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 March 31, 1999
------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission File Number: 1-12306
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Integrated Health Services, Inc.
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(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
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(Address of principal executive offices) (Zip Code)
(410) 998-8400
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(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
May 12, 1999: 52,779,399 shares.
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. - Condensed Financial Statements -
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations
for the three months ended March 31, 1999
and 1998 4
Consolidated Statement of Changes in
Stockholders' Equity for the three
months ended March 31, 1999 5
Consolidated Statements of Cash Flows
for the three months ended March 31, 1999
and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14
PART II: OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds 22
Item 6 Exhibits and Report on Form 8-K 23
</TABLE>
Page 2 of 24
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INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 74,598 $ 31,391
Temporary investments 19,741 12,828
Patient accounts and third-party payor settlements
receivable, less allowance for doubtful receivables of $165,712
At March 31, 1999 and $165,260 at December 31, 1998 615,079 649,106
Inventories, prepaid expenses and other current assets 78,172 75,945
Income tax receivable 41,338 39,320
Net assets of discontinued operations 8,300 12,500
----------- -----------
Total current assets 837,228 821,090
----------- -----------
Property, plant and equipment, net 1,377,898 1,469,122
Assets held for sale -- 7,500
Intangible assets 2,969,377 2,970,163
Other assets 156,448 125,253
----------- -----------
Total assets $ 5,340,951 $ 5,393,128
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt $ 22,742 $ 16,760
Accounts payable and accrued expenses 404,251 463,130
----------- -----------
Total current liabilities 426,993 479,890
----------- -----------
Long-term Debt:
Revolving Credit and Term Loan, less current maturities 1,941,125 1,893,000
Mortgages and other long term debt, less current maturities 210,328 227,269
Subordinated Debt 1,245,908 1,245,908
----------- -----------
Total long-term debt 3,397,361 3,366,177
----------- -----------
Other long-term liabilities 168,199 169,099
Deferred gain on sale-leaseback transactions 4,474 4,642
Deferred income tax payable 41,575 41,355
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 52,774,791 at March 31, 1999 and 52,416,527 shares at
December 31, 1998 (including 4,209,476 treasury shares at
March 31, 1999 and 602,476 treasury shares at December 31,
1998) 53 53
Additional paid-in capital 1,371,062 1,370,049
Deficit (29,071) (22,483)
Treasury stock, at cost (4,209,476 shares at March 31, 1999 and
602,476 SHARES AT DECEMBER 31, 1998) (39,695) (15,654)
----------- -----------
Total stockholders' equity 1,302,349 1,331,965
----------- -----------
Total liabilities and stockholders' equity $ 5,340,951 $ 5,393,128
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
Page 3 of 24
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
--------- ---------
<S> <C> <C>
Total revenues $ 620,235 $ 761,687
--------- ---------
Costs and expenses:
Operating, general and administrative (including rent) 507,902 599,011
Depreciation and amortization 46,374 35,601
Interest, net 70,492 60,658
--------- ---------
Total costs and expenses 624,768 695,270
--------- ---------
Earnings (loss) from continuing operations before equity in
earnings of affiliates and income taxes (4,533) 66,417
Equity in earnings of affiliates 147 270
--------- ---------
Earnings (loss) from continuing operations before income taxes (4,386) 66,687
Federal and state income taxes 2,202 27,342
--------- ---------
Earnings (loss) from continuing operations (6,588) 39,345
Loss from discontinued operations -- (1,764)
--------- ---------
Net earnings (loss) $ (6,588) $ 37,581
========= =========
Per Common Share - Basic:
Earnings (loss) from continuing operations $ (0.13) $ 0.91
Net earnings (loss) (0.13) 0.87
========= =========
Per Common Share - Diluted:
Earnings (loss) from continuing operations $ (0.13) $ 0.77
Net earnings (loss) (0.13) 0.73
========= =========
See accompanying Notes to Consolidated Financial Statements
</TABLE>
Page 4 of 24
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN TREASURY
STOCK CAPITAL DEFICIT STOCK TOTAL
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 $ 53 1,370,049 (22,483) (15,654) 1,331,965
EXERCISE OF EMPLOYEE STOCK OPTIONS
FOR 2,446 COMMON SHARES -- 25 -- -- 25
ISSUANCE OF 95,307 COMMON SHARES IN
CONNECTION WITH EMPLOYEE STOCK PURCHASE
PLAN -- 734 -- -- 734
ISSUANCE OF 232,583 COMMON SHARES IN
CONNECTION WITH 1998 ACQUISITIONS -- -- -- -- 0
ACQUISITION OF 3,607,000 COMMON SHARES OF
TREASURY STOCK (AT COST) -- -- -- (24,041) (24,041)
ISSUANCE OF 27,928 COMMON SHARES IN
CONNECTION WITH DEBT PAYMENTS -- 254 -- -- 254
NET LOSS -- -- (6,588) -- (6,588)
-------------------------------------------------------------------------
BALANCE AT MARCH 31, 1999 $ 53 1,371,062 (29,071) (39,695) 1,302,349
=========================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
Page 5 of 24
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
March 31,
------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (6,588) $ 37,581
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Loss from discontinued operations -- 1,764
Results of joint ventures -- 83
Depreciation and amortization 46,374 34,060
Deferred income taxes and other non-cash items 2,739 4,923
Amortization of gain on sale-leaseback transactions (168) (175)
(Increase) decrease in patient accounts and third-party
payor settlements receivable, net 34,629 (89,307)
Increase in supplies, inventory, prepaid
expenses and other current assets (2,227) (12,925)
Increase (decrease) in accounts payable and accrued expenses (55,158) 3,602
Increase in income taxes receivable (2,018) --
Increase in income taxes payable -- 22,042
--------- ---------
Net cash provided by operating activities of
continuing operations 17,583 1,648
--------- ---------
Net cash used by discontinued operations (8,283) (3,677)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of capital stock, net 759 26,077
Proceeds from long-term borrowings 256,798 77,367
Repayment of long-term debt (210,821) (11,482)
Dividends paid -- (814)
Deferred financing costs (9,027) --
Purchase of treasury stock (24,041) --
--------- ---------
Net cash provided by financing activities 13,668 91,148
--------- ---------
Cash flows from investing activities:
Sale of temporary investments 15,257 8,939
Purchase of temporary investments (22,170) (61,169)
Business acquisitions (Note 3) (25,216) (62,391)
Purchase of property, plant and equipment (42,987) (66,505)
Disposition of assets (Notes 4, 7 and 8) 126,812 99,926
Other assets (31,457) (12,496)
--------- ---------
Net cash provided (used) by investing activities 20,239 (93,696)
--------- ---------
Increase (decrease) in cash and cash equivalents 43,207 (4,577)
Cash and cash equivalents, beginning of period 31,391 60,333
--------- ---------
Cash and cash equivalents, end of period $ 74,598 $ 55,756
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
Page 6 of 24
<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 the "Company"), refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998. 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.
NOTE 2: EARNINGS PER SHARE
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 per
share of common stock is summarized as follows:
<TABLE>
<CAPTION>
EARNINGS* SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
For The Three Months Ended
March 31, 1998:
Basic EPS: $ 39,345 43,229 $ 0.91
Adjustment for interest on and incremental shares
from assumed conversion of the convertible
subordinated debentures: 2,388 8,037 --
Incremental shares from assumed
exercise of dilutive options
and warrants: -- 3,195 --
-------- ------ ------
Diluted EPS: $ 41,733 54,461 $ 0.77
======== ====== ======
</TABLE>
* Represents earnings from continuing operations.
