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 June 30, 1999
------------------------------------------
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.)
910 Ridgebrook Road, Sparks, Maryland 21152
---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(410) 773-1000
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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
July 28, 1999: 52,943,909 shares.
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. - Condensed Financial Statements -
Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations
for the three and six months ended
June 30, 1999 and 1998 4
Consolidated Statement of Changes in
Stockholders' Equity for the six
months ended June 30, 1999 5
Consolidated Statements of Cash Flows
for the six months ended June 30, 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 25
Item 6 Exhibits and Report on Form 8-K 26
</TABLE>
Page 2 of 27
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
Assets
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 46,036 $ 31,391
Temporary investments 911 12,828
Patient accounts and third-party payor settlements
receivable, less allowance for doubtful receivables of $159,965
at June 30, 1999 and $165,260 at December 31, 1998 590,988 649,106
Inventories, prepaid expenses and other current assets 79,180 75,945
Income tax receivable 26,403 39,320
Net assets of discontinued operations - 12,500
----------- -----------
Total current assets 743,518 821,090
----------- -----------
Property, plant and equipment, net 1,417,441 1,469,122
Assets held for sale - 7,500
Intangible assets 3,042,963 2,970,163
Other assets 199,990 125,253
----------- -----------
Total assets $5,403,912 $5,393,128
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt $ 22,710 $ 16,760
Accounts payable and accrued expenses 442,810 463,130
----------- -----------
Total current liabilities 465,520 479,890
----------- -----------
Long-term Debt:
Revolving Credit and Term Loan, less current maturities 1,977,750 1,893,000
Mortgages and other long term debt, less current maturities 204,255 227,269
Subordinated Debt 1,245,908 1,245,908
----------- -----------
Total long-term debt 3,427,913 3,366,177
----------- -----------
Other long-term liabilities 164,699 169,099
Deferred gain on sale-leaseback transactions 4,306 4,642
Deferred income tax payable 41,932 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 53,175,598 at June 30, 1999 and 53,416,527 shares at
December 31, 1998 (including 793,920 treasury shares at
June 30, 1999 and 602,476 treasury shares at December 31,
1998) 53 53
Additional paid-in capital 1,340,678 1,370,049
Deficit (33,702) (22,483)
Treasury stock, at cost (793,920 shares at June 30, 1999 and
602,476 shares at December 31, 1998) (7,487) (15,654)
----------- -----------
Total stockholders' equity 1,299,542 1,331,965
----------- -----------
Total liabilities and stockholders' equity $5,403,912 $5,393,128
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
Page 3 of 27
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Total revenues $ 624,251 $ 740,754 $1,244,486 $1,502,441
--------- --------- ---------- ----------
Costs and expenses:
Operating, general and administrative (including rent) 505,656 572,063 1,013,558 1,171,074
Depreciation and amortization 46,617 36,595 92,991 72,196
Interest, net 74,245 58,187 144,737 118,845
--------- --------- ---------- ----------
Total costs and expenses 626,518 666,845 1,251,286 1,362,115
--------- --------- ---------- ----------
Earnings (loss) from continuing operations before equity in
earnings of affiliates and income taxes (2,267) 73,909 (6,800) 140,326
Equity in earnings of affiliates 1,198 184 1,345 454
--------- --------- ---------- ----------
Earnings (loss) from continuing operations before income taxes (1,069) 74,093 (5,455) 140,780
Federal and state income taxes 3,562 30,378 5,764 57,720
--------- --------- ---------- ----------
Earnings (loss) from continuing operations (4,631) 43,715 (11,219) 83,060
Loss from discontinued operations -- (2,217) -- (3,981)
--------- --------- ---------- ----------
Net earnings (loss) $ (4,631) $ 41,498 $ (11,219) $ 79,079
========= ========= ========== ==========
Per Common Share - Basic:
