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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[X] SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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 ______
Commission File Number 1-12306
INTEGRATED HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 23-2428312
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
THE HIGHLANDS
910 RIDGEBROOK ROAD
SPARKS, MARYLAND 21152
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code: 410-773-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
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Common Stock, par value
$.001 per share
10 1/4% Senior Subordinated
Notes due 2006
9 1/2% Senior Subordinated
Notes due 2007
9 1/4% Senior Subordinated
Notes due 2008
5 3/4% Convertible Senior
Subordinated Debentures due 2001
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
Aggregate market value of the Registrant's Common Stock held by
non-affiliates at March 31, 2000 (based on the closing sale price for such
shares as reported by the OTC Bulletin Board): $12,924,606
Common Stock outstanding as of March 31, 2000: 53,429,412 shares.
Documents Incorporated by Reference:
Portions of the Registrant's definitive proxy statement for its 2000 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
report.
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PART I
ITEM 1. BUSINESS
GENERAL OVERVIEW
Integrated Health Services, Inc. ("IHS" or the "Company") is one of the
nation's leading providers of post-acute healthcare services. Post-acute care is
the provision of a continuum of care to patients following discharge from an
acute care hospital. IHS' post-acute care services and products include (i)
inpatient services, including subacute care, skilled nursing facility care,
contract rehabilitation and respiratory, hospice services and management of
skilled nursing facilities owned by third parties, (ii) home respiratory care
and durable medical equipment ("DME"), (iii) diagnostic services and (iv)
lithotripsy, a non-invasive technique that uses shockwaves to disintegrate
kidney stones, primarily on an outpatient basis. The Company's post-acute care
network is designed to address the cost containment measures implemented by
private insurers and managed care organizations and limitations on government
reimbursement of hospital costs that have resulted in the discharge from
hospitals of many patients who continue to require medical and rehabilitative
care. IHS' post-acute healthcare system is intended to provide cost-effective
continuity of care for its patients and enable payors to contract with one
provider to provide all of a patient's needs following discharge from acute care
hospitals. IHS' post-acute care network currently consists of over 1,300 service
locations in 46 states and the District of Columbia.
The Company's post-acute care network strategy is to provide cost-effective
continuity of care for its patients, using geriatric care facilities as
platforms to provide a wide variety of subacute medical and rehabilitative
services more typically delivered in the acute care hospital setting. To
implement its post-acute care network strategy, IHS has focused on (i)
developing market concentration for its post-acute care services in targeted
states due to increasing payor consolidation and the increased preference of
payors, physicians and patients for dealing with only one service provider; (ii)
expanding the range of services it offers to patients directly in order to
provide patients with a continuum of care throughout their recovery, to better
control costs and to meet the growing desire by payors for one-stop shopping;
and (iii) developing subacute care units.
IHS presently operates 366 geriatric care facilities (290 owned or leased
and 76 managed), 17 specialty hospitals and nine hospice facilities. The Company
provides a wide range of basic medical and subacute care services as well as a
comprehensive array of respiratory, physical, speech, occupational and
physiatric therapy in all its geriatric care facilities. The Company has over
2,000 contracts to provide services, primarily physical, occupational, speech
and respiratory therapies, to third-party skilled nursing facilities, subacute
care centers, assisted living facilities, hospitals and other locations. IHS
also provides mobile diagnostics such as portable x-ray and EKG to patients in
geriatric care facilities and other settings, lithotripsy services on an
outpatient basis, as well as diversified home respiratory care and other
pharmacy-related services and products and durable medical equipment products
from approximately 800 primarily non-urban locations in 44 states.
On February 2, 2000, the Company and substantially all of its subsidiaries
filed voluntary petitions (the "Bankruptcy Filings") in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") under
Chapter 11 of the United States Bankruptcy Code. The Company's need to seek
relief under the Bankruptcy Code is due, in part, to the significant financial
pressure created by the Balanced Budget Act of 1997 (the "Balanced Budget Act")
and its implementation, which, among other things, changed Medicare
reimbursement for nursing facilities from a cost-based retrospective
reimbursement system to a prospective payment system ("PPS"). The per diem
reimbursement rates under PPS were significantly lower than anticipated by the
industry, and generally have been less than the amount the Company's facilities
received on a daily basis under cost-based reimbursement. Moreover, since IHS
treats a greater percentage of higher acuity patients than many nursing
facilities, IHS has also been adversely affected because the federally
established per diem rates do not adequately compensate the Company for the
additional expenses of caring for such patients. In addition, the implementation
of PPS has resulted in a greater than expected decline in demand for the
Company's therapy services. The changes in Medicare reimbursement resulting from
the Balanced Budget Act have had a material adverse effect on the Company,
rendering IHS unable to service
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its debt obligations to its senior lenders and subordinated noteholders while at
the same time meeting its operating expenses. The Company hopes to use the
Bankruptcy Filings to restructure its capital structure to better position the
Company to address the changed economics resulting from the implementation of
the Balanced Budget Act.
In 1996 and 1997, the Company also focused on providing home health nursing
in order to meet patients' desires to be treated at home. However, the delay in
the implementation of a prospective payment system ("PPS") for Medicare home
health nursing until after October 1, 2000 at the earliest and a reduction in
current cost reimbursement for Medicare home health nursing pending
implementation of a prospective payment system mandated in the Balanced Budget
Act adversely impacted the Company's home health nursing business. Accordingly,
in the third quarter of 1998 the Company decided to exit the home health nursing
business, and sold this business in the first half of 1999.
INDUSTRY BACKGROUND
The healthcare industry has undergone several significant changes over the
past 15 years, primarily in response to governmental and private payor efforts
to control the cost of providing healthcare services.
In 1983, the Federal government acted to curtail increases in healthcare
costs under Medicare, a Federal insurance program under the Social Security Act
primarily for individuals age 65 or over. Instead of continuing to reimburse
hospitals on a cost plus basis (i.e., the hospital's actual cost of care plus a
specified return on investment), the Federal government established a new type
of payment system based on prospectively determined prices rather than
retrospectively determined costs, with payment for inpatient hospital services
based on regional and national rates established under a system of diagnosis-
related groups ("DRGs"). As a result, hospitals bear the cost risk of providing
care inasmuch as they receive specified reimbursement for each treatment
regardless of actual cost.
Concurrent with the change in government reimbursement of healthcare costs,
a "managed care" segment of the healthcare industry emerged based on the theme
of cost containment. The health maintenance organizations and preferred provider
organizations, which constitute the managed care segment, are able to limit
hospitalization costs by giving physicians incentives to reduce hospital
utilization and by negotiating discounted fixed rates for hospital services. In
addition, traditional third party indemnity insurers began to limit
reimbursement to pre-determined amounts of "reasonable charges," regardless of
actual cost, and to increase the amount of co-payment required to be paid by
patients, thereby requiring patients to assume more of the cost of hospital
care. These changes have resulted in the earlier discharge of patients from
acute care hospitals.
At the same time, the number of people over the age of 65 began to grow
significantly faster than the overall population. Further, advances in medical
technology have increased the life expectancies of an increasingly large number
of medically complex patients, many of whom require a high degree of monitoring
and specialized care and rehabilitative therapy that is generally not available
outside the acute care hospital. However, the changes in government and
third-party reimbursement and growth of the managed care segment of the
healthcare industry, when combined with the fact that the cost of providing care
to these patients in an acute care hospital is higher than in a non-acute care
hospital setting, provide economic incentives for acute care hospitals and
patients or their insurers to minimize the length of stay in acute care
hospitals. As a result of the early discharge from hospitals of patients who are
not fully recovered and still require medical care and rehabilitative therapy,
IHS believes there is an increasing need for non-acute care hospital facilities
which can provide the monitoring, specialized care and comprehensive
rehabilitative therapy required by the growing population of subacute and
medically complex patients.
Recent healthcare reform proposals, which have focused on containment of
healthcare costs, together with the desire of third-party payors to contract
with one service provider for all post-acute care services, the increasing
complexity of medical services provided, growing regulatory and compliance
requirements and increasingly complicated reimbursement systems, have resulted
in a trend of consolidation of smaller, local operators who lack the
sophisticated management information systems, operating efficiencies and
financial resources to compete effectively into larger, more established
regional or national operators that offer a broad range of services, either
through its own network or through subcontracts with other third party service
providers.
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The Balanced Budget Act, enacted in August 1997, made numerous changes to
the Medicare and Medicaid programs that are significantly affecting the delivery
of subacute care, skilled nursing facility care and home healthcare. With
respect to Medicare, the Balanced Budget Act provides, among other things, for a
prospective payment system for skilled nursing facilities to be implemented for
cost reporting periods beginning on or after July 1, 1998, a prospective payment
system for home nursing to be implemented for cost reporting periods beginning
on or after October 1, 1999 (subsequently extended to October 1, 2000), a
reduction in current cost reimbursement for home nursing care pending
implementation of a prospective payment system, reductions in reimbursement for
oxygen and oxygen equipment for home respiratory therapy and a shift of the bulk
of home health coverage from Part A to Part B of Medicare. As a result, like
hospitals, skilled nursing facilities and providers of subacute care and home
healthcare now bear the cost risk of providing care inasmuch as they receive
specified reimbursement for each treatment regardless of actual cost. With
respect to Medicaid, the Balanced Budget Act repealed the so-called Boren
Amendment, which required state Medicaid programs to reimburse nursing
facilities for the costs that are incurred by efficiently and economically
operated providers in order to meet quality and safety standards. As a result,
states now have considerable flexibility in establishing payment rates and the
Company believes many states are moving toward a prospective payment type system
for skilled nursing facilities.
The Balanced Budget Act has materially adversely affected the Company and
its competitors, several of which have also filed voluntary petitions under
Chapter 11 of the United States Bankruptcy Code. The initial reimbursement rates
under PPS were published less than two months prior to the implementation of PPS
and were significantly lower than anticipated within the industry. The Balanced
Budget Act also imposed a per beneficiary cap of $1,500 per provider per therapy
service provided, which cap was subsequently temporarily suspended for the two
year period beginning January 1, 2000. In November 1999, the acuity adjusted PPS
rates for specified acuity categories were temporarily increased in an attempt
to mitigate some of the adverse effects of the Balanced Budget Act pending
refinement to the PPS rates to better account for medically complex patients.
INPATIENT SERVICES
Inpatient services is the largest source of revenue for the Company. IHS
operates 366 geriatric care facilities (290 owned or leased and 76 managed), 17
specialty hospitals and nine hospice facilities.
IHS provides a wide range of basic medical services at its geriatric care
facilities which are licensed as skilled care nursing homes. Services provided
to all patients include required nursing care, room and board, special diets,
and other services which may be specified by a patient's physician who directs
the admission, treatment and discharge of the patient. Inpatient services also
include a wide array of rehabilitative therapies.
IHS offers specialized subacute care programs at its facilities, including
complex care programs, ventilator programs, wound management programs and
cardiac care programs; other programs offered include subacute rehabilitation,
oncology and HIV. IHS initially focused on the provision of subacute care
through Medical Specialty Units ("MSUs"), which were typically 20 to 75 bed
specialty units with physical identities, specialized medical technology and
staffs separate from the geriatric care facilities in which they were located.
Because of the high level of specialized care provided, the Company's MSUs
generated substantially higher net revenue and operating profit per patient day
than traditional geriatric care facilities. While IHS continues to focus on the
provision of subacute care, it is no longer focusing on providing such care
through its MSUs.
Complex Care Program. This program is designed to treat persons who are
generally subacute or chronically ill and sick enough to be treated in an acute
care hospital. Persons requiring this care include post-surgical patients,
cancer patients and patients with other diseases requiring long recovery
periods. This program is designed to provide the monitoring and specialized care
these patients require but in a less institutional and more cost efficient
setting than provided by hospitals. Some of the monitoring and specialized care
provided to these patients are apnea monitoring, continuous peripheral
intravenous therapy with or without medication, continuous subcutaneous
infusion, chest percussion and postural drainage, gastrostomy or naso-gastric
tube feeding, ileostomy or fistula care (including patient teaching),
post-operative care, tracheostomy care, and oral, pharyngeal or tracheal
suctioning. Patients in this program also typically undergo intensive
rehabilitative services to allow them to return home.
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Ventilator Program. This program is designed for persons who require
ventilator assistance for breathing because of respiratory disease or
impairment. Persons requiring ventilation include sufferers of chronic
obstructive pulmonary disease, muscular atrophy and respiratory failure,
pneumonia, cancer, spinal cord or traumatic brain injury and other diseases or
injuries which impair respiration. Ventilators assist or effect respiration in
patients unable to breathe adequately for themselves by injecting heated,
humidified, oxygen-enriched air into the lungs at a pre-determined volume per
breath and number of breaths per minute and by controlling the relationship of
inhalation time to exhalation time. Patients in this program undergo respiratory
rehabilitation to wean them from ventilators by teaching them to breathe on
their own once they are medically stable. Patients are also trained to use the
ventilators on their own.
Wound Management Programs. These programs are designed to treat persons
suffering from post operative complications and persons infected by certain
forms of penicillin and other antibiotic resistant bacteria, such as methicillin
resistant staphylococcus aureus ("MRSA"). Patients infected with these types of
bacteria must be isolated under strict infection control procedures to prevent
the spread of the resistant bacteria, which makes MSUs an ideal treatment site
for these patients. Because of the need for strict infection control, including
isolation, treatment of this condition in the home is not practical.
Cardiac Care Program. This program is designed to treat persons suffering
from congestive heart failure, severe cardiac arrhythmia, pre/post transplants
and other cardiac diagnoses. The monitoring and specialized care provided to
these patients includes electrocardiographic monitoring/telemetry, continuous
hemodynamic monitoring, infusion therapy, cardiac rehabilitation, stress
management and dietary counseling, planning and education.
Rehabilitation
IHS provides a comprehensive array of rehabilitative services for patients
at all of its geriatric care facilities in order to enable those persons to
return home. These services include respiratory therapy with licensed
respiratory therapists, physical therapy with a particular emphasis on programs
for the elderly, speech therapy, particularly for the elderly recovering from
cerebral vascular disorders, occupational therapy, and physiatric care.
Rehabilitation services are instrumental in lowering the overall cost of care by
reducing the length of a patient's stay and improving a patient's quality of
life. A portion of the rehabilitative service hours is provided by independent
contractors. In order to reduce the number of rehabilitative services hours
provided by independent contractors, IHS began in late 1993 to acquire companies
which provide physical, occupational and speech therapy to healthcare
facilities.
The Company also offers rehabilitation programs, ranging from stroke
victims to persons who have undergone hip replacement.
The Company also offers rehabilitation services to skilled nursing
facilities not operated or managed by the Company as well as subacute care
centers, assisted living facilities and other locations. IHS believes that by
offering a comprehensive array of rehabilitative services through one provider,
skilled nursing facilities can provide quality patient care more efficiently and
cost-effectively. The Company believes that demand for a single provider for a
comprehensive array of rehabilitative services will increase as a result of the
prospective payment system being implemented under the Balanced Budget Act,
which provides for a fixed payment for these services.
With the implementation of PPS, with its fee schedule and beneficiary
therapy caps for rehabilitation services, the Company has experienced reduced
demand for, and reduced operating margins from, the rehabilitation services it
provides to third parties because such providers are admitting fewer Medicare
patients and are reducing utilization of rehabilitative services and/or
providing such services with their own personnel. Beginning in the fourth
quarter of 1998, the Company has focused on reducing its cost of providing
rehabilitation services by reducing staff and changing the method of
compensating its remaining therapists.
Hospice Services
IHS provides hospice services, including medical care, counseling and
social services, to the terminally ill through 9 locations in 7 states. Hospice
care is a coordinated program of support services providing physical,
psychological, social and spiritual care for dying persons and their families.
Services
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are provided in the home and/or inpatient settings. The goal of hospice care is
typically to improve a terminal patient's quality of life rather than trying to
extend life. IHS also provides hospice care to the terminally ill at its
facility in Miami, Florida.
Management and Other Services
The Company manages geriatric care facilities under contract for others to
capitalize on its specialized care programs without making the capital outlay
generally required to acquire and renovate a facility. IHS currently manages 76
geriatric care facilities with 9,878 licensed beds. IHS is responsible for
providing all personnel, marketing, nursing, resident care, dietary and social
services, accounting and data processing reports and services for these
facilities, although such services are provided at the facility owner's expense.
The facility owner is also obligated to pay for all required capital
expenditures. The Company manages these facilities in the same manner as the
facilities it owns or leases, and provides the same geriatric care services as
are provided in its owned or leased facilities. Contract acquisition costs for
legal and other direct costs incurred to acquire long-term management contracts
are capitalized and amortized over the term of the related contract.
IHS receives a management fee for its services which generally is equal to
4% to 8% of gross revenues of the geriatric care facility. Certain management
agreements also provide the Company with an incentive fee based on the amount of
the facility's operating income which exceeds stipulated amounts. Management fee
revenues are recognized when earned and billed generally on a monthly basis.
Incentive fees are recognized when operating results of managed facilities
exceed amounts required for incentive fees in accordance with the terms of the
management agreements. The management agreements generally have an initial term
of ten years, with IHS having a right to renew in most cases. The management
agreements expire at various times between June 2000 and January 2012 although
all can be terminated earlier under certain circumstances. The Company generally
has a right of first refusal in respect of the sale of each managed facility.
IHS believes that by implementing its specialized care programs and services in
these facilities, it will be able to increase significantly the operating income
of these facilities and thereby increase the management fees the Company will
receive for managing these facilities.
HOME RESPIRATORY AND DURABLE MEDICAL EQUIPMENT
IHS currently provides home respiratory and durable medical equipment
services from approximately 750 locations in 43 states, primarily in the
respiratory therapy segments of the home healthcare market. In October 1999 the
Company sold its home infusion therapy business, which involved the intraveneous
administration of anti-infective biotherapy, chemotherapy, pain management,
nutrition and other therapies.
