by
nursing homes. The degree of success with which IHS' facilities compete varies
from location to location and depends on a number of factors. The Company
believes that the specialized services and care provided, the quality of care
provided, the reputation and physical appearance of facilities and, in the case
of private pay patients, charges for services, are significant competitive
factors. In light of these factors, IHS seeks to meet competition in each
locality by improving the appearances of, and the quality and types of services
provided at, its facilities, establishing a reputation within the local medical
communities for providing competent care services, and by responding
appropriately to regional variations in demographics and tastes. There is
limited, if any, competition in price with respect to Medicaid and Medicare
patients, since revenues for services to such patients are strictly controlled
and based on fixed rates and cost
17
<PAGE>
reimbursement principles. Because IHS' facilities compete primarily on a local
and regional basis rather than a national basis, the competitive position of IHS
varies from facility to facility depending upon the types of services and
quality of care provided by facilities with which each of IHS' facilities
compete, the reputation of the facilities with which each of IHS' facilities
compete, and, with respect to private pay patients, the cost of care at
facilities with which each of IHS' facilities compete.
The home healthcare market is highly competitive and is divided among a large
number of providers, some of which are national providers but most of which are
either regional or local providers. IHS believes that the primary competitive
factors are availability of personnel, the price of the services and quality
considerations such as responsiveness, the technical ability of the professional
staff and the ability to provide comprehensive services.
IHS also competes with other healthcare companies for acquisitions and
management contracts. There can be no assurance that additional acquisitions can
be made and additional management contracts can be obtained on favorable terms.
EMPLOYEES
As of March 31, 1997, IHS had approximately 59,000 full-time and regular
part-time employees. Full-time and regular part-time service and maintenance
employees at 17 facilities, totaling approximately 1,300 employees, are covered
by collective bargaining agreements. IHS' corporate staff consisted of
approximately 1,100 people at such date. The Company believes its relations with
its employees are good.
IHS seeks the highest quality of professional staff within each market.
Competition in the recruitment of personnel in the health care industry is
intense, particularly with respect to nurses. Many areas are already facing
nursing shortages, and it is expected that the shortages will increase in the
future. Although the Company has, to date, been successful in hiring and
retaining nurses and rehabilitation professionals, IHS in the future may
experience difficulty in hiring and retaining nurses and rehabilitation
professionals. The Company believes that its future success and the success of
its MSU programs will depend in large part upon its continued ability to hire
and retain qualified personnel.
INSURANCE
Healthcare companies are subject to medical malpractice, personal injury and
other liability claims which are generally covered by insurance. The Company
maintains liability insurance coverage in amounts deemed appropriate by
management based upon historical claims and the nature and risks of its
business. There can be no assurance that a future claim will not exceed
insurance coverage or that such coverage will continue to be available. In
addition, any substantial increase in the cost of such insurance could have an
adverse effect on IHS' business, results of operations and financial condition.
18
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the
executive officers of the Company:
NAME AGE POSITION
- ----------------------- ------ ---------------------------------------------
Robert N. Elkins, M.D. 53 Chairman Of The Board and
Chief Executive Officer
Lawrence P. Cirka .... 45 President, Chief Operating Officer
and Director
W. Bradley Bennett ... 31 Executive Vice President--Chief Accounting
Officer
Brian K. Davidson .... 39 Executive Vice President--Development
Virginia M. Dollard ... 45 Senior Vice President--Post Acute Network
Operations
Marshall A. Elkins ... 49 Executive Vice President and General Counsel
Eleanor C. Harding .... 47 Executive Vice President--Finance
John Heller............ 38 Senior Vice President--Facility Operations
Marc B. Levin ......... 42 Executive Vice President--Investor Relations
Anthony R. Masso....... 55 Executive Vice President--Managed Care
C. Taylor Pickett .... 35 Executive Vice President--Symphony Health
Services
Scott W. Robertson .... 42 Executive Vice President--Symphony Health
Services
C. Christian Winkle .. 34 Executive Vice President--Field Operations
The officers of the Company are elected annually and serve at the pleasure of
the Board of Directors.
Robert N. Elkins, M.D. has been Chairman of the Board and Chief Executive
Officer of the Company since March 1986 and also served as President from March
1986 to July 1994. From 1980 until co-founding IHS with Timothy F. Nicholson, a
director of the Company, in 1986, Dr. Elkins was a co-founder and Vice President
of Continental Care Centers, Inc., an owner and operator of long-term healthcare
facilities. From 1976 through 1980, Dr. Elkins was a practicing physician. Dr.
Elkins is a graduate of the University of Pennsylvania, received his M.D. degree
from the Upstate Medical Center, State University of New York, and completed his
residency at Harvard University Medical Center. Dr. Elkins is the brother of
Marshall Elkins, General Counsel and Executive Vice President of the Company.
Lawrence P. Cirka has been President and Chief Operating Officer and a
director of the Company since July 1994, and served as Senior Vice President and
Chief Operating Officer of the Company from October 1987 to July 1994. Prior to
joining IHS, Mr. Cirka served in various operational capacities with Unicare
Healthcare Corporation, a long-term healthcare company, for 15 years, most
recently as Vice President-Western Division, where he had operational and
financial responsibility for 46 long-term healthcare facilities exceeding 5,000
beds. Mr. Cirka is a graduate of Clarion University and a Licensed Nursing Home
Administrator in Pennsylvania, Florida and Washington.
W. Bradley Bennett has been Executive Vice President--Chief Accounting
Officer of the Company since September 1996. From April 1996 to September 1996,
he served as Senior Vice President--Chief Accounting Officer of the Company, as
Senior Vice President--Corporate Controller from November 1995 to April 1996,
and as Vice President--Corporate Controller from December 1992 to November 1995.
From October 1991, when he joined IHS, to December 1992, he served as Assistant
Corporate Controller. For five years prior to joining IHS, Mr. Bennett was with
KPMG Peat Marwick LLP, Certified Public Accountants. Mr. Bennett is a Certified
Public Accountant and a Summa Cum Laude graduate of Loyola College, receiving a
B.A. in Accounting.
Brian K. Davidson has been Executive Vice President--Development of the
Company since November 1995. From January 1993 to November 1995 he served as
Senior Vice President--Development. From January 1991, when he joined IHS, to
January 1993 he served as Senior Vice President--Managed
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<PAGE>
Operations of the Company. For more than five years prior to joining IHS, Mr.
Davidson served as Chief Operating Officer of the Tutera Group, a management
company operating skilled nursing beds and retirement apartment units. Mr.
Davidson received B.S. and M.S. degrees from Central Missouri State University.
Virginia M. Dollard has been Senior Vice-President--Post Acute Network
Operations of the Company since January 1997. From May 1995 to January 1997, she
served as Senior Vice President, Southeast Division of the Company. For several
years prior to joining the Company, Ms. Dollard was Executive Vice-President and
Chief Operating Officer of HealthPlus-New York Life Health Plan, a 350,000
member HMO/PPO subsidiary of New York Life Insurance Company. Ms. Dollard
graduated Magna Cum Laude from Roger Williams College with a B.S. in Health and
Social Services Administration. She also received an M.A. in Management with
Distinction from Pepperdine University.
Marshall A. Elkins has been Executive Vice President and General Counsel of
the Company since November 1995. From July 1992 to November 1995 he served as
Senior Vice President and General Counsel of the Company and from January 1990
to July 1992 he served as General Counsel and Vice President of the Company.
From July 1987 until joining IHS in 1990, Mr. Elkins was in private practice in
New York City. Mr. Elkins served as General Counsel to US West Capital
Corporation and later as Assistant General Counsel of US West Financial Services
Corporation from July 1985 to July 1987. Prior thereto, Mr. Elkins was associate
counsel at CIT Corporation from 1980 to 1985. Mr. Elkins received a B.A. degree
from the University of Wisconsin and a J.D. from New York Law School. Mr. Elkins
is the brother of Robert N. Elkins, Chairman and Chief Executive Officer of the
Company.
Eleanor C. Harding has been Executive Vice President--Finance of the Company
since September 1996. From November 1995 to September 1996 she served as Senior
Vice President--Finance and Treasurer and from August 1993 to November 1995 she
served as Vice President--Finance and Treasurer of the Company. From Janaury
1990 until she joined IHS in August 1993, Ms. Harding served as Senior Vice
President, Chief Financial Officer and Treasurer of the Marcor Company. Prior to
January 1990, Ms. Harding served in similiar positions for Jiffy Lube
International, Inc. and The Black and Decker Corporation. Ms. Harding received a
B.A. in Economics from Mount Holyoke College and an M.S. in Finance from Loyola
College.
John F. Heller has been Senior Vice President--Facility Operations of the
Company since September 1996. From June 1995 to September 1996, he served as
Senior Vice President--Northern Operations of the Company, and as Senior Vice
President--MSU Operations from April 1992 to June 1995. From February 1991 to
April 1992 he served as Director of Subacute Finance. For six years prior to
joining IHS, Mr. Heller was with Ernst & Young Management Consulting Group. Mr.
Heller is a graduate of Denison University and holds both a Masters in Health
Services Administration and a Masters of Public Administration from Ohio State
University.
Marc B. Levin has been Executive Vice President--Investor Relations since
November 1995. From March 1993 to November 1995 he served as Senior Vice
President--Investor Relations and from May 1991 to March 1993 he served as Vice
President--Investor Relations of the Company. From March 1989 until May 1991,
Mr. Levin served as Vice President--Corporate Controller/Administration of the
Company. Prior to joining IHS in 1989, Mr. Levin served in various capacities
with Beverly Enterprises for six years, most recently as Assistant to the
President--Eastern Division. Mr. Levin is a Certified Public Accountant and
received B.S. and M.B.A. degrees from the University of Maryland.
Anthony R. Masso has been Executive Vice President--Managed Care since June
1994. Prior to joining IHS, Mr. Masso served in several managed care operating
roles as Senior Vice President of American MedCenters, an HMO company in
Minneapolis and as Regional Vice President of Aetna Health Plans for the Midwest
and Eastern Divisions. He had operational responsibility for thirteen HMOs,
serving on the boards of ten. For twelve years, Mr. Masso served as a senior
executive in the federal HMO office of the Department of Health and Human
Services. Mr. Masso is a graduate of the University of Rhode Island and holds a
masters degree from Syracuse University.
C. Taylor Pickett has been Executive Vice President--Symphony Health Services
since November 1996. From February 1995 to November 1996 he served as Senior
Vice President--Symphony Health Services. Mr. Pickett joined IHS in September
1993 as Vice President of Acquisitions and Taxes. Prior
20
<PAGE>
to joining IHS, Mr. Pickett was Director of Taxes for PHH Corporation. Mr.
Pickett is a Certified Public Accountant and received a B.S. degree in
Accounting from the University of Delaware and a J.D. from the University of
Maryland School of Law.
Scott W. Robertson has been Executive Vice President--Symphony Health
Services since November 1995. From October 1993 to November 1995 he served as
Senior Vice President--Symphony Health Services. Prior to joining IHS in October
1993, Mr. Robertson was the founder of Health Care Consulting, Inc. which the
Company acquired effective September 30, 1993. Prior to founding HCC, Mr.
Robertson founded and served as president of Payne Robertson, a Medicare
consulting and nursing home management company. Mr. Robertson is a graduate from
the University of Utah (1977) with a B.S. in Sociology and a certificate in
Gerontology.
C. Christian Winkle has been Executive Vice President--Field Operations of
the Company's owned and leased facilities since November 1995. From March 1994
to November 1995 he served as Senior Vice President--Operations. Mr. Winkle
joined IHS in September 1990 as Regional Vice President of Operations and
President--MSU Product Development. Prior to joining IHS, Mr. Winkle was the
Executive Director of the Renaissance Rehabilitation & Diagnostic Hospital in
Chattanooga, Tennessee. Mr. Winkle is a graduate of Case Western Reserve
University in Cleveland, Ohio.
ITEM 2. PROPERTIES
The Company owns 41 geriatric care facilities with 5,372 licensed beds, and
leases 77 geriatric care facilities with 10,084 licensed beds. The leases for
the leased facilities have terms of four to 20 years, expiring on various dates
between 1997 and 2010. The leases generally can be renewed and the Company
generally has a right of first refusal to purchase the leased facility. The
Company leases ten facilities from Meditrust, a publicly-traded real estate
investment trust. With respect to all the facilities leased from Meditrust, the
Company is obligated to pay additional rent in an amount equal to a specified
percentage (generally five percent) of the amount by which the facility's gross
revenues exceed a specified amount (generally based on the facility's gross
revenues during its first year of operation). If an event of default occurs
under any Meditrust lease or any other agreement the Company has with Meditrust,
Meditrust has the right to require the Company to purchase the facility leased
from the partnership at a price equal to the higher of the then current fair
market value of the facility or the original purchase price of the facility paid
by Meditrust plus the cost of certain capital expenditures paid for by
Meditrust, an adjustment for the increase in the cost of living index since the
commencement of the lease and all rent then due and payable, all such amounts to
be determined pursuant to the prescribed formula contained in the lease. In
addition, each Meditrust lease provides that a default under any other Meditrust
lease or any other agreement the Company has with Meditrust constitutes a
default under such lease. Upon such a default, Meditrust has the right to
terminate the leases and to seek damages based upon lost rent. The lessor of the
Company's Green Briar facility in Miami, Florida has the right to require the
Company to purchase the facility upon a change in control of the Company (which
includes (i) any person becoming the beneficial owner of more than 30% of the
Company's outstanding Common Stock other than pursuant to an arrangement between
the Company and such person pursuant to which the Company's senior management
remains substantially unchanged and (ii) the Company's Chairman of the Board
dying or becoming disabled). The net purchase price for the facility is $4.0
million. The Company has also guaranteed approximately $6.6 million of the
indebtedness of the lessor of the Company's Green Briar facility in Miami,
Florida, which indebtedness was incurred to finance a portion of the cost of the
expansion and renovation of the facility and to refinance the mortgage thereon.
Any payment under such guaranty would reduce the Company's purchase price for
the facility if it elects or is required to purchase the facility. The lessor of
this facility has the right to require Messrs. Robert N. Elkins and Timothy F.
Nicholson to purchase all or any part of 13,944 shares of Common Stock owned by
it at a per share purchase price equal to the sum of $12.25 per share plus 9%
simple interest per annum from May 8, 1988 until the date of such purchase. The
Company has agreed to purchase such shares if Messrs. Elkins and Nicholson fail
to do so.
The Company leases its headquarters in Owings Mills, Maryland under an eight
year lease expiring in May 2001.
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<PAGE>
The following table presents certain information regarding the Company's
owned and leased facilities as of December 31, 1996.
<TABLE>
<CAPTION>
AMOUNT OF
DATE LICENSED OWNERSHIP MORTGAGE ON
FACILITY/LOCATION ACQUIRED BEDS (LEASED/OWNED) PROPERTY
- ----------------------------------- ----------- ----------- --------------- --------------
<S> <C> <C> <C> <C>
Alexandria......................... 9/1/94 60 Leased
Alexandria, LA
Amarillo........................... 9/1/94 133 Owned $ 951,000
Amarillo, TX
Atlanta at Briarcliff Haven ...... 9/15/92 160 Leased
Atlanta, GA
Auburndale......................... 12/l/93 120 Owned
Auburndale, FL
Avenel............................. 8/1/95 120 Owned
Plantation, FL
Beeville........................... 12/1/93 101 Owned $ 744,000
Beeville, TX
Beneva Nursing Pavillion........... 12/1/93 120 Owned
Sarasota, FL
Boise.............................. 9/1/94 218 Leased
Boise, ID
Bradenton.......................... 9/1/94 120 Leased
Bradenton, FL
Brandon............................ 12/1/93 120 Owned
Brandon, FL
Brentwood.......................... 1/20/88 140 Owned
Burbank, IL
Briarcliff......................... 12/1/86 230 Leased
Alabaster, AL
Broomall........................... 12/1/93 298 Owned $1,493,000
Broomall, PA
Carriage-by-the-Lake............... 12/14/90 78 Leased
Bellbrook, OH
Central Florida -- Fort Pierce .... 12/20/93 107 Owned (1)
Fort Pierce, FL
Central Florida -- Orlando......... 12/20/93 120 Owned (1)
Orlando, FL
Central Florida -- Vero Beach ..... 12/20/93 110 Owned (1)
Vero Beach, FL
Central Park Village............... 12/1/93 120 Owned
Orlando, FL
Charleston at Driftwood............ 7/1/92 160 Leased
Charleston, SC
Charlestown........................ 9/1/94 126 Leased
Charles Town, WV
Charlotte at Hawthorne............. 4/1/93 142 Leased
Charlotte, NC
Chateau Nursing & Rehabilitation .. 7/1/94 156 Leased
Bryn Mawr, PA
Cherry Creek....................... 8/1/95 267 Leased
Aurora, CO
Chestnut Hill...................... 12/1/93 200 Owned
Philadelphia, PA
Cheyenne Mountain Nursing.......... 9/1/94 180 Leased
Colorado Springs, CO
Cheyenne Care Center............... 5/1/96 96 Leased
Las Vegas, NV
22
<PAGE>
AMOUNT OF
DATE LICENSED OWNERSHIP MORTGAGE ON
FACILITY/LOCATION ACQUIRED BEDS (LEASED/OWNED) PROPERTY
- ----------------------------------- ----------- ----------- --------------- --------------
Cheyenne Residential and Nursing .. 5/1/96 240 Leased
Las Vegas, NV
Church Lane Health Care Center .... 7/1/94 126 Leased
Broomall, PA
Claiborne.......................... 9/1/94 90 Leased
Shreveport, LA
Clara Burke Community.............. 12/31/86 73 Owned $ 6,392,000
Plymouth Meeting, PA
Clearwater......................... 12/1/93 150 Owned
Clearwater, FL
Colorado Springs................... 12/29/93 155 Owned $ 8,087,000
Colorado Springs, CO
Dallas at Treemont (Nursing) ...... 6/30/94 114 Owned(2) $13,332,000
Dallas, TX
Derry.............................. 3/05/93 112 Owned
Derry, NH
Erie at Bayside.................... 9/2/86 141 Leased
Erie, PA
Fort Myers......................... 9/1/94 110 Leased
Fort Myers, FL
Gainesville........................ 12/1/93 120 Owned $ 1,129,000
Gainesville, FL
Gonzales........................... 9/1/94 124 Leased
Gonzales, LA
Governor's Park.................... 11/1/95 150 Owned
Barrington, IL
Great Bend......................... 9/1/94 160 Leased
Great Bend, KS
Greater Pittsburgh................. 4/25/91 120 Leased
Greensburg, PA
Green Briar........................ 5/8/88 205 Leased
Miami, FL
Hanover............................ 12/7/92 80 Leased
Birmingham, AL
Heritage........................... 9/1/94 180 Leased
Atlanta, GA
Heritage North..................... 9/1/94 121 Leased
New Iberia, LA
Heritage South..................... 9/1/94 80 Leased
New Iberia, LA
Hershey at Woodlands............... 2/9/89 213 Owned $ 5,502,000
Hershey, PA
Houston Hospital................... 12/1/94 60 Owned $ 9,794,000
Houston, TX
Huber Heights at Spring Creek ..... 12/14/90 100 Leased
Huber Heights, OH
Hurst Care Center.................. 12/1/93 112 Owned
Hurst, TX
Indianapolis at Cambridge.......... 2/9/89 145 Leased
Indianapolis, IN
Iowa at Des Moines................. 3/11/93 93 Owned
Des Moines, IA
Iowa Park.......................... 9/1/94 77 Leased
Iowa Park, TX
Jacksonville....................... 12/1/93 120 Owned
Jacksonville, FL
23
<PAGE>
AMOUNT OF
DATE LICENSED OWNERSHIP MORTGAGE ON
FACILITY/LOCATION ACQUIRED BEDS (LEASED/OWNED) PROPERTY
- ----------------------------------- ----------- ----------- --------------- --------------
Julia Ribaudo Home................. 7/1/94 120 Leased
Lake Ariel, PA
Kansas City at Alpine North........ 1/25/88 190 Leased
Kansas City, MO
Kaplan............................. 9/1/94 120 Leased
Kaplan, LA
Kent Convalescent Center........... 7/1/94 153 Leased
Smyma, DE
Lafayette.......................... 9/1/94 60 Leased
Lafayette, LA
Las Vegas.......................... 6/1/92 118 Owned
Las Vegas, NV
Maclen Rehabilitation Center ...... 12/1/93 120 Owned $1,313,000
Lake Worth, FL
Manchester at Hackett Hill......... 4/26/88 68 Owned
Manchester, NH
Many............................... 9/1/94 128 Leased
Many, LA
Many South......................... 9/1/94 60 Leased
Many, LA
Marrero............................ 9/1/94 134 Leased
Marrero, LA
Mayfair Manor...................... 9/1/94 100 Leased
Lexington, KY
Mesa Manor......................... 9/1/94 98 Leased
Grand Junction, CO
Michigan at Riverbend.............. 5/7/88 160 Leased
Grand Blanc, MI
Mill Hill.......................... 9/1/95 110 Leased
Worcester, MA
Mimosa Manor....................... 12/1/93 150 Leased
Keller, TX
Minden............................. 9/1/94 230 Leased
Minden, LA
Mountain View...................... 12/5/86 137 Leased
Greensburg, PA
Nashville.......................... 9/l/94 124 Leased
Nashville, TN
New Hampshire at Claremont......... 3/05/93 68 Owned
Claremont, NH
New Jersey at Somerset Valley ..... 12/20/86 58 Leased
Bound Brook, NJ
New London at Firelands............ 12/14/90 50 Leased
New London, OH
Northern Virginia.................. 12/15/94 114 Leased
Alexandria, VA
Oakbridge Village.................. 12/1/93 120 Owned
Lakeland, FL
Orange Hills....................... 8/1/92 150 Leased
Orange, CA
Orange Park........................ 9/1/94 105 Leased
Orange Park, FL
Palm Bay........................... 9/1/94 120 Leased
Palm Bay, FL
Pierremont......................... 9/1/94 196 Leased
Shreveport, LA
24
<PAGE>
AMOUNT OF
DATE LICENSED OWNERSHIP MORTGAGE ON
FACILITY/LOCATION ACQUIRED BEDS (LEASED/OWNED) PROPERTY
- ----------------------------------- ----------- ----------- --------------- --------------
Pikes Peak......................... 9/1/94 210 Leased
Colorado Springs, CO
Pinellas Park...................... 12/1/93 120 Owned
Pinellas Park, FL
Plainview.......................... 9/1/94 102 Leased
Plainview, TX
Plymouth House Rehabilitation ..... 7/1/94 154 Leased
Norristown, PA
Port Charlotte..................... 9/1/94 165 Leased
Port Charlotte, FL
Pueblo Manor....................... 9/1/94 151 Leased
Pueblo, CO
Raleigh at Crabtree Valley......... 12/31/91 134 Leased
Raleigh, NC
St. Louis at Big Bend Woods........ 7/27/87 176 Owned
Valley Park, MO
St. Louis at Gravois............... 7/27/87 167 Leased
St. Louis, MO
St. Petersburg at William & Mary .. 9/1/87 92 Owned
St. Petersburg, FL
Sarasota Nursing Pavilion.......... 12/1/93 180 Owned $1,172,000
Sarasota, FL
Seattle............................ 5/25/90 210 Leased
Seattle, WA
Sebring............................ 9/1/94 105 Leased
Sebring, FL
Shady Oaks Nursing Center.......... 12/1/93 179 Owned $2,181,000
Sherman, TX
Shoreham........................... 9/1/94 154 Leased
Marietta, GA
Shreveport......................... 9/1/94 110 Leased
Shreveport, LA
Southern California at Park
Regency............................ 2/1/92 99 Leased
La Habra, CA
Sunset House....................... 7/1/96 55 Leased
Burbank, IL
Tarpon Springs..................... 12/1/93 120 Owned
Tarpon Springs, FL
Terrell............................ 9/1/94 140 Leased
Terrell, TX
Terrell Care Center................ 9/1/94 94 Leased
Terrell, TX
Theron Grainger Nursing Home ...... 12/1/93 65 Leased
Hughes Springs, TX
Thibodaux.......................... 9/1/94 60 Leased
Thibodaux, LA
Trinity Hills Manor................ 12/1/93 133 Leased
Benbrook, TX
Venice Nursing Pavilion North ..... 12/1/93 178 Owned $ 644,000
Venice, FL
Vintage............................ 1/1/96 110 Owned(2)
Denton, TX
Vivian............................. 9/1/94 80 Leased
Vivian, LA
Waterford Commons.................. 1/16/90 101 Owned
Toledo, OH
25
<PAGE>
AMOUNT OF
DATE LICENSED OWNERSHIP MORTGAGE ON
FACILITY/LOCATION ACQUIRED BEDS (LEASED/OWNED) PROPERTY
- ----------------------------------- ----------- ----------- --------------- --------------
West Carrollton at Elm Creek ...... 12/14/90 100 Leased
West Carrollton, OH
West Palm Beach.................... 12/1/93 94 Owned(2)
West Palm Beach, FL
Whitemarsh......................... 12/1/93 247 Owned
Whitemarsh, PA
Wichita............................ 9/1/94 120 Leased
Wichita, KS
Wichita Falls...................... 9/1/94 120 Leased
Wichita Falls, TX
Winter Park........................ 9/1/94 103 Leased
Winter Park, FL
Winthrop........................... 9/1/95 150 Leased
Medford, MA
Woodridge Convalescent Center ..... 12/1/93 142 Leased
Grapevine, TX ....................
</TABLE>
- ----------
(1) Consolidated facilities mortgage of $9,314,000.
(2) IHS owns a condominium interest in each of these facilities.
Integrated Living Communities, Inc. ("ILC"), a wholly-owned subsidiary
of IHS through October 9, 1996 and now a company in which IHS owns a
37% interest, owns the remaining condominium interest. IHS operates a
geriatric care facility in each of these facilities, and ILC operates
an assisted living facility.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings that are incidental to
the conduct of its business. The Company is not involved in any pending or
threatened legal proceedings which the Company believes could reasonably be
expected to have a material adverse effect on the Company's financial condition,
liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
26
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the New York Stock Exchange under the symbol
"IHS". The following table sets forth for the periods indicated the high and low
last reported sale prices for the Common Stock as reported by the New York Stock
Exchange.
HIGH LOW
------- -------
CALENDAR YEAR 1995
First Quarter ................................. $42 1/2 $34 1/2
Second Quarter ................................ 37 1/4 28 5/8
Third Quarter ................................. 32 7/8 27 5/8
Fourth Quarter ................................ 29 3/4 20 3/8
HIGH LOW
------ ------
CALENDAR YEAR 1996
First Quarter ............................... $26 $20 1/8
Second Quarter .............................. 27 7/8 23 3/8
Third Quarter ............................... 25 7/8 20 1/2
Fourth Quarter .............................. 27 22
As of March 17, 1997, there were approximately 658 record holders of the
Common Stock.
In 1994, 1995 and 1996 the Company declared a cash dividend of $0.02 per
share; prior to 1994, the Company had never declared or paid any cash dividends
on its Common Stock. The payment of any future dividends will be at the
discretion of the Company's Board of Directors and will depend upon, among other
things, future earnings, operations, capital requirements, the general financial
condition of the Company, contractual restrictions and general business
conditions. The Company's revolving credit facility prohibits the payment of
dividends without the consent of the lenders, and the indentures under which the
Company's 10 3/4% Senior Subordinated Notes due 2004, 9 5/8% Senior Subordinated
Notes due 2002, Series A, and 10 1/4% Senior Subordinated Notes due 2006 limit
the payment of dividends unless certain financial tests are met.
27
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following tables summarize certain selected consolidated financial data,
which should be read in conjunction with the Company's Consolidated Financial
Statements and related Notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein. The
selected consolidated financial data set forth below for the five-year period
ended December 31, 1996 and as of the end of each of such periods have been
derived from the Consolidated Financial Statements of the Company which have
been audited by KPMG Peat Marwick LLP, independent certified public accountants.
The consolidated financial statements as of December 31, 1995 and 1996 and for
each of the years in the three year period ended December 31, 1996, and the
independent auditors' report thereon, are included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1992 1993 1994 1995 1996
------------- ------------ ------------- ------------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data(1)(2):
Net revenues:
Basic medical services ................ $ 100,799 $ 113,508 $ 269,817 $ 368,569 $ 389,773
Specialty medical services ............ 88,065 162,017 404,401 770,554 999,209
Management services and other ......... 13,232 20,779 37,884 39,765 45,713
------------- ------------ ------------- ------------- ------------
Total ............................... 202,096 296,304 712,102 1,178,888 1,434,695
Cost and expenses:
Operating expenses .................... 145,623 212,936 528,131 888,551 1,093,948
Corporate administrative and
general .............................. 11,927 16,832 37,041 56,016 60,976
Depreciation and amortization ......... 4,334 8,126 26,367 39,961 41,681
Rent .................................. 19,509 23,156 42,158 66,125 77,785
Interest, net ......................... 1,493 5,705 20,602 38,977 64,110
Loss from impairment of long lived
assets(3)............................. -- -- -- 83,321 --
Other non-recurring charges
(income)(4)........................... -- -- -- 49,639 (14,457)
------------- ------------ ------------- ------------- ------------
Earnings (loss) before equity in
earnings (loss) of affiliates, income
taxes and extraordinary items ....... 19,210 29,549 57,803 (43,702) 110,652
Equity in earnings (loss) of affiliates (36) 1,241 1,176 1,443 828
------------- ------------ ------------- ------------- ------------
Earnings (loss) before income taxes
and extraordinary items ............. 19,174 30,790 58,979 (42,259) 111,480
Income tax provision (benefit).......... 7,286 12,008 22,117 (16,270) 63,715
------------- ------------ ------------- ------------- ------------
Earnings (loss) before extraordinary
items ............................... 11,888 18,782 36,862 (25,989) 47,765
Extraordinary items(5) ................. 2,524 2,275 4,274 1,013 1,431
------------- ------------ ------------- ------------- ------------
Net earnings (loss) ................. $ 9,364 $ 16,507 $ 32,588 $ (27,002) $ 46,334
============= ============ ============= ============= ============
Per Common Share (fully diluted)(6):
Earnings (loss) before extraordinary
items ................................ $ 1.01 $ 1.35 $ 1.73 $ (1.21) $ 1.82
Net earnings (loss) ................... .80 1.22 1.57 (1.26) 1.78
============= ============ ============= ============= ============
Weighted average number of common and
common equivalent shares outstanding(6) 11,996,815 17,261,079 27,154,153 21,463,464 31,652,620
============= ============ ============= ============= ============
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1992 1993 1994 1995 1996
----------- --------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and temporary investments . $103,858 $ 65,295 $ 63,347 $ 41,304 $ 41,072
Working capital ................. 144,074 69,495 76,383 136,315 57,549
Total assets .................... 313,671 776,324 1,255,989 1,433,730 1,993,107
Long-term debt, including
current portion ............... 142,620 402,536 551,452 770,661 1,054,747
Stockholders' equity ............ 146,013 216,506 453,811 431,528 534,865
</TABLE>
- ----------
(1) The Company has grown substantially through acquisitions and the opening of
MSUs, which acquisitions and MSU openings materially affect the
comparability of the financial data reflected herein.
(2) In 1995, the Company merged with IntegraCare, Inc. ("IntegraCare") in a
transaction accounted for as a pooling of interests. Accordingly the
Company's historical financial statements for all periods prior to the
effective date of the merger have been restated to include the results of
IntegraCare. See Note 1(o) of Notes to Consolidated Financial Statements.
(3) In December 1995, the Company elected early implementation of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, resulting in a non-cash charge of $83,321,000.
See Notes 1(k) and 18 of Notes to Consolidated Financial Statements.
(4) In 1995 consists primarily of loss on termination of management contract,
costs in connection with the merger with IntegraCare and write-off of
deferred pre-opening costs. In the fourth quarter of 1995, IHS terminated a
contract, entered into in January 1994, to manage 23 long-term care and
psychiatric facilities owned by Crestwood Hospital and, as a result,
incurred a loss of $21,915,000 on the termination of this contract. Such
loss consists of $8,496,000 of accrued management fees, $11,097,000 of
loans made to Crestwood Hospital and the owners of Crestwood Hospital, as
well as the interest thereon, and $2,322,000 of contract acquisition costs.
In connection with the merger with IntegraCare, IHS incurred $1,939,000 of
accounting, legal and other costs in 1995. In the fourth quarter of 1995,
IHS changed its accounting estimate regarding the future benefit of
deferred pre-opening costs. As a result, IHS wrote-off $25,785,000 of
deferred pre-opening costs in 1995. In 1996 consists primarily of (i) a
gain of $34,298,000 from the sale of its pharmacy division, (ii) a loss of
$8,497,000 from its sale of shares in its assisted living services
subsidiary, (iii) a $7,825,000 loss on write-off of accrued management fees
and loans resulting from the Company's termination of its ten year
management contract with All Seasons, originally entered into during
September 1994 and (iv) a $3,519,000 exit cost resulting from the closure
of redundant home healthcare agencies. Because IHS' investment in the
Capstone common stock received in the sale of its pharmacy division had a
very small tax basis, the taxable gain on the sale significantly exceeded
the gain for financial reporting purposes, thereby resulting in a
disproportionately higher income tax provision related to the sale. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Acquisition and Divestiture History" and "-- Year
Ended December 31, 1996 Compared to Year Ended December 31, 1995" and Notes
1(g), 1(o), and 18 of Notes to Consolidated Financial Statements.
(5) In 1992 the Company recorded a loss on extinguishment of debt of $4,072,000
relating primarily to prepayment charges and the write-off of deferred
financing costs. Such loss, reduced by the related income tax effect of
$1,548,000, is presented for the year ended December 31, 1992 as an
extraordinary loss of $2,524,000. In 1993 the Company recorded a loss on
extinguishment of debt of $3,730,000 relating primarily to the write-off of
deferred financing costs. Such loss, reduced by the related income tax
effect of $1,455,000, is presented for the year ended December 31, 1993 as
an extraordinary loss of $2,275,000. In 1994 the Company recorded a loss on
extinguishment of debt of $6,839,000 relating primarily to the write-off of
deferred financing costs. Such loss, reduced by the related income tax
effect of $2,565,000, is presented for the year ended December 31, 1994 as
an extraordinary loss of $4,274,000. In 1995, the Company recorded a loss
on extinguishment of debt of $1,647,000 relating primarily to prepayment
charges and the write-off of deferred financing costs. Such loss, reduced
by the related income tax effect of $634,000, is presented for the year
ended December 31, 1995 as an extraordinary loss of $1,013,000. In 1996,
the Company recorded a loss on extinguishment of debt of $2,327,000,
relating primarily to the write-off of deferred financing costs. Such loss,
reduced by the related income tax effect of $896,000, is presented in the
statement of operations for the year ended December 31, 1996 as an
extraordinary loss of $1,431,000.
(6) The weighted average number of common and common equivalent shares
outstanding for the years ended December 31, 1992, 1993, 1994 and 1996
includes the assumed conversion of the convertible subordinated debentures
into IHS Common Stock. Additionally, interest expense and amortization of
underwriting costs related to such debentures are added, net of tax, to
income for the purpose of calculating fully-diluted earnings per share.
Such amounts aggregated $183,000, $4,516,000, $10,048,000 and $9,888,000
for the years ended December 31, 1992, 1993, 1994 and 1996, respectively.
The weighted average number of common and common equivalent shares
outstanding for the year ended December 31, 1995 does not include the
assumed conversion of the convertible subordinated debentures or the
related interest expense and underwriting costs, as such conversion would
be anti-dilutive.
29
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statements in this Annual Report on Form 10-K concerning the Company's
business outlook or future economic performance; anticipated profitability,
revenues, expenses or other financial items; and product line growth, together
with other statements that are not historical facts, are "forward-looking
statements" as that term is defined under Federal Securities Laws.
Forward-looking statements are subject to risks, uncertainties and other factors
which could cause actual results to differ materially from those stated in such
statements. Such risks, uncertainties and factors include, but are not limited
to, the Company's substantial indebtedness, growth strategy, managed care
strategy, capital requirements and recent acquisitions as well as competition,
government regulation, general economic conditions and the other risks detailed
in the Company's filings with the Securities and Exchange Commission, including
this Annual Report on Form 10-K.
INTRODUCTION
In the past 15 years, the number of people over the age of 65 began to grow
significantly faster than the overall population. At the same time, advances in
medical technology have increased the life expectancies of an increasingly large
number of medically complex patients. This trend, combined with the
implementation of healthcare cost containment measures by private insurers and
government reimbursement programs, has created a need for a more cost efficient
alternate site for the provision of a wide range of medical and rehabilitative
services which traditionally have been provided in an acute care hospital. To
address this need, the Company has developed medical specialty units within its
geriatric care facilities. The Company opened its first MSU in April 1988 in
conjunction with HEALTHSOUTH Rehabilitation Corporation, and as of December 31,
1996 operated 158 MSUs totaling 3,555 beds. The Company's strategy generally has
been to acquire geriatric care facilities and to implement in such facilities
specialty medical services programs, such as MSUs, to treat the more medically
complex patient. Beginning in 1993, the Company began to expand the range of
related services it offers to its patients directly in order to serve the full
spectrum of patients' post-acute care needs. The Company is now able to offer
directly to its patients, rather than through third party providers, a continuum
of care following discharge from an acute care hospital. IHS' post-acute
services include sub-acute care, home care, inpatient and outpatient
rehabilitation, hospice and diagnostic services.
GENERAL
BASIC MEDICAL SERVICES
The Company includes in basic medical services revenues all room and board
charges for its geriatric care patients (other than patients in its MSU and
Alzheimer's programs) at its owned and leased geriatric care and assisted living
facilities.
The following table sets forth the Company's sources of basic medical
services revenues by payor type for the periods indicated:
YEARS ENDED DECEMBER 31,
----------------------------------------------
1992 1993 1994 1995 1996
--------- -------- -------- -------- --------
Private Pay(1) 54.4% 52.9% 40.8% 37.4% 37.0%
Medicare ...... 17.1 12.6 9.9 11.5 12.2
Medicaid ...... 28.5 34.5 49.3 51.1 50.8
--------- -------- -------- -------- --------
Total ....... 100.0% 100.0% 100.0% 100.0% 100.0%
========= ======== ======== ======== ========
- ----------
(1) The Company classifies revenues from commercial insurers, health
maintenance organizations (HMOs) and other charge-based sources and from
individuals (including the co-insurance portion of Medicare paid by
individuals) as private pay.
The decrease in the percentage of basic medical services revenues received
from private pay sources and Medicare from 1992 to 1996 and the commensurate
increase in the percentage received from Medicaid was primarily the result of
the higher level of Medicaid patients in the geriatric care facilities in which
the Company acquired ownership or leasehold interests. The Company seeks to
increase the percentage of basic medical services revenues received from private
pay sources and Medicare.
30
<PAGE>
Changes in the mix of the Company's patients among the private pay, Medicare
and Medicaid categories can significantly affect the profitability of the
Company's operations. Generally, private pay patients constitute the most
profitable category of patients and Medicaid patients the least profitable.
The occupancy percentages for those beds from which basic medical services
revenues are derived are shown in the table below. The percentages are
calculated both on the basis of the weighted average number of beds licensed
(regardless of whether such beds are actually available for the provision of
basic medical services) and the weighted average number of beds in service for
the period. In certain facilities the Company temporarily operates fewer beds
than it is licensed to operate so as to permit routine maintenance and to
accommodate patients desiring private rooms. In addition, the Company has
removed beds from service for extended periods as certain facilities have
undergone construction projects for expansion purposes and to implement its
medical specialty units. All revenues derived from licensed beds located in MSUs
or used in the Renaissance Program are included in specialty medical services
revenues; accordingly, such beds are not considered beds licensed or beds in
service for purposes of determining occupancy for those beds from which basic
medical services revenues are derived.
YEARS ENDED DECEMBER 31,
----------------------------------------
1992 1993 1994 1995 1996
-------- ------- ------- ------- -------
Beds Licensed . 80.5% 80.6% 83.2% 81.7% 82.7%
Beds in Service 85.2 87.4 92.2 92.7 93.1
======== ======= ======= ======= =======
SPECIALTY MEDICAL SERVICES
Specialty medical services revenues include all charges to the Company's MSU
patients for room and board as well as all revenues from providing
rehabilitative therapies, pharmaceuticals, medical supplies and durable medical
equipment to all its patients. The Company also includes in this classification
all revenues from its Alzheimer's programs and all revenue from its provision of
pharmacy, rehabilitative, home healthcare, mobile x-ray and electrocardiogram
and similar services.
The following table sets forth the Company's sources of specialty medical
services revenues by payor type for the periods indicated:
YEARS ENDED DECEMBER 31,
--------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
Private Pay(1) 51.8% 51.6% 47.6% 48.2% 45.0%
Medicare ...... 45.7 45.4 48.2 44.8 48.0
Medicaid ...... 2.5 3.0 4.2 7.0 7.0
-------- -------- -------- -------- --------
Total ....... 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
- ----------
(1) The Company classifies revenues from commercial insurers, health
maintenance organizations (HMOs) and other charge-based sources and from
individuals (including the co-insurance portion of Medicare paid by
individuals) as private pay.
The decrease in the percentage of specialty medical services revenues
received from private pay sources and Medicare during the year ended December
31, 1993 and the commensurate increase in Medicaid was primarily the result of
the higher level of Medicaid patients serviced by the rehabilitative services
company acquired in December 1993 and the pharmacy company acquired in June
1993. The decrease in the percentage of specialty medical services revenues
received from private pay sources during the year ended December 31, 1994 and
the commensurate increase in Medicare and Medicaid was primarily the result of
the higher level of Medicare and Medicaid patients serviced by the related
services companies acquired in 1994, as well as the opening of 49 MSU programs
and the expansion of 18 MSU programs. The decrease in the percentage of
specialty medical service revenues from Medicare and the commensurate increase
in Medicaid for the year ended December 31, 1995 was primarily the result of the
higher level of Medicaid patients serviced by the 41 facilities leased in August
1994. The decrease in the percentage of specialty medical services revenues
received from private pay sources and the commensurate increase in Medicare for
the year ended December 31, 1996 was primarily the result of the acquisition of
large home health companies throughout 1996. The Company's experience has been
that Medicare patients constitute a higher percentage of an MSU program's
initial occupancy.
31
<PAGE>
The average occupancy rate of the Company's MSU beds (on a weighted average
basis) was 76.9% in the year ended December 31, 1996 as compared with 72.0% in
the year ended December 31, 1995 and 71.4% in the year ended December 31, 1994.
Average occupancy in the Alzheimer's programs in the Company's owned and leased
facilities, which had an average of 345 beds in the year ended December 31,
1996, 394 beds in the year ended December 31, 1995 and 314 beds in the year
ended December 31, 1994, was 77.2%, 77.9% and 83.4%, respectively.