For the three months ended March 31, 1999, no exercise of options and warrants
nor conversion of subordinated debt is assumed since their effect is
antidilutive. The weighted average number of common shares is 52,105,164.
Page 7 of 24
<PAGE>
NOTE 3: NEW ACQUISITIONS
Acquisitions during the three months ended March 31, 1999 and
the manner of payment are summarized as follows:
<TABLE>
<CAPTION>
NOTES PAYABLE
AND
TOTAL COMMON ACCRUED CASH
MONTH TRANSACTION COST STOCK ISSUED LIABILITIES PAID
----- ----------- ---- ------------ ----------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Jan. Assets of Suncoast of
Manatee, Inc. $ 11,920 -- $ 4,900 $ 7,020
Jan. Assets of Certified Medical 2,760 -- 810 1,950
Associates, Inc.
March Stock of Medical Rental
Supply, Inc. and Andy Boyd's
Inhome Medical/Inhome
Medical, Inc. 4,897 -- 1,583 3,314
Various 7 acquisitions, each with
total cost of less than $2,000 7,062 -- 1,626 5,436
Various Cash payments of acquisition
costs accrued -- -- (7,496) 7,496
-------- ----- ------- --------
$ 26,639 -- $ 1,423 $ 25,216
======== ===== ======= ========
</TABLE>
The allocation of the total cost of the 1999 acquisitions to
the assets acquired and the liabilities assumed is summarized
as follows:
<TABLE>
<CAPTION>
Property,
Current Plant & 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>
Suncoast of Manatee, Inc. -- $ 11,920 -- -- -- -- $ 11,920
Certified Medical Assoc., Inc. $ 71 77 -- 2,612 -- -- 2,760
Medical Rental Supply, Inc.
and Andy Boyd's Inhome
Medical/Inhome Medical, Inc. 270 374 -- 4,253 -- -- 4,897
7 acquisitions, each with
total costs of less than
$2,000 261 383 -- 6,428 (10) -- 7,062
----- -------- ----- -------- ----- ----- --------
$ 602 $ 12,754 -- $ 13,293 $ (10) -- $ 26,639
===== ======== ===== ======== ===== ===== ========
</TABLE>
During 1999, the Company issued an additional 162,998 and
69,585 shares to stockholders of Medicare Convalescent Aids of
Pinnellas, Inc. and Hialeah Convalescent Home, respectively.
NOTE 4: TRANSACTIONS WITH LYRIC HEALTH CARE LLC
In 1997, the Company began to explore various options to
Page 8 of 24
<PAGE>
deleverage the Company without adversely affecting earnings. As
part of its delveraging strategy, in each of January and April
1998, (but effective March 31, 1998 in the case of the April
1998 sale) the Company sold five long-term care facilities to
Omega Healthcare Investors, Inc. for $44.5 million and $50.5
million, respectively, which facilities were leased back by
Lyric Health Care LLC ("Lyric"), a newly formed subsidiary of
IHS, at an annual rent of approximately $4.5 million and $4.9
million, respectively. IHS also entered into management and
franchise agreements with Lyric. 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 Lyric the authority to use the Company's trade
names and proprietary materials. In a related transaction, TFN
Healthcare Investors, Inc. ("TFN") purchased a 50% interest in
Lyric for $1.0 million, an amount equal to the Company's
initial investment in Lyric and IHS' interest in Lyric was
reduced to 50%. Lyric will dissolve on December 31, 2047 unless
extended for an additional 12 months. The transactions with
Lyric were approved by the disinterested members of the Board
of Directors. The Company believes that the terms of the
arrangement with Lyric are more advantageous to the Company
than could have been obtained from an unrelated third party.
The Company believes that the long-term growth of Lyric through
facility acquisitions from third parties will allow IHS to
increase management fee revenues.
On February 1, 1998 Lyric also entered into a five-year
employment agreement with Timothy F. Nicholson, the principal
stockholder of TFN and a director of the Company. Pursuant to
Lyric's operating agreement, Mr. Nicholson will serve as
Managing Director of Lyric and will have the day-to-day
authority for the management and operation of Lyric 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 accounts for its investment in Lyric using
the equity method of accounting since IHS no longer controls
Lyric.
As part of its deleveraging strategy, the Company and various
wholly owned subsidiaries of the Company (the "Lyric
Subsidiaries") sold 32, effective January 1, 1999, long-term
care facilities to Monarch Properties LP ("Monarch LP") for
approximately $135.0 million plus contingent earn-out payments
of up to a maximum of $67.6 million. Net proceeds from the sale
were approximately $114.3 million. The contingent earn-out
payments will be paid to the Company by Monarch LP upon a sale,
transfer or refinancing of any or all of the facilities or upon
a sale, consolidation or merger of Monarch LP, with the amount
of the earn-out payments determined in accordance with a
formula described in the Facilities Purchase Agreement among
the Company, the Lyric Subsidiaries and Monarch
Page 9 of 24
<PAGE>
LP. After the sale of the facilities to Monarch LP, the Company
transferred the stock of each of the Lyric Subsidiaries to
Lyric. Monarch LP then leased all of the facilities back to the
Lyric Subsidiaries under the long-term master lease. The
Company is managing these facilities for Lyric. Dr. Robert N.
Elkins, Chairman of the Board, Chief Executive Officer and
President of the Company, beneficially owns 30% of Monarch LP
and is the Chairman of the Board of Managers of Monarch
Properties, LLP, the parent company of Monarch LP. After the
sale of the facilities to Monarch LP, the Company transferred
the stock of each of the Lyric Subsidiaries under a long-term
master lease. In March 1999, the Company sold effective April
1, 1999, three additional facilities to Monarch LP for $33
million, which purchase price was paid by a 10% promissory note
due March 2000. Monarch LP then leased these facilities to
subsidiaries of Lyric. The Company is managing these facilities
for Lyric pursuant to the above-described agreements. The
transactions with Monarch LP and Lyric were approved by the
disinterested members of the Board of Directors. The Company
believes that the terms of the arrangements with Monarch LP are
as advantageous to the Company as could be obtained from an
unrelated third party. The Company recorded an immaterial
gain on this transaction.
NOTE 5: CREDIT FACILITY AMENDMENT
In March 1999, the Company amended its Credit Facility, which
amendments loosened the financial convenants, increased
interest rates and accelerated the reduction in the
availability under the Credit Facility. As amended:
o The 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) between two and three quarters
percent and three and one quarter percent (depending on
the ratio of the Company's debt) (as defined in the New
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 between one and
one half percent and two percent (depending on the
Debt/EBITDAR Ratio).
o 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) between three
percent and three and one half percent (depending on
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
Page 10 of 24
<PAGE>
between one and three quarters percent and two and one
quarter percent (depending on the Debt/EBITDAR Ratio).