Respiratory Therapy
Respiratory therapy, which is the largest segment of the Company's homecare
services, is provided primarily to older patients with chronic lung diseases
(such as chronic obstructive pulmonary disease, asthma and cystic fibrosis) or
reduced respiratory function. The Company's home respiratory care product line
includes oxygen concentrators, portable liquid oxygen systems, nebulizers and
ventilator care. Oxygen concentrators extract oxygen from room air and generally
provide the least expensive supply of oxygen for patients who require a
continuous supply of oxygen, are not ambulatory and who do not require excessive
flow rates. Liquid oxygen systems store oxygen under pressure in a liquid form.
The liquid oxygen is stored in a stationary unit that can be easily refilled at
the patient's home and can be used to fill a portable device that permits
greatly enhanced patient mobility. Nebulizers are devices which aerosolize
medications, allowing them to be inhaled directly into the patient's lungs.
Ventilator therapy is used for the individual that suffers from respiratory
failure by mechanically assisting the individual to breathe. The Company
provides technicians who deliver and/or install the respiratory care equipment,
instruct the patient in its use, refill the high pressure and liquid oxygen
systems as necessary and provide continuing maintenance of the equipment.
Respiratory therapy is monitored by licensed respiratory therapists and other
clinical staff under the direction of physicians.
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Home Medical Equipment
Home medical equipment consists of the sale or rental of medical equipment
such as specialized beds, wheelchairs, walkers, rehabilitation equipment and
other patient aids.
MOBILE DIAGNOSTIC SERVICES
The Company provides on-call mobile x-ray and electrocardiogram services,
both to its own facilities as well as to facilities operated by others. These
services are provided year round to over 6,700 third-party facilities. In
providing its services the Company utilizes sophisticated computer equipment to
transmit digitized x-ray images from the field directly to the radiologist. The
technology allows a facility requesting an x-ray to receive written results of
the diagnostic test within one hour of the patient test. The predominant market
of the Company's diagnostic services includes patients in long term care
facilities, including subacute and board and care type facilities. In addition,
services are provided in home health settings, correctional institutions and
agencies, psychiatric hospitals, industrial sites, dialysis centers and public
tuberculosis screening programs.
LITHOTRIPSY SERVICES
Lithotripsy is a non-invasive technique that uses shock waves to
disintegrate kidney stones. Depending on the particular lithotripter used, the
patient is sedated using either general anesthesia or a mild sedative while
seated in a bath or lying on a treatment table. The operator of the lithotripter
machine locates the stone using fluoroscopy and directs the shock waves toward
the stone. The shock waves then fragment the stone, thereby enabling the patient
to pass the fragments through the urinary tract. Because lithotripsy is
non-invasive and is provided on an outpatient basis, lithotripsy is an
attractive alternative to other more invasive techniques otherwise used in
treating urinary tract stones.
IHS currently owns a controlling interest in 12 lithotripsy partnerships as
well as three wholly-owned lithotripsy partnerships, a wholly-owned lithotripsy
management company and a wholly-owned lithotripter maintenance company. The
Company's lithotripsy businesses currently contain in the aggregate 48
lithotripsy machines that provide services in 157 locations in 17 states. The
other owners of the partnerships are primarily physicians, many of whom utilize
the partnership's equipment to treat their patients. Twenty of the 48
lithotripsy machines are stationary and located at hospitals or ambulatory
surgery centers, while the other 28 machines are mobile, allowing them to be
moved in order to meet patient needs and market demands. IHS' lithotripsy
businesses typically lease the machine on a per procedure basis to a hospital,
ambulatory surgery center or other facility providing care to the patient. In
some cases, the lithotripsy businesses bill the patient directly for the use of
the partnership's machine. The Company also provides maintenance services to its
own and third-party equipment.
The Company's agreements with its lithotripsy physician partners
contemplate that IHS will acquire the remaining interest in each partnership at
a defined price in the event that legislation is passed or regulations are
adopted that would prevent the physician from owning an interest in the
partnership and using the partnership's lithotripsy equipment for the treatment
of his or her patients. While current interpretations of existing law are
subject to considerable uncertainty, IHS believes that its partnership
arrangements with physicians in its lithotripsy business are in compliance with
current law. If, however, the Company were required to acquire the minority
interest of its physician partners in each of its lithotripsy partnerships, the
cost in aggregate would not be material to IHS. Physicians in one partnership
have commenced an action claiming that current legislation precludes them from
owning an interest in the partnership and using the partnership's lithotripsy
equipment to treat his or her patients. IHS is disputing the claim, which has
been stayed by the Bankruptcy Filings.
In 1993, the Health Care Financing Administration ("HCFA") released a
proposed rule defining the rate at which ambulatory surgery centers and certain
hospitals would be reimbursed for the technical component of a lithotripsy
procedure. Although, this proposed rule has not been finalized, HCFA recently
issued a range in which the rate will be established. The range of rates
proposed by HCFA is significantly lower than the rates received by IHS to date.
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QUALITY ASSURANCE
The Company has developed a comprehensive Quality Assurance Program to
verify that high standards of care are maintained at each facility operated or
managed by IHS. The Company requires that its facilities meet standards of care
more rigorous than those required by Federal and state law. Under the Company's
Quality Assurance Program, standards for delivery of care are set and the care
and services provided by each facility are evaluated to insure they meet IHS'
standards. A quality assurance team evaluates each facility bi-annually,
reporting directly to IHS' Chief Executive Officer, as well as to the
administrator of each facility. Facility administrator bonuses are dependent in
part upon their facility's evaluation. The Company also maintains an 800 number,
called the "In-Touch Line," which is prominently displayed above telephones in
each facility and placed in patients' bills. Patients and staff are encouraged
to call this number if they have any problem with nursing or administrative
personnel which cannot be resolved quickly at the facility level. This program
provides IHS with an early-warning of problems which may be developing at the
facility.
IHS has also developed a specialized Quality Assurance Program for its
subacute care programs. IHS has begun a program to obtain accreditation by the
Joint Commission on Accreditation of Healthcare Organizations ("JCAHO") for each
of its facilities. At March 31, 2000, 93 of the Company's facilities had been
fully accredited by the JCAHO.
OPERATIONS
The day-to-day operations of each facility are managed by an on-site state
licensed administrator and an on-site business office manager who monitors the
financial operations of each facility. The administrator of each facility is
supported by other professional personnel, including the facility's medical
director, social workers, dietician and recreation staff. Nursing departments in
each facility are under the supervision of a director of nursing who is
state-registered. The nursing staffs are composed of registered nurses and
licensed practical nurses as well as nursing assistants.
The Company's home respiratory and durable medical equipment businesses are
conducted through approximately 750 branches which are managed through two
geographic area offices. The area office provides each of its branches with key
management direction and support services. IHS' organizational structure is
designed to create operating efficiencies associated with certain centralized
services and purchasing while also promoting local decision making.
IHS' corporate staff provides services such as marketing assistance,
training, quality assurance oversight, human resource management, reimbursement
expertise, accounting, cash management and treasury functions, internal auditing
and management support. Financial control is maintained through fiscal and
accounting policies that are established at the corporate level for use at each
facility and branch location. The Company has standardized operating procedures
and monitors its facilities and branch locations to assure consistency of
operations. IHS emphasizes frequent communications, the setting of operational
goals and the monitoring of actual results. The Company uses a financial
reporting system which enables it to monitor, on a daily basis, certain key
financial data at each facility such as payor mix, admissions and discharges,
cash collections, net revenue and staffing.
Each facility and branch location has all necessary state and local
licenses. Most facilities are certified as providers under the Medicare and
Medicaid programs of the state in which they are located.
SOURCES OF REVENUE
IHS receives payments for services rendered to patients from private
insurers and patients themselves, from the Federal government under Medicare,
and from the states in which certain of its facilities are located under
Medicaid. The sources and amounts of the Company's patient revenues are
determined by a number of factors, including licensed bed capacity of its
facilities, occupancy rate, the mix of patients and the rates of reimbursement
among payor categories (private, Medicare and Medicaid). Changes in the mix of
IHS' patients among the private pay, Medicare and Medicaid categories can
significantly affect the profitability of the Company's operations.
Historically, the Company derived higher revenue from providing specialized
medical services than routine inpatient care. Generally, private pay patients
are the most profitable and
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Medicaid patients are the least profitable. IHS also contracts with private
payors, including health maintenance organizations and other managed care
organizations, to provide certain healthcare services to patients for a set per
diem payment for each patient. There can be no assurance that the rates paid to
IHS by these payors will be adequate to cover the cost of providing services to
covered beneficiaries. The Balanced Budget Act made numerous changes to the
Medicare and Medicaid programs which have had a negative impact on the Company.
During the years ended December 31, 1997, 1998 and 1999, IHS derived
approximately $708.0 million, $1.1 billion and $974.0 million, respectively, or
52%, 38% and 39%, respectively, of its patient revenues from private pay sources
and approximately $657.2 million, $1.8 billion and $1.5 billion, respectively,
or 48%, 62% and 61%, respectively, of its patient revenues from government
reimbursement programs, after giving effect to the discontinuance of its home
health nursing business, which was primarily covered by government reimbursement
programs. Patient revenues from government reimbursement programs during these
periods consisted of approximately $351.5 million, $880.0 million and $691.9
million, or 26%, 30% and 27% of total patient revenues, respectively, from
Medicare and approximately $305.7 million, $936.1 million and $845.8 million,
respectively, or 22%, 32% and 34% of total patient revenues, respectively, from
Medicaid, after giving effect to the discontinuance of its home health nursing
business in 1998. The increase in the percentage of revenue from government
reimbursement programs is due to the higher level of Medicare and Medicaid
patients in the 139 owned, leased or managed facilities (12 of which were
subsequently sold), acquired from HEALTHSOUTH Corporation in December 1997 (the
"Facility Acquisition") and the higher level of such patients serviced by the
respiratory therapy, rehabilitative therapy, and mobile diagnostic companies
acquired beginning in 1994.
Until the implementation of the prospective payment system ("PPS") for
Medicare skilled nursing facilities, which was completed for IHS' facilities on
June 1, 1999, Medicare reimbursed the skilled nursing facility based on a
reasonable cost standard. With certain exceptions, payment for skilled nursing
facility services was made prospectively, with each facility receiving an
interim payment during the year for its expected reimbursable costs. The interim
payment was later adjusted to reflect actual allowable direct and indirect costs
of services based on the submission of an annual cost report. Each facility was
also subject to limits on reimbursement for routine costs. Exceptions to these
limits were available for, among other things, the provision of atypical
services. The Company's cost of care for its subacute care patients generally
exceeded regional reimbursement limits established under Medicare, and IHS
submitted waiver requests to recover these excess costs. The Company's final
rates approved by HCFA represented approximately 90% of the requested rates as
submitted in the waiver requests. There can be no assurance, however, that IHS
will be able to recover its excess costs under any waiver requests which are
relating to periods prior to the implementation of PPS.
The Balanced Budget Act mandated the establishment of a prospective payment
system for Medicare skilled nursing facility services, under which facilities
are paid a fixed fee for virtually all covered services. PPS is being phased in
over a four-year period, effective January 1, 1999 for IHS' owned and leased
skilled nursing facilities other than the facilities acquired in the Facility
Acquisition, which facilities became subject to PPS on June 1, 1999. Prospective
payment for facilities managed by IHS became effective for each facility at the
beginning of its first cost reporting period on or after July 1, 1998. During
the first three years, payments will be based on a blend of the facility's
historical costs (based largely on the facility's costs for the services it
provided to Medicare beneficiaries in the 1994-1995 base year) and federal
costs. Facilities that did not receive any Medicare payments prior to October 1,
1995 are reimbursed 100% based on the federal per diem rates. Thereafter, the
per diem rates will be based 100% on federal costs. Under PPS, each patient's
clinical status is evaluated and placed into a payment category. The patient's
payment category dictates the amount that the provider will receive to care for
the patient on a daily basis. The per diem rate covers (i) all routine inpatient
costs currently paid under Medicare Part A, (ii) certain ancillary and other
items and services previously covered separately under Medicare Part B on a
"pass-through" basis, and (iii) certain capital costs. The Company's ability to
offer the ancillary services required by higher acuity patients, such as those
in its subacute care programs, in a cost-effective manner will be critical to
the Company's survival and will affect the profitability of the Company's
Medicare patients. To date the per diem reimbursement rates have generally been
less than the amount the Company received on a daily basis under cost-based
reimbursement, particularly in the
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case of higher acuity patients. As a result, PPS has to date had a material
adverse impact on IHS' results of operations and financial condition. In
November 1999, the acuity adjusted PPS rates for specified acuity categories
were temporarily increased in an attempt to mitigate some of the adverse effects
of the Balanced Budget Act pending refinement to PPS rates to better account for
medically complex patients.
Under the various Medicaid programs, the federal government supplements
funds provided by the participating states for medical assistance to qualifying
needy individuals. The programs are administered by the applicable state welfare
or social service agencies. Although Medicaid programs vary from state to state,
typically they provide for the payment of certain expenses, up to established
limits. The Balanced Budget Act also contains changes to the Medicaid program,
the most significant of which is the repeal of the Boren Amendment. The Boren
Amendment required state Medicaid programs to pay rates that are reasonable and
adequate to meet the costs that must be incurred by a nursing facility in order
to provide care and services in compliance with applicable standards. By
repealing the Boren Amendment, the Balanced Budget Act eases the impediments on
the states' ability to reduce their Medicaid reimbursement for such services
and, as a result, states now have considerable flexibility in establishing
payment rates. Texas has now adopted a case-mix prospective payment system
similar to the Medicare PPS, and the Company expects additional states will move
in this direction. IHS is unable to predict what effect such changes will have
on the Company. There can be no assurance that any changes to the Medicaid
program will not have a material adverse impact on the Company.
Under PPS, the reimbursement for rehabilitation therapy services provided
to nursing facility patients is a component of the total reimbursement to the
nursing facility allowed per patient. Medicare pays the skilled nursing facility
directly for all rehabilitation services and the outside suppliers of such
services to residents of the skilled nursing facility must collect payment from
the skilled nursing facility. Effective January 1, 1999 a per provider limit of
$1,500 was applied to all rehabilitation therapy services provided under
Medicare Part B ($1,500 for physical and speech-language pathology services, and
a separate $1,500 for occupational therapy services; this $1,500 cap was
temporarily suspended for the two year period beginning January 1, 2000).
Additionally, effective January 1, 1999, Medicare Part B therapy services are no
longer being reimbursed on a cost basis; rather, payment for each service
provided is based on fee screen schedules published in November 1998. As a
result of the implementation of PPS, the Company has to date experienced a
substantial reduction in demand for, and reduced operating margins from, therapy
services it provides to third parties, because such providers are admitting
fewer Medicare patients and are reducing utilization of rehabilitative services
and/or providing such services with their own personnel. To date these fee
schedules and caps have had a material adverse effect on the Company.
Prior to the implementation of PPS, Medicare covered and paid for
rehabilitation therapy services furnished in facilities in various ways. For
rehabilitation services provided directly, specific guidelines existed for
evaluating the reasonable cost of physical therapy, occupational therapy and
speech language pathology services. Medicare applied salary equivalency
guidelines in determining the reasonable cost of physical therapy and
respiratory services, which was the cost that would be incurred if the therapist
were employed by a nursing facility, plus an amount designed to compensate the
provider for certain general and administrative overhead costs. Until April 1,
1998, Medicare paid for occupational therapy and speech language pathology
services on a reasonable cost basis, subject to the so-called "prudent buyer"
rule for evaluating the reasonableness of the costs. In January 1998, HCFA
issued rules applying salary equivalency limits to certain speech and
occupational therapy services and revised existing physical and respiratory
therapy limits. The new limits were effective for services provided on or after
April 1, 1998 until nursing facilities transitioned to PPS. IHS' gross margins
for services reimbursed under the salary equivalency guidelines were
significantly less than services reimbursed under the "prudent buyer" rule.
The Medicare program reimburses IHS' home respiratory care and durable
medical equipment services, and reimbursed IHS home infusion services, under a
charge-based system, pursuant to which the Company receives either a fixed fee
for a specific service or product or a fixed per diem amount for providing
certain services. The Balanced Budget Act reduced Medicare payment amounts for
oxygen and oxygen equipment furnished after January 1, 1998 to 75% of the fee
schedule amounts in effect during 1997. Payment amounts for oxygen and oxygen
equipment furnished after January 1, 1999 and
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each subsequent year thereafter are reduced to 70% of the fee schedule amounts
in effect during 1997. The Balanced Budget Act freezes the Consumer Price Index
(U.S. urban average) update for covered items of durable medical equipment for
each of the years 1998 through 2002 while limiting fees for parenteral and
enteral nutrients, supplies and equipment to 1995 reasonable charge levels over
the same period. The Balanced Budget Act reduces payment amounts for covered
drugs and biologicals to 95% of the average wholesale price of such covered
items for each of the years 1998 through 2002. The Balanced Budget Act
authorizes the Department of Health and Human Services ("HHS") to conduct up to
five competitive bidding demonstration projects for the acquisition of durable
medical equipment and requires that one such project be established for oxygen
and oxygen equipment. Each demonstration project is to be operated over a
three-year period and is to be conducted in not more than three competitive
acquisition areas. The Balanced Budget Act also includes provisions designed to
reduce healthcare fraud and abuse, including a surety bond requirement for
durable medical equipment providers.
The Medicare program reimbursed the Company's home nursing services on a
cost-based system, under which IHS was reimbursed at the lowest of IHS'
reimbursable costs (based on Medicare regulations), cost limits established by
HCFA or IHS' charges.
The Company expects that both third party and governmental payors will
continue to undertake cost containment measures designed to limit payments made
to healthcare providers such as IHS. Furthermore, government programs are
subject to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings and government funding restrictions, all of which may
materially increase or decrease the rate of program payments to facilities
managed and operated by IHS. There can be no assurance that payments under
governmental and third-party private payor programs will remain at levels
comparable to present levels or will, in the future, be sufficient to cover the
operating and other costs allocable to patients participating in such programs.