Earnings (loss) from continuing operations $ (0.09) $ 0.95 $ (0.22) $ 1.86
Net earnings (loss) (0.09) 0.90 (0.22) 1.77
========= ========= ========== ==========
Per Common Share - Diluted:
Earnings (loss) from continuing operations $ (0.09) $ 0.80 $ (0.22) $ 1.57
Net earnings (loss) (0.09) 0.76 (0.22) 1.50
========= ========= ========== ==========
See accompanying Notes to Consolidated Financial Statements
</TABLE>
Page 4 of 27
<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 270,856 COMMON SHARES IN
CONNECTION WITH 1997 AND 1998 ACQUISITIONS(note 3) -- -- -- -- 0
ISSUANCE OF 326,459 COMMON SHARES IN
CONNECTION WITH EMPLOYEE STOCK COMPENSATION LESS
UNAMORTIZED COST OF $1,659 -- 177 -- -- 177
ACQUISITION OF 3,607,000 COMMON SHARES OF
TREASURY STOCK (AT COST) -- -- -- (24,041) (24,041)
ISSUANCE OF 64,003 COMMON SHARES IN
CONNECTION WITH DEBT PAYMENTS -- 438 -- -- 438
RE-ISSUANCE OF 3,415,556 COMMON SHARES
OF TREASURY STOCK IN CONNECTION WITH
EMPLOYEE STOCK COMPENSATION
LESS UNAMORTIZED COST OF $11,175 -- (30,745) -- 32,208 1,463
NET LOSS -- -- (11,219) -- (11,219)
-------------------------------------------------------------------------
BALANCE AT JUNE 30, 1999 $ 53 1,340,678 (33,702) (7,487) 1,299,542
=========================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
Page 5 of 27
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
June 30,
------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (11,219) $ 79,079
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Loss from discontinued operations -- 3,981
Results of joint ventures (1,198) 389
Depreciation and amortization 92,991 72,196
Deferred income taxes and other non-cash items 5,596 9,734
Amortization of gain on sale-leaseback transactions (336) (355)
(Increase) decrease in patient accounts and third-party
payor settlements receivable, net 58,720 (127,901)
Increase in supplies, inventory, prepaid
expenses and other current assets (3,497) (16,413)
Decrease in accounts payable and accrued expenses (113,038) (44,742)
Decrease in income taxes receivable 12,917 --
Increase in income taxes payable -- 47,536
--------- ---------
Net cash provided by operating activities of
continuing operations 40,936 23,504
--------- ---------
Net cash (used) provided by discontinued operations (13,469) 1,088
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of capital stock, net 759 55,724
Proceeds from long-term borrowings 318,268 389,735
Repayment of long-term debt (250,775) (373,110)
Dividends paid -- (814)
Deferred financing costs (9,027) --
Purchase of treasury stock (24,041) --
--------- ---------
Net cash provided by financing activities 35,184 71,535
--------- ---------
Cash flows from investing activities:
Sale of temporary investments 179,636 61,698
Purchase of temporary investments (167,719) (61,169)
Business acquisitions (Note 3) (43,883) (95,524)
Purchase of property, plant and equipment (112,537) (115,165)
Disposition of assets (Notes 4, 7 and 8) 140,298 156,594
Other assets (43,801) (5,603)
--------- ---------
Net cash used by investing activities (48,006) (59,169)
--------- ---------
Increase in cash and cash equivalents 14,645 36,958
Cash and cash equivalents, beginning of period 31,391 60,333
--------- ---------
Cash and cash equivalents, end of period $ 46,036 $ 97,291
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
Page 6 of 27
<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
June 30, 1998:
Basic EPS: $ 43,715 46,233 $ 0.95
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: -- 3,408 --
-------- ------ ------
Diluted EPS: $ 46,103 57,678 $ 0.80
======== ====== ======
For The Six Months Ended
June 30, 1998:
Basic EPS: $ 83,060 44,770 $ 1.86
Adjustment for interest on and incremental shares
from assumed conversion of the convertible
subordinated debentures: 4,775 8,037 --
Incremental shares from assumed
exercise of dilution options
and warrants: -- 3,274 --
-------- ------ ------
Diluted EPS: $ 87,835 56,081 $ 1.57
======== ====== ======
</TABLE>
* Represents earnings from continuing operations.
For the three and six months ended June 30, 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 51,523,079 for the
six months ended June 30, 1999 and 51,455,647 for the three months ended June
30, 1999.