The following table sets forth the percentage of specialty medical services
revenues generated by the Company's MSU programs, rehabilitation and other
services and Alzheimer's programs for the periods indicated:
YEARS ENDED DECEMBER 31,
---------------------------------------------
1992 1993 1994 1995 1996
--------- -------- -------- -------- --------
MSU Programs ........ 63.6% 71.1% 47.5% 37.7% 37.5%
Other Ancillaries
(1).................. 29.6 25.1 50.8 61.0 61.4
Alzheimer's Programs 6.8 3.8 1.7 1.3 1.1
--------- -------- -------- -------- --------
100.0% 100.0% 100.0% 100.0% 100.0%
========= ======== ======== ======== ========
- ----------
(1) Consists of pharmacy, rehabilitative, home healthcare, mobile x-ray and
electrocardiogram and similar services. The Company sold its pharmacy
division in July. See "-- Acquisition and Divestiture History."
The percentage decrease in MSU revenue in 1995 and 1996 was primarily the
result of the acquisition of rehabilitation, home healthcare and similar service
companies in connection with the Company's vertical integration strategy and the
implementation of the Company's post-acute care network. MSU revenue as a
percentage of total revenues and as a percentage of specialty medical revenues
is expected to continue to decrease as the Company implements its vertical
integration strategy and continues to expand its post-acute care network through
the acquisition of rehabilitation, home healthcare and similar service
companies. Additionally, in expanding its post-acute care network, IHS expects
to place less emphasis on subacute care through MSUs and more emphasis on home
healthcare. While IHS added 1,098 MSU beds in 1994 and 938 MSU beds in 1995, it
added only an additional 383 beds in 1996 and it anticipates adding only an
additional 300 to 400 MSU beds in each of 1997 and 1998.
MANAGEMENT SERVICES AND OTHER
The Company's management agreements for its geriatric care facilities provide
for a management fee to the Company generally equal to 4% to 8% of the gross
revenues of the facility. In addition, certain of such agreements contain a
provision wherein the Company may earn an incentive fee based on certain levels
of performance. See "Item 1. Business -- Management Services." At December 31,
1996, the Company was managing 56 geriatric care facilities with a total of
6,337 beds. Also, all revenue derived from Health Care Consulting, Inc., a
specialty reimbursement and consulting company with expertise in subacute
rehabilitation programs which was acquired effective September 30, 1993, is
included in this revenue category.
The revenues derived from certain activities relating to the operation of the
Company's facilities such as patient laundry, vending sales, guest meals, and
beauty and barber services are classified in this category as other revenue.
Other revenue constituted approximately 17.0%, 16.9% and 16.3%, respectively, of
management services and other revenues during the years ended December 31, 1994,
1995 and 1996. The Company expects other revenue to continue to decrease as a
percentage of management services and other revenues.
ACQUISITION AND DIVESTITURE HISTORY
FACILITY EXPANSION
The Company commenced operations on March 25, 1986. From inception to June
30, 1988, the Company acquired seven geriatric care facilities with a total of
900 beds and acquired leasehold interests in seven geriatric care facilities
having a total of 1,050 beds. The Company initiated its MSU program in April
1988, in conjunction with HEALTHSOUTH Rehabilitation Corporation, with a 16 bed
unit serving patients with traumatic brain injury at its Gravois facility.
32
<PAGE>
During the fiscal year ended June 30, 1989 the Company acquired leasehold
interests in six geriatric care facilities having 974 beds and entered into an
agreement to manage one geriatric care facility having 121 beds. One of the six
leased facilities, having 143 beds, was subject to a sublease to a third party
and was managed by the Company for such third party. The sublease terminated
February 2, 1991 and the facility was treated as a leased, rather than a
managed, facility. In addition, the Company opened two MSU programs totalling 35
beds.
During fiscal year ended June 30, 1990 the Company acquired one geriatric
care facility having 101 beds, a leasehold interest in one facility having 210
beds, and a 49% joint venture interest in a 160 bed geriatric care facility
which was managed by the Company until its purchase in September 1994. IHS also
entered into agreements to manage three other geriatric care facilities having
468 beds and acquired 90% (assuming the exercise of all options and related
exchange rights) of the stock of Professional Community Management
International, Inc. ("PCM"), which managed residential retirement community
living units in Southern California. The Company sold PCM in 1994. The Company
also opened six MSU programs totalling 77 beds.
In December 1990 the Company acquired leasehold interests in four geriatric
care facilities having 328 beds and received by assignment management agreements
covering 12 facilities having 1,403 beds. On July 24, 1990, the Company assumed
the management of 14 of these 16 facilities and, subsequent to July 24, 1990,
assumed the management of the remaining two facilities, pending the consummation
of the acquisition. In 1991 the owners of four of these managed facilities
terminated the Company's management agreement for those facilities. During the
six months ended December 31, 1990 the Company opened four MSU program totalling
71 beds.
In December 1991 the Company leased two geriatric care facilities having a
total of 258 beds. The Company also opened six MSU programs totalling 106 beds.
During 1992 the Company expanded its MSU focus by opening thirteen MSU
programs totaling 250 beds at its facilities, expanding seven MSU programs by 61
beds and converting its neuro-rehabilitation MSU program for the treatment of
patients with traumatic brain injury, which was operated in conjunction with
HEALTHSOUTH Rehabilitation Corporation, to a 16 bed complex care MSU program.
Also the Company expanded by acquiring one geriatric care facility with a total
of 120 beds, leasing five facilities having a total of 640 beds and entering
into thirteen management contracts having a total of 1,481 beds. The total cost
of the aforementioned acquisitions was approximately $13.9 million which
includes all costs to secure the facility or leasehold interest. None of the
acquisitions were individually significant and all were financed with cash flow
from operations and borrowings under the Company's line of credit.
During 1993, the Company expanded its MSU focus by opening 30 MSU programs
totaling 442 beds (including four MSU programs totalling 84 beds at its managed
facilities) and expanding 24 MSU programs by 140 beds. On December 1, 1993 the
Company acquired substantially all of the United States operations of Central
Park Lodges, Inc. ("CPL"), consisting of 30 geriatric care facilities (24 owned
and 6 leased) and nine retirement facilities, totaling 5,210 beds, a division
which provides pharmacy consulting services and supplies prescription drugs and
intravenous medications to geriatric care facilities through five pharmacies in
Florida, Pennsylvania and Texas, and a division which provides healthcare
personnel and support services to home healthcare and institutional markets
through five branch locations located in Florida and Pennsylvania. The Company
disposed of seven retirement facilities and five of the geriatric care
facilities acquired from CPL which the Company did not consider to fit within
its post-acute care strategy. The total cost of the CPL acquisition was
approximately $185.3 million, including $20.1 million in assumption of
indebtedness, warrants to purchase 100,000 shares of common stock of the Company
at a purchase price per share of $28.92 (valued at $1.4 million), and other
direct acquisition costs. The $163.8 million cash paid to purchase CPL was
financed using the Company's term loan and revolving credit facility. The number
of shares and price per share are subject to adjustment under certain
circumstances. In addition, the Company agreed to provide consulting services to
Trizec for the development of subacute care programs at its Canadian facilities.
The Company received a consulting fee of $4.0 million and $3.0 million in 1994
and 1995, respectively.
During 1993, the Company also acquired eight geriatric care facilities (two
of which had previously been leased by IHS), leased one facility and entered
into nine management contracts.
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During 1994, the Company continued to expand its MSU focus by opening 49 MSU
programs totalling 998 beds (including four MSU programs totalling 102 beds at
its managed facilities which includes 33 beds located at a facility no longer
managed by the Company as of August 1994) and expanding 18 MSU programs by 100
beds. During the same period, the Company acquired five geriatric care
facilities (two of which had been previously leased and three of which had been
managed by IHS), leased 49 (three of which had been previously owned and seven
of which had been previously managed) and entered into 42 management contracts
(five of which have become leased facilities, one of which has become an owned
facility and one of which was terminated).
Effective January 1, 1994, the Company entered into an agreement to manage 23
facilities in California, consisting of 14 geriatric care facilities having
1,875 beds and nine psychiatric facilities having 1,265 beds (the "Crestwood
Facilities"), owned by certain affiliated partnerships (the "Crestwood
Partnerships") and leased by Crestwood Hospitals, Inc. ("Crestwood"). The
management agreement had a term of ten years and provided for payments to IHS
based upon a percentage of the gross revenues of the Crestwood Facilities.
Pursuant to this transaction, IHS had agreed to loan Crestwood up to $11
million, including a $7 million line of credit. IHS was granted purchase options
whereby it had the option upon expiration of its management agreement to
purchase certain partnership interests of the partnerships which own 19 of the
23 Crestwood Facilities at a purchase price equal to the product determined by
multiplying (i) the sum of (a) ten times the net cash flow of the 19 facilities
for the year ended December 31, 2003, plus (b) the amount of the outstanding
mortgages on the 19 facilities, by (ii) a percentage equal to the percentage
ownership of the partners whose interests IHS chooses to purchase. IHS also had
an option to purchase Crestwood on the expiration of the management agreement at
a purchase price equal to fair market value determined by an appraisal. If IHS
elected to purchase Crestwood prior to the expiration of the management
agreement, it was obligated to pay Crestwood a break-up fee of $6 million. The
Company was obligated to purchase Crestwood if it elected to purchase the
partnership interests of the partnerships which own the Crestwood Facilities.
IHS paid the stockholders of Crestwood a non-refundable purchase option deposit
consisting of $3 million in cash and 168,067 shares of IHS Common Stock. This
agreement was terminated in 1995 and, as a result, the Company incurred a loss
of $21,915,000. See Note 18 of Notes to Consolidated Financial Statements.
In February 1994 the Company entered into management agreements to manage, on
an interim basis, eight geriatric care facilities, aggregating 1,174 beds, in
Delaware, Massachusetts, New Jersey and Pennsylvania previously operated by
IFIDA Health Care Group Ltd. ("IFIDA"). Upon the earlier of the completion by
the owners of the eight facilities of the refinancing of certain debt or May 18,
1995, IHS was obligated to lease and operate these facilities, and was granted
an option to purchase any or all of these facilities. Five of these facilities
were subsequently leased by the Company in July 1994 and one management
agreement for a facility was terminated in August 1994. The remaining two
facilities were leased in 1995. The annual lease payments for these facilities
currently are $4.1 million. The purchase price per facility is equal to the
greater of its fair market value or its allocable percentage (as agreed to by
the parties) of $59.5 million ($57 million if the option is exercised prior to
the seventh year of the lease). The Company has to date made purchase option
deposits aggregating $6.6 million with respect to these facilities, and is
obligated to make additional purchase option deposits aggregating $500,000
during each year of the agreement. IHS has agreed to loan the owners of the
eight facilities an aggregate of up to $3.5 million for working capital
purposes, and issued to the owners of the eight facilities an aggregate of
90,000 shares of Common Stock.
In May 1994 the Company sold its 49% interest in two separate joint ventures
formed with Sunrise Terrace, Inc. ("Sunrise") to develop and operate two
assisted living facilities. Each facility was to be managed by Sunrise; Sunrise
had a 51% interest in, and the Company had a 49% interest in, the venture's
capital, earnings and losses. Sunrise had an option to purchase the Company's
interest in either venture at any time, and the Company had a right to require
Sunrise to purchase the Company's interest in the Fairfax, Virginia venture. The
assisted living facility in Fairfax, Virginia opened in October 1990; the second
facility was being constructed in Bound Brook, New Jersey at the time of sale.
In May 1990, a wholly owned subsidiary of IHS, Integrated of Amarillo, Inc.
("IAI"), purchased a geriatric care facility in Amarillo, Texas, and contributed
the facility to a joint venture in exchange for a 49% interest therein. The
Company managed the facility, for which it received a management fee equal to 6%
of
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gross revenues. The venturers shared in the venture's capital, earnings and
losses in accordance with their respective interests in the venture except that
net taxable operating losses were borne 100% by the other venturer. In September
1994, the Company purchased the remaining 51% interest in this joint venture.
As of August 31, 1994 the Company entered into a Facilities Agreement, Lease
Agreement and certain other agreements with Litchfield Asset Management Corp.
("LAM") pursuant to which it leased, effective September 1, 1994, on a triple
net basis, 43 geriatric care facilities (consisting of 41 skilled nursing
facilities and two retirement centers), including two facilities previously
leased and two facilities previously managed by the Company (the "LPIMC
Facilities"), aggregating approximately 5,400 beds located in 12 states. The
Company's current annual lease payments are approximately $17.4 million, based
upon the annual debt service of monies borrowed by LAM to purchase the LPIMC
Facilities and repay approximately $150 million in existing indebtedness of such
facilities. In addition, the Company made refundable lease deposits aggregating
$29 million, and will make additional refundable deposits during the initial
term (including any extension thereof) of the leases aggregating approximately
$4 million per annum. Rent payments are subject to escalation commencing
September 1997 in an amount equal to two percent (three percent if the Company
elects to pay such increase in shares of the Company's Common Stock) of the net
annual incremental revenues of the LPIMC Facilities (subject to certain
maximums). The leases have initial terms of seven years (subject to extension of
up to five years under certain circumstances), subject to renewal by the Company
for one additional period of seven years and three additional periods of five
years each, and the Company has guaranteed all lease payments. The Company has
also received options to purchase each of the LPIMC Facilities, at any time
after nine months prior to the end of the seventh year, for a purchase price
that will represent (i) during the seventh through eleventh years following the
lease commencement date, such facility's allocable percentage of the total
amount of $343 million (to be increased annually after the seventh year by the
rate of increase in the consumer price index) and (ii) beginning in the twelfth
year following the lease commencement date, the greater of (a) fair market
value, (b) 125% of the release cost of the monies borrowed by LAM which are
applicable to such facility or (c) five times the contribution margin of such
facility. The Company loaned LAM's principal stockholders an aggregate of $3
million. In addition, the Company issued LAM warrants to purchase 300,000 shares
of the Company's Common Stock at an exercise price of $31.33 per share, and has
granted LAM "piggy-back" registration rights with respect to the shares of
Common Stock issuable upon exercise of such warrants. The Company has agreed to
issue up to an additional 50,000 shares of Common Stock if the leases are
terminated prior to September 1, 2006. The agreement with LAM requires that the
Company meet certain financial tests. IHS has sublet two of these facilities to
ILC.
In September 1994, the Company entered into a management agreement with All
Seasons to manage six geriatric care facilities with 872 beds located in the
State of Washington. During the fourth quarter of 1996 the Company terminated
its management contract with All Seasons. As a result of the termination, the
Company incurred a $7.8 million loss on the termination. See Note 18 of Notes
to Consolidated Financial Statements.
In February 1995, the Company entered into a management agreement to manage a
190 bed geriatric care facility located in Aurora, Colorado.
In March 1995, the Company entered into a management agreement to manage 34
geriatric care facilities in Texas, California, Florida, Nevada and Mississippi
(the "Preferred Care Facilities"). The management agreement has a term of ten
years and provides for payments to the Company based upon a percentage of
adjusted gross revenues and adjusted earnings before interest, taxes,
depreciation and amortization of the Preferred Care Facilities. The Company has
also been granted an option to purchase the Preferred Care Facilities, between
March 29, 1996 and the date of the termination of the management agreement, for
$80 million net of purchase option deposits plus adjustments for inflation. The
Company has a non-refundable purchase option deposit of $20.6 million which will
be applied against the purchase price if the Company elects to acquire the
facilities.
During 1995, the Company purchased five geriatric care facilities (two of
which were previously leased). Also, the Company leased three facilities, all of
which were previously managed. The total cost of these acquisitions was
approximately $42.9 million which includes legal fees and other costs incurred
to secure the facilities or leasehold interests in the facilities.
During 1995, the Company continued to expand its MSU focus by opening 31 MSU
programs totalling 691 beds (including two MSU programs totalling 63 beds at its
managed facilities) and expanding existing programs by 177 beds (including 17
beds at managed facilities).
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In January 1996, the Company entered into agreements to manage four assisted
living facilities in California and Ohio having a total of 234 beds. The
management agreements subsequently were transferred to ILC.
In January 1996, the Company purchased Vintage Health Care Center, a 110 bed
skilled nursing and assisted living facility in Denton, Texas for $6.9 million.
A condominium interest in the assisted living portion of this facility, as well
as in the assisted living portion of the Company's Dallas at Treemont and West
Palm Beach facilities, were transferred as a capital contribution to ILC in June
1996.
In May 1996, the Company assumed leases for a 96 bed skilled nursing facility
and a 240 bed residential facility located in Las Vegas, Nevada.
In July 1996, the Company assumed a lease for a skilled nursing facility in
Chicago, Illinois.
In December 1996, the Company sold its Palestine facility located in
Palestine, Texas. Total proceeds from the sale were $1.3 million.
In addition, in 1996 the Company transferred to ILC, as a capital
contribution, ownership of three facilities.
During 1996, the Company opened MSU programs totalling 184 beds (including
one MSU programs totalling 28 beds at its managed facilities) and expanding
existing programs by 199 beds.
VERTICAL INTEGRATION
During 1993 the Company began to implement its strategy of expanding the
range of related services it offers directly to its patients in order to serve
the full spectrum of patient needs following acute hospitalization. As a result,
the Company is now able to offer directly to its patients, rather than through
third-party providers, home healthcare, rehabilitation (physical, occupational
and speech), and mobile x-ray and electrocardiogram and similar services. See
"Item 1. Business -- Company Strategy."
In June 1993, the Company acquired all of the outstanding stock of Patient
Care Pharmacy, Inc. ("PCP"), a California corporation engaged in the business of
providing pharmacy services to geriatric care facilities and other healthcare
providers in Southern California. The Company combined the operations of PCP
with CPL's pharmacy operations. The total cost for PCP was $10,400,000 including
$9,840,000 representing the issuance of 425,674 shares of the Company's Common
Stock. In addition, the Company had agreed to make contingent payments in the
shares of the Company's Common Stock following each of the next three years
based upon the earnings of PCP. On March 3, 1995, the Company and the PCP
stockholders terminated all rights to contingent payments in consideration for a
payment of $3.5 million in the form of 92,434 shares of IHS Common Stock. IHS
sold this business in July 1996. See "-- Divestitures -- Sale of Pharmacy
Division."
In July 1993, Comprehensive Post Acute Services, Inc. ("CPAS"), a newly
formed subsidiary 80% owned by the Company and 20% owned by Chi Systems, Inc.,
formerly Chi Group, Inc. ("Chi"), acquired joint ventures and contracts to
develop and manage subacute programs from Chi. Chi is a healthcare consulting
company in which John Silverman, a director of the Company, is President and
Chief Financial Officer and an approximately 16% stockholder. The purchase price
was $200,000 and IHS had made available a loan commitment of $300,000 for
working capital purposes, which loan bore interest at a rate equal to Citicorp's
base rate plus four percent. Chi granted the Company the option to purchase, and
Chi had the right to require the Company to purchase, at any time between July
1, 1997 and September 1, 1997, Chi's 20% equity interest in CPAS for a purchase
price equal to 20% of the greater of (i) three times the pre-tax net income of
CPAS for the year then ended or (ii) five times the after-tax net income of CPAS
for the year then ended. In connection with this transaction, the Company
engaged Chi to act as consultant with respect
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to the Company's transitional care units. The consulting agreement, which
expires June 30, 1997, provides for the payment, in four equal installments, of
a $100,000 annual consulting fee. As of July 21, 1994 the Company purchased the
remaining 20% of CPAS from Chi for 5,200 shares of IHS Common Stock valued at
$159,900.
In October 1993, the Company acquired, effective as of September 30, 1993,
Health Care Systems, Inc., which owns Health Care Consulting, Inc. ("HCC") and
RMi, Inc., a Rehabilitation Company ("RMI"), for $1,850,000 in cash and a
five-year earnout, up to a maximum of $3,750,000, based upon achievement of
pre-tax earnings targets. HCC is a specialty reimbursement and consulting
company with expertise in subacute rehabilitation programs. RMI provides direct
therapy services, including physical therapy, occupational therapy and speech
pathology, to healthcare facilities. RMI also provides management and consulting
services in the oversight and training of therapists employed by geriatric care
facilities to facilitate higher quality patient care. In July, 1996, the Company
issued warrants to purchase 20,000 shares of Common Stock at a purchase price
per share of $37.88 to each of Scott Robertson, Gary Kelso and Grantly Payne in
exchange for their rights under the five-year earn-out agreement.
In December 1993, the Company purchased all of the capital stock of
Associated Therapists Corporation, d/b/a Achievement Rehab ("Achievement"), a
provider of rehabilitation therapy services on a contract basis to various
geriatric facilities in Minnesota, Indiana and Florida. The purchase price of
$22.5 million consisted of 839,865 shares of the Company's Common Stock (based
on the average price of the stock of $26.79), plus a contingent earn-out
payment, also payable in shares of Common Stock, based upon increases in
Achievement's earnings in 1994, 1995 and 1996 over a base amount. The total cost
was applied primarily to intangible assets. The final earn-out amount of
approximately $26,439,000 was paid in March 1997 through the issuance of 976,504
shares of IHS Common Stock.
On July 7, 1994, the Company acquired all the outstanding capital stock of
Cooper Holding Corporation ("Cooper"), a Delaware corporation engaged in the
business of providing mobile x-ray and electrocardiogram services to long-term
care and subacute care facilities in California, Florida, Georgia, Indiana,
Nebraska, Ohio, Oklahoma, Texas and Virginia. The purchase price for Cooper was
approximately $44.5 million, including $19.9 million representing the issuance
of 593,953 shares of the Company's Common Stock and options to acquire 51,613
shares of Common Stock (based on the average closing price of the Common Stock
of $30.81 over the 30 day period prior to June 2, 1994, the date on which the
Cooper acquisition was publicly announced). In addition, the Company repaid
approximately $27.2 million of Cooper's debt.
On August 8, 1994, the Company acquired substantially all the assets of Pikes
Peak Pharmacy, Inc., a company which provides pharmacy services to patients at
nine facilities in Colorado Springs, Colorado which have an aggregate of 625
beds, for $646,000. The Company subsequently sold this business as part of the
sale of the pharmacy division.
On September 23, 1994 the Company acquired substantially all of the assets of
Pace Therapy, Inc., a company which provides physical, occupational, speech and
audiology therapy services to approximately 60 facilities in Southern California
and Nevada. The purchase price for Pace was $5.8 million, representing the
issuance of 181,822 shares of the Company's Common Stock. In addition, the
Company repaid approximately $1.6 million of Pace's debt.
On October 7, 1994 the Company acquired all of the outstanding stock of
Amcare, Inc., an institutional pharmacy serving approximately 135 skilled
nursing facilities in California, Minnesota, New Jersey and Pennsylvania. The
purchase price for Amcare was $21.0 million, including $10.5 million
representing the issuance of 291,101 shares of the Company's Common Stock. The
Company subsequently sold this business in the sale of its pharmacy division.
On October 11, 1994 the Company acquired substantially all of the assets of
Pharmaceutical Dose Service of La., Inc., an institutional pharmacy serving 14
facilities. The purchase price for PDS was $4.2 million, including $3.9 million
representing the issuance of 122,117 shares of the Company's Common Stock. The
Company subsequently sold this business in the sale of its pharmacy division.
On November 2, 1994 the Company acquired all of the outstanding stock of
CareTeam Management Services, Inc., a home health company serving Arizona,
Kansas, Missouri, New Mexico, North
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Carolina and Texas. The purchase for CareTeam was $5.9 million, including $5.2
million representing the issuance of 147,068 shares of the Company's Common
Stock.
On November 3, 1994 the Company acquired all of the outstanding stock of
Therapy Resources, a company which provides physical, occupational, speech and
audiology services to approximately 22 geriatric care facilities and operates
seven out-patient rehabilitation facilities. The purchase price was $1.6
million.
On November 3, 1994 the Company acquired all of the outstanding stock of
Rehab People, Inc., a company which provides physical, occupational and speech
therapy services to approximately 38 geriatric care facilities in Delaware, New
York, North Carolina and Pennsylvania. The purchase price for Rehab People was
$10 million representing the issuance of 318,471 shares of Common Stock.
On November 3, 1994, the Company acquired certain assets of Portable X-Ray
Service of Rhode Island, Inc., a mobile x-ray company, for a purchase price of
$2.0 million including $700,000 representing the issuance of 19,739 shares of
the Company's Common Stock.
On November 18, 1994 the Company acquired substantially all of the assets of
Medserv Corporation's Hospital Services Division, which provides respiratory
therapy. The purchase price was $21.0 million.
On December 9, 1994, the Company acquired all rights of Jule Institutional
Supply, Inc. under a management agreement with Samaritan Care, Inc. ("Samaritan
Care"), an entity which provides hospice services, for a purchase price of $14.0
million, representing the issuance of 375,134 shares of the Company's Common
Stock. In addition, the Company acquired the membership interests in Samaritan
Care for no additional consideration.
On December 23, 1994, the Company acquired all of the outstanding stock of
Partners Home Health, Inc., a home health infusion company operating in seven
states. The purchase price was $12.4 million, representing the issuance of
332,516 shares of the Company's Common Stock.
Between August 1994 and January 1995, the Company acquired six additional
radiology and diagnostic service providers for an aggregate consideration of
$3.8 million. These entities provide radiology and diagnostic services in
Indiana, Louisiana, North Carolina, Pennsylvania and Texas.
In January 1995, the Company acquired four ancillary services companies which
provide mobile x-ray and electrocardiogram services to long-term care and
subacute care facilities. The total purchase price was $3.6 million, including
$300,000 representing the issuance of 7,935 shares of the Company's Common
Stock. Total goodwill at the date of acquisition was $3.2 million.
In February 1995, the Company acquired all of the assets of ProCare Group,
Inc. ("ProCare") and its affiliated entities, which provide home health services
in Broward, Dade and Palm Beach counties, Florida. The total purchase price was
$3.9 million, including $3.6 million representing the issuance of 95,062 of the
Company's Common Stock. In addition, the Company incurred direct costs of
acquisition of $675,000. Total goodwill at the date of acquisition was $4.4
million.
In February 1995, the Company purchased the assets of Epsilon Equipment
Corporation ("Epsilon"), which provides mobile video fluoroscopy procedures to
skilled nursing facilities for the diagnosis of dysphasia for the aspiration of
foods and liquids causing pneumonia. The total purchase price was $200,000, plus
an earnout based on the future earnings of the business, payable in shares of
the Company's Common Stock. In addition, the Company incurred direct costs of
acquisition of $500,000 and repaid debt of Epsilon of $961,000. The total
goodwill at the date of acquisition was $1.9 million.
In February 1995, the Company entered into a management agreement to manage
Total Home Health Care, Inc. and Total Health Service, Inc. (collectively "Total
Home Health"), which are private-duty and Medicare certified home health
agencies in the Dallas/Ft. Worth, Texas market, pursuant to which a subsidiary
of the Company received a management fee of $10 per home visit by Total Home
Health personnel. The Company was also granted a five-year option to purchase
Total Home Health for a purchase price of $5.0 million.
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In March 1995, the Company purchased Samaritan Management, Inc., which
provides hospice services in Michigan. Total purchase price was $5.5 million. In
addition, the Company incurred direct costs of acquisition of $1.0 million.
Total goodwill at the date of acquisition was $6.8 million.
In March 1995, the Company acquired substantially all of the assets of
Fidelity Health Care, Inc., a company which provides home healthcare services,
temporary staffing services and infusion services in Ohio. Total purchase price
was $2.1 million. In addition, the Company incurred direct costs of acquisition
of $350,000. Total goodwill at the date of acquisition was $2.3 million.
In April 1995, the Company purchased the assets of Hometown Nurses Registry,
which provides home healthcare in Tennessee. The total purchase price was
$500,000. In addition, the Company incurred direct costs of acquisition of
$150,000. Total goodwill at the date of acquisition was $646,000.
In April 1995, the Company purchased the assets of Bernard's X-Ray Mobile
Service, which provides x-ray services to long-term care and subacute care
facilities. The total purchase price was $100,000. Total goodwill at date of
acquisition was $90,000.
In May 1995, the Company purchased the assets of Stewart's Portable X-Ray,
Inc., which provides x-ray services to long-term care and subacute care
facilities. The total purchase price was $1.9 million. In addition, the Company
incurred direct costs of $100,000. Total goodwill at the date of acquisition was
$1.8 million.
In May 1995, the Company purchased Immediate Care Clinic, an emergency clinic
in Amarillo, Texas for approximately $225,000.
In June 1995, the Company acquired three ancillary services companies which
provide mobile x-ray and electrocardiogram services to long-term and subacute
care facilities. The total purchase price was $2.2 million. Total goodwill at
the date of acquisition was $2.5 million.
In August 1995, the Company acquired all of the outstanding stock of Senior
Life Care Enterprises, Inc. ("SLC"), which provides home health, supplemental
staffing, and management services. The total purchase price was $6.0 million
representing the issuance of 189,785 shares (the "SLC Shares") of the Company's
Common Stock. In addition, the Company incurred direct costs of acquisition of
$700,000. The total goodwill at the date of acquisition was $5.6 million.
In September 1995, the Company merged with IntegraCare, Inc. ("IntegraCare"),
which provides physical, occupational and speech therapy to skilled nursing
facilities in Florida and operated seven physician practices, in a transaction
that was accounted for as a pooling of interests. Accordingly, the Company's
historical financial statements for all periods prior to the effective date of
the merger have been restated to include the results of IntegraCare. In
addition, the Company incurred $1.9 million of costs as a result of the
IntegraCare merger. This amount is included as a non-recurring charge in the
Company's Statement of Operations for the year ended December 31, 1995.
In September 1995, the Company purchased Mobile X-Ray Limited Partnership, a
provider of electrocardiogram services in Maryland, Virginia, West Virginia, and
the District of Columbia. The total purchase price was $1.4 million. The total
goodwill at the date of purchase was $1.8 million.
In September 1995, the Company purchased Southern Nevada Physical Therapy
Associates, which provides outpatient physical therapy, for $500,000.
In November 1995, the Company purchased Chesapeake Health, which provides
electrocardiogram services. The total purchase price was $1.1 million. In
addition, the Company incurred direct costs of acquisition of $75,000. The total
goodwill at the date of acquisition was $1.1 million.
In December 1995, the Company purchased Miller Portable X-Ray. The total
purchase price was $295,000. The total goodwill at the date of purchase was
$275,000.
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In January 1996, the Company acquired the assets of two ancillary service
companies which provide mobile x-ray services. The total purchase price was $1.3
million. Total goodwill at the date of acquisition was $1.2 million.
In March 1996, the Company acquired all of the outstanding stock of Rehab
Management Systems, Inc., which operates outpatient rehabilitative clinics and
inpatient therapy centers. The total purchase price was $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 $2.9
million. Total goodwill at the date of acquisition was $12.8 million.
In May 1996, the Company acquired all of the assets of Hospice of the Great
Lakes, Inc., which provides hospice services in Illinois. The total purchase
price was $8.2 million representing the issuance of 304,822 shares of the
Company's Common Stock. In addition, the Company incurred direct costs of
acquisition of $1.0 million. Total goodwill at the date of acquisition was $9.1
million.
In June 1996, the Company acquired the assets of American Medical Services,
Inc., which provides mobile diagnostic services. The total purchase price was
$45,000. Total goodwill at the date of acquisition was $42,000.
In July 1996, the Company sold its pharmacy division. See "-- Divestitures --
Sale of Pharmacy Division."
In August 1996, the Company acquired all of the outstanding stock of J.R.
Rehab Associates, Inc., which provides rehab therapy services to nursing homes,
hospitals and other healthcare providers. The total purchase price was $2.1
million. In addition, the Company incurred direct costs of acquisition of
$200,000. Total goodwill at the date of acquisition was $3.1 million.
In August 1996, the Company acquired the assets of Colorado Portable X-ray,
Inc., which provides mobile diagnostic services. The total purchase price was
$422,000. Total goodwill at the date of acquisition was $372,000.
In August 1996, the Company acquired the assets of ExtendiCare of Tennessee,
Inc., which provides home healthcare services. The total purchase price was $3.4
million. In addition, the Company incurred direct costs of acquisition of
$200,000. Total goodwill at the date of acquisition was $1.9 million.
In August 1996, the Company acquired the assets of Edgewater Home Infusion
Services, Inc., which provides home infusion services. The total purchase price
was $8.0 million. In addition, the Company incurred direct costs of acquisition
of $300,000. Total goodwill at the date of acquisition was $7.7 million.
In September 1996, the Company acquired the assets of Century Health
Services, Inc., which provides home healthcare services. The total purchase
price was $2.4 million. In addition, the Company repaid approximately $1.6
million of Century's debt. In addition, the Company incurred direct costs of
acquisition of $200,000. Total goodwill at the date of acquisition was $12.1
million.
In September 1996, the Company acquired all of the outstanding stock of
Signature Home Care, Inc., which provides home healthcare and management
services. The total purchase price was $9.2 million, including $4.7 million
representing the issuance of 196,374 shares of the Company's Common Stock. In
addition, the Company repaid approximately $1.9 million of Signature's debt. In
addition, the Company incurred direct costs of acquisition of $2.5 million.
Total goodwill at the date of acquisition was $21.1 million.
In October 1996, the Company acquired, through merger, First American Health
Care of Georgia, Inc., which provides home healthcare services. The total
purchase price was $154.1 million in cash plus contingent payments of up to $155
million. In addition, the Company incurred direct costs of acquisition of $22.0
million. Total goodwill at the date of acquisition was $227.4 million. See "--
First American Acquisition."
In October 1996, the Company acquired the assets of Laboratory Corporation of
America, which provides mobile x-ray services in Ohio. The total purchase price
was $75,000. Total goodwill at the date of acquisition was $55,000.
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In November 1996, the Company acquired the assets of Mediq Mobile X-ray
Services, Inc., which provides mobile diagnostic services. The total purchase
price was $10.1 million, including $5.2 million representing the issuance of
203,721 shares of the Company's Common Stock. In addition, the Company incurred
direct costs of acquisition of $5.5 million. Total goodwill at the date of
acquisition was $15.6 million.
In November 1996, the Company acquired the assets of Total Rehab Services,
LLC and Total Rehab Services 02, LLC, which provide contract rehabilitative and
respiratory services. The total purchase price was $8.0 million, including $2.7
million representing the issuance of 106,559 shares of the Company's Common
Stock. In addition, the Company repaid approximately $3.9 million of Total
Rehab's debt. In addition, the Company incurred direct costs of acquisition of
$1.3 million. Total goodwill at the date of acquisition was $12.0 million.
In November 1996, the Company acquired all of the outstanding stock of
Lifeway, Inc., which provides physician and disease management services. The
total purchase price was $900,000 representing the issuance of 38,502 shares of
the Company's Common Stock. IHS also issued 48,129 shares of Common Stock to
Robert Elkins, Chairman and Chief Executive Officer of the Company, in payment
of outstanding loans of $1.1 million from Mr. Elkins to LifeWay. In addition,
the Company incurred direct costs of acquisition of $275,000.
In December 1996, the Company acquired the assets of Redi-Ray, Inc., which
provides mobile x-ray services. The total purchase price was $450,000. Total
goodwill at the date of acquisition was $400,000.
In January 1997, the Company acquired all of the outstanding stock of In-Home
Healthcare, Inc., which provides home healthcare services. The total purchase
price was $3.2 million. In addition, the Company incurred direct costs of
acquisition of $250,000. Total goodwill at the date of acquisition was $3.9
million.
In February 1997, the Company acquired the assets of Portable X-Ray Labs,
Inc., which provides mobile x-ray services. The total purchase price was $4.9
million. Total goodwill at the date of acquisition was $5.7 million.
In February 1997, the Company acquired the assets of Professional Health
Services, Inc., which provides mobile x-ray services. The total purchase price
was $350,000. Total goodwill at the date of acquisition was $321,000.
In March 1997, the Company acquired the assets of Doctor's Home Health
Agency, Inc., which provides home healthcare in Florida. Total purchase price
was $350,000.
In addition, IHS has reached agreements in principle to acquire a contract
rehab company in Florida for approximately $1.4 million, mobile x-ray company in
North Carolina for approximately $225,000 and a contract rehab company in the
midwest for approximately $23.1 million. There can be no assurance that any of
these pending acquisitions will be consummated on the proposed terms, on
different terms or at all. IHS has also reached an agreement in principle to
manage a home health company in Tennessee, although there can be no assurance a
management agreement will be entered into.
FIRST AMERICAN ACQUISITION
On October 17, 1996, IHS acquired through merger First American Health Care
of Georgia, Inc., a provider of home health services in 21 states, principally
Alabama, California, Florida, Georgia, Michigan, Pennsylvania and Tennessee. IHS
believes the acquisition of First American is an important component in the
implementation of its post-acute care network.
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 (i) 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 (ii) in respect of any year the percentage
increase in the seasonally unadjusted Consumer Price Index for all Urban
Consumers for the Medical Care expenditure category (the "Medical CPI") is less
than 8% or, even if the Medical CPI is greater than 8% in such year, 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
41
<PAGE>
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. IHS borrowed the cash
purchase price paid at the closing under its revolving credit facility. $115
million of the $154.1 million paid at closing was paid to 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 overpayments and unallowable reimbursements under
Medicare (the "HCFA Claims"). The total settlement with the United States
government was $255 million; the remaining $140 million will be paid from the
contingent payments to the extent such payments become due. Substantially all of
First American's revenues are derived from Medicare. The following table
summarizes certain selected financial and operating data of First American for
the three years ended December 31, 1995 and the nine months ended September 30,
1995 and 1996. The selected historical financial information of First American
has been derived from, the historical consolidated financial statements of First
American. The results for the nine months ended September 30, 1996 are not
necessarily indicative of the results achieved for the full fiscal year.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- -----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total revenues(1).......... $ 340,897 $ 452,163 $ 563,747 $ 439,873 $ 370,654
Total expenses............. 356,387 496,647 673,658 515,332 402,106
Loss from operations....... (15,490) (44,484) (109,911) (75,459) (31,452)
Net loss................... (15,557) (55,314) (110,376) (75,776) (36,189)
Visits to patient homes ... 5,036,000 7,433,203 9,024,271 6,966,451 5,731,026
Number of States........... 17 22 23 21 21
Number of service
locations.................. 288 379 456 426 410
Number of employees
(est.)..................... 9,000 12,000 16,000 15,000 13,700
</TABLE>
- ----------
(1) As a result of the settlement of the HCFA Claims, First American recorded
reductions to patient service revenues of $8.7 million for all periods
preceding December 31, 1992, $11.4 million, $29.3 million and $54.6 million
for the years ended December 31, 1993, 1994 and 1995, respectively, and
$41.0 million for the nine months ended September 30, 1995. There was a
reduction in revenue from the settlement of the HCFA Claims of $10.4
million for the nine months ended September 30, 1996.
PROPOSED CORAM ACQUISITION
On October 19, 1996, IHS and Coram entered into a definitive agreement and
plan of merger (the "Merger Agreement") providing for the merger of a
wholly-owned subsidiary of IHS into Coram, with Coram becoming a wholly-owned
subsidiary of IHS. On March 30, 1997, IHS and Coram agreed to amend the terms of
the merger agreement, effective the close of business on Friday April 4, 1997,
unless either party terminates the amendment prior to its effectiveness. Under
the amended agreement, the exchange ratio will be reduced to 0.15 shares of IHS
Common Stock for each share of Coram common stock from the original exchange
ratio of 0.2111 shares of IHS Common Stock for each share of Coram common stock.
Based on the closing price of the IHS Common Stock on the last business day
prior to execution of the amendment agreement, IHS is paying $4.35 per share of
Coram Common Stock. IHS expects to issue approximately 7.11 million shares in
the merger, and to reserve approximately 2.35 million shares for issuance upon
exercise of outstanding Coram options and warrants. IHS expects to assume
approximately $375 million of Coram's indebtedness in connection with the
transaction. The amendment is subject to approval by both Boards of Directors,
and may be terminated by either party for any reason before the close of
business on Friday April 4, 1997.
42
<PAGE>
The Merger is intended to qualify as a tax free reorganization, as permitted
by the Internal Revenue Code of 1986, as amended (the "Code"), and a "pooling of
interests" for accounting and financial reporting purposes. The amendment
eliminates most of the original closing conditions from the merger agreement. If
the amendment becomes effective, IHS will be obligated to pay Coram a $25
million break-up fee if the Merger is not consummated by May 31, 1997, which
date may be extended by either party by up to 60 days, or, subject to certain
limited conditions, if IHS otherwise terminates the merger agreement. The Merger
is subject to approval by the stockholders of IHS and Coram.
Coram is a leading provider of alternate site (outside the hospital) infusion
therapy and related services in the United States, operating approximately 110
branches located in 43 states. Infusion therapy involves the intravenous
administration of anti-infective, chemotherapy, pain management, nutrition and
other therapies. Other services offered by Coram include lithotripsy, mail-order
pharmacy, pharmacy benefit management and other non-intravenous products and
services.
Coram was formed on July 8, 1994 as a result of a merger (the "Four-Way
Merger") by and among T(2) Medical, Inc., Curaflex Health Services, Inc.,
Medisys, Inc. and HealthInfusion, Inc., each of which was a publicly-held
national or regional provider of home infusion therapy and related services.
Each of these other companies became and is now a wholly-owned subsidiary of
Coram. This transaction was accounted for as a pooling of interests.
Coram has made a number of acquisitions since operations commenced, the most
significant of which was the acquisition of substantially all of the assets and
the assumption of certain specified liabilities of the alternate site infusion
business and certain related businesses (the "Caremark Business") from Caremark
effective April 1, 1995. Coram further broadened its geographic coverage by
acquiring H.M.S.S., Inc, a leading regional provider of home infusion therapies
based in Houston, Texas, effective September 12, 1994. As a result of such
mergers, Coram became the largest provider of alternate site infusion therapy
services in the United States based on breadth of service and total revenues.
DIVESTITURES
On July 11, 1991, the Company sold its audiology business to Hearing Health
Services, Inc., a newly-formed affiliate of privately-held Foster Management
Company. The sale involved all customer lists, license agreements, store leases,
property and equipment, accounts receivable and merchandise inventory. The
Audiology Division's products and services, which were offered at 34 retail
outlets (of which 12 were located in speech pathologist/professional/doctor
offices) in Florida and Illinois, included hearing aids, protective and
assistive listening devices, and hearing, testing and aural rehabilitation
services. The Company received $5 million for substantially all the assets of
the Audiology Division as follows: $1 million in cash and a combination of
common and preferred stock valued by independent financial advisors at $4
million. The common stock was repurchased for $2.6 million plus interest in July
1996 and the preferred stock is convertible under certain conditions and has a
liquidation preference of $2 million. Approximately $450,000 of the cash
proceeds were paid to NovaCare, Inc., an affiliate of Foster Management Company,
representing amounts owed by IHS to NovaCare, Inc. for services rendered. The
Company determined to discontinue the audiology business in June 1990 because it
could not be integrated effectively into its primary business. A substantial
portion of the audiology business had been acquired from Dr. Thomas F. Frist,
Jr., who was a director of the Company until June 1993.