In addition, there can be no assurance that facilities owned, leased or managed
by IHS now or in the future will initially meet or continue to meet the
requirements for participation in such programs. The Company has been, and may
continue to be, adversely affected by the continuing efforts of governmental and
private third party payors to contain the amount of reimbursement for healthcare
services. In an attempt to limit the Federal and state budget deficits, there
have been, and IHS expects that there will continue to be, a number of
additional proposals to limit Medicare and Medicaid reimbursement for healthcare
services. The Company cannot at this time predict whether this legislation or
any other legislation will be adopted or, if adopted and implemented, what
effect, if any, such legislation will have on IHS. See "-- Government
Regulation" and "-- Cautionary Statements -- Risk of Adverse Effect of
Healthcare Reform."
GOVERNMENT REGULATION
The healthcare industry is subject to extensive federal, state and local
statutes and regulations. The regulations include licensure requirements,
reimbursement rules and standards and levels of services and care. Changes in
applicable laws and regulations or new interpretations of existing laws and
regulations could have a material adverse effect on licensure of IHS'
facilities, eligibility for participation in Federal and state programs,
permissible activities, costs of doing business, or the levels of reimbursement
from governmental, private and other sources. Political, economic and regulatory
influences are subjecting the healthcare industry in the United States to
fundamental change. It is not possible to predict the content or impact of
future legislation and regulations affecting the healthcare industry.
Most states in which IHS operates have statutes which require that prior to
the addition or construction of new beds, the addition of new services or
certain capital expenditures in excess of defined levels, the Company must
obtain a certificate of need ("CON") which certifies that the state has made a
determination that a need exists for such new or additional beds, new services
or capital expenditures. The CON process is intended to promote quality
healthcare at the lowest possible cost and to avoid the unnecessary duplication
of services, equipment and facilities. These state determinations of need or CON
programs are designed to comply with certain minimum Federal standards and to
enable states to participate in certain Federal and state health-related
programs. Elimination or relaxation of CON requirements may result in increased
competition in such states and may also result in increased expansion
possibilities in such states. Of the states in
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which the Company operates, the following require CONs for the facilities that
are owned, operated or managed by IHS: Alabama, Connecticut, Delaware, Florida,
Georgia, Illinois, Iowa, Kentucky, Massachusetts, Michigan, Mississippi,
Missouri, Nebraska, Nevada, New Hampshire, New Jersey, North Carolina, Ohio,
Oklahoma, South Carolina, Tennessee, Virginia, Washington, West Virginia and
Wisconsin.
The Company's facilities are also subject to licensure regulations. Each of
IHS' geriatric care facilities is licensed as a skilled care facility and
substantially all are certified as a provider under the Medicare program and
most are also certified by the state in which they are located as a provider
under the Medicaid program of that state. IHS believes it is in substantial
compliance with all material statutes and regulations applicable to its
business. In addition, all healthcare facilities are subject to various local
building codes and other ordinances.
IHS' geriatric care facilities must comply with certain requirements to
participate either as a skilled nursing facility under Medicare or a nursing
facility under Medicaid. Regulations promulgated pursuant to the Omnibus Budget
Reconciliation Act of 1987 obligate facilities to demonstrate compliance with
requirements relating to resident rights, resident assessment, quality of care,
quality of life, physician services, nursing services, pharmacy services,
dietary services, rehabilitation services, infection control, physical
environment and administration. State and local agencies survey all geriatric
care centers on a regular basis to determine whether such centers are in
compliance with governmental operating and health standards and conditions for
participation in government medical assistance programs. Regulations adopted by
HCFA effective July 1, 1995 require that surveys focus on residents' outcomes of
care and state that all deviations from participation requirements will be
considered deficiencies, but a facility may have deficiencies and be in
substantial compliance with the regulations. The regulations identify
alternative remedies (meaning remedies other than termination of a facility from
the Medicare or Medicaid programs) against facilities and specify the categories
of deficiencies for which they will be applied. The alternative remedies
include, but are not limited to: civil money penalties of up to $10,000 per day;
facility closure and/or transfer of residents in emergencies; denial of payment
for new or all admissions; directed plans of correction; and directed in-service
training.
IHS endeavors to maintain and operate its facilities in compliance with all
such standards and conditions. However, in the ordinary course of its business
the Company's facilities receive notices of deficiencies for failure to comply
with various regulatory requirements. Generally, the facility and the reviewing
agency will agree upon the measures to be taken to bring the facility into
compliance with regulatory requirements. In some cases or upon repeat
violations, the reviewing agency may take adverse actions against a facility,
including the imposition of fines, temporary suspension of admission of new
patients to the facility, suspension or decertification from participation in
the Medicare or Medicaid programs, and, in extreme circumstances, revocation of
a facility's license. These adverse actions may adversely affect the ability of
the facility to operate or to provide certain services and its eligibility to
participate in the Medicare or Medicaid programs. In addition, such adverse
actions may adversely affect other facilities operated by IHS. There can be no
assurance that the Company will be able to maintain compliance with all
regulatory requirements or that it will not be required to expend significant
amounts to do so.
Various federal and state laws regulate the relationship between providers
of healthcare services and physicians or others able to refer medical services,
including employment or service contracts, leases and investment relationships.
These laws include the fraud and abuse provisions of Medicare and Medicaid and
similar state statutes (the "Fraud and Abuse Laws"), which prohibit the payment,
receipt, solicitation or offering of any direct or indirect remuneration
intended to induce the referral of Medicare or Medicaid patients or for the
ordering or providing of Medicare or Medicaid covered services, items or
equipment. Violations of these provisions may result in civil and criminal
penalties and/or exclusion from participation in the Medicare and Medicaid
programs and from state programs containing similar provisions relating to
referrals of privately insured patients. HHS and other federal agencies have
interpreted these provisions broadly to include the payment of anything of value
to influence the referral of Medicare or Medicaid business. HHS has issued
regulations which set forth certain "safe harbors," representing business
relationships and payments that can safely be undertaken without violation of
the Fraud and Abuse Laws. In addition, certain Federal and state requirements
generally prohibit certain
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providers from referring patients to certain types of entities in which such
provider has an ownership or investment interest or with which such provider has
a compensation arrangement, unless an exception is available. The Company
considers all applicable laws in planning marketing activities and exercises
care in an effort to structure its arrangements with healthcare providers to
comply with these laws. However, there can be no assurance that all of IHS'
existing or future arrangements will withstand scrutiny under the Fraud and
Abuse Laws, safe harbor regulations or other state or federal legislation or
regulations, nor can IHS predict the effect of such rules and regulations on
these arrangements in particular or on IHS' operations in general.
The Health Insurance Portability and Accountability Act of 1996 granted
expanded enforcement authority to HHS and the U.S. Department of Justice
("DOJ"), and provided enhanced resources to support the activities and
responsibilities of the Office of Inspector General ("OIG") and DOJ by
authorizing large increases in funding for investigating fraud and abuse
violations relating to healthcare delivery and payment. The Balanced Budget Act
also includes numerous health fraud provisions, including new civil money
penalties for contracting with an excluded provider, and new surety bond and
information disclosure requirements for certain providers and suppliers
including home health agencies.
In 1995, a major anti-fraud demonstration project, "Operation Restore
Trust," was announced by the OIG. A primary purpose for the project was to
scrutinize the activities of healthcare providers which are reimbursed under the
Medicare and Medicaid programs. Investigative efforts focused on skilled nursing
facilities, home health and hospice agencies and durable medical equipment
suppliers, as well as several other types of healthcare services. Operation
Restore Trust originally focused on California, Florida, Illinois, New York and
Texas, but has now been expanded to all states. This effort is focused on
problems with claims for services not rendered or not provided as claimed and
claims falsified to circumvent coverage limitations on medical supplies. IHS
expects these types of efforts to continue. The OIG has issued, and is expected
to continue to issue, special fraud alert bulletins identifying "suspect"
characteristics of potentially illegal practices by providers and illegal
arrangements between providers. The bulletins contain "hot-line" numbers and
encourage Medicare beneficiaries, healthcare employees, competitors and others
to report suspected violations. Enforcement actions could include criminal
prosecution, suit for civil penalties and/or exlcusion from the Medicare and
Medicaid programs.
False claims are prohibited pursuant to criminal and civil statutes.
Criminal provisions prohibit filing false claims or making false statements to
receive payment or certification under Medicare or Medicaid, or failing to
refund overpayments or improper payments; offenses for violation are felonies
punishable by up to five years imprisonment and/or $25,000 fines. Civil
provisions prohibit the knowing filing of a false claim or the knowing use of
false statements to obtain payment; penalties for violations are fines of not
less than $5,000 nor more than $10,000, plus treble damages, for each claim
filed. Suits alleging false claims can be brought by individuals, including
employees and competitors. In addition to qui tam actions brought by private
parties, the Company believes that governmental enforcement activities have
increased at both the federal and state levels. If it were found that any of the
Company's practices failed to comply with any of the anti-fraud provisions
discussed in the paragraphs above, the Company could be materially adversely
affected.
The Company is a defendant in certain actions or the subject of
investigations concerning alleged violations of the False Claims Act or of
Medicare regulations. As a result of the Company's financial position during the
fourth quarter of 1999, various agencies of the federal government accelerated
efforts to reach a resolution of all outstanding claims and issues related to
the Company's alleged violation of healthcare statutes and related causes of
action. These matters involve various government claims, many of which are of
unspecified amounts. Because the government's review of these matters has not
been completed, management is unable to assess fully the merits of the
government's monetary claims. Based on a preliminary evaluation of the
government's estimable claims for which an unfavorable outcome is probable, the
Company recorded a $39.5 million accrued liability for such claims as of
December 31, 1999. However, the ultimate amount of any future settlement could
differ significantly from such provision.
President Clinton has announced initiatives designed to improve the quality
of care in nursing homes and to reduce fraud in the Medicare program. On July
21, 1998, the President directed HCFA to ensure that states take tougher
enforcement measures in surveying skilled nursing facilities, including
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the onsite imposition of fines without grace periods, the imposition of fines
per violation rather than per day of noncompliance, and increased review of
facilities' systems to prevent resident neglect and abuse. On December 7, 1998,
the President announced that the Administration would continue its crackdown on
providers who commit Medicare program fraud by empowering specialized
contractors to track down Medicare scams and program waste, and by requiring
providers to report evidence of fraud so patterns of fraud can be identified
early and stopped.
The Company's healthcare operations generate medical waste that must be
disposed of in compliance with Federal, state and local environmental laws,
rules and regulations. IHS' operations are also subject to compliance with
various other environmental laws, rules and regulations. Such compliance has not
materially affected, and IHS anticipates that such compliance will not
materially affect, the Company's capital expenditures, earnings or competitive
position, although there can be no assurance to that effect.
As a result of the Bankruptcy Filings, IHS may experience an increase in
regulatory oversight from both federal and state regulatory bodies compared to
historical levels. The increased oversight may result from such regulatory
bodies' concerns that the Company's financial difficulties may result in a
decrease in the quality of care provided by the Company.
Management is unable to predict the effect of future administrative or
judicial interpretations of the laws discussed above, or whether other
legislation or regulations on the federal or state level in any of these areas
will be adopted, what form such legislation or regulations may take, or their
impact on the Company. There can be no assurances that such laws will ultimately
be interpreted in a manner consistent with the Company's practices.
In addition to extensive existing government healthcare regulation, there
are numerous initiatives on the Federal and state levels for comprehensive
reforms affecting the payment for and availability of healthcare services. It is
not clear at this time what proposals, if any, will be adopted or, if adopted,
what effect such proposals would have on IHS' business. Aspects of certain of
these healthcare proposals, such as cutbacks in the Medicare and Medicaid
programs, containment of healthcare costs on an interim basis by means that
could include a short-term freeze on prices charged by healthcare providers, and
permitting greater state flexibility in the administration of Medicaid, could
adversely affect IHS. See "-- Sources of Revenue" and "-- Cautionary Statements
- - -- Uncertainty of Government Regulation." There can be no assurance that
currently proposed or future healthcare legislation or other changes in the
administration or interpretation of governmental healthcare programs will not
have an adverse effect on the Company. Concern about the potential effects of
the proposed reform measures has contributed to the volatility of prices of
securities of companies in healthcare and related industries, including IHS, and
may similarly affect the price of the Company's securities in the future. IHS
cannot predict the ultimate timing or effect of such legislative efforts and no
assurance can be given that any such efforts will not have a material adverse
effect on the Company's business, results of operations and financial condition.
COMPETITION
The healthcare industry is highly competitive and is subject to continuing
changes in the provision of services and the selection and compensation of
providers. The Company's ability to compete may be adversely affected by its
Bankruptcy Filings. IHS competes on a local and regional basis with other
providers on the basis of the breadth and quality of its services, the quality
of its facilities and, to a limited extent, price. The Company also competes
with other providers in the acquisition and development of additional facilities
and service providers. IHS' current and potential competitors include national,
regional and local operators of geriatric care facilities, acute care hospitals
and rehabilitation hospitals, extended care centers, retirement centers and
similar institutions, many of which have significantly greater financial and
other resources than IHS. In addition, the Company competes with a number of
tax-exempt nonprofit organizations which can finance acquisitions and capital
expenditures on a tax-exempt basis or receive charitable contributions
unavailable to IHS. New service introductions and enhancements, acquisitions,
continued industry consolidation and the development of strategic relationships
by the Company's competitors could cause a significant decline in sales or loss
of market acceptance of the Company's services or intense price competition, or
make IHS' services noncompetitive.
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Further, technological advances in drug delivery systems and the development of
new medical treatments that cure certain complex diseases or reduce the need for
healthcare services could adversely impact the business of IHS. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors or that competitive pressures will not have a material
adverse effect on the Company's business, financial condition and results of
operations. IHS also competes with various healthcare providers with respect to
attracting and retaining qualified management and other personnel. Any
significant failure by IHS to attract and retain qualified employees could have
a material adverse effect on its business, results of operations and financial
condition.
The inpatient facilities operated and managed by IHS primarily compete on a
local and regional basis with other skilled care providers. The Company's
inpatient facilities primarily compete on a local basis with acute care and
long-term care hospitals. In addition, some skilled nursing facilities have
developed units which provide a greater level of care than the care
traditionally provided by nursing homes. The degree of success with which IHS'
facilities compete varies from location to location and depends on a number of
factors. The Company believes that the specialized services and care provided,
the quality of care provided, the reputation and physical appearance of
facilities and, in the case of private pay patients, charges for services, are
significant competitive factors. In light of these factors, IHS seeks to meet
competition in each locality by improving the appearances of, and the quality
and types of services provided at, its facilities, establishing a reputation
within the local medical communities for providing competent care services, and
by responding appropriately to regional variations in demographics and tastes.
There is limited, if any, competition in price with respect to Medicaid and
Medicare patients, since revenues for services to such patients are strictly
controlled and based on fixed rates and cost reimbursement principles. Because
IHS' facilities compete primarily on a local and regional basis rather than a
national basis, the competitive position of IHS varies from facility to facility
depending upon the types of services and quality of care provided by facilities
with which each of IHS' facilities compete, the reputation of the facilities
with which each of IHS' facilities compete, and, with respect to private pay
patients, the cost of care at facilities with which each of IHS' facilities
compete.
The home respiratory care and durable medical equipment market is highly
competitive and is divided among a large number of providers, some of which are
national providers but most of which are either regional or local providers. IHS
believes that the primary competitive factors are availability of personnel, the
price of the services and quality considerations such as responsiveness, the
technical ability of the professional staff and the ability to provide
comprehensive services.
EMPLOYEES
As of March 31, 2000, IHS had approximately 73,200 full-time and regular
part-time employees. Full-time and regular part-time service and maintenance
employees at 33 facilities, totaling approximately 4,600 employees, are covered
by collective bargaining agreements. IHS' corporate staff consisted of
approximately 1,200 people at such date. The Company believes its relations with
its employees are good.
IHS seeks the highest quality of professional staff within each market.
Competition in the recruitment of personnel in the healthcare industry is
intense, particularly with respect to nurses. Many areas are already facing
nursing shortages, and it is expected that the shortages will increase in the
future. Although the Company has, to date, been successful in hiring and
retaining nurses and rehabilitation professionals, IHS in the future may
experience difficulty in hiring and retaining nurses and rehabilitation
professionals. The Company believes that its future success will depend in large
part upon its continued ability to hire and retain qualified personnel. The
Company's Bankruptcy Filings could adversely affect its ability to attract,
retain and motivate qualified personnel.
INSURANCE
Healthcare companies are subject to medical malpractice, personal injury
and other liability claims which are generally covered by insurance. The Company
maintains liability insurance coverage in amounts deemed appropriate by
management based upon historical claims and the nature and risks of
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its business. There can be no assurance that a future claim will not exceed
insurance coverage or that such coverage will continue to be available. In
addition, any substantial increase in the cost of such insurance could have an
adverse effect on IHS' business, results of operations and financial condition.
CAUTIONARY STATEMENTS
This Annual Report on Form 10-K contains, and from time to time the Company
may disseminate materials and make statements which may contain, certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All
statements regarding the Company's expected future financial position, results
of operations, cash flows, financing plans, business strategy, competitive
position, plans and objectives and words such as "anticipate," "believe,"
"estimate," "expect," "intend," "plan" and other similar expressions are
forward-looking statements. Such forward-looking statements are inherently
uncertain, and stockholders must recognize that actual results could differ
materially from those projected or contemplated in the forward-looking
statements as a result of a variety of factors, including factors set forth
below. Securityholders should not place undue reliance on these forward-looking
statements.
The forward-looking statements speak only as of the date on which they are
made, and IHS undertakes no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which the statement is made
or to reflect the occurrence of unanticipated events. In addition, IHS cannot
assess the effect of each factor on the Company's business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from these contained in any forward-looking statements.
Risks Related to Operations in Bankruptcy. On February 2, 2000, the Company
and substantially all its subsidiaries filed voluntary petitions under Chapter
11 of the United States Bankruptcy Code. The Company is currently operating its
business as a debtor-in-possession subject to the jurisdiction of the Bankruptcy
Court. There can be no assurance that the amounts available to the Company under
its debtor-in-possession financing arrangements will be sufficient to fund the
operations of the Company until such time as the Company is able to propose a
plan of reorganization that will be acceptable to the creditors and confirmed by
the Bankruptcy Court. Under the Bankruptcy Code, actions to collect pre-petition
indebtedness are enjoined and other contractual obligations may not be enforced
against the Company. In addition, the Company may reject executory contracts and
lease obligations. There can be no assurance that any actions taken by these
creditors or landlords will not have the effect of preventing or unduly delaying
confirmation of a plan of reorganization in connection with the Bankruptcy
Filings.