Page 7 of 27
<PAGE>
NOTE 3: NEW ACQUISITIONS
Acquisitions during the six months ended June 30, 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
May Management agreement for
Novacare, Inc. 5,548 -- -- 5,548
Various 10 acquisitions, each with
total cost of less than $2,000 8,359 -- 1,811 6,548
Various Cash payments of acquisition
costs accrued and acquiree
accrued liabilities -- -- (19,503) 19,503
-------- ----- ------- --------
$ 33,484 -- $(10,399) $ 43,883
======== ===== ======= ========
</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 Total
Transaction Assets Equipment Assets Assets Liabilities Cost
----------- ------ --------- ------ ------ ----------- ----
(Dollars in Thousands)
<S> <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
Management agreement for
Novacare, Inc. -- -- 30,000 85,548 (110,000) 5,548
10 acquisitions, each with
total costs of less than
$2,000 654 752 (421) 7,505 (131) 8,359
----- -------- ------- -------- --------- --------
$ 995 $ 13,123 $29,579 $ 99,918 (110,131) $ 33,484
===== ======== ======= ======== ========= ========
</TABLE>
During 1999, the Company issued an additional 162,998, 69,585,
18,097, 9,677 and 10,499 shares to stockholders of Medicare
Convalescent Aids of Pinnellas Inc., Hialeah Convalescent Home,
Premier Medical, Plateau Medical Equipment and Indian
Respiratory Care Inc., respectively, in connection with share
price adjustments.
Page 8 of 27
<PAGE>
NOTE 4: TRANSACTIONS WITH LYRIC HEALTH CARE LLC
In 1997, the Company began to explore various options to
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 as advantageous as 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.
Effective January 1, 1999, as part of its deleveraging
strategy, the Company and various wholly owned subsidiaries of
the Company (the "Lyric Subsidiaries") sold 32 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 27
<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 deferred 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 27
<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. The Company acquired certain
common shares of treasury stock prior to amending its
Credit Facility.
NOTE 6: SEGMENT REPORTING
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) contract services that
provide specialty medical services under contract to other
healthcare providers, and (d) management of skilled nursing
Page 11 of 27
<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 JUNE 30, 1999
HOME
INPATIENT RESPIRATORY/ DIAGNOSTIC LITHOTRIPSY
SERVICES INFUSION/DME SERVICES SERVICES CONSOLIDATED
-------- ------------ -------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues $ 417,816 $ 165,406 $ 25,743 $ 15,286 $ 624,251
Operating, general and administrative
expenses (including rent) 353,751 121,226 21,495 9,184 505,656
---------- ---------- ---------- ---------- ----------
Earnings from continuing operations
before non-recurring charges, equity in
earnings of affiliates, interest, taxes,
depreciation and amortization $ 64,065 $ 44,180 $ 4,248 $ 6,102 $ 118,595
========== ========== ========== ========== ==========
Total Assets $3,315,628 $1,658,310 $ 219,942 $ 210,032 $5,403,912
========== ========== ========== ========== ==========
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
HOME
INPATIENT RESPIRATORY/ DIAGNOSTIC LITHOTRIPSY
SERVICES INFUSION/DME SERVICES SERVICES CONSOLIDATED
-------- ------------ -------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues $ 836,663 $ 324,526 $ 53,852 $ 29,445 $1,244,486
Operating, general and administrative
expenses (including rent) 718,025 236,089 42,827 16,617 1,013,558
---------- ---------- ---------- ---------- ----------
Earnings from continuing operations
before non-recurring charges, equity in
earnings of affiliates, interest, taxes,
depreciation and amortization $ 118,638 $ 88,437 $ 11,025 $ 12,828 $ 230,928
========== ========== ========== ========== ==========
Total Assets $3,315,628 $1,658,310 $ 219,842 $ 210,032 $5,403,912
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
HOME
INPATIENT RESPIRATORY/ DIAGNOSTIC LITHOTRIPSY
SERVICES INFUSION/DME SERVICES SERVICES CONSOLIDATED
-------- ------------ -------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues $ 547,658 $ 152,815 $ 27,018 $ 13,263 $ 740,754
Operating, general and administrative
expenses (including rent) 432,616 113,389 18,763 7,295 572,063
---------- ---------- ---------- ---------- ----------
Earnings from continuing operations
before non-recurring charges, equity in
earnings of affiliates, interest, taxes,
depreciation and amortization $ 115,042 $ 39,426 $ 8,255 $ 5,968 $ 168,691
========== ========== ========== ========== ==========
Total Assets $3,203,188 $1,267,256 $ 215,688 $ 211,011 $4,897,143
========== ========== ========== ========== ==========
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
HOME
INPATIENT RESPIRATORY/ DIAGNOSTIC LITHOTRIPSY
SERVICES INFUSION/DME SERVICES SERVICES CONSOLIDATED
-------- ------------ -------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues $1,115,052 $ 302,450 $ 60,192 $ 24,747 $1,502,441
Operating, general and administrative
expenses (including rent) 886,698 225,167 45,564 13,645 1,171,074
---------- ---------- ---------- ---------- ----------
Earnings from continuing operations
before non-recurring charges, equity in
earnings of affiliates, interest, taxes,
depreciation and amortization $ 228,354 $ 77,283 $ 14,628 $ 11,102 $ 331,367
========== ========== ========== ========== ==========
Total Assets $3,203,188 $1,267,256 $ 215,688 $ 211,011 $4,897,143
========== ========== ========== ========== ==========
</TABLE>
There are no material inter-segment revenues or receivables.