The Term Facility and the Additional Term Facility can
be prepaid at any time in whole or in part without
penalty.
o The Revolving Facility will reduce to $800,000,000 on
January 1, 2001, $600,000,000 on January 1, 2002,
$500,000,000 on September 30, 2002 and $400,000,000 on
January 1, 2003, with a final maturity on September 15,
2003; however, the $100,000,000 letter of credit
subfacility and $10,000,000 swing line subfacility will
remain at $100,000,000 and $10,000,000, respectively,
until final maturity. The Revolving Credit 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) between two percent and two and three
quarters percent (depending on 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 between three quarters of one percent and one
and one-half percent (depending on the Debt/EBITDAR
Ratio).
o The Credit Facility prohibits IHS from purchasing or
redeeming IHS stock.
NOTE 6: SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards 131, Disclosures
about Segments of an Enterprise and Related Information. SFAS
No. 131 establishes standards for the way public business
enterprises report information about operating segments in
annual and interm financial statements issued to shareholders.
It also establishes standards for related disclosures about
products and services, geographic areas and major customers.
After giving effect to the discontinuance of its home health
nursing segment, IHS has four primary reportable segments:
inpatient services, home respiratory/infusion/DME, diagnostic
services and lithotripsy services. Inpatient services include:
(a) inpatient facilities which provide basic medical services
primarily on an inpatient basis at skilled nursing facilities,
as well as hospice services, (b) contract services that provide
specialty medical services (e.g., rehabilitation and
respiratory services), primarily on an inpatient basis at
skilled nursing facilities, (c) contracted services that
provide specialty medical services under contract to other
healthcare providers, and (d) management of skilled nursing
Page 11 of 24
<PAGE>
facilities owned by third parties. Home
respiratory/infusion/DME provides respiratory and infusion
therapy, as well as the sale and/or rental of home medical
equipment. Diagnostic services provide mobile x-ray and
electrocardiogram services on an inpatient basis at skilled
nursing facilities. Lithotripsy services is a non-invasive
technique that uses shock waves to disintegrate kidney stones,
primarily on an outpatient basis. Certain services with similar
economic characteristics 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
HOME
INPATIENT RESPIRATORY/ DIAGNOSTIC LITHOTRIPSY
SERVICES INFUSION/DME SERVICES SERVICES CONSOLIDATED
-------- ------------ -------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues $ 418,847 $ 159,120 $ 28,109 $ 14,159 $ 620,235
Operating, general and administrative
expenses (including rent) 364,274 114,863 21,332 7,433 507,902
---------- ---------- ---------- ---------- ----------
Earnings from continuing operations
before non-recurring charges, equity in
earnings of affiliates, interest, taxes,
depreciation and amortization $ 54,573 $ 44,257 $ 6,777 $ 6,726 $ 112,333
========== ========== ========== ========== ==========
Total Assets $3,251,925 $1,658,209 $ 219,942 $ 210,875 $5,340,951
========== ========== ========== ========== ==========
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
HOME
INPATIENT RESPIRATORY/ DIAGNOSTIC LITHOTRIPSY
SERVICES INFUSION/DME SERVICES SERVICES CONSOLIDATED
-------- ------------ -------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues $ 567,394 $ 149,635 $ 33,174 $ 11,484 $ 761,687
Operating, general and administrative
expenses (including rent) 454,082 111,778 26,801 6,350 599,011
---------- ---------- ---------- ---------- ----------
Earnings from continuing operations
before non-recurring charges, equity in
earnings of affiliates, interest, taxes,
depreciation and amortization $ 113,312 $ 37,857 $ 6,373 $ 5,134 $ 162,676
========== ========== ========== ========== ==========
Total Assets $3,287,083 $1,489,460 $ 215,198 $ 185,698 $5,177,439
========== ========== ========== ========== ==========
</TABLE>
There are no material inter-segment revenues or receivables.
Revenues derived from Medicare and various state Medicaid
reimbursement programs represented 32% and 25%, respectively,
Page 12 of 24
<PAGE>
for the three months ended March 31, 1999 and 38% and 20%,
respectively, for the three months March 31, 1998. The Company
does not evaluate its operations on a geographic basis.
NOTE 7: 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 on
such sale.
NOTE 8: DISCONTINUED OPERATIONS
In October 1998, the Company adopted a plan to discontinue its
home health nursing business segment. Accordingly, during 1998,
the operating results of the home health nursing 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 $1.8 million
represents the operating loss for the three month period ended
March 31, 1998. The operating loss includes the effects of
interest expense incurred in connection with acquisition
financing. During the three months ended March 31, 1999, the
Company sold a portion of this business segment for
approximately $12.5 million. The Company sold the remaining
portion during the second quarter of 1999.
NOTE 9: SUBSEQUENT EVENTS
In May 1999, the Company acquired Amber Enterprises, Inc., a
respiratory company in Iowa. The total purchase price was
approximately $941,000.
The Company has reached definitive agreements to purchase six
respiratory companies for approximately $28.4 million, as well
as definitive agreements to enter into two separate leases of
28 skilled nursing facilities. There can be no assurance that
any of these pending acquisitions will be consummated on the
proposed terms, different terms, or at all.
Page 13 of 24
<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 business segment
growth, together with other statements that are not historical facts, are
"forward-looking statements" as that term is defined under Federal Securities
Laws. Forward-looking statements are subject to risks, uncertainties and other
factors which could cause actual results to differ materially from those stated
in such statements. Such risks, uncertainties and factors include, but are not
limited to, the Company's substantial indebtedness, growth strategy, capital
requirements and recent acquisitions as well as the Company's ability to operate
profitably under the newly implemented Medicare Prospective Payment System
("PPS"), competition, government regulation, general economic conditions and the
other risks detailed in the Company's filings with the Securities and Exchange
Commission, including the Annual Report on Form 10-K for the year ended December
31, 1998.
The Company continues to evaluate the impact of the Balanced
Budget Act ("BBA") upon future operating results. While the BBA was passed in
August 1997, specifics relating to each business line will continue to be
released until the year 2000. The assumptions used by the Company to evaluate
the BBA are based upon the most accurate information available at each quarter
end. At present the Company believes it is reacting to all of the known changes
created by the BBA, however, it cannot predict the impact of unforeseen
reductions in anticipated rates issued by the government.
After giving effect to the discontinuance of its home health
nursing segment, IHS has four primary reportable segments: inpatient services,
home respiratory/infusion/DME, diagnostic services and lithotripsy services.
Inpatient services include: (a) inpatient facilities which provide basic medical
services primarily on an inpatient basis at skilled nursing facilities, as well
as hospice services, (b)
Page 14 of 24
<PAGE>
contract services that provide specialty medical services (e.g., rehabilitation
and respiratory services), primarily on an inpatient basis at skilled nursing
facilities, (c) contracted services that provide specialty medical services
under contract to other healthcare providers, and (d) management of skilled
nursing facilities owned by third parties. Home respiratory/infusion/DME
provides respiratory and infusion therapy, as well as the sale and/or rental of
home medical equipment. Diagnostic services provide mobile x-ray and
electrocardiogram services on an inpatient basis at skilled nursing facilities.
Lithotripsy services is a non-invasive technique that uses shock waves to
disintegrate kidney stones, primarily on an outpatient basis. Certain services
with similar economic characteristics have been aggregated pursuant to SFAS No.
131. No other individual business segment exceeds the 10% quantitative
thresholds of SFAS No. 131.