As a result of the Bankruptcy Filings, the Company may have difficulty
attracting patients and attracting and retaining employees. The Company may also
be subject to increased regulatory oversight as a result of the Bankruptcy
Filings, resulting from concerns of regulatory bodies that the Company's current
financial difficulties may result in a decrease in the quality of care provided
by the Company.
As a result of the Bankruptcy Filings, the Company anticipates that its
currently outstanding Common Stock will have no value following the Company's
reorganization under the bankruptcy laws. Further, there can be no assurance
that the Company will be able to obtain adequate financing on reasonable terms,
or at all, in the future as a result of the Bankruptcy Filings.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. However, as a
result of the Bankruptcy Filings and circumstances relating to this event,
including the Company's leveraged financial structure and losses from
operations, such realization of assets and liquidation of liabilities is subject
to significant uncertainty. While under the protection of Chapter 11, the
Company may sell or otherwise dispose of assets, and liquidate or settle
liabilities, for amounts other than those reflected in the financial statements.
Further, a plan of reorganization could materially change the amounts reported
in the financial statements, which do not give effect to all adjustments of the
carrying value of assets or liabilities that might be necessary as a consequence
of a plan of reorganization. The Company's ability to continue as a going
concern is dependent upon, among
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other things, confirmation of a plan of reorganization, future profitable
operations, the ability to comply with the terms of the DIP Financing Agreement
and the ability to generate sufficient cash from operations and financing
arrangements to meet obligations.
Risks Related to Prospective Payment System. The Balanced Budget Act,
enacted in August 1997, made numerous changes to the Medicare and Medicaid
programs that are significantly affecting the Company's operations. The Balanced
Budget Act provides for the phase-in of a PPS for skilled nursing facilities
over a four year period effective January 1, 1999 for IHS owned and leased
facilities other than the facilities acquired in the Facility Acquisition, which
facilities became subject to PPS on June 1, 1999. Prospective payment for
skilled nursing facilities managed by IHS became effective for each facility at
the beginning of its first cost reporting period beginning on or after July 1,
1998. Under PPS, Medicare pays skilled nursing facilities a fixed fee per
patient day based on the acuity level of the patient to cover all post-hospital
extended care routine service costs, as well as substantially all items and
services, such as rehabilitation therapy, furnished during a covered stay (for
which reimbursement was formerly made separately under Medicare). During the
first three years of the phase-in, reimbursement will be based on a blend of the
facility's historical costs and federal costs. Thereafter, the per diem rates
will be based 100% on federal costs. The facility specific per diem rate is
based upon the facility's 1995 cost report for routine, ancillary and capital
services, updated using a skilled nursing market basket index. The federal per
diem is calculated by the weighted average of each facility's standardized
costs, based upon the historical national average per diem for freestanding
facilities. Facilities that did not receive any Medicare payments prior to
October 1, 1995 are reimbursed 100% based on the federal per diem rates.
Although temporary adjustments to the rate categories were made in the PPS rates
in November 1999, particularly for high acuity level patients, to date the per
diem reimbursement rate has generally been less than the amount the Company
received on a daily basis under cost-based reimbursement, particularly in the
case of higher acuity patients. As a result, the PPS has to date had a material
adverse impact on IHS' results of operations and financial condition. To date,
the implementation of PPS has resulted in reduced demand for, and reduced
operating margins from, the rehabilitation services it provides to third parties
because such providers are admitting fewer Medicare patients and are reducing
utilization of rehabilitative services and/or providing such services with their
own personnel.
The profitability of IHS' inpatient services segment will be significantly
affected by the federally established per diem rate and IHS' cost of providing
care. There can be no assurance that the per diem rate will cover IHS' cost of
providing care, particularly with respect to higher acuity patients. As a
result, there can be no assurance that IHS' financial condition and results of
operations will not continue to be materially and adversely affected.
The Balanced Budget Act also reduced significantly Medicare payment amounts
for oxygen and oxygen equipment, and froze fees for durable medical equipment
and certain infusion services. There can be no assurance that these fees will
cover IHS' cost of providing such services. As a result, there can be no
assurance that IHS' financial condition and results of operations will not
continue to be materially and adversely affected.
Reliance on Reimbursement by Third Party Payors. The Company receives
payment for services rendered to patients from private insurers and patients
themselves, from the Federal government under Medicare, and from the states in
which it operates under Medicaid. The healthcare industry is experiencing a
trend toward cost containment, as government and other third party payors seek
to impose lower reimbursement and utilization rates and negotiate reduced
payment schedules with service providers. These cost containment measures,
combined with the increasing influence of managed care payors and competition
for patients, has resulted in reduced rates of reimbursement for services
provided by IHS, which has adversely affected, and may continue to adversely
affect, IHS' margins, particularly in its inpatient facilities. Aspects of
certain healthcare reform proposals, such as cutbacks in the Medicare and
Medicaid programs, reductions in Medicare reimbursement rates and/or limitations
on reimbursement rate increases, containment of healthcare costs on an interim
basis by means that could include a short-term freeze on prices charged by
healthcare providers, and permitting greater state flexibility in the
administration of Medicaid, could adversely affect the Company. The Balanced
Budget Act made numerous changes to the Medicare and Medicaid programs which
significantly impacted the Company and were in large part the cause of the
Company's need to file
16
<PAGE>
under the bankruptcy laws. There can be no assurance that adequate reimbursement
levels will be available for services to be provided by IHS which are currently
being reimbursed by Medicare, Medicaid or private payors. Significant limits on
the scope of services reimbursed and on reimbursement rates and fees could have
a material adverse effect on the Company's results of operations and financial
condition. See "-- Risk of Adverse Effect of Healthcare Reform." During the
years ended December 31, 1997, 1998 and 1999, the Company derived approximately
48%, 62% and 61%, respectively, of its patient revenues from Medicare and
Medicaid.
The sources and amounts of the Company's patient revenues derived from the
operation of its geriatric care facilities are determined by a number of
factors, including licensed bed capacity of its facilities, occupancy rate, the
mix of patients and the rates of reimbursement among payor categories (private,
Medicare and Medicaid). Changes in the mix of the Company's patients among the
private pay, Medicare and Medicaid categories can significantly affect the
profitability of the Company's operations. IHS also contracts with private
payors, including health maintenance organizations and other managed care
organizations, to provide certain healthcare services to patient's for a set per
diem payment for each patient. There can be no assurance that the rates paid to
IHS by those payors will be adequate to cover the cost of providing services to
covered beneficiaries.
Managed care organizations and other third party payors have continued to
consolidate to enhance their ability to influence the delivery of healthcare
services. Consequently, the healthcare needs of a large percentage of the United
States population are provided by a small number of managed care organizations
and third party payors. These organizations generally enter into service
agreements with a limited number of providers for needed services. To the extent
such organizations terminate IHS as a preferred provider and/or engage IHS'
competitors as a preferred or exclusive provider, the business of IHS could be
materially adversely affected. In addition, private payors, including managed
care payors, increasingly are demanding discounted fee structures or the
assumption by healthcare providers of all or a portion of the financial costs
through prepaid capitation.
Risk of Adverse Effect of Healthcare Reform. In addition to extensive
existing government healthcare regulation, in recent years a number of laws have
been enacted which have effected major changes in the healthcare system, both
nationally and at the state level. The Balanced Budget Act made numerous changes
to the Medicare and Medicaid programs which have significantly impacted the
Company and were in large part the cause of the Company's need to file under the
bankruptcy laws. The Balanced Budget Act provides, among other things, for a
prospective payment system for skilled nursing facilities to be implemented for
cost reporting periods beginning on or after July 1, 1998, a prospective payment
system for home nursing to be implemented for cost reporting periods beginning
on or after October 1, 1999 (subsequently delayed to October 1, 2000), a
reduction in current cost reimbursement for home nursing care pending
implementation of a prospective payment system, reductions (effective January 1,
1998) in Medicare reimbursement for oxygen and oxygen equipment for home
respiratory therapy and a shift of the bulk of home health coverage from Part A
to Part B of Medicare. The Balanced Budget Act also instituted consolidated
billing for skilled nursing facility services, under which payments for
non-physician Part B services for beneficiaries no longer eligible for Part A
skilled nursing facility care will be made to the facility, regardless of
whether the item or service was furnished by the facility, by others under
arrangement or under any other contracting or consulting arrangement, effective
for items or services furnished on or after July 1, 1997. The inability of IHS
to provide inpatient services and/or home respiratory and durable medical
equipment services at a cost below the established Medicare fee schedule could
have a material adverse effect on IHS' home respiratory and durable medical
equipment operations, post-acute care network and business generally. IHS
expects that there will continue to be numerous initiatives on the federal and
state levels for comprehensive reforms affecting the payment for and
availability of healthcare services, including proposals that will further limit
reimbursement under Medicare and Medicaid. It is not clear at this time what
proposals, if any, will be adopted or, if adopted, what effect such proposals
will have on IHS' business. See "-- Reliance on Reimbursement by Third Party
Payors." There can be no assurance that currently proposed or future healthcare
legislation or other changes in the administration or interpretation of
governmental healthcare programs will not have an adverse effect on the Company
or that payments under governmental programs will remain at levels comparable to
present levels or will be sufficient to cover the costs allocable to patients
eligible for reimbursement pursuant to such programs. Concern about the
potential effects of the proposed reform
17
<PAGE>
measures has contributed to the volatility of prices of securities of companies
in healthcare and related industries, including the Company, and may similarly
affect the price of the Company's securities in the future. See "-- Uncertainty
of Government Regulation."
With respect to Medicaid, the Balanced Budget Act repeals the so-called
Boren Amendment, which required state Medicaid programs to reimburse nursing
facilities for the costs that are incurred by efficiently and economically
operated providers in order to meet quality and safety standards. As a result,
states now have considerable flexibility in establishing payment rates, and the
Company believes many states will move towards a prospective payment type system
similar to PPS.
The Company anticipates that federal and state governments will continue to
review and assess alternative healthcare delivery systems and payment
methodologies. There can be no assurance that future healthcare legislation or
other changes in the administration or interpretation of government healthcare
programs will not have an adverse effect on the operations of IHS.
Uncertainty of Government Regulation. The Company and the healthcare
industry generally are subject to extensive federal, state and local regulation
governing licensure and conduct of operations at existing facilities,
construction of new facilities, acquisition of existing facilities, additions of
new services, certain capital expenditures, the quality of services provided and
the manner in which such services are provided and reimbursement for services
rendered. Changes in applicable laws and regulations or new interpretations of
existing laws and regulations could have a material adverse effect on licensure,
eligibility for participation, permissible activities, operating costs and the
levels of reimbursement from governmental and other sources. There can be no
assurance that regulatory authorities will not adopt changes or new
interpretations of existing regulations that could adversely affect the Company.
The failure to maintain or renew any required regulatory approvals or licenses
could prevent the Company from offering existing services or from obtaining
reimbursement. In certain circumstances, failure to comply at one facility may
affect the ability of the Company to obtain or maintain licenses or approvals
under Medicare and Medicaid programs at other facilities. In addition, in the
conduct of its business the Company's operations are subject to review by
federal and state regulatory agencies to assure continued compliance with
various standards, their continued licensing under state law and their
certification under the Medicare and Medicaid programs.
In the ordinary course of its business the Company's facilities receive
notices of deficiencies for failure to comply with various regulatory
requirements. Generally, the facility and the reviewing agency will agree upon
the measures to be taken to bring the facility into compliance with regulatory
requirements. In some cases or upon repeat violations, the reviewing agency may
take adverse actions against a facility, including the imposition of fines,
temporary suspension of admission of new patients to the facility, suspension or
decertification from participation in the Medicare or Medicaid programs, and, in
extreme circumstances, revocation of a facility's license. These adverse actions
may adversely affect the ability of the facility to operate or to provide
certain services and its eligibility to participate in the Medicare or Medicaid
programs. In addition, such adverse actions may adversely affect other
facilities operated by IHS. There can be no assurance that the Company will be
able to maintain compliance with all regulatory requirements or that it will not
be required to expend significant amounts to do so.
The Company is also subject to federal and state laws which govern
financial and other arrangements between healthcare providers. These laws often
prohibit certain direct and indirect payments or fee-splitting arrangements
between healthcare providers that are designed to induce or encourage the
referral of patients to, or the recommendation of, a particular provider for
medical products and services. These laws include the federal "Stark Bills,"
which prohibit, with limited exceptions, financial relationships between
ancillary service providers and referring physicians, and the federal
"anti-kickback law," which prohibits, among other things, the offer, payment,
solicitation or receipt of any form of remuneration in return for the referral
of Medicare and Medicaid patients. The Office of Inspector General of the
Department of Health and Human Services, the Department of Justice and other
federal agencies interpret these fraud and abuse provisions liberally and
enforce them aggressively. The Balanced Budget Act contains new civil monetary
penalties for violations of these laws and imposes an affirmative duty on
providers to insure that they do not employ or contract with persons excluded
from the Medicare program. The Balanced Budget Act also provides a minimum 10
year period for exclusion from participation in Federal healthcare programs of
persons convicted of a prior
18
<PAGE>
healthcare violation. In addition, some states restrict certain business
relationships between physicians and other providers of healthcare services.
Many states prohibit business corporations from providing, or holding themselves
out as a provider of, medical care. Possible sanctions for violation of any of
these restrictions or prohibitions include loss of licensure or eligibility to
participate in reimbursement programs (including Medicare and Medicaid), asset
forfeitures and civil and criminal penalties. These laws vary from state to
state, are often vague and have seldom been interpreted by the courts or
regulatory agencies. The Company seeks to structure its business arrangements in
compliance with these laws and, from time to time, the Company has sought
guidance as to the interpretation of such laws; however, there can be no
assurance that such laws ultimately will be interpreted in a manner consistent
with the practices of the Company.
In 1995, a major anti-fraud demonstration project, "Operation Restore
Trust," was announced by the OIG. A primary purpose for the project was to
scrutinize the activities of healthcare providers which are reimbursed under the
Medicare and Medicaid programs. Investigative efforts focused on skilled nursing
facilities, home health and hospice agencies and durable medical equipment
suppliers, as well as several other types of healthcare services. Operation
Restore Trust originally focused on California, Florida, Illinois, New York and
Texas, but has now been expanded to all states. This effort is focused on
problems with claims for services not rendered or not provided as claimed and
claims falsified to circumvent coverage limitations on medical supplies. IHS
expects these types of efforts to continue. The OIG has issued, and is expected
to continue to issue, special fraud alert bulletins identifying "suspect"
characteristics of potentially illegal practices by and illegal arrangements
between providers. The bulletins contain "hot-line" numbers and encourage
Medicare beneficiaries, healthcare employees, competitors and others to report
suspected violations. Enforcement actions could include criminal prosections,
suit for civil penalties, and/or exclusion from the Medicare and Medicaid
programs.
False claims are prohibited pursuant to criminal and civil statutes.
Criminal provisions prohibit filing false claims or making false statements to
receive payment or certification under Medicare or Medicaid, or failing to
refund overpayments or improper payments; offenses for violation are felonies
punishable by up to five years imprisonment and/or $25,000 fines. Civil
provisions prohibit the knowing filing of a false claim or the knowing use of
false statements to obtain payment; penalties for violations are fines of not
less than $5,000 nor more than $10,000, plus treble damages, for each claim
filed. Suits alleging false claims can be brought by individuals, including
employees and competitors. In addition to qui tam actions brought by private
parties, the Company believes that governmental enforcement activities have
increased at both the federal and state levels. If it were found that any of the
Company's practices failed to comply with any of the anti-fraud provisions
discussed in the paragraphs above, the Company could be materially adversely
affected.
The Company is a defendant in certain actions or the subject of
investigations concerning alleged violations of the False Claims Act or of
Medicare regulations. As a result of the Company's financial position during the
fourth quarter of 1999, various agencies of the federal government accelerated
efforts to reach a resolution of all outstanding claims and issues related to
the Company's alleged violation of healthcare statutes and related causes of
action. These matters involve various government claims, many of which are of
unspecified amounts. Because the government's review of these matters has not
been completed, management is unable to assess fully the merits of the
government's monetary claims. Based on a preliminary evaluation of the
government's estimable claims for which an unfavorable outcome is probable, the
Company recorded a $39.5 million accrued liability for such claims as of
December 31, 1999. However, the ultimate amount of any future settlement could
differ significantly from such provision.
Many states have adopted certificate of need or similar laws which
generally require that the appropriate state agency approve certain acquisitions
or capital expenditures in excess of defined levels and determine that a need
exists for certain new bed additions, new services and the acquisition of such
medical equipment or capital expenditures or other changes prior to beds and/or
services being added. Many states have placed a moratorium on granting
additional certificates of need or otherwise stated their intent not to grant
approval for new beds. To the extent certificates of need or other similar
approvals are required for expansion of the Company's operations, either through
facility acquisitions or expansion or provision of new services or other
changes, such expansion could be adversely affected by
19
<PAGE>
the failure or inability to obtain the necessary approvals, changes in the
standards applicable to such approvals and possible delays in, and the expenses
associated with, obtaining such approvals.
The Company is unable to predict the future course of federal, state or
local regulation or legislation, including Medicare and Medicaid statutes and
regulations. Further changes in the regulatory framework could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "-- Risk of Adverse Effect of Healthcare Reform."
Competition. The healthcare industry is highly competitive and is subject
to continuing changes in the provision of services and the selection and
compensation of providers. The Company's ability to compete may be adversely
affected by its Bankruptcy Filings. The Company competes on a local and regional
basis with other providers on the basis of the breadth and quality of its
services, the quality of its facilities and, to a more limited extent, price.