On April 27, 1994, the Company sold its approximate 92% interest in
Professional Community Management International, Inc. ("PCM") to PCM at its book
value of $4.3 million. The Company accepted a promissory note for the full
amount of the purchase price, which note bears interest at 6.36% per annum and
is payable by PCM in installments over a 40 year period. The promissory note is
secured by a pledge of PCM stock held by certain PCM stockholders and a security
interest in all tangible and intangible assets of PCM. Certain stockholders of
PCM also executed personal guarantees with respect to the payment of $1.2
million over a period of six years, subject to reduction in an amount equal to
the amortization of the principal amount of the note. PCM manages approximately
41,000 residential condominium units in retirement communities in Southern
California.
In developing its post-acute healthcare system, IHS continuously evaluates
whether owning and operating businesses which provide certain ancillary
services, or contracting with third parties for such services, is
43
<PAGE>
more cost-effective. As a result, the Company is continuously evaluating its
existing operations to determine whether to retain or divest operations. To
date, IHS has divested its pharmacy division and a majority interest in its
assisted living division, and may divest additional divisions or assets in the
future.
Sale of Pharmacy Division. In July 1996, IHS 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 common stock
having a value of $25 million. In connection with the sale of the pharmacy
division, IHS agreed that prior to July 2001 neither it nor any of its
subsidiaries would be involved, directly or indirectly, in the operation,
management or conduct of any business that provides institutional pharmacy
dispensing or consulting services to long-term care facilities (including
skilled nursing facilities) located within a 150 mile radius of any IHS
long-term care facility or any pharmacy sold to, or operated by, Capstone,
except in certain limited circumstances. The Company's pharmacy division
operated institutional pharmacies in eight states providing service to over
40,000 beds within 379 facilities. Approximately 17% of the beds are currently
owned, leased or managed by IHS. IHS' revenues for the years ended December 31,
1995 and 1996 included revenue generated by the pharmacy division of
approximately $91.0 million (of which $17.5 million was revenue from services to
IHS facilities) and approximately $63.6 million (of which $11.3 million was
revenue from services to IHS facilities), respectively. The Company's earnings
(loss) before income taxes for the years ended December 31, 1995 and 1996
included earnings (loss) before income taxes generated by the pharmacy division
of approximately $6.6 million and $6.4 million, respectively. IHS has determined
that its ownership of pharmacy operations is not critical to the development and
implementation of its post-acute care network strategy.
Sale of Assisted Living Services Division. On October 9, 1996, Integrated
Living Communities, Inc. ("ILC"), at the time a wholly-owned subsidiary of IHS
which provides assisted living and related services to the private pay elderly
market, completed an initial public offering of ILC common stock. IHS sold
1,400,000 shares of ILC common stock in the offering, for which it received
aggregate net proceeds of approximately $10.4 million. In addition, ILC used
approximately $7.4 million of the proceeds from the offering to repay
outstanding indebtedness to IHS. Following the offering, IHS continues to own
2,497,900 shares of ILC common stock, representing 37.3% of the outstanding ILC
common stock. Following the ILC Offering IHS loaned $3.4 million to ILC.
ILC currently operates 23 residential-style assisted-living communities,
which comprise a combination of housing, personalized support services and
healthcare in a non-institutional setting designed to respond to the individual
needs of the elderly who need assistance with certain activities of daily living
but who do not require the level of healthcare provided in a skilled nursing
facility. ILC's facilities (11 owned, eight leased and four managed) have
approximately 2,460 beds in ten states. In addition, ILC is currently developing
29 new assisted living facilities (having approximately 2,200 beds), of which 20
(having approximately 1,500 beds) are expected to open during 1997. IHS'
revenues for the years ended December 31, 1995 and 1996 include revenue
generated by ILC of approximately $16.3 million and $17.1 million, respectively.
The Company's earnings (loss) before income taxes for the years ended December
31, 1995 and 1996 include earnings (loss) before income taxes generated by ILC
of approximately $(4.0) million and $1.7 million, respectively. Because of its
rapid growth strategy, ILC expects to incur losses at least through the first
quarter of 1998. As a result of IHS' approximately 37% equity investment in ILC,
IHS will recognize approximately 37% of ILC's income or loss from operations.
IHS has determined that the direct operation of assisted-living communities is
not required for its post-acute care network strategy.
44
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the fiscal periods indicated the
percentage of net revenues represented by certain items reflected in the
Company's statement of operations and the percentage change in such items from
the prior corresponding fiscal periods.
<TABLE>
<CAPTION>
PERCENTAGE OF NET PERIOD TO PERIOD
REVENUES INCREASE (DECREASE)
------------------------- -----------------------
YEAR YEAR
ENDED ENDED
DECEMBER DECEMBER
YEARS ENDED DECEMBER 31, 31, 1995 31, 1996
------------------------- COMPARED COMPARED
1994 1995 1996 TO 1994 TO 1995
-------- ------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues:
Basic medical services ................................ 37.9% 31.3% 27.2% 36.6% 5.8%
Specialty medical services ............................ 56.8 65.4 69.6 90.5 29.7
Management services and other ......................... 5.3 3.3 3.2 5.0 15.0
-------- ------- -------- ----------- -----------
Total Revenues ....................................... 100.0 100.0 100.0 65.6 21.7
-------- ------- -------- ----------- -----------
Costs and Expenses:
Operating expenses .................................... 74.2 75.4 76.2 68.2 23.1
Corporate administrative and general .................. 5.2 4.8 4.3 51.2 8.9
Depreciation and amortization ......................... 3.7 3.4 2.9 51.6 4.3
Rent .................................................. 5.9 5.6 5.4 56.9 17.6
Interest, net ......................................... 2.9 3.3 4.5 89.2 64.5
Loss from impairment of long-lived assets.............. -- 7.0 -- * *
Other non-recurring charges (income)................... -- 4.2 (1.0) * *
-------- ------- -------- ----------- -----------
Earnings (loss) before equity in earnings of
affiliates, income taxes and extraordinary items .... 8.1 (3.7) 7.7 (175.6) 353.2
Equity in earnings of affiliates ....................... 0.2 0.1 0.1 22.7 (42.6)
-------- ------- -------- ----------- -----------
Earnings (loss) before income taxes and extraordinary
items ............................................... 8.3 (3.6) 7.8 (171.7) 363.8
Federal and state income taxes ......................... 3.1 (1.4) 4.5 (173.6) 491.6
-------- ------- -------- ----------- -----------
Earnings (loss) before extraordinary items ........... 5.2 (2.2) 3.3 (170.5) 283.8
Extraordinary items .................................... 0.6 0.1 0.1 (76.3) 41.3
-------- ------- -------- ----------- -----------
Net earnings (loss) .................................. 4.6 (2.3) 3.2 (182.9) 271.6
======== ======= ======== =========== ===========
</TABLE>
* Not meaningful.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net revenues for the year ended December 31, 1996 increased $255.81 million
or 21.7% to $1,434.70 million from the comparable period in 1995. Such increase
was attributable to (1) growth in revenues from facilities and ancillary
companies in operation in both periods and facilities and ancillary companies
acquired during 1995, as well as the conversion of MSU beds at existing
facilities of $78.17 million, (2) the addition of new facilities acquired or
leased and ancillary service businesses acquired in 1996 which increased revenue
by $171.69 million, and (3) increased management services and other revenue of
$5.95 million. The increase in revenues was partially offset by the sale of the
pharmacy division in July 1996, which generated revenues of $91.0 million in
1995 and $63.6 million in 1996. In addition, net revenues include revenues for
ILC of $16.3 million, and $17.1 million in 1995 and 1996 (through October 9,
1996). Basic medical services revenue increased $21.20 million, or 5.8%, from
$368.57 million in 1995 to $389.77 million in 1996. Of the $21.20 million
increase, $12.20 million, or 57.5%, was attributable to the addition of 391
leased and 110 owned beds in 1996. The remainder of the increase was due to the
addition of facilities during 1995, partially offset by the conversion of
existing basic medical services beds to MSU beds. Specialty medical services
revenue increased from $770.55 million to $999.21 million. Of the $228.66
million increase, $158.87 million, or 69.5%, was attributable to revenue from
acquisitions subsequent to December 31, 1995. The remainder of the increase is
due to increased revenue at facilities in operation in both periods, facilities
and ancillary companies acquired during 1995, and the conversion of basic
medical services beds to MSU beds in 1996 partially offset by the sale of the
pharmacy division and a majority interest in ILC. Management services and other
revenues increased from $39.77 million to $45.71 million. The increase was due
to the addition of four management contracts in 1996, 43 management contracts
during 1995 and improved operating results at facilities managed in both
periods, partially offset by the termination in December 1995 of an agreement to
manage 23 facilities.
45
<PAGE>
Total expenses for the period increased from $1,222.59 million to $1,324.04
million, an increase of 8.3%. This increase was due to the acquisition of
facilities and ancillary companies subsequent to December 31, 1995, partially
offset by the sale of the pharmacy division and a majority interest in ILC.
Salaries, wages and benefits paid to personnel increased $144.37 million, or
26.3%, from the year ended December 31, 1995. Of the $144.37 million increase,
approximately $86.50 million was attributable to facilities and ancillary
companies acquired subsequent to December 31, 1995. The remaining increase
resulted from salary increases for existing employees, increases in salaries due
to facilities and ancillary companies acquired during 1995, as well as
additional personnel needed due to increased census and the increased medical
acuity level of the Company's patients. Other operating expenses, which include
physician fees and fees paid to independent contractors providing rehabilitative
therapy, utilities, food supplies and facility maintenance, increased $61.03
million, or 18.0%, in 1996 as compared to 1995. Of this increase, approximately
$58.79 million was attributable to the aforementioned facilities and ancillary
companies acquired in 1996.
Corporate administrative and general expenses for the year ended December 31,
1996 increased by $4.96 million, or 8.9%, over the comparable period in 1995.
This increase primarily represents additional operations, information systems,
finance, accounting and other personnel to support the growth of owned, leased
and managed facilities and related services businesses. Depreciation and
amortization increased to $41.68 million during the year ended December 31,
1996, a 4.3% increase as compared to $39.96 million in the comparable period of
1995. Of the $1.72 million increase, $4.01 million was attributable to
depreciation and amortization at facilities and ancillary businesses acquired in
1996. The remaining increase was primarily due to the amortization and
depreciation related to increased routine and capital expenditures at existing
facilities, increased debt issue costs and increases in depreciation and
amortization of facilities and ancillary companies acquired during 1995,
partially offset by a change in accounting method in 1996 from deferring and
amortizing pre-opening costs to expensing them when incurred. Rent expense
increased by $11.66 million, or 17.6%, over the comparable period in 1995,
primarily as a result of increased rental equipment at ancillary companies
acquired during 1996, two leaseholds acquired in 1996 and increases in
contingent rentals based on gross revenues. Net interest expense increased
$25.13 million during the year ended December 31, 1996 to $64.11 million. The
increase was primarily the result of the full year effect of the 9 5/8% Senior
Subordinated Notes due 2002 issued in May 1995, the 10 1/4% Senior Subordinated
Notes due 2006 issued in May 1996, and increased borrowings under the Company's
$700 million revolving credit facility which closed in May 1996.
In the fourth quarter of 1995, the Company, as well as industry analysts,
concluded that Medicare and Medicaid reform was imminent. Both the House and
Senate balanced budget proposals proposed a reduction in future growth in
Medicare and Medicaid spending from 10% a year to approximately 4-6% a year.
While Medicare and Medicaid reform had been discussed prior to the fourth
quarter, the Company came to believe that a future reduction in the growth of
Medicare and Medicaid spending was virtually a certainty. Such reforms include,
in the near term, a continued freeze in the Medicare routine costs limit
("RCL"), followed by reduced increases in later years, more stringent
documentation requirements for Medicare RCL exception requests, reductions in
the growth in Medicaid reimbursement in most states, as well as salary
equivalency in rehabilitative services, and, in the longer term (2-3 years), a
switch to a prospective payment system for home care and nursing homes, and
repeal of the "Boren Amendment", which requires that states pay hospitals
"reasonable and adequate" rates. The Company estimated the effect of the
aforementioned reforms on each nursing and subacute facility, as well as on its
rehabilitative services, respiratory therapy, home care, mobile diagnostic and
pharmacy divisions by reducing (or in some cases increasing) the future revenues
and expense growth rates for the impact of each of the aforementioned factors.
Accordingly, these events and circumstances triggered the early adoption of
Statement of Financial Accounting Standards ("SFAS") No. 121 in the fourth
quarter of 1995. In accordance with SFAS No. 121, the Company estimated the
future cash flows expected to result from those assets to be held and used.
In estimating the future cash flows for determining whether an asset is
impaired, and if expected future cash flows used in measuring assets are
impaired, the Company grouped its assets at the lowest level for which there are
identifiable cash flows independent of other groups of assets. These levels were
each of the individual nursing/subacute facilities, and each of the home health,
rehabilitative therapy, respiratory therapy, pharmacy and mobile diagnostics
divisions. The results of comparing future
46
<PAGE>
undiscounted cash flows to historical carrying value were that some individual
nursing facilities and one assisted living facility were identified for an
impairment charge. None of the remaining facilities or business units were
eligible since only those facilities or business units where the carrying value
exceeded the undiscounted cash flows are considered impaired. Prior to adoption
of SFAS 121, the Company evaluated impairment on the entity level. Such an
evaluation yielded no impairment as of September 30, 1995.
After determining the facilities identified for an impairment charge the
Company determined the estimated the fair value of such facilities. Also, the
Company obtained valuation estimates prepared by independent appraisers or had
received offers from potential buyers on six of the facilities eligible for
impairment, comprising 72.4% of the total charge. Such valuation estimates were
obtained to corroborate the Company's estimate of value. The excess carrying
value of goodwill, buildings and improvements, leasehold improvements and
equipment above the fair value was $83.32 million (of which $1.53 million
represented goodwill and $81.79 million represented property and equipment) and
is included in the statement of operations for 1995 as loss on impairment of
long-lived assets.
In 1996, IHS had non-recurring income of $14.46 million, consisting primarily
of a gain of $34.30 million from the sale of the pharmacy division, partially
offset by a loss of $8.50 million from its sale of shares of ILC, a $7.82
million loss related to the termination of a management contract and a $3.52
million, non-recurring charge resulting from the closure of certain redundant
home health agencies. During the fourth quarter of 1995, the Company terminated
a 10 year contract entered into in January 1994 to manage 23 long-term care and
psychiatric facilities in California owned by Crestwood Hospital. The terms of
the contract required the payment of a management fee to IHS and a preferred
return to the Crestwood owners. IHS terminated the management contract with
Crestwood Hospital due primarily to changes in California Medicaid rates which
no longer provided sufficient cash flow at the facilities to support both IHS'
management fee and the preferred return to the owners. As a result, the Company
incurred a loss of $21.92 million. Such loss consists of the write-off of $8.50
million of management fees, $11.10 million of loans made to Crestwood Hospital
and the owners of Crestwood, as well as the interest thereon, and $2.32 million
of contract acquisition costs. During the third quarter of 1995, the Company
merged with IntegraCare, Inc. in a transaction accounted for as a pooling of
interests. In connection with this transaction, the Company incurred merger
costs of $1.94 million for accounting, legal and other costs. In addition, in
the fourth quarter of 1995 IHS changed its accounting estimate regarding the
future benefit of deferred pre-opening costs. This change was made in
recognition of the change in the estimated future benefit of such costs
resulting from the effect of the aforementioned Medicare and Medicaid reforms.
As a result, the company wrote-off $25.78 million of deferred pre-opening costs.
See "-- Acquisition and Divestiture History."
Equity in earnings of affiliates decreased by 42.6% to $828,000 from $1.44
million in the comparable period of 1995. Equity in earnings of affiliates
include for 1996 IHS' 37.3% interest in the earnings (loss) of ILC from October
9, 1996, the closing date of ILC's initial public offering, which resulted in
ILC no longer being a wholly owned subsidiary of IHS.
Earnings before income taxes and extraordinary item increased by 363.8% to
$111.48 million for the year ended December 31, 1996, as compared to a loss of
$42.26 million for the comparable period in 1995. The increase was primarily due
to certain non-cash charges and income discussed previously as well as
significant acquisitions during 1996. The provision for state and federal income
taxes increased from a benefit of $16.27 million in 1995 to an expense of $63.72
million in 1996. Net earnings and fully diluted earnings per share for 1996 were
$46.33 million and $1.78 per share, respectively, compared to net loss and fully
diluted loss per share for 1995 of $27.00 million and $1.26 per share. During
the year ended December 31, 1996, the Company incurred a $1.43 million (net of
tax benefit) or 4 cents a share (fully-diluted) extraordinary loss on the
extinguishment of debt, as compared to $1.01 million or 5 cents a share
(fully-diluted) in 1995. Weighted average shares increased from 21,463,464
(fully-diluted) in 1995 to 31,652,620 (fully-diluted) in 1996. The weighted
average shares increased because the impact of the convertible debentures and
options outstanding were not included in weighted average shares because they
were anti-dilutive in 1995.
47
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net revenues for the year ended December 31, 1995 increased $466.79 million
or 65.6% to $1,178.89 million from the comparable period in 1994. Such increase
was attributable to (1) growth in revenues from facilities and ancillary
companies in operation in both periods and facilities and ancillary companies
acquired during 1994, as well as the conversion of MSU beds at existing
facilities of $410.50 million, (2) the addition of new facilities acquired or
leased and ancillary service business acquired in 1995 which increased revenue
by $54.41 million, and (3) increased management services and other revenue of
$1.88 million. Basic medical services revenue increased $98.75 million, or
36.6%, from $269.82 million in 1994 to $368.57 million in 1995. Of the $98.75
million increase, $7.67 million, or 7.8%, was attributable to the addition of
433 leased and 442 owned beds in 1995. The remainder of the increase was due to
the addition of facilities during 1994, partially offset by the conversion of
existing basic medical services beds to MSU beds. Specialty medical services
revenue increased from $404.40 million to $770.55 million. Of the $366.15
million increase, $46.44 million, or 12.7%, was attributable to revenue from
acquisitions subsequent to December 31, 1994. The remainder of the increase is
due to increased revenue at facilities in operation in both periods, facilities
and ancillary companies acquired during 1994, and the conversion of basic
medical services beds to MSU beds in 1995. Management services and other
revenues increased from $37.88 million to $39.77 million. The increase was due
to the addition of 43 management contracts and improved operating results at
facilities managed in both periods partially offset by (1) the purchase of
facilities that were previously managed, (2) the reduction in the Trizec
consulting fee from $4 million to $3 million, (3) the cancellation of 29
management contracts (including 23 from Crestwood) during 1995.
Total expenses for the period increased from $654.30 million to $1,222.59
million, an increase of 86.9%. Of the $568.29 million increase, $360.42 million,
or 63.4%, was due to an increase in operating expenses. Salaries, wages and
benefits paid to personnel increased $216.95 million, or 65.2%, from the year
ended December 31, 1994. Of the $216.95 million increase, $34.39 million was
attributable to facilities and ancillary companies acquired subsequent to
December 31, 1994. The remaining increase resulted from salary increases for
existing employees, increases in salaries due to facilities and ancillary
companies acquired during 1994, as well as additional personnel needed due to
increased census and the increased medical acuity level of the Company's
patients. Other operating expenses, which include physician fees and fees paid
to independent contractors providing rehabilitative therapy, utilities, food
supplies and facility maintenance, increased $143.47 million, or 73.5%, as
compared to December 31, 1994. Of this increase, $12.67 million was attributable
to the aforementioned facilities and ancillary companies acquired in 1995.
Corporate administrative and general expenses for the year ended December 31,
1995 increased by $18.98 million, or 51.2%, over the comparable period in 1994.
This increase primarily represents additional operations, information systems,
finance, accounting and other personnel to support the growth of owned, leased,
and managed facilities and related services businesses. Depreciation and
amortization increased to $39.96 million during the year ended December 31,
1995, a 51.6% increase as compared to $26.37 million in the comparable period of
1994. Of the $13.59 million increase, $852,000 was attributable to depreciation
and amortization at facilities and ancillary businesses acquired in 1995. The
remaining increase was primarily due to the amortization and depreciation
related to increased routine and capital expenditures at existing facilities,
increased amortization of deferred pre-opening costs for newly opened MSUs,
increased debt issue costs and increases in depreciation and amortization of
facilities and ancillary companies acquired during 1994. Rent expense increased
by $23.97 million, or 56.9%, over the comparable period in 1994, primarily the
result of the full year effect of fifty leaseholds acquired in 1994, the
acquisition of three leaseholds acquired in 1995, and increases in contingent
rentals based on gross revenues, partially offset by the purchase of two
geriatric care facilities previously leased by the Company. Net interest expense
increased $18.38 million during the year ended December 31, 1995 to $38.98
million. The increase was primarily the result of the full year effect of 10 3/4
% Senior Subordinated Notes due 2004 issued in July 1994, the 9 5/8 % Senior
Subordinated Notes due 2002 issued in May 1995, and increased borrowings under
the Company's $500 million credit and term loan facility which closed in May
1995.
In the fourth quarter of 1995, the Company, as well as industry analysts,
concluded that Medicare and Medicaid reform was imminent. Both the House and
Senate balanced budget proposals proposed a reduction in future growth in
Medicare and Medicaid spending from 10% a year to approximately 4-6%
48
<PAGE>
a year. While Medicare and Medicaid reform had been discussed prior to the
fourth quarter, the Company came to believe that a future reduction in the
growth of Medicare and Medicaid spending was virtually a certainty. Such reforms
include, in the near term, a continued freeze in the Medicare RCL, followed by
reduced increases in later years, more stringent documentation requirements for
Medicare RCL exception requests, reductions in the growth in Medicaid
reimbursement in most states, as well as salary equivalency in rehabilitative
services, and, in the longer term (2-3 years), a switch to a prospective payment
system for home care and nursing homes, and repeal of the "Boren Amendment",
which requires that states pay hospitals "reasonable and adequate" rates. The
Company estimated the effect of the aforementioned reforms on each nursing and
subacute facility, as well as on its rehabilitative services, respiratory
therapy, home care, mobile diagnostic and pharmacy divisions by reducing (or in
some cases increasing) the future revenues and expense growth rates for the
impact of each of the aforementioned factors. Accordingly, these events and
circumstances triggered the early adoption of Statement of Financial Accounting
Standards No. 121 in the fourth quarter of 1995. In accordance with SFAS No.
121, the Company estimated the future cash flows expected to result from those
assets to be held and used.
In estimating the future cash flows for determining whether an asset is
impaired, and if expected future cash flows used in measuring assets are
impaired, the Company grouped its assets at the lowest level for which there are
identifiable cash flows independent of other groups of assets. These levels were
each of the individual nursing/subacute facilities, and each of the home health,
rehabilitative therapy, respiratory therapy, pharmacy and mobile diagnostics
divisions. The results of comparing future undiscounted cash flows to historical
carrying value were that some individual nursing facilities and one assisted
living facility were eligible for an impairment charge. None of the remaining
facilities or business units were identified since only those facilities or
business units where the carrying value exceeded the undiscounted cash flows are
considered impaired. Prior to adoption of SFAS 121, the Company evaluated
impairment on the entity level. Such an evaluation yielded no impairment as of
September 30, 1995.
After determining the facilities identified for an impairment charge the
Company determined the estimated the fair value of such facilities. Also, the
Company obtained valuation estimates prepared by independent appraisers or had
received offers from potential buyers on six of the facilities eligible for
impairment, comprising 72.4% of the total charge. Such valuation estimates were
obtained to corroborate the Company's estimate of value. The excess carrying
value of goodwill, buildings and improvements, leasehold improvements and
equipment above the fair value was $83.32 million (of which $1.53 million
represents goodwill and $81.79 million represents property and equipment) and is
included in the statement of operations for 1995 as loss on impairment of
long-lived assets.
During the fourth quarter of 1995, the Company terminated the Crestwood
management contract, a 10 year contract entered into in January 1994 to manage
23 long-term care and psychiatric facilities in California owned by Crestwood
Hospital. The terms of the contract required the payment of a management fee to
IHS and a preferred return to the Crestwood owners. IHS terminated the
management contract with Crestwood Hospital due primarily to changes in
California Medicaid rates which no longer provided sufficient cash flow at the
facilities to support both IHS' management fee and the preferred return to the
owners. As a result, the Company incurred a loss of $21.92 million. Such loss
consists of the write-off of $8.50 million of management fees, $11.10 million of
loans made to Crestwood Hospital and the owners of Crestwood, as well as the
interest thereon, and $2.32 million of contract acquisition costs. During the
third quarter of 1995, the Company merged with IntegraCare, Inc. in a
transaction accounted for as a pooling of interests. In connection with this
transaction, the Company incurred merger costs of $1.94 million for accounting,
legal and other costs. In addition, in the fourth quarter of 1995 IHS changed
its accounting estimate regarding the future benefit of deferred pre-opening
costs. This change was made in recognition of the change in estimated future
benefit or such costs resulting from the effects of the aforementioned Medicare
and Medicaid reforms. As a result, the Company wrote-off $25.78 million of
deferred pre-opening costs. These costs are included as an other non-recurring
charge on the statement of operations and are included as a component of income
from continuing operations.
Equity in earnings of affiliates increased by 22.7% to $1.44 million from
$1.18 million in the comparable period of 1994.
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<PAGE>
Earnings before income taxes and extraordinary item decreased by 171.7% to a
loss of $42.26 million for the year ended December 31, 1995, as compared to
income of $58.98 million for the comparable period in 1994. The decrease was
primarily due to certain non-cash charges discussed above. The provision for
state and federal income taxes decreased from expense of $22.12 million in 1994
to a benefit of $16.27 million in 1995. Net loss and fully diluted loss per
share for 1995 were $27.00 million and $1.26 per share respectively, compared to
net earnings and fully diluted earnings per share for 1994 of $32.59 million and
$1.57 per share. During the year ended December 31, 1995, the Company incurred a
$1.01 million (net of tax benefit) or 5 cents a share extraordinary loss on the
extinguishment of debt, as compared to $4.27 million or 16 cents a share
(fully-diluted) in 1994. Weighted average shares decreased from 27,154,153
(fully-diluted) in 1994 to 21,463,464 in 1995. The weighted average shares
decreased because the impact of the convertible debentures and options
outstanding are not included in weighted average shares because they are
anti-dilutive in 1995.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had net working capital of $57.55 million,
as compared with $136.32 million at December 31, 1995. There are no material
capital commitments for capital expenditures as of the date of this filing.
Patient accounts receivable and third-party payor settlements receivable
increased $96.60 million to $326.88 million at December 31, 1996, as compared to
$230.28 million at December 31, 1995. Of the $96.60 million increase, $91.84
million related primarily to acquisitions of new facilities and related service
businesses in 1996, the $22.75 million related to activities in operation during
both years, partially offset by $18.0 million of patient accounts receivable and
third party payor settlements receivable in 1995 from facilities and related
service businesses sold subsequent to December 31, 1995. The growth in
receivables was consistent with the growth in revenues of such activities in
1996. Gross patient accounts receivable were $340.8 million at December 31, 1996
as compared with $226.82 million at December 31, 1995. Third-party payor
settlements receivable from federal and state governments (i.e., Medicare and
Medicaid cost reports) were $42.59 million at December 31, 1996 as compared to
$33.03 million at December 31, 1995. Approximately $15.6 million, or 36.7%, of
the third-party payor settlements receivable at December 31, 1996 represent the
costs for its MSU patients which exceed regional reimbursement limits
established under Medicare, as compared to approximately $7.6 million, or 23.0%,
at December 31, 1995. The Company's cost of care for its MSU patients generally
exceeds regional reimbursement limits established under Medicare. The success of
the Company's MSU strategy will depend in part on its ability to obtain
reimbursement for those costs which exceed the Medicare established
reimbursement limits by obtaining waivers of these cost limitations. The Company
has submitted waiver requests for 225 cost reports, covering all cost report
periods through December 31, 1995. To date, final action has been taken by the
Health Care Financing Administration ("HFCA") on 221 waiver requests covering
cost report periods through December 31, 1995. The Company's final rates as
approved by HCFA represent approximately 95% of the requested rates as submitted
in the waiver requests. There can be no assurance, however, that the Company
will be able to recover its excess costs under any waiver requests which may be
submitted in the future. The Company's failure to recover substantially all
these excess costs would adversely affect its results of operations and could
adversely affect its MSU strategy.
All remaining balance sheet increases were due to acquisitions and normal
growth in operations in both years which was consistent with the growth in
revenues of such operations in 1996.
On May 29, 1996, IHS issued $150 million aggregate principal amount of its 10
1/4% Senior Subordinated Notes due 2006 (the "10 1/4% Senior Notes"). Interest
on the 10 1/4% Senior Notes is payable semi-annually on April 30 and October 30.
The 10 1/4% Senior Notes are redeemable for cash at any time after April 30,
2001, at IHS' option, in whole or in part, initially at a redemption price equal
to 105.125% of the principal amount, declining to 100% of the principal amount
on April 30, 2004, plus accrued interest thereon to the date fixed for
redemption. In the event of a change in control of IHS (as defined in the
indenture under which the 10 1/4% Senior Notes were issued), each holder of 10
1/4% Senior Notes may require IHS to repurchase such holder's 10 1/4% Senior
Notes, in whole or in part, at 101% of the principal amount thereof, plus
accrued interest to the repurchase date. The indenture under which the 10 1/4%
Senior Notes were issued contains certain covenants, including, but not limited
to, covenants with respect to the following matters: (i) limitations on
additional indebtedness unless certain ratios are met; (ii) limitations on other
subordinated
50
<PAGE>
debt; (iii) limitations on liens; (iv) limitations on the issuance of preferred
stock by IHS' subsidiaries; (v) limitations on transactions with affiliates;
(vi) limitations on certain payments, including dividends; (vii) application of
the proceeds of certain asset sales; (viii) restrictions on mergers,
consolidations and the transfer of all or substantially all of the assets of IHS
to another person; and (ix) limitations on investments and loans. The Company
used the $145.38 million net proceeds from the sale of the 10 1/4 % Senior Notes
to repay a portion of the $328.20 million then outstanding under its credit
facility.
The 10 1/4% Senior Notes were sold to Smith Barney, Inc., Donaldson, Lufkin,
& Jenrette Securities Corporation and Citicorp Securities, Inc., as Initial
Purchasers. The Initial Purchasers sold the 10 1/4% Senior Notes to qualified
institutional buyers under Rule 144A of the Securities Act of 1933, as amended
and to a limited number of institutional accredited investors. Pursuant to an
agreement with the Initial Purchasers, IHS was obligated to take certain actions
to effect an exchange offer within specified periods whereby each holder of 10
1/4% Senior Notes would be offered the opportunity to exchange such notes for
new notes identical in all material respects to the 10 1/4% Senior Notes except
that the new notes would be registered under the Securities Act of 1933, as
amended. IHS has not to date commenced the exchange offer and, as a result,
beginning November 25, 1996 the interest rate on the 10 1/4% Senior Notes
increased to 10.5%, and will continue to increase by 0.25% each 90 days until
the exchange offer is commenced.
On May 15, 1996, IHS entered into a $700 million revolving credit facility,
including a $100 million letter of credit subfacility, with Citibank, N.A., as
Administrative Agent, and certain other lenders (the "New Credit Facility"). The
New Credit Facility consists of a $700 million revolving loan which reduces to
$560 million on June 30, 2000 and $315 million on June 30, 2001, with a final
maturity on June 30, 2002. The $100 million subcommitment for letters of credit
will remain at $100 million until final maturity. The New Credit Facility is
guaranteed by IHS' subsidiaries and secured by a pledge of all of the stock of
substantially all of IHS' subsidiaries. At the option of IHS, loans under the
New Credit Facility bear interest at a rate equal to either (i) the sum of (a)
the higher of (1) the bank's base rate or (2) one percent plus the latest
overnight federal funds rate plus (b) a margin of between zero percent and one
and one-quarter percent (depending on certain financial ratios); or (ii) in the
case of Eurodollar loans, the sum of between three quarters of one percent and
two and one-half percent (depending on certain financial ratios) and the
interest rate in the London interbank market for loans in an amount
substantially equal to the amount of borrowing and for the period of the
borrowing selected by IHS.
The New Credit Facility limits IHS' ability to incur indebtedness or
contingent obligations, to make additional acquisitions, to create or incur
liens on assets, to pay dividends and to purchase or redeem IHS' stock. In
addition, the New Credit Facility requires that IHS meet certain financial
tests, and provides the banks with the right to require the payment of all of
the amounts outstanding under the New Credit Facility if there is a change in
control of IHS or if any person other than Dr. Robert N. Elkins or a group
managed by Dr. Elkins owns more than 40% of IHS' capital stock. Amounts repaid
under the New Credit Facility may be reborrowed until June 30, 2002. The new
$700 million credit facility replaced IHS' $500 million revolving credit
facility (the "Prior Credit Facility"). As a result, IHS recorded a loss on
extinguishment of debt, net of related tax benefits, of approximately $1.4
million in the second quarter of 1996. On May 15, 1996, IHS borrowed $328.2
million under the New Credit Facility to repay amounts outstanding under the
Prior Credit Facility.
Net cash provided by operating activities was $33.83 million for the year
ended December 31, 1996 as compared to $31.60 million provided by operating
activities for the comparable period in 1995. Cash provided by operating
activities for the year ended December 31, 1995 increased from the comparable
period in 1995 primarily as a result of an increase in net earnings before
non-cash charges, partially offset by an increase in patient accounts and
third-party payor settlements receivable.
Net cash provided by financing activities was $249.53 million for the year
ended December 31, 1996 as compared to $192.92 million for the comparable period
in 1995. In both periods, the Company received proceeds from long-term
borrowings. In addition, in 1996 IHS reissued in connection with contingent
earnouts all 400,600 shares of its common stock in treasury, which shares were
repurchased in 1995 for $12.79 million.
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<PAGE>
Net cash used by investing activities was $283.25 million for the year ended
December 31, 1996 as compared to $246.29 million for the year ended December 31,
1995. Cash used for the purchase of property, plant and equipment was $145.90
million for the year ended December 31, 1996 and $145.07 million in the
comparable period in fiscal 1995. During 1995, the Company sold 10 of its
facilities for $33.15 million. During 1996, the Company sold a majority interest
in its assisted living division and its pharmacy division for approximately
$136.71 million. Cash used for business acquisitions was $242.82 million for
1996 as compared to $82.69 million for 1995.
IHS' contingent liabilities (other than liabilities in respect of litigation
and the contingent payments in respect of the First American acquisition)
aggregated approximately $52.4 million as of December 31, 1996. The Company is
obligated to purchase its Greenbriar facility upon a change in control of IHS.
The net price of the facility is approximately $4.0 million. The lessor of this
facility has the right to require Messrs. Robert Elkins and Timothy Nicholson to
purchase all or any part of 13,944 shares of IHS Common Stock owned by it at a
per share purchase price equal to the sum of $12.25 per share plus 9% simple
interest per annum from May 8, 1988 until the date of such purchase. IHS has
agreed to purchase such shares if Messrs. Elkins and Nicholson fail to do so.
This amount aggregated approximately $353,000 at December 31, 1996. The Company
has guaranteed approximately $6.6 million of the lessor's indebtedness. IHS is
required, upon certain defaults under the lease, to purchase its Orange Hills
facility at a purchase price equal to the greater of $7.1 million or the
facility's fair market value. The Company has jointly and severally guaranteed a
$1.2 million construction loan made to River City Limited Partnership in which
IHS has a 30% general partnership interest. The Company has guaranteed
approximately $4.0 million owed by Tutera Group, Inc. and Sunset Plaza Limited
Partnership, a partnership affiliated with a partnership in which IHS has a 49%
interest, to Finova Capital Corporation. IHS has guaranteed approximately $4.0
million of a construction loan for Trizec, the entity from which IHS purchased
the Central Park Lodges facilities. IHS has established several irrevocable
standby letters of credit with the Bank of Nova Scotia to secure certain of the
Company's self-insured workers' compensation obligations, health benefits and
other obligations. The maximum obligation was $15.7 million at December 31,
1996. The Company has guaranteed approximately $539,000 owed by a managed
facility to National Health Investors Inc. and approximately $8.9 million owed
by Litchfield Asset Management Corporation to National Health Investors Inc. In
addition, with respect to certain acquired businesses IHS is obligated to make
certain contingent payments if earnings of the acquired business increase or
earnings targets are met. The Company is also obligated under certain
circumstances to make contingent payments of up to $155 million in respect of
IHS' acquisition of First American. See " -- Acquisition and Divestiture History
- -- First American Acquisition." In addition, IHS has obligations under operating
leases aggregating approximately $235.8 million at December 31, 1996.
The liquidity of the Company will depend in large part on the timing of
payments by private third-party and governmental payors. In addition, the
Company's liquidity is dependent upon the timing of the approvals, if any, of
waivers of Medicare regional cost reimbursement limitations which exceed the
limits established under Medicare. Costs in excess of the regional reimbursement
limits relate to the delivery of services and patient care to the Company's MSU
patients.
The Company anticipates that working capital from operations and borrowings
under revolving credit facilities will be adequate to cover its scheduled debt
payments and future anticipated capital expenditure requirements throughout 1997
through its existing operations, continued implementation of its MSU programs at
existing facilities as well as newly acquired facilities and by the acquisition
of additional facilities and service companies or agreements to manage
additional facilities. The Company will fund future acquisitions with a
combination of cash flow from operations, bank borrowings and debt and equity
offerings.
The Company's indebtedness is substantial in relation to its stockholders'
equity. At December 31, 1996, IHS' total long-term debt, net of current portion,
accounted for 66.0% of its total capitalization. IHS also has significant lease
obligations with respect to the facilities operated pursuant to long-term
leases, which aggregated approximately $235.79 million at December 31, 1996. For
the year ended December 31, 1996, the Company's rent expense was $77.8 million
after giving effect to the First American Acquisition, the sale of the pharmacy
division and a majority interest in ILC and certain other acquisitions
consummated in 1996. In addition, IHS is obligated to pay up to an additional
$155 million in respect of the acquisition of First
52
<PAGE>
American during 2000 to 2004 under certain circumstances. See " -- Acquisition
and Divestiture History -- First American Acquisition." The Company's strategy
of expanding its specialty medical services and growing through acquisitions may
require additional borrowings in order to finance working capital, capital
expenditures and the purchase price of any acquisitions. The degree to which the
Company is leveraged, as well as its rent expense, could have important
consequences to holders of the Company's securities, including: (i) IHS' ability
to obtain additional financing in the future for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired, (ii) a
substantial portion of IHS' cash flow from operations may be dedicated to the
payment of principal and interest on its indebtedness and rent expense, thereby
reducing the funds available to IHS for its operations, (iii) certain of IHS'
borrowings bear, and will continue to bear, variable rates of interest, which
expose IHS to increases in interest rates, and (iv) certain of IHS' indebtedness
contains financial and other restrictive covenants, including those restricting
the incurrence of additional indebtedness, the creation of liens, the payment of
dividends and sales of assets and imposing minimum net worth requirements. In
addition, IHS' leverage may also adversely affect IHS' ability to respond to
changing business and economic conditions or continue its growth strategy. There
can be no assurance that IHS' operating results will be sufficient for the
payment of IHS' indebtedness. On October 21, 1996, Moody's placed IHS'
indebtedness on Creditwatch for possible downgrade in anticipation of the
pending acquisition of Coram due to the substantial additional indebtedness of
Coram. Any such downgrade could increase the Company's borrowing costs. If IHS
were unable to meet interest, principal or lease payments, or satisfy financial
covenants, it could be required to seek renegotiation of such payments and/or
covenants or obtain additional equity or debt financing. To the extent IHS
finances its activities with additional debt, IHS may become subject to certain
financial and other covenants that may restrict its ability to pursue its growth
strategy. There can be no assurance that any such efforts would be successful or
timely or that the terms of any such financing or refinancing would be
acceptable to IHS.
The Company's growth strategy requires substantial capital for the
acquisition of additional home healthcare and related service providers and
geriatric care facilities and the establishment of new, and expansion of
existing, MSUs. The effective integration, operation and expansion of the
existing businesses will also require substantial capital. IHS expects to
finance new acquisitions from a combination of funds from operations, borrowings
under its bank credit facility and the issuance of debt and equity securities.
IHS may raise additional capital through the issuance of long-term or short-term
indebtedness or the issuance of additional equity securities in private or
public transactions, at such times as management deems appropriate and the
market allows. Any of such financings could result in dilution of existing
equity positions, increased interest and amortization expense or decreased
income to fund future expansion. There can be no assurance that acceptable
financing for future acquisitions or for the integration and expansion of
existing businesses and operations can be obtained. The Company's bank credit
facility limits IHS' ability to make acquisitions, and certain of the indentures
under which IHS' outstanding subordinated debt securities were issued limit IHS'
ability to incur additional indebtedness unless certain financial tests are met.
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QUARTERLY RESULTS (UNAUDITED)
Set forth below is certain summary information with respect to the Company's
operations for the last eight fiscal quarters.
<TABLE>
<CAPTION>
THREE MONTHS ENDED(1)
-----------------------------------------------------------------------------------------
1995 1996
---------------------------------------------- ------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
----------- ---------- ----------- ----------- ---------- --------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Basic medical services .............. $ 89,336 $ 87,365 $ 95,482 $ 96,386 $ 97,216 $ 98,063 $101,189 $ 93,305
Specialty medical services .......... 176,158 188,331 193,604 212,461 219,525 226,868 211,904 340,912
Management services and other ....... 9,141 10,583 10,039 10,002 10,532 10,849 12,572 11,760
----------- ---------- ----------- ----------- ---------- --------- ---------- ----------
Total ............................. 274,635 286,279 299,125 318,849 327,273 335,780 325,665 445,977
Cost and Expenses:
Operating expenses .................. 207,304 214,404 224,457 242,386 249,895 254,274 241,177 348,602
Corporate administrative and general 12,402 14,174 14,262 15,178 15,093 14,854 14,943 16,086
Depreciation and
amortization ....................... 8,960 9,682 9,867 11,452 8,274 8,505 9,130 15,772
Rent ................................ 16,066 16,454 16,726 16,879 17,656 17,879 18,445 23,805
Interest, net ....................... 7,330 8,585 10,955 12,107 14,214 15,888 15,931 18,077
Loss from impairment of long-lived
assets.............................. -- -- -- 83,321 -- -- -- --
Other non-recurring charges
(income)(2)......................... -- -- 1,939 47,700 -- -- (34,298) 19,841
----------- ---------- ----------- ----------- ---------- --------- ---------- ----------
Earnings (loss) before equity in
earnings (loss) of affiliates,
income taxes and extraordinary
items............................... 22,573 22,980 20,919 (110,174) 22,141 24,380 60,337 3,794
Equity (loss) in earnings of
affiliates........................... 315 417 401 310 300 460 323 (255)
----------- ---------- ----------- ----------- ---------- --------- ---------- ----------
Earnings (loss) before income taxes
and extraordinary items ............ 22,888 23,397 21,320 (109,864) 22,441 24,840 60,660 3,539
Income tax provision (benefit) ....... 8,812 9,008 8,208 (42,298) 8,640 9,563 44,149 1,363
----------- ---------- ----------- ----------- ---------- --------- ---------- ----------
Earnings (loss) before extraordinary
items(2)............................ 14,076 14,389 13,112 (67,566) 13,801 15,277 16,511 2,176
Extraordinary items(3)................ -- 508 -- 505 -- 1,431 -- --
----------- ---------- ----------- ----------- ---------- --------- ---------- ----------
Net earnings (loss).................. $ 14,076 $ 13,881 $ 13,112 $ (68,071) $ 13,801 $ 13,846 $ 16,511 $ 2,176
=========== ========== =========== =========== ========== ========= ========== ==========
Per Common Shares-fully diluted:
Earnings (loss) before extraordinary
items .............................. $ .53 $ .54 $ .52 $ (3.03) $ .54 $ .56 $ .58 $ .14
Net earnings (loss).................. .53 .52 .52 (3.06) .54 .51 .58 $ .14
=========== ========== =========== =========== ========== ========= ========== ==========
</TABLE>
- ----------
(1) In 1995, the Company merged with IntegraCare in a transaction accounted for
as a pooling of interests. Accordingly, the Company's historical financial
statements for all periods prior to the effective date of the merger have
been restated to include the results of IntegraCare. See Note 1(o) of Notes
to Consolidated Financial Statements.
