SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM 8-K/A
------------------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) December 31, 1997
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INTEGRATED HEALTH SERVICES, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 1-12306 23-2428312
- ---------------------------- ----------- -----------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
10065 Red Run Boulevard, Owings Mills, Maryland 21117
- -------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (410) 998-8400
-----------------------------
Not Applicable
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(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On December 31, 1997, Integrated Health Services, Inc. ("IHS")
acquired from HEALTHSOUTH Corporation ("HEALTHSOUTH") 139 owned, leased or
managed long-term care facilities, 12 specialty hospitals, a contract therapy
business having over 1,000 contracts and an institutional pharmacy business
serving approximately 38,000 beds. The businesses acquired by IHS were acquired
by HEALTHSOUTH in its recent acquisition of Horizon/CMS Healthcare Corporation.
Under the terms of the acquisition agreement, IHS paid $1.15 billion
in cash and assumed approximately $100 million in debt. IHS funded the purchase
price with available cash from term loan and revolving credit borrowings under
its $2.15 billion revolving credit and term loan facility and the sale of its
9 1/4% Senior Subordinated Notes due 2008. The transaction will be treated as a
purchase for accounting and financial reporting purposes.
Donaldson Lufkin & Jenrette Securities Corporation and Morgan Stanley
Dean Witter Discover & Co. acted as financial advisors to IHS in the
transaction.
ITEM 5. OTHER EVENTS
In connection with the acquisition of the businesses from HEALTHSOUTH
described in Item 2 above IHS and the lenders under IHS' revolving credit and
term loan facility (the "Credit Facility") amended the Credit Facility to
provide for an additional $400 million term loan facility (the "Additional Term
Facility") to finance a portion of the purchase price for the acquisition and to
amend certain covenants to permit the consummation of the acquisition. The
Additional Term Facility, which was borrowed at the closing of the acquisition,
will mature on December 31, 2005, and will be amortized beginning December 31,
1998 as follows: 1998 -- $4 million; each of 1999, 2000, 2001, 2002 and 2003 --
$4 million (payable in equal quarterly installments); 2004 -- $176 million
(payable in equal quarterly installments); and 2005 -- $200 million (payable in
equal quarterly installments). The Additional Term Facility bears interest at a
rate equal to, at the option of IHS, either (i) in the case of Eurodollar loans,
the sum of (x) two and one-quarter percent or two and one-half percent
(depending on the ratio of IHS' Debt (as defined in the Credit Facility) to
earnings before interest, taxes, depreciation, amortization and rent, pro forma
for any acquisitions or divestitures during the measurement period (the
"Debt/EBITDAR Ratio")) and (y) the interest rate in the London interbank market
for loans in an amount substantially equal to the amount of borrowing and for
the period of borrowing selected by IHS or (ii) the sum of (a) the higher of (1)
Citibank, N.A.'s base rate or (2) one percent plus the latest overnight federal
funds rate plus (b) a margin of one percent or one and one-quarter percent
(depending on the Debt/EBITDAR Ratio). The Additional Term Facility can be
prepaid at any time in whole or in part without penalty.
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<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
1. The combined balance sheets of selected facilities
operated by Horizon/CMS Healthcare Corporation to be sold
to Integrated Health Services, Inc. as of May 31, 1997 and
1996 and the related consolidated statements of operations
and parent investment and advances and cash flows for the
years ended May 31, 1997 and 1996, and the notes thereto,
and the report of Arthur Andersen LLP, are included
herein.
2. The combined balance sheet of the selected facilities
operated by Horizon/CMS Healthcare Corporation to be sold
to Integrated Health Services, Inc. as of September 30,
1997 and November 30, 1997 and the related consolidated
statements of operations and parent investment and
advances and cash flows for the four months ended
September 30, 1996 and 1997 and the six months ended
November 30, 1997 are included herein.
(b) PRO FORMA FINANCIAL INFORMATION.
IHS' unaudited pro forma consolidated balance sheet at
September 30, 1997 and statement of operations for the year
ended December 31, 1996 and the nine months ended September
30, 1997, reflecting the acquisition of the selected
facilities operated by Horizon/CMS Healthcare Corporation, the
Coram Lithotripsy division and RoTech Medical Corporation and
certain other acquisitions and divestitures consummated by IHS
during the period commencing January 1, 1996 and ending
September 30, 1997, are included herein.
(c) EXHIBITS.
2. Purchase and Sale Agreement, entered into as of November 3,
1997, between HEALTHSOUTH Corporation, Horizon/CMS Healthcare
Corporation and Integrated Health Services, Inc. (incorporated
herein by reference to Exhibit 2 to Current Report on Form 8-K
dated November 3, 1997 of Integrated Health Services, Inc.)
10. Amendment No. 1 dated as of December 1, 1997, to the
Revolving Credit and Term Loan Agreement among Integrated
Health Services, Inc., the lenders parties to the Credit
Agreement and Citibank, N.A., as administrative agent for the
lenders.*
23. Consent of Arthur Andersen LLP.
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* Filed as an exhibit to the Company's Current Report on Form 8-K dated
December 31, 1997 and filed January 14, 1998.
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Integrated Health Services, Inc.:
We have audited the accompanying combined balance sheets of selected facilities
operated by Horizon/CMS Healthcare Corporation (a wholly owned subsidiary of
HEALTHSOUTH Corporation) as described in Note 1 as of May 31, 1997 and 1996, to
be sold to Integrated Health Services, Inc. and the related combined statements
of operations, parent investment and advances, and cash flows for the years then
ended. These financial statements are the responsibility of the selected
facilities management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of the selected
facilities as of May 31, 1997 and 1996, to be sold to Integrated Health
Services, Inc. and the results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
March 6, 1998
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<PAGE>
ACQUIRED FACILITIES OPERATED BY HORIZON/CMS HEALTHCARE CORPORATION
AND SOLD TO INTEGRATED HEALTH SERVICES, INC.
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER
MAY 31, 30,
---------------------------- ----------
1997 1996 1997
-------- -------- ----------
ASSETS (UNAUDITED)
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents $ 18,817 $ 21,381 $ 26,643
Accounts receivable and settlements,
net of allowance for doubtful accounts
of $32,420, $30,549 and $35,015 as
of May 31, 1997, May 31, 1996 and
September 30, 1997 respectively 231,304 222,640 222,282
Prepaid and other assets 42,342 35,894 45,221
Deferred income taxes - 12,296 --
-------- -------- --------
Total current asets 292,463 292,211 294,146
PROPERTY AND EQUIPMENT, net 402,726 372,219 411,771
GOODWILL, net 100,527 95,909 99,616
OTHER INTANGIBLE ASSETS, net 18,222 17,920 17,469
NOTES RECEIVABLE, excluding current portion 10,890 10,882 10,653
OTHER ASSETS 16,175 18,681 19,561
-------- -------- --------
Total assets $841,003 $807,822 $853,216
======== ======== ========
LIABILITIES AND PARENT INVESTMENT AND ADVANCES
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,520 $ 5,088 $ 3,300
Accounts payable 14,310 10,050 15,754
Accrued expenses and other liabiltiies 70,357 68,706 70,400
Deferred income taxes 845 - 845
-------- -------- --------
Total current liabilities 89,032 83,844 90,299
LONG-TERM DEBT, excluding current portion 91,581 95,115 91,177
DEFERRED INCOME TAXES 9,604 13,680 9,604
OTHER LIABILITIES 11,872 13,400 11,294
-------- -------- --------
Total liabilities 202,089 206,039 202,374
MINORITY INTERESTS 644 504 86
COMMITMENTS AND CONTINGENCIES
PARENT INVESTMENT AND ADVANCES 638,270 601,279 650,756
-------- -------- --------
Total liabilities and parent
Investment and advances $841,003 $807,822 $853,216
======== ======== ========
</TABLE>
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<PAGE>
ACQUIRED FACILITIES OPERATED BY HORIZON/CMS HEALTHCARE CORPORATION
AND SOLD TO INTEGRATED HEALTH SERVICES, INC.
COMBINED STATEMENTS OF OPERATIONS AND PARENT INVESTMENT AND ADVANCES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS ENDED
MAY 31, SEPTEMBER 30,
------------ -------- -------- --------
1997 1996 1997 1996
------------ -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
TOTAL OPERATING REVENUES $974,449 $928,280 $327,580 $319,155
----------- -------- -------- --------
COSTS AND EXPENSES:
Costs of services 838,872 790,371 284,467 273,928
Facility leases 43,064 41,285 14,843 13,822
Depreciation and amoritization 28,661 25,916 9,702 9,894
Interest expsense 43,594 39,952 14,958 13,458
Special Charges - 22,950 - -
----------- -------- -------- --------
Total costs and expenses 954,191 920,474 323,970 311,102
----------- -------- -------- --------
Earnings before minority interest and
income taxes 20,258 7,806 3,610 8,053
Minority interests (1,351) (1,302) 203 (604)
Earnings before income taxes 18,907 6,504 3,813 7,449
Income taxes 9,065 12,423 2,050 3,470
----------- -------- -------- --------
Net earnings (loss) 9,842 (5,919) 1,763 3,979
Parent investment and advances,
beginning of period 601,279 550,170 638,270 601,279
Net advances from parent 27,149 57,028 10,723 1,693
Parent investment and advances,
end of period $638,270 $601,279 $650,756 $606,951
=========== ======== ======== ========
</TABLE>
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<PAGE>
ACQUIRED FACILITIES OPERATED BY HORIZON/CMS HEALTHCARE CORPORATION AND
SOLD TO INTEGRATED HEALTH SERVICES, INC.
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS ENDED
MAY 31, SEPTEMBER 30,
----------------------------- --------------------------
1997 1996 1997 1996
-------------- ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) ........................................... $ 9,842 $ (5,919) $ 1,763 $ 3,979
--------- --------- --------- --------
Adjustments:
Depreciation and amortization ............................... 28,661 25,916 9,702 9,894
Provision for doubtful accounts ............................. 8,716 4,557 4,961 2,226
Special charges ............................................. -- 22,950 -- --
Other ....................................................... (1,583) (303) (781) 70
--------- --------- --------- --------
35,794 53,120 13,882 12,190
--------- --------- --------- --------
Increase (decrease) in cash from changes in
assets and liabilities excluding effects of
acquisitions and dispositions:
Patient care accounts receivable and estimated third
party settlements ........................................ (16,222) (30,610) 4,061 (8,244)
Prepaid and other assets ................................... (6,418) (10,100) (2,879) (1,034)
Deferred income taxes ...................................... 9,065 33 -- --
Accounts payable and accrued expenses ...................... 5,853 6,562 1,487 6,717
Other liabilities .......................................... 62 (324) -- --
--------- --------- --------- --------
(7,660) (34,439) 2,669 (2,561)
--------- --------- --------- --------
Net cash provided by operating activities ................. 37,976 12,762 18,314 13,608
--------- --------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Other intangible assets ....................................... (2,838) (4,147) -- --
Acquisition of property and equipment ......................... (51,989) (45,849) (17,083) (9,777)
Notes receivable .............................................. (8) (4,792) 237 6
Other investing activities .................................... (1,719) 420 (3,386) (120)
---------- --------- --------- --------
Net cash used in investing activities ....................... (56,554) (54,368) (20,232) (9,891)
---------- --------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings ..................................... 3,203 2,182 -- --
Long-term debt repayments ..................................... (8,906) (3,002) (624) (713)
Minority interests ............................................ 140 (932) (355) (511)
Net cash advances from parent ................................. 21,577 52,942 10,723 (5,285)
---------- --------- --------- --------
Net cash (used in) provided by financing activities ......... 16,014 51,190 9,744 (6,509)
---------- --------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ................................................... (2,564) 9,584 7,826 (2,792)
CASH AND CASH EQUIVALENTS, beginning of year ................... 21,381 11,797 18,817 21,381
---------- --------- --------- --------
CASH AND CASH EQUIVALENTS, end of year ......................... $ 18,817 $ 21,381 $ 26,643 $ 18,589
========== ========= ========= ========
</TABLE>
The accompanying notes to financial statements
are an integral part of these combined statements.
-7-
<PAGE>
ACQUIRED FACILITIES OPERATED BY HORIZON/CMS HEALTHCARE CORPORATION
--------------------------------------------------------------------
AND SOLD TO INTEGRATED HEALTH SERVICES, INC.
--------------------------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
FOR THE YEARS ENDED MAY 31, 1997 AND 1996 AND THE UNAUDITED FOUR
-----------------------------------------------------------------
MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
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(1) COMPANY BACKGROUND, ACQUISITION AGREEMENT AND BASIS OF PRESENTATION
Horizon/CMS Healthcare Corporation ("Horizon" or the "Company") is a wholly
owned subsidiary of HEALTHSOUTH Corporation ("HEALTHSOUTH"). Horizon was
acquired by HEALTHSOUTH on October 29, 1997. On December 31, 1997, Integrated
Health Services, Inc. ("Integrated") acquired from HEALTHSOUTH certain of the
Horizon operations ("Acquired Facilities") as outlined in the Purchase and Sale
Agreement dated November 3, 1997, between HEALTHSOUTH Corporation, Horizon/CMS
Healthcare Corporation and Integrated Health Services, Inc. The Acquired
Facilities consist of 139 owned, leased or managed long-term care facilities, 12
specialty hospitals, a contract therapy business having over 1,000 contracts and
35 institutional pharmacies. Under the terms of the acquisition agreement,
Integrated paid $1.15 billion in cash and assumed approximately $100 million in
debt.
