UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended September 30, 1998
----------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
------------- ---------------
Commission File Number: 1-12306
-----------------
Integrated Health Services, Inc.
--------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-2428312
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10065 Red Run Boulevard, Owings Mills, MD 21117
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(410) 998-8400
- --------------------------------------------------------------------------------
(Registrant's telephone, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ X ] Yes [ ] No
Number of shares of common stock of the registrant outstanding as of November
10, 1998: 52,816,595 shares.
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page
--------
Item 1. - Condensed Financial Statements -
----------------------------------
Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations
for the three and nine months ended
September 30, 1998 and 1997 4
Consolidated Statement of Changes in
Stockholders' Equity for the nine
months ended September 30, 1998 5
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998
and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 17
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 27
Item 6. Exhibits and Reports on Form 8-K 30
2
<PAGE>
<TABLE>
<CAPTION>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
September 30, December 31,
1998 1997
---------------- --------------
(Unaudited)
<S> <C> <C>
Assets
- -----------
Current Assets:
Cash and cash equivalents $ 88,484 $ 52,965
Temporary investments 1,289 8,042
Patient accounts and third-party payor settlements
receivable, less allowance for doubtful receivables 619,640 603,432
of $202,749 at September 30, 1998 and $161,438 at December 31, 1997
Inventories, prepaid expenses and other current assets 59,149 53,152
Income tax receivable 22,685 --
----------- -----------
Total current assets 791,247 717,591
----------- -----------
Property, plant and equipment, net 1,382,147 1,318,633
Assets held for sale 59,905 111,629
Intangible assets 2,909,101 2,815,272
Deferred income taxes 1,564 --
Investments in and advances to affiliates 28,293 19,527
Other assets 85,528 80,492
----------- -----------
Total assets $ 5,257,785 $ 5,063,144
=========== ===========
Liabilities and Stockholders' Equity
- -----------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 41,702 $ 36,081
Accounts payable and accrued expenses 482,633 615,967
Net liabilities of discontinued operations 55,480 --
Income tax payable -- 2,426
----------- -----------
Total current liabilities 579,815 654,474
----------- -----------
Long-term Debt:
Revolving credit and term loan facility less current maturities 1,796,875 1,673,500
Mortgages and other long-term debt less current maturities 203,907 167,606
Subordinated debt 1,246,046 1,361,046
----------- -----------
Total long-term debt 3,246,828 3,202,152
----------- -----------
Other long-term liabilities 119,632 113,042
Deferred gain on sale-leaseback transactions 4,619 5,315
Stockholders' equity:
Preferred stock, authorized 15,000,000 shares; no shares
issued and outstanding -- --
Common stock, $0.001 par value. Authorized 150,000,000
shares; issued 52,511,057 at September 30, 1998 and 43,098,373
at December 31, 1997 52 43
Additional paid-in capital 1,359,766 1,062,436
Retained earnings (deficit) (33,268) 45,495
Treasury stock at cost (785,800 shares at September 30, 1998 and 548,500
shares at December 31, 1997) (19,659) (19,813)
----------- -----------
Net stockholders' equity 1,306,891 1,088,161
----------- -----------
Total liabilities and stockholders' equity $ 5,257,785 $ 5,063,144
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ------------------------
1998 1997 1998 1997
--------------------------- ------------------------
NET REVENUES:
<S> <C> <C> <C> <C>
BASIC MEDICAL SERVICES $ 236,192 $ 91,458 $ 703,440 $ 268,268
SPECIALTY MEDICAL SERVICES 507,263 243,465 1,521,327 710,873
MANAGEMENT SERVICES AND OTHER 8,745 10,694 25,026 29,998
---------- ---------- --------- ----------
TOTAL REVENUES 752,200 345,617 2,249,793 1,009,139
---------- ---------- --------- ----------
COSTS AND EXPENSES:
OPERATING, GENERAL AND ADMINISTRATIVE 549,225 255,832 1,660,166 757,414
DEPRECIATION AND AMORTIZATION 38,427 12,506 107,697 35,744
RENT 32,579 19,496 91,043 55,961
INTEREST, NET 59,521 22,697 177,761 57,827
NON-RECURRING CHARGES, NET (NOTE 8) -- -- -- 20,047
---------- ---------- --------- ----------
TOTAL COSTS AND EXPENSES 679,752 310,531 2,036,667 926,993
---------- ---------- --------- ----------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE EQUITY IN EARNINGS (LOSS) OF
AFFILIATES, INCOME TAXES AND
EXTRAORDINARY ITEM 72,448 35,086 213,126 82,146
EQUITY IN EARNINGS (LOSS) OF AFFILIATES 161 (811) 615 (713)
---------- ---------- --------- ----------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM 72,609 34,275 213,741 81,433
FEDERAL AND STATE INCOME TAXES 29,770 13,367 87,634 31,759
---------- ---------- ---------- ----------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY ITEM 42,839 20,908 126,107 49,674
LOSS FROM DISCONTINUED OPERATIONS (NET OF TAX)
(NOTE 13) 201,180 244 204,870 715
---------- ---------- --------- ----------
EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM (158,341) 20,664 (78,763) 48,959
EXTRAORDINARY ITEM (NOTE 9) -- 2,384 -- 20,552
---------- ---------- --------- ----------
NET EARNINGS (LOSS) $ (158,341) $ 18,280 $ (78,763) $ 28,407
=========== ========== ========= ==========
PER COMMON SHARE - BASIC:
EARNINGS FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY ITEMS $ 0.82 $ 0.82 $ 2.67 $ 2.01
EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM (3.03) 0.81 (1.67) 1.98
NET EARNINGS (LOSS) (3.03) 0.72 (1.67) 1.15
=========== ========== ========= ==========
PER COMMON SHARE - DILUTED:
EARNINGS FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY ITEMS $ 0.77 $ 0.64 $ 2.34 $ 1.61
EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM (2.72) 0.63 (1.29) 1.59
NET EARNINGS (LOSS) (2.72) 0.57 (1.29) 1.01
=========== ========== ========= ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS TREASURY
STOCK CAPITAL (DEFICIT) STOCK TOTAL
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 $ 43 1,062,436 45,495 (19,813) 1,088,161
EXERCISE OF EMPLOYEE STOCK OPTIONS
FOR 3,511,717 COMMON SHARES 3 58,524 -- -- 58,527
ISSUANCE OF 51,186 COMMON SHARES IN
CONNECTION WITH EMPLOYEE STOCK PURCHASE
PLAN -- 1,079 -- -- 1,079
ISSUANCE OF 2,290,189 COMMON SHARES IN
CONNECTION WITH ACQUISITIONS (NOTE 3) 2 70,071 -- -- 70,073
RE-ISSUANCE OF 347,700 TREASURY SHARES
IN CONNECTION WITH ACQUISITIONS -- -- -- 13,059 13,059
RE-PURCHASE OF 585,000 COMMON SHARES
(AT COST) -- -- -- (12,905) (12,905)
ISSUANCE OF 223,466 COMMON SHARES IN
CONNECTION WITH DEBT PAYMENTS -- 8,554 -- -- 8,554
VALUE OF 1,841,700 OPTIONS ISSUED IN
CONNECTION WITH ACQUISITION OF ROTECH
MEDICAL CORPORATION -- 32,743 -- -- 32,743
TAX BENEFIT ARISING FROM EXERCISE OF