Revenues derived from Medicare and various state Medicaid
reimbursement programs represented 31% and 25%, respectively,
Page 12 of 27
<PAGE>
for the three and six months ended June 30, 1999 and 37% and
20%, respectively, for the three and six months June 30, 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: 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. Therefore, the Company recognized no gain or
loss during the second quarter of 1998.
NOTE 9: 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 $4.0 million
represents the operating loss for the six month period ended
June 30, 1998. The operating loss includes the effects of
interest expense incurred in connection with acquisition
financing. During the six months ended June 30, 1999, the
Company sold this business segment for approximately
$26.0 million.
NOTE 10: SUBSEQUENT EVENTS
On August 1, 1999, the Company entered into a lease agreement
to lease 14 skilled nursing facilities from Florida
Convalescent Centers, Inc. for annual lease payments of
$14,300,000.
The Company has reached definitive agreements to purchase seven
respiratory companies for approximately $11,350,000. 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 27
<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 27
<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.
The Company, in an effort to reduce indebtedness, as well as to
improve liquidity, is currently exploring the sale of a portion or all of
certain business segments. There can, however, be no assurance that a sale will
be completed, or that such sale if it were to occur would not have a material
adverse affect on the Company. Additionally, the sale of a major segment or a
major portion of a segment may require a reevaluation under SFAS 121,
"Impairment of Long Lived Assets" of the impact on other business segments
including corporate division assets such as computer systems. Finally, the
Company is in the process of assessing the impact of the relocation of various
business units to the Company's new headquarters campus scheduled for the third
and fourth quarter.
THREE MONTHS ENDED JUNE 30, 1999
COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Net revenues for the three months ended June 30, 1999 decreased
$116.5 million, or 15.7%, to $624.25 million from the comparable period in 1998.
Such decrease was attributable to (i) a $142.78 million decrease from (a) the
sale, subsequent to June 30, 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
the implementation of a BBA mandated prospective payment system ("PPS") for the
Company's nursing facilities during the first half of 1999 and (c) a decrease in
demand for therapy services
Page 15 of 27
<PAGE>
in the Company's contract rehabilitation division as a result of PPS, (ii)a
decrease of $7.77 million from home respiratory/infusion/DME companies in
operations in both periods, (iii) a decrease of $1.28 million from diagnostic
services in operations in both periods, partially offset by (iv) an increase of
$1.52 million from lithotripsy services in operations in both periods and (v)
revenue from companies acquired subsequent to June 30, 1998, including (x)
$12.94 million from inpatient services, (y) $20.36 million from home
respiratory/infusion/DME, and (z) $500,000 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 $66.41 million, or 11.61%, in the three months ended June 30, 1999
compared to the three months ended June 30, 1998. Such decrease was attributable
to (i) a $91.28 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, and (ii) a
$5.73 million decrease from home respiratory/infusion/DME companies in
operations in both periods, partially offset by (iii) an increase of $2.73
million from diagnostic services in operations in both periods, (iv) an increase
of $1.74 million from lithotripsy services in operations in both periods and (v)
increases in expenses from acquisitions subsequent to June 30, 1998, including
(x) $12.41 million from inpatient services, (y) $13.57 million from home
respiratory/infusion/DME services, and (z) $152,000 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 $46.62 million for
the three months ended June 30, 1999, a 27.39% increase as compared to $36.60
million in 1998. Of the $10.02 million increase, $1.38 million, or
Page 16 of 27
<PAGE>
13.78%, was attributable to depreciation and amortization of businesses acquired
subsequent to June 30, 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 second
quarter of 1998 partially offset by the sale of the Lyric facilities.
Net interest expense increased $16.06 million, or 27.60%, during
the three months ended June 30, 1999. The increase was primarily the result of
increased borrowings under the revolving credit facility and other debt assumed
related to acquisitions subsequent to June 30, 1998.
Earnings (loss) from continuing operations decreased from
earnings of $43.72 million in the three months ended June 30, 1998 to a loss of
$4.63 million for the three months ended June 30, 1999. The decrease is
primarily due to the decrease in therapy services in the Company's contract
rehabilitation division within the inpatient services segment.