THREE MONTHS ENDED MARCH 31, 1999
COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net revenues for the three months ended March 31, 1999
decreased $141.45 million, or 18.6%, to $620.24 million from the comparable
period in 1998. Such decrease was attributable to (i) a $190.33 million decrease
from (a) the sale, subsequent to March 31, 1998, of 37 facilities ("the Lyric
facilities") to real estate investment trusts, which leased such facilities to
Lyric Health Care LLC, which is 50% owned by IHS and which facilities are now
managed by IHS, (b) a decrease in the Company's rates for inpatient services
provided as a result of PPS, and (c) a decrease in demand for therapy services
Page 15 of 24
<PAGE>
in the Company's contract rehabilitation division as a result of PPS, (ii)a
decrease of $4.16 million from home respiratory/infusion/DME companies in
operations in both periods, (iii) a decrease of $5.06 million from diagnostic
services in operations in both periods, partially offset by (iv) an increase of
$820,000 from lithotripsy services in operations in both periods. This decrease
was partially offset by revenue from acquisitions subsequent to March 31, 1998,
including (i) $41.79 million from inpatient services, (ii) $13.64 million from
home respiratory/infusion/DME, and (iii) $1.86 million from lithotripsy
services. Customers of the Company's contract rehabilitation division are
admitting fewer Medicare patients and are reducing utilization of rehabilitation
services to a far greater degree than the Company had expected.
Operating, general and administrative expense (including rent)
decreased $91.11 million, or 15.2%, in the three months ended March 31, 1999
compared to the three months ended March 31, 1998. Such decrease was
attributable to (i) a $131.10 million decrease from (a) the sale of the Lyric
facilities, (b) a decrease in the Company's inpatient services provided, and (c)
a decrease in therapy services in the Company's contract rehabilitation
division,(ii) a $7.18 million decrease from home respiratory/infusion/DME
companies in operations in both periods, (iii) a $5.47 million decrease from
diagnostic services in operations in both periods, partially offset by (iv) an
increase of $198,000 from lithotripsy services in operations in both periods.
This net decrease was partially offset by increases in expenses from
acquisitions subsequent to March 31, 1998, including (i) $41.29 million from
inpatient services, (ii) $10.26 million from home respiratory/infusion/DME
services, and (iii) $885,000 from lithotripsy services. In response to the
reduced demand for therapy services provided to third parties by the Company's
contract rehabilitation division, the Company began in the fourth quarter of
1998 to reduce staff and changed the method of compensation to its remaining
therapists.
Depreciation and amortization increased to $46.37 million for
the three months ended March 31, 1999, a 30.3% increase as compared to $35.6
million in 1998. Of the $10.77 million increase, $2.27 million, or
Page 16 of 24
<PAGE>
21.1%, was attributable to depreciation and amortization of businesses acquired
subsequent to March 31, 1998. The remaining increase was primarily due to
depreciation and amortization related to increased routine and capital
expenditures at existing facilities and depreciation and amortization of
inpatient services and home respiratory companies acquired during the first
quarter of 1998 partially offset by the sale of the Lyric facilities.
Net interest expense increased $9.83 million, or 16.2%, during
the three months ended March 31, 1999. The increase was primarily the result of
increased borrowings under the revolving credit facility and other debt assumed
related to acquisitions subsequent to March 31, 1998.
Earnings (loss) from continuing operations decreased from
earnings of $39.35 million in the three months ended March 31, 1998 to a loss of
$6.59 million for the three months ended March 31, 1999. The decrease is
primarily due to the decrease in therapy services in the Company's contract
rehabilitation division.
The Company's effective tax rate in 1998 under generally
accepted accounting principles was approximately 41% which included certain
amortization costs that are not deductible for income tax purposes. The
Company's anticipated effective tax rate in 1999 exceeds 100%. Since pre-tax
earnings (loss) in 1999 are excepted to be substantially less in 1999 compared
to 1998 pre-tax earnings, the non-deductibility of these amortization costs will
have a much greater impact on the effective tax rate under generally accepted
accounting principles. As pre-tax earnings grow, the non-deductibility of
certain amortization costs will have a diminishing impact on the effective tax
rate.
In October 1998, the Company's Board of Directors adopted a
plan to discontinue operations of the home health nursing segment. Accordingly,
during 1998, the operating results of the home nursing segment have been
segregated from continuing operations and reported as a separate line item on
the statement of operations. The operating loss (net of tax) during the three
months ended March 31, 1998 was $1.76 million.
Net loss and loss per share for 1999 were $6.59 million and
$0.13 per share, respectively, compared to net earnings and diluted earnings per
share for 1998 of $37.58 million and $0.73 per share. Weighted average shares
decreased from 54,461,000 (diluted) in 1998 to 52,105,000 in 1999. In 1999, no
exercise of options and warrants nor conversion of subordinated debt is assumed
since their effect is antidilutive. Subsequent to March 31, 1998, the Company
issued an aggregate of 7,553,406 shares of Common Stock, including 3,573,446
shares upon conversion of its 6% Convertible Subordinated Debentures, 2,062,928
shares for acquisitions and 1,519,145 shares upon exercise of options.
During this period, the Company repurchased 4,667,500 shares of its Common
Stock and reissued 1,006,524 of such shares.
Page 17 of 24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had working capital of $410.2
million, as compared with $341.2 million at December 31, 1998. The increase in
working capital was primarily due to an increase in cash and cash equivalents,
temporary investments and other current assets and a decrease in accounts
payable and accrued expenses partially offset by a decrease in patient accounts
and third party payor settlements receivable. There were no material capital
commitments for capital expenditures as of March 31, 1999. Net patient accounts
and third-party payor settlements receivable decreased $34.0 million to $615.1
million at March 31, 1999, as compared to $649.1 million at December 31, 1998.
The decrease was primarily attributable to improved cash collections and reduced
revenue resulting from lower rates for the Company's inpatient services and
decreased demand for contract rehab services provided to third parties. Gross
patient accounts receivable were $726.3 million at March 31, 1999, as compared
with $735.2 million at December 31, 1998. Net third-party payor settlements
receivable from federal and state governments (i.e., Medicare and Medicaid cost
reports) was $54.5 million at March 31, 1999, as compared to $79.2 million at
December 31, 1998.
Net cash provided by operating activities for the three months
ended March 31, 1999, was $17.6 million as compared to $1.6 million for the
comparable period in 1998. Cash provided by operating activities in the first
quarter of 1999 increased compared to the comparable period in 1998 primarily
because of a decrease in patient accounts and third party payor settlements
receivable, net, partially offset by a net loss in 1999 compared to net earnings
in 1998 and a decrease in accounts payable and accrued expenses.
Net cash provided by financing activities was $13.7 million for
the three month period in 1999 as compared to $91.1 million provided by
financing activities for the comparable period in 1998. In both periods, the
Company received net proceeds from long-term borrowings and made repayments on
certain debt. During the three months ended March 31, 1999, the Company
repurchased 3.6 million shares of its stock for
Page 18 of 24
<PAGE>
approximately $24.0 million.