EMPLOYEE STOCK OPTIONS -- 16,981 -- -- 16,981
ISSUANCE OF 3,573,446 COMMON SHARES IN
CONNECTION WITH THE CONVERSION OF THE
COMPANY'S 6% CONVERTIBLE SUBORDINATED
DEBENTURES, LESS ISSUANCE COSTS OF $5,417 4 109,378 -- -- 109,382
NET LOSS -- -- (78,763) -- (78,763)
---------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1998 $ 52 1,359,766 (33,268) (19,659) 1,306,891
===============================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1998 1997
-------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET EARNINGS (LOSS) $ (78,763) $ 28,407
ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
EXTRAORDINARY ITEM (NOTE 9) 0 33,690
NON-RECURRING CHARGES, NET 0 20,047
DISCONTINUED OPERATIONS 204,870 715
RESULTS OF JOINT VENTURES 43 958
DEPRECIATION AND AMORTIZATION 107,697 35,744
DEFERRED INCOME TAXES AND OTHER NON-CASH ITEMS 19,492 6,781
AMORTIZATION OF GAIN ON SALE-LEASEBACK TRANSACTIONS (696) (804)
INCREASE IN PATIENT ACCOUNTS AND THIRD-PARTY
PAYOR SETTLEMENTS RECEIVABLE, NET (117,180) (31,940)
INCREASE IN INVENTORIES, PREPAID
EXPENSES AND OTHER CURRENT ASSETS (16,067) (2,220)
DECREASE IN ACCOUNTS PAYABLE AND ACCRUED EXPENSES (112,183) (63,582)
INCREASE IN INCOME TAXES RECEIVABLE 0 (4,180)
INCREASE IN INCOME TAXES PAYABLE 48,138 0
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF
CONTINUING OPERATIONS 55,351 23,616
---------- ----------
NET CASH (USED) PROVIDED BY DISCONTINUED OPERATIONS (68,882) 3,090
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM ISSUANCE OF CAPITAL STOCK, NET 59,606 14,643
PROCEEDS FROM LONG-TERM BORROWINGS 696,518 2,544,918
REPAYMENT OF LONG-TERM DEBT (570,110) (1,419,179)
PAYMENT OF PRE-PAYMENT PREMIUMS AND FEES OF DEBT
EXTINGUISHMENT (NOTE 9) 0 (23,598)
DEFERRED FINANCING COSTS 0 (33,085)
DIVIDENDS PAID (814) (471)
PURCHASE OF TREASURY STOCK (12,905) (12,324)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 172,295 1,070,904
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
SALE OF TEMPORARY INVESTMENTS 67,923 639
PURCHASE OF TEMPORARY INVESTMENTS (61,170) (820,560)
BUSINESS ACQUISITIONS (NOTE 3) (127,337) (166,822)
PAYMENT OF TERMINATION FEES AND OTHER COSTS
OF TERMINATED MERGER (NOTE 8) 0 (27,555)
PURCHASE OF PROPERTY, PLANT AND EQUIPMENT (187,025) (86,656)
DISPOSITION OF ASSETS (NOTES 4,5,6 AND 7) 180,704 54,137
OTHER ASSETS 3,660 (30,906)
---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (123,245) (1,077,723)
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 35,519 19,887
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 52,965 39,028
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 88,484 $ 58,915
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements included herein do not contain all
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles. For
further information, such as the significant accounting policies followed by
Integrated Health Services, Inc. ("IHS" or "Company"), refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1997. In the opinion of
management, the consolidated financial statements include all necessary
adjustments (consisting of only normal recurring accruals) for a fair
presentation of the financial position and results of operations for the interim
periods presented. The results of operations for the interim periods presented
are not necessarily indicative of the results that may be expected for the full
year.
Certain prior year amounts have been reclassified to conform to the current year
presentation (See Note 13: Discontinued Operations).
NOTE 2: EARNINGS PER SHARE
The Company adopted SFAS No. 128 during the fourth quarter of 1997. SFAS No. 128
establishes revised standards for computing and presenting earnings per share
(EPS) data. It requires dual presentation of "basic" and "diluted" EPS on the
face of the statements of operations and a reconciliation of the numerators and
denominators used in the basic and diluted EPS calculations. As required by SFAS
No. 128, EPS data for prior periods presented have been restated to conform to
the new standard.
Basic EPS is calculated by dividing net earnings (loss) by the weighted average
number of common shares outstanding for the applicable period. Diluted EPS is
calculated after adjusting the numerator and the denominator of the basic EPS
calculation for the effect of all potential dilutive common shares outstanding
during the period. Information related to the calculation of net earnings from
continuing operations before extraordinary item per share of common stock is
summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
EARNINGS FROM CONTINUING
OPERATIONS BEFORE
EXTRAORDINARY ITEM SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For The Three Months Ended
September 30, 1998:
Basic EPS: $ 42,839 52,195 $ 0.82
Adjustment for interest on
convertible debentures: $ 1,310 ----- -----
Incremental shares from assumed
exercise of dilutive options
and warrants: ----- 998 -----
Incremental shares from assumed
conversion of the convertible
subordinated debentures: ----- 4,457 -----
------------- ----------- -------------
Diluted EPS: $ 44,149 57,650 $ 0.77
============= =========== =============
For The Three Months Ended
September 30, 1997:
Basic EPS: $ 20,908 25,489 $ 0.82
Adjustment for interest on
convertible debentures: $ 2,452 ----- -----
Incremental shares from assumed
exercise of dilutive options
and warrants: ----- 3,194 -----
Incremental shares from assumed
conversion of the convertible
subordinated debentures: ----- 7,989 -----
------------- ----------- -------------
Diluted EPS: $ 23,360 36,672 $ 0.64
============= =========== =============
For The Nine Months Ended
September 30, 1998:
Basic EPS: $ 126,107 47,272 $ 2.67
Adjustment for interest on
convertible debentures: $ 6,086 ----- -----
Incremental shares from assumed
exercise of dilutive options
and warrants: ----- 2,271 -----
Incremental shares from assumed
conversion of the convertible
subordinated debentures: ----- 6,831 -----
------------- ----------- -------------
Diluted EPS: $ 132,193 56,374 $ 2.34
============= =========== =============
<PAGE>
For The Nine Months Ended
September 30, 1997:
Basic EPS: $ 49,674 24,681 $ 2.01
Adjustment for interest on
convertible debentures: $ 7,356 ----- -----
Incremental shares from assumed
exercise of dilutive options
and warrants: ----- 2,831 -----
Incremental shares from assumed
conversion of the convertible
subordinated debentures: ----- 7,989 -----
------------- ----------- -------------
Diluted EPS: $ 57,030 35,501 $ 1.61
============= =========== =============
</TABLE>
7
<PAGE>
NOTE 3: NEW ACQUISITIONS
ACQUISITIONS DURING THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Acquisitions for the nine months ended September 30, 1998 and the manner of
payment are summarized as follows:
<TABLE>
<CAPTION>
TOTAL COMMON ACCRUED CASH
MONTH TRANSACTION COST STOCK ISSUED LIABILITIES PAID
- --------- --------------------------------------- ---------- -------------- ------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Jan. Stock of Paragon Rehabilitative $ 11,183 $10,758 $ 425 --
Service, Inc.