(2) In 1995, consists primarily of (i) expenses of $1,939,000 related to the
merger with IntegraCare in the third quarter, (ii) a loss of $21,915,000
related to the termination of a management agreement in the fourth quarter
and (iii) write-off of $25,785,000 of deferred pre-opening costs in the
fourth quarter. In 1996 consists primarily of (i) a gain of $34,298,000
from the sale of the pharmacy division in the third quarter, (ii) a loss of
$8,497,000 from its sale of shares in the ILC offering in the fourth
quarter (iii) a loss of $7,825,000 related to the termination of a
management agreement in the fourth quarter, and (iv) a $3,519,000 exit cost
in the fourth quarter resulting from the closure of redundant home
healthcare agencies. Because IHS' investment in the Capstone common stock
received in the sale of the pharmacy division had a very small tax basis,
the taxable gain on the sale significantly exceeded the gain for financial
reporting purposes, thereby resulting in a disproportionately higher income
tax provision related to the sale.
(3) Extraordinary items relate to extinguishment of debt. See Note 15 of
Consolidated Financial Statements.
From January 1, 1995 through December 31, 1996, the Company acquired 6
geriatric care facilities (including 3 facilities which it had previously leased
and 3 of which had been managed by IHS), leased 6 geriatric care facilities (5
of which had previously been managed) and entered into management agreements to
manage 35 geriatric care facilities and 4 assisted living facilities. During
this period, the Company sold its interest in 4 geriatric care facilities and
seven retirement facilities (5 owned and 2 leased) and agreements to manage 60
facilities were terminated. In addition, during this period the Company opened
42 MSUs totalling 875 beds and expanded existing MSUs (including MSUs opened
during this period) by 376 beds. During this period, the Company's assisted
living division completed its initial public offering, reducing the Company's
interest in the division to 37%, and the Company sold its pharmacy division. See
"-- Acquisition and Divestiture History."
54
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-------
Independent Auditors' Report ...................................... 56
Consolidated Balance Sheets at December 31, 1995 and 1996 ........ 57
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996................................... 58
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996 .................................. 59
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 .................................. 60
Notes to Consolidated Financial Statements ........................ 61
Schedule II--Valuation and Qualifying Accounts .................... 94
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted because
they are not required under the related instructions, are inapplicable or the
information has been provided in the Consolidated Financial Statements or the
Notes thereto.
55
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Integrated Health Services, Inc.:
We have audited the accompanying consolidated financial statements of
Integrated Health Services, Inc. and subsidiaries (the Company) as listed in the
accompanying index. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule listed in the
accompanying index. These consolidated financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule 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 Integrated
Health Services, Inc. and subsidiaries at December 31, 1995 and 1996 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in notes 1(k) and 18 to the consolidated financial statements,
in 1995 the Company adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Also, effective January 1, 1996, the Company changed its accounting method from
deferring and amortizing pre-opening costs of medical specialty units to
recording them as an expense when incurred.
Baltimore, Maryland KPMG PEAT MARWICK LLP
March 24, 1997
56
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
------------ -------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents .................................... $ 38,917 $ 39,028
Temporary investments ........................................ 2,387 2,044
Patient accounts and third-party payor settlements
receivable, net (note 3) .................................... 230,282 326,883
Inventories, prepaid expenses and other current assets ....... 25,629 26,243
Income tax receivable......................................... 16,517 20,992
------------ -------------
Total current assets ....................................... 313,732 415,190
Property, plant and equipment, net (note 5) ................... 758,127 864,335
Intangible assets (notes 2 and 6) ............................. 288,033 572,159
Investments in and advances to affiliates (note 4) ........... 29,362 76,047
Other assets .................................................. 44,476 65,376
------------ -------------
Total assets ............................................... $1,433,730 $1,993,107
============ =============
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt (note 8) ................ $ 5,404 $ 16,547
Accounts payable and accrued expenses (note 7) ............... 172,013 341,094
------------ -------------
Total current liabilities .................................. 177,417 357,641
------------ -------------
Long-term debt (note 8):
Convertible subordinated debentures .......................... 258,750 258,750
Other long-term debt less current maturities ................. 506,507 779,450
----------- -------------
Total long-term debt ....................................... 765,257 1,038,200
----------- -------------
Other long-term liabilities (note 9)........................... -- 33,851
Deferred income taxes (note 12) ............................... 52,279 22,283
Deferred gain on sale-leaseback transactions .................. 7,249 6,267
Commitments and contingencies (notes 4, 9, 10, 11 and 13)
Stockholders' equity (note 11):
Preferred stock, authorized 15,000,000 shares; no shares
issued and outstanding in 1995 and 1996 ..................... -- --
Common stock, $0.001 par value. Authorized 150,000,000 shares;
issued 21,785,334 shares in 1995 and 23,628,250 shares in
1996 (including 400,600 treasury shares in 1995) ............ 22 24
Additional paid-in capital ................................... 410,345 445,667
Retained earnings ............................................ 33,951 79,814
Unrealized gain on available for sale securities.............. -- 9,360
Treasury stock, at cost (400,600 shares in 1995)(note 11)..... (12,790) --
------------ -------------
Total stockholders' equity ................................. 431,528 534,865
------------ -------------
Total liabilities and stockholders' equity ................. $1,433,730 $1,993,107
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
57
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
---------- ------------ -----------
<S> <C> <C> <C>
Net revenues:
Basic medical services ................................ $ 269,817 $ 368,569 $ 389,773
Specialty medical services ............................ 404,401 770,554 999,209
Management services and other ......................... 37,884 39,765 45,713
---------- ------------ -----------
Total revenues ...................................... 712,102 1,178,888 1,434,695
---------- ------------ -----------
Costs and expenses:
Operating expenses:
Salaries, wages, and benefits ........................ 332,812 549,766 694,137
Other operating expenses ............................. 195,319 338,785 399,811
Corporate administrative and general .................. 37,041 56,016 60,976
Depreciation and amortization ......................... 26,367 39,961 41,681
Rent (note 10) ........................................ 42,158 66,125 77,785
Interest (net of investment income of $1,121 in 1994,
$1,876 in 1995, and $2,233 in 1996) (note 8) ......... 20,602 38,977 64,110
Loss on impairment of long-lived assets (note 18)...... -- 83,321 --
Other non-recurring charges (income), net
(notes 6 and 18)...................................... -- 49,639 (14,457)
---------- ------------ -----------
Total costs and expenses ............................ 654,299 1,222,590 1,324,043
---------- ------------ -----------
Earnings (loss) before equity in earnings of
affiliates, income taxes and extraordinary items ... 57,803 (43,702) 110,652
Equity in earnings of affiliates (note 4)............... 1,176 1,443 828
---------- ------------ -----------
Earnings (loss) before income taxes and
extraordinary items ................................ 58,979 (42,259) 111,480
Federal and state income taxes (note 12) ............... 22,117 (16,270) 63,715
---------- ------------ -----------
Earnings (loss) before extraordinary items .......... 36,862 (25,989) 47,765
Extraordinary items (note 15) .......................... 4,274 1,013 1,431
---------- ------------ -----------
Net earnings (loss).................................. $ 32,588 $ (27,002) $ 46,334
========== ============ ============
Per Common Share--primary:
Earnings (loss) before extraordinary item ............. $ 1.99 $ (1.21) $ 2.03
Net earnings (loss) ................................... 1.75 (1.26) 1.97
========== ============ ============
Per Common Share--fully diluted:
Earnings (loss) before extraordinary item ............. $ 1.73 $ (1.21) $ 1.82
Net earnings (loss) ................................... 1.57 (1.26) 1.78
========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
58
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
ADDITIONAL AVAILABLE FOR
PREFERRED COMMON PAID-IN RETAINED SALE TREASURY
STOCK STOCK CAPITAL EARNINGS SECURITIES STOCK TOTAL
---------- --------- ------------- ----------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $-- $ 14 $ 187,294 $ 29,198 $ -- $ -- $ 216,506
Issuance of 2,620,309 common shares in
connection with acquisitions -- 2 92,429 -- -- -- 92,431
Issuance of warrants in connection with
acquisitions -- -- 3,000 -- -- -- 3,000
Exercise of warrants for 113,848 common
shares -- -- 2,508 -- -- -- 2,508
Issuance of 21,670 common shares in
connection with employee stock purchase plan -- -- 551 -- -- -- 551
Issuance of 3,477,384 common shares in
connection with a public offering, less
issuance costs -- 4 98,634 -- -- -- 98,638
Exercise of employee stock options for
521,992 common shares -- 1 7,986 -- -- -- 7,987
Declaration of cash dividend, $0.02 per
common share -- -- -- (398) -- -- (398)
Net earnings -- -- -- 32,588 -- -- 32,588
----- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1994 -- 21 392,402 61,388 -- -- 453,811
Issuance of 385,216 common shares in
connection with acquisitions -- 1 9,794 -- -- -- 9,795
Issuance of warrants in connection with
acquisitions -- -- 339 -- -- -- 339
Issuance of 49,377 common shares in
connection with employee stock purchase plan -- -- 1,339 -- -- -- 1,339
Acquisition of 400,600 common shares of
treasury stock -- -- -- -- -- (12,790) (12,790)
Exercise of employee stock options for
340,244 common shares -- -- 5,676 -- -- -- 5,676
Exercise of warrants for 44,181 common shares -- -- 795 -- -- -- 795
Declaration of cash dividend, $0.02 per
common share -- -- -- (435) -- -- (435)
Net loss -- -- -- (27,002) -- -- (27,002)
----- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1995 -- 22 410,345 33,951 -- (12,790) 431,528
Issuance of 1,632,873 common shares in
connection with acquisitions and
management agreements -- 2 35,435 -- -- -- 35,437
Re-issuance of 400,600 common shares of
treasury stock in payment of earn-out in
connection with prior acquisitions -- -- (3,592) -- -- 12,790 9,198
Issuance of 68,661 common shares in
connection with employee stock purchase plan -- -- 1,401 -- -- -- 1,401
Exercise of employee stock options for
141,382 common shares -- -- 2,078 -- -- -- 2,078
Unrealized gain on available for sale
securities -- -- -- -- 9,360 -- 9,360
Declaration of cash dividend, $0.02 per
common share -- -- -- (471) -- -- (471)
Net earnings -- -- -- 46,334 -- -- 46,334
----- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 $-- $ 24 $ 445,667 $ 79,814 $ 9,360 $ -- $ 534,865
===== ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
59
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1994 1995 1996
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 32,588 $ (27,002) $ 46,334
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Extraordinary items 6,839 1,647 2,327
Loss from impairment of long-lived assets -- 83,321 --
Other non-recurring charges (income) -- 47,700 (14,457)
Undistributed results of affiliates (142) (431) 2
Depreciation and amortization 26,367 39,961 41,681
Deferred income taxes and other non-cash items 2,628 (22,920) 3,462
Amortization of deferred gain on sale-leaseback (680) (1,018) (982)
Increase in patient accounts and third-party payor
settlements receivable (42,998) (62,512) (44,232)
(Increase) decrease in supplies, inventories, prepaid
expenses and other current assets (349) (6,121) 82
Increase in accounts payable and accrued expenses 1,205 1,177 4,086
Increase in income taxes receivable -- (16,517) (4,475)
Increase (decrease) in income taxes payable 1,681 (5,686) --
------------- ------------ ------------
Net cash provided by operating activities 27,139 31,599 33,828
------------- ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of capital stock, net 109,683 8,399 3,479
Proceeds from long-term borrowings 308,467 510,659 1,087,175
Repayment of long-term borrowings (191,338) (307,440) (830,434)
Proceeds from sale-leaseback transactions, net 28,210 -- --
Deferred financing costs (11,156) (5,512) (10,251)
Purchase of treasury stock -- (12,790) --
Dividends paid -- (398) (435)
------------- ------------ -----------
Net cash provided by financing activities 243,866 192,918 249,534
------------- ------------ -----------
Cash flows from investing activities:
Purchases of temporary investments (48,909) (401) (5,645)
Sales of temporary investments 102,498 672 5,988
Business acquisitions (152,791) (82,686) (242,819)
Purchases of property, plant, and equipment (91,354) (145,065) (145,902)
Disposition of assets -- 33,153 136,709
Intangible assets (7,201) (14,183) --
Investment in affiliates and other assets (21,401) (37,779) (31,582)
------------- ------------ -----------
Net cash used by investing activities (219,158) (246,289) (283,251)
------------- ------------ -----------
Increase (decrease) in cash and equivalents 51,847 (21,772) 111
Cash and cash equivalents, beginning of period 8,842 60,689 38,917
------------- ------------ -----------
Cash and cash equivalents, end of period $ 60,689 $ 38,917 $ 39,028
============== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
60
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Basis of Presentation
Integrated Health Services, Inc. (IHS), a Delaware corporation, was formed on
March 25, 1986. The consolidated financial statements include the accounts of
IHS and its majority-owned and controlled subsidiaries (the Company). In
consolidation, all significant intercompany balances and transactions have been
eliminated. Investments in affiliates in which the Company has less than
majority ownership and control are accounted for by the equity method (see note
4).
(b) Medical Services Revenues
Medical services revenues are recorded at established rates and adjusted for
differences between such rates and estimated amounts reimbursable by third-party
payors when applicable. Estimated settlements under third-party payor
retrospective rate setting programs (primarily Medicare and Medicaid) are
accrued in the period the related services are rendered. Settlements receivable
and related revenues under such programs are based on annual cost reports
prepared in accordance with Federal and state regulations, which reports are
subject to audit and retroactive adjustment in future periods. In the opinion of
management, adequate provision has been made for such adjustments and final
settlements will not have a material effect on financial position or results of
operations. Basic medical services revenues represent routine service (room and
board) charges of geriatric and assisted living facilities, exclusive of medical
specialty units. Specialty medical services revenues represent ancillary service
charges of geriatric and assisted living facilities, revenues generated by
medical specialty units and revenues of pharmacy, rehabilitation, diagnostic,
respiratory therapy, home health, hospice and similar service operations.
(c) Cash Equivalents and Investments in Debt and Equity Securities
Cash equivalents consist of highly liquid debt instruments with original
maturities of three months or less at the date of investment by the Company. The
Company's temporary investments, consisting primarily of preferred stocks and
municipal bonds, are classified as a trading security portfolio and are recorded
at their fair value, with net unrealized gains or losses included in earnings.
The Company classifies its other investments in marketable equity securities as
available for sale, which are reported at fair value, with net unrealized
holding gains and losses excluded from income and reported as a separate
component of stockholders' equity (see note 4). Realized gains and losses are
recorded using the specific identification basis to determine cost.
(d) Property, Plant and Equipment
The Company capitalizes costs associated with acquiring health care
facilities and related interests therein. Pre-acquisition costs represent direct
costs of the investigation and negotiation of the acquisition of operating
facilities and ancillary business units; indirect and general expenses related
to such activities are expensed as incurred. Pre-construction costs represent
direct costs incurred to secure control of the development site, including the
requisite certificate of need and other approvals, and to perform other initial
tasks which are essential to the development and construction of a facility.
Pre-acquisition and pre-construction costs are transferred to construction in
progress and depreciable asset categories when the related tasks are completed.
Interest cost incurred during construction is capitalized. Non-refundable
purchase option fees related to operating leases are generally classified as
leasehold interests and treated as deposits until (1) the option is exercised,
whereupon the deposit is applied as a credit against the purchase price, or (2)
the option period expires, whereupon the deposit is written off as lease
termination expense.
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(d) Property, Plant and Equipment--(Continued)
Total costs of facilities acquired are allocated to land, land improvements,
equipment and buildings (or leasehold interests therein) based on their
respective fair values determined generally by independent appraisal. Cost in
excess of such identified fair values is classified as intangible assets of
businesses acquired.
(e) Depreciation
Depreciation is provided on the straight-line basis over the estimated useful
lives of the assets, generally 25 years for land improvements, 10 years for
equipment, 40 years for buildings and the term of the lease for costs of
leasehold interests and improvements.
(f) Deferred Financing Costs
The Company defers financing costs incurred to obtain long-term debt and
amortizes such costs over the term of the related obligation. Debt discount is
amortized using the debt outstanding (interest) method over the term of the
related debt.
(g) Deferred Pre-opening Costs
Through December 31, 1995, direct costs incurred to initiate and implement
new medical specialty units (MSUs) at nursing facilities (e.g., respiratory
therapy, rehabilitation and Alzheimers' units) were deferred during the
pre-opening period and amortized on a straight-line basis over five years, which
corresponded to the period over which the Company receives reimbursement from
Medicare. Effective January 1, 1996, the Company changed its policy to expense
such costs when incurred (see note 18).
(h) Intangible Assets Acquired
Intangible assets of businesses acquired (primarily goodwill) are amortized
by the straight-line method primarily over 40 years, the period over which such
costs are recoverable through operating cash flows (see note 6).
(i) Deferred Gains on Sale-Leaseback Transactions
Gains on the sales of nursing facilities which are leased back under
operating leases are initially deferred and amortized over the terms of the
leases in proportion to and as a reduction of related rental expense.
(j) Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," ("APB No. 25") in accounting for its stock
options. Additional information required by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123")
is discussed in note 11.
62
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(k) Impairment of Long-Lived Assets
Management regularly evaluates whether events or changes in circumstances
have occurred that could indicate an impairment in the value of long-lived
assets. In December 1995, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In
accordance with the provisions of SFAS No. 121, if there is an indication that
the carrying value of an asset is not recoverable, the Company estimates the
projected undiscounted cash flows, excluding interest, of the related individual
facilities and business units (the lowest level for which there are identifiable
cash flows independent of other groups of assets) to determine if an impairment
loss should be recognized. The amount of impairment loss is determined by
comparing the historical carrying value of the asset to its estimated fair
value. Estimated fair value is determined through an evaluation of recent
financial performance and projected discounted cash flows of its facilities and
business units using standard industry valuation techniques, including the use
of independent appraisals when considered necessary. If an asset tested for
recoverability was acquired in a business combination accounted for using the
purchase method, the related goodwill is included as part of the carrying value
and evaluated as described above in determining the recoverability of that
asset.
In addition to consideration of impairment upon the events or changes in
circumstances described above, management regularly evaluates the remaining
lives of its long-lived assets. If estimates are changed, the carrying value of
affected assets is allocated over the remaining lives.
Prior to adoption of SFAS No. 121 in 1995, the Company performed its analyses
of impairment of long-lived assets by consideration of the projected
undiscounted cash flows on an entity-wide basis. The effect of the adoption of
SFAS 121 in December 1995 required the Company to perform this analysis on a
facility-by-facility and individual business unit basis. This resulted in the
recognition of a loss on impairment of long-lived assets (see note 18). If the
facility-by-facility and individual business unit analysis had been adopted
prior to December 1995, the Company may have incurred the loss on impairment of
long-lived assets prior to December 1995.
(l) Income Taxes
Deferred income taxes are recognized for the tax consequences of temporary
differences between financial statement carrying amounts and the related tax
bases of assets and liabilities. Such tax effects are measured by applying
enacted statutory tax rates applicable to future years in which the differences
are expected to reverse, and the effect of a change in tax rates is recognized
in the period the legislation is enacted.
(m) Earnings Per Share
Primary earnings per share is computed based on the weighted average number
of common and common equivalent shares outstanding during the periods. Common
stock equivalents include options and warrants to purchase common stock, assumed
to be exercised using the treasury stock method. Fully diluted earnings per
share is computed as described above, except that the weighted average number of
common equivalent shares is determined assuming the dilution resulting from the
issuance of the aforementioned options and warrants at the end-of-period price
per share, rather than the weighted average price for the period, and the
issuance of common shares upon the assumed conversion of the convertible
subordinated debentures. An adjustment for interest expense and amortization of
underwriting costs related to such debentures is added, net of tax, to earnings
for the purpose of calculating fully diluted earnings per share. The weighted
average number of common and common equivalent shares outstanding for the year
ended December 31, 1995 does not include the assumed conversion of the
convertible subordinated debentures or the related interest expense and
underwriting costs, as such conversion would be anti-dilutive. Such adjustment
and the weighted average number of common and common equivalent shares used in
the computations of earnings per share were as follows:
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(m) Earnings Per Share -- (Continued)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
------------ ------------- -------------
<S> <C> <C> <C>
Weighted Average Shares:
Primary ................................ 18,568,599 21,463,464 23,574,311
Fully diluted .......................... 27,154,153 21,463,464 31,652,620
Adjustment for interest on convertible
debentures ............................. $ 10,048 $ -- $ 9,888
============ ============= =============
</TABLE>
(n) Business and Credit Concentrations
The Company's medical services revenues are generated through 1,100 service
locations in 40 states, including 174 owned, leased and managed geriatric care
facilities. The Company generally does not require collateral or other security
in extending credit to patients; however, the Company routinely obtains
assignments of (or is otherwise entitled to receive) benefits receivable under
the health insurance programs, plans or policies of patients (e.g., Medicare,
Medicaid, commercial insurance and managed care organizations) (see note 3).
(o) Merger with IntegraCare, Inc.
In August 1995, the Company merged with IntegraCare, Inc. (Integra) which
provides physical, occupational and speech services to skilled nursing
facilities, hospitals, outpatient clinics, home health agencies and schools in
Florida. The Company exchanged 681,723 shares of its Common Stock for all of the
outstanding stock of Integra. The merger was accounted for using the pooling of
interests method and the consolidated financial statements and related notes for
1994 and 1995 have been restated to combine the financial data of the Company
and Integra for those periods. The accounting practices of the Company and
Integra were comparable; therefore, no adjustments to net assets of either
enterprise were required to effect the combination. The consolidated statements
of operations include revenues of $29,650 in 1994 and $17,886 in 1995 and net
earnings of $1,648 in 1994 and $891 in 1995 related to the operations of Integra
prior to the date of the merger.
(p) Management Agreements
IHS manages geriatric care facilities under contract for others for a fee
which generally is equal to 4% to 8% of the gross revenue of the geriatric care
facility. Under the terms of the contract, IHS is responsible for providing all
personnel, marketing, nursing, resident care, dietary and social services,
accounting and data processing reports and services for these facilities,
although such services are provided at the facility owner's expense. In
addition, certain management agreements also provide IHS with an incentive fee
based on the amount of the facility's operating income in excess of stipulated
amounts. Management fee revenues are recognized when earned and billed,
generally on a monthly basis. Incentive fees are recognized when operating
results of managed facilities exceed amounts required for incentive fees in
accordance with the terms of the management agreement. Management agreements
generally have an initial term of ten years, with IHS having a right to renew in
most cases. Contract acquisition costs for legal and other direct costs incurred
by IHS to acquire long-term management contracts are capitalized and amortized
over the term of the related contract. Management periodically evaluates its
deferred contract costs for recoverability by assessing the projected
undiscounted cash flows, excluding interest, of the managed facilities; any
impairment in the financial condition of the facility will result in a writedown
by IHS of its deferred contract costs.
(q) Reclassifications
Certain amounts presented in 1994 and 1995 have been reclassified to conform
with the presentation for 1996.
64
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(2) BUSINESS ACQUISITIONS
ACQUISITIONS DURING THE YEAR ENDED DECEMBER 31, 1996
Acquisitions in 1996 and the manner of payment are summarized as follows:
<TABLE>
<CAPTION>
COMMON
STOCK ACCRUED CASH
MONTH TRANSACTION DESCRIPTION TOTAL COST ISSUED(1) LIABILITIES PAID
- ----------- ----------------------------------------------------------------------------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
January Assets Of Vintage Healthcare Center, a 110 Bed Facility In Denton,
Texas ............................................................. $ 6,900 $ -- $ -- $ 6,900
January Assets of two mobile x-ray service companies in Louisiana and
Missouri........................................................... 520 -- -- 520
March Stock of Rehab Management Systems, Inc., a multi-state operator of
outpatient rehabilitative clinics and inpatient therapy centers.... 12,900 8,000 2,900 2,000
May Assets of Hospice of the Great Lakes, Inc., an Illinois hospice
service provider .................................................. 9,200 8,200 1,000 --
May Operating leases of Cheyenne Care Center, a 96 bed nursing
facility, and Cheyenne Residential and Nursing Center, a 240 bed
facility in Las Vegas, Nevada ..................................... 110 -- -- 110
May Preferred Care, Inc. purchase option deposits in connection with
management agreements ............................................. 10,350 7,250 -- 3,100
July Operating lease of Sunset House, a 55 bed facility in Burbank,
Illinois .......................................................... 100 -- -- 100
August Stock of J.R. Rehab Associates, Inc., a North Carolina provider of
rehabilitative therapy services to nursing homes, hospitals and
others ............................................................ 2,300 -- 200 2,100
August Assets of Colorado Portable X-Ray Inc., a mobile diagnostic
services provider ................................................. 390 -- -- 390
August Assets of Extendicare of Tennessee Inc., a home health provider.... 3,611 -- 200 3,411
August Assets of Edgewater Home Infusion Services Inc., a home infusion
services provider ................................................. 8,274 -- 300 7,974
September Assets of Century Health Services Inc., a home health provider..... 4,192 -- 200 3,992
September Stock of Signature Home Care, Inc., a home health provider ........ 13,672 4,725 2,500 6,447
October Stock of First American Health Care of Georgia, Inc., a home
health services provider........................................... 176,084 -- 22,000 154,084
Various Litchfield Asset Management, Inc., purchase option deposits in
connection with operating leases .................................. 4,018 -- -- 4,018
November Assets of Mediq Mobile X-Ray Services, Inc., a mobile diagnostic
service provider .................................................. 15,642 5,200 5,500 4,942
November Assets of Total Rehab Services, LLC and Total Rehab Services O2,
LLC, a provider of contract rehabilitative and respiratory
services .......................................................... 13,123 2,700 1,250 9,173
December Stock, at carryover basis, of Lifeway, Inc., a provider of
physician management and disease management services............... (230) (1,440) 275 935
Various Contingent purchase price payments on prior acquisition of The
Rehab People in 1994 .............................................. 10,000 10,000 -- --
Various Other acquisitions ................................................ 1,511 -- 65 1,446
Cash payments of acquisition costs accrued in 1995 and 1996....... -- -- (31,177) 31,177
------------ ---------- --------- ----------
$292,667 $44,635 $ 5,213 $242,819
============ ========== ========= ==========
</TABLE>
- ----------
(1) Represents shares of IHS common stock as follows: 385,542 shares for RMS,
304,822 shares for Hospice, 305,300 shares for Preferred Care, 196,374
shares for Signature, 203,721 shares for Mediq, 106,559 shares for Total
Rehab, 95,615 shares for Lifeway, and 435,540 shares for The Rehab People.
65
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The allocation of the total cost of the 1996 acquisitions to the assets
acquired and liabilities assumed is summarized as follows:
<TABLE>
<CAPTION>
PROPERTY,
CURRENT PLANT AND OTHER INTANGIBLE CURRENT LONG-TERM TOTAL
ASSETS EQUIPMENT ASSETS ASSETS LIABILITIES LIABILITIES COSTS
---------- ----------- --------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Vintage $ -- $ 6,900 $ -- $ -- $ -- $ -- $ 6,900
Two mobile x-ray service
companies -- 114 -- 1,186 (780) -- 520
Rehab Management Systems(RMS) 1,644 1,021 165 12,832 (1,848) (914) 12,900
Hospice of the Great Lakes
(Hospice) -- 144 25 9,031 -- -- 9,200
Cheyenne Care Center and Cheyenne .
Residential and Nursing Center -- 110 -- -- -- -- 110
Preferred Care -- 10,350 -- -- -- -- 10,350
Sunset House -- 100 -- -- -- -- 100
J.R. Rehab 532 149 -- 3,159 (1,540) -- 2,300
Colorado Portable X-Ray -- 50 -- 372 (32) -- 390
Extendicare 2,229 18 -- 1,945 (581) -- 3,611
Edgewater 1,789 160 1 7,685 (1,313) (48) 8,274
Century 5,628 139 202 12,140 (13,917) -- 4,192
Signature 19,938 7,521 99 21,122 (18,077) (16,931) 13,672
First American 44,608 22,438 73,226 227,406 (152,095) (39,499) 176,084
Litchfield -- 4,018 -- -- -- -- 4,018
Mediq 4,518 431 21 15,600 (4,928) -- 15,642
Total Rehab 5,505 128 -- 11,982 (4,492) -- 13,123
Lifeway 158 270 70 -- (728) -- (230)
Rehab People -- -- -- 10,000 -- -- 10,000
Other acquisitions -- 1,489 -- 42 (20) -- 1,511
--------- --------- --------- --------- --------- --------- ---------
Totals $ 86,549 $ 55,550 $ 73,809 $ 334,502 $(200,351) $ (57,392) $ 292,667
========= ========= ========= ========= ========= ========= =========
</TABLE>
66
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
ACQUISITIONS DURING THE YEAR ENDED DECEMBER 31, 1995
Acquisitions in 1995 and the manner of payment are summarized as follows:
<TABLE>
<CAPTION>
COMMON
STOCK ACCRUED CASH
MONTH TRANSACTION DESCRIPTION TOTAL COST ISSUED(1) LIABILITIES PAID
- ----------- ------------------------------------------------------------------------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
January Assets of four ancillary service companies......................... $ 3,624 $ 300 $ -- $ 3,324
February Assets of ProCare Group, Inc., and its affiliated entities, a home
health service provider in Broward, Dade and Palm Beach counties,
Florida............................................................ 4,575 3,600 675 300
February Assets of Epsilon Medical Equipment Corporation, a mobile video
flouroscopy company in Illinois.................................... 1,661 -- 500 1,161
February Management agreement with Total Home Health Care, Inc. and Total
Health Services, Inc., private-duty and Medicare certified home
health agencies in Dallas/Ft. Worth, Texas......................... -- -- -- --
March Management agreement to manage 34 geriatric care facilities in
Texas, California, Florida, Nevada and Mississippi (known
collectively as the "Preferred Care Facilities")................... 10,200 -- -- 10,200
March Stock of Samaritan Management, Inc., a hospice service provider in
Michigan .......................................................... 6,500 -- 1,000 5,500
March Substantially all the assets of Fidelity Health Care, Inc., a home
healthcare, temporary staffing and infusion services provider in
Ohio............................................................... 2,490 -- 350 2,140
January-April Stock of five physician practices (acquisitions by IntegraCare,
Inc. prior to that company's merger with IHS in August, 1995)...... 1,134 589 -- 545
April Assets of Hometown Nurses Registry, a home healthcare provider in
Tennessee ......................................................... 650 -- 150 500
April Assets of Bernard's X-Ray Mobile Service, an x-ray service provider
to long-term care and subacute care facilities in California. .... 100 -- -- 100
May Assets of Stewart's Portable X-Ray, Inc. an x-ray service provider
to long-term care and subacute care facilities in California. ..... 2,000 -- 100 1,900
May Stock of Immediate Care Clinic, an emergency clinic in Amarillo,
Texas.............................................................. 355 -- 130 225
June Stock of three ancillary service companies providing mobile x-ray
and electrocardiagram services to long-term care and subacute care
facilities. ....................................................... 2,200 -- -- 2,200
August Stock of Senior Life Care Enterprises, Inc. ("SLC"), a home health,
supplemental staffing and management service provider.............. 6,700 6,000 700 --
August Stock of Avenel, a 120 bed facility in Plantation, Florida ........ 6,360 -- -- 6,360
August Operating lease with Cherry Creek, a nursing home facility in
Colorado........................................................... -- -- -- --
August Hershey at Woodlands, a 213 bed nursing and personal care facility
in Pennsylvania ................................................... 2,100 -- -- 2,100
September Partnership interest in Mobile X-Ray Limited Partnership, an
electrocardiagram service service provider in Maryland, West
Virginia, and the District of Columbia............................. 1,400 -- -- 1,400
September Stock of Southern Nevada Physical Therapy Associates, an outpatient
physical therapy provider ......................................... 610 -- 110 500
September Operating lease with Mill Hill, a 110 bed facility, in Massachusetts
and Winthrop, a 150 bed facility in Massachusetts.................. 405 -- -- 405
November Stock of Chesapeake Health, an electrocardiagram service provider
in Maryland ...................................................... 1,175 -- 75 1,100
November Stock of Governor's Park, a 150 bed facility in Illinois .......... 10,035 -- -- 10,035
November Clara Burke, a 69 bed skilled nursing facility in Pennsylvania .... 330 -- -- 330
December Stock of Miller Portable X-Ray, a mobile x-ray provider in Florida. 295 -- -- 295
December Stock of Carrington Pointe, an assisted living facility in
Massachusetts...................................................... 11,800 -- -- 11,800
Various Litchfield Asset Management, Inc., purchase option deposits in
connection with operating leases................................... 4,018 -- -- 4,018
Various Other acquisitions................................................. (355) (355) -- --
Cash payments of acquisition costs accrued in 1994 and 1995 -- -- (16,248) 16,248
--------- -------- -------- --------
$ 80,362 $ 10,134 $(12,458) $ 82,686
========= ======== ======== ========
</TABLE>
- ----------
(1) Represents shares of IHS common stock as follows: 7,935 shares for four
ancillary service companies, 95,062 shares for ProCare, 92,434 shares for
the PCP earnout, and 189,785 shares of SLC.
67
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The allocation of the total cost of the 1995 acquisitions to the assets
acquired and liabilities assumed is summarized as follows:
<TABLE>
<CAPTION>
PROPERTY,
CURRENT PLANT AND OTHER INTANGIBLE CURRENT LONG-TERM TOTAL
ASSETS EQUIPMENT ASSETS ASSETS LIABILITIES LIABILITIES COST
- ------------------------------ --------- ------------ -------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Four ancillary service
companies $ -- $ 501 $ -- $ 3,155 $ -- $ (32) $ 3,624
ProCare 57 154 47 4,434 -- (117) 4,575
Epsilon 109 78 (140) 1,865 (251) -- 1,661
Preferred Care -- 10,200 -- -- -- -- 10,200
Samaritan of Michigan 265 -- -- 6,775 (540) -- 6,500
Fidelity 8 183 -- 2,299 -- -- 2,490
Five physician practices -- 1,134 -- -- -- -- 1,134
Hometown Nursing 3 1 -- 646 -- -- 650
Bernard's -- 10 -- 90 -- -- 100
Stewart's -- 190 -- 1,810 -- -- 2,000
Immediate Care -- 14 -- 341 -- -- 355
Diagnostics -- 176 -- 2,458 (434) -- 2,200
Senior Life Care Enterprises
(SLC) 4,314 103 (202) 5,638 (1,428) (1,725) 6,700
Avenel -- 6,360 -- -- -- -- 6,360
Hershey -- 7,870 -- -- -- (5,770) 2,100
Mobile X of Md -- 230 -- 1,770 (600) -- 1,400
Southern Nevada -- 81 -- 529 -- -- 610
Mill Hill and Winthrop Leases -- 405 -- -- -- -- 405
Chesapeake -- 110 -- 1,065 -- -- 1,175
Governor's Park 832 9,203 -- -- -- -- 10,035
Clara Burke -- 6,830 -- -- -- (6,500) 330
Miller -- 20 -- 275 -- -- 295
Carrington Pointe -- 11,800 -- -- -- -- 11,800
Litchfield -- 4,018 -- -- -- -- 4,018
Other acquisitions -- (355) -- -- -- -- (355)
-------- -------- -------- -------- -------- -------- --------
Totals $ 5,588 $ 59,316 $ (295) $ 33,150 $ (3,253) $(14,144) $ 80,362
======== ======== ======== ======== ======== ======== ========
</TABLE>
68
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
ACQUISITIONS DURING THE YEAR ENDED DECEMBER 31, 1994
Acquisitions in 1994 and the manner of payment are summarized as follows:
<TABLE>
<CAPTION>
COMMON
STOCK ACCRUED CASH
MONTH TRANSACTION DESCRIPTION TOTAL COST ISSUED(1) LIABILITIES PAID
----- ------------------------- ---------- --------- ----------- ----
<S> <C> <C> <C> <C> <C>
February Crestwood, Inc. purchase option deposit on a management agreement $ 10,984 $ 4,728 $ -- $ 6,256
April Assets of Homestead, a geriatric care facility located in Denton, Md. 1,400 -- -- 1,400
June Assets of Treemont, a facility in Dallas, Texas which was previously
leased 7,395 -- -- 7,395
July IFIDA, purchase option deposit in connection with operating leases. 9,227 3,027 -- 6,200
July Stock of Cooper Holding Corporation, a mobile x-ray and
electrocardiagram service provider to long-term care and subacute
care facilities. 79,058 19,890 7,400 51,768
August Substantially all the assets of Pikes Peak Pharmacy, Inc., a
pharmacy service provider to patients at nine facilities in
Colorado Springs, Colorado. 646 -- -- 646
August Litchfield Asset Management, Inc., purchase option deposit in
connection with operating leases 31,500 3,000 -- 28,500
September Substantially all the assets of Pace Therapy, Inc., a physical,
occupational, speech and audiology therapy services provider to
approximately 60 facilities in Southern California and Nevada 8,666 5,798 1,300 1,568
September Stock of Quail Creek of Amarillo, a 160 bed facility in Amarillo,
Texas 586 -- -- 586
October Stock of Amcare, Inc., an institutional multi-state pharmacy serving
approximately 135 skilled nursing facilities. 24,700 10,500 3,700 10,500
October Substantially all the assets of Pharmaceutical Dose Services of La.,
Inc., ("PDS") an institutional pharmacy serving 14 facilities 5,565 3,896 1,375 294
November Stock of CareTeam Management Services, Inc. ("CareTeam"), a multi-
state provider of home healthcare services. 6,576 5,221 675 680
November Stock of Therapy Resources, Inc., a physical, occupational, speech
and audiology services provider to approximately 22 geriatric care
facilities and the operator of seven outpatient rehabilitation
facilities. 1,900 -- 300 1,600
November Stock of The Rehab People, Inc. ("Rehab People"), a multi-state
physical, occupational, and speech therapy services provider to
approximately 38 geriatric care facilities. . 11,875 10,000 1,875 --
November Substantially all the assets of Medserv Corporation's Hospital
Service Division ("Primedica"), a multi-state respiratory therapy
service provider 25,600 -- 4,600 21,000
December Rights of Jules Institutional Supply, Inc., under a management
agreement with Samaritan Care, Inc. 14,720 14,000 720 --
December Assets of Houston Hospital, a 60 bed facility in Texas 10,000 -- -- 10,000
December Stock of Partners Home Health, Inc. ("Partners"), a home infusion
company operating in seven states 13,428 12,403 1,025 --
Various Other acquisitions 7,366 7,366 -- --
Cash payments of acquisition costs accrued in 1994 and 1993 -- -- (4,398) 4,398
--------- -------- -------- --------
$ 271,192 $ 99,829 $ 18,572 $152,791
========= ======== ======== ========
</TABLE>
- ----------
(1) Represents shares of IHS common stock as follows: 593,953 shares for
Cooper, 181,882 shares for Pace, 291,101 shares for Amcare, 122,117 shares
for PDS, 147,068 shares for CareTeam, 318,471 shares for The Rehab People,
332,516 shares for Partners, 375,134 shares for Samaritan, 168,067 shares
for Crestwood, and 90,000 shares for IFIDA.
69
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The allocation of the total cost of the 1994 acquisitions to the assets
acquired and liabilities assumed is summarized as follows:
<TABLE>
<CAPTION>
PROPERTY,
CURRENT PLANT AND OTHER INTANGIBLE CURRENT LONG-TERM TOTAL
ASSETS EQUIPMENT ASSETS ASSETS LIABILITIES LIABILITIES COST
--------- ----------- -------- ------------ ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Crestwood....... $ -- $ 10,984 $ -- $ -- $ -- $ -- $ 10,984
Homestead....... -- 1,400 -- -- -- -- 1,400
Treemont........ -- 22,625 -- -- -- (15,230) 7,395
IFIDA........... -- 9,227 -- -- -- -- 9,227
Cooper.......... 8,962 826 922 73,945 (1,364) (4,233) 79,058
Pikes Peak...... 139 41 50 432 (16) -- 646
Litchfield...... 7,500 24,000 -- -- -- -- 31,500
Pace............ 1,869 -- 148 6,672 (23) -- 8,666
Amarillo........ 1,675 10,886 108 -- (1,547) (10,536) 586
Amcare.......... 7,295 3,819 (261) 20,300 (5,656) (797) 24,700
PDS............. 549 90 -- 5,696 (770) -- 5,565
CareTeam........ 2,094 472 628 7,651 (3,520) (749) 6,576
Therapy
Resources....... 576 506 39 3,776 (2,997) -- 1,900
Rehab People ... 1,542 380 734 13,693 (3,978) (496) 11,875
Primedica....... 3,797 8,530 84 21,348 (8,159) -- 25,600
Samaritan....... 1,106 1,028 -- 18,632 (6,046) -- 14,720
Houston
Hospital........ 662 10,000 12 -- (674) -- 10,000
Partners........ 836 1,788 1,256 17,146 (5,422) (2,176) 13,428
Other........... -- 4,124 -- 3,642 -- (400) 7,366
------- ----------- -------- ------------ ------------- ------------- ----------
Totals.......... $38,602 $110,726 $3,720 $192,933 $(40,172) $(34,617) $271,192
======= =========== ======== ============ ============= ============= ==========
</TABLE>
All business acquisitions described above have been accounted for by the
purchase method.
Unaudited pro forma combined results of operations of the Company for the
years ended December 31, 1995 and 1996 are presented below. Such pro forma
presentation has been prepared assuming that the acquisitions had been made as
of January 1, 1995.