Net cash provided by investing activities was $20.2 million for
the three month period ended March 31, 1999 as compared to $93.7 million used by
investing activities for the three month period ended March 31, 1998. Cash used
for the acquisition of facilities and ancillary company acquisitions was $25.2
million in 1999 as compared to $62.4 million for 1998. Cash used for the
purchase of property, plant and equipment was $43.0 million in 1999 and $66.5
million in 1998. In the first quarter of 1999, the Company received $114.3
million related to the sale of 32 long-term care facilities to Monarch LP (See
Note 4). Also during the first quarter of 1999, the Company sold a portion of
its discontinued home nursing segment for approximately $12.5 million. In the
first quarter of 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).
During the first quarter of 1998, the Company sold its outpatient clinics for
approximately $10.0 million (See Note 7). The net proceeds from such sales were
used to repay debt outstanding under the revolving credit facility and other
corporate purposes, including acquisitions.
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 March 31, 1999 is $124.4 million and is recorded on the
balance sheet under the caption other long-term liabilities.
IHS' contingent liabilities (other than liabilities in respect
of litigation) aggregated approximately $131.1 million as of March 31, 1999. 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. IHS has established several irrevocable standby
letters of credit with the Bank of Nova Scotia totaling $31.6 million at March
31, 1999 to secure certain of the Company's workers' compensation obligations,
health benefits and
Page 19 of 24
<PAGE>
other obligations. In addition, IHS has several surety bonds in the amount of
$69.8 million to secure certain of the Company's health benefits, patient trust
funds and other obligations. In addition, with respect to certain acquired
businesses IHS is obligated to make certain contingent payments if earnings of
the acquired business increase or earnings targets are met. The Company is
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 $853.5 million at March 31, 1999.
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 1999.
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"
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 70% complete and it is anticipated that the project
will be substantially 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.
Page 20 of 24
<PAGE>
Through March 31, 1999, expenditures related to the Year 2000
issue totaled approximately $7.0 million. The Company currently estimates that
an additional $4.0 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 the Revolving Facility 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. This program consists of obtaining verification of
compliance, arranging contingency pay out agreements, testing electronic
transactions and necessary business interruption insurance. 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.
Page 21 of 24
<PAGE>
PART II: OTHER INFORMATION
Item 2. - Changes in Securities
On January 6, 1999 and March 26, 1999, the Company
issued 11,872 and 151,126, respectively, shares of
Common Stock to the stockholders of Medicare
Convalescent Aids of Pinellas, Inc. d/b/a Medaids,
RxStat and Prime Medical Services, Inc., which was
purchased in February 1998. These shares are being
issued pursuant to terms in the purchase agreement
which require the Company to recalculate the number of
shares deliverable based upon the average closing New
York Stock Exchange price for IHS shares for the 20
trading day period immediately preceding the first
anniversary of the Closing Date.
On January 13, 1999, the Company issued 69,585 shares
of Common Stock to the stockholders of Hialeah
Convalescent Home, which was purchased in June 1998,
because the average price of 68,259 shares of Common
Stock issued to the Hialeah shareholders 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 $2.5 million by the average closing price of the
Common Stock on the New York Stock Exchange ("NYSE")
for the 30 trading days ending on the date immediately
preceding the date of the registration statement
covering the cost of the Original Shares was declared
effective and (ii) the number of shares determined by
dividing the merger consideration of $2.5 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.
During the first quarter of 1999, the Company issued
2,446 shares of Common Stock to ex-employees as
severance payments.
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
Page 22 of 24
<PAGE>
in Section 4(2) thereof. Each of the stockholders made
representations to the effect that (i) the shares were
being acquired for its own account and not with a view
to, or for sale in connection with, any distribution;
(ii) acknowledging that the shares were restricted
securities under Rule 144; (iii) that it 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; (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
10.1 Revolver Amendment
27 Financial Data Schedule
(b) Reports on Form 8-K
None
Page 23 of 24
<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/ C. Taylor Pickett
------------------------------------
C. Taylor Pickett
Executive Vice President-Chief Financial
and Accounting Officer
Date: May 17, 1999
Page 24 of 24
AMENDMENT NO. 4, DATED AS OF MARCH 25, 1999, TO THE REVOLVING
CREDIT AND TERM LOAN AGREEMENT, among INTEGRATED HEALTH SERVICES, INC., a
Delaware corporation (the "Borrower"), the lenders parties to the Credit
Agreement referred to below (the "Lenders") and CITIBANK, N.A., as
administrative agent (the "Agent") for the Lenders.
PRELIMINARY STATEMENTS:
(1) The Borrower, the Lenders and the Agent have entered into
a Revolving Credit and Term Loan Agreement dated as of September 15, 1997 (such
Credit Agreement, as amended, the "Credit Agreement"). Capitalized terms not
otherwise defined in this Amendment have the same meanings as specified in the
Credit Agreement.
(2) The Borrower has requested various amendments to the
Credit Agreement, and the Lenders are, on the terms and conditions stated below,
willing to grant the request of the Borrower and the Borrower and the Lenders
have agreed to amend the Credit Agreement as hereinafter set forth.
SECTION 1. Amendments to Credit Agreement. The Credit
Agreement is, effective as of the date hereof and subject to the satisfaction of
the conditions precedent set forth in Section 3, hereby amended as follows:
(a) The following definitions in Section 1.01 are amended
in full to read as follows:
"`Commitment Fee Rate' means, for commitment fees accruing in
any Pricing Period, the rate per annum set forth below opposite the
Pricing Ratio determined for such Pricing Period:
Pricing Ratio Commitment Fee Rate
------------- -------------------
greater than or equal to 5.25 0.500%
less than 5.25 0.375%
`Fixed Charge Coverage Ratio' means the ratio, (i) as of the
last day of any Quarter other than the Quarter ending September 30,
2000, of (A) EBITDAR minus Capital Expenditures of the Borrower and its
Subsidiaries for the 12-month period then ending to (B) the sum of (1)
(w) Interest Expense, (x) taxes paid in cash, (y) Lease Expense and (z)
all cash dividends paid on the Borrower's common stock and preferred
stock, each during the 12-month period then ending and (2) the Current
Portion of Long-Term Debt as at the last day of such Quarter, and (ii)
as of the last day of the Quarter ending September 30, 2000, of (A)
EBITDAR minus Capital Expenditures of the Borrower and its Subsidiaries
for the 12-month period then ending to (B) the amount of (1) the sum of
(X) (I) Interest Expense, (II) taxes paid in cash, (III) Lease Expense
and (IV) all cash dividends paid on the Borrower's common stock and
preferred stock, each during the 12-month period then ending, (Y) the
Current Portion of Long-Term Debt as at the last day of such Quarter
and (Z) the outstanding principal
<PAGE>
amount of the Convertible Subordinated Debt as of the first day of such
Quarter minus (2) the principal amount of any Subordinated Debt not in
excess of $143,750,000 incurred during such Quarter the proceeds of
which are used to repay the Convertible Subordinated Debt.