Feb. Assets of Health Star, Inc. $ 3,165 -- $ 310 $ 2,855
Feb. Stock of Medicare Convalescent
Aids of Pinellas d/b/a Medaids,
RxStat, Prime Medical Services $ 4,700 $ 3,654 $ 216 $ 830
Feb. Stock of Michigan Medical Supply $ 2,165 -- $ 265 $ 1,900
Feb. Assets of Nutmeg Respiratory $ 2,557 -- $ 217 $ 2,340
Homecare
March Assets of Chancy Healthcare $ 5,690 -- $ 355 $ 5,335
Services, Inc., Chancy Oxygen
Services, Inc., CHS Home Infusion
Co., Chancy Healthcare Services of
Waynesboro
April Stock of Magnolia Group, Inc. $ 16,118 $15,118 $ 1,000 --
May Assets of First Community
Care, Inc. $ 8,900 $ 2,282 $ 988 5,630
May American Mobile Health
Systems, Inc. $ 2,800 $ 2,800 -- --
May Assets of Eastern Home Care &
Oxygen, Inc., Mira Assoc., Altoona
Medox Enterprises, Professional
Home Health Centers, Keystone
Home Oxygen Services $ 4,225 -- $ 405 $ 3,820
June Assets of Downstate Lithotripter, LLC,
Metro/Litho LP & Long Island
Litrotripter, LLC & all the stock of
Lithotripter Corp. $ 11,182 $10,901 $ 281 --
June Stock of Premiere Assoc., Inc., and
assets of Hialeah facility $ 40,891 $29,264 $ 5,127 $ 6,500
June Assets of Apex Home Care, Inc. $ 2,936 -- $ 270 $ 2,666
June Assets of Osborne Medical, Inc. $ 2,095 -- $ 135 $ 1,960
July Assets of Collins Rentals, Inc. $ 2,895 -- $ 411 $ 2,484
August Assets of Home Care Oxygen
Services, Inc. $ 3,917 -- $ 267 $ 3,650
August Assets of Tri-County Medical
Oxygen, Inc. $ 2,236 -- $ 161 $ 2,075
Sept. Assets of Accucare Medical Corp. $ 2,938 $ 2,854 $ 84 --
Sept. Assets of Valley Oxygen & Medical
Equipment, Inc. $ 2,850 -- $ 386 $ 2,464
Various 58 acquisitions, each with total cost
of less than $2,000 $ 45,336 $ 5,501 $ 4,716 $ 35,119
Various Cash payments of acquisition costs
accrued -- -- $ (47,709) $ 47,709
-------- ------- --------- --------
$178,779 $83,132 $ (31,690) $127,337
======== ======= ========= ========
</TABLE>
8
<PAGE>
The allocation of the total cost of the 1998 acquisitions to the assets acquired
and liabilities assumed is summarized as follows:
<TABLE>
<CAPTION>
PROPERTY,
CURRENT PLAN & OTHER INTANGIBLE CURRENT LONG-TERM TOTAL
TRANSACTION ASSETS EQUIPMENT ASSETS ASSETS LIABILITIES LIABILITIES COST
- --------------------------------------- --------- ----------- -------- ------------ ------------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Paragon Rehabilitation
Services, Inc. $ 1,505 $ 85 $ 4 $ 13,036 $ (3,427) $ (20) $ 11,183
Health Star, Inc. $ 133 $ 110 -- $ 2,922 -- -- $ 3,165
Medicare Convalescent
Aids of Pinellas d/b/a
Medaids, RxStat,
Prime Medical Services $ 720 $ 366 -- $ 3,891 $ (277) -- $ 4,700
Michigan Medical Supply $ 215 $ 295 -- $ 1,801 $ (131) $ (15) $ 2,165
Nutmeg Respiratory Home Care $ 267 $ 146 -- $ 2,144 -- -- $ 2,557
Chancy Healthcare Services, Inc.,
Chancy Oxygen Services, Inc., CHS
Home Infusion Co., Chancy
Healthcare Services of Waynesboro $ 349 $ 40 -- $ 5,301 -- -- $ 5,690
Magnolia Group, Inc. $ 4,962 $ 21,753 $ 734 -- $ (8,989) $ (2,342) $ 16,118
American Mobile Health
Systems, Inc. $ 1,112 -- $ 1 $ 2,575 $ (888) -- $ 2,800
Eastern Home Care & Oxygen, Inc.,
Mira Assoc., Altoona Medox
Enterprises, Professional Home
Health Centers, Keystone Home
Oxygen Services $ 220 $ 859 -- $ 3,146 -- -- $ 4,225
First Community Care, Inc. $ 1,300 $ 639 $ 661 $ 7,800 -- $ (1,500) $ 8,900
Downstate Lithotripter, LLC,
Metro/Litho LP, Long Island
Lithotripter, LLC &
Lithotripter Corp. $ 2,485 $ 1,860 $ 431 $ 18,846 $ (11,500) $ (940) $ 11,182
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Premiere Assoc, Inc. &
Hialeah facility $ 2,986 $ 73,837 -- $ 39,030 $ (35,819) (39,143) $ 40,891
Apex Home Care, Inc. $ 150 $ 393 -- $ 2,693 -- $ (300) $ 2,936
Osborne Medical, Inc. $ 6 $ 142 -- $ 1,947 -- -- $ 2,095
Collins Rentals, Inc. $ 112 $ 400 -- $ 2,383 -- -- $ 2,895
Home Care Oxygen Services, Inc. $ 156 $ 369 -- $ 3,392 -- -- $ 3,917
Tri-County Medical Oxygen, Inc. $ 74 $ 47 -- $ 2,115 -- -- $ 2,236
Accucare Medical Corp. $ 166 $ 195 -- $ 3,223 $ (646) -- $ 2,938
Valley Oxygen & Medical
Equipment, Inc. 351 $ 46 -- $ 2,453 -- -- $ 2,850
58 acquisitions, each with total costs
of less than $2,000 $ 2,146 $ 4,229 -- $ 40,292 $ (805) $ (526) $ 45,336
------- -------- ------ -------- --------- --------- --------
$19,415 $105,811 $1,831 $158,990 $ (62,482) $ (44,786) $178,779
======= ======== ====== ======== ========= ========= ========
</TABLE>
NOTE 4: TRANSACTIONS WITH LYRIC HEALTH CARE LLC
In January 1998, the Company sold five long-term care facilities to
Omega Healthcare Investors, Inc. for $44.5 million, which facilities
were leased back by Lyric Health Care LLC ("LLC"), a newly formed
subsidiary of IHS, at an annual rent of approximately $4.5 million. In a
related transaction, TFN Healthcare Investors, LLC, ("TFN", an entity in
which Timothy F. Nicholson, a director of IHS, is the principal member)
purchased a 50% interest in LLC for $1.0 million and IHS' interest in
LLC was reduced to 50%. IHS also entered into management and franchise
agreements with LLC. The management and franchise agreements' initial
terms are 13 years with two renewal options of 13 years each. The base
management fee is 3% of gross revenues, subject to increase if gross
revenues exceed $350.0 million. In addition, the agreement provides for
an incentive management fee equal to 70% of annual net cash flow (as
defined in the management agreement). The duties of IHS as manager
include the following: accounting, legal, human resources, operations,
materials and facilities management and regulatory compliance. The
annual franchise fee is 1% of gross revenues, which grants LLC the
authority to use the Company's trade names and proprietary materials.
The LLC will dissolve on December 31, 2047 unless extended for an
additional 12 months. On February 1, 1998 LLC also entered into a
10
<PAGE>
five-year employment agreement with Timothy F. Nicholson, the principal
stockholder of TFN and a director of the Company. Pursuant to LLC's
operating agreement, Mr. Nicholson will serve as Managing Director of
LLC and will have the day-to-day authority for the management and
operation of LLC and will initiate policy proposals for business plans,
acquisitions, employment policy, approval of budgets, adoption of
insurance programs, additional service offerings, financing strategy,
ancillary service usage, change in material terms of any lease and
adoption/amendment of employee health, benefit and compensation plans.
As a result of the aforementioned transactions, IHS will account for
its investment in LLC using the equity method of accounting since IHS
no longer controls LLC. Under the equity method of accounting for LLC,
IHS will record 50% of LLC's earnings and losses pursuant to the
amended operating agreement. The equity method will be applied to the
Company's investment in LLC, including outstanding management and
franchise fees. The Company recorded a $2.5 million loss on the sale of
these facilities in 1997 in anticipation of the sale of these
facilities.