70
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED
DECEMBER 31,
-------------------------
1995 1996
------------ ------------
Revenues .................................. $1,823,024 $1,846,637
Earnings (loss) before extraordinary items (125,076) 6,396
Net earnings (loss)........................ (126,089) 4,965
Per common share--primary:
Earnings (loss) before extraordinary items (5.52) 0.26
Net earnings (loss)....................... (5.56) 0.20
The unaudited pro forma results include the historical accounts of the
Company and the historical accounts for the acquired businesses adjusted to
reflect (1) depreciation and amortization of the acquired identifiable tangible
and intangible assets based on the new cost basis of the acquisitions, (2) the
interest expense resulting from the financing of the acquisitions, (3) the new
cost basis for the allocation of corporate overhead expenses and (4) the related
income tax effects. The pro forma results are not necessarily indicative of
actual results which might have occurred had the operations and management teams
of the Company and the acquired companies been combined in prior years.
In connection with its business acquisitions, the Company incurs transaction
costs, costs to exit certain activities and costs to terminate or relocate
certain employees of acquired companies. Liabilities accrued in the acquisition
cost allocations represent direct costs of acquisitions, which consist primarily
of transaction costs for legal, accounting and consulting fees of $3,376 in 1995
and $16,299 in 1996, as well as exit costs and employee termination and
relocation costs of $414 in 1995 and $20,091 in 1996. Accrued acquisition
liabilities for exit costs and employee termination and relocation costs are
recognized in accordance with EITF 95-3, "Recognition Of Liabilities In
Connection With A Purchase Business Combination" and are summarized as follows
for the years ended December 31, 1995 and 1996:
<TABLE>
<CAPTION>
EMPLOYEE
TERMINATION AND
EXIT RELOCATION
COSTS COSTS TOTAL
--------- ---------------- ---------
<S> <C> <C> <C>
Acquired companies - 1995 $ -- $ 414 $ 414
Payments charged against
liability -- (414) (414)
Adjustments recorded to:
Cost of acquisitions -- -- --
Operations -- -- --
-------- -------- --------
Balance at December 31, 1995 -- -- --
Acquired companies - 1996 8,203 11,888 20,091
Payments charged against
liability (2,326) (6,198) (8,524)
Adjustments recorded to:
Cost of acquisitions -- (528) (528)
Operations -- -- --
-------- -------- --------
Balance at December 31, 1996 $ 5,877 $ 5,162 $ 11,039
======== ======== ========
</TABLE>
The Company has not finalized its plans to exit activities (exit plans) and
to terminate or relocate employees (termination plans) of certain companies
acquired in 1996. Accordingly, unresolved issues could result in additional
liabilities to the acquisition cost. These adjustments will be reported
primarily as an increase or decrease in goodwill.
The exit plans at December 31, 1996 consist primarily of the discontinuation
of certain activities of First American, including estimates for costs related
to the closure of duplicative facilities, lease termination fees and other exit
costs as defined in EITF 95-3. Significant exit activities are expected to be
completed by December 31, 1997. There were no significant exit plans at December
31, 1995.
71
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The termination plans at December 31, 1996 relate primarily to the following
employee groups with the indicated anticipated dates of completion of
termination/relocation: First American by October 1997, Mediq by November 1997,
RMS by March 1997, Signature by September 1997, Total Rehab by November 1997,
Hospice of Great Lakes by May 1997, and Edgewater by August 1997. Such plans at
December 31, 1995 related to SLC by August 1996, and Epsilon and ProCare by
February 1996.
In addition to the accrued acquisition liabilities described above, the
Company allocates the cost of its business acquisitions to the respective assets
acquired and liabilities assumed, including preacquisition contingencies, on the
basis of estimated fair values at the date of acquisition. Often the Company
must await additional information for the resolution or final measurement of
such contingencies during the allocation period, which usually does not exceed
one year from the date of acquisition. Accordingly, the effect of the resolution
or final measurement of preacquisition contingencies during the allocation
period is treated as an acquisition adjustment primarily to the amount of
goodwill recorded. After the allocation period, such resolution or final
measurement is recognized in the determination of net earnings. Preacquisition
contingencies in connection with the Company's business acquisitions primarily
relate to Medicare and Medicaid regulatory compliance matters, claims subject to
intermediary audits, income tax matters and legal proceedings. During the three
years ended December 31, 1996, the Company resolved or completed the final
measurement of certain preacquisition contingencies related to business
acquisitions. Accordingly, the Company adjusted the original allocation of these
businesses by increasing goodwill, decreasing certain third-party payor
settlements receivable, and increasing certain current liabilities. Management
is aware of certain adjustments that might be required with respect to
acquisitions recorded at December 31, 1996; accordingly, the original allocation
could be adjusted to the extent that finalized amounts differ from the
estimates (see note 9).
(3) PATIENT ACCOUNTS AND THIRD-PARTY PAYOR SETTLEMENTS RECEIVABLE
Patient accounts and third-party payor settlements receivable consist of the
following as of December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Patient accounts receivable.................................. $226,821 $340,803
Allowance for doubtful accounts ............................. 18,128 41,527
---------- ----------
208,693 299,276
Third party payor settlements, less allowance for
contractual adjustments of $11,442 and $14,979 .............. 21,589 27,607
---------- ----------
$230,282 $326,883
========== ==========
</TABLE>
Gross patient accounts receivable and third-party payor settlements
receivable from the Federal government (Medicare) were $73,726 and $148,791 at
December 31, 1995 and 1996, respectively. Medicare receivables include pending
requests for exceptions to the Medicare established routine cost limitations for
the reimbursement of costs exceeding these limitations (before related
allowances for contractual adjustments) of $7,611 and $15,640 at December 31,
1995 and 1996, respectively. Amounts receivable from various states (Medicaid)
were $57,723 and $61,675 respectively, at such dates, which relate primarily to
the states of Ohio, Florida, Pennsylvania, Louisiana and Texas.
72
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(4) INVESTMENTS IN AND ADVANCES TO AFFILIATES
The Company's investments in and advances to affiliates at December 31, 1995
and 1996 are summarized as follows:
1995 1996
---------- ----------
Investments accounted for by the equity method:
HPC............................................ $ 7,967 $ 8,003
Tutera ........................................ 7,788 7,551
Speciality .................................... 9,250 9,379
Integrated Living Communities.................. -- 24,531
Other ......................................... 898 799
---------- ----------
25,903 50,263
Other investments:
Capstone Pharmacy Services, Inc. .............. -- 24,019
Other.......................................... 3,459 1,765
---------- ----------
$29,362 $76,047
========== ==========
Investments in significant unconsolidated affiliates are summarized below.
HPC AMERICA, INC. (HPC)
In September 1995, a wholly owned subsidiary of IHS (Southwood), invested
$8,200 for a 40% interest in HPC America, Inc. ("HPC"), a Delaware corporation
that operates home infusion and home health care companies, in addition to
owning physician practices. Subject to certain material transactions requiring
the approval of Southwood, the business is conducted under the direction of the
Chief Executive Officer and President of HPC. Southwood had a right of first
refusal to purchase the remaining 60% interest in HPC at any time through March
1997 and has the exclusive right to purchase the remaining 60% interest in HPC
for the six month period beginning March 1997, in each case based upon a
multiple of HPC's earnings.
TUTERA HEALTH CARE MANAGEMENT, L.P. (TUTERA)
In January, 1993, a wholly-owned subsidiary of IHS, Integrated Health
Services of Missouri, Inc. ("IHSM"), invested $4,650 for a 49% interest in
Tutera Health Care Management, L.P. (the"Partnership" or "Tutera"), a
partnership newly formed to manage and operate approximately 8,000 geriatric
care and assisted retirement beds. Cenill, Inc., a wholly owned subsidiary of
Tutera Group, Inc., is the sole general partner of the Partnership and owns a
51% interest therein. Subject to certain material transactions requiring the
approval of IHSM, the business of the Partnership is conducted by its general
partner. IHSM has the right to become a 51% owner and sole general partner of
the Partnership, or to purchase the general partner's entire interest in the
Partnership, in each case for a price based upon a multiple of the Partnership's
earnings, under the following circumstances: (a) if earnings decline and the
general partner fails to implement operational changes recommended by IHS; (b)
if the general partner discontinues its relationship with the partnership and
the general partner fails to accept IHS' suggested
73
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
TUTERA HEALTH CARE MANAGEMENT, L.P. (TUTERA)-(Continued)
replacement; or (c) if the general partner defaults on its revolving credit and
security agreement with Continental Bank and fails to pay obligations within 36
months of the default. Also, the Company has guaranteed the debt of the
Partnership up to $4,200, which bears interest at prime plus 1 3/4 % and matures
in October 1998.
SPECIALITY CARE PLC (SPECIALITY)
In April 1993, a wholly owned subsidiary of IHS, (Southwood), acquired a
21.28% interest in the common stock and a 47.64% interest in the 6% cumulative
convertible preferred stock of Speciality Care PLC, an owner and operator of
geriatric care facilities in the United Kingdom. The total cost of the
investment was $748 for the common stock and $2,245 for the preferred stock. The
preferred stock contains certain preferences as to liquidation. In 1994,
Southwood loaned an additional $1,000 to Speciality bearing interest at 9%. In
January 1995 Southwood applied $627 of the loan to pay for additional shares of
common and preferred stock of Speciality subscribed for in November 1994.
In June 1995 the Company loaned an additional $8,575 to Speciality bearing
interest at 12%; this loan was subsequently repaid in August 1995. In addition
the Company invested an additional $4,384 in Speciality. As a result of the
Company's additional investment, the Company has a 21.30% interest in the common
stock and a 63.65% interest in the 6% cumulative convertible preferred stock.
Upon conversion of the preferred stock, the Company will own approximately
31.38% of Speciality (assuming no further issuances).
INTEGRATED LIVING COMMUNITIES, INC. (ILC)
In November 1995, the Company formed ILC as a wholly-owned subsidiary to
operate the Company's assisted living and other senior housing facilities owned,
leased and managed by the Company. Following formation of ILC, the Company
transferred to ILC as a capital contribution the Company's ownership interests
in three facilities, condominium interests in three facilities and agreements to
manage nine facilities (five of which have subsequently been terminated), and
sublet to ILC two facilities. On October 9, 1996, ILC completed an initial
public offering of its shares at $8.00 per share, in which ILC sold 2,800,000
shares and received aggregate net proceeds of approximately $19,100, and the
Company sold 1,400,000 shares and received aggregate net proceeds of
approximately $10,400. In addition, ILC repaid $7,400 owed to the Company. The
Company continues to own 2,497,900 shares of ILC common stock, representing
37.3% of the outstanding ILC common stock. Following the offering, the Company
loaned ILC $3,400, which loan bears interest at 14% and is being repaid in 24
equal monthly installments of principal and interest beginning December 1996.
ILC currently operates 23 residential-style assisted-living communities.
CAPSTONE PHARMACY SERVICES, INC. (CAPSTONE)
On July 30, 1996, the Company sold its pharmacy division to Capstone Pharmacy
Services, Inc. for a purchase price of $150,000, consisting of cash of $125,000
and unregistered shares of Capstone common stock having a value of approximately
$25,000. The Company's investment in Capstone common stock represents less than
8% of the total Capstone shares. Such investment is recorded at carryover basis
of $14,659 and classified as securities available for sale. An unrealized gain
of $9,360 is reflected in stockholders' equity with respect to such investment,
as the current market value of the Capstone shares at December 31, 1996 was
$24,019. The Capstone shares were registered with the Securities and Exchange
Commission in the first fiscal quarter of 1997.
74
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company's equity in earnings (loss) of affiliates for the years ended
December 31, 1994, 1995 and 1996 is summarized as follows:
1994 1995 1996
------- ------- -------
HPC $ -- $ (185) $ 82
Tutera 1,181 960 883
Integrated Living
Communities -- -- (241)
Speciality 167 668 104
Other (172) -- --
------- ------- -------
$ 1,176 $ 1,443 $ 828
======= ======= =======
At December 31, 1996 the Company's investment in Tutera and HPC exceeded its
equity in the underlying net assets by $3,450 and $5,119 respectively, which are
being amortized over 15 years. The Company received cash distributions from its
affiliates of $1,034, in 1994, $1,012 in 1995 and $830 in 1996. During 1996, the
Company's 250,000 common shares or $2,600 investment in Hearing Health Services,
Inc. was repurchased for approximately $2,600. The Company continues to hold an
investment in Hearing Health Services, Inc. preferred stock. In addition, during
1996 the Company made approximately $900 in other investments.
Selected financial information for the combined affiliates accounted for
under the equity method is as follows:
DECEMBER 31, DECEMBER 31,
1995 1996
-------- --------
Working capital ........................ $ 5,904 $ 2,007
Total assets ........................... 74,065 141,167
Long-term debt ......................... 34,000 19,399
Equity ................................. $ 28,555 $ 82,707
======== ========
YEARS ENDED DECEMBER 31,
------------------------------
1994 1995 1996
-------- -------- --------
Revenues ...................................... $ 25,906 $ 64,294 $118,995
Net earnings .................................. 3,381 1,316 1,550
======== ======== ========
75
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1995 and 1996 are summarized as
follows:
1995 1996
---------- -----------
Land .......................................... $ 39,158 $ 38,236
Buildings and improvements .................... 381,447 356,063
Leasehold improvements and leasehold interests 172,025 218,107
Equipment ..................................... 153,918 270,248
Construction in progress ...................... 57,809 67,169
Pre-construction and pre-acquisition costs ... 10,120 19,603
---------- -----------
814,477 969,426
Less accumulated depreciation and amortization 56,350 105,091
---------- -----------
Net property, plant and equipment ........... $758,127 $864,335
========== ===========
Included in leasehold improvements and leasehold interests are purchase
option deposits on 89 facilities of $57,147 at December 31, 1995 of which
$25,357 is refundable and $74,131 at December 31, 1996 of which $29,375 is
refundable.
(6) INTANGIBLE ASSETS
Intangible assets are summarized as follows at December 31, 1995 and 1996:
1995 1996
---------- -----------
Intangible assets of businesses acquired $287,439 $570,651
Deferred financing costs................. 17,461 26,842
---------- -----------
304,900 597,493
Less accumulated amortization............ 16,867 25,334
---------- -----------
Net intangible assets.................. $288,033 $572,159
========== ===========
The Company amortizes goodwill primarily over 40 years. Management regularly
evaluates whether events or circumstances have occurred that would indicate an
impairment in the value or the life of goodwill. In December 1995, the Company
adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." In accordance with the provisions of
SFAS No. 121, if there is an indication that the carrying value of an asset,
including goodwill, is not recoverable, the Company estimates the projected
undiscounted cash flows, excluding interest, of the related business unit to
determine if an impairment loss should be recognized. Such impairment loss is
determined by comparing the carrying amount of the asset, including goodwill, to
its estimated fair value. With its adoption of SFAS 121 in December 1995, the
Company performed the impairment analysis at the individual facility and
business unit basis. Prior to the adoption of SFAS 121 the Company performed the
analysis on an entity-wide basis (see note 18).
In addition, in the fourth quarter of 1995 IHS adopted a change in accounting
estimate and wrote-off $25,785 of deferred pre-opening costs (see note 18).
Effective January 1, 1996, the Company changed its accounting method from
deferring and amortizing pre-opening costs to recording them as an expense when
incurred.
76
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(7) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1995 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Accounts payable ....................................................... $102,999 $185,248
Accrued salaries and wages ............................................. 32,093 53,572
Accrued workers' compensation and other claims ......................... 10,715 38,141
Accrued interest ....................................................... 15,921 16,892
Accrued acquisition liabilities (exit costs and employee termination
and relocation costs)................................................... -- 11,039
Other accrued expenses ................................................. 10,285 36,202
----------- ----------
$172,013 $341,094
=========== ==========
</TABLE>
(8) LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -------------
<S> <C> <C>
Revolving credit facility notes due June 2002 (March 31, 2001 in
1995)................................................................. $220,500 $342,650
10.125% mortgage note payable in monthly installments of $64,
including interest, due August 1997 .................................. 5,723 5,502
8.094% note payable, due December 2001 ................................. 9,508 9,314
Prime plus 1.25% note payable (9.50% at December 31, 1996), due
December 2000 ........................................................ 8,252 8,087
Mortgages payable in monthly installments of $62, including interest
at rates ranging from 9% to 14%....................................... 10,512 8,604
9.75% mortgage note payable in monthly installments of $107,
including interest, with final payment of $13,087 in October 1998 .... 14,845 13,332
Prime plus 1% (9.25% at December 31, 1996) note payable in monthly
installments of $89, including interest, with final payment in
January 2020.......................................................... 9,905 9,793
Seller notes, interest rates ranging from 10% to 14%, with final
payment of $2,971 in July 2000........................................ 3,585 3,710
LIBOR plus 1.75% (7.95% at December 31, 1996) mortgage note payable
in monthly installments of $51, including interest, with final
payment due December 2000............................................. 6,500 6,392
8.8% factored receivables note due December 8, 1998, interest
payable monthly ...................................................... -- 5,000
Prime plus 1% note payable due May 1997 (9.25% at December 31, 1996) ... -- 1,500
12.0% note payable in monthly installments of $153, including
interest, with final payment due May 2000............................. -- 5,130
Other .................................................................. 7,581 11,983
77
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(8) LONG-TERM DEBT-(Continued)
1995 1996
----------- -------------
Subordinated debt:
5 3/4 % convertible senior subordinated debentures due January 1,
2001, with interest payable semi-annually on January 1 and July 1. . 143,750 143,750
6% convertible subordinated debentures due December 31, 2003, with
interest payable semi-annually on January 1 and July 1 ............. 115,000 115,000
10 3/4 % Senior Subordinated Notes due July 15, 2004, with interest
payable semi-annually on January 15 and July 15..................... 100,000 100,000
9 5/8 % Senior Subordinated Notes due May 31, 2002, Series A, with
interest payable semi-annually on May 31 and November 30 ........... 115,000 115,000
10 1/4 % Senior Subordinated Notes due April 30, 2006, with interest
payable semi-annually in April 30 and October 30.................... -- 150,000
----------- -------------
Total debt........................................................... 770,661 1,054,747
Less current portion ................................................ 5,404 16,547
----------- -------------
Total long-term debt, less current portion.......................... $765,257 $1,038,200
=========== =============
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
REVOLVING CREDIT FACILITY
In May 1996, IHS entered into a $700,000 revolving credit facility, including
a $100,000 letter of credit subfacility, with Citibank, N.A., as administrative
agent, and certain other lenders (the "New Credit Facility"). The New Credit
Facility consists of a $700,000 revolving loan which reduces to $560,000 on June
30, 2000 and $315,000 on June 30, 2001, with a final maturity on June 30, 2002.
The $100,000 subcommitment for letters of credit will remain at $100,000 until
final maturity. The New Credit Facility is guaranteed by IHS' subsidiaries and
secured by a pledge of all of the stock of substantially all of IHS'
subsidiaries. At the option of IHS, loans under the New Credit Facility bear
interest at a rate equal to either (i) the sum of (a) the higher of (1) the
bank's base rate or (2) one percent plus the latest overnight federal funds rate
plus (b) a margin of between zero percent and one and one-quarter percent
(depending on certain financial ratios); or (ii) in the case of Eurodollar
loans, the sum of between three quarters of one percent and two and one-half
percent (depending on certain financial ratios) and the interest rate in the
London interbank market for loans in an amount substantially equal to the amount
of borrowing and for the period of the borrowing selected by IHS.
The New Credit Facility limits IHS' ability to incur indebtedness or
contingent obligations, to make additional acquisitions, to create or incur
liens on assets, to pay dividends and to purchase or redeem IHS' stock. In
addition, the New Credit Facility requires that IHS meet certain financial
tests, and provides the banks with the right to require the payment of all of
the amounts outstanding under the New Credit Facility if there is a change in
control of IHS or if any person other than Dr. Robert N. Elkins or a group
managed by Dr. Elkins owns more than 40% of IHS' capital stock. Amounts repaid
under the New Credit Facility may be reborrowed until June 30, 2002. The New
Credit Facility replaced IHS' $500,000 revolving credit facility (the "Prior
Credit Facility"). On May 15, 1996, IHS borrowed $328,200 under the New Credit
Facility to repay amounts outstanding under the Prior Credit Facility. As a
result, IHS recorded a loss on extinguishment of debt, net of related tax
benefits, of $1,431 in the second quarter of 1996.
In May 1995, the Company entered into a $500,000 revolving credit and term
loan agreement with Citicorp USA, Inc., the agent and certain other lenders
which replaced the $250,000 revolving credit and term loan facility which the
Company entered into during 1994. Amounts outstanding under the revolving
78
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
loan on April 30, 1997 were to be converted to a term loan with a final maturity
date of March 31, 2001. The revolving credit and term loan agreement was secured
by a pledge of all of the stock of substantially all of the Company's
subsidiaries. Interest was based upon the LIBOR plus 1.5% which was 6.94% at
December 31, 1995. The $500,000 revolving credit and term loan facility was used
to finance the Company's working capital requirements, to make acquisitions and
for general corporate purposes.
In 1994 the Company entered into a $250,000 revolving credit and term loan
agreement (the "Facility") with Citicorp USA, Inc., as agent, and certain other
lenders. The Facility, which included a $50,000 letter of credit subfacility,
initially consisted of a $250,000 three year revolving loan. Amounts outstanding
under the revolving loan on September 30, 1997 were to be converted to a term
loan with a final maturity date of September 30, 2001. The Facility was secured
by a pledge of all of the stock of substantially all of the Company's
subsidiaries. Interest was based upon various market indices (7.97% at December
31, 1994).
SUBORDINATED DEBT
The Company's $150,000 aggregate principal amount of 10 1/4% Senior
Subordinated Notes (the "10 1/4% Senior Notes") are due on April 30, 2006. The
10 1/4% Senior Notes were sold to certain initial purchasers which sold the 10
1/4% Senior Notes to qualified institutional buyers under Rule 144A of the
Securities Act and to a limited number of institutional accredited investors.
Pursuant to an agreement with the initial purchasers, IHS is obligated to take
certain actions to effect an exchange offer within specified periods whereby
each holder of 10 1/4% Senior Notes would be offered the opportunity to exchange
such notes for new notes identical in all material respects to the 10 1/4%
Senior Notes, except that the new notes would be rgistered under the Securities
Act. IHS has not to date commenced the exchange offer and, as a result,
beginning November 25, 1996 the interest rate on the 10 1/4% Senior Notes
increased to 10.5%, and will continue to increase by 0.25% each 90 days until
the exchange offer is commenced.
The Company's $115,000 aggregate principal amount of 9 5/8% Senior
Subordinated Notes, Series A (the "9 5/8% Series A Senior Notes") are due on May
31, 2002. The 9 5/8% Series A Senior Subordinated Notes were issued in October
1995 in exchange for, and are identical to the 9 5/8% Senior Subordinated Notes
issued in May 1995, except that the Series A Senior Notes have been registered
under the Securities Act of 1933, and are listed on the New York Stock Exchange.
The net proceeds of the 9 5/8% Series A Senior Notes were used to repay $78,000
of the credit facility among other things.
The Company's $100,000 aggregate principal amount of 10 3/4% Senior
Subordinated Notes (the "10 3/4% Senior Notes") are due on July 15, 2004. The
net proceeds were used to repay the remaining outstanding balance under the term
loan facility and the revolving credit facility notes.
The Company's $115,000 aggregate principal amount of 6% convertible
subordinated debentures (the "6% Debentures") are due December 31, 2003. The
Company's 5 3/4% convertible senior subordinated debentures (the "5 3/4%
Debentures") in the aggregate principal amount of $143,750 are due January 1,
2001. At any time prior to redemption or final maturity, the 5 3/4% Debentures
and the 6% Debentures are convertible into Common Stock of the Company, at
$32.60 per share and $32.125 per share, respectively, at the option of the
holder, subject to adjustment upon the occurrence of certain events.
79
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The subordinated debt is redeemable for cash at the Company's option, in
whole or in part, plus accrued interest, as follows:
<TABLE>
<CAPTION>
INITIAL REDEMPTION PRICE
EXPRESSED AS
PERMITTED A PERCENTAGE
AFTER OF PRINCIPAL
--------------- ------------------
<S> <C> <C>
5 3/4% Debentures January 2, 1997 103.29%
6% Debentures January 1, 1996 104.2%
10 3/4% Senior Notes July 15, 1999 105.375%
9 5/8% Series A Senior Notes Not redeemable --
10 1/4% Senior Notes April 30, 2001 105.125%
</TABLE>
In the event of a change in control of IHS (as defined), each debt holder may
require the Company to repurchase the debt, in whole or in part, at redemption
prices of 100% of the principal amount in the case of the 5 3/4% Debentures and
the 6% Debentures and 101% of the principal amount in the case of the 10 3/4%
Senior Notes, 9 5/8% Series A Senior Notes and 10 1/4% Senior Notes.
The indentures under which each of the 10 1/4% Senior Notes, the 9 5/8%
Series A Senior Notes and the 10 3/4% Senior Notes were issued contain certain
covenants, including but not limited to, covenants with respect to the following
matters: (i) limitations on additional indebtedness unless certain ratios are
met; (ii) limitations on other subordinated debt; (iii) limitations on liens;
(iv) limitations on the issuance of preferred stock by IHS' subsidiaries; (v)
limitations on transactions with affiliates; (vi) limitations on certain
payments, including dividends; (vii) application of the proceeds of certain
asset sales; (viii) restrictions on mergers, consolidations and the transfer of
all or substantially all of the assets of IHS to another person; and (ix)
limitations on investments and loans.
At December 31, 1996, the aggregate maturities of long-term debt for the five
years ending December 31, 2001 and thereafter are as follows:
1997 ............................... $ 16,547
1998 ............................... 31,242
1999 ............................... 1,800
2000 ............................... 10,611
2001 ............................... 172,631
Thereafter ......................... 821,916
----------
$1,054,747
==========
Interest capitalized to construction in progress was $3,030 in 1994, $5,155
in 1995 and $3,800 in 1996.
(9) OTHER LONG-TERM LIABILITIES AND CONTINGENCIES RELATED TO FIRST AMERICAN
ACQUISITION
As indicated in note 2, the Company acquired all of the outstanding stock of
First American Health Care of Georgia, Inc. in October 1996. The purchase price
includes contingent payments, certain of which have been determined to be
probable, and the present value thereof is recorded as other long-term
liabilities as of December 31, 1996.
Prior to its acquisition by the Company, First American was under protection
of the U.S. Bankruptcy Court, with which it had filed a petition for
reorganization under Chapter 11 of the Bankruptcy Code on February 21, 1996 (the
petition date) following its and its two principal shareholders' convictions on
multiple counts of having made improper Medicare reimbursement claims.
Immediately preceding the Chapter 11 filing, First American and its principal
shareholders had entered into a merger
80
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(9) OTHER LONG-TERM LIABILITIES AND CONTINGENCIES RELATED TO FIRST AMERICAN
ACQUISITION - (Continued)
agreement with the Company. In connection with the bankruptcy proceedings and
the establishment and approval of First American's plan of reorganization, the
merger agreement was amended and confirmed by the Bankruptcy Court on October 4,
1996.
Pursuant to the terms of the First American plan of reorganization and the
amended merger agreement, the purchase price included contingent payments of up
to $155,000. 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 year through 2003,
the percentage increase 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 due on
February 14 as follows: $10,000 in 2000; $40,000 in 2001; $51,000 in 2002;
$39,000 in 2003; and $15,000 in 2004. The contingent payments would be payable
to the Health Care Financing Administration (HCFA) for $140,000 and to the
former shareholders of First American for $15,000.
The contingent payments to HCFA, which are due only if the contingent
payments described above become payable, and $95,000 of the cash purchase price
paid by the Company, which was paid to HCFA, are in full settlement of HCFA's
claims made to the Bankruptcy Court related to First American's Medicare
reimbursement claims for all periods prior to the petition date and of any
claims by HCFA related to First American's Medicare reimbursement claims made
after the petition date through December 31, 1996.
The Company has accrued the present value of the payments contingently
payable to HCFA and the former shareholders of First American of $10,000 in 2000
and $40,000 in 2001. The present value of these payments of $33,851 at December
31, 1996 was determined using a discount rate of 10% per annum from the dates of
probable payment. Management is presently studying the likelihood of the
remaining contingent 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 1999 and 2000 will probably trigger the
required payments. However, management is unable to predict what the Medical CPI
will be in years subsequent to 2000. Management will continue to evaluate the
likelihood of the contingencies being met, and will accrue the additional
payments within one year as a purchase price adjustment or will expense such
amounts payable to HCFA if such probability is determined subsequent to one year
in accordance with SFAS No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises."
81
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(10) LEASES
The Company has entered into operating leases as lessee of 77 health care
facilities and certain office facilities expiring at various dates through June
2010. Minimum rent payments due under operating leases in effect at December 31,
1996 are summarized as follows:
1997 .................................................. $ 43,065
1998 .................................................. 42,696
1999 .................................................. 42,620
2000 .................................................. 41,787
2001 .................................................. 27,691
Subsequent to 2001 .................................... 37,930
--------
Total ............................................... $235,789
========
The Company also leases equipment under short-term operating leases having
rentals of approximately $20,201 per year.
The leases of health care facilities provide renewal options for various
terms at fair market rentals at the expiration of the initial term, except for
leases of three facilities which have no renewal options. The Company generally
has the option or right of first refusal to purchase the facilities at fair
market value determined by independent appraisal (or by formula based upon the
cash flow of the facility, as defined) or, with respect to certain leases, at a
fixed price representing the fair market value at the inception of the lease.
Under certain conditions, the Company may be required to exercise the options to
buy the facilities. In connection with 55 leases the Company has paid purchase
option deposits aggregating $53,581 at December 31, 1996, of which $29,375 is
refundable. In connection with one lease expiring September 30, 2002, the lessor
has the right to require two officers of the Company to repurchase up to 13,944
shares of the Company's Common Stock owned by the lessor at the original issue
price increased at the annual rate of 9%. The Company has guaranteed this
obligation of the officers and has also guaranteed approximately $6,600 of the
lessor's indebtedness.
Minimum rentals are generally subject to adjustment based on the consumer
price index or the annual rate of five year U.S. Treasury securities. Also, the
leases generally provide for contingent rentals, based on gross revenues of the
facilities in excess of base year amounts, and additional rental obligations for
real estate taxes, utilities, insurance and repairs. Contingent rentals were
$2,596 in 1994, $2,777 in 1995 and $3,565 in 1996.
(11) CAPITAL STOCK
The Company is authorized to issue up to 150,000,000 shares of Common Stock
and 15,000,000 shares of Preferred Stock. The issuance of such preferred stock
may have the effect of delaying, deferring or preventing a change in control of
the Company without further action by the stockholders and may adversely affect
the voting and other rights of the holders of Common Stock, including the loss
of voting control to others. As of December 31, 1995 and 1996, there were no
shares of Preferred Stock outstanding.
82
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(11) CAPITAL STOCK (Continued)
The Company declared a $0.02 per share cash dividend in 1995 and 1996.
At December 31, 1994 and 1995 the Company had outstanding stock options as
follows:
1995 1996
----------- ------------
Stock options outstanding pursuant to:
Equity Incentive Plan ...................... 14,969 13,169
1990 Employee Stock Option Plan ............ 889,956 832,906
1992 Employee Stock Option Plan ............ 905,120 903,715
Stock Option Plan for Non-Employee Directors 300,000 200,000
1994 Stock Incentive Plan .................. 1,439,080 2,316,355
Senior Executives' Stock Option Plan ....... 2,100,000 1,800,000
Stock Option Compensation Plan for
Non-Employee Directors .................... 250,000 200,000
1995 Board of Director's Plan .............. 300,000 300,000
1996 Employee Stock Option Plan............. -- 1,886,000
Other options .............................. 178,429 297,954
----------- ------------
Total stock options outstanding............ 6,377,554 8,750,099
=========== ============
The Equity Incentive Plan provides that options may be granted to certain
employees at a price per share not less than the fair market value at the date
of grant. The 1990 Employee Stock Option Plan, the 1992 Employee Stock Option
Plan and the 1996 Employee Stock Option Plan provide for issuance of options
with similar terms as well as non-qualified options. In 1993, the Company
adopted the Senior Executives' Stock Option Plan and the 1994 Stock Incentive
Plan which provide for the issuance of options with terms similar to the 1992
plan. In addition, the Company has adopted two Stock Option Plans for
Non-Employee Directors and a Stock Option Compensation Plan for Non-Employee
Directors. The Board of Directors has authorized the issuance of 10,428,571
shares of Common Stock under the plans. Such options have been granted with
exercise prices equal to or greater than the estimated fair market value of the
common stock on the date of grant; accordingly, the Company has recorded no
compensation expense related to such grants. The options' maximum term is 10
years. Vesting for the 1990, 1992, and 1994 Employee Stock Option Plans are
graded over six years. Vesting for the 1996 Plan is over four years. Vesting for
the directors' plans is one year after the date of grant. Vesting for the Senior
Executive's Plan is generally over three years. In addition, the Company
provides an Employee Stock Purchase Plan whereby employees have the right to
purchase the Company's Common Stock at 90% of the quoted market price, subject
to certain limitations.
83
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(11) CAPITAL STOCK (Continued)
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding--beginning
of period ..................... 5,658,789 $24.23 5,879,832 $25.98 6,377,554 $20.19
Granted ....................... 873,300 32.90 1,059,146 28.81 3,096,500 22.14
Exercised ..................... (521,992) 18.95 (340,244) 19.61 (141,382) 14.55
Cancelled ..................... (130,265) 24.50 (221,180) 29.63 (582,573) 20.66
------------ ----------- ------------ ----------- ------------ -----------
Options outstanding--end of
period ........................ 5,879,832 25.98 6,377,554 20.19 8,750,099 20.94
------------ ----------- ------------ ----------- ------------ -----------
Options exercisable--end of
period ........................ 1,839,015 $24.19 2,731,876 $20.15 3,914,843 $20.18
============ =========== ============ =========== ============ ===========
</TABLE>
The following summarizes information about stock options outstanding as of
December 31, 1996.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
-------------- --------------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
under $15...... 182,931 3.44 $11.52 121,561 $11.23
$15 to $20..... 781,393 5.19 17.86 501,185 17.72
$20 to $25..... 7,735,128 8.54 21.37 3,287,097 20.88
over $25....... 50,647 8.74 36.61 5,000 26.00
-------------- --------------- ---------- ------------- ----------
8,750,099 8.14 $20.94 3,914,843 $20.18
============== =============== =========== ============= ==========
</TABLE>
84
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(11) CAPITAL STOCK (Continued)
The Company applies APB No. 25 and related interpretations in accounting for
its stock options. Accordingly, no compensation expense has been recognized in
connection with its stock options. Had compensation expense for the Company's
stock options been determined consistent with SFAS No. 123, the Company's net
earnings (loss) and earnings (loss) per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
----------- -------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Net earnings (loss) ....................$(27,002) $(44,752) $46,334 $43,082
Primary earnings (loss) per share ...... (1.26) (2.09) 1.97 1.91
Fully dilluted earnings (loss) per share (1.26) (2.09) 1.78 1.67
</TABLE>
The fair value of the options including the Employee Stock Purchase Plan for
purposes of the above pro forma disclosure was estimated on the date of grant or
modification using the Black-Scholes option pricing model and the following
assumptions: a risk-free interest rate of 5.40% to 6.74%, weighted average
expected lives of 4 to 9 years for options and 6 months for the Employee Stock
Purchase Plan, 0.1% dividend yield and volatility of 26.3%. The effects of
applying SFAS No. 123 in the pro forma net earnings (loss) and earnings (loss)
per share for 1995 and 1996 may not be representative of the effects on such pro
forma information for future years. In November 1995, the Board of Directors
authorized a modification to the options outstanding under the Company's option
plans which resulted in the change of the exercise price to $20.875, the market
price on the date of the modification, for certain options with exercise prices
over $21.00. Because no compensation was recognized for the original options,
the modified options are treated as a new grant. Under SFAS 123, compensation
cost of $23,655 in 1995 is recognized immediately for vested options for the
fair value of the new options on the modification date. The effect of this
modification has been included in the pro forma earnings (loss) per share
amounts above.
Warrant transactions are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
1994 PRICE 1995 PRICE 1996 PRICE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Warrants outstanding--
beginning of year................ 311,029 $24.65 497,181 $29.28 518,000 $31.30
Granted to sellers............... 300,000 31.33 65,000 37.95 -- --
Exercised ....................... (113,848) 22.03 (44,181) 18.35 -- --
Cancelled ....................... -- -- -- -- (20,000) 38.02
----------- ----------- ----------- ----------- ----------- -----------
Warrants outstanding--end of
year ............................ 497,181 $29.28 518,000 $31.30 498,000 $31.03
=========== =========== =========== =========== =========== ===========
</TABLE>
As discussed in note 10, the Company is contingently obligated to repurchase
up to 13,944 shares of its Common Stock, aggregating approximately $353 at
December 31, 1996.
In 1995, the Company's Board of Directors authorized the repurchase in the
open market of up to $50,000 of the Company's Common Stock. The purpose of the
repurchase program was to have available treasury shares of Common Stock to
satisfy contingent earn-out payments under prior business combinations accounted
for by the purchase method. The repurchases were funded from cash from
operations and drawings under the Company's revolving credit facility. In 1995,
the Company repurchased 400,600 shares of Common Stock for an aggregate purchase
price of approximately $12,790. No shares were repurchased in 1996. The
repurchase program was discontinued in September 1996. During 1996 the Company
reissued all 400,600 shares in partial satisfaction of earn-out payments.
85
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(12) INCOME TAXES
The provision for income taxes on earnings before income taxes and
extraordinary items is summarized as follows:
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
-------- -------- --------
Federal ................................. $ 18,388 $(13,341) $ 55,577
State ................................... 3,729 (2,929) 8,138
-------- -------- --------
$ 22,117 $(16,270) $ 63,715
======== ======== ========
Current ................................. $ 19,905 $ 7,732 $ 21,515
Deferred ................................ 2,212 (24,002) 42,200
-------- -------- --------
$ 22,117 $(16,270) $ 63,715
======== ======== ========
The amount computed by applying the Federal corporate tax rate of 35% in
1994, 1995 and 1996 to earnings before income taxes and extraordinary items is
summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- ----------- ----------
<S> <C> <C> <C>
Income tax computed at statutory rates ..... $ 20,643 $(14,791) $ 39,018
State income taxes, net of Federal tax
benefit .................................... 2,424 (1,904) 5,290
Amortization of non-deductible intangibles . 993 1,975 2,293
Basis difference on assets sold ............ -- -- 16,136
Valuation allowance adjustment ............. (1,675) (2,111) (1,353)
Other ...................................... (268) 561 2,331
-------- -------- --------
$ 22,117 $(16,270) $ 63,715
======== ======== ========
</TABLE>
Deferred income tax (assets) liabilities at December 31, 1995 and 1996 are as
follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Excess of book over tax basis of assets .............. $ 76,097 $ 109,900
Deferred pre-opening costs ........................... 199 84
Accrued workers compensation ......................... (3,769) (10,874)
Deferred gain on sale-leaseback ...................... (2,775) (2,413)
Allowance for doubtful accounts ...................... (11,384) (21,753)
Accrued third-party payor settlements ................ -- (23,523)
Accrued claims........................................ -- (7,354)
Accrued vacation ..................................... -- (4,059)
Other accrued expenses not yet deductible for tax .... -- (12,729)
Pre-acquisition separate company net operating loss
carryforwards ........................................ (7,612) (4,679)
Other ................................................ 170 (317)
--------- ---------
$ 50,926 $ 22,283
Valuation allowance .................................. 1,353 --
--------- ---------
$ 52,279 $ 22,283
========= =========
</TABLE>
The decrease in the valuation allowance for deferred tax assets of $1,353 is
attributable to the utilization of pre-acquisition separate company net
operating loss carryforwards in the year ended December 31, 1996. Also, the
Company recorded deferred tax assets in connection with business acquisitions
(primarily First American) of $70,843 in 1996, which has been applied as a
reduction of goodwill.
86
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(12) INCOME TAXES (Continued)
At December 31, 1996, certain subsidiaries of the Company had pre-acquisition
net operating loss carryforwards available for Federal and state income tax
purposes of approximately $12,154 which expire in the years 1997 through 2008.
The annual utilization of these net operating loss carryforwards is subject to
certain limitations under the Internal Revenue Code.
(13) OTHER COMMITMENTS AND CONTINGENCIES
IHS' contingent liabilities (other than liabilities in respect of litigation
and the First American acquisition) aggregated approximately $52,449 as of
December 31, 1996. IHS is obligated to purchase its Greenbriar facility upon a
change in control of IHS. The net price of the facility is approximately $4,014.
The lessor of this facility has the right to require Messrs. Robert Elkins and
Timothy Nicholson to purchase all or any part of 13,944 shares of IHS Common
Stock owned by it at a per share purchase price equal to the sum of $12.25 per
share plus 9% simple interest per annum from May 8, 1988 until the date of such
purchase. IHS has agreed to purchase such shares if Messrs. Elkins and Nicholson
fail to do so. This amount aggregated approximately $353 at December 31, 1996.
IHS has guaranteed approximately $6,600 of the lessor's indebtedness. IHS is
required, upon certain defaults under the lease, to purchase its Orange Hills
facility at a purchase price equal to the greater of $7,130 or the facility's
fair market value. IHS has jointly and severally guaranteed a $1,231
construction loan made to River City Limited Partnership in which IHS has a 30%
general partnership interest. IHS has guaranteed approximately $4,020 owed by
Tutera Group, Inc. and Sunset Plaza Limited Partnership, a partnership
affiliated with a partnership in which IHS has a 49% interest, to Finova Capital
Corporation. IHS has guaranteed approximately $3,994 of a construction loan for
Trizec, the entity from which IHS purchased the Central Park Lodges facilities.
IHS has established several irrevocable standby letters of credit with the Bank
of Nova Scotia to secure certain of IHS' self-insured workers' compensation
obligations, health benefits and other obligations. The maximum obligation was
$15,670 at December 31, 1996. IHS has guaranteed approximately $539 owed by a
managed facility to National Health Investors Inc. IHS has guaranteed
approximately $8,898 owed by Litchfield Asset Management Corpooration to
National Health Investors Inc. In addition, with respect to certain acquired
businesses IHS is obligated to make certain contingent payments if earnings of
the acquired business increase or earnings targets are met. IHS is also
obligated under certain circumstances to make contingent payments of up to
$155,000 in respect of IHS' acquisition of First American (see note 9). In
addition, IHS has obligations under operating leases aggregating approximately
$235,789 at December 31, 1996. (See note 10).