`Minimum Net Worth' means the sum, as of the last day of any
Quarter, of (i) $1,120,000,000, less up to $25,000,000 of extraordinary
losses (determined in accordance with GAAP) of the Borrower and its
Subsidiaries on a consolidated basis incurred at any time after
December 31, 1997, plus (ii) 75% of the aggregate net income
(determined in accordance with GAAP) of the Borrower and its
Subsidiaries on a consolidated basis earned in the Quarter ended
December 31, 1997 and in each Quarter thereafter, if net income was
earned in such Quarter (and not reduced for a net loss in any Quarter),
plus (iii) 100% of all additions to Adjusted Stockholders' Equity
resulting at any time after December 31, 1997 from the sale or issuance
of any common or preferred stock of the Borrower, except upon
conversion of any Convertible Subordinated Debt; provided, however,
that the amount "$1,120,000,000" referred to above shall be reduced by
the amount of cash used by the Borrower to redeem on the scheduled
maturity date thereof the notes issued under the 1993 Convertible
Subordinated Debt Indenture, but in no event shall the amount of such
reduction exceed $143,750,000.
`Revolving Borrowing Base Rate Margin' means, for any Pricing
Period, the rate per annum set forth below opposite the Pricing Ratio
determined for that Pricing Period:
Pricing Ratio Margin
------------- ------
greater than or equal to 6.50 1.500%
greater than or equal to 6.00 but less 1.250%
than 6.50
greater than or equal to 5.25 but less 1.000%
than 6.0
less than 5.25 0.750%
`Revolving Borrowing Eurodollar Rate Margin' means, for any
Pricing Period, the rate per annum set forth below opposite the Pricing
Ratio determined for that Pricing Period:
Pricing Ratio Margin
------------- ------
greater than or equal to 6.50 2.750%
greater than or equal to 6.00 but less 2.500%
than 6.50
greater than or equal to 5.25 but less 2.250%
than 6.00
less than 5.25 .000%
`Subordinated Debt Indentures' means the 1992 Convertible
Subordinated Debt Indenture; the 1993 Convertible Subordinated Debt Indenture;
the 1994 Subordinated Debt Indenture; the 1995 Subordinated Debt Indenture; the
1996 Subordinated Debt Indenture; the
<PAGE>
1997 Subordinated Debt Indenture; the 1997 B Subordinated Debt Indenture; and,
upon the effectiveness thereof, the subordinated debt indenture to be entered
into in connection with the Debt incurred the proceeds of which are to be used
in part or in full to repay the Convertible Subordinated Debt.
`Term Borrowing Base Rate Margin' means, for any Pricing
Period, the rate per annum set forth below opposite the Pricing Ratio determined
for that Pricing Period:
Pricing Ratio Margin
------------- ------
less than 6.00 1.50%
greater than or equal to 6.00 but less 1.75%
than 6.50
greater than or equal to 6.50 2.00%
`Term Borrowing Eurodollar Rate Margin' means, for any Pricing
Period, the rate per annum set forth below opposite the Pricing Ratio determined
for that Pricing Period:
Pricing Ratio Margin
------------- ------
less than 6.00 2.75%
greater than or equal to 6.00 but less 3.00%
than 6.50
greater than or equal to 6.50 3.25%
`Term Loan C Borrowing Base Rate Margin' means, for any
Pricing Period, the rate per annum set forth below opposite the Pricing Ratio
determined for that Pricing Period:
Pricing Ratio Margin
------------- ------
less than 6.00 1.75%
greater than or equal to 6.00 but less 2.00%
than 6.50
greater than or equal to 6.50 2.25%
`Term Loan C Eurodollar Rate Margin' means, for any Pricing
Period, the rate per annum set forth below opposite the Pricing Ratio determined
for that Pricing Period:
Pricing Ratio Margin
------------- ------
less than 6.00 3.00%
greater than or equal to 6.00 but less 3.25%
than 6.50
greater than or equal to 6.50 3.50%"
(b) The definition of "Cash Flow from Operations" in Section
1.01 is amended by adding before the period at the end thereof a new
clause (E) to read as follows:
<PAGE>
"and (E) cash severance payments not in excess of
$25,000,000 reserved or accrued during the Quarter ending December 31,
1998 shall be included as an addback to net income for purposes of this
definition to the extent such payments are included in the December 31,
1998 financial statements of the Borrower."
(c) Section 2.05 is amended by deleting subsection (b) therein
and substituting the following therefor:
"(b) The Revolving Facility Amount shall be
automatically and permanently reduced (i) on January 1, 2001 to
$800,000,000, (ii) on January 1, 2002 to $600,000,000, (iii) on
September 30, 2002 to $500,000,000, (iv) on January 1, 2003 to
$400,000,000 and (v) on the Termination Date as provided in Section
2.06(a) below."
(d) Section 2.06 is amended by adding at the end thereof
a new subsection (h) to read as follows:
"(h) Mandatory Prepayments. The Borrower shall, on
the date of receipt of (i) the Net Cash Proceeds of Sale in respect of
any Asset Sale by the Borrower or any of its Subsidiaries or (ii) the
cash proceeds (net of legal and accounting fees and expenses incurred
in connection therewith) in respect of any issuance or sale of debt
(except debt issued or sold where the proceeds of such debt are used to
refinance Subordinated Debt and to pay the costs of such refinancing)
or equity, the Borrower shall prepay the aggregate principal amount of
the Advances in an amount equal to (x) the amount of such Net Cash
Proceeds of Sale in the case of an Asset Sale, (y) the amount of such
cash proceeds in the event of an issuance or sale of debt, or (z) an
amount equal to 50% of such cash proceeds in the event of an issuance
or sale of equity, as applicable; provided, that each such prepayment
shall be applied to the outstanding principal amount of Revolving
Borrowings, Term Borrowings and Term Loan C Borrowings and shall be
applied thereto on a ratable basis calculated on the basis of the
Revolving Facility Amount, Term Borrowings and Term Loan C Borrowings,
respectively, and in the case of prepayments of Term Borrowings and
Term Loan C Borrowings, applied ratably to each respective installment
thereof."
(e) Section 5.01(a) is amended by replacing the table set
forth therein with the table set forth below:
"Quarter(s) Ended Debt/EBITDAR Ratio
---------------- ------------------
December 31, 1998 5.75
March 31, 1999 6.25
June 30, 1999 6.50
September 30, 1999 6.75
December 31, 1999 6.75
March 31, 2000 6.75
June 30, 2000 6.50
September 30, 2000 6.25
December 31, 2000 5.75
March 31, 2001 5.75
June 30, 2001 5.50
September 30, 2001 5.50
December 31, 2001 5.25
March 31, 2002 5.25
June 30, 2002 5.00
September 30, 2002 5.00
December 31, 2002 4.50
In 2003 and thereafter 4.50"
<PAGE>
(f) Section 5.01(b) is amended by replacing the table set
forth therein with the table set forth below:
"Quarter(s) Ended Fixed Charge Coverage Ratio
---------------- ---------------------------
December 31, 1998 1.15
March 31, 1999 1.10
June 30, 1999 1.10
September 30, 1999 1.10
December 31, 1999 1.10
March 31, 2000 1.10
June 30, 2000 1.15
September 30, 2000 1.15
December 31, 2000 1.15
March 31, 2001 1.15
June 30, 2001 1.15
September 30, 2001 1.20
December 31, 2001 1.20
March 31, 2002 1.00
June 30, 2002 1.00
September 30, 2002 1.00
December 31, 2002 1.00
In 2003 1.00
In 2004 1.25
In 2005 1.50"
(g) Section 5.03(c) is amended by deleting subsection (ix)
therein, and such subsection shall be left blank.