Cash flow deficiencies, if any, of LLC may be satisfied by (1)
available working capital loans under a $10.0 million revolving credit
facility from Copelco/American Healthfund, Inc., (2) obtaining
additional borrowings under new debt arrangements, (3) obtaining
additional capital contributions from IHS and TFN, the existing members
of the LLC, although such contributions are not required, and (4)
admission of new members to LLC.
In March 1998, the Company sold an additional five long-term care
facilities to Omega Healthcare Investors, Inc. for approximately $50
million, which facilities were leased back to LLC at an annual rent of
approximately $4.9 million. IHS also entered into management and
franchise agreements with LLC with terms similar to those described
above. The Company recorded no gain or loss on this transaction.
The net proceeds from the sale of these facilities were approximately
$89.9 million.
NOTE 5: SALE OF OUTPATIENT CLINICS
In February 1998, the Company sold its outpatient clinics to Continucare
Rehabilitation Services, Inc. for $10.0 million. During the fourth
quarter of 1997, the Company wrote down its basis in its outpatient
clinics to net realizable value. Accordingly, no gain or loss was
recognized by the Company during the first quarter of 1998.
NOTE 6: SALE OF FACILITIES
In June 1998, the Company sold eleven long-term care facilities for
approximately $56.7 million, which approximated the Company's basis. The
Company recognized no gain or loss on the transaction.
11
<PAGE>
In July 1998, the Company sold four of its facilities held for sale for
approximately $1.0 million. The Company recognized no gain or loss on
the transaction.
NOTE 7: SALE OF INSTITUTIONAL PHARMACY DIVISION
In August 1998, the Company sold portions of its institutional pharmacy
division, which was acquired by IHS as part of the Horizon/CMS assets
acquired from HEALTHSOUTH Corporation in December 1997. The Company
recorded no gain or loss on the transaction.
NOTE 8: NON-RECURRING CHARGES
PHARMACY GAIN:
In July 1996, the Company sold its pharmacy division to Capstone
Pharmacy, Inc. ("Capstone") for a purchase price of $150 million,
consisting of cash of $125 million, and shares of Capstone's common
stock having a value of $25 million. At the date of the sale the
Company's investment in the shares of Capstone's common stock was
recorded at its carryover cost of $14.7 million, which represented less
than 20% of the total Capstone shares. During the first quarter of 1997,
the Company recorded the remaining gain of $7.6 million on its
investment in the Capstone shares. Previously, such gain was accounted
for as an unrealized gain on available for sale securities.
SETTLEMENT WITH CORAM:
On October 19, 1996, the Company and Coram Healthcare Corporation
("Coram") entered into a definitive agreement and plan of merger (the
"Merger Agreement") providing for the merger of a wholly owned
subsidiary of IHS into Coram, with Coram becoming a wholly owned
subsidiary of IHS. Under the terms of the Merger Agreement, holders of
Coram common stock were to receive for each share of Coram common stock
0.2111 of a share of the Company's common stock, and IHS would have
assumed approximately $375 million of indebtedness. On April 4, 1997,
IHS notified Coram that it had exercised its right to terminate the
Merger Agreement. IHS also terminated the March 30, 1997 letter
amendment, setting forth proposed revisions to the terms of the merger
(which included a reduction in the exchange ratio to 0.15 of a share of
IHS common stock for each share of Coram common stock), prior to the
revisions becoming effective at the close of business on April 4, 1997.
On May 5, 1997, IHS and Coram entered into a settlement agreement
pursuant to which the Company paid Coram $21 million in full settlement
of all claims Coram might have against IHS pursuant to the Merger
Agreement, which the Company recognized as a non-recurring charge in the
second quarter of 1997. In addition, during the first quarter of 1997
the Company incurred
12
<PAGE>
a non-recurring charge of $6.6 million relating to accounting, legal and
other costs related to the merger.
NOTE 9: EXTRAORDINARY ITEM
In the second quarter of 1997, the Company recorded a pre-tax loss of
$29.8 million representing (1) approximately $23.6 million of cash
payments for pre-payment premium and tender and consent fees relating to
the early extinguishment of debt resulting from the Company's repurchase
pursuant to cash tender offers of $99,893,000 principal amount of the
Company's $100 million of outstanding 10-3/4% Senior Subordinated Notes
due 2004 and $114,975,000 of the Company's $115 million of outstanding
9-5/8% Senior Subordinated Notes due 2002 and (2) approximately $6.2
million relating to the write-off of deferred financing costs. Such
loss, reduced by the related income tax effect of $11.6 million, is
presented in the statement of operations as an extraordinary loss of
$18.2 million.
In the third quarter of 1997, the Company replaced its $700 million
revolving credit facility with a $1.75 billion revolving credit and term
loan facility. This event has been accounted for as an extinguishment of
debt and the Company has recorded a loss on extinguishment of debt of
$3.9 million, relating primarily to the write-off of deferred costs.
Such loss, reduced by the related income tax effect of $1.5 million, is
presented in the statement of operations as an extraordinary item of
$2.4 million.
NOTE 10: RECENT ACCOUNTING PRONOUNCEMENTS
In 1998 the Company adopted Statement of Financial Standards No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive earnings and its components in a
full set of general-purpose financial statements. A reconciliation of
the Company's net earnings and comprehensive earnings follows:
13
<PAGE>
THREE MONTHS ENDED
<TABLE>
<CAPTION>
SEP. 30 DEC. 31 MAR. 31
------------ ------------ -----------------------
1996 1996 1997 1998
------------ ------------ ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net earnings (loss) ............. $ 16,511 $ 2,176 $ 19,069 $38,080
Increase (decrease) in unrealized
gain on available for sale
securities ..................... $ 11,483 $ (2,133) $ (9,360) --
Income tax effect ............... $ (4,421) $ 817 $ 3,604 --
-------- -------- -------- -------
Comprehensive earnings .......... $ 23,573 $ 860 $ 13,313 $38,080
======== ======== ======== =======
<CAPTION>
JUNE 30 SEPT. 30
----------------------- -------------------------
1997 1998 1997 1998
------------ ---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net earnings (loss) ............. $ (8,943) $41,497 $18,280 $ (158,341)
Increase (decrease) in unrealized
gain on available for sale
securities ..................... -- -- -- --
Income tax effect ............... -- -- -- --
-------- ------- ------- ----------
Comprehensive earnings .......... $ (8,943) $41,497 $18,280 $ (158,341)
======== ======= ======= ==========
</TABLE>
There were no differences between net earnings and comprehensive
earnings prior to July 1, 1996.
NOTE 11: 6% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
On May 29, 1998, the Company called for redemption on June 29, 1998 all
of its outstanding 6% Convertible Subordinated Debentures due 2003 (the
"6% Debentures"). Of the $115,000,000 principal amount of 6% Debentures
outstanding, holders of $114,799,000 principal amount of the 6%
Debentures converted their 6% Debentures into an aggregate of 3,573,446
shares of Common Stock. Holders of the remaining $201,000 principal
amount of 6% Debentures received a cash redemption aggregating $213,026
($1,059.83 per $1,000 principal amount of the 6% Debentures), equal to
approximately $34.05 per underlying share of Common Stock in lieu of
conversion.
NOTE 12: SEGMENT REPORTING
After giving effect to the discontinuation of its home nursing
division, IHS has two primary reportable segments: Home
Respiratory/Infusion/DME and Inpatient Services. Home
Respiratory/Infusion/DME provides respiratory and infusion therapy, as
well as the sale and/or rental of home medical equipment. Inpatient
Services include basic and specialty medical services (e.g.,
rehabilitation and diagnostic services) provided primarily on an
inpatient basis at skilled nursing facilities, as well as lithotripsy,
hospice and contracted services. These services have similar economic
characteristics and have been aggregated pursuant to SFAS No. 131. No
other individual business segment exceeds the 10% quantitative
thresholds of SFAS No. 131.