IHS leases ten facilities from Meditrust, a publicly-traded real estate
investment trust. With respect to all the facilities leased from Meditrust, IHS
is obligated to pay additional rent in an amount equal to a specified percentage
(generally five percent) of the amount by which the facility's gross revenues
exceed a specified amount (generally based on the facility's gross revenues
during its first year of operation). If an event of default occurs under any
Meditrust lease or any other agreement IHS has with Meditrust, Meditrust has the
right to require IHS to purchase the facility leased from the partnership at a
price equal to the higher of the then current fair market value of the facility
or the original purchase price of the facility paid by Meditrust plus (i) the
cost of certain capital expenditures paid for by Meditrust, (ii) an adjustment
for the increase in the cost of living index since the commencement of the lease
and (iii) all rent then due and payable (all such amounts to be determined
pursuant to the prescribed formula contained in the lease). In addition, each
Meditrust lease provides that a default under any other Meditrust lease or any
other agreement IHS has with Meditrust constitutes a default under such lease.
Upon such default, Meditrust has the right to terminate the leases and to seek
damages based upon lost rent.
87
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(14) SUPPLEMENTAL CASH FLOW INFORMATION
See note 2 for information concerning significant non-cash investing and
financing activities related to business acquisitions for the years ended
December 31, 1994, 1995 and 1996. Other significant non-cash investing and
financing activities are as follows:
o The sale of Professional Community Management, Inc., which manages
residential retirement community living units in Southern California, in
1994 resulted in decreases in net current assets of $716, property, plant
and equipment of $200, other assets of $746 and intangible assets of
$3,899, net current liabilities of $1,226 and debt of $31; offset by the
$4,304 purchase price paid in the form of a note receivable.
o The Company declared cash dividends, which resulted in increases in current
liabilities offset by decreases in retained earnings of $398 in 1994, $435
in 1995 and $471 in 1996.
o The write off of the Crestwood management agreement in 1995 resulted in a
decrease in current assets of $5,969, a decrease in property of $2,322, a
decrease in other assets of $13,624, and a non-cash charge to income of
$21,915 (see note 18).
o In 1995, the write off of long lived assets in connection with SFAS No. 121
resulted in a decrease in property of $81,788, a decrease in intangible
assets of $1,533, and a non-cash charge to income of $83,321. Also, the
write-off of deferred pre-opening costs resulted in a decrease in
intangible assets and a non-cash charge to income of $25,785 (see note 18).
o The sale of the Pharmacy division in 1996 resulted in a decrease in current
assets of $25,901, a decrease in property of $9,399, a decrease in
intangible assets of $52,173, an increase in investments in affiliates of
$24,019, an increase in current liabilities of $17,888 and an increase in
unrealized gain on available for sale securities of $9,360. Cash received
for the sale of the Pharmacy division was $125,000 (see note 4).
o The sale of a majority interest in the assisted living division in 1996
resulted in a decrease in current assets of $1,716, a decrease in property
of $48,375, a decrease in intangible assets of $1,667, an increase in
investments in affiliates of $24,772 and a decrease in current liabilities
of $8,073. Total cash received from the sale was $10,416 (see note 4).
o The sale of certain non-strategic assets in 1996 resulted in decreases in
net current assets of $449, property of $8,730, other assets of $3,803, an
increase in net current liabilities of $144 and a decrease in long term
debt of $4,008. Total cash received from the sales was $1,293.
Cash payments for interest were $20,728 in 1994, $49,863 in 1995 and $56,883
in 1996. Cash payments for income taxes were $13,761 in 1994, $27,549 in 1995
and $38,193 in 1996.
(15) EXTRAORDINARY ITEMS
In the second quarter of 1996, the Company replaced its $500,000 revolving
credit and term loan facility with the $700,000 revolving credit facility (see
note 8). This event has been accounted for as an extinguishment of debt and the
Company has recorded a loss on extinguishment of debt of $2,327 relating
primarily to the write-off of deferred financing costs. Such loss, reduced by
the related income tax effect of $896, is presented in the statement of earnings
as an extraordinary item of $1,431.
In the second quarter of 1995, the Company replaced its $250,000 revolving
credit and term loan facility with a $500,000 revolving credit and term loan
facility (see note 8). This event has been accounted for as an extinguishment of
debt and the Company has recorded a loss on extinguishment of debt of $826
representing
88
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(15) EXTRAORDINARY ITEMS (Continued)
the write-off of deferred financing costs. In the fourth quarter of 1995, the
Company incurred prepayment penalties on debt in the amount of $821. Such
losses, reduced by the related income tax effect of $634, is presented in the
statement of earnings as an extraordinary item of $1,013.
In September 1994, the Company replaced its $260,000 revolving credit and
term loan facility with a $250,000 revolving credit and term loan facility (see
note 8). Such event has been accounted for as an extinguishment of debt and the
Company has recorded a loss on extinguishment of debt of $6,839, representing
the write-off of deferred financing costs. Such loss, reduced by the related
income tax effect of $2,565, is presented in the statement of earnings as an
extraordinary item of $4,274.
(16) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, patient accounts
receivable, other current assets, accounts payable, and accrued expenses
approximates fair value because of the short-term maturity of these instruments.
The fair value of temporary investments is estimated based on quoted market
prices for these or similar investments. The fair value of third-party payor
settlements receivable is estimated by discounting anticipated cash flows using
estimated market discount rates to reflect the time value of money. The fair
value of the Company's long-term debt is estimated based on current rates
offered to the Company for similar instruments with the same remaining
maturities. Management of the Company believes the carrying amount of the above
financial instruments approximates the estimated fair value. The Company has
investments in unconsolidated affiliates described in note 4, which are untraded
companies and joint ventures. The Company has notes receivable from unaffiliated
individuals and untraded companies totaling $26,115 and $28,102 at December 31,
1995 and 1996, respectively. Also, the Company has guaranteed the indebtedness
of two of its leased facilities and has purchase option deposits of $57,147 and
$74,131 on 89 leased and managed facilities of which $25,357 and $29,375 is
refundable at December 31, 1995 and 1996, respectively. It is not practicable to
estimate the fair value of these investments, notes and guarantees since they
are not traded, no quoted values are readily available for similar financial
instruments and the Company believes it is not cost-effective to have valuations
performed. However, management believes that there has been no permanent
impairment in the value of such investments and no indication of probable loss
on such guarantees.
(17) RELATED PARTY TRANSACTIONS
In December 1996, the Company loaned $2,000 to Community Care of America,
Inc. ("CCA") and received a management agreement and warrants to purchase up to
9.9% of CCA's common stock at a price of $3.25 per share. The loan bears
interest at the annual rate of interest set forth in the Company's Revolving
Credit Agreement plus 2% and is due on December 27, 1998. Dr. Robert N. Elkins,
Chairman and Chief Executive Officer of the Company, is a director of CCA, and
John Silverman, a director and employee of the Company, is Chairman of the board
of directors of CCA.
In November 1996, the Company purchased LifeWay, Inc., ("LifeWay") a disease
management company in Miami, Florida for approximately $900 through the issuance
of 38,502 shares of common stock. Prior to the purchase, IHS owned approximately
10% of LifeWay and Dr. Robert N. Elkins, IHS' Chairman and Chief Executive
Officer, beneficially owned approximately 65%. IHS also issued 48,129 shares of
Common Stock to Mr. Elkins in payment of outstanding loans of $1,125 from Mr.
Elkins to LifeWay and 8,784 shares in partial payment of a bonus to a
stockholder of LifeWay.
In October 1996, the Company loaned $3,445 to ILC. Dr. Robert N. Elkins,
Chairman and Chief Executive Officer of the Company, is Chairman of the Board of
Directors of ILC and Lawrence P. Cirka, President and Chief Operating Officer of
the Company, is a director of ILC.
In 1994, the Company sold and leased back three of its geriatric care
facilities in a transaction with affiliates of Capstone Capital Corporation
("Capstone Capital"), at the time a newly formed real estate investment trust.
Robert N. Elkins, Chairman of the Board and Chief Executive Officer of the
Company, is a Director of Capstone Capital and Richard M. Scrushy, at the time a
director of the Company, is Chairman of the Board of Capstone Capital.
The proceeds received by the Company were $28,210.
89
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(17) RELATED PARTY TRANSACTIONS (Continued)
In April 1993, a wholly-owned subsidiary of the Company acquired a 21.28%
interest in the common stock and a 47.64% interest in the 6% cumulative
preferred stock of Speciality Care PLC, an owner and operator of geriatric care
facilities in the United Kingdom. Robert N. Elkins, Chairman of the Board and
Chief Executive Officer of the Company, is a director of Speciality Care PLC,
and Timothy Nicholson, a director of the Company, is Chairman and Managing
Director of Speciality Care PLC. Mr. Nicholson was formerly Executive Vice
President of the Company. In 1995 the Company invested an additional $4,384 in
Speciality Care PLC. As a result of the Company's additional investment, the
Company has a 21.3% interest in the Common Stock and a 63.65% interest in the 6%
cumulative convertible preferred stock. The Company's equity in Speciality Care
PLC was $9,379 at December 31, 1996 (see note 4).
(18) LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER NON-RECURRING CHARGES
LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS IN 1995
In the fourth quarter of 1995, the Company, as well as industry analysts,
believed that Medicare and Medicaid reform was imminent. Both the House and
Senate balanced budget proposals proposed a reduction in future growth in
Medicare and Medicaid spending from 10% a year to approximately 4-6% a year.
While Medicare and Medicaid reform had been discussed prior to the fourth
quarter, the Company came to believe that a future reduction in the growth of
Medicare and Medicaid spending was now virtually a certainty. Such reforms
include, in the near term, a continued freeze in the Medicare routine cost limit
(RCL), followed by reduced increases in later years, more stringent
documentation requirements for Medicare RCL exception requests, reduction in the
growth in Medicaid reimbursement in most states, as well as salary equivalency
in rehabilitative services and, in the longer term (2-3 years), a switch to a
prospective payment system for home care and nursing homes, and repeal of the
"Boren Amendment", which requires that states pay hospitals "reasonable and
adequate" rates. The Company estimated the effect of the aforementioned reforms
on each nursing and subacute facility, as well as on its rehabilitative
services, respiratory therapy, home care, mobile diagnostic and pharmacy
divisions by reducing (or in some cases increasing) the future revenues and
expense growth rates for the impact of each of the aforementioned factors.
Accordingly, these events and circumstances triggered the early adoption of
Statement of Financial Accounting Standards No. 121 in the fourth quarter of
1995. In accordance with SFAS No. 121, the Company estimated the future cash
flows expected to result from those assets to be held and used.
In estimating the future cash flows for determining whether an asset is
impaired, and if expected future cash flows used in measuring assets are
impaired, the Company grouped its assets at the lowest level for which there are
identifiable cash flows independent of other groups of assets. These levels were
each of the individual nursing/subacute facilities, and each of the home health,
rehabilitative therapy, respiratory therapy, pharmacy and mobile diagnostics
divisions. The results of comparing future undiscounted cash flows to historical
carrying value were that 12 individual nursing facilities and one assisted
living facility were identified for an impairment charge. None of the remaining
facilities or business units were identified since only those facilities or
business units where the carrying value exceeded the undiscounted cash flows are
considered impaired. The business units having significant goodwill were not
identified for an impairment charge because projected undiscounted cash flows
were sufficient to recover goodwill over the remainder of the 40 year estimated
useful life. Prior to adoption of SFAS 121, the Company evaluated impairment on
the entity level. Such an evaluation yielded no impairment as of September 30,
1995.
After determining the facilities eligible for an impairment charge, the
Company determined the estimated fair value of such facilities. Also, the
Company obtained valuation estimates prepared by independent appraisers or had
received offers from potential buyers on 6 of the 12 facilities identified for
impairment, comprising 72% of the total charge. Such valuation estimates were
obtained to corroborate the Company's estimate of value. The excess carrying
value of goodwill, buildings and improvements, leasehold improvements and
equipment above the fair value was $83,321 (of which $1,533 represented goodwill
and $81,788 represented property and equipment), which was included in the
statement of operations for 1995 as loss on impairment of long-lived assets.
90
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(18) LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER NON-RECURRING CHARGES
(Continued)
OTHER NON-RECURRING CHARGES (INCOME)
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Other non-recurring charges (income) are summarized as
follows:
Write-off of deferred pre-opening costs in connection with
change in accounting estimate ........................... $ 25,785 $ --
Loss on management contract termination .................. 21,915 7,825
IntegraCare merger costs ................................. 1,939 --
Gain on sale of Pharmacy division ........................ -- (34,298)
Loss on sale of majority interest in Integrated Living
Communities, Inc. ....................................... -- 8,497
Loss on closure of redundant home health agencies ........ -- 3,519
-------- --------
$ 49,639 $(14,457)
======== ========
</TABLE>
During the fourth quarter of 1995, the Company terminated the Crestwood
management contract, a 10 year contract entered into in January 1994 to manage
23 long-term care and psychiatric facilities in California owned by Crestwood
Hospital. The terms of the contract required the payment of a management fee to
IHS and a preferred return to the Crestwood owners. IHS terminated the
management contract with Crestwood Hospital due primarily to changes in
California Medicaid rates which no longer provided sufficient cash flow at the
facilities to support both IHS' management fee and the preferred return to the
owners. As a result, the Company incurred a $21,915 loss on the termination of
this contract. Such loss consists of the write-off of $8,496 of management fees,
$11,097 of loans made to Crestwood Hospital and the owners of Crestwood, as well
as the interest thereon, and $2,322 of contract acquisition costs.
During the third quarter of 1995, the Company merged with IntegraCare, Inc.
in a transaction accounted for as a pooling of interests. In connection with
this transaction, the Company incurred merger costs of $1,939 for accounting,
legal, and other costs. These costs are included as an other non-recurring
charge on the statement of operations.
In connection with the adoption of SFAS No. 121 described above, the Company
adopted a change in accounting estimate to write-off in 1995 all deferred
pre-opening costs of MSUs. This change was made in recognition of the
circumstances, discussed above, which raised doubt about and thereby triggered
the assessment of recoverability of long-lived assets in 1995. These
circumstances also raised doubt as to the estimated future benefit and
recoverability of deferred pre-opening costs, resulting in the Company's
decision to write-off $25,785 of deferred pre-opening costs. In connection with
the change in accounting estimate regarding the future benefits and
recoverability of deferred pre-opening costs, the Company has changed its
accounting method beginning in 1996 from deferring and amortizing pre-opening
costs to recording them as an expense when incurred. The effect of this change
in 1996 was to decrease amortization expense by approximately $3,900 and to
increase operating expenses by approximately $3,900.
On July 30, 1996, the Company sold its pharmacy division to Capstone Pharmacy
Services, Inc. ("Capstone") for a purchase price of $150,000, consisting of cash
of $125,000 and shares of Capstone Common Stock having a value of approximately
$25,000. The Company had determined that its ownership of pharmacy operations is
not critical to the development and implementation of its post-acute care
network strategy. As a result of the sale, the Company recorded a $34,298
pre-tax gain ($298 gain after income taxes). Because IHS's investment in the
pharmacy division had a very small tax basis, the taxable gain on the sale
significantly exceeded the gain for financial reporting purposes, thereby
resulting in a disproportionately higher income tax provision related to the
sale (see note 4).
On October 9, 1996, ILC, a wholly owned subsidiary of IHS, completed an
initial public offering of ILC common stock. The Company had determined that the
direct operation of assisted-living communities is not required for its
post-acute care network strategy. In connection with the ILC offering the
Company sold 1,400,000 of ILC common stock and recorded a $8,497 loss. Following
the offering, the Company continues to own 2,497,900 shares of ILC Common Stock,
representing 37.3% of the outstanding ILC common stock (see note 4).
91
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(18) LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER NON-RECURRING CHARGES
(Continued)
The Company's strategy is to expand its home health care services to take
advantage of health care payors' increasing focus on having healthcare provided
in the lowest-cost setting possible and patients' desires to be treated at home.
As a result, during the fourth quarter of 1996, the Company acquired 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. In addition, the Company has acquired
other home care companies during 1994, 1995 and 1996. In the fourth quarter of
1996, the Company, as a large provider of home nursing service, has recorded a
$3,519 non-recurring charge resulting from the closure of certain redundant home
care agencies in markets where First American presently provides home health
services.
In connection with the acquisition of First American, the Company terminated
the All Seasons management contract, a 10 year contract entered into in
September 1994 to manage six geriatric care facilities in Washington State. As a
result of the lack of synergies with First American home care agencies, as well
as changes to the reimbursement environment within the state of Washington, the
Company believed it was in its best interest to terminate such contract. As a
result, the Company incurred a $7,825 loss on the termination. Such loss
consists of the write-off of $3,803 of management fees and $4,022 of loans made
to All Seasons.
(19) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
The following infomation is provided in accordance with the AICPA Statement
of Position No. 94-6, "Disclosure of Certain Significant Risks and
Uncertainties."
The Company's strategy is to use geriatric care-facilities as a platform to
provide a wide variety of post-acute medical and rehabilitative services more
typically delivered in the acute care hospital setting and to use home
healthcare to provide those medical and rehabilitative services which do not
require 24-hour monitoring. Post-acute care includes subacute care, outpatient
and home care, inpatient and outpatient rehabilitation, diagnostic, respiratory
therapy and pharmacy services. The Company's post-acute health care system is
intended to provide continuity of care for its patients following discharge from
acute care hospitals. The Company also manages such operations for other owners
for a fee, which is generally based on a percentage of the gross revenue. The
Company and others in the health care business are subject to certain inherent
risks, including the following:
o Substantial dependence on revenues derived from reimbursement by the
Federal Medicare and state Medicaid programs;
o Ability to obtain per diem rates approvals for costs which exceed the
Federal Medicare established per diem rates;
o Government regulations, government budgetary constraints and proposed
legislative and regulatory changes; and
o Lawsuits alleging malpractice and related claims.
Such inherent risks require the use of certain management estimates in the
preparation of the Company's financial statements and it is reasonably possible
that a change in such estimates may occur.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(19) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES (Continued)
The Company receives payment for a significant portion of services rendered
to patients from the Federal government under Medicare and from the states in
which its facilities and/or services are provided, are located under Medicaid.
Revenue derived from Medicare and various state Medicaid reimbursement programs
represented 37.2% and 22.3%, respectively, of the Company's revenue for the year
ended December 31, 1996, and the Company's operations are subject to a variety
of other Federal, state and local regulatory requirements. Failure to maintain
required regulatory approvals and licenses and/or changes in such regulatory
requirements could have a significant adverse effect on the Company. Changes in
Federal and state reimbursement funding mechanisms, related government budgetary
constraints and differences between final settlements and estimate settlements
receivable under Medicare and Medicaid retrospective reimbursement programs,
which are subject to audit and retroactive adjustment, could have a significant
adverse effect on the Company. The Company's cost of care for its MSU patients
generally exceeds regional reimbursement limits established under Medicare. The
success of the Company's MSU strategy will depend in part on its ability to
obtain per diem rate approvals for costs which exceed the Medicare established
per diem rate limits and by obtaining waivers of these limitations. Also, the
Company is from time to time subject to malpractice and related claims and
lawsuits, which arise in the normal course of business and which could have a
significant effect on the Company. The Company believes that adequate provision
for these items has been made in the accompanying consolidated financial
statements and that their ultimate resolution will not have a material effect on
the consolidated financial statements.
Since its inception, the Company has grown through acquisitions, and
realization of acquisition costs, including intangible assets of businesses
acquired, is dependent initially upon the consummation of the acquisitions and
subsequently upon the Company's ability to successfully integrate and manage
acquired operations. Also, the Company's development of post-acute care networks
is dependent upon successfully effecting economics of scale, the recruitment of
skilled personnel and the expansion of services and related revenues.
(20) SUBSEQUENT EVENTS
In January 1997, the Company acquired all of the outstanding stock of In-Home
Healthcare, Inc., which provides home health care services. The total purchase
price was $3,200.
In February 1997, the Company acquired the assets of Portable X-Ray Labs
Inc., which provides mobile x-ray services. Total purchase price was $4,900.
In February 1997, the Company acquired the assets of Professional Health
Services, Inc., which provides mobile x-ray services. Total purchase price was
$350.
In March 1997, the Company acquired the assets of Doctor's Home Health
Agency, Inc., which provides home healthcare in Florida. Total purchase price
was $350.
In addition, IHS has reached agreements in principle to acquire a contract
rehabilitation company in Florida for approximately $1,350, a mobile x-ray
company in North Carolina for approximately $225, a contract rehabilitation
company in the midwest for approximately $23,100, and a contract to manage a
home health company in Tennessee. There can be no assurance that any of these
pending acquisitions will be consummated on the proposed terms, different terms,
or at all.
(21) PROPOSED CORAM MERGER
On October 19, 1996, IHS and Coram entered into a definitive agreement and
plan of merger (the "Merger Agreement") providing for the merger of a
wholly-owned subsidiary of IHS into Coram, with Coram becoming a wholly-owned
subsidiary of IHS. On March 30, 1997, IHS and Coram agreed to amend the terms of
the merger agreement, effective the close of business on Friday April 4, 1997,
unless either party terminates the amendment prior to its effectiveness. Under
the amended agreement, the exchange ratio will be reduced to 0.15 shares of IHS
Common Stock for each share of Coram common stock from the original exchange
ratio of 0.2111 shares of IHS Common Stock for each share of Coram common stock.
Based on the closing price of the IHS Common Stock on the last business day
prior to execution of the amendment agreement, IHS is paying $4.35 per share of
Coram Common Stock. IHS expects to issue approximately 7.11 million shares in
the merger, and to reserve approximately 2.35 million shares for issuance upon
exercise of outstanding Coram options and warrants. IHS expects to assume
approximately $375 million of Coram's indebtedness in connection with the
transaction. The amendment is subject to approval by both Boards of Directors,
and may be terminated by either party for any reason before the close of
business on Friday April 4, 1997.
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INTEGRATED HEALTH SERVICES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Allowance for doubtful accounts:
Balance at beginning of period ....... $ 4,592 $ 16,630 $ 18,128
Provisions for bad debts ............. 16,359 19,359 29,913
Acquired companies ................... 16,760 993 10,932
Accounts receivable written-off (net
of recoveries) ...................... (21,081) (18,854) (17,446)
---------- ------------ -------------
$ 16,630 $ 18,128 $ 41,527
========== ============ =============
</TABLE>
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTOR
The section entitled "Proposal No. 1--Elections of Directors" in the
Company's Proxy Statement for the Annual Meeting of stockholders is
incorporated herein by reference.
EXECUTIVE OFFICERS
See "Part I--Item 1. Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the Company's Proxy
Statement for the Annual Meeting of Stockholders is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Beneficial Ownership of Common Stock" in the Company's
Proxy Statement for the Annual Meeting of Stockholders is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Executive Compensation--Compensation Committee
Interlocks and Insider Participation" and "Certain Transactions" in the
Company's Proxy Statement for the Annual Meeting of Stockholders is incorporated
herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
(1) and (2) See "Index to Consolidated Financial Statements and Supplemental
Schedules" at Item 8 of this Annual Report on Form 10-K.
(3) The following exhibits are filed or incorporated by reference as part of
this Annual Report (Exhibit Nos. 10.60, 10.61, 10.62, 10.63, 10.64, 10.65,
10.66, 10.67, 10.68, 10.69, 10.70, 10.71, 10.72, 10.73, 10.74, 10.75, 10.76,
10.77, 10.78, 10.79, 10.80, 10.81, 10.82, 10.83 and 10.84 are management
contracts, compensatory plans or arrangements):
<TABLE>
<CAPTION>
<S> <C>
2.1 -- Assets Purchase Agreement dated as of June 20, 1996 by and among the Company, various
subsidiaries of the Company and Capstone Pharmacy Services, Inc., as amended. (28)
2.2 -- Stock Purchase Agreement dated as of August 25, 1996 by and among the Company, Signature and
Selling Stockholders of Signature. (29)
2.3. -- 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. (30)
2.4 -- 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. (30)
2.5 -- Agreement and Plan of Merger entered into as of October 19, 1996, among Coram Healthcare
Corporation, Integrated Health Services, Inc., and IHS Acquisition XIV, Inc. (31)
3.1 -- Third Restated Certificate of Incorporation, as amended. (1)
3.2 -- Amendment to the Third Restated Certificate of Incorporation, dated May 26, 1995. (2)
3.3 -- Certificate of Designation of Series A Junior Participating Cumulative Preferred Stock (3)
3.4 -- By-laws, as amended. (24)
4.1 -- Indenture, dated as of December 1, 1992, between Integrated Health Services, Inc. and Signet
Trust Company, as Trustee, relating to the Company's 6% Convertible Subordinated Debentures.
(5)
4.2 -- Form of 6% Debenture (included in 4.1). (5)
4.3 -- Indenture, dated as of December 15, 1993, from Integrated Health Services, Inc., as Issuer,
to The Bank of New York (as successor in interest) to NationsBank of Virginia, N.A., as
Trustee, relating to the Company's 5 3/4 % Convertible Senior Subordinated Debentures due
2001.(6)
4.4 -- Form of 5 3/4 % Debenture (included in 4.3) (6)
4.5 -- Registration Rights Agreement, dated as of December 17, 1993, between Integrated Health
Services, Inc. and Smith Barney Shearson Inc. relating to the Company's 5 3/4 % Convertible
Senior Subordinated Debentures due 2001. (6)
4.6. -- Supplemental Indenture dated as of September 15, 1994 between Integrated Health Services,
Inc. and The Bank of New York (as successor in interest) to NationsBank of Virginia N.A. (7)
4.7 -- Indenture, dated as of July 1, 1994, between Integrated Health Services, Inc. and Signet
Trust Company, Inc. relating to the Company's 10 3/4 % Senior Subordinated Notes due 2004 (8)
4.8 -- Form of Note (included in 4.7)(8)
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4.9 -- Amended and Restated Supplemental Indenture, dated as of May 15, 1995, from Integrated Health
Service, Inc. to Signet Trust Company, as trustee, relating to the Company's 9 5/8% Senior
Subordinated Notes due 2002 and 9 5/8 % Senior Subordinated Notes due 2002, Series A.(24)
4.10 -- Form of 9 5/8 % Senior Subordinated Notes (included in 4.9). (24)
4.11 -- Indenture, dated as of May 15, 1996 between the Company and Signet Trust Company, as Trustee.
(26)
4.12 -- Supplemental Indenture, dated as of June 13, 1996, to the Indenture dated as of July 1, 1994
between the Company and Signet Trust Company, as Trustee. (26)
4.13 -- Supplemental Indenture, dated as of June 13, 1996, to the Amended and Restated Supplemental
Indenture, dated as of May 15, 1995, between the Company and Signet Trust Company, as
Trustee. (26)
10.1 -- Letter dated March 28, 1991 from Integrated Health Services of Brentwood, Inc., Integrated
Health Services, Inc., Alpine Manor, Inc., Briarcliff Nursing Home, Inc., Cambridge Group,
Inc., Integrated Health Services of Riverbend, Inc., Integrated Health Services of Cliff
Manor, Inc., Integrated Health Group, Elm Creek of IHS, Inc., Spring Creek of IHS, Inc.,
Carriage-By-The-Lake of IHS, Inc. and Firelands of IHS, Inc. to Meditrust Mortgage
Investments, Inc. (9)
10.2 -- Loan and Security Agreement dated as of May 1, 1990 by and between Sovran Bank/Central South
and Integrated of Amarillo, Inc. (9)
10.3 -- Amended and Restated Promissory Note dated April 8, 1991 made by Integrated of Amarillo, Inc.
in favor of Sovran Bank/Tennessee in the aggregate principal amount of $300,000. (9)
10.4 -- Construction Loan Agreement dated November, 1990 by and between First National Bank of
Vicksburg and River City Limited Partnership. (9)
10.5 -- Guaranty and Suretyship Agreement, dated as of January 1, 1992, between Integrated Health
Services, Inc. and Nationsbank of Tennessee. (9)
10.6 -- Deed of Trust Note from Integrated Health Services at Alexandria, Inc. to Oakwood Living
Centers of Virginia, Inc., dated June 4, 1993. (10)
10.7 -- Loan Agreement dated as of December 30, 1993, by and among Integrated Health Services at
Colorado Springs, Inc. as Borrower, Integrated Health Services, Inc., as Guarantor, and Bell
Atlantic Tricon Leasing Corp. (6)
10.8 -- Promissory Note, dated December 30, 1993 made by Integrated Health Services at Colorado
Springs, Inc. in favor of Bell Atlantic Tricon Leasing Corp. (6)
10.9 -- Guaranty Agreement, dated as of December 30, 1993, made by Integrated Health Services, Inc.
in favor of Bell Atlantic Tricon Leasing Corp. (6)
10.10 -- Revolving Credit and Term Loan Agreement dated as of April 20, 1995 among Integrated Health
Services, Inc., Citicorp USA, Inc. and the lenders named herein. (23)
10.11 -- First Amendment to revolving credit and term loan agreement dated as of May 11, 1995 among
Integrated Health Services, Inc., and Citicorp USA, Inc., et al. (24)
10.12 -- Guaranty by Integrated Health Services, Inc. dated December 16, 1993 to IFIDA Healthcare
Group, Ltd., Morris Manor Associates, Plymouth House Health Care Center, Inc., Chateau
Associates, Broomall Associates, Lake Ariel Associates, Winthrop House Associates, Limited
Partnership, Mill Hill Associates, Limited Partnership, Hillcrest Associates and Kent
Associates, L.P. (13)
10.13 -- Loan Agreement, dated December 20, 1993, by and between Integrated Health Services at Central
Florida, Inc. and Southtrust Bank of Alabama, National Association. (6)
10.14 -- Mortgage and Security Agreement, dated December 20, 1993, between Integrated Health Services
of Central Florida, Inc. and Southtrust Bank of Alabama, National Association. (13)
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10.15 -- Guaranty Agreement, dated December 20, 1993, by Integrated Health Services, Inc. in favor of
Southtrust Bank of Alabama, National Association. (13)
10.16 -- Assignment and Pledge of Deposit Account, dated December 20, 1993, from Integrated Health
Services at Central Florida, Inc. in favor of Southtrust Bank of Alabama, National
Association. (13)
10.17 -- Lease Agreement dated as of July 11, 1985 (Cambridge Health Care Center, Indianapolis, IN)
by and between Cambridge Group of Indiana, Inc. and The Mediplex Group, Inc., as amended by
the First Amendment to Lease Agreement dated as of December 19, 1985 and Second Amendment to
Lease Agreement dated as of October 24, 1990. (9)
10.18 -- Lease Guaranty dated February 10, 1989 by Integrated Health Services, Inc. to and for the
benefit of Mediplex of Indiana, Inc. (9)
10.19 -- Facility Lease dated as of December 30, 1986 (Somerset Nursing Home, Bound Brook, NJ) by and
between Integrated Health Services, Inc. and Meditrust. (9)
10.20 -- Facility Lease and Security Agreement dated as of August 13, 1987 (Briarcliff Nursing Home,
Alabaster, AL) by and between Briarcliff Nursing Home, Inc. and Meditrust of Alabama, Inc.,
as amended by First Amendment of Lease dated December 30, 1987 and Second Amendment of Lease
Agreement dated March 23, 1989. (9)
10.21 -- Facility Lease and Security Agreement dated as of December 30, 1987 (Alpine Manor Nursing
Home, Erie, PA) by and between Alpine Manor, Inc. and Meditrust at Alpine, Inc., as amended
by the First Amendment of Lease Agreement dated as of March 23, 1989. (9)
10.22 -- Facility Lease and Security Agreement dated as of March 24, 1988 (Cliff Manor Nursing Home,
Riverside, Missouri) by and between Integrated Health Services of Cliff Manor, Inc. and
Meditrust of Missouri, Inc. (9)
10.23 -- Pledge Agreement dated March 24, 1988 by and between Integrated Health Services, Inc. and
Meditrust of Missouri, Inc., relating to Cliff Manor Nursing Home, Riverside, Missouri. (9)
10.24 -- Facility Lease and Security Agreement dated as of May 5, 1988 (Riverbend Nursing Home, Grand
Blanc, MI) by and between Integrated Health Services of Riverbend, Inc. and Meditrust of
Michigan, Inc. (9)
10.25 -- Amendment of Lease Agreement dated as of March 28, 1991 by and between Integrated Health
Services of Riverbend, Inc. and Meditrust of Michigan, Inc. (8)
10.26 -- Pledge Agreement dated May 5, 1988 by and between Integrated Health Services, Inc. and
Meditrust of Michigan, Inc. (9)
10.27 -- Amended and Restated Lease dated as of May 24, 1990 (Ballard Convalescent Center, Seattle,
WA) by and between Integrated Ballard, Inc. and Liberty Retirement Housing Limited
Partnership. (9)
10.28 -- Facility Lease and Security Agreement dated as of December 7, 1990 (Elm Creek Nursing
Center) by and between Elm Creek of IHS, Inc. and Meditrust of Ohio, Inc. Facility Lease and
Security Agreements dated as of December 7, 1990 by and between Meditrust of Ohio, Inc. and
each of Spring Creek of IHS, Inc., Carriage-By-The-Lake of IHS Inc. and Firelands of IHS,
Inc. have been omitted because such agreements are substantially identical to the
aforementioned agreement. (9)
10.29 -- Letter Agreement dated December 7, 1990 by and between Integrated Health Services, Inc., for
itself and certain subsidiaries and affiliates and Meditrust, for itself and its
subsidiaries that are parties to certain lease documents. (9)
10.30 -- Letter Agreement dated December 7, 1990 by and among Integrated Health Services, Inc.,
Integrated Health Services of Cliff Manor, Inc., Meditrust, Meditrust of Missouri, Inc. and
Meditrust of Ohio, Inc. (9)
10.31 -- Letter Agreement dated December 7, 1990 by and among Integrated Health Services, Inc., Elm
Creek of IHS, Inc., Spring Creek of IHS, Inc., Carriage-By-The-Lake of IHS, Inc., Firelands
of IHS, Inc. and Meditrust of Ohio, Inc. (9)
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10.32 -- Letter Agreement dated December 7, 1990 by and among Integrated Health Services, Inc.,
Alpine Manor, Inc., Briarcliff Nursing Home, Inc., Cambridge Group, Inc., Integrated Health
Services of Riverbend, Inc., Integrated Health Services of Cliff Manor, Inc., Integrated
Health Group and Meditrust. (9)
10.33 -- Letter Agreement dated March 28, 1991 by and among Integrated Health Services, Inc., Alpine
Manor, Inc., Briarcliff Nursing Home, Inc., Cambridge Group, Inc., Integrated Health
Services of Riverbend, Inc., Integrated Health Services of Cliff Manor, Inc., Integrated
Health Group, Elm Creek of IHS, Inc., Spring Creek of IHS, Inc., Carriage-By-The-Lake of
IHS, Inc., Firelands of IHS, Inc. and Meditrust. (9)
10.34 -- Letter of Amendment dated December 7, 1990 between Integrated Health Services, Inc. and Jack
S. Semelsberger, Sr. (9)
10.35 -- Letter dated December 7, 1990 among Integrated Health Services, Inc., Elm Creek of IHS,
Inc., Spring Creek of IHS, Inc., Carriage-By-The-Lake of IHS, Inc., Firelands of IHS, Inc.
and Meditrust of Ohio, Inc. (9)
10.36 -- Memorandum of Facility Lease and Security Agreement dated December 7, 1990 by and between
Meditrust of Ohio, Inc. and Elm Creek of IHS, Inc. Memorandum of Facility Lease and Security
Agreement dated December 7, 1990 by and between Meditrust of Ohio, Inc. and each of Spring
Creek of IHS, Inc., Firelands of IHS, Inc. and Carriage-By-The-Lake of IHS, Inc. have been
omitted because such agreements are substantially identical to the aforementioned agreement.
(9)
10.37 -- Letter dated December 11, 1990 between Integrated Health Services, Inc., Elm Creek of IHS,
Inc., Spring Creek of IHS, Inc., Carriage-By-The-Lake of IHS, Inc., Firelands of IHS, Inc.,
and Meditrust of Ohio, Inc. (9)
10.38 -- Letter Agreement dated December 17, 1991, among Integrated Health Services, Inc., certain of
its subsidiaries and Meditrust for itself and its subsidiaries that are parties to
agreements with Integrated Health Services and its subsidiaries. (15)
10.39 -- Purchase Option Agreement, dated December 31, 1991, by and among Darrel C. Watson, William
W. Webb and Darrel C. Watson as executors under the Last Will and Testament of Rachel A.
Brantley, deceased, and Integrated Health Services at Blue Ridge Manor, Inc. (15)
10.40 -- Purchase Option Agreement dated as of July 1, 1992, between Driftwood Health Care Managers,
Inc. and Integrated Health Services at Driftwood, Inc. (5)
10.41 -- Purchase Option Agreement, Amendment dated as of April 15, 1995, between Briarcliff Haven,
Inc. and Integrated Health Services at Briarcliff Haven, Inc. (24)
10.42 -- Amended and Restated Lease Agreement, dated as of October 1, 1992, by and among Skilled
Rehabilitative Services, Inc., Integrated Health Services of Green Briar, Inc. and
Integrated Health Services, Inc. (5)
10.43 -- Amended and Restated Purchase Option, dated as of October 1, 1992, by and between Integrated
Health Services of Green Briar, Inc. and Skilled Rehabilitative Services, Inc. (5)
10.44 -- Receivables Purchase Agreement, dated as of September 30, 1992, by and between Skilled
Rehabilitative Services, Inc. and Integrated Health Services of Green Briar, Inc. (5)
10.45 -- Promissory Note, dated October 1, 1992, made by Integrated Health Services of Green Briar,
Inc. to the order of Skilled Rehabilitative Services, Inc. (5)
10.46 -- Third Amendment to Facility Lease and Security Agreement, dated as of October 29, 1992, by
and between Briarcliff Nursing Home, Inc. and Meditrust of Alabama, Inc. (5)
10.47 -- Lease and Security Agreement, dated August 17, 1992, by and between Nationwide Health
Properties, Inc. and Integrated Health Services at Orange Park, Inc. (5)
10.48 -- Guaranty of Lease, dated as of August 17, 1992, by Integrated Health Services, Inc. in favor
of Nationwide Health Services, Inc. (5)
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10.49 -- Purchase Option Agreement, dated December 7, 1992, by and between Heritage/Highlands Health
Care Associates Limited Partnership and Integrated Health Services at Hanover House, Inc.
(5)
10.50 -- Letter dated February 18, 1994, to IFIDA Health Care Group, Ltd. from Integrated Health
Services, Inc. (13)
10.51 -- Facilities Agreement dated as of August 31, 1994 by and among Litchfield Asset Management
Corp., Integrated Health Services of Lester, Inc and Integrated Health Services, Inc. (16)
10.52 -- Lease dated as of August 31, 1994 between Litchfield Asset Management Corp. and Integrated
Health Services of Lester, Inc. As permitted by the instructions to Item 601 of Regulation
S-K, the 42 additional Lease Agreements between subsidiaries of Integrated Health Services,
Inc. and Litchfield Asset Management Corp. have been omitted because each such agreement is
substantially identical in all material respects to the aforementioned Lease Agreement (16)
10.53 -- Purchase Option Agreement dated as of August 31, 1994 between Litchfield Asset Management
Corp. and Integrated Health Services of Lester, Inc. As permitted by the instructions of
Item 601 of Regulation S-K, the 42 additional Purchase Option Agreements between
subsidiaries of Integrated Health Services, Inc. and Litchfield Asset Management Corp. have
been omitted because each such agreeement is substantially identical in all material
respects to the aforementioned Purchase Option. (16)
10.54 -- Guaranty dated as of August 31, 1994 by Integrated Health Services, Inc. for the benefit of
Litchfield Asset Management Corp. (16)
10.55 -- Warrant to Purchase Shares of Common Stock of Integrated Health Services, Inc. dated as of
August 31, 1994 issued to Litchfield Asset Management Corp. (16)
10.56 -- Participation Agreement dated as of August 31, 1994 between Litchfield Asset Management
Corp. and Integrated Health Services of Lester, Inc. (16)
10.57 -- Agreement of Limited Partnership of River City Limited Partnership dated December 6, 1989 by
and between Sydney House, Inc., Delco, Inc. and the limited partners named therein. (9)
10.58 -- Stock Issue Agreement dated May 18, 1988, as amended on December 21, 1990 by and among
Integrated Health Services, Inc., Robert N. Elkins, Timothy F. Nicholson and Skilled
Rehabilitation Services, Inc. (9)
10.59 -- Form of Indemnity Agreement. (9)
10.60 -- Integrated Health Services, Inc. Equity Incentive Plan, as amended. (17)
10.61 -- Integrated Health Services, Inc. 1990 Employee Stock Option Plan, as amended. (17)
10.62 -- Integrated Health Services, Inc. 1992 Stock Option Plan (17)
10.63 -- Integrated Health Services, Inc. Employee Stock Purchase Plan (17)
10.64 -- Senior Executives' Stock Option Plan. (18)
10.65 -- Cash Bonus Replacement Plan (22)
10.66 -- Integrated Health Services, Inc. Stock Option Plan for New Non-Employee Directors, as
amended. (27)
10.67 -- Integrated Health Services, Inc. Stock Option Compensation Plan for Non-Employee Directors,
as amended. (27)
10.68 -- Integrated Health Services, Inc. 1995 Stock Option Plan for Non-Employee Directors. (27)
10.69 -- Stock Option Agreement, dated as of November 27, 1995, by and between Integrated Health
Services, Inc. and John Silverman. (27)
10.70 -- Integrated Health Services, Inc. 1994 Stock Incentive Plan, as amended. (27)
10.71 -- 1996 Stock Incentive Plan of Integrated Health Services, Inc. (27)
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10.72 -- Integrated Health Services, Inc. Key Employee Supplemental Executive Retirement Plan ("Plan
A")(24)
10.73 -- Integrated Health Services, Inc. Supplemental Executive Retirement Plan ("Plan B")(24)
10.74 -- Integrated Health Services, Inc. Supplemental Deferred Compensation Plan ("Plan Z")(24)
10.75 -- Option Agreement dated January 25, 1988 by and between Timothy F. Nicholson and Integrated
Health Services, Inc. (9)
10.76 -- Employment Agreement dated January 1, 1994 between Integrated Health Services, Inc. and
Robert N. Elkins (25)
10.77 -- Amendment No. 1 to Employment Agreement dated as of January 1, 1995 between Integrated
Health Services, Inc. and Robert N. Elkins (25)
10.78 -- Employment Agreement dated as of January 1, 1994 between Integrated Health Services, Inc.
and Lawrence P. Cirka (25)
10.79 -- Amendment to Employment Agreement dated as of January 1, 1995 between Integrated Health
Services, Inc. and Lawrence P. Cirka (25)
10.80 -- Employment Agreement dated as of October 1, 1996 between Integrated Health Services, Inc.
and C. Christian Winkle
10.81 -- Employment Agreement dated June 5, 1995 between Asia Care, Inc. and John L. Silverman (22)
10.82 -- Amendment to Employment Agreement dated as of April 1, 1996 between Asia Care and John L.
Silverman (25)
10.83 -- Employment Agreement dated as of May 1, 1995 between Integrated Health Services, Inc. and
Virginia Dollard.
10.84 -- Employment Agreement dated as of June 1, 1994 between Integrated Health Services, Inc. and
Anthony Masso.