In July 1995, Horizon completed the merger of one of Horizon's wholly owned
subsidiaries with Continental Medical Systems, Inc. and subsidiaries ("CMS").
The merger was accounted for as a pooling of interests. Accordingly, the
accompanying financial statements include the accounts and operations of the
Acquired Facilities previously a part of CMS for all periods prior to the
merger.
The accompanying combined financial statements represent the accounts of the
Acquired Facilities and include assets and liabilities sold and selected
non-acquired liabilities which would be considered "regenerative" in nature
(accruals and other liabilities). These financial statements are presented for
the purposes of complying with the Securities and Exchange Commission's rules
and regulations regarding acquired businesses.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
- ------------------
The Acquired Facilities provide post acute and long-term health care services.
The long-term care facilities provide skilled nursing care and basic patient
services with respect to daily living and general medical needs. The Acquired
Facilities also provide contract therapy medical rehabilitation services,
institutional pharmacy services, Alzheimer's care and home health care.
Substantially all of these services are within the post-acute health care market
and, accordingly, the Acquired Facilities operate within a single industry
segment.
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<PAGE>
Basis of Combination
- --------------------
The combined financial statements include the accounts of the Acquired
Facilities and those entities that are controlled by the Acquired Facilities and
in which they own more than 50% of the equity. All significant intercompany
accounts and transactions have been eliminated in combination.
In certain cases, activities and amounts are centrally controlled and managed by
the Company on behalf of the Acquired Facilities, which require allocations. The
methods for allocation are described in the following paragraphs and footnotes.
Operating Revenues
- ------------------
The Acquired Facilities derive net patient care revenues principally from public
funding through the Medicaid and Medicare programs, private pay patients and
non-affiliated long-term care facilities. For fiscal years 1997 and 1996 and the
four months ended September 30, 1997 and 1996, the Acquired Facilities derived
23%, 22%, 24% and 21%, respectively, of their revenues from Medicare. For fiscal
years 1997 and 1996 and the four months ended September 30, 1997 and 1996, the
Acquired Facilities derived 27%, 29%, 27% and 28%, respectively, of their
revenues from Medicaid. Under the Medicare program and some state Medicaid
programs, the Acquired Facilities long-term care facilities are paid interim
amounts designed to approximate the facilities reimbursable costs. Such interim
amounts due from third party payors and amounts due from other payor sources are
recorded as accounts receivable. With respect to these programs for which
interim payments are subject to retroactive cost adjustment, actual costs
incurred are reported through cost reports by each facility annually. Throughout
the annual cost reporting period, the Acquired Facilities record, for each of
several hundred Medicare and Medicaid certified providers operated by the
Acquired Facilities, the estimated difference between interim payments received
and the expected actual costs as estimated third party settlements. The cost
reports are subject to examinations and retroactive adjustments, which may
result in upward or downward adjustment from initially submitted reimbursable
costs. The Acquired Facilities generally expect final settlement on annual cost
reports to occur approximately 24 months following the end of an annual cost
reporting period. Tentative partial settlement may occur as soon as six months
following the cost reporting period. Differences between amounts originally
accrued as estimated third-party settlements, subsequent revisions of estimates,
and the amounts ultimately received or paid are recorded in operations in the
year of final settlement and disclosed if material. Most of the Acquired
Facilities' Medicaid payments are prospective and no retroactive adjustment is
generally made to such payments.
Estimated settlements reflect expected amounts receivable from third parties
offset by expected amounts payable to third parties. The Acquired Facilities
total net settlement positions are anticipated to vary from period to period due
to several factors including: the significant number of individual providers for
which settlements must be estimated, that several cost reporting periods remain
open for each provider at any given time, the numerous cost reporting periods of
the Acquired Facilities' various providers, the interrelationship between
continually changing interim rates and estimated settlements, the unpredictable
timing of tentative and final settlements and the offset of estimated payables
and receivables.
-9-
<PAGE>
While settlement adjustments are common upon third-party intermediary cost
report examination, the Acquired Facilities are currently unaware of any matters
that may result in a retroactive cost report adjustment that would be material
to the Acquired Facilities financial condition or results of operations.
There have been and the Acquired Facilities expect that there will continue to
be a number of proposals to limit Medicare and Medicaid reimbursement. The
Acquired Facilities cannot predict at this time whether any of these proposals
will be adopted or, if adopted and implemented, what effect such proposals would
have on the Acquired Facilities.
The Acquired Facilities have also entered into payment agreements with certain
commercial insurance carriers, health maintenance organizations, and other payor
sources. The basis for payment under these arrangements include prospectively
determined amounts for each unit of service.
Cash and Cash Equivalents
- -------------------------
For purposes of the accompanying combined statements of cash flows, the Acquired
Facilities consider their highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
The Acquired Facilities currently participate in a centralized cash management
program with the Company whereby all excess cash generated by the Acquired
Facilities is transferred to and invested by the Company or used to repay any
working capital advances from the Company.
Depreciation
- ------------
Property and equipment is stated at the lower of cost or net realizable value.
Depreciation is recorded using the straight-line method over the estimated
useful lives of the assets (buildings - 30 to 40 years; equipment - 3 to 20
years). Maintenance and repairs are charged to expense as incurred. Major
renewals or improvements are capitalized.
Goodwill and Other Intangible Assets Resulting from Business Combinations
- -------------------------------------------------------------------------
In connection with acquisitions accounted for using the purchase method, the
purchase price is allocated to the estimated fair value of the tangible and
identifiable intangible net assets as of the effective date of the acquisition,
with any excess cost allocated to goodwill.
Identifiable intangible assets are identified and measured under the provisions
of Accounting Principles Board Opinion No. 16, "Business Combinations."
Historically, the nature and circumstances surrounding Horizon's acquisition of
the Acquired Facilities' have resulted in the identification and recognition of
certain identifiable intangible assets including: favorable lease purchase
costs, noncompetition agreements, contract rights, sign-on bonuses and trade
name costs. These intangible assets are amortized over the respective estimated
useful lives from one to ten years.
-10-
<PAGE>
Management believes that the excess cost over net assets of acquired companies
(goodwill) generally has an unlimited useful life and, therefore, an
amortization period of 15 to 40 years has been assigned. In determining that the
life of goodwill is unlimited, management considered the following factors: (i)
the concentrations that exist in the Acquired Facilities selected markets and
the fact that acquisitions frequently serve as a platform for the integration of
other services provided by the Acquired Facilities; (ii) the long-term and
specialty health care industry, which is positively impacted by aging trends and
the continued pressure to transfer patients from high cost, acute care settings
to long-term and specialty health care settings; (iii) the increasing acceptance
by the medical establishment of long-term and specialty health care as a better
alternative to acute care hospital based treatment; and (iv) the nature of the
services provided by the Acquired Facilities, which will be continuously needed
in the future and are not subject to obsolescence.
Management reviews the realizability of the carrying amount of goodwill whenever
events or circumstances occur that indicate the recorded costs may not be
recoverable. Principal factors considered by the Acquired Facilities in this
review include changes in market share and competitive conditions, technological
and regulatory changes (including reimbursement), demand trends and earnings
trends of the acquired companies. If such a review indicates that the
undiscounted future cash flows from operations of the acquired business are less
than the recorded asset, its carrying amount will be reduced to its estimated
fair value. In the absence of an active market for the asset, fair value will be
estimated using accepted valuation techniques, including discounted cash flow
analysis.
As discussed further in Note 9, the Company recorded special charges related to
the carrying amounts of certain tangible and intangibles associated with some of
these Acquired Facilities.
Income Taxes
- ------------
The Acquired Facilities have been included in the consolidated federal income
tax return of Horizon, as required in the applicable statutes, for the fiscal
years ended May 31, 1997 and 1996. The combined tax provision included in the
accompanying financial statements has been presented as if the Acquired
Facilities filed a separate tax return for all periods presented, and has been
accounted for under the provisions of Securities and Exchange Commission's Staff
Accounting Bulletin No. 55 ("SAB 55") and Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." SFAS 109 requires
the recognition of deferred tax liabilities and assets for the expected future
tax consequences of temporary differences between the carrying amounts and the
tax basis of assets and liabilities.
Self Insurance
- --------------
Horizon maintains malpractice insurance with a level of self-insurance retention
(deductible) limitation. Horizon's self-insured retention with respect to
malpractice and public liability insurance is $1.0 million per occurrence per
policy year and $11.0 million in the aggregate with a subaggregate of $3.0
million with respect to long-term care operations. In addition, Horizon
maintains umbrella malpractice and public liability insurance coverage of $50.0
million per occurrence and in the aggregate. Workers' compensation coverage is
effected
-11-
<PAGE>
through deductible insurance policies and qualified self insurance plans which
vary by the states in which Horizon operates. Provisions for estimated
settlements are provided in the period of the related coverage and are
determined on a case by case basis plus an amount for incurred but not reported
claims. Differences between the amounts accrued and subsequent settlements are
recorded in operations in the period of settlement. Horizon is largely
self-insured with respect to health insurance benefits made available to its
employees. Provisions for estimated claim payments are provided in the period of
the related coverage and are determined based upon historical development
experience and include amounts for incurred but not reported claims.
The Acquired Facilities participate in these programs and expenses related to
these services are recorded in the accompanying financial statements as
discussed in Note 3.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
In the case of all known contingencies, the Acquired Facilities accrue a charge
for a loss when it is probable and the amount is reasonably estimable. Accruals
for loss contingencies include estimates of legal fees and other related costs
to be incurred in connection with the known contingency. As facts concerning
contingencies becomes known, the Acquired Facilities reassess their position and
adjust recorded reserves, as necessary.
Interim Unaudited Financial Information
- ---------------------------------------
In management's opinion, the financial statements for the four month periods
ended September 30, 1997 and 1996, include all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the Acquired Facilities
financial position, results of operations, and cash flows as of and for the
periods then ended. Operating results for the four month period ended September
30, 1997 are not indicative of the results that may be expected on an annual
basis.
(3) TRANSACTIONS WITH HORIZON
Employee Benefit Programs
- -------------------------
During fiscal years 1997 and 1996 and the four months ended September 30, 1997
and 1996, the Acquired Facilities participated in Horizon's employee benefit
programs. These programs consist of professional liability insurance, workers'
compensation coverage and health insurance benefits. The cost of these programs,
related to the Acquired Facilities, have been included in the accompanying
financial statements.
-12-
<PAGE>
The amounts recorded at the Acquired Facilities for professional liability
insurance, workers' compensation coverage and health insurance benefits are
based on the number of facility beds, a percentage of facility total labor costs
and number of facility participants, of the Acquired Facilities, respectively,
and are believed to approximate, in all material respects, what would have been
incurred had the Acquired Facilities operated on a stand-alone basis.
Approximately $36.0 million, $30.3 million, $12.0 million and $10.1 million have
been recorded for the fiscal years ended May 31, 1997 and 1996 and the four
months ended September 30, 1997 and 1996, respectively.
Employee Benefits
- -----------------
Horizon also has 401(k) savings plans available to substantially all employees
who have been with Horizon for more than six months. Employees may defer up to
15% of their salary subject to the maximum permitted by law. Horizon matches a
portion of the employee's contribution, which may be discretionary, depending
upon the plan. Employee contributions are vested immediately. Employer
contributions vest on a graduated basis, with full vesting achieved at the end
of five or seven years, depending upon the plan or upon termination of the plan
by Horizon.
The Acquired Facilities participate in the 401(k) savings plan and Horizon
contributed approximately $1.0 million and $1.6 million to these plans on behalf
of the employees of the Acquired Facilities for the years ended May 31, 1997 and
1996, respectively. These amounts have been recorded in the accompanying
statements of operations. No amounts were contributed with respect to these
plans for the four months ended September 30, 1997 and 1996.
In addition, Horizon has a profit-sharing plan to which it may make
contributions at its discretion. Horizon has not made any contributions to this
plan. Horizon may terminate any of the above plans at any time.
Corporate Administration
- ------------------------
During fiscal years 1997 and 1996 and the four months ended September 30, 1997
and 1996, Horizon provided corporate support services to the Acquired Facilities
including audit, tax, legal, cash management, employee benefits and insurance
program administration and other corporate administration services. The costs
for these services have been allocated to the Acquired Facilities and are
included in the accompanying financial statements based upon the proportion of
total costs attributable to the Acquired Facilities activities determined on a
basis representative of the cost driver including specific identification,
proportionate revenues and proportionate full time equivalent personnel.
Approximately $2.7 million, $1.2 million, $0.8 million and $0.6 million have
been allocated for the fiscal years ended May 31, 1997 and 1996 and the four
months ended September 30, 1997 and 1996, respectively.
The amounts allocated to the Acquired Facilities are not necessary indicative of
the actual costs which may have been incurred had the Acquired Facilities
operated as an entity unaffiliated with Horizon. However, management believes
that the allocation is reasonable and in accordance with SAB 55.