IHS management evaluates the performance of its operating segments on
the basis of earnings before interest, income taxes, depreciation and
amortization and non-recurring charges.
14
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30,1997 SEPTEMBER 30, 1998
----------------------------------------- ----------------------------------------
HOME HOME
RESPIRATORY/ IMPATIENT RESPIRATORY/ INPATIENT
INFUSION/DME SERVICES CONSOLIDATED INFUSION/DME SERVICES CONSOLIDATED
-------------- ----------- -------------- -------------- ----------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues ............................ 52,186 956,953 1,009,139 500,848 1,748,945 2,249,793
Operating, general and administrative
(including rent) ................... 48,156 765,219 813,375 379,029 1,372,180 1,751,209
Earnings before
interest, taxes,
depreciation and
amortization ....................... 4,030 191,734 195,764 121,819 376,765 498,584
</TABLE>
There are no inter-segment revenues or receivables. Revenue derived
from Medicare and various state Medicaid reimbursement programs
represented 49% and 17%, respectively, for the nine months ended
September 30, 1997 and 41% and 19%, respectively, for the nine months
ended September 30, 1998. The Company does not evaluate its operations
on a geographic basis.
NOTE 13: DISCONTINUED OPERATIONS
In October 1998, the Company adopted a plan to discontinue its home
health nursing business segment. Accordingly, the operating results of
the home health segment have been segregated from continuing operations
and reported as a separate line item on the condensed statement of
operations.
The loss from this discontinued operation of $204.9 million represents
the operating loss for the nine month period ended September 30, 1998,
the estimated loss on disposal of the investment and an estimated
provision for losses to be incurred during the disposal period through
June 30, 1999. The operating loss for the nine month period of $41.8
million includes the effects of interest expense incurred in connection
with acquisition financing as well as significant non-recurring costs
to close home health agencies and restructure operations primarily
related to payments for lease termination and employee severance.
Revenues of the home health nursing segment were $54.8 million for the
three months ended September 30, 1998 and $127.3 million for the three
months ended September 30, 1997. Revenue for the nine months ended
September 1998 and 1997 were $228.7 million and $382.7 million,
respectively.
15
<PAGE>
NOTE 14: SUBSEQUENT EVENTS
AGREEMENT WITH MONARCH PROPERTIES, INC.
In April 1998 the Company reached an agreement in principle to sell 44
facilities to Monarch Properties, Inc., a newly-formed real estate
investment trust ("Monarch"), for an aggregate purchase price of
approximately $371 million. It is currently contemplated that Monarch
will lease 42 of these 44 facilities to Lyric, and that Lyric will
engage the Company to manage the facilities pursuant to the
arrangements described in Note 4. The transactions with Monarch and
Lyric are subject to completion of definitive documentation and
completion of Monarch's initial public offering of common stock, and
there can be no assurance that the transaction will be completed on
these terms, on different terms, or at all. Because of the current
unfavorable market conditions for REITs such as Monarch, Monarch is
pursuing alternative financing, although there can be no assurance such
financing can be obtained on reasonable terms or at all. Dr. Robert N.
Elkins, the Company's Chairman of the Board, Chief Executive Officer
and President, is Chairman of the Board of Directors of Monarch, and it
is currently contemplated that he will beneficially own between five
and ten percent of Monarch following completion of Monarch's public
offering; however, Dr. Elkins may own greater than five to ten percent
of Monarch if alternative financing is arranged. If Monarch is unable
to purchase some or all of the facilities from the Company, the Company
intends to explore other alternatives with respect to these facilities,
including sale/leaseback transactions with other real estate investment
trusts and sale of the facilities.
OTHER ACQUISITIONS
During October, IHS acquired a leasehold interest in a skilled nursing
facility and eight respiratory companies for approximately $16.2
million. Also, in November, the Company acquired a skilled nursing
facility for approximately $7.5 million.
In addition, the Company has reached agreements in principle to
purchase a skilled nursing facility for approximately $12.0 million,
three lithotripsy operations for approximately $14.6 million and 21
respiratory companies for approximately $45.1 million.
There can be no assurance that any of these pending acquisitions will
be consummated on the proposed terms, on different terms, or at all.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Statements in this Quarterly Report on Form 10-Q concerning the Company's
business outlook or future economic performance; anticipated profitability,
revenues, expenses or other financial items; and product line growth, together
with other statements that are not historical facts, are "forward-looking
statements" as that term is defined under Federal Securities Laws. In addition,
when used in this quarterly report on Form 10-Q, the words "estimate",
"project", "believe", "anticipate", "intend", "expect", and similar expressions
are intended to identify forward-looking statements which reflect the current
views of IHS with respect to future events. Forward-looking statements are
subject to risks, uncertainties and other factors that could cause actual
results to differ materially from those stated in such statements. Such risks,
uncertainties and factors include, but are not limited to, the Company's
substantial indebtedness, growth strategy, managed care strategy, capital
requirements and recent acquisitions as well as competition, government
regulation, general economic conditions and the other risks detailed in the
Company's filings with the Securities and Exchange Commission, including the
Company's Annual Report on Form 10-K/A for the year ended December 31, 1997.
17
<PAGE>
The Company continues to evaluate the impact of the Balanced Budget Act of
1997 ("BBA") upon future operating results. While the BBA was passed in August
1997, specific interpretative regulations for various service providers will
continue to be released until the year 2000. The assumptions used by the Company
to evaluate the impact of the BBA on the Company's business lines are based upon
the most accurate information available at each quarter end. Presently the
Company is responding to all of the known changes created by the BBA; however,
it cannot predict the impact future regulations may have on anticipated rates,
service usage and operating costs.
In addition to implementing a Medicare prospective payment system for
skilled nursing facilities, the BBA also provided for a prospective payment
system for home nursing to be implemented for cost reporting periods beginning
on or after October 1, 1999 (which the Health Care Financing Administration has
indicated it is attempting to extend) and a reduction in current cost
reimbursement for Medicare home nursing care pending implementation of a
prospective payment system. As a result of the delay in implementation of a
prospective payment system for home nursing and the current reduction in cost
reimbursement for Medicare home nursing and its impact on the Company's
financial performance, the Company adopted a plan of disposition for the home
health nursing business segment. This business, which the Company intends to
sell, is treated as a discontinued operation for all periods presented (See Note
13: Discontinued Operations).
THREE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997
Net revenues for the three months ended September 30, 1998 increased $406.6
million, or 118%, to $752.2 million from the comparable period in 1997. The
increase in revenues was primarily a result of acquisitions consummated
subsequent to September 30, 1997, as well as increased revenues from companies
in operation during both periods, partially offset by the sale of five long-term
care facilities in January 1998, the sale of the Company's outpatient clinics in
February 1998, the sale of five long-term care facilities in March 1998, the
sale of eleven long-term care facilities in June 1998, and the sale of the
institutional pharmacy division in August 1998. The growth in revenues was
primarily the result of increased occupancy in the Company's Medical Specialty
Units ("MSUs") and additional service contracts entered into subsequent to
September 30, 1997.
Basic medical services revenue increased 158% from $91.5 million to $236.2
million. This increase primarily resulted from the acquisition of long-term care
facilities subsequent to September 30, 1997, partially offset by the conversion
of skilled nursing beds to MSU beds after September 30, 1997 and the sales of
long-term care facilities in January, March and June 1998 referred to above.
18
<PAGE>
Specialty medical services revenue increased $263.8 million, or 108%, from
$243.5 million to $507.3 million. This increase was attributable to revenue from
acquisitions subsequent to September 30, 1997 and skilled nursing beds being
converted to MSU beds after September 30, 1997, which results in higher revenue
per day, partially offset by the aforementioned sales of long-term care
facilities in January, March and June 1998, the sale of the Company's outpatient
clinics in February 1998, and the sale of the institutional pharmacy division in
August 1998.