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 expected 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 June 30, 1998 was $2.22 million.
Net loss and loss per share for 1999 were $4.63 million and $0.09 per
share, respectively, compared to net earnings and diluted earnings per share for
1998 of $41.5 million and $0.76 per share. Weighted average shares decreased
from 57,678,000 (diluted) in 1998 to 51,456,000 in 1999. In 1999, no exercise of
options and warrants nor conversion of subordinated debt is assumed since their
effect is antidilutive. Subsequent to June 30, 1998, the Company issued an
aggregate of 1,315,544 shares of Common Stock, including 746,662 shares for
acquisitions 31,927 shares upon exercise of options and 146,493 shares for the
employee stock purchase plan and 32,459 shares for current and deferred
compensation.
During this period, the Company repurchased 4,667,500 shares of its Common
Stock and reissued 4,074,380 of such shares.
Page 17 of 27
<PAGE>
SIX MONTHS ENDED JUNE 30, 1999
COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net revenues for the six months ended June 30, 1999 decreased
$257.96 million, or 17.17%, to $1,244.49 million from the comparable period in
1998. Such decrease was attributable to (i) a $291.61 million decrease from (a)
the sale, subsequent to June 30, 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 in the
Company's contract rehabilitation division as a result of PPS, (ii)a decrease of
$4.10 million from home respiratory/infusion/DME companies in operations in both
periods, (iii) a decrease of $6.34 million from diagnostic services in
operations in both periods, partially offset by (iv) an increase of $3.90
million from lithotripsy services in operations in both periods and (v) revenue
from acquisitions subsequent to June 30, 1998, including (x) $13.22 million from
inpatient services, (y) $26.18 million from home respiratory/infusion/DME, and
(z) $804,000 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.
Page 18 of 27
<PAGE>
Operating, general and administrative expense (including rent)
decreased $157.52 million, or 13.5%, in the six months ended June 30, 1999
compared to the six months ended June 30, 1998. Such decrease was attributable
to (i) a $181.38 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 $6.68
million decrease from home respiratory/infusion/DME companies in operations in
both periods, (iii) a $2.74 million decrease from diagnostic services in
operations in both periods, partially offset by (iv) an increase of $2.68
million from lithotripsy services in operations in both periods and (v)
increases in expenses from acquisitions subsequent to June 30, 1998, including
(x) $12.71 million from inpatient services, (y) $17.60 million from home
respiratory/infusion/DME services, and (z) $288,000 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 $92.99 million for the six
months ended June 30, 1999, a 28.80% increase as compared to $72.20 million in
1998. Of the $20.80 million increase, $2.04 million, or 9.80%, was attributable
to depreciation and amortization of businesses acquired subsequent to June 30,
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 second quarter of 1998 partially offset by the
sale of the Lyric facilities.
Page 19 of 27
<PAGE>
Net interest expense increased $25.89 million, or 21.79%,
during the six months ended June 30, 1999. The increase was primarily the result
of increased borrowings under the revolving credit facility and other debt
assumed related to acquisitions subsequent to June 30, 1998.
Earnings (loss) from continuing operations decreased from
earnings of $83.06 million in the six months ended June 30, 1998 to a loss of
$11.22 million for the six months ended June 30, 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 six
months ended June 30, 1998 was $3.98 million.
Net loss and loss per share for 1999 were $11.22 million and $0.22 per
share, respectively, compared to net earnings and diluted earnings per share for
1998 of $79.08 million and $1.50 per share. Weighted average shares decreased
from 56,081,000 (diluted) in 1998 to 51,523,000 in 1999. In 1999, no exercise of
options and warrants nor conversion of subordinated debt is assumed since their
effect is antidilutive. Subsequent to June 30, 1998, the Company issued an
aggregate of 1,315,544 shares of Common Stock, including 746,662 shares for
acquisitions, 31,927 shares upon exercise of options 146,493 shares issued for
the employee stock purchase plan and 326,459 shares for current and deferred
compensation.
During this period, the Company repurchased 4,667,500 shares of its Common
Stock and reissued 4,074,380 of such shares.
Page 20 of 27
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had working capital of $278.0
million, as compared with $341.2 million at December 31, 1998. The decrease in
working capital was primarily due to an increase in cash and cash equivalents
and other current assets, a decrease in accounts payable and accrued expenses
partially offset by a decrease in patient accounts and third party payor
settlements receivable and a decrease in temporary investments and income tax
receivable. There were no material capital commitments for capital expenditures
as of June 30, 1999. Net patient accounts and third-party payor settlements
receivable decreased $58.1 million to $591.0 million at June 30, 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 $692.9 million at June 30, 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 $58.1
million at June 30, 1999, as compared to $79.2 million at December 31, 1998.