The Company also competes with other providers in the acquisition and
development of additional facilities and service providers. The Company's
current and potential competitors include national, regional and local operators
of geriatric care facilities, acute care hospitals and rehabilitation hospitals,
extended care centers, retirement centers and other home respiratory care,
infusion and durable medical equipment companies and similar institutions, many
of which have significantly greater financial and other resources than the
Company. In addition, the Company competes with a number of tax-exempt nonprofit
organizations which can finance acquisitions and capital expenditures on a
tax-exempt basis or receive charitable contributions unavailable to the Company.
New service introductions and enhancements, acquisitions, continued industry
consolidation and the development of strategic relationships by IHS' competitors
could cause a significant decline in sales or loss of market acceptance of IHS'
services or intense price competition or make IHS' services noncompetitive.
Further, technological advances in drug delivery systems and the development of
new medical treatments that cure certain complex diseases or reduce the need for
healthcare services could adversely impact the business of IHS. There can be no
assurance that IHS will be able to compete successfully against current or
future competitors or that competitive pressures will not have a material
adverse effect on IHS' business, financial condition and results of operations.
IHS also competes with various healthcare providers with respect to attracting
and retaining qualified management and other personnel. Any significant failure
by IHS to attract and retain qualified employees could have a material adverse
effect on its business, results of operations and financial condition.
Effect of Certain Anti-Takeover Provisions. IHS' Third Restated Certificate
of Incorporation and By-laws, as well as the Delaware General Corporation Law
(the "DGCL"), contain certain provisions that could have the effect of making it
more difficult for a third party to acquire, or discouraging a third party from
attempting to acquire, control of IHS. These provisions could limit the price
that certain investors might be willing to pay in the future for shares of
Common Stock. Certain of these provisions allow IHS to issue, without
stockholder approval, preferred stock having voting rights senior to those of
the Common Stock. Other provisions impose various procedural and other
requirements that could make it more difficult for stockholders to effect
certain corporate actions. In addition, the IHS Stockholders' Rights Plan, which
provides for discount purchase rights to certain stockholders of IHS upon
certain acquisitions of 20% or more of the outstanding shares of Common Stock,
may also inhibit a change in control of IHS. As a Delaware corporation, IHS is
subject to Section 203 of the DGCL, which, in general, prevents an "interested
stockholder" (defined generally as a person owning 15% or more of the
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) for three years following the date such person became
an interested stockholder unless certain conditions are satisfied.
Possible Volatility of Securities' Prices. There has been significant
volatility in the market price of the Common Stock and the Company's debt
securities, and it is likely that the price of these securities will fluctuate
in the future. The potential value, if any, of the Common Stock following the
Company's reorganization under the bankruptcy laws, quarterly operating results
of IHS, changes in general conditions in the economy, the financial markets or
the healthcare industry, or other developments affecting IHS or its competitors,
could cause the market price of the Common Stock and the Company's debt
securities to fluctuate substantially. In addition, in recent years the stock
market and, in particular, the healthcare industry segment, has experienced
significant price and volume fluctuations. This volatility has affected the
market price of securities issued by many companies for reasons unrelated to
their operating performance. In the past,
20
<PAGE>
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been initiated against such
company. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
upon IHS' business, operating results and financial condition.
21
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- - --------------------------------- ----- ----------------------------------------------------------
<S> <C> <C>
Robert N. Elkins, M.D. .......... 56 Chairman of the Board,
Chief Executive Officer and President
Stephen P. Griggs ............... 42 President of RoTech Medical Corporation
John F. Heller .................. 41 Executive Vice President and President of Long-Term Care
Division
C. Taylor Pickett ............... 38 Executive Vice President -- Chief Financial Officer
Sally Weisberg .................. 52 Executive Vice President and President of Symphony Health
Services Division
</TABLE>
- - ----------
The officers of the Company are elected annually and serve at the pleasure of
the Board of Directors.
Robert N. Elkins, M.D. has been Chairman of the Board and Chief Executive
Officer of the Company since March 1986 and President since March 1998 and also
served as President from March 1986 to July 1994. From 1980 until co-founding
IHS with Timothy F. Nicholson, a director of the Company, in 1986, Dr. Elkins
was a co-founder and Vice President of Continental Care Centers, Inc., an owner
and operator of long-term healthcare facilities. From 1976 through 1980, Dr.
Elkins was a practicing physician. Dr. Elkins is a graduate of the University
of Pennsylvania, received his M.D. degree from the Upstate Medical Center,
State University of New York, and completed his residency at Harvard University
Medical Center. Dr. Elkins is the brother of Marshall Elkins, Executive Vice
President and General Counsel of the Company.
Stephen P. Griggs has served as President of RoTech Medical Corporation,
which was acquired by IHS in October 1997, since 1992. Prior to joining RoTech
in 1988, where he also was a director and Chief Operating Officer, Mr. Griggs
was controller for Church Street Station. Mr. Griggs received a B.A. in
Business Administration from East Tennessee State University and a degree in
Accounting from the University of Central Florida.
John F. Heller has been Executive Vice President and President of the
Long-Term Care Division of the Company since September 1998. From May 1997 to
September 1998, he served as Executive Vice President of Facility Operations, as
Senior Vice President -- Facility Operations from November 1996 to May 1997 and
as Senior Vice President -- Medical Specialty Operations from May 1994 to May
1997. From February 1991, when he joined IHS, to May 1994 he served as Vice
President of Medical Specialty Finance. For seven years prior to joining IHS,
Mr. Heller was with the Management Consulting Services group of Ernst & Young,
in Columbus, Ohio. Mr. Heller has a Masters in Healthcare Administration and a
Masters in Public Policy, both from the Ohio State University. Mr. Heller
received a BA in Economics from Denison University.
C. Taylor Pickett has been Executive Vice President -- Chief Financial
Officer since January 1998. From November 1996 to January 1998 he served as
Executive Vice President -- Symphony Health Services, and from February 1995 to
November 1996 he served as Senior Vice President -- Symphony Health Services.
Mr. Pickett joined IHS in September 1993 as Vice President of Acquisitions and
Taxes. Prior to joining IHS, Mr. Pickett was Director of Taxes for PHH
Corporation. Mr. Pickett is a Certified Public Accountant and received a B.S.
degree in Accounting from the University of Delaware and a J.D. from the
University of Maryland School of Law.
Sally Weisberg has been Executive Vice President and President of Symphony
Health Services Division since August 1997. From November 1994, when Ms.
Weisberg's rehabilitation company, the Rehab People, Inc., was purchased by
IHS, to August 1997, Ms. Weisberg served as President of IHS' Rehabilitation
Division. Ms. Weisberg served as President of The Rehab People, Inc. from 1989
to November 1994. Prior to founding The Rehab People, Inc., Ms. Weisberg
founded Occupational Therapy Associates, a rehabilitation contracting
organization. Ms. Weisberg is a magna cum laude occupational therapy graduate
of Temple University.
22
<PAGE>
ITEM 2. PROPERTIES
The Company owns 71 geriatric care facilities with 8,565 licensed beds,
leases 219 geriatric care facilities with 25,449 licensed beds and manages 76
geriatric care facilities with 9,878 licensed beds. The leases for the leased
facilities have terms of 4 to 25 years, expiring on various dates between 2000
and 2023. The leases generally can be renewed and the Company generally has a
right of first refusal to purchase the leased facility. The Company is obligated
with respect to many of the leased facilities to pay additional rent in an
amount equal to a specified percentage of the amount by which the facility's
gross revenues exceed a specified amount (generally based on the facility's
gross revenues during its first year of operation). The Company leases its
headquarters in Sparks, Maryland under a four year synthetic lease, expiring in
July 2003.
23
<PAGE>
The following table presents certain information regarding the Company's
owned, leased and managed service locations as of March 31, 2000.
<TABLE>
<CAPTION>
OWNED LEASED MANAGED
---------------------- ----------------------- ----------------------- OTHER
LICENSED LICENSED LICENSED SERVICE
STATE FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS LOCATIONS(1)
- - ------------------------------ ------------ --------- ------------ ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Alabama ...................... 5 550 32
Arizona ...................... 18
Arkansas ..................... 24
California ................... 2 244 2 199 20
Colorado ..................... 1 49 10 1,308 1 155 34
Connecticut .................. 3 585 1
Delaware ..................... 1 153
District of Columbia ......... 3
Florida ...................... 13 1,977 25 3,080 16 1,868 82
Georgia ...................... 2 304 24 3,015 2 190 51
Idaho ........................ 7
Illinois ..................... 1 165 1 55 1 150 28
Indiana ...................... 1 147 22
Iowa ......................... 2 221 5 352 24
Kansas ....................... 4 314 5 621 18
Kentucky ..................... 1 98 30
Louisiana .................... 2 235 15 1,694 2 240 22
Maine ........................ 5
Maryland ..................... 3
Massachusetts ................ 1 122 6 883 2
Michigan ..................... 3 449 4 597 1 99 30
Minnesota .................... 21
Mississippi .................. 4 536 28
Missouri ..................... 1 114 4 548 1 176 25
Montana ...................... 16
Nebraska ..................... 14 841 2 119 4
Nevada ....................... 2 369 11 1,488 17
New Hampshire ................ 1 112 2 88 3
New Jersey ................... 1 64 14
New Mexico ................... 1 113 24 2,357 1 85 21
New York ..................... 11
North Carolina ............... 2 275 9 1,083 46
North Dakota ................. 2
Ohio ......................... 1 100 17 1,655 17 1,846 42
Oklahoma ..................... 2 161 1 106 22
Oregon ....................... 3
Pennsylvania ................. 2 379 8 1,094 5 897 57
South Carolina ............... 2 164 12 1,324 23
South Dakota ................. 7
Tennessee .................... 1 124 23
Texas ........................ 16 2,262 17 1,903 17 2,658 82
Utah ......................... 7
Virginia ..................... 1 111 12
Washington ................... 1 150 11
West Virginia ................ 1 125 11
Wisconsin .................... 1 115 12
Wyoming ...................... 2 231 21
-- ----- -- ----- -- ----- --
Total ........................ 71 8,565 219 25,449 76 9,878 997
== ===== === ====== == ===== ===
</TABLE>
- - ----------
(1) Represents locations within the state from which the Company offers home
respiratory services (774 service locations), hospice services (9 service
locations), contract rehabilitation and respiratory services (159 service
locations), mobile diagnostic services (23 service locations, including 15
fixed lithotripsy service locations) and medical products services (2
service locations). In addition, other service locations includes 17
specialty hospitals, 5 assisted living facilities and 8 specialty clinics.
The majority of these facilities are leased. Substantially all of these
service locations are small agencies which are administrative in function,
with substantially all healthcare services being provided at the patient's
home or in a geriatric care facility, rather than the service location. The
only exceptions are the 15 fixed lithotripsy centers, 5 assisted living
facilities, 8 specialty clinics, 17 specialty hospitals and 9 hospice
facilities, where services are provided at the locations.
Under the Bankruptcy Code, the Company may elect to assume or reject real estate
leases. The Company is in the process of analyzing and reviewing its lease
portfolio. The Company expects to terminate certain leases and/or seek rent
relief for certain facilities.
24
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings that are incidental to
the conduct of its business. Other than the Bankruptcy Filings, the Company is
not involved in any pending or threatened legal proceedings which the Company
believes could reasonably be expected to have a material adverse effect on the
Company's financial condition, liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
25
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Common Stock was traded on the New York Stock Exchange under the symbol
"IHS" through December 22, 1999, when trading in the Company's Common stock was
suspended on the NYSE. On January 5, 2000, the Common Stock commenced trading on
the over-the-counter bulletin board ("OTCBB") under the symbol "IHSV". The
following table sets forth for the periods indicated the high and low last
reported sale prices for the Common Stock as reported by the New York Stock
Exchange.
HIGH LOW
----------- -----------
CALENDAR YEAR 1998
First Quarter ............... $39 5/16 $ 28 1/4
Second Quarter .............. 39 3/8 35
Third Quarter ............... 37 3/8 16 13/16
Fourth Quarter .............. 17 9 1/2
HIGH LOW
---------- ---------
CALENDAR YEAR 1999
First Quarter ............... $14 5/8 $5 1/2
Second Quarter .............. 8 5/16 3 5/8
Third Quarter ............... 7 3/4 1 1/2
Fourth Quarter .............. 1 5/8 1/64
As of March 15, 2000, there were approximately 1,600 record holders of the
Common Stock.
As a result of the Bankruptcy Filings, the Company anticipates that its
currently outstanding Common Stock will have no value following the Company's
reorganization under the bankruptcy Laws.
In 1997 the Company declared a cash dividend of $0.02 per share. IHS does
not expect to pay cash dividends on its Common Stock in the foreseeable future.
The Company's secured super priority debtor in possession credit agreement
prohibits the payment of dividends. The Company's term loan and revolving credit
facility prohibits the payment of dividends without the consent of the lenders,
and the indentures under which the Company's 10 1/4% Senior Subordinated Notes
due 2006, 9 1/2% Senior Subordinated Notes due 2007 and 9 1/4% Senior
Subordinated Notes due 2008 limit the payment of dividends unless certain
financial tests are met.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following tables summarize certain selected consolidated financial
data, which should be read in conjunction with the Company's Consolidated
Financial Statements and related Notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere herein. The
selected consolidated financial data set forth below for each of the years in
the five-year period ended December 31, 1999 and as of the end of each of such
periods have been derived from the Consolidated Financial Statements of the
Company which have been audited by KPMG LLP, independent certified public
accountants. The consolidated financial statements as of December 31, 1998 and
1999 and for each of the years in the three year period ended December 31, 1999,
and the independent auditors' report thereon, are included elsewhere herein.
26
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1995 1996
------------- -------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Total revenues .................................................. $1,099,203 $1,203,626
---------- ----------
Cost and expenses:
Operating, general and administrative expenses (including rent) 933,203 1,013,141
Depreciation and amortization .................................. 38,963 37,223
Interest, net .................................................. 38,942 59,826
Provision for settlement of government claims(2) ............... -- --
Reorganization costs ........................................... -- --
Loss from impairment of long-lived assets and other non-
recurring charges (income)(3) ................................. 132,960 (17,976)
---------- ----------
Earnings (loss) from continuing operations before equity in earnings of
affiliates, income taxes, extraordinary items
and cumulative effect of accounting change ................... (44,865) 111,412
Equity in earnings of affiliates ................................ 1,443 828
---------- ----------
Earnings (loss) from continuing operations before income taxes, extraordinary
items and cumulative effect of ac-
counting change .............................................. (43,422) 112,240
Income tax provision (benefit) .................................. (16,717) 64,008
---------- ----------
Earnings (loss) from continuing operations before extraordi-
nary items and cumulative effect of accounting change ........ (26,705) 48,232
Earnings (loss) from discontinued operations (net of tax)(4) .... 716 (467)
---------- ----------
Earnings (loss) before extraordinary items and cumulative
effect of accounting change .................................. (25,989) 47,765
Extraordinary items(5) .......................................... (1,013) (1,431)
---------- ----------
Earnings (loss) before cumulative effect of accounting change (27,002) 46,334
Cumulative effect of accounting change(6) ....................... -- --
---------- ----------
Net earnings (loss) ........................................... $ (27,002) $ 46,334
========== ==========
Per Common Share(7):
Basic:
Earnings (loss) from continuing operations before extraordi-
nary items and cumulative effect of accounting change ........ $ (1.24) $ 2.14
Earnings (loss) before extraordinary items and cumulative
effect of accounting change .................................. (1.21) 2.12
Earnings (loss) before cumulative effect of accounting change (1.26) 2.06
Net earnings(loss) ............................................ $ (1.26) $ 2.06
Diluted:
Earnings (loss) from continuing operations before extraordi-
nary items and cumulative effect of accounting change ........ $ (1.24) $ 1.84
Earnings (loss) before extraordinary items and cumulative
effect of accounting change .................................. (1.21) 1.83
Earnings (loss) before cumulative effect of accounting change (1.26) 1.78
Net Earnings (loss) ........................................... $ (1.26) $ 1.78
Weighted average number of common shares outstanding(7)(8).......
Basic ......................................................... 21,463 22,529
Diluted ....................................................... 21,463 31,564
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1998 1999
------------- ------------- ---------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
AMOUNTS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Total revenues .................................................. $1,402,628 $2,972,186 $ 2,559,299
---------- ---------- ------------
Cost and expenses:
Operating, general and administrative expenses (including rent) 1,092,472 2,345,184 2,162,612
Depreciation and amortization .................................. 56,162 156,719 193,202
Interest, net .................................................. 94,880 238,647 320,923
Provision for settlement of government claims(2) ............... -- -- 39,500
Reorganization costs ........................................... -- -- 8,296
Loss from impairment of long-lived assets and other non-
recurring charges (income)(3) ................................. 123,456 -- 2,076,332
---------- ---------- ------------
Earnings (loss) from continuing operations before equity in earnings of
affiliates, income taxes, extraordinary items
and cumulative effect of accounting change ................... 35,658 231,636 (2,241,566)
Equity in earnings of affiliates ................................ 88 384 2,208
---------- ---------- ------------
Earnings (loss) from continuing operations before income taxes, extraordinary
items and cumulative effect of ac-
counting change .............................................. 35,746 232,020 (2,239,358)
Income tax provision (benefit) .................................. 33,238 95,128 9,764
---------- ---------- ------------
Earnings (loss) from continuing operations before extraordi-
nary items and cumulative effect of accounting change ........ 2,508 136,892 (2,249,122)
Earnings (loss) from discontinued operations (net of tax)(4) .... (13,631) (204,870) --
---------- ---------- ------------
Earnings (loss) before extraordinary items and cumulative
effect of accounting change .................................. (11,123) (67,978) (2,249,122)
Extraordinary items(5) .......................................... (20,552) -- 9,195
---------- ---------- ------------
Earnings (loss) before cumulative effect of accounting change (31,675) (67,978) (2,239,927)
Cumulative effect of accounting change(6) ....................... (1,830) -- --
---------- ---------- ------------
Net earnings (loss) ........................................... $ (33,505) $ (67,978) $ (2,239,927)
========== ========== ============
Per Common Share(7):
Basic:
Earnings (loss) from continuing operations before extraordi-
nary items and cumulative effect of accounting change ........ $ 0.09 $ 2.83 $ (45.05)
Earnings (loss) before extraordinary items and cumulative
effect of accounting change .................................. (0.39) (1.40) (45.05)
Earnings (loss) before cumulative effect of accounting change (1.12) (1.40) (44.87)
Net earnings(loss) ............................................ $ (1.19) $ (1.40) $ (44.87)
Diluted:
Earnings (loss) from continuing operations before extraordi-
nary items and cumulative effect of accounting change ........ $ 0.33 $ 2.56 $ (45.05)
Earnings (loss) before extraordinary items and cumulative
effect of accounting change .................................. (0.02) (1.08) (45.05)
Earnings (loss) before cumulative effect of accounting change (0.55) (1.08) (44.87)
Net Earnings (loss) ........................................... $ (0.60) $ (1.08) $ (44.87)
Weighted average number of common shares outstanding(7)(8).......