10.85 -- Consultation Agreement, dated as of February 1, 1992, between Integrated Health Services,
Inc. and Park Regency Ltd. I. (15)
10.86 -- Pledge Agreement and Amendment No 1 to Agreement for Consulting and Management Services and
Personal Services Agreement, dated January 4, 1993, among the Company, Health Care
Consulting, Inc., Health Care Systems, Inc., Grantly Payne, and Scott Robertson. (19)
10.87 -- Revolving Credit and Security Agreements, dated as of December 30, 1992, between Integrated
Health Services, Inc. and Morgan Hill Health Care Investors, Inc. (19)
10.88 -- Purchase Option, dated as of December 1, 1992, between Integrated Health Services at Denton,
Inc. and Wesleyan Home Care, Inc. (19)
10.89 -- Purchase Option and Right of First Refusal Agreement, dated January 20, 1993, among
Integrated Health Services of Missouri, Inc., Dominic F. Tutera, Joseph C. Tutera, and
Michael J. Tutera. (19)
10.90 -- Purchase Option and Right of First Refusal Agreement dated January 20, 1993, between
Integrated Health Services of Missouri, Inc. and Dominic F. Tutera. (19)
10.91 -- Revolving Credit and Security Agreement dated January 20, 1993, between Integrated Health
Services of Missouri, Inc. and Cenill, Inc. (19)
10.92 -- Purchase Option Agreement, dated December 28, 1992, between Briarcliff Nursing Home, Inc.
and Meditrust of Alabama, Inc. (19)
10.93 -- Warrant to Purchase Shares of Common Stock dated July 1, 1992 issued to Driftwood Health
Care Managers, Inc. (19)
10.94 -- Guaranty dated July 1, 1992 made by Integrated Health Services, Inc. (19)
10.95 -- Guaranty dated September 15, 1992 made by Integrated Health Services, Inc. (19)
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10.96 -- (i) Aircraft Purchase Agreement between Steve Allen Aircraft Sales, Inc. and Integrated
Health Services, Inc., dated as of May 27, 1993, and (ii) Bill of Sale between Integrated
Health Services, Inc. and Integrated Health Services of Skyview, Inc., dated June 30, 1993.
(10)
10.96 -- Assignment Agreement dated May 28, 1993 among Square D Company, Integrated Health Services,
Inc., Manekin at Owings Mills I Limited Partnership, and McDonough School, Inc. (10)
10.98 -- Assignment dated June 1, 1993 among Integrated Health Services, Inc., Rouse-Teachers
Properties, Inc., Rouse Office Management, Inc. and Square D Company. (10)
10.99 -- Consulting Agreement dated as of April 26, 1993 between Integrated Health Services, Inc. and
Timothy F. Nicholson. (11)
10.100 -- Loan and Security Agreement, dated July 7, 1993, among Health Care Industries Corporation,
Integrated Health Services, Inc., and Jack Semelsberger, Sr. (20)
10.101 -- Stock Subscription Agreement, dated December 16, 1993, by and between Integrated Health
Services, Inc. and Plymouth House Health Care Center, Inc. As permitted by the Instructions
to Item 601 of Regulation S-K, the Stock Subscription Agreements entered into by Integrated
Health Services, Inc. with Mill Hill Associates, Limited Partnership, Hillcrest Associates,
Broomall Associates, Lake Ariel Associates, Ltd., Winthrop House Associates, Limited
Partnership, Chateau Associates, and Kent Associates have been omitted because each such
agreement is substantially identical in all material respects to the aforementioned stock
subscription agreement. (13)
10.102 -- Amended and Restated Purchase and Sale Agreement dated as of October 27, 1993 by and among
Trizec Properties Inc., Triangle Realty Investments, Inc. and Integrated Health Services,
Inc. (21)
10.103 -- Purchase Option Agreement, made and entered into January 2, 1994 by and among James M.
Dobbins, Sr., James M. Dobbins, Jr., Bryan D. Burr, George Lytal, Mary Lou Glantz, Crestwood
Hospitals, Inc., West Coast Cambridge, Inc. and Integrated Health Services, Inc. (6)
10.104 -- Partnership Purchase Option Agreements, made and entered to January 1, 1994, by and among
James M. Dobbins, Sr., James M. Dobbins, Jr., Bryan D. Burr and West Coast Cambridge, Inc.
(6)
10.105 -- Facilities Credit Agreement, dated January 1, 1994, between Crestwood Hospitals, Inc. and
West Coast Cambridge, Inc. (6)
10.106 -- Management Agreement, made and entered into (and effective as of) January 1, 1994, between
and among Crestwood Hospitals, Inc., West Coast Cambridge, Inc., James M. Dobbins, Sr.,
James M. Dobbins, Jr., and Bryan D. Burr. (6)
10.107 -- Loan Agreement, dated December 16, 1993, between Mill Hill Associates, Limited Partnership
and Integrated Health Services at Eastern Massachusetts, Inc. As permitted by the
Instructions to Item 601 of Regulation S-K, seven additional Loan Agreements entered into
subsidiaries of the Registrant have been omitted because each such agreement is
substantially identical to the aforementioned loan agreement. (6)
10.108 -- Purchase and Sale Agreement, effective as of September 30, 1993, by and between Vero Beach
Associates Limited Partnership, Fort Pierce Associates Limited Partnership and Integrated
Health Services at Central Florida, Inc. (6)
10.109 -- Stock Purchase Agreement, dated as of March 19, 1996 among Integrated Health Services Inc.
and James Hough, Summitt Ventures III, L.P., Summitt Investors II, L.P., Frank Foster, Jamie
Ellertson and Rehab Management Systems, Inc. (24)
10.110 -- Purchase Option Agreement, dated December 16, 1993, between Mill Hill Associates, Limited
Partnership and Integrated Health Services at Eastern Massachusetts, Inc. As permitted by
the Instructions to Item 601 of Regulation S-K, seven additional Purchase Option Agreements
entered into by subsidiaries of the Registrant have been omitted because each such agreement
is substantially identical in all material aspects to the aforementioned purchase option
agreement. (6)
102
<PAGE>
10.111 -- Investment Agreement for Speciality Care PLC dated July 26, 1995 (24)
10.112 -- Purchase Agreement, dated May 23, 1996, among the Company, Smith Barney, Inc., Donaldson,
Lufkin and Jenrette Securities Corporation, and Citicorp Securities, Inc. (26)
10.113 -- Registration Rights Agreement, dated as of May 23, 1996 among the Company, Smith Barney,
Inc., Donaldson, Lufkin and Jenrette Securities Corporation, and Citicorp Securities, Inc.
(26)
10.113 -- Agreement, dated as of October 19, 1996, among Integrated Health Services, Inc. and Coram
Funding, Inc. (31)
10.121 -- Agreement, dated as of October 20, 1996, by and between MedPartners, Inc. and Integrated
Health Services, Inc. (31)
11 -- Computation of Earnings Per Share
21 -- Subsidiaries of Registrant.
23.1 -- Consent of KPMG Peat Marwick LLP.
27 -- Financial Data Schedule.
</TABLE>
- -------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-3, Nos 33-77754, effective June 29, 1994.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-4, No. 33-94130, effective September 15, 1995.
(3) Incorporated by reference to the Company's Current Report on Form 8-K dated
September 27, 1995.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 33-54458, effective December 9, 1992.
(6) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 33-76322, effective June 29, 1994.
(7) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 33-81378, effective September 21, 1994.
(8) Incorporated by reference to the Company's Quarterly Report on From 10-Q
for the period ended June 30, 1994.
(9) Incorporated by reference to the Company's Registration Statement on Form
S-1, No. 33-39339, effective April 25, 1991.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1993.
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1993.
(12) Incorporated by reference to the Company's Current Report on Form 8-K/A,
dated December 1, 1993.
(13) Incorporated by reference the Company's Annual Report on Form 10-K for the
year ended December 31, 1993.
(14) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1994.
(15) Incorporated by reference to the Company's Registration Statement on Form
S-1, No. 33-46134, effective April 1, 1992.
(16) Incorporated by reference to the Company's Current Report on Form 8-K dated
August 31, 1994.
(17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1992.
(18) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1994.
(19) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.
(20) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1993.
(21) Incorporated by reference to the Company's Current Report on Form 8-K,
dated December 1, 1993.
(22) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1995.
(23) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1995.
(24) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(25) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1996.
(26) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1996.
103
<PAGE>
(27) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1996.
(28) Incorporated by reference to the Company's Current Report on Form 8-K dated
as of July 30, 1996.
(29) Incorporated by reference to the Company's Current Report on Form 8-K dated
as of September, 25, 1996.
(30) Incorporated by reference to the Company's Current Report on Form 8-K dated
as of October 17, 1996.
(31) Incorporated by reference to the Company's Current Report on Form 8-K dated
as of October 19, 1996.
(b) Reports on Form 8-K
1. Current Report on Form 8-K, dated October 17, 1996, as amended, reporting
the acquisition of First American Health Care of Georgia, Inc., including (a)
historical financial statements of First American (i) as of December 31, 1994
and 1995 and for each of the years in the three year period ended December 31,
1995, including the related notes thereto, audited by KPMG Peat Marwick LLP, and
(ii) unaudited financial statements of First American as of September 30, 1996
and for the nine months ended September 30, 1995 and 1996 and (b) pro forma
financial statements for the Company at September 30, 1996 and for the year
ended December 31, 1995 and the nine months ended September 30, 1996, giving
effect to the acquisition of First American and certain other acquisitions and
divestitures.
2. Current Report on Form 8-K, dated October 19, 1996, reporting the proposed
acquisition of Coram Healthcare Corporation.
(c) Exhibits
See (a) (3) above.
(d) Financial Statement Schedules.
See "Index to Consolidated Financial Statements and Supplemental Schedule" at
Item 8 of this Annual Report on Form 10-K. Schedules not included herein are
omitted because they are not applicable or the required information appears in
the Consolidated Financial Statements or notes thereto.
104
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NUMBER
- ----------- ---------------------------------------- -----------
<S> <C> <C>
10.80 -- C. Christian Winkle Employment Agreement
10.83 -- Virginia M. Dollard Employment Agreement
10.87 -- Anthony R. Masso Employment Agreement
21.00 -- Subsidiaries of Registrant
23.1 -- Consent of KPMG Peat Marwick LLP.
27.00 -- Financial Data Schedule
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
INTEGRATED HEALTH SERVICES, INC.
(Registrant)
By: /s/ Robert N. Elkins
Robert N. Elkins
Chairman of the Board
and Chief Executive Officer
March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------- ---------------------------------------- -----------------
<S> <C> <C>
/s/ Robert N. Elkins Chairman of The Board and Chief
- ----------------------------- Executive Officer (Principal Executive
Robert N. Elkins Officer) March 28, 1997
/s/ Lawrence P. Cirka President, Chief Operating Officer and
- -----------------------------
Lawrence P. Cirka Director March 28, 1997
/s/ E. Mac Crawford
- -----------------------------
E. Mac Crawford Director March 28, 1997
/s/ Kenneth M. Mazik
- -----------------------------
Kenneth M. Mazik Director March 28, 1997
/s/ Robert A. Mitchell
- -----------------------------
Robert A. Mitchell Director March 28, 1997
/s/ Charles W. Newhall III
- -----------------------------
Charles W. Newhall III Director March 28, 1997
/s/ Timothy F. Nicholson
- -----------------------------
Timothy F. Nicholson Director March 28, 1997
/s/ John L. Silverman
- -----------------------------
John L. Silverman Director March 28, 1997
<PAGE>
SIGNATURE TITLE DATE
- ----------------------------- ---------------------------------------- -----------------
/s/ George H. Strong
- -----------------------------
George H. Strong Director March 28, 1997
/s/ W. Bradley Bennett Executive Vice President -- Chief
- ----------------------------- Accounting Officer (Principal
W. Bradley Bennett Accounting Officer) March 28, 1997
/s/ Eleanor C. Harding Executive Vice President -- Finance
- ----------------------------- (Principal Financial Officer) March 28, 1997
Eleanor C. Harding
</TABLE>
EMPLOYMENT AGREEMENT
--------------------
This AGREEMENT is made effective as of this 1st day October, 1996 (the
"Effective Date"), by and between INTEGRATED HEALTH SERVICES, INC., a Delaware
corporation (hereinafter referred to as the "Company"), and C. CHRISTIAN WINKLE
(hereinafter referred to as the "Executive").
W I T N E S S E T H:
--------------------
WHEREAS, the Company wishes to employ the Executive and to ensure the
continued services of the Executive for the Term (as hereinafter defined), and
the Executive desires to be employed by the Company for such Term, upon the
terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing premise and the
mutual agreements herein contained, the parties, intending to be legally bound,
hereby agree as follows:
ARTICLE I
EMPLOYMENT RELATIONSHIP
-----------------------
1.1 Employment. The Company hereby employs the Executive in the
position of Executive Vice President - Operations of the Company, with such
responsibilities as may be assigned to Executive from time to time by the
Company's Chief Executive Officer and/or President. Executive shall report to
and be responsible to the individual who is Chief Executive Officer and/or
President of the Company for the period hereinafter set forth, and the Executive
hereby accepts such employment.
During the Term, the Executive agrees to devote all such working time
as is reasonably required for the discharge of his duties hereunder and to
perform such services faithfully and to the
-1-
<PAGE>
best of his ability. Notwithstanding the foregoing, nothing in this Agreement
shall preclude the Executive from (a) engaging in charitable and community
affairs, so long as they are consistent with his duties and responsibilities
under this Agreement, (b) managing his personal investments, and (c) serving on
the boards of directors of other companies with the consent of the President or
the individual to whom the Executive reports.
1.2 TERM. The term of employment under this Agreement shall begin on
the Effective Date, and shall end on that date which is three (3) years
following the Effective Date, unless sooner terminated pursuant to the terms of
this Agreement. The obligations of the Employee under Paragraph 4.4 shall only
be enforceable by Employer in the event (a) Employee terminates this Agreement
either for Good Reason as defined below or without Good Reason, as set forth
below, (b) the Employer terminates this Agreement for cause, as defined below,
and the Employer pays one-half of the Noncompetition Severance Pay as set forth
below, (c) this Agreement terminates on its natural expiration date and the
Employer pays Noncompetition Severance Pay as set forth below, or (d) Employer
terminates this Agreement without cause and pays Noncompetition Severance Pay as
set forth below.
ARTICLE II
COMPENSATION
------------
2.1 Salary. The Executive shall receive a base salary at an initial
rate of Four Hundred Thousand Dollars ($400,000) per year (the "Salary"),
payable in substantially equal installments in accordance with the pay policy
established by the Company from time to time, but not less frequently than
monthly. On each Anniversary Date, the Salary shall be increased or decreased
(but not below Four Hundred Thousand Dollars ($400,000)) by a percentage which
is equal to the percentage
-2-
<PAGE>
increase or decrease, as applicable, in the "Consumer Price Index for All Urban
Consumers" published by the United States Department of Labor's Bureau of Labor
Statistics for the then most recently ended twelve (12) month period as of the
date of such adjustment, and increased by such additional amounts as may be
determined at the discretion of the Chief Executive Officer or the President.
Once adjusted, such adjusted amount shall constitute Salary for purposes of this
Agreement.
2.2 Bonuses.
-------
If the Company's earnings per share equal or exceed the
earnings goals set by the Board (the "Target"), then no more than ten (10) days
following the date the Company publicly announces its earnings, the Company
shall pay the Executive a discretionary bonus ("Bonus") based on the Executive's
performance, benefit to the Company at large, and the extent to which the
Company equals or exceeds the Target. Such Bonus shall be discretionary except
that if the Company's earnings per share equal or exceed the Target then the
Executive shall receive a bonus of not less than one hundred percent (100%) of
his salary.
2.3 Executive Benefits and Perquisites. During the Term, the Company
shall provide and/or pay for employee benefits and perquisites that are, in the
aggregate, no less favorable than the employee benefits and perquisites that the
Executive enjoys as of the Effective Date, as increased from time to time,
including, without limitation:
(a) comprehensive individual health insurance, including
dependent coverage;
(b) life insurance coverage in the amount of Five Hundred
Thousand Dollars ($500,000) any proceeds of which shall be payable to
the Executive's designated beneficiary or his estate;
(c) three (3) weeks paid vacation annually;
-3-
<PAGE>
(d) disability insurance coverage in a monthly benefit amount
equal to the sum of 100% of Executive's Salary plus "Bonus Amount" (as
defined in Section 3.4(a));
(e) an automobile allowance and automobile insurance coverage
in the total amount of One Thousand Dollars ($1,000) per month, and as
increased from time to time.
Once increased, the level of benefits and perquisites shall not be
decreased without the Executive's consent.
2.4 Equity-based Compensation. During the Term, the Compensation
Committee, in its complete discretion, may select the Executive to participate
in programs or enter into agreements which provide for the grant of certain
equity-based compensation or rights to the Executive.
ARTICLE III
TERMINATION AND SEVERANCE
-------------------------
3.1 Termination; Nonrenewal. The Company shall have the right to
terminate the Executive's employment, and the Executive shall have the right to
resign his employment with the Company, at any time during the Term, for any
reason or for no stated reason, upon no less than ninety (90) days prior written
notice (or such shorter notice to the extent provided for herein). Upon the
Executive's termination without "Cause" (as defined in Section 3.2) or
resignation for "Good Reason" (as defined in Section 3.3) or upon the expiration
of the Term following the Company's election not to renew this Agreement (in
accordance with Section 1.3), the Executive shall be entitled to severance as
set forth in Section 3.4. Upon the expiry of the term hereof, the Executive
shall be entitled to severance as set forth in Section 3.4. Upon the Executive's
termination for Cause or resignation without Good Reason, the Executive shall
not be entitled to severance. If the Executive's
-4-
<PAGE>
employment is terminated because of a Permanent Disability (as defined in
Section 3.5), the Executive shall receive the benefits and payments described in
Section 3.5.
3.2 Termination For Cause.
---------------------
(a) The Company may terminate this Agreement for Cause following a
determination by the Chief Executive Officer that Cause exists. For purposes of
this Agreement, Cause shall mean any or all of the following:
(i) the Executive materially fails to perform his
duties hereunder;
(ii) a material breach by the Executive of his
covenants under Sections 4.1 or 4.2;
(iii) Executive is convicted of any felony.
(iv) Executive commits theft, larceny or embezzlement
of Company's tangible or intangible property.
(b) Notwithstanding anything in Section 3.2(a) to the
contrary, a termination shall not be for Cause unless (i) the party to whom the
Executive reports notifies the Executive, in writing, of his intention to
terminate the Executive for Cause (which notice shall set forth the conduct
alleged to constitute Cause) (the "Cause Notice"); and (ii) the Executive does
not cure his conduct (to the reasonable satisfaction of the party to whom the
Executive reports), within sixty (60) days after the receipt of the Cause
Notice.
3.3 Termination for Good Reason. (a) The Executive may terminate this
Agreement for Good Reason, provided he gives the Company prior written notice
that Good Reason exists (the "Good Reason Notice"). For purposes of this
Agreement, Good Reason shall mean one or both of the following:
-5-
<PAGE>
(1) a material breach of the Agreement by the Company
(including, without limitation, one or more of the following without
the Executive's prior written consent:
(i) a material diminution of the Executive's
responsibilities, title, authority or status,
(ii) the failure of the Company to pay the Executive
amounts when due under this Agreement,
(iii) the Executive's removal or dismissal from, the
position of Executive Vice President - Field Operations which
is not concurrent with a promotion in title and/or position,
and
(iv) a reduction in Salary or a material reduction in
benefits (other than a reduction in Salary permitted by
Section 2.1).
(2) the resignation by the Executive within one (1) year of a
"Change of Control," as defined in Section 3.3(b).
Notwithstanding the foregoing, a termination on account of a reason described in
paragraph (1), shall be deemed not to be for Good Reason unless the Executive
(i) gives the Company the opportunity to cure the condition that purports to be
Good Reason, and (ii) the Company fails to cure that condition within sixty (60)
days after the receipt of the Good Reason Notice (or, with respect to the
failure to make any payment when due to the Executive within ten (10) days after
the receipt of such notice).
Notwithstanding any of the foregoing, if there is a "Change of Control"
as defined hereafter, the Company shall cause the Executive's outstanding
options which are not immediately exercisable to vest and become immediately
exercisable and the restrictions on equity held by the Executive which are
scheduled to lapse solely through the passage of time to lapse (such events
collectively referred to as "Acceleration of Equity Rights").
-6-
<PAGE>
(b) For purposes of this Agreement, a "Change of Control"
shall be deemed to occur if (i) there shall be consummated (x) any
consolidation, reorganization or merger of the Company in which the Company is
not the continuing or surviving corporation or pursuant to which shares of the
Company's common stock would be converted into cash, securities or other
property, other than a merger of the Company in which the holders of the
Company's common stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger, or (y) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all, or substantially all,
of the assets of the Company, or (ii) the stockholders of the Company shall
approve any plan or proposal for liquidation or dissolution of the Company, or
(iii) any person (as such term is used in Sections 13(d) and 14(d)(2) of the
Exchange Act, including any "group" (as defined in Section 13(d)(3) of the
Exchange Act) (other than the Executive or any group controlled by the
Executive)) shall become the beneficial owner (within the meaning of Rule 13d-3
under the Exchange Act) of twenty percent (20%) or more of the Company's
outstanding common stock (other than pursuant to a plan or arrangement entered
into by such person and the Company) and such person discloses its intent to
effect a change in the control or ownership of the Company in any filing with
the Securities and Exchange Commission, or (iv) within any twenty-four (24)
month period beginning on or after the Effective Date, the persons who were
directors of the Company immediately before the beginning of such period (the
"Incumbent Directors") shall cease (for any reason other than death, disability
or retirement) to constitute at least a majority of the Board or the board of
directors of any successor to the Company, provided that, any director who was
not a director as of the Effective Date shall be deemed to be an Incumbent
Director if such director was elected to the Board by, or on the recommendation
of or with the approval of,
-7-
<PAGE>
at least two-thirds of the directors who then qualified as Incumbent Directors
either actually or by prior operation of this Section 3.3(b)(iv) unless such
election, recommendation or approval was the result of any actual or threatened
election contest of the type contemplated by Regulation 14a-11 promulgated under
the Exchange Act or any successor provision.
3.4 Severance. (a) If the Executive resigns for Good Reason, or is
terminated without Cause or at the end of the term hereof, or if the Company
gives the Executive notice of its intention not to extend the Term, in
accordance with Article II, the Company shall cause an immediate Acceleration of
Equity Rights in favor of the Executive. In addition, the Company shall pay the
Executive an amount (the "Severance Amount") equal to two and one-half (2.5)
times the sum of (1) his Salary in the year of Termination or the immediately
preceding year, whichever is greater; and (2) the Bonus Amount which shall be
the greater of i) the Executive's Bonus in the year of termination or in the
immediately preceding calendar year, whichever is greater. Such Severance Amount
shall be payable in cash as follows:
(x) no later than 10 days after the effective date of
Executive's termination, the Company shall pay the Executive one-half
(1/2) of the Severance Amount in a lump sum;
(y) commencing on the first day of the month following the
effective date of Executive's termination and on the first day of the
month thereafter for a period of twenty-four (24) months, the Company
shall pay the remaining one-half (1/2) of the Severance Amount to the
Executive in equal monthly installments;
provided, however, that if the Executive's employment terminates other than for
Cause, within one (1) year following a Change of Control, the Company shall, in
lieu of the making the payments
-8-
<PAGE>
described in (x) and (y), pay the Executive the Severance Amount in one lump sum
cash payment within ten (10) days after the effective date of Executive's
termination.
In addition, for a period of thirty (30) months following the effective
date of the Executive's termination, the Company shall provide continued
employee benefits and coverage for the Executive and his dependents of the type
and at a level of coverage comparable to the coverage in effect at the time of
termination or the preceding year, whichever is greater ("Continued Benefits")
including, but not limited to those benefits and perquisites set forth in
Section 2.3 hereof. Such allowances, benefits and coverages, etc., to be not
less than those in effect on the Effective Date of Executive's termination or
the preceding year, whichever is greater. Notwithstanding the foregoing, if any
of the Continued Benefits or other benefits to be provided hereunder have been
decreased or otherwise negatively affected within twelve (12) months prior to
the effective date of the Executive's termination, the reference for measuring
such benefit shall be the date prior to such reduction rather than the date of
such termination.
3.5 Termination for Disability. (a) The Company may terminate the
Executive following a determination by the Chief Executive Officer that the
Executive has a Permanent Disability; provided, however, that no such
termination shall be effective (i) prior to the expiration of the six (6) month
period following the date the Executive first incurred the condition which is
the basis for the Permanent Disability or (ii) if the Executive begins to
substantially perform the significant aspects of his regular duties prior to the
proposed effective date of such termination. For purposes of this Agreement,
"Permanent Disability" shall mean the Executive's inability, by reason of any
physical or mental impairment, to substantially perform the significant aspects
of his regular duties, as contemplated by this Agreement, which inability is
reasonably contemplated to continue for at least
-9-
<PAGE>
one (1) year from its incurrence and at least ninety (90) days from the
effective date of the Executive's termination. Any question as to the existence,
extent, or potentiality of the Executive's Permanent Disability shall be
determined by a qualified independent physician selected by the Executive (or,
if the Executive is unable to make such selection, by an adult member of the
Executive's immediate family) and reasonably acceptable to the Company.
(b) If the Executive is terminated because of his Permanent
Disability, the Company shall provide for the Acceleration of Equity Rights and,
the Company shall, (i) for a period of twenty-four (24) months following the
effective date of such termination (the "Disability Period") pay the Executive
one hundred (100%) percent of his Salary plus Bonus Amount, offset by the
amount, if any, paid to the Executive under the salary replacement portion of
disability benefits paid under a disability plan or policy paid for by the
Company; and (ii) provide him with Continued Benefits during the Disability
Period.
3.6 Death or Disability After Termination. Should the Executive die or
become disabled before receipt of any or all payments to which the Executive is
entitled to under Section 3.4 (or in the case of the Executive's death following
his termination on account of Permanent Disability, before receipt of all
payments under Section 3.5) then the balance of the payments to which the
Executive is entitled shall continue to be paid to the Executive (in the case of
his disability) or to the executors or administrators of the Executive's estate
(in the event of the Executive's death); provided, however, that the Company
may, at any time within its discretion, accelerate any payments and pay the
Executive or his estate the present value of such payments in a lump sum cash
payment. For purposes of determining the present value under this Section 3.6,
the interest rate shall be the prime rate of Citibank, N.A.
-10-
<PAGE>
ARTICLE IV
COVENANTS OF THE EXECUTIVE
--------------------------
4.1 Confidential Information. In connection with his employment at the
Company, the Executive will have access to confidential information consisting
of some or all of the following categories of information:
(a) Financial Information, including but not limited to
information relating to the Company's earnings, assets, debts, prices,
pricing structure, volume of purchases or sales or other financial data
whether related to the Company or generally, or to particular products,
services, geographic areas, or time periods;
(b) Supply and Service Information, including but not limited
to information relating to goods and services, suppliers' names or
addresses, terms of supply or service contracts or of particular
transactions, or related information about potential suppliers to the
extent that such information is not generally known to the public, and
the extent that the combination of suppliers or use of a particular
supplier, though generally known or available, yields advantages to the
Company details of which are not generally known;
(c) Marketing Information, including but not limited to
information relating to details about ongoing or proposed marketing
programs or agreements by or on behalf of the Company, sales forecasts,
advertising formats and methods or results of marketing efforts or
information about impending transactions;
(d) Personnel Information, including but not limited to
information relating to employees' personnel or medical histories,
compensation or other terms of employment, actual or proposed
promotions, hirings, resignation, disciplinary actions, terminations or
reasons therefor, training methods, performance, or other employee
information; and
(e) Customer Information, including but not limited to
information relating to past, existing or prospective customers' names,
addresses or backgrounds, records of agreements and prices, proposals
or agreements between customers and the Company, status of customers'
accounts or credit, or related information about actual or prospective
customers as well as customer lists.
All of the foregoing are hereinafter referred to as "Trade Secrets."
The Company and the Executive consider their relation one of confidence with
respect to Trade Secrets. Therefore, during
-11-
<PAGE>
and after the employment by the Company, regardless of the reasons that such
employment ends, the Executive agrees:
(aa) To hold all Trade Secrets in confidence and not
discuss, communicate or transmit to others, or make any
unauthorized copy of or use the Trade Secrets in any capacity,
position or business except as it directly relates to the
Executive's employment by the Company;
(bb) To use the Trade Secrets only in furtherance of
proper employment related reasons of the Company to further
the interests of the Company;
(cc) To take all reasonable actions that the Company
deems necessary or appropriate, to prevent unauthorized use or
disclosure of or to protect the Company's interest in the
Trade Secrets; and
(dd) That any of the Trade Secrets, whether prepared
by the Executive or which may come into the Executive's
possession during the Executive's employment hereunder, are
and remain the property of the Company and its affiliates, and
all such Trade Secrets, including copies thereof, together
with all other property belonging to the Company or its
affiliates, or used in their respective businesses, shall be
delivered to or left with the Company.
This Agreement does not apply to (i) information that by means other
than the Executive's deliberate or inadvertent disclosure becomes known to the
public; (ii) disclosure compelled by judicial or administrative proceedings
provided the Executive affords the Company the opportunity to obtain assurance
that compelled disclosures will receive confidential treatment; and (iii)
information independently developed by the Executive, the development of which
was not a breach of this Agreement.
4.2 Non-Competition. (a) During the Term and for a period of
twenty-four (24) months thereafter (or in the event of the termination of
Executive's employment under any provision herein within one (1) year after a
Change of Control, for a period of one (1) year thereafter), the Executive
agrees that he will not, without the express written consent of the Company, for
the Executive or on
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behalf of any other person, firm, entity or other enterprise (i) directly or
indirectly solicit for employment or recommend to any subsequent employer of the
Executive the solicitation for employment of any person who, at the time of such
solicitation is employed by Company or any affiliate thereof, (ii) directly or
indirectly solicit, divert, or endeavor to entice away any customer of the
Company or any affiliate thereof, or otherwise engage in any activity intended
to terminate, disrupt, or interfere with the Company's or any affiliate's
relationship with a customer, supplier, lessor or other person, or (iii) be
employed by, be a director, officer or manager of, act as a consultant for, be a
partner in, have a proprietary interest in, give advice to, loan money to or
otherwise associate with, any person, enterprise, partnership, association,
corporation, joint venture or other entity which is directly or indirectly in
the business of owning, operating or managing any (1) healthcare facility or
business, including but not limited to, any subacute healthcare facility,
rehabilitation hospital, nursing home, or home health care business, or (2) any
other business similar to a business which is or was owned, operated or managed
by the Company during the Term or during the period that this Section 4.2 shall
apply to the Executive, unless such business comprises (and has during the
preceding twelve (12) month period comprised) less than five percent (5%) of the
Company's gross revenues; and, in the case of any facility or business
described, in either case, which competes with any such type of facility or
business then operated by the Company or any of its subsidiaries. This provision
shall not be construed to prohibit the Executive from owning up to 10% of the
outstanding voting shares of the equity securities of any company whose common
stock is listed for trading on any national securities exchange or on the NASDAQ
System or serving as a director of any such company. The provisions of this
Section 4.2 shall only apply to businesses and operations located in, or
otherwise conducted in, the United States.
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4.3 Remedies For Breach of Article IV. In the event that the Executive
materially violates the covenants contained in this Article IV, after his
termination of employment under circumstances which entitle him to payments or
benefits under Section 3.4, the Company may, at its election, upon ten (10)
days' prior notice, terminate the Severance Period and cease providing the
Executive with such payments and benefits. In addition, the Executive
acknowledges and agrees that the amount of damages in the event of the
Executive's breach of this Article IV will be difficult, if not impossible, to
ascertain. The Executive therefore agrees that the Company, in addition to, and
without limiting any other remedy or right it may have, shall have the right to
an injunction enjoining any breach of the covenants made by the Executive in
this Article IV.
ARTICLE V
AMENDMENT AND ASSIGNMENT
------------------------
5.1 Right of the Executive to Assign. The Executive may not assign,
transfer, pledge or hypothecate or otherwise transfer his rights, obligations,
interests and benefits under this Agreement and any attempt to do so shall be
null and void.
5.2 Right of Company to Assign. This Agreement shall be assignable and
transferable by the Company and any such assignment or transfer shall inure to
the benefit of and be binding upon the Executive, the Executive's heirs and
personal representatives, and the Company and its successors and assigns. The
Executive agrees to execute all documents necessary to ratify and effectuate
such assignment. An assignment of this Agreement by the Company shall not
release the Company from its monetary obligations under this Agreement.
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5.3 Amendment/Waiver. No change or modification of this Agreement shall
be valid unless it is in writing and signed by both parties hereto. No waiver of
any provisions of this Agreement shall be valid unless in writing and signed by
the person or party to be charged.
ARTICLE VI
GENERAL
-------
6.1 Governing Law. This Agreement shall be subject to and governed by
the laws of the State of Maryland.
6.2 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the Company and the Executive and their respective heirs, legal
representatives, executors, administrators, successors and permitted assigns.
6.3 Entire Agreement. This Agreement constitutes the entire agreement
between the parties and supersedes the Prior Agreement and all other prior
agreements, either oral or written, between the parties hereto; provided,
however, that this Agreement does not supersede any agreements pertaining to
stock options which have been granted as of the Effective Date, except to the
extent that any such option agreement contains provisions which are contrary to
the provisions of this Agreement (including provisions regarding the
Acceleration of Equity Rights).
6.4 Mitigation. The Executive shall not be required to mitigate damages
or the amount of any payment provided for under this Agreement by seeking other
employment or otherwise nor may any payments provided for under this Section be
reduced by any amounts earned by the Executive, except as provided in Article
IV.
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6.5 Survivorship. The respective rights and obligations of the parties
hereunder shall survive the termination of this Agreement to the extent
necessary to preserve the rights and obligations of the parties under this
Agreement.
6.6 Notices. All notices, demands, requests, consents, approvals or
other communications required or permitted hereunder shall be in writing and
shall be delivered by hand, registered or certified mail with return receipt
requested or by a nationally recognized overnight delivery service, in each case
with all postage or other delivery charges prepaid, and to the address of the
party to whom it is directed as indicated below, or to such other address as
such party may specify by giving notice to the other in accordance with the
terms hereof. Any such notice shall be deemed to be received (i) when delivered,
if by hand, (ii) on the next business day following timely deposit with a
nationally recognized overnight delivery service or (iii) on the date shown on
the return receipt as received or refused or on the date the postal authorities
state that delivery cannot be accomplished, if sent by registered of certified
mail, return receipt requested.
If to the Company: Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Attn: Lawrence P. Cirka
If to the Executive: C. Christian Winkle
-------------------------------
-------------------------------
6.7 Indemnification. The Company agrees to maintain Director's and
Officer's liability insurance at a level not less than the level in effect on
the Effective Date, or to the extent such level is increased during the Term, at
such increased level; provided, however, that the level of insurance may be
decreased with the Executive's consent. To the extent not covered by such
liability insurance,
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the Company shall indemnify and hold the Executive harmless to the fullest
extent permitted by Delaware law against any judgments, fines, amounts paid in
settlement and reasonable expenses (including reasonable attorneys' fees), and
advance amounts necessary to pay the foregoing at the earliest time and to the
fullest extent permitted by law, in connection with any claim, action or
proceeding (whether civil or criminal) against the Executive as a result of his
serving as an officer or director of the Company or in any capacity at the
request of the Company in or with regard to any other entity, employee benefit
plan or enterprise. This indemnification shall be in effect during the Term and
thereafter and shall be in addition to and not in lieu of any other
indemnification rights the Executive may otherwise have.
6.8 Attorneys' Fees. Upon presentation of an invoice, the Company shall
pay directly or reimburse the Executive for all reasonable attorneys' fees and
costs incurred by the Executive:
(a) in connection with the negotiation, preparation and
execution of this Agreement; and
(b) in connection with any dispute brought by the Executive
over the terms of this Agreement unless there is a determination that
the Executive had no reasonable basis for his claim.
6.9 Arbitration. Except as otherwise provided in Section 4.3, any
dispute or controversy arising under or in connection with this Agreement shall
be settled exclusively by arbitration, conducted before a panel of three
arbitrators in Baltimore, Maryland, in accordance with the rules of the American
Arbitration Association then in effect, and judgement may be entered on the
arbitrators' award in any court having jurisdiction. The Company shall pay all
costs of the American Arbitration Association and the arbitrator. Each party
shall select one arbitrator, and the
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two so designated shall select a third arbitrator. If either party shall fail to
designate an arbitrator within seven (7) days after arbitration is requested, or
if the two arbitrators shall fail to select a third arbitrator within fourteen
(14) days after arbitration is requested, then an arbitrator shall be selected
by the American Arbitration Association upon application of either party.
Notwithstanding the foregoing, the Executive shall be entitled to seek specific
performance from a court of the Executive's right to be paid until the date of
termination during the pendency of any dispute or controversy arising under or
in connection with this Agreement and the Company shall have the right to obtain
injunctive relief from a court.
6.10 Severability. No provision in this Agreement if held unenforceable
shall in any way invalidate any other provisions of this Agreement, all of which
shall remain in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Agreement to be signed
by its duly authorized officers and its corporate seal to be hereunto affixed,
and the Executive has hereunto set the Executive's hand on the day and year
first above written.
COMPANY EXECUTIVE
- ------- ---------
Integrated Health Services, Inc.,
a Delaware corporation
/s/ C. Christian Winkle
By:___________________________________ ______________________________
C. Christian Winkle
Name:_________________________________
Title:________________________________
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EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT made and entered into as of the 3rd day of March, 1995,
by and between INTEGRATED HEALTH SERVICES, INC., a Delaware corporation,
(hereinafter collectively referred to as the "Employer" or the "Company"), and
VIRGINIA M. DOLLARD (hereinafter referred to as the "Employee").
W I T N E S S E T H:
--------------------
WHEREAS, Employer is engaged in the business of owning and operating
nursing care facilities and other health care-related businesses through its
subsidiaries and tradenames; and
WHEREAS, Employer wishes to employ Employee, and Employee wishes to
accept such employment, on the terms and conditions set forth herein; and
WHEREAS, in the course of her employment, and as a necessary
consequence thereof, Employee will receive information and acquire knowledge of
special procedures, processes, business conduct, and knowledge that is private,
proprietary, and secret to the Company in its business; and
WHEREAS, the business, as well as the success and profits of the
Company, depend in large part upon the maintenance of secrecy as to such
information, processes, procedures and knowledge as to the conduct of the
Company's business generally.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
agreements herein contained, as well as the agreement to employ the Employee or
to continue to employ the Employee under the terms and conditions contained
herein, and intending to be legally bound hereby, it is agreed between the
parties hereto as follows:
<PAGE>
ARTICLE I
EMPLOYMENT RELATIONSHIP
1.1 EMPLOYMENT. The Employer hereby employs the Employee in the
position of Senior Vice President - Southeast Division, pending approval by the
Board of Directors of the Company, with such responsibilities as may be assigned
to Employee from time to time by the Senior Vice President - Operations.
Employee shall report to and be responsible to the Senior Vice President -
Operations for the period hereinafter set forth, and the Employee hereby accepts
such employment. In the event that the Board of Directors does not appoint
Employee as Senior Vice President - Southeast Division or does not approve the
25,000 (warrants/options) for the Company's stock pursuant to Section 3.3(b)
below, Employee shall be entitled to two years of Base Salary.
1.2 EXCLUSIVE EMPLOYMENT. During the continuation of the Employee's
employment by the Employer hereunder, the Employee will, unless the Employee has
first received the prior written consent of the Employer, devote the Employee's
entire business time, energy, attention, and skill to the services of the
Employer and to the promotion of its interests, and covenants that during such
time the Employee will neither: (a) engage in, be employed by, be a director of
or be otherwise directly or indirectly interested in (i) any business or
activity competing with or of a nature similar to the businesses of the
Employer, or (ii) any business or activity engaged in the owning, operation or
management of business or activity competing with or of a nature similar to the
businesses of the Employer, nor (b) take any part in any business activities
that are clearly detrimental to the best interests of the Employer.
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ARTICLE II
PERIOD OF EMPLOYMENT
--------------------
2.1 TERM. The term of employment under this Agreement shall begin May
1, 1995, and shall end on that date which is six (6) years from May 1, 1995,
unless sooner terminated pursuant to the terms of this Agreement. The
obligations of the Employee under Paragraph 4.4 shall only be enforceable by
Employer in the event (a) Employee terminates this Agreement, (b) the Employer
terminates this Agreement for cause, as defined below, and the Employer pays
one-half of the Noncompetition Severance pay as set forth below, (c) this
Agreement terminates on its natural expiration date and the Employer pays
Noncompetition Severance Pay as set forth below, or (d) Employer terminates this
Agreement without cause and pays Noncompetition Severance Pay as set forth
below.
2.2 TERMINATION FOR CAUSE. Employer may terminate this Agreement with
cause and without any obligation to pay Employee further compensation upon the
occurrence of any one or more of the following events:
(a) Employee repeatedly fails to reasonably perform any of her
material duties of employment or ceases to reasonably perform the full
scope of her material professional responsibilities and all material
and reasonable assignments in accordance with the highest professional
standards or breaches any material term of this Agreement, which
failure, non-performance or event is not corrected within fifteen (15)
days after written notice is delivered by the Employer to the Employee
specifying said failure, non-performance or breach.
(b) Employee becomes disabled or is unable to perform her
normal duties, which condition persists for a period of sixty (60) days
or more, and Employer has provided Employee with disability insurance
which shall begin to pay after said sixty (60) day period expires;
(c) Employee is convicted of a felony;
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(d) Employee is convicted of theft, larceny or embezzlement of
Employer's tangible or intangible property.
2.3 TERMINATION WITHOUT CAUSE. Employer may terminate this Agreement
without cause and without any obligation to pay Employee further compensation at
any time prior to this Agreement's natural expiration, provided, however, that
Employer shall pay to Employee Noncompetition Severance Pay in accordance with
Section 3.4.
2.4 TERMINATION BY EMPLOYEE FOR GOOD REASON. The Employee may terminate
this Agreement for Good Reason, provided she gives the Company prior written
notice that Good Reason exists (the "Good Reason Notice"). Upon Employee's
termination of this Agreement for Good Reason, Employer shall have no obligation
to pay Employee further compensation except to pay to Employee Noncompetition
Severance Pay in accordance with Section 3.4(e).
ARTICLE III
COMPENSATION
------------
3.1 BASE SALARY. For all services rendered by Employee under this
Agreement, the Employee shall receive a base salary at an initial rate of
$250,000 per year ("Base Salary"), payable in accordance with the pay period
policy established by the Employer from time to time. Said base salary shall be
reviewed annually, commencing one year after the date hereof. If at any time
Employer decides to effect a company-wide pay reduction, reduction of Employee's
base salary under such company-wide pay reduction shall take effect immediately
and shall neither cause the termination of this Agreement nor constitute an
event of default by the Employer.