-13-
<PAGE>
Parent Investment and Advances
- ------------------------------
Parent investment and advances consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
September
May 31, 30,
---------------------------------- ---------------
1997 1996 1997
(Unaudited)
<S> <C> <C> <C>
Parent's initial investment in Acquired Facilities $ 286,409 $ 269,853 $ 289,219
Working capital advances and corporate allocations, net of
cash earnings 213,841 216,555 200,302
Other 138,020 114,871 161,235
----------------- ---------------- ---------------
Total parent investment and advances $ 638,270 $ 601,279 $ 650,756
================= ================ ===============
</TABLE>
Horizon uses its credit facility ("Parent Credit Facility") to provide funding
for a significant portion of Horizon's initial investment in the Acquired
Facilities, including replacing debt formerly at the facility level. Interest
expense has been charged to the Acquired Facilities for these borrowings at a
rate intended to approximate the cost incurred under the Parent Credit Facility
(7.4% at May 31, 1997). Amounts recorded as a component of interest expense in
the accompanying financial statements are $17.4 million, $13.8 million, $6.4
million and $4.7 million for the years ended May 31, 1997 and 1996 and the four
months ended September 30, 1997 and 1996, respectively.
Under Horizon's centralized cash management program, Horizon transfers excess
cash from and makes working capital advances and corporate allocations to the
Acquired Facilities. These advances are net of Horizon's cash earnings in the
Acquired Facilities and include amounts to fund cash shortfalls, capital
expenditures, advances for accounts payable and amounts paid for employee
benefits and other programs administered by Horizon. Because of the inherent
difficulty in distinguishing certain elements of the Acquired Facilities capital
structure and the Parent's working capital advances, the Company in its normal
procedures neither credits the Acquired Facilities with investment earnings for
excess cash transfers nor charges interest expense for these advances. However,
pro forma interest expense has been recorded in the accompanying financial
statements based upon the Acquired Facilities average outstanding advances at a
rate intended to approximate the cost incurred under the Parent Credit Facility.
Allocated interest of $14.4 million, $12.6 million, $5.2 million and $4.4
million has been recorded in the accompanying financial statements as a
component of interest expense for the years ended May 31, 1997 and 1996 and the
four months ended September 30, 1997 and 1996, respectively.
-14-
<PAGE>
Related Party Transactions
- --------------------------
Certain of the Acquired Facilities provided therapy services to Horizon entities
that have not been acquired by Integrated. These transactions were completed in
the normal course of business and have not been eliminated in the accompanying
combined financial statements. The total operating revenues recorded with
respect to these transactions were approximately $6.3 million, $2.6 million,
$1.7 million, and $2.3 million for the years ended May 31, 1997 and 1996 and the
four months ended September 30, 1997 and 1996, respectively. The total accounts
receivable outstanding with respect to these transactions was approximately $1.4
million, $0.6 million, $0.4 million and $2.1 million as of May 31, 1997 and 1996
and September 30, 1997 and 1996, respectively.
Stand Alone Basis
- -----------------
The accompanying financial statements reflect all of the Acquired Facilities
costs of doing business, including all expenses incurred by Horizon on behalf of
the Acquired Facilities in accordance with SAB 55. Certain corporate level costs
and expenses have not been allocated to the Acquired Facilities. These costs and
expenses include those costs that are driven exclusively by corporate level
activities, including senior executive management salaries and other corporate
support costs. As such, costs and expenses would not have been materially
increased had the Acquired Facilities operated on a stand-alone basis.
(4) NOTES RECEIVABLE
Notes receivable consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
September
May 31, 30,
---------------------------------- ---------------
1997 1996 1997
(Unaudited)
<S> <C> <C> <C> <C>
Variable rate note receivable based on lesser of 8% or
LIBOR + 2.25% (8.0% at May 31, 1997), full recourse;
interest payable semi-annually; principal payable
December 2008; unsecured $ 10,653 $ 10,653 $ 10,653
Other notes receivable due at varying dates,
bearing interest at 6% to 12%
3,587 2,626 -
----------------- ---------------- ----------------
Notes receivable 14,240 13,279 10,653
Less current portion (3,350) (2,397) -
----------------- ---------------- ----------------
Notes receivable, excluding current portion $ 10,890 $ 10,882 $ 10,653
================= ================ ===============
</TABLE>
-15-
<PAGE>
(5) PROPERTY AND EQUIPMENT
Property and equipment owned and held under capital lease is stated at cost and
consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
September
May 31, 30,
---------------------------------- ---------------
1997 1996 1997
(Unaudited)
<S> <C> <C> <C>
Land $ 46,559 $ 45,169 $ 49,374
Buildings 325,198 291,937 335,426
Equipment 96,465 80,130 100,704
----------------- ---------------- ---------------
468,222 417,236 485,504
Less accumulated depreciation and amortization (65,496) (45,017) (73,733)
----------------- ---------------- ---------------
Property and equipment, net $ 402,726 $ 372,219 $ 411,771
================= ================ ===============
(6) ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other current liabilities are comprised of the following (amounts in thousands):
September
May 31, 30,
---------------------------------- ---------------
1997 1996 1997
(Unaudited)
Salaries, wages and benefits $ 17,453 $ 19,859 $ 16,363
Accrued insurance 12,373 10,990 10,990
Accrued property and payroll taxes 18,423 16,147 21,141
Accrued income taxes 15,720 15,720 15,720
Accrued interest 855 2,828 1,960
Other 5,533 3,162 4,226
----------------- ---------------- ---------------
$ 70,357 $ 68,706 $ 70,400
================= ================ ===============
</TABLE>
-16-
<PAGE>
(7) LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following (amounts in thousands):
September
May 31, 30,
----------------------------- ---------------
1997 1996 1997
(Unaudited)
<S> <C> <C> <C> <C>
10%promissory note secured by mortgage, principal and
interest due monthly through fiscal 2003 2,860 $ 2,899 $ 2,849
First mortgage revenue bonds, interest @ 7.25%,
principal due annually, through mandatory sinking fund,
through fiscal 2009 2,715 2,855 2,715
First mortgage revenue bonds series 1985, interest at
12% due semiannually, principal due annually, through
mandatory sinking fund through fiscal 2016 2,185 2,215 2,185
11%promissory note secured by mortgage, principal and
interest due monthly through fiscal 2011 19,288 19,450 19,244
10.1% promissory note secured by mortgage, principal
due fiscal 2017 3,140 3,140 3,140
11.5% promissory note secured by mortgage, principal
and interest due monthly through fiscal 2001 4,260 4,292 4,251
11.5% promissory note secured by mortgage, principal
and interest due monthly through fiscal 2001 5,052 5,091 5,042
10.7% promissory note secured by mortgage, principal
and interest due monthly through fiscal 2004 5,232 5,289 5,217
Obligations under capital leases, interest at 9.09%
maturing in fiscal 2004 46,890 47,557 46,602
Other long-term debt, interest ranging from 5% to 14% 3,479 7,415 3,232
-------------- ---------------- ---------------
Long-term debt 95,101 100,203 94,477
Less current portion (3,520) (5,088) (3,300)
-------------- ---------------- ---------------
Long-term debt, excluding current portion 91,581 $ 95,115 $ 91,177
============== ================ ===============
</TABLE>
-17-
<PAGE>
The approximate aggregate maturities of long-term debt are as follows (amounts
in thousands):
Year ending May 31,
1998 $ 3,520
1999 2,246
2000 2,317
2001 11,121
2002 2,514
Thereafter 73,383
---------------
$ 95,101
===============
(8) LEASE COMMITMENTS
The Acquired Facilities have noncancellable operating leases primarily for
facilities and equipment. Certain leases provide for purchase and renewal
options of from 5 to 15 years, contingent rentals primarily based on operating
revenues and the escalation of lease payments coincident with increases in
certain economic indexes. Contingent rent expense for the years ended May 31,
1997 and 1996 and for the four months ended September 30, 1997 and 1996 was
approximately $1.6 million, $1.5 million, $0.6 million, and $0.5 respectively.
Future minimum payments under noncancellable operating leases are as follows:
Year ending May 31,
1998 $ 46,782
1999 39,144
2000 35,374
2001 32,763
2002 29,804
Thereafter 103,758
---------------
$ 287,625
===============
The Acquired Facilities are contingently liable for annual lease payments of
$6.8 million for leases on managed facilities. The leases expire at varying
dates through fiscal 2007.
Horizon leases seven facilities, under operating leases, from various limited
partnerships and/or limited liability companies of which a former director of
Horizon was a passive investor. The Acquired Facilities made lease payments of
$3.6 million under these leases in 1997.
-18-
<PAGE>
(9) SPECIAL CHARGES
---------------
Horizon recorded special charges in the years ended May 31, 1997 and 1996. These
special charges are discussed in Horizons Annual Report on Form 10-K and have
not been duplicated in the accompanying notes to financial statements as
management believes these charges, with the exception of the following, do not
relate to the Acquired Facilities. The following special charges relate to the
Acquired Facilities and have been recorded in the accompanying financial
statements for the year ended May 31, 1996.
(i) An approximate $21.3 million charge related to an impairment
adjustment resulting from the planned disposition of assets and
leasehold improvements of long-term care facilities which are
included in the Acquired Facilities. The charge represented the
amount by which the carrying amount of the properties intended for
sale at that time exceeded the estimated fair value of the
properties.
(ii) An approximate $1.6 million charge was recorded to reduce the
carrying value of selected long-lived assets to estimated fair
value. The assets written down are comprised largely of two
operations experiencing poor financial performance and for which
management had become concerned with respect to future prospects.
Fair value was based on estimated future cash flows to be generated
by the operations discounted at a market rate.
(10) INCOME TAXES
The proforma provision (benefit) for income taxes on net earnings (loss) as if
the Acquired Facilities were on a stand alone basis consists of the following
(amounts in thousands):
May 31,
--------------------------------
1997 1996
Current:
Federal $ - $ 14,108
State - 1,612
---------------- ---------------
- 15,720
---------------- ---------------
Deferred:
Federal 8,135 (2,959)
State 930 (338)
---------------- ----------------
9,065 (3,297)
---------------- ----------------
Total $ 9,065 $ 12,423
================ ================
-19-
<PAGE>
The differences between the total tax expense recorded on earnings (loss) before
income taxes and the income tax expense using the statutory federal income tax
rate (35 percent) were as follows (amounts in thousands):
<TABLE>
<CAPTION>
May 31,
----------------------------------
1997 1996
<S> <C> <C>
Computed tax expense (benefit) at statutory rate $ 6,617 $ 2,276
State income tax expense, net of federal income tax benefit 930 1,274
Amortization of goodwill 1,101 1,057
Goodwill write-offs, merger costs and other special charges - 7,448
Other 417 368
---------------- -----------------
Total income tax expense (benefit) $ 9,065 $ 12,423
================ =================
The components of the net deferred tax assets and liabilities are as follows (amounts in thousands):
May 31,
----------------------------------
1997 1996
Components of the deferred tax asset:
Reserves for special charges $ 530 $ 530
Basis difference in accounts receivable - 9,340
Accrued payroll and related benefits 2,611 2,902
Deferred lease credit 6,053 6,673
Net operating loss carryover 1,187 -
Other 66 -
---------------- ---------------
Total deferred tax asset 10,447 19,445
Net deferred tax asset
Components of the deferred tax liability:
Basis difference in accounts receivable, 3,669 -
Buildings and equipment, related basis differences,
deferred gain and depreciation 14,334 17,919
Partnership income (loss) 1,128 1,068
Deferred pre-opening costs 1,765 1,778
Other - 64
---------------- ---------------
Total deferred tax liability 20,896 20,829
---------------- ---------------
Excess of deferred assets over liabilities $ (10,449) $ (1,384)
================ ===============
</TABLE>
Management has estimated the approximate amount of provision for income taxes to
be 53.8 percent and 46.6 percent of pretax book income for the four months ended
September 30, 1997 and 1996.
-20-
<PAGE>
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Acquired Facilities financial instruments at
May 31, are as follows (amounts in thousands):
<TABLE>
<CAPTION>
1997 1996
--------------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ------------------------ ----------
<S> <C> <C> <C> <C>
Notes receivable $ 14,240 $ 14,240 $ 13,279 $ 13,279
Long-term debt, including current
portion 48,211 53,356 52,646 59,501
</TABLE>
The fair value of notes receivable was estimated by discounting the future cash
flows using current rates available to similar borrowers under similar
circumstances. The fair value of the Acquired Facilities long-term debt,
excluding capital leases, was estimated based on the quoted market prices for
the same or similar issues or on the current rates offered to the acquired
facilities for debt of the same remaining maturities.
(12) ACQUISITIONS
During fiscal 1997 and 1996 Horizon completed certain acquisitions of long-term
care facilities and providers of specialty health care services. The
acquisitions, with the exception of the CMS merger, have been accounted for
under the purchase method of accounting.
Goodwill associated with Horizon's acquisition of the Acquired Facilities and
special charge writedowns when appropriate, are reflected in the accompanying
financial statements.