Net cash provided by operating activities of continuing
operations for the six months ended June 30, 1999, was $40.9 million as compared
to $23.5 million for the comparable period in 1998. Cash provided by operating
activities for the six months ended June 30, 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.
The discontinued operation resulted in cash used of $13.5
million for the six months ended June 30, 1999 as compared to cash provided of
$1.1 million for the six months ended June 30, 1999.
Net cash provided by financing activities was $35.2 million for
the six month period in 1999 as compared to $71.5 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 six months ended June 30, 1999, the Company repurchased 3.6
million shares of its stock for
Page 21 of 27
<PAGE>
approximately $24.0 million.
Net cash used by investing activities was $48.0 million for the
six month period ended June 30, 1999 as compared to $59.2 million used by
investing activities for the six month period ended June 30, 1998. Cash used for
acquisitions was $43.9 million in 1999 as compared to $95.5 million for 1998.
Cash used for the purchase of property, plant and equipment was $112.5 million
in 1999 and $115.2 million in 1998. Cash used for the purchase of other assets
was $43.8 million in 1999 and $5.6 million in 1998. The $43.8 million in cash
disbursements for other assets was used primarily for $25.0 million of loans to
employees and certain loans to third parties. In the first six months 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 six months of 1999,
the Company sold its discontinued home nursing segment for approximately $26.0
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) and $56.7
million from the sale of eleven long-term care facilities in June 1998 (See Note
8). 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, 1998, 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 June 30, 1999 is $122.5 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 $103.0 million as of June 30, 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 $29.9 million at June
30, 1999 to secure certain of the Company's workers' compensation obligations,
health benefits and
Page 22 of 27
<PAGE>
other obligations. In addition, IHS has several surety bonds in the amount of
$66.0 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 and synthetic
leases aggregating approximately $882.06 million at June 30, 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 2000. The Company continues to explore asset sales to reduce its
leverage and provide additional liquidity.
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 84% complete and it is anticipated that the project will be
substantially implemented by September 1999. Periodic meetings are being held
with the Board of Directors and senior management to ensure that the project
stays on schedule.
Page 23 of 27
<PAGE>
Through June 30, 1999, expenditures related to the Year 2000
issue totaled approximately $9.2 million. The Company currently estimates that
an additional $1.8 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 24 of 27
<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 were 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.
On April 22, 1999, the Company issued 9,677 and 18,097
shares of Common Stock to the stockholders of Plateau
Medical Equipment, Inc. and Premier Medical,
respectively, which were purchased in August 1997 and
October 1997, respectively.These shares were issued
pursuant to terms in the purchase agreements that
require shares of the Company's Common Stock to be held
in escrow for any purchase price adjustments to be made
twenty-four (24) months from the acquisition dates.
On May 11, 1999, the Company issued 10,499 shares of
Common Stock to the stockholders of Indiana Respiratory
Care, Inc. which was purchased in November 1998, because
the average price of 67,395 shares of Common Stock
issued to the Indiana Respiratory Care shareholders at
the time of closing of the acquisition (the "Original
Shares") was higher than the average price of 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 $1 million by the average closing price
of the Common Stock on the New York Stock Exchange
("NYSE") for the 30 trading day period immediately
preceding the date which was two trading days prior to
the closing date of the acquisition less $2.00 and (ii)
the number of shares determined by dividing the merger
consideration of $1 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.
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 25 of 27
<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 3. - Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of Integrated Health Services, Inc. was
held on May 28, 1999
(c) (i) The following persons, comprising the entire Board of Directors, were
elected at the Annual Meeting pursuant to the following vote tabulations:
Votes For Votes Withheld
--------- --------------
Robert N. Elkins 41,619,633 1,668,636
Edwin M. Crawford 41,635,262 1,653,007
Kenneth M. Mazik 41,634,562 1,653,707
Robert M. Mitchell 41,446,001 1,842,268
Charles W. Newhall III 41,634,562 1,653,707
Timothy F. Nicholson 41,635,362 1,652,907
John L. Silverman 41,634,862 1,653,407
George H. Strong 41,634,552 1,653,717
Item 4. - 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 26 of 27
<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: August 13, 1999
Page 27 of 27
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