(h) Section 5.03(c) is amended by deleting subsection (x)
therein and substituting the following therefor:
"(x) Investments by existing, newly-formed or
acquired wholly-owned Subsidiaries of the Borrower in one or more
Health Care Companies or Health Care Facilities; provided that (A) with
respect to such Investments made (i) after the Effective Date of
Amendment No. 4 to this Agreement and during 1999, each such Investment
shall either be (X) in respect of a Health Care Facility licensed as a
skilled
<PAGE>
nursing facility; provided that if such Health Care Facility is listed
on Schedule 5.03(c)(x)(A)(i)(X), (1) such Investment shall be acquired
by exercise of a purchase option in respect of such Health Care
Facility, (2) at the time of the exercise of any such purchase option
the Borrower or such Subsidiary shall have entered into a bona fide and
enforceable contract to sell the respective Health Care Facility for a
cash purchase price not less than the gross purchase price thereof paid
by such Subsidiary, and (3) the proceeds of such sale shall be used by
the Borrower to make mandatory prepayments in accordance with the
provisions of Section 2.06(h); and provided, further, that the
aggregate consideration for all such Investments does not exceed
$75,000,000; or (Y) an Investment by RoTech or a Subsidiary of RoTech
in the normal course of its business; provided that the aggregate
consideration for all such Investments does not exceed $50,000,000;
provided, further that the aggregate consideration for all Investments
made pursuant to the preceding clauses (X) and (Y) does not exceed
$100,000,000; and provided, further that in the event that any portion
of the amounts specified in the preceding clauses (X) and (Y) is not
used during 1999, an amount equal to $100,000,000 minus the aggregate
amount of the portions used shall be available during 2000, subject to
the respective restrictions provided in such clauses, in addition to
the amount specified in clause (ii) below; (ii) during 2000, the
aggregate consideration for all such Investments does not exceed
$50,000,000; provided that the portion of such consideration consisting
of cash, cash equivalents and Debt incurred or assumed shall not exceed
$25,000,000 in the aggregate; and provided, further that to the extent
that any portion of such $50,000,000 is not used during 2000, such
portion shall be available during 2001 in addition to the amount
specified in clause (iii) below; and (iii) during 2001, the aggregate
consideration for all such Investments does not exceed $50,000,000;
provided that no portion of such consideration shall consist of cash,
cash equivalents or Debt incurred or assumed; (B) no such Investments
shall be permitted after 2001; (C) at the time of or after giving
effect to any such Investment, no Event of Default or Potential Default
exists or results; and (D) each entity that becomes a Subsidiary of the
Borrower in connection with or as a result of any such Investment shall
comply with the provisions of Section 5.02(e), and neither the Borrower
nor any of its Subsidiaries nor any of their properties shall be or
become bound by or subject to any contractual obligation that is or
would be violated or put in default by reason of such compliance or by
reason of the enforcement of the claims and Liens of the Agent and
Lenders arising from such compliance;"
(i) Section 5.03(d) is amended by deleting the period at the
end of subsection (viii) thereof and substituting therefor "; and" and
adding after such subsection (viii) a new subsection (ix) to read as
follows:
"(ix) Subordinated Debt incurred under an indenture
the terms and conditions of which are no less favorable to the Lenders
than the terms and conditions of the 1997 Subordinated Debt Indenture
in an aggregate principal amount not in excess of $300,000,000 and
having a maturity not earlier than 30 days after the scheduled maturity
of the Term Loan C, and any extension, renewal or refinancing of such
Debt so long as (A) either (I) the principal amount of such Debt is not
increased or (II) any increase in the principal amount of such Debt is
permitted pursuant to another clause of this Section 5.03(d) and (B)
the terms and conditions of any indenture in connection
<PAGE>
therewith are no less favorable to the Lenders than the 1997
Subordinated Debt Indenture and (C) the Debt incurred under such
indenture matures not earlier than 30 days after the scheduled maturity
date of the Term Loan C."
(j) Section 5.03(h) is amended by deleting subsection (B)
therein, and such subsection shall be left blank.
(k) Schedule 1.01(a) of the Credit Agreement relating to the
senior Debt excluded from the Current Portion of Long-Term Debt is
amended by adding the contents of the Supplemental Schedule 1.01(a)
attached hereto to such Schedule 1.01(a).
(l) Schedule 1.01(b) of the Credit Agreement relating to the
Schedule 1.01(b) Assets is deleted in its entirety and Schedule 1.01(b)
attached hereto is substituted therefor.
(m) Schedule 5.03(c)(x)(A)(i)(X) attached hereto is added as a
new Schedule 5.03(c)(x)(A)(i)(X) to the Credit Agreement.
(n) Schedule 5.03(f) of the Credit Agreement relating to
Accommodation Obligations is amended by adding the contents of the
Supplemental Schedule 5.03(f) attached hereto to such Schedule 5.03(f).
SECTION 2. Special Interest Provision. Notwithstanding any
other provision contained in the Credit Agreement to the contrary, from the
Effective Date until the date on which the Borrower shall deliver to the Agent
the Pricing Certificate referred to in Section 5.02(c)(viii) of the Credit
Agreement in respect of the Quarter ending June 30, 1999:
(a) the Revolving Borrowing Base Rate Margin shall be 1.25%;
(b) the Term Borrowing Base Rate Margin shall be 1.75%;
(c) the Term Loan C Borrowing Base Rate Margin shall be 2.00%;
(d) the Revolving Borrowing Eurodollar Rate Margin shall be
2.50%;
(e) the Term Borrowing Eurodollar Rate Margin shall be 3.00%;
and
(f) the Term Loan C Borrowing Eurodollar Rate Margin shall be
3.25%.
SECTION 3. Conditions of Effectiveness. This Amendment shall
become effective as of the date hereof (the "Effective Date") if on or before
the date hereof the Agent shall have received (i) counterparts of this Amendment
executed by the Borrower and the Requisite Lenders or, as to any of the Lenders,
advice satisfactory to the Agent that such Lender has executed this Amendment;
(ii) evidence that (a) all fees due under the letter dated March 10, 1999
between the Agent and the Borrower have been paid, (b) the Borrower has paid to
the Agent, for the account of the Lenders executing and delivering this
Amendment on or prior to the
<PAGE>
date hereof, a consent fee due under the letter dated March 11, 1999 between the
Agent and the Borrower, which amount will be distributed ratably to such Lenders
as provided in such letter and (c) the Borrower has paid all fees due under
Section 8.04 of the Credit Agreement and (iii) all of the following documents,
each such document in form and substance satisfactory to the Agent and in
sufficient copies for each Lender:
(a) Certified copies of (i) the resolutions of (A) the Finance
Committee of the Board of Directors of the Borrower approving this
Amendment and the matters contemplated hereby and (B) the Board of
Directors of each other Loan Party evidencing approval of the Consent
and the matters contemplated thereby and (ii) all documents evidencing
other necessary corporate action and governmental approvals, if any,
with respect to this Amendment and the Consent and the matters
contemplated hereby and thereby.
(b) A certificate of the Secretary or an Assistant Secretary
of the Borrower and each other Loan Party certifying the names and true
signatures of the officers of the Borrower and such other Loan Party
authorized to sign this Amendment and the Consent and the other
documents to be delivered hereunder and thereunder.