(13) COMMITMENTS AND CONTINGENCIES
Letters of Credit
- -----------------
Horizon was contingently liable for letters of credit aggregating $34.6 million
at May 31, 1997 and September 30, 1997 and $37.9 million at May 31, 1996,
respectively, and by their guaranty so are the Acquired Facilities. The letters
of credit, which reduce the availability under the Nations Bank Facility were
used in lieu of lease deposits for facilities operated by Horizon and for
deposits under various workers' compensation programs.
Purchase Commitments
- --------------------
Under the terms of one of the Acquired Facilities lease agreements, the Acquired
Facilities has the option to purchase the facility and the lessor has the option
to require the Acquired Facilities to purchase the facility should the Acquired
Facilities fail to exercise the purchase option for $5.5 million at the end of
the lease term (August 1, 1998).
-21-
<PAGE>
Other
- -----
In connection with the Greenery merger, Horizon committed to manage three
Connecticut facilities for an affiliate of two former directors of Horizon.
Subject to the terms of the agreement, Integrated is committed to manage these
facilities through December, 1998 subject to the affiliate's right to terminate
sooner at any time with 90 days notice.
As of May 31, 1997 and September 30, 1997 Horizon had future commitments to fund
construction totaling approximately $15.1 million and $1.6 million,
respectively. The substantial majority of this total is comprised of amounts
necessary to complete ongoing construction on an office building to house
corporate operations which is included as a part of the Acquired Facilities.
(14) LEGAL PROCEEDINGS
Horizon is party to legal proceedings which are disclosed in the Horizon Annual
Report on Form 10-K and have not been duplicated in the accompanying notes to
financial statements as management believes these proceedings do not relate to
the Acquired Facilities. The purchase agreement between HEALTHSOUTH (Seller) and
Integrated (Buyer) includes an assumption of certain liabilities of the Acquired
Facilities arising from or in connection with certain disclosed litigation
related to the acquired assets and operations. The legal proceedings summarized
below have been determined to relate to the Acquired Facilities.
OIG/DOJ Investigation Involving Certain Medicare Part B and Related Co-Insurance
Billings
- --------------------------------------------------------------------------------
Horizon announced on March 15, 1996 that certain Medicare Part B and related
co-insurance billings previously submitted by Horizon were being investigated by
the Office of the Inspector General ("OIG") and the Department of Justice
("DOJ"). On December 31, 1996, Horizon announced that it had reached a
settlement with the DOJ and OIG that concluded their investigation of these
billings. Horizon also announced that it had received a letter from the United
States Attorney's office conducting such investigation indicating that the
United States declined any criminal prosecution of Horizon or any of its
employees with respect to these billings. Under the settlement, Horizon paid
approximately $5.8 million to the United States as a complete and final
resolution of such matters. In addition, pursuant to the terms of the
settlement, Horizon/ CMS is implementing a corporate-wide Medicare Part B
compliance program that includes the appointment of a subcommittee to Horizon's
Corporate Compliance Committee reporting directly to the Chairman's office and
to Horizon's Board of Directors, ongoing orientation and training sessions for
current and new employees, training evaluation and annual audits to assess
accuracy, validity and reliability of billings.
None of the revenue billings subjected to this investigation were recorded by
any of the Acquired Facilities in the accompanying financial statements, nor is
any of the final settlement allocated to the Acquired Facilities.
-22-
<PAGE>
Michigan Attorney General Investigation Into Long-Term Care Facility In Michigan
- --------------------------------------------------------------------------------
Horizon learned in September 1996 that the Attorney General of the State of
Michigan was investigating one of its skilled nursing facilities. The facility,
an Acquired Facility in Howell, Michigan, has been owned and operated by Horizon
since February 1994. The Attorney General seized a number of patient, financial
and accounting records that were located at this facility. By order of a circuit
judge in the county in which the facility is located, the Attorney General was
ordered to return patient records to the facility for copying. The investigation
appears to involve allegations arising out of a licensing survey conducted in
April 1996. Horizon has advised the Michigan Attorney General that it is willing
to cooperate in this investigation. Due to the preliminary nature of this
investigation, Horizon cannot now predict when the investigation will be
completed; the ultimate outcome of the investigation; or the effect thereof on
Horizon's financial condition or results of operations. If adversely determined,
this investigation could result in the imposition of civil and criminal fines or
sanctions against Horizon/CMS, which could have a material adverse impact on
Horizon's financial condition and its results of operations.
Southern Oaks Health Care, Inc. et al. V. Horizon Healthcare Corporation, et al.
- --------------------------------------------------------------------------------
In 1996, Southern Oaks Health Care, Inc., in Case No. C196-0759, in the Circuit
Court of the Ninth Judicial Circuit, in and for Osceola County, Florida,
instituted legal action against Horizon Healthcare Corporation ("Horizon"),
National Institutional Pharmacy Services, Inc. ("NIPSI"), Royal Oaks Partnership
("Royal Oaks"), NIPSI-Oaks Institutional Pharmacy Partnership ("NIPSI-Oaks"),
and Neal Elliott (Elliott) individually.
The Plaintiffs, Southern Oaks and Oak Provider, have asserted claims for 50% of
the contract therapy and other ancillary services profits from approximately 10
Florida nursing homes owned or managed by Horizon or Southern Oaks. The case is
presently scheduled for non-jury trial beginning March 23, 1998.
-23-
<PAGE>
Horizon has filed counterclaims against Southern Oaks and Oaks Provider, as well
as, their President, individually for fraud in the inducement, specific
performance, breach of contract, breach of management agreements,
indemnification, unjust enrichment, and declaratory judgement in 13 separate
claims for relief.
The nature of the claims, counterclaims, and damages alleged made it impossible
to predict the likely outcome of this litigation or provide a range of potential
loss, if any.
Texas "Qui Tam" Investigation
- -----------------------------
On September 5, 1997 the Company received a letter from the Office of the United
States Attorney for the Eastern District of Texas advising that the Company is
involved in an investigation of Fraudulent and False claim services in
connection with its long term care facilities.
On September 11, 1997, the General Counsel for the Company met with the
Assistant U.S. Attorney General (AUSA) in Beaumont, Texas. The AUSA advised that
the Company is a named defendant in a Qui Tam Federal False Claims Act Case.
The Company disputes the efficacy of the legal theory upon which the Qui Tam
actions are based. In addition, the Company can not now predict whether the AUSA
will determine to intervene in the litigation nor the nature or the extent of
the exposure, if any, it might have in this matter.
State of Kansas Medicare/Medicaid Investigation of Rehab Works, Inc.
- --------------------------------------------------------------------
On October 7, 1997, the Company learned that certain rehabilitation therapy
services provided by its contract rehabilitation therapy division in the State
of Kansas, and Medicare billings related to those services, are subject of an
investigation by the OIG and the DOJ. In this connection, the AUSA handling the
matter in Wichita, Kansas contends that in Kansas, RehabWorks either directly
submitted claims to the Medicare program for medically unnecessary services or
for services not rendered or billed unrelated nursing homes for medically
unnecessary services or for services not rendered.
On October 15, 1997, representatives of the Company met with the AUSA and
advised the AUSA that it is cooperating, and will continue to cooperate, in the
investigation. The Company is conducting an internal review of the issues
presented by the AUSA and has preliminarily concluded that the DOJ's assertions
are, in large part, not support by the facts. The Company is preparing a written
response to the assertions of the DOJ. Thus, the Company does not believe that,
at this time, it has a loss contingency of any amount material to the financial
statements of the Company. Due to the preliminary nature of this matter,
however, the Company cannot predict when this investigation will be completed.
-24-
<PAGE>
ACQUIRED FACILITIES OPERATED BY HORIZON/CMS HEALTHCARE CORPORATION
AND SOLD TO INTEGRATED HEALTH SERVICES, INC.
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
November
30,
------------------
1997
------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,000
Accounts receivable and settlements,
net of allowance for doubtful accounts
of $36,803 as of November 30 ,1997 253,820
Prepaid and other assets 48,810
------------
Total current assets 312,630
PROPERTY AND EQUIPMENT, net 434,446
INTANGIBLE ASSETS, net 118,405
OTHER ASSETS 30,610
============
Total assets $ 896,091
============
LIABILITIES AND PARENT INVESTMENT AND ADVANCES
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,520
Accounts payable 108,016
------------
Total current liabilities 111,536
------------
LONG-TERM DEBT, excluding current portion 90,880
------------
Total liabilities 202,416
PARENT INVESTMENT AND ADVANCES 693,675
Total liabilities and parent
============
Investment and advances $ 896,091
============
-25-
<PAGE>
ACQUIRED FACILITIES OPERATED BY HORIZON/CMS HEALTHCARE CORPORATION
AND SOLD TO INTEGRATED HEALTH SERVICES, INC.
COMBINED STATEMENTS OF OPERATIONS AND PARENT INVESTMENT AND ADVANCES
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
NOVEMBER 30,
----------------
1997
----------------
(UNAUDITED)
TOTAL OPERATING REVENUES $ 519,911
COST AND EXPENSES:
Costs of services 455,119
Facility leases 22,479
Depreciation and amortization 14,400
Interest expense 20,993
--------------
Total costs and expenses 512,991
--------------
Earnings before minority interest and
income taxes 6,920
Minority interests 351
-------------
Earnings before income taxes 7,271
Income taxes 3,908
--------------
Net earnings $ 3,363
==============
-26-
<PAGE>
ACQUIRED FACILITIES OPERATED BY HORIZON/CMS HEALTHCARE COPRORATION AND
SOLD TO INTEGRATED HEALTH SERVICES, INC.
COMBINED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
November 30,
----------------
1997
----------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net earnings $ 3,363
Adjustments:
Depreciation and amortization 14,400
Increase in patient care accounts receivable and estimated third
party settlements (22,516)
Increase in prepaid and other assets (6,468)
Decrease in deferred income taxes (10,449)
Increase in accounts payable and accrued expenses 23,349
Decrease in other liabilities (11,872)
---------
Net cash used in operating activities (10,193)
---------
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt repayments (701)
Advances from parent 51,398
---------
Net cash provided by financing activities 50,697
---------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (45,776)
Other assets (3,545)
---------
Net cash used by investing activities (49,321)
NET DECREASE IN CASH AND CASH EQUIVALENTS (8,817) -
CASH AND CASH EQUIVALENTS, beginning of period 18,817
---------
CASH AND CASH EQUIVALENTS, end of period $ 10,000
=========
</TABLE>
-27-
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma statements of operations give effect to
(i) the sale by IHS of its pharmacy division in July 1996 (the "Pharmacy Sale"),
(ii) the sale by IHS of a majority interest in its assisted living services
subsidiary ("ILC") in October 1996 (the "ILC Offering"), (iii) the acquisition
of First American Health Care of Georgia, Inc. ("First American") in October
1996 (the "First American Acquisition"), (iv) the acquisition of Community Care
of America, Inc. ("CCA") in September 1997 (the "CCA Acquisition"), (v) the
acquisition of the lithotripsy division (the "Coram Lithotripsy Division") of
Coram Healthcare Corporation in October 1997 (the "Coram Lithotripsy
Acquisition"), (vi) the acquisition of RoTech Medical Corporation ("RoTech") in
October 1997 (the "RoTech Acquisition"), (vii) the acquisition of 139 owned,
leased or managed long-term care facilities, 12 specialty hospitals, a contract
therapy business and an institutional pharmacy business (the "Horizon Business")
from HEALTHSOUTH Corporation in December 1997 (the "Horizon Business
Acquisition") and (viii) the acquisition of (a) Vintage Health Care Center, a
skilled nursing and assisted living facility, in January 1996 (the "Vintage
Acquisition"), (b) Rehab Management Systems, Inc., an outpatient rehabilitation
company, in March 1996 (the "RMS Acquisition"), (c) Hospice of the Great Lakes,
Inc., a hospice company, in May 1996 (the "Hospice Acquisition"), (d) J.R. Rehab
Associates, Inc., an inpatient and outpatient rehabilitation center, in August
1996 (the "J.R. Rehab Acquisition"), (e) Extendicare of Tennessee, Inc., a home
health company, in August 1996 (the "Extendicare Acquisition"), (f) Edgewater
Home Infusion Services, Inc., a home infusion company, in August 1996 (the
"Edgewater Acquisition"), (g) Century Home Services, Inc., a home health
services company, in September 1996 (the "Century Acquisition"), (h) Signature
Home Care, Inc., a home health company, in September 1996 (the "Signature
Acquisition"), (i) Mediq Mobile X-Ray Services, Inc., a mobile diagnostics
company, in November 1996 (the "Mediq Acquisition"), (j) Total Rehab Services,
LLC and Total Rehab Services 02, LLC, providers of contract rehabilitation and
respiratory services, in November 1996 (the "Total Rehab Acquisition"), (k)
Lifeway Inc., a physician management and disease management company, in November
1996 (the "Lifeway Acquisition"), (l) In-Home Health Care, Inc., a home health
company, in January 1997 (the "In-Home Acquisition"), (m) Portable X-Ray Labs,
Inc., a mobile diagnostics company, in February 1997 (the "Portable X-Ray
Acquisition"), (n) Coastal Rehabilitation, Inc., an inpatient rehabilitation
company, in April 1997 (the "Coastal Acquisition"), (o) Health Care Industries,
Inc., a home health company, in June 1997 (the "Health Care Industries
Acquisition"), (p) Rehab Dynamics, Inc. and Restorative Therapy, Ltd., related
contract rehabilitation companies, in June 1997 (the "Rehab Dynamics
Acquisition"), (q) Ambulatory Pharmaceutical Services, Inc. and APS American,
Inc., related home health companies, in August 1997 (the "APS Acquisition"), (r)
Arcadia Services, Inc., a home health company, in August 1997 (the "Arcadia
Acquisition") and (s) Barton Creek Healthcare, Inc., a home health company, in
September 1997 (the "Barton Creek Acquisition"). The pro forma statements of
operations for the year ended December 31, 1996 and the nine months ended
September 30, 1997 were prepared as if all of the foregoing transactions were
consummated on January 1, 1996. The pro forma statement of operations
information does not give effect to the acquisition of the assets of three small
ancillary service businesses and the acquisition of five mobile diagnostic
companies during the nine months ended September 30, 1997 or various financings
conducted by IHS in 1996 and 1997.