Basic ......................................................... 28,253 48,446 49,924
Diluted ....................................................... 38,899 56,257 49,924
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and temporary investments ................... $ 38,499 $ 37,530 $ 68,375 $ 44,219 $ 60,948
Working capital (deficit)(9) ..................... 127,214 97,129 43,357 341,200 (3,055,429)
Total assets ..................................... 1,423,749 1,792,677 5,002,152 5,393,128 3,379,080
Long-term debt, including current portion (9)..... 769,948 1,032,529 3,219,481 3,382,937 3,687,515
Stockholders' equity (deficit) ................... 431,528 534,865 1,088,161 1,331,965 (937,075)
</TABLE>
- - ----------------
(1) The Company has grown substantially through acquisitions and the opening of
MSUs, which acquisitions and MSU openings materially affect the
comparability of the financial data reflected herein. In addition, IHS sold
its pharmacy division in 1996; a majority interest in its assisted living
services subsidiary ("LLC") in October 1996 (the "ILC Offering") and the
remaining interest in ILC in July 1997 (the "ILC Sale"); its physician
practice and outpatient clinic operations in 1998 and its infusion business
in 1999. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Acquisition and Divestiture History."
27
<PAGE>
(2) As a result of the Company's financial position during the fourth quarter of
1999, various agencies of the federal government accelerated efforts to
reach a resolution of all outstanding claims and issues related to the
Company's alleged violation of healthcare statutes and related causes of
action. These matters involve various government claims, many of which are
of unspecified amounts. Because the government's review of these matters has
not been completed, management is unable to assess fully the merits of the
government's monetary claims. Based on a preliminary evaluation of the
government's estimable claims, for which an unfavorable outcome is probable
the Company recorded a $39.5 million accrued liability for such claims as of
December 31, 1999. However, the ultimate amount of any future settlement
could differ significantly from such provision.
(3) In 1995, consists of (i) expenses of $1,939,000 related to the merger with
IntegraCare, (ii) a $21,915,000 loss on the write-off of accrued management
fees ($8,496,000), loans ($11,097,000) and contract acquisition costs
($2,322,000) related to the Company's termination of its agreement, entered
into in January 1994, to manage 23 long-term care and psychiatric facilities
owned by Crestwood Hospital, (iii) the write-off of $25,785,000 of deferred
pre-opening costs resulting from a change in accounting estimate regarding
the future benefit of deferred pre-opening costs and (iv) a loss of
$83,321,000 resulting from the Company's election in December 1995 of early
implementation of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." In 1996, consists
primarily of (i) a gain of $34,298,000 from the sale of its pharmacy
division, (ii) a loss of $8,497,000 from the sale of shares in its assisted
living services subsidiary, and (iii) a $7,825,000 loss on write-off of
accrued management fees and loans resulting from the Company's termination
of its ten year management contract with All Seasons, originally entered
into during September 1994. Because IHS' investment in the Capstone common
stock received in the sale of its pharmacy division had a very small tax
basis, the taxable gain on the sale significantly exceeded the gain for
financial reporting purposes, thereby resulting in a disproportionately
higher income tax provision related to the sale. In 1997, consists primarily
of (i) a gain of $7,580,000 realized on the shares of Capstone common stock
received in the sale of its pharmacy division, (ii) the write-off of
$6,555,000 of accounting, legal and other costs resulting from the proposed
merger transaction with Coram Healthcare Corporation, (iii) the payment to
Coram of $21,000,000 in connection with the termination of the proposed
merger transaction with Coram, (iv) a gain of $3,914,000 from the ILC Sale,
(v) a loss of $4,750,000 resulting from termination payments in connection
with the RoTech Acquisition and (vi) loss of $102,645,000 resulting from its
plan to dispose of certain non-strategic assets to allow the Company to
focus on its core operations. In 1999, consists primarily of (i) a loss on
impairment of long-lived assets of $1,641,487,000, (ii) a loss of
$383,846,000 from the sale of the Company's infusion business, (iii) a loss
of $21,754,000 in connection with the closure of certain diagnostic
operations, (iv) a loss of $10,865,000 from abandoned and terminated
computer systems, (v) a loss of $7,020,000 on the termination of its
proposed sale of RoTech, (vi) a loss of $9,195,000 from the settlement of
notes receivable, and (vii) $2,165,000 of other charges. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Acquisition and Divestiture History" and "-- Results of
Operations" and Notes 1(g), 1(k) and 20 of Notes to Consolidated Financial
Statements.
(4) In October 1998, the Company's Board of Directors adopted a plan to
discontinue its home health nursing business segment. Accordingly, the
operating results of the home health nursing business of approximately
$35,903,000 (net of tax), as well as the loss on disposal of $168,967,000
including provisions for estimated lease termination costs, employee
benefits and losses during the phase-out period (net of tax) have been
segregated from continuing operations and reported as a separate line item
on the statement of operations. The Company has reclassified its prior
financial statements to present the operating results of the home health
nursing business as a discontinued operation. The assets and liabilities of
such operations at December 31, 1997 have been reflected as a net
non-current asset based substantially on the original classification of such
assets and liabilities. See Note 8 of Notes to Consolidated Financial
Statements.
(5) In 1995, the Company recorded a loss on extinguishment of debt of $1,647,000
relating primarily to prepayment charges and the write-off of deferred
financing costs. Such loss, reduced by the related income tax effect of
$634,000, is presented for the year ended December 31, 1995 as an
extraordinary loss of $1,013,000. In 1996, the Company recorded a loss on
extinguishment of debt of $2,327,000, relating primarily to the write-off of
deferred financing costs. Such loss, reduced by the related income tax
effect of $896,000, is presented in the statement of operations for the year
ended December 31, 1996 as an extraordinary loss of $1,431,000. In 1997, IHS
recorded a loss on extinguishment of debt of $33,692,000, representing
approximately (i) $23,554,000 of cash payments for premium and consent fees
relating to the early extinguishment of $214,868,000 aggregate principal
amount of IHS' senior subordinated notes and (ii) $10,138,000 of deferred
financing costs written off in connection with the early extinguishment of
such debt and the Company's revolving credit facility. Such loss, reduced by
the related income tax effect of $13,140,000, is presented in the statement
of operations for the year ended December 31, 1997 as an extraordinary loss
of $20,552,000. In October 1999, B&G Partners Limited Partnership
transferred 9 1/4% Senior Notes, 10 1/4% Senior Notes and 5 3/4% Senior
Debentures (collectviely referred to as "Senior Notes") with a face value of
approximately $3,345,000, $6,050,000 and $1,091,000, respectively, to IHS in
satisfaction of its obligation to the Company pursuant to a promissory note
dated December 10, 1993 in the amount of $10,486,000. On the date of
transfer to IHS, the Senior Notes had a fair market value of approximately
$1,291,000. As a result, the Company recorded a loss on settlement of notes
receivable, (which has been reflected as a non-recurring charge), and a gain
on extinguishment of debt, (which has been reflected as an extraordinary
item), of approximately $9,195,000 in 1999.
(6) Represents the write-off, net of income tax benefit, of the unamortized
balance of costs of business process reengineering and information
technology projects. See Note 21 of Notes to Consolidated Financial
Statements.
(7) The share and per share information for the years ended December 31, 1995
and 1996 have been restated to reflect share and per share information in
accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share," which was adopted by the Company effective with its
financial statements for the year ended December 31, 1997. See Notes 1(m)
and 13 of Notes to Consolidated Financial Statements. The diluted weighted
average number of common shares outstanding for the years ended December 31,
1996, 1997 and 1998 includes the assumed conversion of the convertible
subordinated debentures into IHS Common Stock. Additionally, interest
expense and amortization of underwriting costs related to such debentures
are added, net of tax, to income for the purpose of calculating diluted
earnings per share. Such amounts aggregated $9,888,000, $10,216,000 and
$7,396,000 for the years ended December 31, 1996, 1997 and 1998,
respectively. The diluted weighted average number of common shares
outstanding for the years ended December 31, 1995 and 1999 does not include
the assumed conversion of the convertible subordinated debentures or the
related interest expense and underwriting costs, as such conversion would be
anti-dilutive.
(8) The effect of dilutive securities for the years ended December 31, 1995 and
1999 have been excluded because the effect is anti-dilutive.
(9) Due to the failure to make payments and comply with certain covenants, the
Company is in default of substantially all its long-term debt obligations.
As a result these obligations are classified as current liabilities at
December 31, 1999.
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this Annual Report on Form 10-K concerning the Company's
business outlook or future economic performance; anticipated profitability,
revenues, expenses or other financial items; and product line growth, together
with other statements that are not historical facts, are "forward-looking
statements" as that term is defined under Federal Securities Laws.
Forward-looking statements are subject to risks, uncertainties and other factors
which could cause actual results to differ materially from those stated in such
statements. Such risks, uncertainties and factors include, but are not limited
to, the Company's substantial indebtedness, growth strategy, managed care
strategy, capital requirements and recent acquisitions as well as competition,
government regulation, general economic conditions and the other risks detailed
in the Company's filings with the Securities and Exchange Commission, including
this Annual Report on Form 10-K. See "Item 1. Business -- Cautionary
Statements."
INTRODUCTION
In the past 15 years, the number of people over the age of 65 began to grow
significantly faster than the overall population. At the same time, advances in
medical technology have increased the life expectancies of an increasingly large
number of medically complex patients. This trend, combined with the
implementation of healthcare cost containment measures by private insurers and
government reimbursement programs, has created a need for a more cost efficient
alternate site for the provision of a wide range of medical and rehabilitative
services which traditionally have been provided in an acute care hospital. To
address this need, the Company began in the late 1980s to develop subacute care
programs within its geriatric care facilities. Beginning in 1993, the Company
began to expand the range of related services it offers to its patients directly
in order to serve the full spectrum of patients' post-acute care needs. The
Company is now able to offer directly to its patients, rather than through third
party providers, a continuum of care following discharge from an acute care
hospital. IHS' post-acute services include subacute care, skilled nursing
facility care, home respiratory care and contract rehabilitation, hospice,
lithotripsy and diagnostic services.
IHS presently operates 366 geriatric care facilities (290 owned or leased
and 76 managed), 17 specialty hospitals and nine hospice facilities. The Company
provides a wide range of basic medical and subacute care services as well as a
comprehensive array of respiratory, physical, speech, occupational and
physiatric therapy in all its geriatric care facilities. The Company has over
2,000 contracts to provide services, primarily physical, occupational, speech
and respiratory therapies, to third-party skilled nursing facilities, subacute
care centers, assisted living facilities, hospitals and other locations. IHS
also provides mobile diagnostics such as portable x-ray and EKG to patients in
geriatric care facilities and other settings, lithotripsy services on an
outpatient basis, as well as diversified home respiratory care and other
pharmacy-related services and durable medical equipment products from
approximately 800 primarily non-urban locations in 44 states.
IHS initially focused on the provision of subacute care through Medical
Specialty Units ("MSUs"), which were typically 20 to 75 bed specialty units with
physical identities, specialized medical technology and staffs separate from the
geriatric care facilities in which they were located. Because of the high level
of specialized care provided, the Company's MSUs generated substantially higher
net revenue and operating profit per patient day than traditional geriatric care
facilities. While IHS continues to focus on the provision of subacute care, it
is no longer focusing on providing such care through its MSUs.
IHS receives payments for services rendered to patients from private
insurers and patients themselves, from the Federal government under Medicare,
and from the states in which certain of its facilities are located under
Medicaid. The sources and amounts of the Company's patient revenues are
determined by a number of factors, including licensed bed capacity of its
facilities, occupancy rate, the mix of patients and the rates of reimbursement
among payor categories (private, Medicare and Medicaid). Changes in the mix of
IHS' patients among the private pay, Medicare and Medicaid categories can
significantly affect the profitability of the Company's operations.
Historically, the Company derived higher revenue from providing specialized
medical services than routine inpatient care. Generally, private pay patients
are the most profitable and Medicaid patients are the least profitable. IHS also
contracts with private payors, including health maintenance organizations and
other managed care organizations, to provide certain healthcare services to
patients
29
<PAGE>
for a set per diem payment for each patient. There can be no assurance that the
rates paid to IHS by these payors will be adequate to cover the cost of
providing services to covered beneficiaries. The Balanced Budget Act made
numerous changes to the Medicare and Medicaid programs which have significantly
and adversely impacted the Company.
Until the implementation of the prospective payment system, which was
completed for IHS' facilities on June 1, 1999, Medicare reimbursed the skilled
nursing facility based on a reasonable cost standard. With certain exceptions,
payment for skilled nursing facility services was made prospectively, with each
facility receiving an interim payment during the year for its expected
reimbursable costs. The interim payment was later adjusted to reflect actual
allowable direct and indirect costs of services based on the submission of an
annual cost report. Each facility was also subject to limits on reimbursement
for routine costs. Exceptions to these limits were available for, among other
things, the provision of atypical services. The Company's cost of care for its
subacute care patients generally exceeded regional reimbursement limits
established under Medicare, and IHS submitted waiver requests to recover these
excess costs. To date, the Company's final rates as approved by HCFA represented
approximately 90% of the requested rates as submitted in the waiver requests.
There can be no assurance, however, that IHS will be able to recover its excess
costs under any waiver requests.
The Balanced Budget Act mandated the establishment of a prospective payment
system ("PPS") for Medicare skilled nursing facility services, under which
facilities are paid a fixed fee for virtually all covered services. PPS is being
phased in over a four-year period, effective January 1, 1999 for IHS' owned and
leased skilled nursing facilities other than the facilities acquired in the
Facility Acquisition, which facilities became subject to PPS on June 1, 1999.
Prospective payment for facilities managed by IHS became effective for each
facility at the beginning of its first cost reporting period on or after July 1,
1998. During the first three years, payments will be based on a blend of the
facility's historical costs (based largely on the facility's costs for the
services it provided to Medicare beneficiaries in the 1994-1995 base year) and
federal costs. Thereafter, the per diem rates will be based 100% on federal
costs. Facilities that did not receive any Medicare payments prior to October 1,
1995 are reimbursed 100% based on the federal per diem rates. Under PPS, each
patient's clinical status is evaluated and placed into a payment category. The
patient's payment category dictates the amount that the provider will receive to
care for the patient on a daily basis. The per diem rate covers (i) all routine
inpatient costs currently paid under Medicare Part A, (ii) certain ancillary and
other items and services previously covered separately under Medicare Part B on
a "pass-through" basis, and (iii) certain capital costs. The Company's ability
to offer the ancillary services required by higher acuity patients, such as
those in its subacute care programs, in a cost-effective manner will be critical
to the Company's success and will affect the profitability of the Company's
Medicare patients. To date the per diem reimbursement rates have generally been
less than the amount the Company received on a daily basis under cost-based
reimbursement, particularly in the case of higher acuity patients. As a result,
PPS has to date had a material adverse impact on IHS' results of operations and
financial condition. In November 1999, the acuity adjusted PPS rates for
specified acuity categories were temporarily increased in an attempt to mitigate
some of the adverse effects of the Balanced Budget Act pending refinement to PPS
rates to better account for medically complex patients.
Under the various Medicaid programs, the federal government supplements
funds provided by the participating states for medical assistance to qualifying
needy individuals. The programs are administered by the applicable state welfare
or social service agencies. Although Medicaid programs vary from state to state,
typically they provide for the payment of certain expenses, up to established
limits. The Balanced Budget Act also contains changes to the Medicaid program,
the most significant of which is the repeal of the Boren Amendment. The Boren
Amendment required state Medicaid programs to pay rates that are reasonable and
adequate to meet the costs that must be incurred by a nursing facility in order
to provide care and services in compliance with applicable standards. By
repealing the Boren Amendment, the Balanced Budget Act eases the impediments on
the states' ability to reduce their Medicaid reimbursement for such services
and, as a result, states now have considerable flexibility in establishing
payment rates. Texas has now adopted a case-mix prospective payment system
similar to the Medicare PPS, and the Company expects additional states will move
in this direction. IHS is unable to predict what effect such changes will have
on the Company. There can be no assurance that any changes to the Medicaid
program will not have a material adverse impact on the Company.
30
<PAGE>
Under PPS, the reimbursement for rehabilitation therapy services provided
to nursing facility patients is a component of the total reimbursement to the
nursing facility allowed per patient. Medicare pays the skilled nursing facility
directly for all rehabilitation services and the outside suppliers of such
services to residents of the skilled nursing facility must collect payment from
the skilled nursing facility. Effective January 1, 1999 a per beneficiary limit
of $1,500 applies to all rehabilitation therapy services provided under Medicare
Part B ($1,500 for physical and speech-language pathology services, and a
separate $1,500 for occupational therapy services); this $1,500 cap was
temporarily suspended for the two year period beginning January 1, 2000.
Additionally, effective January 1, 1999, Medicare Part B therapy services are no
longer being reimbursed on a cost basis; rather, payment for each service
provided is based on fee screen schedules published in November 1998. As a
result of the implementation of PPS, the Company has to date experienced a
substantial reduction in demand for and reduced operating margins from, therapy
services it provides to third parties, because such providers are admitting
fewer Medicare patients and are reducing utilization of rehabilitative services
and/or providing such services with their own personnel.