Management services and other revenues decreased 18% from $10.7 million to
$8.7 million primarily as a result of the termination of 14 management
agreements subsequent to September 30, 1997, partially offset by management fees
from the ten facilities which the Company began to manage on behalf of Lyric
Health Care LLC in January and March 1998 (see Note 4: Transactions with Lyric
Health Corporation, LLC) and the addition of two management agreements in the
third quarter of 1998.
Total expenses for the period increased 119% to $679.8 million from $310.5
million in the comparable period of 1997. Of the $369.2 million increase, $293.4
million, or 79%, resulted from an increase in operating, general and
administrative expenses. Substantially all of the increase in operating, general
and administrative expenses was due to acquisitions consummated subsequent to
September 30, 1997.
Depreciation and amortization increased to $38.4 million during the three
months ended September 30, 1998, a 207% increase as compared to $12.5 million in
the same period in 1997. This increase is primarily the result of acquisitions
consummated subsequent to September 30, 1997. Rent expense increased by $13.1
million, or 67%, over the comparable period in 1997. This increase is primarily
a result of acquisitions consummated subsequent to September 30, 1997 and
increases in contingent rentals, which are based on gross revenues of certain
leased facilities. Interest expense, net, increased $36.8 million, or 162%,
during the three months ended September 30, 1998 to $59.5 million. The increase
in interest expense is primarily a result of additional term loan borrowings of
$400 million in December 1997 and $750 million in September 1997, the issuance
of $500 million of 9-1/4% Senior Subordinated Notes due 2008 in September 1997
and increased borrowings under the Company's $1.0 billion revolving credit
facility, partially offset by a reduction of interest expense resulting from the
payoff of the Company's $700 million previous revolving credit facility, the
retirement (primarily through conversion) of $115 million of 6% Convertible
Subordinated Debentures due 2003 and lower interest rates.
Earnings from continuing operations before equity in earnings (loss) of
affiliates, income taxes and extraordinary item increased 106% to $72.4 million
for the three months ended September 30, 1998, as
19
<PAGE>
compared to $35.1 million for the comparable period in the prior year.
Earnings from continuing operations before income taxes and extraordinary
items increased by 112% to $72.6 million for the three months ended September
30, 1998, as compared to $34.3 million for the comparable period in the prior
year. The provision for federal and state income taxes was $29.8 million for the
three months ended September 30, 1998, and $13.4 million for the same period in
the prior year. Included in the third quarter of 1998 is a $201.2 million charge
resulting from the Company's adoption of a plan of disposition for the home
health nursing business segment (see Note 13: Discontinued Operations). The
$201.2 million charge includes provisions for estimated losses during the
holding period and the estimated loss on the disposal of assets. Net loss and
diluted loss per share for the quarter were $158.3 million in 1998, or $2.72 per
share, as compared to net earnings and diluted earnings per share of $18.3
million or 57 cents per share for the same period in 1997. During the three
months ended September 30, 1997, the Company incurred extraordinary losses on
the extinguishment of debt of $2.4 million (net of tax), or 6 cents per share
(diluted)(See Note 9: Extraordinary Items). Weighted average shares (diluted)
for the quarter increased 21.0 million shares, or 57%, to 57.7 million from the
comparable period in 1997, primarily as a result of the issuance of
approximately 15.6 million shares in October 1997 in connection with the
acquisition of RoTech Medical Corporation, partially offset by less outstanding
options being considered common stock equivalents because their exercise price
was above the average market price of the common stock for the third quarter of
1998.
20
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997
Net revenues for the nine months ended September 30, 1998 increased
$1,240.7 million, or 123%, to $2,249.8 million from the comparable period in
1997. The increase in revenues was primarily a result of acquisitions
consummated subsequent to September 30, 1997, as well as increased revenues from
facilities and ancillary companies in operation during both periods, partially
offset by the aforementioned sales of long-term care facilities in January,
March and June 1998, the sale of its outpatient clinics in February 1998 and the
sale of the institutional pharmacy division in August 1998. The growth in
revenues was primarily the result of increased occupancy in the Company's MSU's
and additional service contracts entered into subsequent to September 30, 1997.
Basic medical services revenue increased 162% from $268.3 million to $703.4
million. This increase resulted from the acquisition of long-term care
facilities subsequent to September 30, 1997, partially offset by the conversion
of skilled nursing beds to MSU beds after September 30, 1997 and the
aforementioned sales of long-term care facilities in January, March and June
1998.
Specialty medical services revenue increased $810.5 million, or 114%, from
$710.9 million to $1,521.3 million. This increase was primarily attributable to
revenue from acquisitions subsequent to September 30, 1997, as well as increased
revenue from facilities and ancillary companies in operation in both periods and
skilled nursing beds being converted to MSU beds after September 30, 1997, which
results in higher revenue per day, partially offset by the aforementioned sale
of long-term care facilities in January, March and June 1998, the sale of its
outpatient clinics in February 1998 and the sale of its institutional pharmacy
division in August 1998.
Management services and other revenues decreased 17% from $30.0 million to
$25.0 million primarily as a result of the termination of 14 management
agreements subsequent to September 30, 1997, partially offset by management fees
from ten facilities which the Company began to manage on behalf of Lyric
Healthcare LLC in January and March 1998, and the addition of two management
agreements in the third quarter of 1998. (See Note 4: Transactions with Lyric
Health Care LLC)
Total expenses for the period increased to $2,036.7 million from $927.0
million, an increase of 120%. Of the $1,109.7 million increase in total
expenses, $902.8 million, or 81%, was due to an increase in operating, general
and administrative expenses. Substantially all of the increase in operating,
general and administrative expenses was due to
21
<PAGE>
acquisitions consummated subsequent to September 30, 1997. Depreciation and
amortization increased to $107.7 million during the nine months ended September
30, 1998, an increase of 201% as compared to $35.7 million in the same period in
1997. This increase is the result of acquisitions consummated subsequent to
September 30, 1997. Rent expense increased by $35.1 million, or 63%, over the
comparable period in 1997. This increase is primarily a result of acquisitions
consummated subsequent to September 30, 1997, and increases in contingent
rentals that are based on gross revenues of certain leased facilities. Interest
expense, net increased 207%, or $119.9 million, during the nine months ended
September 30, 1998 to $177.8 million. The increase in interest expense is
primarily a result of the aforementioned additional borrowings under the term
loan and revolving credit facility and the issuance of the 9-1/4% Senior
Subordinated Notes and the 9-1/2% Senior Subordinated Notes, partially offset by
a reduction in interest resulting from the repurchase of substantially all of
the Company's 9-5/8% Senior Subordinated Notes due 2007 and 10-3/4% Senior
Subordinated Notes due 2004 in May 1997, the payoff of the Company's $700
million revolving credit facility, the retirement of the 6% Convertible
Subordinated Debentures due 2003 and lower interest rates. During the first nine
months of 1997, the Company realized a $7.6 million gain on its investment in
shares of common stock of Capstone Pharmacy Services, Inc. received in
connection with the sale of its pharmacy division to Capstone in July 1996,
offset by $27.6 million of settlement and other costs related to the terminated
merger with Coram Healthcare Corporation. As a result, the Company has recorded
in its statement of operations $20.0 million of non-recurring charges, net for
the nine months ended September 30, 1997. (See Note 8: Non-recurring Charge)
Earnings from continuing operations before equity in earnings (loss) of
affiliates and income taxes increased 159% to $213.1 million for the nine months
ended September 30, 1998, as compared to $82.1 million for the comparable period
in the prior year.
Earnings from continuing operations before income taxes and extraordinary
items increased 162% to $213.7 million for the nine months ended September 30,
1998, as compared to $81.4 million for the comparable period in the prior year.