-28-
<PAGE>
The pro forma balance sheet at September 30, 1997 was prepared as if the
Coram Lithotripsy Acquisition, the RoTech Acquisition and the Horizon Business
Acquisition were consummated at September 30, 1997. The Pharmacy Sale, the ILC
Offering, the First American Acquisition, the CCA Acquisition, the Vintage
Acquisition, the RMS Acquisition, the Hospice Acquisition, the J.R. Rehab
Acquisition, the Extendicare Acquisition, the Edgewater Acquisition, the Century
Acquisition, the Signature Acquisition, the Mediq Acquisition, the Total Rehab
Acquisition, the Lifeway Acquisition, the In-Home Acquisition, the Portable
X-Ray Acquisition, the Coastal Acquisition, the Health Care Industries
Acquisition, the Rehab Dynamics Acquisition, the APS Acquisition, the Arcadia
Acquisition and the Barton Creek Acquisition were all consummated prior to
September 30, 1997 and are therefore reflected in the actual September 30, 1997
balance sheet.
The pro forma adjustments are based upon available information and certain
assumptions that management believes are reasonable. The unaudited pro forma
financial information set forth below is not necessarily indicative of IHS'
financial position or the results of operations that actually would have
occurred if the transactions had been consummated on the dates shown. In
addition, they are not intended to be a projection of results of operations that
may be obtained by IHS in the future. The unaudited pro forma financial
information should be read in conjunction with the consolidated financial
statements and related notes thereto of IHS and certain acquired companies
included in IHS' filings with the Securities and Exchange Commission.
It is possible that, subsequent to the consummation of the CCA Acquisition,
the Coram Lithotripsy Acquisition, the RoTech Acquisition and the Horizon
Business Acquisition, IHS will incur costs to discontinue or dispose of certain
activities previously performed by such entities. Furthermore, in order to
combine the operations of these entities, it is possible that IHS will incur
integration costs, such as training personnel, relocating certain personnel,
integrating and upgrading computer systems, consolidating and restructuring
certain functions, severance and other expenses relating to personnel performing
duplicative functions, and other related costs. These activities are
collectively referred to as "restructuring measures". At this time, a formal
plan of restructuring measures is currently being formulated and the Company has
incurred a non-recurring charge of $113 million in the fourth quarter of 1997,
primarily related to the write-down of assets of certain business activities.
However, other than the estimated costs noted in the notes to the pro forma
financial statements, it is not practicable at this time to estimate the
individual nature, timing or total cost of the various potential restructuring
measures or to assess the likelihood that particular restructuring measures will
be implemented. Therefore, no provision for the cost of restructuring measures
has been included in the accompanying pro forma condensed combined financial
information. However, if restructuring measures are approved and implemented by
IHS management, depending upon the nature of the measures to be undertaken and
the timing of management's commitment with respect to such measures, costs
resulting from such measures may be accrued as liabilities and added to the
total consideration in accordance with generally accepted accounting principles.
Alternatively, management's decisions with respect to the nature and timing of
any potential restructuring measures may require that nonrecurring charges,
potentially significant, be recorded in IHS' statements of operations in periods
subsequent to the acquisitions. These types of charges would include all costs
related to activities or employees of IHS.
-29-
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
PRO FORMA BALANCE SHEET AS OF SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
CORAM LITHOTRIPSY
DIVISION
IHS ---------------------------------
ACTUAL ACTUAL(1) ADJUSTMENTS
------------ ----------------- -----------------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents .................. $ 58,915 $ --
Temporary investments ..................... 821,965 -- $ (131,000)(3)
Patient accounts and third-party payor
settlements receivable, net ............ 377,546 1,930
Inventories, prepaid expenses and other
current assets ........................... 36,457 4,356
Income tax receivable ..................... 25,630 --
---------- -------- -----------
Total current assets ..................... 1,320,513 6,286 (131,000)
---------- -------- -----------
Property, plant and equipment, net ......... 948,120 5,776
Assets held for sale ........................ 12,109 --
Intangible assets ........................... 836,804 77,745 62,378 (4)
Other assets .............................. 110,534 3,736
---------- -------- -----------
Total assets ........................... $3,228,080 $93,543 $ (68,622)
========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
<S> <C> <C> <C>
Current maturities of long-term debt ...... $ 6,782 $ --
Accounts payable and accrued expenses ...... 332,813 19,921 $5,000(4)
---------- ---------- ------
Total current liabilities ............... 339,595 19,921 5,000
---------- ---------- ------
Long-term debt:
Convertible subordinated debentures ...... 258,750 --
Other long-term debt less current
maturities .............................. 1,933,233 --
---------- ----------
Total long-term debt ..................... 2,191,983 --
---------- ----------
Other long-term liabilities(2) ............ 36,114 --
Deferred income taxes ..................... 27,501 --
Deferred gain on sale-leaseback
transactions .............................. 5,463 --
Stockholders' equity:
Common stock .............................. 27 --
Additional paid-in capital ............... 531,500 --
Retained earnings .......................... 108,221 73,622 $ (73,622)(5)
Treasury stock ........................... (12,324) --
---------- ---------- -----------
Total stockholders'
equity ................................. 627,424 73,622 (73,622)
---------- ---------- -----------
Total liabilities and stockholders'
equity .............................. $3,228,080 $ 93,543 $ (68,622)
========== ========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ASSETS HORIZON HORIZON
ROTECH ROTECH BUSINESS BUSINESS PRO FORMA
ACTUAL(1)* ADJUSTMENTS ACTUAL(1)** ADJUSTMENTS CONSOLIDATED
---------- ----------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents .................. $ 12,819 $ 10,000 $ 81,734
Temporary investments ..................... -- $(288,827)(6) -- $(215,000)(3) 187,138
Patient accounts and third-party payor
settlements receivable, net ............ 112,341 253,820 745,637
Inventories, prepaid expenses and other
current assets ........................... 26,980 48,810 116,603
Income tax receivable ..................... -- 800 (7) -- 26,430
-------- --------- -------- --------- -----------
Total current assets ..................... 152,140 (288,027) 312,630 (215,000) 1,157,542
-------- --------- -------- --------- -----------
Property, plant and equipment, net ......... 131,240 434,446 (101,582)(12) 1,418,000
Assets held for sale ........................ -- 80,647 (12) 92,756
Intangible assets ........................... 272,795 306,967 (8) 118,405 512,260 (13) 2,187,354
Other assets .............................. 4,557 30,610 149,437
-------- --------- -------- --------- -----------
Total assets ........................... $560,732 $ 18,940 $896,091 $ 276,325 $5,005,089
======== ========= ======== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Current Liabilities:
<S> <C> <C> <C> <C>
Current maturities of long-term debt ...... $180,991 $(180,991)(6) $ -- $ 6,782
Accounts payable and accrued 4,750 (7)
expenses ................................. 30,970 10,250 (9) 108,016 $ 35,000 (14) 546,720
-------- --------- -------- -------- -----------
Total current liabilities ............... 211,961 (165,991) 108,016 35,000 553,502
-------- --------- -------- -------- -----------
Long-term debt:
Convertible subordinated debentures ...... 110,000 (107,836)(6) -- 260,914
Other long-term debt less current
maturities .............................. -- 94,400 935,000 (15) 2,962,633
-------- --------- -------- -------- -----------
Total long-term debt ..................... 110,000 (107,836) 94,400 935,000 3,223,547
-------- --------- -------- -------- -----------
Other long-term liabilities(2) ............ -- -- 36,114
Deferred income taxes ..................... 20,735 -- 48,236
Deferred gain on sale-leaseback
transactions .............................. -- -- 5,463
Redeemable Common stock .................... 4,076 (4,076)(10) -- --
Stockholders' equity:
Common Stock................................ 5 11 (11) -- 43
Additional paid-in capital ............... 131,269 383,468 (11) 642,811 (642,811)(16) 1,046,237
(83,534)(11)
Retained earnings ......................... 83,534 (3,950) (7) 50,864 (50,864)(16) 104,271
Treasury stock ........................... (848) 848 (11) -- (12,324)
-------- -------- -------- -------- -----------
Total stockholders'
equity ................................. 213,960 296,843 693,675 (693,675) 1,138,227
-------- -------- -------- -------- -----------
Total liabilities and stockholders'
equity .............................. $560,732 $ 18,940 $896,091 $276,325 $5,005,089
======== ======== ======== ======== ==========
</TABLE>
- ----------
* As of July 31, 1997
** As of November 30, 1997
-30-
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
IHS PHARMACY ILC
ACTUAL(17) ADJUSTMENTS(18) ADJUSTMENTS(19)
------------- ------------------- -------------------
<S> <C> <C> <C>
Net revenues:
Basic medical services ..................... $ 389,773 $ (16,101)(a)
Specialty medical services .................. 999,209 $ (52,331)(a)
Management services and other ............... 45,713 (1,020)(a)
----------- ------------ ------------
Total revenues .......................... 1,434,695 (52,331) (17,121)
Costs and expenses:
Operating, general and administrative
expenses................................... 1,154,924 (43,279)(a) (12,453)(a)
Depreciation and amortization ............. 41,681 (1,785)(a) (833)(a)
Rent ..................................... 77,785 (838)(a) (1,885)(a)
Interest, net ............................ 64,110 (3,817)(b) (963)(b)
Non-recurring costs (income) ............. (14,457) 34,298 (c) (8,497)(d)
----------- ------------ ------------
Total costs and expenses ................. 1,324,043 (15,421) (24,631)
Earnings (loss) before equity in earnings
(loss) of affiliates, income taxes
and extraordinary items .................... 110,652 (36,910) 7,510
Equity in earnings (loss) of affiliates ...... 828 722
----------- ------------ ------------
Earnings (loss) before income taxes and
extraordinary items ...................... 111,480 $ (36,910) $ 8,232
============ ============
Federal and state income taxes ................ 63,715
-----------
Earnings before extraordinary items ......... $ 47,765
===========
Earnings per share before extraordinary items:
Primary .................................... $ 2.03
Fully-diluted .............................. 1.82
===========
Weighted average shares:
Primary .................................... 23,574
Fully-diluted .............................. 31,653
===========
</TABLE>
<TABLE>
<CAPTION>
CORAM
FIRST FIRST LITHOTRIPSY
AMERICAN AMERICAN CCA CCA DIVISION
ACTUAL(20) ADJUSTMENTS ACTUAL(21) ADJUSTMENTS ACTUAL(22)
-------------- ----------------- ----------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Net revenues:
Basic medical services ..................... $ -- $ 82,653 $ --
Specialty medical services .................. 387,547 11,367 $ (310)(f) 48,958
Management services and other ............... 3,115 2,974 (148)(g) --
---------- --------- ---------- -------
Total revenues .......................... 390,662 96,994 (458) 48,958
Costs and expenses:
Operating, general and administrative
expenses .................................. 406,800 85,201 (458)(f)(g) 20,634
Depreciation and amortization ............... 5,439 $ 4,501 (e) 2,056 1,854 (e) 6,773
Rent ....................................... -- 5,982 --
Interest, net .............................. 6,208 9,314 (b) 5,013 1,395 (b) 15
Non-recurring costs (income) ............... 3,468 22,062 --
---------- ---------- --------- ---------- -------
Total costs and expenses ................. 421,915 13,815 $120,314 2,791 27,422
Earnings (loss) before equity in earnings
(loss) of affiliates,
income taxes and extraordinary items ....... (31,253) (13,815) (23,320) (3,249) 21,536
Equity in earnings (loss) of affiliates ...... (671) -- 312
---------- ---------- --------- ---------- -------
Earnings (loss) before income taxes and
extraordinary items ...................... $ (31,924) $ (13,815) $(23,320) $ (3,249) $21,848
========== ========== ========= ========== =======
Federal and state income taxes ................
Earnings before extraordinary items .........
Earnings per share before extraordinary
items:
Primary ....................................
Fully-diluted ..............................
Weighted average shares:
Primary ....................................