Prior to the implementation of PPS, Medicare covered and paid for
rehabilitation therapy services furnished in facilities in various ways. For
rehabilitation services provided directly, specific guidelines existed for
evaluating the reasonable cost of physical therapy, occupational therapy and
speech language pathology services. Medicare applied salary equivalency
guidelines in determining the reasonable cost of physical therapy and
respiratory services, which is the cost that would be incurred if the therapist
was employed by a nursing facility, plus an amount designed to compensate the
provider for certain general and administrative overhead costs. Until April 1,
1998, Medicare paid for occupational therapy and speech language pathology
services on a reasonable cost basis, subject to the so-called "prudent buyer"
rule for evaluating the reasonableness of the costs. In January 1998, HCFA
issued rules applying salary equivalency limits to certain speech and
occupational therapy services and revised existing physical and respiratory
therapy limits. The new limits were effective for services provided on or after
April 1, 1998 until nursing facilities transitioned to PPS. IHS' gross margins
for services reimbursed under the salary equivalency guidelines were
significantly less than services reimbursed under the "prudent buyer" rule.
The Medicare program reimburses IHS' home respiratory care and durable
medical equipment services and reimbursed home infusion services, under a
charge-based system, pursuant to which the Company receives either a fixed fee
for a specific service or product or a fixed per diem amount for providing
certain services. The Balanced Budget Act reduced Medicare payment amounts for
oxygen and oxygen equipment furnished after January 1, 1998 to 75% of the fee
schedule amounts in effect during 1997. Payment amounts for oxygen and oxygen
equipment furnished after January 1, 1999 and each subsequent year thereafter
are reduced to 70% of the fee schedule amounts in effect during 1997. The
Balanced Budget Act freezes the Consumer Price Index (U.S. urban average) update
for covered items of durable medical equipment for each of the years 1998
through 2002 while limiting fees for parenteral and enteral nutrients, supplies
and equipment to 1995 reasonable charge levels over the same period. The
Balanced Budget Act reduces payment amounts for covered drugs and biologicals to
95% of the average wholesale price of such covered items for each of the years
1998 through 2002. The Balanced Budget Act authorizes the Department of Health
and Human Services ("HHS") to conduct up to five competitive bidding
demonstration projects for the acquisition of durable medical equipment and
requires that one such project be established for oxygen and oxygen equipment.
Each demonstration project is to be operated over a three-year period and is to
be conducted in not more than three competitive acquisition areas. The Balanced
Budget Act also includes provisions designed to reduce healthcare fraud and
abuse, including a surety bond requirement for durable medical equipment
providers.
The Medicare program reimbursed the Company's home nursing services (which
was discontinued in 1998) on a cost-based system, under which IHS was reimbursed
at the lowest of IHS' reimbursable costs (based on Medicare regulations), cost
limits established by HCFA or IHS' charges. The Balanced Budget Act reduced
current cost reimbursement for home nursing care pending implementation of a
prospective payment system, which the BBA mandated be implemented for cost
reporting periods beginning on or after October 1, 1999 (which date was
subsequently extended to October 1, 2000). This postponement of implementation
of a prospective payment system for home nursing and the reduction in cost
reimbursement resulted in IHS' decision in 1998 to exit the home nursing
business.
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The Company expects that both third party and governmental payors will
continue to undertake cost containment measures designed to limit payments made
to healthcare providers such as IHS. Furthermore, government programs are
subject to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings and government funding restrictions, all of which may
materially increase or decrease the rate of program payments to facilities
managed and operated by IHS. There can be no assurance that payments under
governmental and third-party private payor programs will remain at levels
comparable to present levels or will, in the future, be sufficient to cover the
operating and other costs allocable to patients participating in such programs.
In addition, there can be no assurance that facilities owned, leased or managed
by IHS now or in the future will initially meet or continue to meet the
requirements for participation in such programs. The Company has been and may
continue to be, adversely affected by the continuing efforts of governmental and
private third party payors to contain the amount of reimbursement for healthcare
services. In an attempt to limit the Federal and state budget deficits, there
have been, and IHS expects that there will continue to be, a number of
additional proposals to limit Medicare and Medicaid reimbursement for healthcare
services. The Company cannot at this time predict whether this legislation or
any other legislation will be adopted or, if adopted and implemented, what
effect, if any, such legislation will have on IHS. See "Item 1. Business --
Government Regulation" and "-- Cautionary Statements -- Risk of Adverse Effect
of Healthcare Reform."
DISCONTINUED OPERATIONS
Home nursing is the largest, the most labor-intensive and generally the
least profitable segment of the home healthcare market. IHS exited this business
in late 1998. Home nursing services provided by IHS ranged from skilled care
provided by registered and other nurses, typically for those recently discharged
from hospitals, to unskilled services delivered by home health aides for those
needing help with the activities of daily living. Home nursing also included
physical, occupational and speech therapy, as well as social worker services.
The Medicare program reimbursed the Company's home nursing services on a
cost-based system, under which IHS was reimbursed at the lowest of IHS'
reimbursable costs (based on Medicare regulations), cost limits established by
HCFA or IHS' charges. Although IHS substantially expanded its home nursing
services through acquisitions in 1996 and 1997, the delay in implementation of a
prospective payment system for Medicare home nursing until after October 1, 2000
and a reduction in current cost reimbursement adversely affected the Company's
financial performance and resulted in the Company's decision in the third
quarter of 1998 to exit the home health nursing business.
BANKRUPTCY FILING
On February 2, 2000, the Company and substantially all of its subsidiaries
filed voluntary petitions (the "Bankruptcy Filings") in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") under
Chapter 11 of the United States Bankruptcy Code. The Company's need to seek
relief under the Bankruptcy Code is due, in part, to the significant financial
pressure created by the Balanced Budget Act and its implementation, which, among
other things, changed Medicare reimbursement for nursing facilities from a
cost-based retrospective reimbursement system to a prospective payment system.
The per diem reimbursement rates under PPS were significantly lower than
anticipated by the industry, and generally have been less than the amount the
Company's facilities received on a daily basis under cost-based reimbursement.
Moreover, since IHS treats a greater percentage of higher acuity patients than
many nursing facilities, IHS has also been adversely affected because the
federally established per diem rates do not adequately compensate the Company
for the additional expenses of caring for such patients. In addition, the
implementation of PPS has resulted in a greater than expected decline in demand
for the Company's therapy services. The changes in Medicare reimbursement
resulting from the Balanced Budget Act have had a material adverse effect on the
Company, rendering IHS unable to service its debt obligations to its senior
lenders and subordinated noteholders while at the same time meeting its
operating expenses. The Company hopes to use the Bankruptcy Filings to
restructure its capital structure to better position the Company to address the
changed economics resulting from the implementation of the Balanced Budget Act.
The Balanced Budget Act has also materially adversely affected the Company's
competitors, several of which have also filed voluntary petitions under Chapter
11 of the United States Bankruptcy Code.
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The accompanying financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. However, as a
result of the Bankruptcy Filings and circumstances relating to this event,
including the Company's leveraged financial structure and losses from
operations, such realization of assets and liquidation of liabilities is subject
to significant uncertainty. While under the protection of Chapter 11, the
Company may sell or otherwise dispose of assets, and liquidate or settle
liabilities, for amounts other than those reflected in the financial statements.
Further, a plan of reorganization could materially change the amounts reported
in the financial statements, which do not give effect to all adjustments of the
carrying value of assets or liabilities that might be necessary as a consequence
of a plan of reorganization. The Company's ability to continue as a going
concern is dependent upon, among other things, confirmation of a plan of
reorganization, future profitable operations, the ability to comply with the
terms of the DIP Financing Agreement and the ability to generate sufficient cash
from operations and financing arrangements to meet obligations.
ACQUISITION AND DIVESTITURE HISTORY
Facility Acquisitions
The Company commenced operations on March 25, 1986. From inception to June
30, 1988, the Company acquired seven geriatric care facilities with a total of
900 beds and acquired leasehold interests in seven geriatric care facilities
having a total of 1,050 beds. The Company initiated its MSU program in April
1988, in conjunction with HEALTHSOUTH Corporation ("HEALTHSOUTH"), with a 16 bed
unit serving patients with traumatic brain injury.
During the fiscal year ended June 30, 1989 the Company acquired leasehold
interests in six geriatric care facilities having 974 beds and entered into an
agreement to manage one geriatric care facility having 121 beds. One of the six
leased facilities, having 143 beds, was subject to a sublease to a third party
and was managed by the Company for such third party. The sublease terminated
February 2, 1991 and the facility was treated as a leased, rather than a
managed, facility. In addition, the Company opened two MSU programs totalling 35
beds.
During fiscal year ended June 30, 1990 the Company acquired one geriatric
care facility having 101 beds, a leasehold interest in one facility having 210
beds, and a 49% joint venture interest in a 160 bed geriatric care facility
which was managed by the Company until its purchase in September 1994. IHS also
entered into agreements to manage three other geriatric care facilities having
468 beds and acquired 90% (assuming the exercise of all options and related
exchange rights) of the stock of Professional Community Management
International, Inc. ("PCM"), which managed residential retirement community
living units in Southern California. The Company sold PCM in 1994. The Company
also opened six MSU programs totalling 77 beds.
In December 1990, the Company acquired leasehold interests in four
geriatric care facilities having 328 beds and received by assignment management
agreements covering 12 facilities having 1,403 beds. On July 24, 1990, the
Company assumed the management of 14 of these 16 facilities and, subsequent to
July 24, 1990, assumed the management of the remaining two facilities, pending
the consummation of the acquisition. In 1991 the owners of four of these managed
facilities terminated the Company's management agreement for those facilities.
During the six months ended December 31, 1990 the Company opened four MSU
programs totalling 71 beds.
In December 1991, the Company leased two geriatric care facilities having a
total of 258 beds. The Company also opened six MSU programs totalling 106 beds.
During 1992, the Company expanded its MSU focus by opening thirteen MSU
programs totaling 250 beds at its facilities, expanding seven MSU programs by 61
beds and converting its neuro-rehabilitation MSU program for the treatment of
patients with traumatic brain injury, which was operated in conjunction with
HEALTHSOUTH, to a 16 bed complex care MSU program. Also the Company expanded by
acquiring one geriatric care facility with a total of 120 beds, leasing five
facilities having a total of 640 beds and entering into thirteen management
contracts having a total of 1,481 beds. The total
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cost of the aforementioned acquisitions was approximately $13.9 million, which
includes all costs to secure the facility or leasehold interest. None of the
acquisitions were individually significant and all were financed with cash flow
from operations and borrowings under the Company's line of credit.
During 1993, the Company expanded its MSU focus by opening 30 MSU programs
totaling 442 beds (including four MSU programs totalling 84 beds at its managed
facilities) and expanding 24 MSU programs by 140 beds. On December 1, 1993 the
Company acquired substantially all of the United States operations of Central
Park Lodges, Inc. ("CPL"), consisting of 30 geriatric care facilities (24 owned
and 6 leased) and nine retirement facilities, totaling 5,210 beds, a division
which provides pharmacy consulting services and supplies, prescription drugs and
intravenous medications to geriatric care facilities through five pharmacies in
Florida, Pennsylvania and Texas, and a division which provides healthcare
personnel and support services to home healthcare and institutional markets
through five branch locations located in Florida and Pennsylvania. The Company
disposed of seven retirement facilities and five of the geriatric care
facilities acquired from CPL that the Company did not consider to fit within its
post-acute care strategy. The total cost of the CPL acquisition was
approximately $185.3 million, including $20.1 million in assumption of
indebtedness, warrants to purchase 100,000 shares of common stock of the Company
at a purchase price per share of $28.92 (valued at $1.4 million), and other
direct acquisition costs. The $163.8 million cash paid to purchase CPL was
financed using the Company's term loan and revolving credit facility. The number
of shares and price per share are subject to adjustment under certain
circumstances. In addition, the Company agreed to provide consulting services to
Trizec for the development of subacute care programs at its Canadian facilities.
The Company received a consulting fee of $4.0 million and $3.0 million in 1994
and 1995, respectively.
During 1993, the Company also acquired eight geriatric care facilities (two
of which had previously been leased by IHS), leased one facility and entered
into nine management contracts.
During 1994, the Company continued to expand its MSU focus by opening 49
MSU programs totalling 998 beds (including four MSU programs totalling 102 beds
at its managed facilities which includes 33 beds located at a facility no longer
managed by the Company as of August 1994) and expanding 18 MSU programs by 100
beds. During the same period, the Company acquired five geriatric care
facilities (two of which had been previously leased and three of which had been
managed by IHS), leased 49 (three of which had been previously owned and seven
of which had been previously managed) and entered into 42 management contracts
(five of which have become leased facilities, one of which has become an owned
facility and one of which was terminated).
Effective January 1, 1994, the Company entered into an agreement to manage
23 facilities in California, consisting of 14 geriatric care facilities having
1,875 beds and nine psychiatric facilities having 1,265 beds (the "Crestwood
Facilities"), owned by certain affiliated partnerships (the "Crestwood
Partnerships") and leased by Crestwood Hospitals, Inc. ("Crestwood"). The
management agreement had a term of ten years and provided for payments to IHS
based upon a percentage of the gross revenues of the Crestwood Facilities.
Pursuant to this transaction, IHS had agreed to loan Crestwood up to $11
million, including a $7 million line of credit. IHS was granted purchase options
whereby it had the option upon expiration of its management agreement to
purchase certain partnership interests of the partnerships which owned 19 of the
23 Crestwood Facilities. If IHS elected to purchase Crestwood prior to the
expiration of the management agreement, it was obligated to pay Crestwood a
break-up fee of $6 million. The Company was obligated to purchase Crestwood if
it elected to purchase the partnership interests of the partnerships which own
the Crestwood Facilities. IHS paid the stockholders of Crestwood a
non-refundable purchase option deposit consisting of $3 million in cash and
168,067 shares of IHS Common Stock. This agreement was terminated in 1995 and,
as a result, the Company incurred a loss of $21.915 million.
In February 1994, the Company entered into management agreements to manage,
on an interim basis, eight geriatric care facilities, aggregating 1,174 beds, in
Delaware, Massachusetts, New Jersey and Pennsylvania previously operated by
IFIDA Health Care Group Ltd. ("IFIDA"). Upon the earlier of the completion by
the owners of the eight facilities of the refinancing of certain debt or May 18,
1995, IHS was obligated to lease and operate these facilities, and was granted
an option to purchase any or all
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of these facilities. Five of these facilities were subsequently leased by the
Company in July 1994 and one management agreement for a facility was terminated
in August 1994. The remaining two facilities were leased in 1995. The annual
lease payments for these facilities currently total $4.9 million. The purchase
price per facility is equal to the greater of its fair market value or its
allocable percentage (as agreed to by the parties) of $59.5 million ($57 million
if the option is exercised prior to the seventh year of the lease). The Company
has to date made purchase option deposits aggregating $6.5 million with respect
to these facilities, and is obligated to make additional purchase option
deposits aggregating $500,000 during each year of the agreement. IHS has agreed
to loan the owners of the eight facilities an aggregate of up to $3.5 million
for working capital purposes, and issued to the owners of the eight facilities
an aggregate of 90,000 shares of Common Stock.
In May 1994, the Company sold its 49% interest in two separate joint
ventures formed with Sunrise Terrace, Inc. ("Sunrise") to develop and operate
two assisted living facilities. Each facility was to be managed by Sunrise;
Sunrise had a 51% interest in, and the Company had a 49% interest in, the
venture's capital, earnings and losses. Sunrise had an option to purchase the
Company's interest in either venture at any time, and the Company had a right to
require Sunrise to purchase the Company's interest in the Fairfax, Virginia
venture. The assisted living facility in Fairfax, Virginia opened in October
1990; the second facility was being constructed in Bound Brook, New Jersey at
the time of sale.
In May 1990, a wholly owned subsidiary of IHS, Integrated of Amarillo, Inc.
("IAI"), purchased a geriatric care facility in Amarillo, Texas, and contributed
the facility to a joint venture in exchange for a 49% interest therein. The
Company managed the facility, for which it received a management fee equal to 6%
of gross revenues. The venturers shared in the venture's capital, earnings and
losses in accordance with their respective interests in the venture except that
net taxable operating losses were borne 100% by the other venturer. In September
1994, the Company purchased the remaining 51% interest in this joint venture.
As of August 31, 1994 the Company entered into a Facilities Agreement,
Lease Agreement and certain other agreements with Litchfield Asset Management
Corp. ("LAM") pursuant to which it leased, effective September 1, 1994, on a
triple net basis, 43 geriatric care facilities (consisting of 41 skilled nursing
facilities and two retirement centers), including two facilities previously
leased and two facilities previously managed by the Company (the "LPIMC
Facilities"), aggregating approximately 5,400 beds located in 12 states. The
Company and Litchfield Investment Company, L.L.C., the successor to LAM ("LIC"),
subsequently amended and restated these agreements effective October 1, 1997.
The Company's current annual lease payments are approximately $13.7 million,
based upon the annual debt service of monies borrowed by LIC to refinance the
LPIMC Facilities. In addition, the Company made refundable lease deposits
aggregating $37.4 million, and will make additional refundable deposits during
the initial term (including any extension thereof) of the leases aggregating
approximately $4 million per annum. Rent payments are subject to escalation
commencing October 1998 in an amount equal to two percent (three percent if the
Company elects to pay such increase in shares of the Company's Common Stock) of
the net annual incremental revenues of the LPIMC Facilities (subject to certain
maximums). The leases have initial terms of eleven years, subject to renewal by
the Company for one additional period of seven years and three additional
periods of five years each, and the Company has guaranteed all lease payments.