(c) Counterparts of the Consent appended hereto (the
"Consent"), executed by each of the Loan Parties (other than the
Borrower).
(d) A certificate from an Authorized Officer of the Borrower
that (i) the representations and warranties contained in Section 4 of
this Amendment, in Article IV of the Credit Agreement and in Article
III of the Pledge and Security Agreements are correct on and as of such
date as though made on and as of such date and (ii) no event has
occurred and is continuing, or would result from such extension of
credit or from the application of the proceeds therefrom, which
constitutes an Event of Default or a Potential Default.
(e) A favorable opinion of LeBoeuf, Lamb, Greene & MacRae,
L.L.P., counsel for the Borrower, substantially in the form of Exhibit
A hereto and as to such other matters as any Lender through the Agent
may reasonably request.
SECTION 4. Representations and Warranties of the Borrower. The Borrower
represents and warrants as follows:
(a) Each Loan Party is a corporation or partnership duly
organized, validly existing and in good standing (except where the
failure of one or more Loan Parties, other than the Borrower and its
Material Subsidiaries, to be in good standing could not reasonably be
expected to result in a Material Adverse Change) under the laws of the
jurisdiction in which it is organized and is duly qualified to do
business in each jurisdiction where the character of its properties or
the nature of its activities makes such qualification necessary.
(b) Each Loan Party has the corporate or partnership power (i)
to carry on its business as now being conducted and as proposed to be
conducted by it, (ii) to execute,
<PAGE>
deliver and perform this Amendment and the Credit Agreement, as amended
hereby, and (iii) to take all action necessary to consummate the
transactions contemplated under this Amendment and the Credit
Agreement, as amended hereby.
(c) The execution, delivery and performance by each Loan Party
of this Amendment, the Credit Agreement, as amended hereby, and the
Consent, as applicable, have been duly authorized by all necessary
action of its board of directors (or, in the case of a partnership, of
its governing authority), and do not contravene (i) its certificate or
articles of incorporation (or, in the case of a partnership, governing
agreements) or (ii) any law or any indenture, lease or written
agreement binding on or affecting it and do not result in or require
the creation of any Lien (other than pursuant to the Collateral
Documents) upon any of its property or assets.
(d) No authorization or approval or other action by, and no
notice to or filing with, any Governmental Authority is required for
the due execution, delivery and performance by any Loan Party of this
Amendment, the Credit Agreement, as amended hereby, or the Consent, as
applicable.
(e) This Amendment and the Consent have been duly executed and
delivered by the respective Loan Party. This Amendment, the Credit
Agreement, as amended hereby, and the Consent are legal, valid and
binding obligations of the respective Loan Party, enforceable against
the respective Loan Party in accordance with their respective terms,
subject to laws generally affecting the enforcement of creditors'
rights.
(f) There is no pending or overtly threatened action or
proceeding affecting any Loan Party before any court, governmental
agency or arbitrator which would, if adversely determined, result in a
Material Adverse Change or which relates to or could reasonably be
expected to affect the legality, validity or enforceability of this
Amendment, the Credit Agreement, as amended hereby, or the Consent or
the consummation of any of the transactions contemplated hereby.
(g) The execution, delivery and performance of this Amendment,
the Consent and the Credit Agreement, as amended hereby, do not and
will not (i) conflict with, result in a breach of, or constitute (with
or without notice or the lapse of time or both) a default under, any
instrument, lease, indenture, agreement or other contractual obligation
issued by any Loan Party or enforceable against it or any of its
property or assets, except under immaterial agreements for supplies or
services which are readily replaceable without any adverse effect on
such Loan Party or its business or (ii) require any approval of its
stockholders.
SECTION 5. Reference to and Effect on the Credit Agreement and
the Loan Documents.
(a) On and after the effectiveness of this Amendment, each
reference in the Credit Agreement to "this Agreement", "hereunder",
"hereof" or words of like import referring to the Credit Agreement, and
each reference in the Notes and each of the other Loan Documents to
"the Credit Agreement", "thereunder", "thereof" or words of like
<PAGE>
import referring to the Credit Agreement, shall mean and be a reference
to the Credit Agreement, as amended by this Amendment.
(b) The Credit Agreement, as specifically amended by this
Amendment, is and shall continue to be in full force and effect and is
hereby in all respects ratified and confirmed. Without limiting the
generality of the foregoing, the Collateral Documents and all of the
Collateral described therein do and shall continue to secure the
payment of all Obligations of the Loan Parties under the Loan
Documents, in each case as amended by this Amendment.
(c) The execution, delivery and effectiveness of this
Amendment shall not, except as expressly provided herein, operate as a
waiver of any right, power or remedy of any Lender or the Agent under
the Credit Agreement, nor constitute a waiver of any provision of the
Credit Agreement.
SECTION 6. Costs, Expenses and Taxes. The Borrower agrees to
pay on demand all reasonable and documented costs and expenses of the Agent in
connection with the preparation, execution, delivery and administration,
modification and amendment of this Amendment and the other instruments and
documents to be delivered hereunder (including, without limitation, the
reasonable and documented fees and expenses of counsel for the Agent) in
accordance with the terms of Section 8.04 of the Credit Agreement. In addition,
the Borrower shall pay any and all stamp and other taxes payable or determined
to be payable in connection with the execution and delivery of this Amendment
and the other instruments and documents to be delivered hereunder, and agrees to
save the Agent and each Lender harmless from and against any and all liabilities
with respect to or resulting from any delay in paying or omission to pay such
taxes.
SECTION 7. Execution in Counterparts. This Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute but one and the same
agreement. Delivery of an executed counterpart of a signature page to this
Amendment by telecopier shall be effective as delivery of a manually executed
counterpart of this Amendment.
SECTION 8. Governing Law. This Amendment shall be governed by,
and construed in accordance with, the laws of the State of New York.
<PAGE>
SUPPLEMENTAL SCHEDULE 1.01(a)
Supplemental List of Senior Debt Excluded from Current Portion of Long-Term Debt
- --------------------------------------------------------------------------------
<PAGE>
SUPPLEMENTAL SCHEDULE 1.01(b)
Supplemental List of "Schedule 1.01(b) Assets" Designated for Sale
------------------------------------------------------------------
<PAGE>
SUPPLEMENTAL SCHEDULE 5.03(c)(x)(A)(i)(X)
List of Skilled Nursing Facilities Subject to Purchase Option
-------------------------------------------------------------
[TO COME]
<PAGE>
SUPPLEMENTAL SCHEDULE 5.03(f)
Supplemental List of Accommodation Obligations
----------------------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 74,598
<SECURITIES> 19,741
<RECEIVABLES> 780,791
<ALLOWANCES> 165,712
<INVENTORY> 0
<CURRENT-ASSETS> 837,228
<PP&E> 1,377,898
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,340,951
<CURRENT-LIABILITIES> 426,993
<BONDS> 1,100,132
0
0
<COMMON> 53
<OTHER-SE> 1,302,296
<TOTAL-LIABILITY-AND-EQUITY> 5,340,951
<SALES> 620,235
<TOTAL-REVENUES> 620,235
<CGS> 0
<TOTAL-COSTS> 624,768
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70,492
<INCOME-PRETAX> (4,386)
<INCOME-TAX> 2,202
<INCOME-CONTINUING> (6,588)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,588)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