Fully-diluted ..............................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CORAM LITHOTRIPSY HORIZON HORIZON
DIVISION ROTECH ROTECH BUSINESS BUSINESS
ADJUSTMENTS ACTUAL(23)* ADJUSTMENT ACTUAL(24)** ADJUSTMENTS
------------------------------ ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Net revenues:
Basic medical services ..................... $ -- $ --
Specialty medical services .................. 344,590 920,116
Management services and other ............... -- --
--------- ---------
Total revenues .......................... 344,590 920,116
Costs and expenses:
Operating, general and administrative ex-
penses...................................... 258,891 821,897
Depreciation and amortization ............... $ (533)(e) 36,074 $ 2,850 (e) 23,864 $ 1,889 (i)
Rent ....................................... -- --
Interest, net .............................. 9,746 (b) 9,456 475 (h) 5,348 97,750 (b)
Non-recurring costs (income) ............... -- --
---------- -------- ---------- --------- --------
Total costs and expenses ................. 9,213 304,421 3,325 851,109 99,639
Earnings (loss) before equity in earnings
(loss) of affiliates,
income taxes and extraordinary items ....... (9,213) 40,169 (3,325) 69,007 (99,639)
Equity in earnings (loss) of affiliates ...... -- --
---------- --------- ---------- ---------- --------
Earnings (loss) before income taxes and
extraordinary items ...................... $ (9,213) $ 40,169 $ (3,325) $ 69,007 $(99,639)
============ ========= ========== ========== ========
Federal and state income taxes ................
Earnings before extraordinary items .........
Earnings per share before extraordinary items:
Primary ....................................
Fully-diluted ..............................
Weighted average shares:
Primary .................................... 25,513 (10,700)
Fully-diluted .............................. 30,063 (12,608)
======== ==========
</TABLE>
<TABLE>
<CAPTION>
OTHER OTHER
ACQUISITIONS ACQUISITIONS PRO FORMA
ACTUAL(25) ADJUSTMENTS CONSOLIDATED
-------------- ------------------ ------------
<S> <C> <C> <C>
Net revenues:
Basic medical services ..................... $ 292 $ 456,617
Specialty medical services .................. 269,690 2,928,836
Management services and other ............... 3 50,637
--------- -----------
Total revenues .......................... 269,985 3,436,090
Costs and expenses:
Operating, general and administrative
expenses.................................... 259,532 2,951,689
Depreciation and amortization ............... 2,359 $ 4,535 (e) 130,724
Rent ....................................... 3,474 84,518
Interest, net .............................. 5,039 4,683 (b) 213,772
Non-recurring costs (income) ............... -- 36,874
--------- ---------- -----------
Total costs and expenses ................. 270,404 9,218 3,417,577
Earnings (loss) before equity in earnings
(loss) of affiliates,
income taxes and extraordinary items ....... (419) (9,218) 18,513
Equity in earnings (loss) of affiliates ...... 1,032 2,223
--------- ----------- ----------
Earnings (loss) before income taxes and
extraordinary items ...................... $ 613 $ (9,218) 20,736
========= ==========
Federal and state income taxes ................ 22,371
----------
Earnings before extraordinary items ......... $ (1,635)
==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Earnings per share before extraordinary items:
<S> <C>
Primary .................................... $ (0.04)
Fully-diluted .............................. (0.04)
==========
Weighted average shares:
Primary .................................... 1,985 40,372
Fully-diluted .............................. (8,736) 40,372
======= ==========
</TABLE>
- -------------
* Twelve months ended January 31, 1997
** Twelve months ended November 30, 1996
-31-
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
PRO FORMA STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
IHS PHARMACY ILC CCA CCA
ACTUAL(26) ADJUSTMENTS(18) ADJUSTMENTS(19) ACTUAL(21) ADJUSTMENTS
------------- ---------------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Net revenues:
Basic medical services .................. $ 268,268 $ 66,287
Specialty medical services ............... 1,093,571 1,086 $ (3,321)(f)
Management services and other ............ 29,998 1,408 (2,232)(j)
----------- -------- ----------
Total revenues ....................... 1,391,837 68,781 (5,553)(f)(j)
Costs and expenses:
Operating, general and administrative
expenses ............................... 1,095,686 60,118 (5,553)(f)(j)
Depreciation and amortization ............ 47,818 1,931 1,167 (e)
Rent .................................... 75,322 5,702
Interest, net ........................... 71,991 3,918 1,046 (b)
Non-recurring charges, net ............... 20,047 $ 7,578 (c) $ 4,635 (d) --
----------- ----------- ----------- -------- ----------
Total costs and expenses .............. 1,310,864 7,578 4,635 71,669 (3,340)
Earnings (loss) before equity in earn-
ings of affiliates, income taxes and
extraordinary items ................... 80,973 (7,578) (4,635) (2,888) (2,213)
Equity in earnings of affiliates ......... (713) --
----------- ------------ ----------- -------- ----------
Earnings (loss) before income taxes
and extraordinary items ................ 80,260 $ (7,578) $ (4,635) $ (2,888) $ (2,213)
=========== =========== ======== ==========
Federal and state income taxes ............. 31,301
-----------
Earnings before extraordinary items ...... $ 48,959
===========
Earnings per share before extraordinary items:
Primary ................................. $ 1.78
Fully-diluted ........................... 1.57
===========
Weighted average shares:
Primary ................................. 27,512
Fully-diluted ........................... 35,803
===========
</TABLE>
<TABLE>
<CAPTION>
CORAM LITHOTRIPSY
DIVISION
-------------------------------
ROTECH ROTECH
ACTUAL(22) ADJUSTMENTS ACTUAL(23)* ADJUSTMENTS
------------ ------------------ ------------- -----------------
<S> <C> <C> <C> <C>
Net revenues:
Basic medical services .................. $ -- $ --
Specialty medical services ............... 35,873 332,384
Management services and other ............ -- --
------- ---------
Total revenues ....................... 35,873 332,384
Costs and expenses:
Operating, general and administrative
expenses ............................... 14,408 245,925
Depreciation and amortization ............ 4,184 $ 89 (e) 35,007 $(1,229)(e)
Rent .................................... -- --
Interest, net ........................... (119) 7,310 (b) 11,131 667 (f)
Non-recurring charges, net ............... -- -- --
------- ----------- --------- -------
Total costs and expenses .............. 18,473 7,399 292,063 (562)
Earnings (loss) before equity in earn-
ings of affiliates, income taxes and
extraordinary items ................... 17,400 (7,399) 40,321 562
Equity in earnings of affiliates ......... 465 -- --
------- ----------- --------- -------
Earnings (loss) before income taxes $17,865 $ (7,399) $ 40,321 $ 562
and extraordinary items .................. ======= =========== ========= =======
Federal and state income taxes .............
Earnings before extraordinary items ......
Earnings per share before extraordinary items:
Primary .................................
Fully-diluted ...........................
Weighted average shares:
Primary ................................. 26,621 (11,165)
Fully-diluted ........................... 31,237 (13,101)
========= ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HORIZON HORIZON OTHER OTHER
BUSINESS BUSINESS ACQUISITIONS ACQUISITIONS PRO FORMA
ACTUAL(24)** ADJUSTMENTS ACTUAL(27) ADJUSTMENTS CONSOLIDATED
--------- ------------- -------------- ----------------- -------------
<C> <C> <C>
<S>
Net revenues:
Basic medical services .................. $ -- $ -- $ 334,555
Specialty medical services ............... 734,771 95,031 2,289,395
Management services and other ............ -- -- 29,174
-------- --------- -----------
Total revenues ....................... 734,771 95,031 2,653,124
Costs and expenses:
Operating, general and administrative
expenses ............................... 659,143 83,288 2,153,015
Depreciation and amortization ............ 18,990 $ 324 (g) 462 $ 1,749 (e) 110,492
Rent .................................... -- 547 81,571
Interest, net ........................... 3,988 73,313 (b) 1,312 1,500 (b) 176,057
Non-recurring charges, net ............... -- -- 32,260
-------- -------- --------- ---------- -----------
Total costs and expenses .............. 682,121 73,637 85,609 3,249 2,553,395
Earnings (loss) before equity in earn-
ings of affiliates, income taxes and
extraordinary items ................... 52,650 (73,637) 9,422 (3,249) 99,729
Equity in earnings of affiliates ......... -- -- (248)
-------- -------- --------- ---------- ----------
Earnings (loss) before income taxes
and extraordinary items .................. $52,650 $(73,637) $ 9,422 $ (3,249) 99,481
======== ======== ========= ==========
Federal and state income taxes ............. 51,096
Earnings before extraordinary items ....... $ 48,385
==========
Earnings per share before extraordinary items:
Primary ................................. $ 1.10
Fully-diluted ........................... 1.01
Weighted average shares: ==========
Primary .................................
Fully-diluted ........................... 1,174 44,142
1,174 55,113
========== =========
</TABLE>
- -----------
* Nine months ended July 31, 1997
** Nine months ended August 31, 1997
-32-
<PAGE>
NOTES TO PRO FORMA FINANCIAL INFORMATION
(1) Certain amounts have been reclassified to conform the presentation of the
Coram Lithotripsy Division, RoTech, the Horizon Business and IHS.
(2) Represents the present value of contingent payments aggregating $50,000,000
due in 2000 and 2001 relating to the First American Acquisition, which
payments IHS deems probable.
(3) Represents proceeds from term loan borrowings under the Company's revolving
credit and term loan facility and the sale of 9 1/4% Senior Subordinated
Notes due 2008 which were used to pay a portion of the purchase price for
the acquisition.
(4) Represents the excess of the purchase price for the Coram Lithotripsy
Division over the estimated fair values of the net assets acquired, as
follows:
<TABLE>
<S> <C>
Purchase price ....................................... $131,000,000
Direct costs of acquisition ........................... 5,000,000
Stockholders' equity of Coram Lithotripsy Division ... (73,622,000)
-------------
$ 62,378,000
=============
</TABLE>
(5) Represents elimination of stockholders' equity of Coram Lithotripsy
Division.
(6) Represents (a) the pay down of $180,991,000 outstanding under RoTech's
credit facility with proceeds from IHS' revolving credit and term loan
facility and (b) the repurchase of $107,836,000 principal amount of
RoTech's convertible subordinated debentures in accordance with the terms
of the indenture under which such debentures were issued with proceeds from
the Company's revolving credit and term loan facility and the sale of
9 1/4% Senior Subordinated Notes due 2008.
(7) Represents nonrecurring charges directly attributable to the RoTech
Acquisition, which will be included in IHS' statement of operations within
the 12 month period following the transaction. Such charges represent the
nonrecurring lump sum payments to certain RoTech officers aggregating
$4,750,000 less related income tax benefit of $800,000.
(8) Represents the excess of the purchase price (based on a price per share of
IHS Common Stock of $33.00 (the closing price of IHS Common Stock on
October 21, 1997 (the date the RoTech Acquisition was consummated)) and
using the 26,866,000 shares of RoTech Common Stock outstanding on October
21, 1997 (including 422,651 shares of redeemable common stock (see note 10
below)) adjusted for the exchange ratio of .5806) including estimated
direct costs of the RoTech Acquisition of $10,250,000 (see note 9 below),
over the estimated fair values of the net assets acquired, as follows:
Merger consideration for RoTech ................ $514,753,000
Direct costs of acquisition .................... 10,250,000
------------
525,003,000
Stockholders' equity of RoTech (including redeemable
common stock of $4,076,000) .................. (218,036,000)
------------
$306,967,000
============
(9) Represents the estimated expenses of the RoTech Acquisition of $10,250,000
as follows: Non-compete payments to certain officers ($5,000,000);
professional fees ($2,500,000); filing fees ($500,000); and other
($2,250,000). Other primarily represents severance payments and related
benefits anticipated to be paid to identified employees whose employment
will be terminated after the RoTech Acquisition in accordance with a
restructuring plan to be adopted.
(10)Represents 422,651 shares of RoTech Common Stock (245,391 shares of IHS
Common Stock after the RoTech Acquisition) subject to put options at the
sole discretion of the RoTech stockholder at prices ranging from $9.75 to
$17.50 per share ($16.79 to $30.14 per share of IHS Common Stock). The put
options expire at various dates between October 1997 and December 1999.
Because the put price is below the current market price of the IHS Common
Stock, IHS has assumed for purposes of these pro forma financial statements
that the put options will not be exercised and, therefore, the shares of
IHS Common Stock issued in exchange for such RoTech Common Stock have not
been classified as redeemable common stock, but have been included in
stockholders' equity for purposes of the pro forma financial statements.
-33-
<PAGE>
(11)Represents the RoTech Acquisition consideration of $514,753,000 (see note 8
above), less $16,000 allocated to Common stock and less RoTech's Additional
paid-in capital of $131,269,000. Other adjustments represent eliminations
of RoTech's equity account balances.
(12)Represents the preliminary revaluation of the Horizon Business property,
plant and equipment by IHS. IHS is holding for sale approximately 20
long-term care facilities and certain other assets of the Horizon Business.
See note 24 below.