The provision for federal and state income taxes was $87.6 million for the nine
months ended September 30, 1998, and $31.8 million for the same period in the
prior year. During the nine months ended September 30, 1998, the Company
recorded a loss from discontinued operations relating to its home nursing
division of $204.9 million, representing operating losses for the nine months
ended September 30, 1998, provisions for estimated losses during the holding
period and the estimated loss on disposal of assets (see Note 13: Discontinued
Operations). Net loss and diluted loss per share for the period were $78.8
million in 1998, or $1.29 per share, as compared to net earnings and diluted
earnings per share of $28.4 million, or $1.01 per share, for the same period in
1997. The 1997 amounts reflect the non-recurring charge of $20.0 million
referred to
22
<PAGE>
above. During the nine months ended September 30, 1997, the Company incurred
extraordinary losses on the early extinguishment of debt of $20.6 million (net
of tax), or 58 cents per share (diluted), representing the payment of premium
and consent fees, the write-off of deferred financing costs in connection with
the repurchase of substantially all of the Company's 9-5/8% and 10-3/4% Senior
Subordinated Notes, and the write-off of deferred financing costs related to the
early extinguishment of the Company's $700 million revolving credit facility
referred to above. (See Note 9: Extraordinary Item) Weighted average shares
(diluted) increased 20.9 million shares, or 59%, to 56.4 million shares from the
comparable period in 1997 primarily as the result of the issuance of
approximately 15.6 million shares in October 1997 in connection with the
acquisition of RoTech Medical Corporation, partially offset by less outstanding
options being considered common stock equivalents because their exercise price
was above the average market price of the common stock for the nine months ended
September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had working capital of $211.4 million,
as compared with $63.1 million at December 31, 1997. The increase in working
capital was primarily due to an increase in patient accounts and third party
payor settlements receivable, cash and cash equivalents and other current assets
and a decrease in accounts payable and accrued expenses. There were no material
commitments for capital expenditures as of September 30, 1998. Net patient
accounts and third-party payor settlements receivable increased $16.2 million to
$619.6 million at September 30, 1998, as compared to $603.4 million at December
31, 1997. The net increase in accounts receivable includes an increase
attributable to related service businesses acquired subsequent to December 31,
1997 partially offset by a decrease due to the discontinuation of the home
nursing division. Gross patient accounts receivable were $734.9 million at
September 30, 1998, as compared to $726.1 million at December 31, 1997. Net
third-party payor settlements receivable from federal and state governments
(i.e., Medicare and Medicaid cost reports) was $87.4 million at September 30,
1998, as compared to $38.7 million at December 31, 1997.
The other asset and liability increases were due to acquisitions and normal
growth in operations which was consistent with the growth in revenues of such
operations in 1997.
23
<PAGE>
Net cash provided by operating activities for the nine months ended
September 30, 1998, was $55.4 million as compared to $23.6 million for the
comparable period in 1997.
Net cash used by discontinued operations was $68.9 million for the nine
months ended September 30, 1998 as compared to net cash provided by discontinued
operations of $3.1 million for the comparable period in 1997.
Net cash provided by financing activities was $172.3 million for the nine
month period in 1998 as compared to $1,070.9 million for the comparable period
in 1997. In both periods, the Company received net proceeds from long-term
borrowings and made repayments on certain debt. In addition, during the nine
months ended September 30, 1997, the Company paid $23.6 million of prepayment
premiums and consent fees and incurred $11.6 million of deferred financing costs
in connection with the issuance of the 9-1/2% Senior Subordinated Notes due 2007
in May 1997, $13.5 million of deferred financing costs in connection with the
issuance of the 9-1/4% Senior Subordinated Notes due 2008 in September 1997 and
$8.0 million of deferred financing costs in connection with its $1.75 billion
term loan and revolving credit facility entered into in September 1997.
Net cash used by investing activities was $123.2 million for the nine month
period ended September 30, 1998 as compared to $1,077.7 million for the nine
month period ended September 30, 1997. Cash used for the acquisition of
facilities and ancillary companies was $127.3 million in 1998 as compared to
$166.8 million for 1997. Cash used for the purchase of property, plant and
equipment was $187.0 million in 1998 and $86.7 million in 1997. During the nine
months ended September 30, 1998, the Company received $89.9 million related to
the sale of ten long-term care facilities to Omega Healthcare Investors, Inc.
(See Note 4: Transactions with Lyric Health Care LLC), $10.0 million from the
sale of its outpatient clinics to Continucare Rehabilitation Services, Inc. (See
Note 5: Sale of Outpatient Clinics), $56.7 million from the sale of eleven
long-term care facilities in June 1998, approximately $1.0 million from the sale
of four held for sale facilities in July 1998 and $23.1 million from the sale of
its institutional pharmacy division in August 1998 (See Note 6: Sale of
Facilities and Note 7: Sale of Institutional Pharmacy Division).
As a result of the BBA's implementation of a prospective payment system for
home nursing beginning with cost report periods beginning on or after October 1,
1999, contingent payments in respect of the acquisition of First American Health
Care of Georgia, Inc. in October 1996, aggregating $155 million, became payable
over five years beginning in 2000. The present value of such payments at
September 30, 1998 is $119.6 million and is recorded on the balance sheet under
the caption other long-term liabilities.
24
<PAGE>
IHS' contingent liabilities (other than liabilities in respect of
litigation) aggregated approximately $112.6 million as of September 30, 1998.
The Company is obligated to purchase its Greenbriar facility upon a change in
control of IHS. The net price of the facility is approximately $4.0 million. The
Company has guaranteed approximately $6.6 million of the lessor's indebtedness.
IHS is required, upon certain defaults under the lease, to purchase its Orange
Hills facility at a purchase price equal to the greater of $7.1 million or the
facility's fair market value. The Company has guaranteed approximately $4.0
million owed by Tutera Group, Inc. and Sunset Plaza Limited Partnership, a
partnership affiliated with a partnership in which IHS has a 49% interest, to
Finova Capital Corporation. IHS has established several irrevocable standby
letters of credit with the Bank of Nova Scotia totaling $26.5 million at
September 30, 1998 to secure certain of the Company's workers' compensation
obligations, health benefits and other obligations. The Company also has a
surety bond in the amount of $22.6 million to secure certain liabilities related
to the sale of the Company's institutional pharmacy division. In addition, IHS
has several surety bonds in the amount of $37.2 million to secure certain of the
Company's health benefits, patient trust funds and other obligations. IHS also
has established letters of credit with the Bank of Nova Scotia for approximately
$2.4 million for credit support of Lyric Health Care LLC financing. IHS also has
established a letter of credit with NationsBank in the amount of $2.2 million
for credit enhancement to an industrial development bond issued for construction
of a facility in Amarillo, Texas. In addition, with respect to certain acquired
businesses IHS is obligated to make certain contingent payments if earnings of
the acquired business are met. The Company is obligated to purchase the
remaining interests in its lithotripsy partnerships at a defined price in the
event legislation is passed or regulations adopted that would prevent the
physician partners from owning an interest in the partnership and using the
partnership's lithotripsy equipment for the treatment of his or her patients. In
addition, IHS has obligations under operating leases aggregating approximately
$664.6 million at September 30, 1998.
The Company anticipates that cash from operations and borrowings under
revolving credit facilities will be adequate to cover its scheduled debt
payments and future anticipated capital expenditure requirements throughout
1998. The Company expects to continue to be growth oriented in 1998 through the
expansion of its existing operations and by the acquisition of additional
facilities, ancillary companies and management agreements.