3.2 BONUSES. Within 90 days of the close of each calendar year (begin-
ning with calendar year 1994), the Company shall pay to the Employee a cash
bonus ("Cash Bonus") in such amount as
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may be determined according to the criteria below and which may be up to 100% of
Base Salary. If at any time Employer decides to effect a company-wide bonus
reduction among employees at the Employee's level, reduction of Employee's Cash
Bonus under such company-wide bonus reduction shall take effect immediately for
that year and shall neither cause the termination of this Agreement nor
constitute an event of default by the Employer. This Cash Bonus will be broken
down in the following manner:
(a) 40% for her division's facilities exceeding the
aggregate budget target for all facilities in her
division.
(b) 40% for the development of profitable new business
opportunities including, but not limited to, provider
and ancillary service networks, Medica and HMO risk
contract relations, new managed care or joint venture
relationships, as determined by the Company.
(c) 20% for other performance indicators, as mutually
determined by the Company and the Employee.
3.3 ADDITIONAL BENEFITS. (a) Separate and apart from the Employee's
cash compensation as set forth above, the Company shall provide to the Employee
coverage under the Company's standard health and disability insurance package as
currently provided to Senior Vice Presidents, term life insurance equal to two
times Base Salary, a monthly automobile allowance of $450.00, ten (10) sick
days, three (3) personal days and three (3) weeks of paid non-cumulative
vacation per year. The Company shall reimburse Employee for reasonable business
expenses, including telephone and fax costs at her home office and mobile phone
costs. Employee shall also be eligible to participate in the Company's Employee
Stock Participation Program and the Company's 401(k) Retirement Savings Plan, in
accordance with the eligibility requirements of those programs. Employee shall
also be eligible for, and be considered for, additional stock options pursuant
to the Company's then current Stock Option Plan applicable to Senior Executives,
at such times and in such amounts as determined
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by the Company, in its sole discretion, and approved by the Company's Board of
Directors. The 5,000 options for the Company's common stock previously granted
to Employee as a member of the Company's Managed Care Advisory Board shall
remain subject to the financial and vesting terms and conditions upon which they
were issued.
(b) As additional compensation for the performance by
the Employee of her services hereunder, the Company shall recommend to the Board
of Directors that, as soon as is reasonably practicable following the effective
date of this Agreement and upon the approval by the Board of Directors, the
Employee be granted an employee nonqualified option to purchase 25,000 shares of
common stock, which option shall vest according to the Company's standard
schedule for vesting over a period of six (6) years. The price per share for
purposes of this Section 3.3(b) shall be the price on the date on which the
Board of Directors approves this option. In the event that Employee is
terminated by the Company without cause or the Employee terminates this
Agreement according to Section 3.4(e)(i) (i.e. upon a material dimunition in the
Employee's authority and/or duties), the unvested portion of stock option
granted under this Section 3.3(b) shall continue to vest according to the
Company's standard schedule. In the event of a Change of Control, the unvested
portion of stock option granted under this Section 3.3(b) shall vest
immediately.
3.4 SEVERANCE PAY. (a) In the event Employer chooses to terminate this
Agreement without cause prior to the Agreement's natural expiration date and so
notifies the Employee, then Employer shall pay to Employee non-competition
severance pay of one-twelfth (1/12) of Employee's annual salary on a monthly
basis ("Noncompetition Severance Pay") for a minimum of twenty-four (24) months
or the amount of time remaining until this Agreement's natural expiration,
whichever is less, but in no event shall the Employee receive less than 6 months
of Noncompetition Severance Pay,
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provided, however, that Employee shall be bound by the non-competition
restrictions of Paragraph 4.4 for as long as Employee is receiving such
Noncompetition Severance Pay. The benefits provided for under Paragraph 3.3,
above, shall continue to be applicable during any period of salary continuation
under this Paragraph 3.4.
(b) In the event this Agreement terminates at its natural expiration
date and Employer elects to enforce and bind Employee to the noncompetition
restrictions of Paragraph 4.4 below, then Employer shall pay to Employee
Noncompetition Severance Pay for each month of restriction for a period of time
which is no later than twenty-four (24) months from the Agreement's natural
expiration, which time period shall be at Employer's election, but in no event
shall the Employee receive less than 6 months of Noncompetition Severance Pay.
(c) In the event that this Agreement is terminated by the Employer for
cause, and the Employer elects to enforce and bind Employee to the
non-competition restrictions of Paragraph 4.4, below, then Employer shall pay to
Employee one-half of the Noncompetition Severance Pay for the period during
which the non-competition restrictions of Paragraph 4.4 shall apply, up to a
period of nine (9) months. Employer may extend the nine-month restriction period
of Paragraph 4.4 by paying to the Employee the full Noncompetition Severance Pay
for each month of restriction after the initial nine-month restriction period,
up to a maximum of three (3) additional months, which time period shall be at
Employer's election. The benefits provided for under Paragraph 3.3, above, shall
not continue to be applicable during such restriction period.
(d) In the event Employee terminates this Agreement, other than for
Good Reason as defined below, prior to the Agreement's natural expiration date,
then Employee shall not be entitled to any Noncompetition Severance Pay,
provided, however, that Employee shall be bound by the non-
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competition restrictions of Paragraph 4.4 for a period of nine (9) calendar
months following the date of termination of the Employee's employment hereunder.
(e) In the event Employee terminates this Agreement for Good Reason
prior to the Agreement's natural expiration date, the Company shall bind the
Employee to the non-competition restrictions of Section 4.4 for a period of
twelve (12) months following the termination of the Employee's employment
hereunder, provided, however, that Company shall then pay the Employee full
Noncompetition Severance Pay for each month that the Employee is bound by the
non-competition restrictions of Section 4.4. Good Reason is defined as either
(i) a material dimunition in the Employee's authority and/or duties or (ii) a
Change of Control. For purposes of this Agreement, a "Change of Control" shall
be deemed to occur if (i) there shall be consummated (x) any consolidation,
reorganization or merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of the Company's
common stock would be converted into cash, securities or other property, other
than a merger of the Company in which the holders of the Company's common stock
immediately prior to the merger have the same proportionate ownership of common
stock of the surviving corporation immediately after the merger, or (y) any
sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, of the assets of the
Company, or (ii) the stockholders of the Company shall approve any plan or
proposal for liquidation or dissolution of the Company, or (iii) any person (as
such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act, including
any "group" (as defined in Section 13(d)(3) of the Exchange Act) (other than the
Executive or any group controlled by the Executive)) shall become the beneficial
owner (within the meaning of Rule 13d-3 under the Exchange Act) of twenty
percent (20%) or more of the Company's outstanding common stock (other
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than pursuant to a plan or arrangement entered into by such person and the
Company) and such person discloses its intent to effect a change in the control
or ownership of the Company in any filing with the Securities and Exchange
Commission.
ARTICLE IV
COVENANTS OF THE EMPLOYEE
-------------------------
4.1 OWNERSHIP AND RETURN OF DOCUMENTS. The Employee agrees that all
memoranda, notes, records, papers or other documents and all copies thereof
relating to the Employer's operations or businesses, some of which may be
prepared by the Employee, and all objects associated therewith in any way
obtained by the Employee shall be the Employer's property. The Employee shall
not, except for employer's use, copy or duplicate any of the aforementioned
documents or objects, nor remove them from the Employer's facilities nor use any
information concerning them except for the Employer's benefit, either during the
Employee's employment or thereafter. The Employee agrees that the Employee will
deliver all of the aforementioned documents and objects that may be in her
possession to the Employer on termination of the Employee's employment, or at
any other time on the Employer's request, together with the Employee's written
certification of compliance with the provision of this paragraph.
4.2 CONFIDENTIAL INFORMATION. In connection with employment at the
Company, Employee will have access to confidential information consisting of
some or all of the following categories of information. Employer and Employee
consider their relation one of confidence with respect to such information:
(a) FINANCIAL INFORMATION, including but not limited to
information relating to the Company's earnings, assets, debts, prices,
pricing structure, volume of purchases or sales
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or other financial data whether related to the Company or generally, or
to particular products, services, geographic areas, or time periods;
(b) SUPPLY AND SERVICE INFORMATION, including but not limited
to information relating to goods and services, suppliers' names or
addresses, terms of supply or service contracts or of particular
transactions, or related information about potential suppliers to the
extent that such information is not generally known to the public, and
to the extent that the combination of suppliers or use of a particular
supplier, though generally known or available, yields advantages to the
Company details of which are not generally known;
(c) MARKETING INFORMATION, including but not limited to
information relating to details about ongoing or proposed marketing
programs or agreements by or on behalf of the Company, sales
fore-casts, advertising formats and methods or results of marketing
efforts or information about impending transactions;
(d) PERSONNEL INFORMATION, including but not limited to
information relating to employees' personal or medical histories,
compensation or other terms of employment actual or proposed
promotions, hirings, resignation, disciplinary actions, terminations or
reasons therefor, training methods, performance, or other employee
information; and
(e) CUSTOMER INFORMATION, including but not limited to
information relating to past, existing or prospective customers' names,
addresses or backgrounds, records of agreements and prices, proposals
or agreements between customers and the Company, status of customers'
accounts or credit, or related information about actual or prospective
customers as well as customer lists.
(f) INVENTIONS AND TECHNOLOGICAL INFORMATION, including but
not limited to information related to proprietary technology, trade
secrets, research and development data, processes, formulae, data and
know-how, improvements, inventions, techniques, and information that
has been created, discovered or developed, or has otherwise become
known to the Company (including without limitation information created,
discovered, developed or made known by or to the Employee during the
period of or arising out of Employee's employment by the Company),
and/or in which property rights have been assigned or otherwise
conveyed to the Company, which information has commercial value in the
business in which the Company is engaged.
All of the foregoing are hereinafter referred to as "Trade Secrets."
During and after the employment by the Company, regardless of the reasons that
such employment ends, Employee agrees:
(aa) To hold all Trade Secrets in confidence and not discuss,
communicate or transmit to others, or make any unauthorized copy of or
use the Trade Secrets in any
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capacity, position or business except as it directly relates to
Employee's employment by the Company;
(bb) To use the Trade Secrets only in furtherance of proper
employment related reasons of the Company to further the interests of
the Company;
(cc) To take all reasonable actions that Company deems
necessary or appropriate, to prevent unauthorized use or disclosure of
or to protect the Company's interest in the Trade Secrets; and
(dd) That any of the Trade Secrets, whether prepared by
Employee or which may come into Employee's possession during Employee's
employment hereunder, are and remain the property of the Company and
its affiliates, and all such Trade Secrets, including copies thereof,
together with all other property belonging to the Company or its
affiliates, or used in their respective businesses, shall be delivered
to or left with the Company.
This Agreement does not apply to (i) information that by means other
than Employee's deliberate or inadvertent disclosure becomes well known to the
public; (ii) disclosure compelled by judicial or administrative proceedings
after Employee diligently tries to avoid each disclosure and affords the Company
the opportunity to obtain assurance that compelled disclosures will receive
confidential treatment.
The Employee specifically waives any rights to customer names, customer
lists, customer files or parts thereof as well as test results or information
Employee might otherwise be entitled to by virtue of any applicable state or
federal law or regulation.
4.3 NON-SOLICITATION AND NON-PIRATING. For a period of two (2) years
following a termination or the natural expiration of this Agreement, the
Employee hereby agrees that, without the express written consent of the
Employer, the Employee will not, directly or indirectly, for the Employee or on
behalf of any other person, firm, entity or other enterprise:
(a) call upon any client or customer of the Employer or in any
way solicit, divert or take away any client or customer of the Employer
who was a client or customer of the
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Employer while the Employee was an employee of the Employer under this
Agreement (such period being hereinafter referred to as the "Employment
Period"); and
(b) disturb, hire, entice away or in any other manner persuade
any employee, client, or customer of the Employer who was an employee,
client, or customer of the Employer during the Employment Period, to
alter, modify or terminate their relationship with the Employer as an
employee, client, or customer, as the case may be.
4.4 NON-COMPETITION. In consideration of the Employee's employment
hereunder, and subject to the provisions of Paragraphs 2.1 and 3.4, above, the
Employee hereby agrees that, without the express written consent of the
Employer, the Employee will not, directly or indirectly, for the Employee or on
behalf of any other person, firm, entity or other enterprise, during any period
by which the Employee is receiving Noncompetition Severance Pay pursuant to
Paragraph 3.4 or, in the event Employee terminates this Agreement pursuant to
Paragraph 3.4(d) then for a period of nine (9) months, be employed by in the
same capacity as hereunder, be a director or manager of, act as a consultant
for, be a partner in, have a proprietary interest in, give advice to, loan money
to or otherwise associate with, any person, enterprise, partnership,
association, corporation, joint venture or other entity which is directly or
indirectly in the business of owning, operating or managing any nursing home,
hospital, health care facility or other entity of any type, licensed or
unlicensed, which is engaged in or provides nursing, residential or domiciliary
care services or which provides community meals, supervises the personal care of
individuals, any of which compete with the Employer or its subsidiaries within
100 miles of any subacute center then operated by the Company or any of its
subsidiaries. This provision shall not be construed to prohibit the Employee
from owning up to 2% of the issued shares of any company subject to the
reporting requirements of Section 13 or Section 15(d) of the Securities and
Exchange Act of 1934, as amended.
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<PAGE>
4.5 NECESSARY RESTRICTIONS. The Employee acknowledges that the
restrictions contained in Paragraphs 4.3 and 4.4 are reasonable and necessary to
protect the legitimate business interests of the Employer and that any violation
thereof by her would result in irreparable harm to the Employer. Accordingly,
the Employee agrees that upon the violation by her of any of the restrictions
contained in Paragraphs 4.3 or 4.4, the Employer shall be entitled to obtain
from any court of competent jurisdiction a preliminary and permanent injunction
as well as any other relief provided at law, equity, under this Agreement or
otherwise. In the event any of the foregoing restrictions are adjudged
unreasonable in any proceeding, then the parties agree that the period of time
or the scope of such restrictions (or both) shall be adjusted to such a manner
or for such a time (or both) as is adjudged to be reasonable.
4.6 PRIOR EMPLOYERS. Employee hereby represents and warrants to the
Company that (i) she is not bound by any agreement with any prior employer or
other party to refrain from using or disclosing any confidential information or
from competing with the business of such employer or other party, (ii) her
performance under this Agreement will not breach any other agreement by which
she is bound, and (iii) she has not brought with her to the Company, nor will
she bring or use in the performance of her responsibilities at the Company, any
materials or documents of a former employer which are not generally available to
the public.
4.7 REMEDIES FOR BREACH. The Employee acknowledges that the covenants
contained in Article IV of this Agreement are independent covenants and that any
failure by the Employer to perform its obligations under this Agreement (other
than the act of nonpayment which is not cured by the Employer within thirty (30)
days of the receipt of written notice of said condition from the Employee) shall
not be a defense to enforcement of the covenants contained in Article IV,
including
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<PAGE>
but not limited to a temporary or permanent injunction. The Employee
acknowledges that damages in the event of Employee's breach of this Article IV
will be difficult, if not impossible, to ascertain and it is therefore agreed
that the Employer, in addition to, and without limiting any other remedy or
right it may have, shall have the right to an injunction enjoining the said
breach.
ARTICLE V
ASSIGNMENT
----------
5.1 PROHIBITION OF EMPLOYMENT ASSIGNMENT. The Employee agrees on behalf
of the Employee and the Employee's heirs and executors, personal
representatives, and any other person or persons claiming any benefit under the
Employee by virtue of this Agreement, that this Agreement and the rights,
interests, and benefits hereunder shall not be assigned, transferred, pledged or
hypothecated in any way by the Employee or the Employee's heirs, executors and
personal representatives, and shall not be subject to execution, attachment or
similar process. Any attempt to assign, transfer, pledge, hypothecate or
otherwise dispose of this Agreement or any such rights, interests and benefits
thereunder contrary to the foregoing provision, or the levy of any attachment or
similar process thereupon shall be null and void and without effect and shall
relieve the Employer of any and all liability hereunder.
5.2 RIGHT OF EMPLOYER TO ASSIGN. This Agreement shall be assignable and
transferable by the Employer to Employer's transferee, assignee or any
successor-in-interest, parent, subsidiary or affiliate of Employer, and shall
inure to the benefit of and be binding upon the Employee, the Employee's heirs
and personal representatives, and the Employer and its successors and assigns.
Employee agrees to execute all documents necessary to ratify and effectuate such
assignment.
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<PAGE>
5.3 BINDING EFFECT IF TRANSFERRED. In the event this Agreement is
transferred by Employer, the term "Employer" and "Company" used herein shall
refer to and be binding upon the Employer's transferee or assignee.
ARTICLE VI
GENERAL
-------
6.1 GOVERNING LAW. This Agreement shall be subject to and governed by
the laws of the State of Maryland, irrespective of the fact that the Employee
may become a resident of a different state.
6.2 BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the Employer and the Employee and their respective heirs, legal
representatives, executors, administrators, successors and permitted assigns.
6.3 ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement
between the parties and contains all of the agreements between the parties with
respect to the subject matter hereof; this Agreement supersedes any and all
other agreements, either oral or in writing, between the parties hereto with
respect to the subject hereof. No change or modification of this Agreement shall
be valid unless the same be in writing and signed by both parties hereto. No
waiver of any provisions of this Agreement shall be valid unless in writing and
signed by the person or party to be charged.
6.4 SEVERABILITY. If any portion of this Agreement shall be for any
reason, invalid or unenforceable, the remaining portion or portions shall
nevertheless be valid, enforceable and carried into effect, unless to do so
would clearly violate the present legal and valid intention of the parties
hereto.
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<PAGE>
6.5 NOTICES. All notices, demands, requests, consents, approvals or
other communications required or permitted hereunder shall be in writing and
shall be delivered by hand, registered or certified mail with return receipt
requested or by a nationally recognized overnight delivery service, in each case
with all postage or other delivery charges prepaid, and to the address of the
party to whom it is directed as indicated below, or to such other address as
such party may specify by giving notice to the other in accordance with the
terms hereof. Any such notice shall be deemed to be received (i) when delivered,
if by hand, (ii) on the next business day following timely deposit with a
nationally recognized overnight delivery service, or (iii) on the date shown on
the return receipt as received or refused or on the date the postal authorities
state that delivery cannot be accomplished, if sent by registered of certified
mail, return receipt requested.
IF TO THE COMPANY: Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, MD 21117
Attn: General Counsel
IF TO THE EMPLOYEE: Virginia M. Dollard
1480 Waterfront Road
Reston, VA 22094
6.6 INDEPENDENT LEGAL COUNSEL. Employee represents and warrants that
she has had the opportunity to seek the advice of independent legal counsel
prior to signing this Agreement, and that the Company has recommended to her
that she obtain such counsel.
6.7 ATTORNEYS' FEES. In the event of litigation concerning this
Agreement, the prevailing party shall be entitled to collect from the losing
party attorneys' fees and costs, including those on appeal.
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<PAGE>
IN WITNESS WHEREOF, the Employer has caused this Agreement to be signed
by its duly authorized officers and its corporate seal to be hereunto affixed,
and the Employee has hereunto set Employee's hand on the day and year first
above written.
EMPLOYER EMPLOYEE
- -------- --------
Integrated Health Services, Inc.,
a Delaware Corporation
/s/ Virginia M. Dollard
By: ----------------------------- -----------------------------------
Virginia M. Dollard
-17-
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT made and entered into as of the __________ day of April,
1994, by and between INTEGRATED HEALTH SERVICES, INC., a Delaware corporation,
(hereinafter collectively referred to as the "Employer" or the "Company"), and
ANTHONY R. MASSO (hereinafter referred to as the "Employee").
W I T N E S S E T H:
--------------------
WHEREAS, Employer is engaged in the business of owning and operating
nursing care facilities and other health care-related businesses through its
subsidiaries and tradenames; and
WHEREAS, Employer wishes to employ Employee, and Employee wishes to
accept such employment, on the terms and conditions set forth herein; and
WHEREAS, in the course of his employment, and as a necessary
consequence thereof, Employee will receive information and acquire knowledge of
special procedures, processes, business conduct, and knowledge that is private,
proprietary, and secret to the Company in its business; and
WHEREAS, the business, as well as the success and profits of the
Company, depend in large part upon the maintenance of secrecy as to such
information, processes, procedures and knowledge as to the conduct of the
Company's business generally.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
agreements herein contained, as well as the agreement to employ the Employee or
to continue to employ the Employee under the terms and conditions contained
herein, and intending to be legally bound hereby, it is agreed between the
parties hereto as follows:
<PAGE>
ARTICLE I
EMPLOYMENT RELATIONSHIP
-----------------------
1.1 EMPLOYMENT. The Employer hereby employs the Employee in the
position of Senior Vice President-Managed Care, with such responsibilities as
may be assigned to Employee from time to time by the ________________________,
provided, that in the event the Company's Board of Directors provides for the
creation of an Executive Vice President position and any individual is appointed
to such position, then Employee shall be appointed Executive Senior Vice
President of Managed Care. Employee shall report to and be responsible to the
________________________________for the period hereinafter set forth, and the
Employee hereby accepts such employment.
1.2 EXCLUSIVE EMPLOYMENT. During the continuation of the Employee's
employment by the Employer hereunder, the Employee will, unless the Employee has
first received the prior written consent of the Employer, devote the Employee's
entire business time, energy, attention, and skill to the services of the
Employer and to the promotion of its interests, and covenants that during such
time the Employee will not engage in, be employed by, be a director of or be
otherwise directly or indirectly interested in (i) any business or activity
competing with or of a nature similar to the businesses of the Employer, or (ii)
any business or activity engaged in the owning, operation or management of
business or activity competing with or of a nature similar to the businesses of
the Employer.
ARTICLE II
PERIOD OF EMPLOYMENT
--------------------
2.1 TERM. Unless sooner terminated pursuant to the terms of this
Agreement, the term of Employee's employment under this Agreement shall be for a
period of three (3) years, commencing
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as of June 1, 1994, and ending on May 31, 1997, provided, however, that on June
1, 1997 and on each June 1st thereafter (an "Anniversary Date"), the term of
this Agreement shall be automatically extended by an additional period of twelve
(12) months. Notwithstanding the foregoing, either party hereto may elect not to
so extend this Agreement by giving written notice of his or its election to the
other party hereto at least one (1) year prior to any Anniversary Date. The
expiration of this Agreement following an election by either party not to renew
shall be deemed to be an expiration on the Agreement's natural expiration date
for all purposes of this Agreement.
2.2 TERMINATION FOR CAUSE. Employer may terminate this Agreement with
cause and without any obligation to pay Employee further compensation upon the
occurrence of any one or more of the following events:
(a) Employee fails to materially perform any of his duties of
employment or breaches any material term of this Agreement, which
failure, non-performance or event is not corrected within fifteen (15)
days after written notice is delivered by the Employer to the Employee
specifying said failure, non-performance or breach.
(b) Employee becomes disabled or is unable to perform his
normal duties, which condition persists for a period of sixty (60) days
or more, and Employer has provided Employee with disability insurance
which shall begin to pay after said sixty (60) day period expires;
(c) Employee is convicted of a misdemeanor or a felony;
(d) Employee commits theft, larceny or embezzlement of
Employer's tangible or intangible property.
2.3 TERMINATION WITHOUT CAUSE. Employer may terminate this Agreement
without cause at any time prior to this Agreement's natural expiration,
provided, however, that Employer shall pay to Employee Severance Pay in
accordance with Section 3.5.
2.4 TERMINATION BY EMPLOYEE WITH CAUSE. Employee may terminate this
Agreement with cause at any time prior to the Agreement's natural expiration
upon the occurrence of any one or more of the following events:
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<PAGE>
(a) A material breach of the Agreement by Employer, which
breach is not corrected within sixty (60) days after written notice is
delivered by the Employee to the Employer specifying said breach.
(b) Removal or dismissal of Robert N. Elkins as Chief
Executive Officer of the Company or Lawrence P. Cirka as Senior Vice
President and Chief Operating Officer of the Company at any time after
April 25, 1996.
(c) A substantial diminution in Employee's employment duties.
(d) A requirement that Employee relocate his current
residence.
(e) Employer fails to grant to Employee stock options in
accordance with Section 3.3.
ARTICLE III
COMPENSATION
------------
3.1 BASE SALARY. For all services rendered by Employee under this
Agreement, the Employee shall receive a base salary at an initial rate of
$250,000 per year, payable in accordance with the pay period policy established
by the Employer from time to time. Said base salary shall be reviewed for
increase annually, commencing one year after the date hereof. If at any time
Employer decides to effect a company-wide pay reduction, any reduction of
Employee's base salary, such reduction not to exceed twenty (20%) percent of
Employee's then current base salary, shall take effect immediately and shall
neither cause the termination of this Agreement nor constitute an event of
default by the Employer.
3.2 BONUSES. Within 90 days of the close of each calendar year
(beginning with calendar year 1994), the Company shall pay to the Employee a
cash bonus ("Cash Bonus") in such amount as may be determined at the Company's
discretion.
3.3 STOCK OPTIONS. As additional compensation for the performance by
the Employee of his services hereunder, the Company shall recommend to the Stock
Option Plan Committee that, as soon as is reasonably practicable following the
execution of this Agreement and upon the approval
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<PAGE>
by the Company's stockholders of Employer's 1994 Stock Incentive Plan that the
Employee be granted options to purchase 100,000 shares of common stock pursuant
to the Company's 1994 Stock Incentive Plan, which options shall have the
following terms: options to purchase 10,000 shares shall vest immediately, and
options to purchase the remaining 90,000 shares shall vest on a straight line
basis over the five (5) year period commencing on February 1, 1994. From and
after any termination of this Agreement, none of such options which have not
already vested shall vest unless this Agreement was terminated by the Company
without cause, which termination without cause shall include Company's failure
to renew this Agreement pursuant to Section 2.1. If such options are granted at
Employee's request as non-statutory stock options, all of such options will be
granted at an exercise price equal to the lowest daily closing NYSE price of the
Company's common stock reached during the period of April 25, 1994, through June
1, 1994; provided, however, that Employee may, by notice to the Company prior to
the granting of such options, elect to have any or all of such options qualify
as Incentive Stock Options under the 1994 Stock Incentive Plan, in which event
the exercise price of the options so designated by the Employee will be equal to
the market value of the Company's common stock as of the date of grant. In the
event Employee is not granted stock options in accordance with this Section 3.3,
Employer shall be entitled, at his sole option, to either (i) terminate this
Agreement for cause pursuant to Section 2.4 hereof, or (ii) receive an annual
bonus for each calendar year during the term of this Agreement, commencing with
the calendar year ending December 31, 1994, of at least thirty (30%) percent of
his then current base salary.
3.4 ADDITIONAL BENEFITS. Separate and apart from the Employee's cash
compensation as set forth above, the Company shall provide and pay for the
following:
(a) Employee's coverage under the Company's standard life and
health package for executives and Exec-U-Care;
(b) Employee's coverage under the Company's long term
disability plan;
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<PAGE>
(c) a monthly automobile allowance; and
(d) Employee's reasonable out of pocket expenses incurred as a
result of his relocation to the Owings Mills, MD area.
3.5 SEVERANCE PAY. (a) In the event (i) Employer chooses to terminate
this Agreement without cause, prior to the Agreement's natural expiration date
and so notifies the Employee, or (ii) Employee chooses to terminate this
Agreement with cause, then Employer shall pay to Employee severance pay of
one-twelfth (1/12) of Employee's annual salary on a monthly basis ("Severance
Pay") for (i) twenty-four (24) months or (ii) the amount of time remaining until
this Agreement's natural expiration, whichever is less. Employee shall be bound
by the non-competition restrictions of Paragraph 4.4 for as long as Employee is
receiving such Severance Pay, provided, however, that Employer shall be
obligated to pay the foregoing Severance Pay regardless of whether Employer
wishes to bind Employee to the non-competition restrictions of Paragraph 4.4 or
agrees to release Employee from such restrictions. However, the Employer may
extend the restriction period to such a date which is no later than thirty-six
(36) months from the date of Employee's termination, which time period shall be
at Employer's election, provided that Employer shall pay to Employee Severance
Pay for the extension of such restriction, and shall give Employee written
notice thereof within fifteen (15) days of such termination. The benefits
provided for under Paragraph 3.4(a), (b) and (c), above, shall continue to be
applicable during any period of salary continuation under this Paragraph 3.5.
(b) In the event this Agreement terminates at its natural expiration
date, including termination as a result of a notice of nonrenewal by Employer or
Employee, and Employer elects to enforce and bind Employee to the noncompetition
restrictions of Paragraph 4.4 below, then Employer shall pay to Employee
Severance Pay for each month of restriction for a period of time which is no
later than twelve (12) months from the Agreement's natural expiration, which
time period shall be at Employer's election.
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<PAGE>
(c) In the event that this Agreement is terminated by the Employer for
cause and the Employer elects to enforce and bind Employee to the
non-competition restrictions of Paragraph 4.4, below, then Employer shall pay to
Employee one-half of the Severance Pay over the nine-month restriction period of
said Paragraph 4.4. Employer may extend the nine-month restriction period of
Paragraph 4.4 by paying to Employee the full Severance Pay for each month of
restriction after the initial nine-month restriction period, up to a maximum of
three (3) additional months, which time period shall be at Employer's election.
The benefits provided for under Paragraph 3.4, above, shall continue to be
applicable during the first 4.5 months of such restriction period.
ARTICLE IV
COVENANTS OF THE EMPLOYEE
-------------------------
4.1 OWNERSHIP AND RETURN OF DOCUMENTS. The Employee agrees that all
memoranda, notes, records, papers or other documents and all copies thereof
relating to the Employer's operations or businesses, some of which may be
prepared by the Employee, and all objects associated therewith in any way
obtained by the Employee shall be the Employer's property. The Employee shall
not, except for employer's use, copy or duplicate any of the aforementioned
documents or objects, nor remove them from the Employer's facilities nor use any
information concerning them except for the Employer's benefit, either during the
Employee's employment or thereafter. The Employee agrees that the Employee will
deliver all of the aforementioned documents and objects that may be in his
possession to the Employer on termination of the Employee's employment, or at
any other time on the Employer's request, together with the Employee's written
certification of compliance with the provision of this paragraph.
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<PAGE>
4.2 CONFIDENTIAL INFORMATION. In connection with employment at the
Company, Employee will have access to confidential information consisting of
some or all of the following categories of information. Employer and Employee
consider their relation one of confidence with respect to such information:
(a) FINANCIAL INFORMATION, including but not limited to
information relating to the Company's earnings, assets, debts, prices,
pricing structure, volume of purchases or sales or other financial data
whether related to the Company or generally, or to particular products,
services, geographic areas, or time periods;
(b) SUPPLY AND SERVICE INFORMATION, including but not limited
to information relating to goods and services, suppliers' names or
addresses, terms of supply or service contracts or of particular
transactions, or related information about potential suppliers to the
extent that such information is not generally known to the public, and
to the extent that the combination of suppliers or use of a particular
supplier, though generally known or available, yields advantages to the
Company details of which are not generally known;
(c) MARKETING INFORMATION, including but not limited to
information relating to details about ongoing or proposed marketing
programs or agreements by or on behalf of the Company, sales
fore-casts, advertising formats and methods or results of marketing
efforts or information about impending transactions;
(d) PERSONNEL INFORMATION, including but not limited to
information relating to employees' personal or medical histories,
compensation or other terms of employment actual or proposed
promotions, hirings, resignation, disciplinary actions, terminations or
reasons therefor, training methods, performance, or other employee
information; and
(e) CUSTOMER INFORMATION, including but not limited to
information relating to past, existing or prospective customers' names,
addresses or backgrounds, records of agreements and prices, proposals
or agreements between customers and the Company, status of customers'
accounts or credit, or related information about actual or prospective
customers as well as customer lists.
All of the foregoing are hereinafter referred to as "Trade Secrets."
During and after the employment by the Company, regardless of the reasons that
such employment ends, Employee agrees:
(aa) To hold all Trade Secrets in confidence and not discuss,
communicate or transmit to others, or make any unauthorized copy of or
use the Trade Secrets in any capacity, position or business except as
it directly relates to Employee's employment by the Company;
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<PAGE>
(bb) To use the Trade Secrets only in furtherance of proper
employment related reasons of the Company to further the interests of
the Company;
(cc) To take all reasonable actions that Company deems
necessary or appropriate, to prevent unauthorized use or disclosure of
or to protect the Company's interest in the Trade Secrets; and
(dd) That any of the Trade Secrets, whether prepared by
Employee or which may come into Employee's possession during Employee's
employment hereunder, are and remain the property of the Company and
its affiliates, and all such Trade Secrets, including copies thereof,
together with all other property belonging to the Company or its
affiliates, or used in their respective businesses, shall be delivered
to or left with the Company.
This Agreement does not apply to (i) information that by means other
than Employee's deliberate or inadvertent disclosure becomes well known to the
public; (ii) disclosure compelled by judicial or administrative proceedings
after Employee diligently tries to avoid each disclosure and affords the Company
the opportunity to obtain assurance that compelled disclosures will receive
confidential treatment.
4.3 NON-SOLICITATION AND NON-PIRATING. At all times following a
termination or the natural expiration of this Agreement, the Employee hereby
agrees that, without the express written consent of the Employer, the Employee
will not, directly or indirectly, for the Employee or on behalf of any other
person, firm, entity or other enterprise:
(a) call upon any client or customer of the Employer or in any
way solicit, divert or take away any client or customer of the Employer
who was a client or customer of the Employer while the Employee was an
employee of the Employer under this Agreement (such period being
hereinafter referred to as the "Employment Period"); and
(b) disturb, hire, entice away or in any other manner persuade
any employee, client, or customer of the Employer who was an employee,
client, or customer of the Employer during the Employment Period, to
alter, modify or terminate their relationship with the Employer as an
employee, client, or customer, as the case may be.
4.4 NON-COMPETITION. In consideration of the Employee's employment
hereunder, and subject to the provisions of 3.5, above, the Employee hereby
agrees that, without the express written consent of the Employer, the Employee
will not, directly or indirectly, for the Employee or on behalf
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<PAGE>
of any other person, firm, entity or other enterprise, during any period in
which the Employee is receiving Severance Pay pursuant to Paragraph 3.5 or, in
the event Employer terminates this Agreement for cause prior to its natural
expiration, for a period of nine (9) calendar months following the date of
termination of the Employee's employment hereunder (subject to extension
pursuant to Paragraph 3.5 hereof), be employed by, be a director or manager of,
act as a consultant for, be a partner in, have a proprietary interest in, give
advice to, loan money to or otherwise associate with, any person, enterprise,
partnership, association, corporation, joint venture or other entity which is
directly or indirectly in the business of owning, operating or managing any
nursing home, hospital, health care facility or other entity of any type,
licensed or unlicensed, which is engaged in or provides nursing, residential or
domiciliary care services or which provides community meals, supervises the
personal care of individuals, or in any way competes with the Employer or its
subsidiaries. This provision shall not be construed to prohibit the Employee
from owning up to 2% of the issued shares of any company whose common stock is
listed for trading on any national securities exchange or on the NASDAQ National
Market System.
4.5 NECESSARY RESTRICTIONS. The Employee acknowledges that the
restrictions contained in Paragraphs 4.3 and 4.4 are reasonable and necessary to
protect the legitimate business interests of the Employer and that any violation
thereof by him would result in irreparable harm to the Employer. Accordingly,
the Employee agrees that upon the violation by him of any of the restrictions
contained in Paragraphs 4.3 or 4.4, the Employer shall be entitled to obtain
from any court of competent jurisdiction a preliminary and permanent injunction
as well as any other relief provided at law, equity, under this Agreement or
otherwise. In the event any of the foregoing restrictions are adjudged
unreasonable in any proceeding, then the parties agree that the period of time
or the scope of such
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<PAGE>
restrictions (or both) shall be adjusted to such a manner or for such a time (or
both) as is adjudged to be reasonable.
4.6 PRIOR EMPLOYERS. The Employee agrees to indemnify and hold harmless
the Company, its officers, directors, and employees from and against any
liabilities and expenses, including attorney's fees and amounts paid in
settlement, incurred by any of them in connection with any claim by any of the
Employee's prior employers that the termination of his employment with such
employer, his employment with the Employer, or that the use of any skills or
knowledge by the Company is a violation of contract or law. Employee hereby
represents and warrants to the Company that (i) he is not bound by any agreement
with any prior employer or other party to refrain from using or disclosing any
confidential information or from competing with the business of such employer or
other party, (ii) his performance under this Agreement will not breach any other
agreement by which he is bound, and (iii) he has not brought with him to the
Company, nor will he bring or use in the performance of his responsibilities at
the Company, any materials or documents of a former employer which are not
generally available to the public.
4.7 REMEDIES FOR BREACH. The Employee acknowledges that the covenants
contained in Article IV of this Agreement are independent covenants and that any
failure by the Employer to perform its obligations under this Agreement (other
than the act of nonpayment which is not cured by the Employer within thirty (30)
days of the receipt of written notice of said condition from the Employee) shall
not be a defense to enforcement of the covenants contained in Article IV,
including but not limited to a temporary or permanent injunction. The Employee
acknowledges that damages in the event of Employee's breach of this Article IV
will be difficult, if not impossible, to ascertain and it is therefore agreed
that the Employer, in addition to, and without limiting any other remedy or
right it may have, shall have the right to an injunction enjoining the said
breach. Employee agrees to
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<PAGE>
reimburse Employer for all costs and expenses, including reasonable attorney's
fees, incurred by Employer because of any breach of this Article.
ARTICLE V
ASSIGNMENT
----------
5.1 PROHIBITION OF EMPLOYMENT ASSIGNMENT. The Employee agrees on behalf
of the Employee and the Employee's heirs and executors, personal
representatives, and any other person or persons claiming any benefit under the
Employee by virtue of this Agreement, that this Agreement and the rights,
interests, and benefits hereunder shall not be assigned, transferred, pledged or
hypothecated in any way by the Employee or the Employee's heirs, executors and
personal representatives, and shall not be subject to execution, attachment or
similar process. Any attempt to assign, transfer, pledge, hypothecate or
otherwise dispose of this Agreement or any such rights, interests and benefits
thereunder contrary to the foregoing provision, or the levy of any attachment or
similar process thereupon shall be null and void and without effect and shall
relieve the Employer of any and all liability hereunder.
5.2 RIGHT OF EMPLOYER TO ASSIGN. This Agreement shall be assignable and
transferable by the Employer to Employer's transferee, assignee or any
successor-in-interest, parent, subsidiary or affiliate of Employer, and shall
inure to the benefit of and be binding upon the Employee, the Employee's heirs
and personal representatives, and the Employer and its successors and assigns.
Employee agrees to execute all documents necessary to ratify and effectuate such
assignment.
5.3 BINDING EFFECT IF TRANSFERRED. In the event this Agreement is
transferred by Employer, the term "Employer" and "Company" used herein shall
refer to and be binding upon the Employer's transferee or assignee.
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<PAGE>
ARTICLE VI
GENERAL
6.1 GOVERNING LAW. This Agreement shall be subject to and governed by
the laws of the State of Maryland, irrespective of the fact that the Employee
may become a resident of a different state.
6.2 BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the Employer and the Employee and their respective heirs, legal
representatives, executors, administrators, successors and permitted assigns.
6.3 ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement
between the parties and contains all of the agreements between the parties with
respect to the subject matter hereof; this Agreement supersedes any and all
other agreements, either oral or in writing, between the parties hereto with
respect to the subject hereof. No change or modification of this Agreement shall
be valid unless the same be in writing and signed by both parties hereto. No
waiver of any provisions of this Agreement shall be valid unless in writing and
signed by the person or party to be charged.
6.4 SEVERABILITY. If any portion of this Agreement shall be for any
reason, invalid or unenforceable, the remaining portion or portions shall
nevertheless be valid, enforceable and carried into effect, unless to do so
would clearly violate the present legal and valid intention of the parties
hereto.
- 13 -
<PAGE>
6.5 NOTICES. All notices, demands, requests, consents, approvals or
other communications required or permitted hereunder shall be in writing and
shall be delivered by hand, registered or certified mail with return receipt
requested or by a nationally recognized overnight delivery service, in each case
with all postage or other delivery charges prepaid, and to the address of the
party to whom it is directed as indicated below, or to such other address as
such party may specify by giving notice to the other in accordance with the
terms hereof. Any such notice shall be deemed to be received (i) when delivered,
if by hand, (ii) on the next business day following timely deposit with a
nationally recognized overnight delivery service, or (iii) on the date shown on
the return receipt as received or refused or on the date the postal authorities
state that delivery cannot be ac
IF TO THE COMPANY: Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, MD 21117
Attn: General Counsel
IF TO THE EMPLOYEE: Anthony R. Masso
15224 Manor Lake Drive
Rockville, MD 20853
6.6 INDEPENDENT LEGAL COUNSEL. Employee represents and warrants that he
has had the opportunity to seek the advice of independent legal counsel prior to
signing this Agreement, and that the Company has recommended to him that he
obtain such counsel.
6.7 ATTORNEY'S FEES. In the event of litigation concerning this
Agreement, the prevailing party shall be entitled to collect from the losing
party attorney's fees and costs, including those on appeal.
- 14 -
<PAGE>
IN WITNESS WHEREOF, the Employer has caused this Agreement to be signed
by its duly authorized officers and its corporate seal to be hereunto affixed,
and the Employee has hereunto set Employee's hand on the day and year first
above written.
EMPLOYER EMPLOYEE
- -------- --------
Integrated Health Services,
Inc., a Delaware Corporation
/s/ Anthony R. Masso
By:-------------------------------- ------------------------------
Lawrence P. Cirka, Anthony R. Masso
Senior Vice President and
Chief Operating Officer
- 15 -
CONSENT OF INDEPENDENT AUDITORS
We consent to incorporation by reference in the registration statements (Nos.
33-44648, 33-44649, 33-44650, 33-44651, 33-44653, 33-53914, 33-53912, 33-53916,
33-86684, 33-97190 and 333-01432) on Form S-8, (Nos. 33-66126, 33-68302,
33-77380, 33-81378, 33-87890, 33-98764 and 333-04053) on Form S-3 and (Nos.
333-12685) on Form S-4 of Integrated Health Services, Inc. of our report dated
March 24, 1997, relating to the consolidated balance sheets of Integrated Health
Services, Inc. and subsidiaries as of December 31, 1995 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996 and the
related schedule, which report appears in the December 31, 1996 annual report on
Form 10-K of Integrated Health Services, Inc.
Our report refers to the adoption of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in
1995.
Baltimore, Maryland KPMG Peat Marwick LLP
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 39,028
<SECURITIES> 2,044
<RECEIVABLES> 368,410
<ALLOWANCES> 41,527
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<PP&E> 864,335
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0
0
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<INTEREST-EXPENSE> 64,110
<INCOME-PRETAX> 111,480
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<INCOME-CONTINUING> 47,765
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<EXTRAORDINARY> 2,327
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