(13)Represents the excess of the purchase price for the Horizon Business over
the estimated fair values of the net assets acquired, as follows (in
thousands):
Purchase price (not including assumed debt) $1,150,000
Direct costs of acquisition 35,000
Stockholders' equity of Horizon (693,675)
Preliminary revaluation of property,
plant and equipment 20,935
----------
$512,260
==========
(14)Represents direct costs of acquisition and estimated expenses accrued in
accordance with EITF 95-3 under IHS' preliminary exit and termination plan
as follows (in thousands):
Termination and relocation costs for
650 employees ............................ $27,000
Lease termination costs of 14
duplicative facilities ................... 8,000
-------
$35,000
=======
(15)Represents borrowings under the Company's revolving credit and term loan
facility to pay a portion of the purchase price for the Horizon Business.
(16)Represents elimination of stockholder's equity of the Horizon Business.
(17)Includes the results of operations of (i) its pharmacy division through
July 30, 1996, the date of the Pharmacy Sale, (ii) its assisted living
services subsidiary through October 9, 1996, the date of closing of the ILC
Offering, (iii) First American from October 17, 1996, the date of closing
of the First American Acquisition, (iv) Vintage Health Care Center from
January 29, 1996, the date of closing of the Vintage Acquisition, (v) Rehab
Management Systems, Inc. from March 19, 1996, the date of closing of the
RMS Acquisition, (vi) Hospice of the Great Lakes, Inc. from May 1, 1996,
the date of closing of the Hospice Acquisition, (vii) J.R. Rehab
Associates, Inc. from August 1, 1996, the date of closing of the J.R. Rehab
Acquisition, (viii) Extendicare of Tennessee, Inc. from August 12, 1996,
the date of closing of the Extendicare Acquisition, (ix) Edgewater Home
Infusion Services, Inc. from August 19, 1996, the date of closing of the
Edgewater Acquisition, (x) Century Home Services, Inc. from September 13,
1996, the date of closing of the Century Acquisition, (xi) Signature Home
Care, Inc. from September 25, 1996, the date of closing of the Signature
Acquisition, (xii) Mediq Mobile X-Ray Services, Inc. from November 7, 1996,
the date of closing of the Mediq Acquisition, (xiii) Total Rehab Services,
LLC and Total Rehab Services 02, LLC from November 8, 1996, the date of
closing of the Total Rehab Acquisition and (xiv) Lifeway Inc. from November
8, 1996, the date of closing of the Lifeway Acquisition. Also includes from
October 9, 1996 IHS' equity in ILC's earnings. See notes 18, 19, 20 and 25
below.
(18)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. IHS used the net proceeds of the sale to repay borrowings under
its revolving credit facility. IHS had a pre-tax gain of $34.3 million.
Because IHS' 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. IHS' investment in
Capstone common stock of $14.7 million was recorded at carryover cost and
classified as securities available for sale. In 1997, IHS recognized the
remaining gain of $7.6 million when restrictions on transferability of such
shares were removed.
(19)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 net proceeds received by it to repay outstanding
indebtedness to IHS. IHS used the net proceeds from the sale to repay
borrowings under its credit facility. IHS recorded a pre-tax loss of
approximately $8.5 million in the fourth quarter of 1996 as a result of
this transaction. On July 2, 1997, IHS sold the remaining 2,497,900 shares
of ILC common stock it owned, representing 37.3% of the outstanding ILC
common stock, for $11.50 per share in a cash tender offer (the "ILC Sale").
IHS recorded a gain of approximately $4.6 million from the ILC Sale in the
third quarter of 1997.
-34-
<PAGE>
(20)In October 1996, IHS acquired through merger First American. The purchase
price was $154.1 million in cash, which IHS borrowed under its credit
facility, plus contingent payments of up to $155 million payable at various
times through 2004.
(21)In September 1997 IHS acquired through a tender offer and subsequent merger
all the outstanding stock of CCA. IHS paid $34.3 million in cash, repaid
approximately $58.5 million of indebtedness assumed in the merger
(including restructuring fees of $4.9 million) and assumed approximately
$27.0 million of indebtedness. IHS incurred direct costs of acquisition of
approximately $5.2 million. In connection with the CCA Acquisition, the
Company held for sale 19 long-term care facilities. Accordingly, actual
results for CCA have been adjusted for the effect of such facilities as
follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 25,
1996 1997
--------------------- --------------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
(IN THOUSANDS)
<S> <C> <C>
Revenue ...................................................... $ (30,518) $ (24,999)
Operating expense ............................................. (31,196) (23,288)
Depreciation ................................................ (965) (594)
Rent ......................................................... (3,017) (3,125)
Interest ...................................................... (323) (900)
Non-recurring costs ........................................... (66) --
--------- ---------
Adjustment to earnings (loss) before extraordinary item .... $ 5,049 $ 2,908
========= =========
</TABLE>
(22)On October 2, 1997, IHS acquired substantially all the assets of the Coram
Lithotripsy Division for cash of approximately $131.0 million, including
the payment of $1.0 million of indebtedness.
(23)In October 1997, IHS acquired through merger RoTech. IHS issued
approximately 15,350,670 shares of Common Stock in the merger, repaid
$199.7 million of indebtedness assumed in the merger and assumed $110
million of indebtedness. The actual RoTech results of operations for the 12
months ended January 31, 1997 and the nine months ended July 31, 1997 both
include RoTech's results of operations for the three months ended January
31, 1997.
(24)On December 31, 1997, IHS acquired from HEALTHSOUTH Corporation 139 owned,
leased or managed long-term care facilities, 12 specialty hospitals, a
contract therapy business and an institutional pharmacy business. The
purchase price was $1.15 billion in cash and the assumption of
approximately $100 million of debt.
In connection with the Horizon Business Acquisition, the Company is holding
for sale approximately 20 long-term care facilities. Accordingly, actual
results for the Horizon Business have been adjusted for the effect of such
facilities as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
1996* 1997**
--------------------- --------------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
(IN THOUSANDS)
<S> <C> <C>
Revenue ...................................................... $(109,447) $ (78,285)
Operating expense ............................................. (108,448) (84,605)
Depreciation ................................................ (3,177) (2,526)
Interest ...................................................... (2,593) (1,995)
--------- ---------
Adjustment to earnings (loss) before extraordinary item .... $ 4,771 $ 10,841
========= =========
</TABLE>
- ----------
* For the Horizon Business, represents the twelve months ended November 30,
1996.
** For the Horizon Business, represents the nine months ended August 31, 1997.
(25)Consists of the following acquisitions:
Vintage Acquisition. In January 1996, IHS purchased Vintage Health Care
Center, a 220 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 (valued at $3.5 million) was contributed to ILC on
June 1, 1996.
RMS Acquisition. In March 1996, IHS acquired all of the outstanding
capital stock of Rehab Management Systems, Inc. ("RMS"), which operates
outpatient rehabilitation therapy clinics in central Florida. RMS also
<PAGE>
managed one therapy and one physician clinic. Total purchase price was $10.0
million, including $8.0 million representing the issuance of 385,542 shares
of IHS Common Stock. In addition, IHS incurred direct costs of acquisition
of $2.9 million. Total goodwill at the date of acquisition was $12.8
million.
Hospice of the Great Lakes Acquisition. In May 1996, IHS acquired
substantially all the assets of Hospice of the Great Lakes, Inc., a hospice
company in Northbrook, Illinois. Total purchase price was $8.2 million
representing the issuance of 304,822 shares of IHS Common Stock. IHS
incurred direct costs of acquisition of $1.0 million. Total goodwill at the
date of acquisition aggregated $9.0 million.
J.R. Rehab Acquisition. In August 1996, IHS acquired all of the
outstanding capital stock of J.R. Rehab Associates, Inc., an inpatient and
outpatient rehabilitation clinic in Mooresville, North Carolina. Total
purchase price was approximately $2.1 million. IHS incurred direct costs of
acquisition of $200,000. Total goodwill at the date of acquisition
aggregated $3.2 million.
Extendicare Acquisition. In August 1996, IHS acquired substantially all of
the assets of Extendicare of Tennessee, Inc., a home healthcare company in
Memphis, Tennessee. Total purchase price was approximately $3.4 million. IHS
incurred direct costs of acquisition of $200,000. Total goodwill at the date
of acquisition aggregated $1.9 million.
Edgewater Acquisition. In August 1996, IHS acquired substantially all the
assets of Edgewater Home Infusion Services, Inc., a home infusion company in
Miami, Florida. Total purchase price was approximately $8.0 million. IHS
incurred direct costs of acquisition of $300,000. Total goodwill at the date
of acquisition aggregated $7.7 million.
-35-
<PAGE>
Century Acquisition. In August 1996, IHS acquired substantially all the
assets of Century Health Services, Inc., a home healthcare company in
Murfreesboro, Tennessee. Total purchase price was approximately $2.4
million. In addition, IHS used borrowings under its revolving credit
facility to repay approximately $1.6 million of debt of Century assumed in
the acquisition. IHS incurred direct costs of acquisition of $200,000. Total
goodwill at the date of acquisition aggregated $12.1 million.
Signature Acquisition. In September 1996, IHS acquired all of the
outstanding capital stock of Signature Home Care, Inc., a home care company
in Dallas, Texas. Total purchase price was approximately $9.2 million,
including $4.7 million representing the issuance of 196,374 shares of IHS
Common Stock. In addition, IHS used borrowings under its revolving credit
facility to repay approximately $1.9 million of Signature's debt. IHS
incurred direct costs of acquisition of $2.5 million. Total goodwill at the
date of acquisition aggregated $21.1 million.
Mediq Acquisition. 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 143,893 shares of the Company's Common Stock
(after giving effect to the return of 59,828 shares of IHS Common Stock
because of an increase in the share price of the Company's Common Stock
between the date of issuance and the date such shares were registered for
resale). In addition, the Company incurred direct costs of acquisition of
$5.5 million. Total goodwill at the date of acquisition was $15.6 million.
Total Rehab Acquisition. 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.
Lifeway Acquisition. 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-Home Acquisition. In January 1997, IHS acquired all the outstanding
capital stock of In-Home Health Care, Inc. ("In-Home"), a home health
company in Salt Lake City, Utah. Total purchase price was $3.2 million. IHS
incurred direct costs of acquisition of $250,000. Total goodwill at the date
of acquisition aggregated $3.9 million.
Portable X-Ray Acquisition. In February 1997, IHS acquired substantially
all the assets of Portable X-Ray Labs, Inc. ("Portable X-Ray"), a mobile
diagnostics company in Anaheim, California. Total purchase price was $4.9
million. IHS incurred direct costs of acquisition of $1.3 million. Total
goodwill at the date of acquisition aggregated $5.7 million.
-36-
<PAGE>
Coastal Acquisition. In April 1997, IHS acquired substantially all the
assets of Coastal Rehabilitation, Inc. ("Coastal"), an inpatient
rehabilitation company in Indian Harbour, Florida. Total purchase price was
$1.3 million. IHS incurred direct costs of acquisition of $200,000. Total
goodwill at the date of acquisition aggregated $1.8 million.
Health Care Industries Acquisition. In June 1997, IHS acquired all the
outstanding capital stock of Health Care Industries, Inc. ("Health Care
Industries"), a home health company in Florida. Total purchase price was
$1.8 million. IHS incurred direct costs of acquisition of $500,000. Total
goodwill at the date of acquisition aggregated $2.5 million.
Rehab Dynamics Acquisition. In June 1997, IHS acquired substantially all
the assets of Rehab Dynamics, Inc. and Restorative Therapy, Ltd.
(collectively "Rehab Dynamics"), related contract rehab companies. Total
purchase price was $19.7 million, including $11.5 million representing the
issuance of 322,472 shares of the Company's Common Stock. IHS incurred
direct costs of acquisition of $2.5 million. Total goodwill at the date of
acquisition aggregated $21.5 million.
Arcadia Acquisition. In August 1997, IHS acquired all the outstanding
capital stock of Arcadia Services, Inc. ("Arcadia"), a home health company.
Total purchase price was $27.0 million, including $17.2 million representing
the issuance of 531,198 shares of IHS Common Stock. IHS incurred direct
costs of acquisition of $3.0 million. Total goodwill at the date of
acquisition aggregated $39.2 million.
APS Acquisition. In August 1997, IHS acquired all the outstanding capital
stock of Ambulatory Pharmaceutical Services, Inc. and APS American, Inc.
(collectively, "APS"), related home health companies. Total purchase price
was $34.3 million, including $16.1 million representing the issuance of
532,240 shares of IHS Common Stock. IHS incurred direct costs of acquisition
of $2.0 million. Total goodwill at the date of acquisition aggregated $39.6
million.
Barton Creek Acquisition. In September 1997, IHS acquired all the
outstanding capital stock of Barton Creek Health Care, Inc. ("Barton
Creek"), a home health company. Total purchase price was $4.9 million. IHS
incurred direct costs of acquisition of $300,000. Total goodwill at the date
of acquisition aggregated $7.3 million.
(26)Includes the results of operations from the respective dates of acquisition
as follows: (i) In-Home from January 10, 1997, (ii) Portable X-Ray from
February 5, 1997, (iii) Coastal from April 7, 1997, (iv) Health Care
Industries from June 10, 1997, (iv) Rehab Dynamics from June 20, 1997, (v)
Arcadia from August 29, 1997, (vi) APS from August 30, 1997, (vii) Barton
Creek from September 23, 1997 and (viii) CCA from September 25, 1997.