YEAR 2000 COMPLIANCE
The Company has conducted a comprehensive review of its computer systems to
identify the systems that are affected by the "Year 2000"
25
<PAGE>
issue and has substantially completed an implementation plan to resolve this
issue. This issue affects computer systems that have date sensitive programs
that may not properly recognize the year 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail, resulting in business interruption. As part of the Company's Year 2000
Project, the Company has completed its initial evaluation of current computer
systems, software and embedded technologies. IHS began implementation of its
Year 2000 plan in January 1997 and all business segments have been examined. An
inventory of all equipment and systems supported by IHS' Information Technology
department has been compiled and compliance has been verified. The Year 2000
Project is approximately 50% complete and it is anticipated that the project
will be fully implemented by June 1999. Periodic meetings are being held with
the Board of Directors and Senior Management to ensure that the project stays on
schedule.
During the first nine months of 1998, expenditures related to the Year 2000
issue totaled approximately $4 million. The Company currently estimates that an
additional $7 million will be spent to complete the project, although additional
amounts may be required. The costs will be funded through cash from operations
and borrowings under revolving credit facilities and are being expensed as
incurred.
One of the biggest risks to the Company is that regulatory payors (i.e.,
Medicare and Medicaid), suppliers and other entities with which the Company has
a material relationship will not be compliant by Year 2000 and therefore unable
to pay claims. The Company has initiated a program to determine whether the
computer programs of its significant payors and suppliers will be upgraded in a
timely manner. The Company has not completed this review; however initial
responses indicate that no significant issues are expected to arise.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. The Company has not established a formal contingency plan to put
into effect in the event of a failure to correct a material Year 2000 problem.
Due to the general uncertainty inherent in the Year 2000 problem, resulting in
part from the uncertainty of the Year 2000 readiness of third party payors and
suppliers, there can be no assurance that the Company's assessment is correct or
that the assessment of materiality of any failure is correct. Completion of the
Year 2000 Project is expected to significantly reduce the Company's level of
uncertainty over the Year 2000 issue and the Company believes that upon
completion of the Project, the possibility of significant interruptions of
normal operations should be minimal.
26
<PAGE>
PART II: OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 8, 1998, the Company settled certain litigation broughy by Icon
Development, Inc. ("Incon") alleging breach of contract and other
theories of recovery under an agreement between the Company and Incon.
The settlement payment was $1.5 million, which was paid through the
issuance of 39,012 shares of the Company's Common Stock.
On July 9, 1998, the Company acquired a 69% interest in South Georgia
Lithotripsy Partners, a lithotripsy services business. The purchase
price for the partnership interest was $1.0 million which was paid
through the issuance of 40,722 shares of the Company's Common Stock.
On July 24, 1998, the Company acquired all the assets of Tacoma
Radiological Associates, P.S., a provider of mobile x-ray, mobile EKG
and mobile ultrasound services. The purchase price was $475,000 which
was paid through the issuance of 15,014 shares of the Company's Common
Stock.
On August 14, 1998, the Company purchased all the assets of American
Oxygen Services of Tennessee, Inc., a home respiratory care and durable
medical equipment business. The purchase price was $1.98 million which
was paid through the issuance of 122,122 shares of the Company's Common
Stock.
On July 24, 1998, the Company issued 11,533 shares of Common Stock to
the stockholders of Magnolia Group, Inc., which was acquired in April
1998, because the average price of the 435,886 shares of Common Stock
issued to the
27
<PAGE>
Magnolia stockholders at the time of closing of the acquisition (the
"Original Shares") was higher than the average price of the Common
Stock at the time such shares were registered for resale under the
Securities Act. The number of Additional Shares is equal to the
difference between (i) the number of shares determined by dividing the
merger consideration of $16.0 million by the average closing price of
the Common Stock on the NYSE for the 30 trading days ending on the date
immediately preceding the date of the registration statement covering
the resale of the Original Shares was declared effective and (ii) the
number of shares determined by dividing the merger consideration of
$16.0 million by the average closing price of the Common Stock on the
NYSE for the 30 trading day period immediately preceding the date which
was two trading days prior to the closing date of the acquisition.
On July 24, 1998, the Company issued 61,312 shares of Common Stock to
the stockholders of Downstate Lithotripter LLC, Metro/Litho L.P. and
Long Island Lithotriper, LLC, which was acquired in June 1998, because
the average price of the 287,662 shares of Common Stock issued to the
aforementioned stockholders at the time of closing of the acquisition
(the "Original Shares") was higher than the average price of the Common
Stock at the time such shares were registered for resale under the
Securities Act. The number of Additional Shares is equal to the
difference between (i) the number of shares determined by dividing the
merger consideration of $11.9 million by the average closing price of
the Common Stock on the NYSE for the 30 trading days ending on the date
immediately preceding the date of the registration statement covering
the resale of the Original Shares was declared effective and (ii) the
number of shares determined by dividing the merger consideration of
$11.9 million by the average closing price of the Common Stock on the
NYSE for the 30 trading day period immediately preceding the date which
was two trading days prior to the closing date of the acquisition.
28
<PAGE>
On July 24, 1998, the Company issued 26,113 shares of Common Stock to
the stockholders of Premiere Associates, Inc., which was acquired in
June 1998, because the average price of the 706,189 shares of Common
Stock issued to the Premiere stockholders at the time of closing of the
acquisition (the "Original Shares") was higher than the average price
of the Common Stock at the time such shares were registered for resale
under the Securities Act. The number of Additional Shares is equal to
the difference between (i) the number of shares determined by dividing
the merger consideration of $26.8 million by the average closing price
of the Common Stock on the NYSE for the 30 trading days ending on the
date immediately preceding the date of the registration statement
covering the resale of the Original Shares was declared effective and
(ii) the number of shares determined by dividing the merger
consideration of $26.8 million by the average closing price of the
Common Stock on the NYSE for the 30 trading day period immediately
preceding the date which was two trading days prior to the closing date
of the acquisition.
On July 24, 1998, the Company issued 16,935 shares of Common Stock to
the stockholders of American Mobile Health Systems, Inc., which was
acquired in May 1998, because the average price of the 72,699 shares of
Common Stock issued to the American stockholders at the time of closing
of the acquisition (the "Original Shares") was higher than the average
price of the Common Stock at the time such shares were registered for
resale under the Securities Act. The number of Additional Shares is
equal to the difference between (i) the number of shares determined by
dividing the merger consideration of $2.8 million by the average
closing price of the Common Stock on the NYSE for the 30 trading days
ending on the date immediately preceding the date of the registration
statement covering the resale of the Original Shares was declared
effective and (ii) the number of shares determined by dividing the
merger consideration of $2.8 million by the average closing price of
the Common Stock on the NYSE for the 30 trading day period immediately
29
<PAGE>
preceding the date which was two trading days prior to the closing date
of the acquisition.
The Common Stock issued by the Company in these transactions was not
registered under the Securities Act of 1933, as amended, in reliance
upon exemptions contained in Section 4(2) thereof. Each of the persons
acquiring shares of Common Stock made representations to the effect
that (i) the shares being acquired for its own account and not with a
view to, or for sale in connection with, any distributions; (ii)
acknowledging that the shares were restricted securities under Rule
144; (iii) that is had knowledge and experience in business matters,
was capable of evaluating the merits and risks of the investment, and
was able to bear the risk of loss; and (iv) had the opportunity to make
inquiries of and obtain information from IHS. The Company is obligated
to register the Common Stock for resale under the Securities Act of
1933, as amended.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
30
<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 thereunto duly authorized.
INTEGRATED HEALTH SERVICES, INC.
By: /s/ Robert N. Elkins
---------------------------------
Robert N. Elkins
Chief Executive Officer
By: /s/ W. Bradley Bennett
---------------------------------
W. Bradley Bennett
Executive Vice President and
Chief Accounting Officer
By: /s/ C. Taylor Pickett
---------------------------------
C. Taylor Pickett
Executive Vice President and
Chief Financial Officer
Dated: November 13, 1998
---------------------------------
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