(27)Consists of the In-Home Acquisition, the Portable X-Ray Acquisition, the
Coastal Acquisition, the Health Care Industries Acquisition, the Rehab
Dynamics Acquisition, the Arcadia Acquisition, the APS Acquisition and the
Barton Creek Acquisition.
----------------
For purposes of determining the effects of the acquisitions and divestitures
described in Notes 17 through 27 above, including those events which are (i)
directly attributable to the transaction, (ii) expected to have a continuing
impact on IHS, and (iii) factually supportable, the following estimates and
adjustments have been made:
(a) Represents actual revenues and expenses of divisions sold.
-37-
<PAGE>
(b) Represents (reduction in) additional interest expense resulting from
(repayment) borrowings under IHS' credit facility to finance
acquisitions based on the interest rate under the credit facility on
the date of (repayment) borrowings, as follows:
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DEBT MONTHS INTEREST INTEREST
(PROCEEDS) IN 1996 RATE ADJUSTMENT
------------ --------- ---------- -----------
<S> <C> <C> <C> <C>
Pharmacy ............................................. $ (91,000) 7.0 7.19% $ (3,817)
ILC Offering ....................................... (17,851) 9.0 7.19% (963)
First American ....................................... 165,000 9.5 7.13% 9,314
CCA borrowings(1) .................................... 98,000 12.0 7.44% 7,291
CCA borrowings repaid(1) ............................. (53,600) 12.0 11.00% (5,896)
Coram Lithotripsy Division ........................... 131,000 12.0 7.44% 9,746
Horizon Business ..................................... 1,150,000 12.0 8.50% 97,750
---------- ----- ------ --------
Other Acquisitions
In-Home Health .................................... 3,200 12.0 7.38% 236
Portable X-Ray .................................... 4,900 12.0 7.25% 355
Coastal .......................................... 1,250 12.0 7.19% 90
Health Care Industries ........................... 1,825 12.0 7.19% 131
Rehab Dynamics .................................... 8,203 12.0 7.19% 590
APS ............................................. 18,125 12.0 7.19% 1,303
Barton Creek .................................... 4,400 12.0 7.44% 327
Total Rehab ....................................... 5,300 10.0 7.13% 315
Mediq ............................................. 4,942 10.0 7.13% 294
Century .......................................... 2,390 8.5 7.25% 123
Signature ....................................... 4,519 9.0 7.19% 244
Edgewater ....................................... 7,974 7.5 7.25% 361
Extendicare ....................................... 3,410 7.5 7.25% 155
J.R. Rehab ....................................... 2,100 7.0 7.25% 89
RMS ............................................. 2,000 2.5 6.88% 29
Vintage .......................................... 6,932 1.0 7.06% 41
---------- --------
Total Other ....................................... 81,470 4,683
Total ............................................. $1,463,019 $118,108
========== ========
Effect of 1/8% reduction in interest expense ... $1,463,019 $116,290
Effect of 1/8% increase in interest expense ...... $1,463,019 $119,926
</TABLE>
- ----------
(1) In connection with the CCA Acquisition, IHS borrowed an aggregate of
$98,000,000, of which $53,600,000 was used to repay outstanding indebtedness
of CCA bearing interest at 11% per annum.
NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MONTHS INTEREST INTEREST
DEBT IN 1997 RATE ADJUSTMENT
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
CCA borrowings(1).................................... $ 98,000 9.0 7.44% $ 5,468
CCA borrowings repaid(1) ............................ (53,600) 9.0 11.00% (4,422)
Coram Lithotripsy Division ........................ 131,000 9.0 7.44% 7,310
Horizon Business .................................... 1,150,000 9.0 8.50% 73,313
---------- --- ----- -------
Other Acquisitions
In-Home Health ................................. $ 3,200 .5 7.38% 10
Portable X-Ray ................................. 4,900 1.3 7.25% 37
Coastal .......................................... 1,250 3.3 7.19% 24
Health Care Industries ........................... 1,825 5.3 7.19% 57
Rehab Dynamics ................................. 8,203 5.5 7.19% 271
APS ............................................. 18,125 8.0 7.19% 869
Barton Creek .................................... 4,400 8.5 7.44% 232
----------- --------
Total Other .................................... 41,903 1,500
Total ............................................. $1,367,303 $83,169
=========== ========
Effect of 1/8% reduction in interest expense ...... $1,367,303 $81,902
Effect of 1/8% increase in interest expense ...... $1,367,303 $84,439
</TABLE>
- ----------
(1) In connection with the CCA Acquisition, IHS borrowed an aggregate of
$98,000,000, of which $53,600,000 was used to repay outstanding indebtedness
of CCA bearing interest at 11% per annum.
-38-
<PAGE>
(c) Represents gain on the sale of the pharmacy division of $34,298,000 and
$7,578,000 recorded in 1996 and 1997, respectively.
(d) Represents loss on sale of shares in the ILC Offering in 1996 and gain
on sale of shares in the ILC Sale in 1997.
(e) Represents additional amortization relating to goodwill and other
intangibles recorded as a result of the acquisition, amortized using
the straight line method over 15-40 years, as follows:
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
LESS: PREVIOUSLY ADJUSTED MONTHS
ANNUAL RECORDED ANNUAL IN
COMPANY GOODWILL LIFE AMORTIZATION AMORTIZATION AMORTIZATION 1996 ADJUSTMENT
- --------------------------------- ----------- ------ -------------- ------------------ -------------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
First American ............ $ 227,406 40 $ 5,685 $ 0 $ 5,685 9.5 $4,501
CCA ........................ 97,009 40 2,425 (571) 1,854 12.0 1,854
Coram Lithotripsy Division ... 140,123 40 3,503 (4,036) (533) 12.0 (533)
RoTech goodwill ............ 574,762 40 14,369 (11,853) 2,516 12.0 2,516
RoTech non-compete ........... 5,000 15 334 0 334 12.0 334
----------- -- -------- ---------- -------- ----- -------
Other Acquisitions
Lifeway .................. 0 40 0 0 0 10.0 0
Total Rehab ............... 11,982 40 300 0 300 10.0 250
Mediq ..................... 15,600 40 390 0 390 10.0 325
Century .................. 12,140 40 304 (5) 299 8.5 211
Signature ............... 21,122 40 528 (24) 504 9.0 378
Edgewater ............... 7,685 40 192 (1) 191 7.5 119
Extendicare ............... 1,945 40 49 0 49 7.5 30
J.R. Rehab ............... 3,159 40 79 (2) 77 7.0 45
Hospice of Great Lakes . 9,031 40 226 (2) 224 4.0 75
RMS ..................... 12,832 40 321 0 321 2.5 67
Vintage .................. 0 40 0 0 0 1.0 0
In Home Health ............ 3,856 40 96 0 96 12.0 96
Portable X-Ray ............ 5,653 40 141 0 141 12.0 141
Coastal .................. 1,764 40 44 0 44 12.0 44
Health Care Industries ... 2,505 40 63 0 63 12.0 63
Rehab Dynamics ............ 21,478 40 537 0 537 12.0 537
Arcadia .................. 39,233 40 981 0 981 12.0 981
APS ........................ 39,624 40 991 0 991 12.0 991
Barton Creek ............... 7,292 40 182 0 182 12.0 182
----------- -- -------- ---------- -------- ------ -------
216,901 5,423 (34) 5,389 4,535
---------- -------- ---------- -------- -------
Total ..................... $1,261,201 $ 31,739 $ (16,494) $15,245 $13,207
========== ======== ========== ======== =======
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
LESS: PREVIOUSLY NINE MONTHS MONTHS
NINE MONTHS RECORDED ADJUSTED IN
COMPANY GOODWILL LIFE AMORTIZATION AMORTIZATION AMORTIZATION 1997 ADJUSTMENT
- -------------------------------- ---------- ------ -------------- ------------------ -------------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CCA .......................... $ 97,009 40 $ 1,819 $ (652) $ 1,167 9.0 $ 1,167
Coram Lithotripsy Division .. 140,123 40 2,627 (2,538) 89 9.0 89
RoTech goodwill ............ 574,762 40 10,777 $(12,256) $ (1,479) 9.0 $ (1,479)
RoTech non-compete .......... 5,000 15 250 0 250 9.0 250
--------- -- -------- -------- -------- ---- --------
Other Acquisitions
In Home Health ............ 3,856 40 72 0 72 .5 4
Portable X-Ray ............ 5,653 40 106 0 106 1.3 15
Coastal .................. 1,764 40 33 0 33 3.3 12
Health Care Industries ... 2,505 40 47 0 47 5.3 29
Rehab Dynamics ............ 21,478 40 404 0 404 5.5 247
Arcadia ..................... 39,233 40 736 0 736 8.0 654
APS ........................ 39,624 40 743 0 743 8.0 660
Barton Creek ............... 7,292 40 137 0 137 8.5 129
--------- -- -------- -------- -------- ---- --------
121,405 2,278 0 2,278 1,749
--------- -------- -------- -------- --------
Total ..................... $938,299 $17,751 $(15,446) $ 2,305 $ 1,776
========= ======== ======== ======== ========
</TABLE>
-39-
<PAGE>
(f) Represents elimination of intercompany revenues.
(g) Represents elimination of revenue and expense in connection with Medicare
consulting agreement between IHS and CCA in 1996. There was no consulting
revenue or expense in 1997.
(h) Represents additional interest on borrowing by IHS to repay RoTech's credit
facility as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, 1997 JULY 31, 1997
--------------------- -----------------
<S> <C> <C>
Credit facility:
Average borrowings outstanding during the period . $ 85,290,000 $ 138,855,000
IHS average borrowing rate during the period ... 7.13% 7.17%
Pro forma interest .............................. $ 6,081,000 $ 7,467,000
Less actual interest .............................. 5,606,000 6,800,000
------------ -------------
Pro forma adjustment .............................. $ 475,000 $ 667,000
============ =============
</TABLE>
<TABLE>
<CAPTION>
(i) Represents depreciation and amortization adjustment on new basis of assets
recorded as a result of the Horizon Business Acquisition as follows:
YEAR ENDED DECEMBER 31, 1996 NINE MONTHS ENDED SEPTEMBER 30, 1997
Amount Life (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
------ ---- --------------------------- ------------------------------------
<S> <C> <C> <C> <C>
Property, plant and equipment
Land ............................ $ 33,286* - - -
Building ........................ 266,292* 40 6,657 4,993
Equipment ....................... 33,286* 10 3,329 2,496
---------- ----------- -----------
332,864 9,986 7,489
Goodwill ............................. 630,665 40 15,767 11,825
----------- -----------
Total proforma depreciation and
amortization ........................ 25,753 19,314
Less: amounts previously recorded.... (23,864) (18,990)
----------- -----------
Total adjustment ..................... $ 1,889 $ 324
=========== ===========
</TABLE>
- -----------------
* Land, building and equipment represents 10%, 80% and 10%, respectively of
the total property, plant and equipment acquired. The above allocation
between fixed asset categories represents management's best estimate based
upon the information currently available. The actual allocation between
fixed asset categories may differ from the amounts stated above.
(j) Represents elimination of IHS management fee from CCA and CCA's management
fee expense to IHS.
-40-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INTEGRATED HEALTH SERVICES, INC.
Date: May 29, 1998 By: /s/ C. Taylor Pickett
-----------------------------------------
Name: C. Taylor Pickett
Title: Executive Vice President--Chief
Financial Officer
-41-
<PAGE>
Exhibit Index
2. Purchase and Sale Agreement, entered into as of November 3, 1997,
between HEALTHSOUTH Corporation, Horizon/CMS Healthcare Corporation
and Integrated Health Services, Inc. (incorporated herein by reference
to Exhibit 2 to Current Report on Form 8-K dated November 3, 1997 of
Integrated Health Services, Inc.).
10. Amendment No. 1 dated as of December 1, 1997, to the Revolving
Credit and Term Loan Agreement among Integrated Health Services, Inc.,
the lenders parties to the Credit Agreement and Citibank, N.A., as
administrative agent for the lenders.*
23. Consent of Arthur Andersen, L.L.P.
- --------------------------
* Filed as an exhibit to the Company's Current Report on Form 8-K dated
December 31, 1997 and filed January 14, 1998.
-42-
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As Independent Public Accountants we hereby consent to the incorporation by
reference in the registration statements of Integrated Health Services, Inc. on
Forms S-3 or S-4 (Nos. 33-87890, 33-66126, 33-68302, 33-77380, 33-81378,
33-98764, 333-4053, 333-12685, 333-31121, 333-35577, 333-35851, 333-41973 and
333-42169 and 333-48947) and on Forms S-8 (Nos. 33-44648, 33-44649, 33-44650,
33-44651, 33-44653, 33-53912, 33-53914, 33-53916, 33-86684, 33-97190, 333-1432,
333-28289, 333-28293, 333-28317, 333-28321 and 333-47853) of our report dated
March 6, 1998 included in this Form 8-K.
Arthur Andersen LLP
Albuquerque, New Mexico
May 27, 1998