The Company has also received options to purchase each of the LPIMC Facilities,
at any time after nine months prior to the end of the fourth lease year, for a
purchase price that will represent (i) during the fourth through tenth years
following the lease commencement date, such facility's allocable percentage of
the total amount of $343 million (to be increased annually after the fifth year
by the rate of increase in the consumer price index) and (ii) beginning in the
twelfth year following the lease commencement date, the greater of (a) fair
market value, (b) 125% of the release cost of the monies borrowed by LIC which
are applicable to such facility or (c) five times the contribution margin of
such facility. The Company loaned LIC's principal stockholders an aggregate of
$3 million. In addition, the Company issued LAM warrants to purchase 300,000
shares of the Company's Common Stock at an exercise price of $31.33 per share,
and has granted LAM "piggy-back" registration rights with respect to the shares
of Common Stock issuable upon exercise of such warrants. The Company has agreed
to issue up to an additional 50,000 shares of Common Stock if the leases are
terminated prior to October 1, 2006. The agreement with LAM requires that the
Company meet certain financial tests. IHS
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has sublet three of these facilities, two to Integrated Living Communities, Inc.
("ILC"), formerly the Company's wholly-owned assisted living services subsidiary
and one to Peak Medical, Inc.
In September 1994, the Company entered into a management agreement with All
Seasons to manage six geriatric care facilities with 872 beds located in the
State of Washington. During the fourth quarter of 1996 the Company terminated
its management contract with All Seasons. As a result of the termination, the
Company incurred a $7.8 million loss on the termination.
In February 1995, the Company entered into a management agreement to manage
a 190 bed geriatric care facility located in Aurora, Colorado.
In March 1995, the Company entered into a management agreement to manage 34
geriatric care facilities in Texas, California, Florida, Nevada and Mississippi
(the "Preferred Care Facilities"), of which three have been purchased by IHS and
19 have been terminated. The management agreement has a term of ten years and
provides for payments to the Company based upon a percentage of adjusted gross
revenues and adjusted earnings before interest, taxes, depreciation and
amortization of the Preferred Care Facilities. The Company has also been granted
an option to purchase the Preferred Care Facilities, between March 29, 1996 and
the date of the termination of the management agreement, for $80 million net of
purchase option deposits plus adjustments for inflation. The Company has paid
non-refundable purchase option deposits of $11.9 million and refundable purchase
option deposits of $9.0 million which will be applied against the purchase price
if the Company elects to acquire the facilities.
During 1995, the Company purchased five geriatric care facilities (two of
which were previously leased). Also, the Company leased three facilities, all of
which were previously managed. The total cost of these acquisitions was
approximately $30.6 million, which includes legal fees and other costs incurred
to secure the facilities or leasehold interests in the facilities.
During 1995, the Company continued to expand its MSU focus by opening 31
MSU programs totalling 691 beds (including two MSU programs totalling 63 beds at
its managed facilities) and expanding existing programs by 177 beds (including
17 beds at managed facilities).
In January 1996, the Company entered into agreements to manage four
assisted living facilities in California and Ohio having a total of 234 beds.
The management agreements subsequently were transferred to ILC.
In January 1996, the Company purchased Vintage Health Care Center, a 110
bed skilled nursing and assisted living facility in Denton, Texas for $6.9
million. A condominium interest in the assisted living portion of this facility,
as well as in the assisted living portion of the Company's Dallas at Treemont
and West Palm Beach facilities, were transferred as a capital contribution to
ILC in June 1996.
In May 1996, the Company assumed leases for a 96 bed skilled nursing
facility and a 240 bed residential facility located in Las Vegas, Nevada.
In July 1996, the Company assumed a lease for a skilled nursing facility in
Chicago, Illinois.
In October 1996, ILC completed its initial public offering, which reduced
IHS' ownership in ILC to approximately 37%. IHS sold its remaining 37% interest
in ILC in July 1997. See "-- Divestitures."
In December 1996, the Company sold its Palestine facility located in
Palestine, Texas. Total proceeds from the sale were $1.3 million.
In addition, in 1996 the Company transferred to ILC, as a capital
contribution, ownership of three facilities.
During 1996, the Company opened MSU programs totalling 184 beds (including
one MSU program totalling 28 beds at a managed facility) and expanding existing
programs by 199 beds.
On September 25, 1997, the Company acquired, through a cash tender offer
and subsequent merger, Community Care of America, Inc. ("CCA") for a purchase
price of approximately $34.3 million in cash. In addition, in connection with
the CCA Acquisition IHS repaid approximately $58.5 million of indebtedness
assumed in the CCA Acquisition (including restructuring fees of $4.9 million)
and assumed
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approximately $17.3 million of indebtedness. CCA develops and operates skilled
nursing facilities in medically underserved rural communities. CCA operated 53
licensed long-term care facilities with 4,390 licensed beds (of which nine
facilities were subsequently sold), one rural healthcare clinic, two outpatient
rehabilitation centers (one of which was subsequently sold), one child day care
center and 124 assisted living units within seven of the facilities which CCA
operates. CCA operated in Alabama, Colorado, Florida, Georgia, Iowa, Kansas,
Louisiana, Maine, Missouri, Nebraska, Texas and Wyoming.
In November 1997, the Company acquired the assets of Durham Meridian
Limited Partnership, owner of Treyburn Nursing Center, a skilled nursing
facility, for $4.8 million. In addition, the Company purchased a leasehold
interest in Shadow Mountain, a skilled nursing facility, for $4.0 million.
On December 31, 1997, IHS acquired from HEALTHSOUTH 139 owned, leased or
managed long-term care facilities (of which 12 facilities were subsequently
sold), 12 specialty hospitals, a contract therapy business having over 1,000
contracts and an institutional pharmacy business serving approximately 38,000
beds (the "Facility Acquisition"). IHS paid approximately $1.16 billion in cash
and assumed approximately $91 million in debt. IHS disposed of the institutional
pharmacy business in August 1998.
During 1997, the Company extended existing MSU programs by 185 beds, but
did not open any new MSU programs.
In January 1998, IHS formed Lyric Health Care LLC, a limited liability
company ("Lyric"), and transferred five geriatric care facilities to Lyric,
which then sold the five facilities to Omega Healthcare Investors, Inc.
("Omega"), a publicly-traded real estate investment trust, for approximately
$44.5 million. Lyric immediately leased back the five facilities from Omega. IHS
manages the facilities for Lyric, pursuant to which it receives 4% of the
facilities' revenues as well as an incentive fee equal to 70% of Lyric's excess
cash flow (which is generally defined as Lyric's gross revenues less operating
expenses including the base management fee and rent). In a related transaction
Lyric in February 1998 sold a 50% membership interest to TFN Healthcare
Investors, Inc. ("TFN Healthcare"), an entity controlled by Timothy Nicholson, a
director of the Company, for $1.0 million. As a result, IHS now owns a 50%
interest in Lyric. Mr. Nicholson is the Managing Director of Lyric. The Company
recorded a $2.5 million loss on the sale of these facilities in 1997.
In February 1998, the Company leased a 100 bed skilled nursing facility,
and in March 1998 leased seven skilled nursing facilities having a total of 816
beds.
In April 1998, the Company sold five additional long-term care facilities
to Omega for $50.5 million, which facilities were leased back by Lyric. The
Company is managing these facilities for Lyric pursuant to the above-described
agreements.
In April 1998, the Company acquired the stock of Magnolia Group, Inc., an
operator of 12 skilled nursing facilities in South Carolina. The merger
consideration was $15.1 million, which was paid through the issuance of 447,419
shares of the Company's Common Stock.
In June 1998, the Company merged with Premiere Associates, an operator of
27 leased and one owned skilled nursing facilities in Georgia and Florida and a
manager of 18 skilled nursing facilities in South Carolina, Georgia and Florida.
The merger consideration was $50.8 million, which was paid through the issuance
of 800,561 shares of the Company's Common Stock, a note payable for $15.0
million and a cash payment of $6.5 million.
In October 1998, the Company leased a 114 bed skilled nursing facility, and
in November 1998, the Company purchased the assets of Oakwood Manor Nursing
Center, Inc., a skilled nursing facility, for $5.8 million.
Effective January 1, 1999, the Company and various wholly owned
subsidiaries of the Company (the "Lyric Subsidiaries") sold 27 long-term care
facilities and five specialty hospitals to Monarch Properties, LP ("Monarch
LP"), a newly formed private company, for approximately $131.2 million in net
cash proceeds plus contingent earn-out payments of up to a maximum of $67.6
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
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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 LP. Dr. Robert N. Elkins, Chairman of the Board, Chief Executive Officer
and President of the Company, beneficially owns 28.6% 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
retained the working capital of the Lyric subsidiaries and 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 a long-term master lease. The
Company is managing these facilities for Lyric pursuant to the above-described
agreements with Lyric. The Company has accounted for the sale to Monarch as a
financing.
In January 1999, the Company acquired SunCoast of Manatee, Inc., a skilled
nursing facility in Florida. The total purchase price was approximately $11.9
million.
In August 1999, the Company acquired a leasehold interest in 14 skilled
nursing facilities in Florida having a total of 1,862 beds from Florida
Convalescent Centers, Inc.
In September 1999, the Company sold its Jacksonville, Florida nursing
facility to Monarch LP for net proceeds of $3.7 million. Monarch LP then leased
this facility to a subsidiary of Lyric, which the Company is currently managing.
The Company has accounted for the sale to Monarch as a financing.
Service Provider Acquisitions
During 1993, the Company began to implement its strategy of expanding the
range of related services it offers directly to its patients in order to serve
the full spectrum of patient needs following acute hospitalization. As a result,
the Company is now able to offer directly to its patients, rather than through
third-party providers, home respiratory care, rehabilitation (physical,
occupational and speech), lithotripsy, and mobile x-ray and electrocardiogram
and similar services.
In June 1993, the Company acquired all of the outstanding stock of Patient
Care Pharmacy, Inc. ("PCP"), a California corporation engaged in the business of
providing pharmacy services to geriatric care facilities and other healthcare
providers in Southern California. The Company combined the operations of PCP
with CPL's pharmacy operations. The total cost for PCP was $10.4 million
including $9.84 million representing the issuance of 425,674 shares of the
Company's Common Stock. In addition, the Company had agreed to make contingent
payments in the shares of the Company's Common Stock following each of the next
three years based upon the earnings of PCP. On March 3, 1995, the Company and
the PCP stockholders terminated all rights to contingent payments in
consideration for a payment of $3.5 million in the form of 92,434 shares of IHS
Common Stock. IHS sold this business in July 1996. See "-- Divestitures."
In July 1993, Comprehensive Post Acute Services, Inc. ("CPAS"), a newly
formed subsidiary 80% owned by the Company and 20% owned by Chi Systems, Inc.,
formerly Chi Group, Inc. ("Chi"), acquired joint ventures and contracts to
develop and manage subacute programs from Chi. Chi is a healthcare consulting
company in which John Silverman, a director of the Company, is President and
Chief Financial Officer and an approximately 16% stockholder. The purchase price
was $200,000 and IHS had made available a loan commitment of $300,000 for
working capital purposes, which loan bore interest at a rate equal to Citicorp's
base rate plus four percent. As of July 21, 1994, the Company purchased the
remaining 20% of CPAS from Chi for 5,200 shares of IHS Common Stock valued at
$159,900. In connection with this transaction, the Company engaged Chi to act as
consultant with respect to the Company's transitional care units. The consulting
agreement, which expired June 30, 1997, provided for the payment, in four equal
installments, of a $100,000 annual consulting fee.
In October 1993, the Company acquired, effective as of September 30, 1993,
Health Care Systems, Inc., which owns Health Care Consulting, Inc. ("HCC") and
RMi, Inc., a Rehabilitation Company ("RMI"), for $1.85 million in cash and a
five-year earnout, up to a maximum of $3.75 million based upon achievement of
pre-tax earnings targets. HCC is a specialty reimbursement and consulting
company with expertise in subacute rehabilitation programs. RMI provides direct
therapy services, including physical therapy, occupational therapy and speech
pathology, to healthcare facilities. RMI also provides
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management and consulting services in the oversight and training of therapists
employed by geriatric care facilities to facilitate higher quality patient care.
In July 1996, the Company issued warrants to purchase 20,000 shares of Common
Stock at a purchase price per share of $37.88 to each of Scott Robertson, Gary
Kelso and Grantly Payne in exchange for their rights under the five-year
earn-out agreement.
In December 1993, the Company purchased all of the capital stock of
Associated Therapists Corporation, d/b/a Achievement Rehab ("Achievement"), a
provider of rehabilitation therapy services on a contract basis to various
geriatric facilities in Minnesota, Indiana and Florida. The purchase price of
$22.5 million consisted of 839,865 shares of the Company's Common Stock (based
on the average price of the stock of $26.79), plus a contingent earn-out
payment, also payable in shares of Common Stock, based upon increases in
Achievement's earnings in 1994, 1995 and 1996 over a base amount. The total cost
was applied primarily to intangible assets. The final earn-out amount of
approximately $26.44 million was paid in March 1997 through the issuance of
976,504 shares of IHS Common Stock.
On July 7, 1994, the Company acquired all the outstanding capital stock of
Cooper Holding Corporation ("Cooper"), a Delaware corporation engaged in the
business of providing mobile x-ray and electrocardiogram services to long-term
care and subacute care facilities in California, Florida, Georgia, Indiana,
Nebraska, Ohio, Oklahoma, Texas and Virginia. The purchase price for Cooper was
approximately $44.5 million, including $19.9 million representing the issuance
of 593,953 shares of the Company's Common Stock and options to acquire 51,613
shares of Common Stock (based on the average closing price of the Common Stock
of $30.81 over the 30 day period prior to June 2, 1994, the date on which the
Cooper acquisition was publicly announced). In addition, the Company repaid
approximately $27.2 million of Cooper's debt.
On August 8, 1994, the Company acquired substantially all the assets of
Pikes Peak Pharmacy, Inc., a company which provides pharmacy services to
patients at nine facilities in Colorado Springs, Colorado which have an
aggregate of 625 beds, for $646,000. The Company subsequently sold this business
as part of the sale of the pharmacy division. See "-- Divestitures."
On September 23, 1994 the Company acquired substantially all of the assets
of Pace Therapy, Inc., a company which provides physical, occupational, speech
and audiology therapy services to approximately 60 facilities in Southern
California and Nevada. The purchase price for Pace was $5.8 million,
representing the issuance of 181,822 shares of the Company's Common Stock. In
addition, the Company repaid approximately $1.6 million of Pace's debt.
On October 7, 1994 the Company acquired all of the outstanding stock of
Amcare, Inc., an institutional pharmacy serving approximately 135 skilled
nursing facilities in California, Minnesota, New Jersey and Pennsylvania. The
purchase price for Amcare was $21.0 million, including $10.5 million
representing the issuance of 291,101 shares of the Company's Common Stock. The
Company subsequently sold this business in the sale of its pharmacy division.
See "-- Divestitures."
On October 11, 1994 the Company acquired substantially all of the assets
of Pharmaceutical Dose Service of La., Inc., an institutional pharmacy serving
14 facilities. The purchase price for PDS was $4.2 million, including $3.9
million representing the issuance of 122,117 shares of the Company's Common
Stock. The Company subsequently sold this business in the sale of its pharmacy
division. See "-- Divestitures."
On November 2, 1994 the Company acquired all of the outstanding stock of
CareTeam Management Services, Inc., a home health company serving Arizona,
Kansas, Missouri, New Mexico, North Carolina and Texas. The purchase for
CareTeam was $5.9 million, including $5.2 million representing the issuance of
147,068 shares of the Company's Common Stock.
On November 3, 1994 the Company acquired all of the outstanding stock of
Therapy Resources, a company which provides physical, occupational, speech and
audiology services to approximately 22 geriatric care facilities and operates
seven out-patient rehabilitation facilities. The purchase price was $1.6
million.
39
<PAGE>
On November 3, 1994 the Company acquired all of the outstanding stock of
Rehab People, Inc., a company which provides physical, occupational and speech
therapy services to approximately 38 geriatric care facilities in Delaware, New
York, North Carolina and Pennsylvania. The purchase price for Rehab People was
$10 million representing the issuance of 318,471 shares of Common Stock.
On November 3, 1994, the Company acquired certain assets of Portable X-Ray
Service of Rhode Island, Inc., a mobile x-ray company, for a purchase price of
$2.0 million including $700,000 representing the issuance of 19,739 shares of
the Company's Common Stock.
On November 18, 1994 the Company acquired substantially all of the assets
of Medserv Corporation's Hospital Services Division, which provides respiratory
therapy. The purchase price was $21.0 million.
On December 9, 1994, the Company acquired all rights of Jule Institutional
Supply, Inc. under a management agreement with Samaritan Care, Inc. ("Samaritan
Care"), an entity which provides hospice services, for a purchase price of $14.0
million, representing the issuance of 375,134 shares of the Company's Common
Stock. In addition, the Company acquired the membership interests in Samaritan
Care for no additional consideration.
On December 23, 1994, the Company acquired all of the outstanding stock of
Partners Home Health, Inc., a home health infusion company operating in seven
states. The purchase price was $12.4 million, representing the issuance of
332,516 shares of the Company's Common Stock.
Between August 1994 and January 1995, the Company acquired six additional
radiology and diagnostic service providers for an aggregate consideration of
$3.8 million. These entities provide radiology and diagnostic services in
Indiana, Louisiana, North Carolina, Pennsylvania and Texas.
In January 1995, the Company acquired four ancillary services companies
which provide mobile x-ray and electrocardiogram services to long-term care and
subacute care facilities. The total purchase price was $3.6 million, including
$300,000 representing the issuance of 7,935 shares of the Company's Common
Stock.
In February 1995, the Company acquired all of the assets of ProCare Group,
Inc. and its affiliated entities, which provide home health services in Broward,
Dade and Palm Beach counties, Florida. The total purchase price was $3.9
million, including $3.6 million representing the issuance of 95,062 of the
Company's Common Stock.
In March 1995, the Company purchased Samaritan Management, Inc., which
provides hospice services in Michigan, for $5.5 million, and acquired
substantially all of the assets of Fidelity Health Care, Inc., a company which
provides home healthcare services, temporary staffing services and infusion
services in Ohio, for $2.1 million.
In June 1995, the Company acquired three ancillary services companies which
provide mobile x-ray and electrocardiogram services to long-term and subacute
care facilities. The total purchase price was $2.2 million.
In August 1995, the Company acquired all of the outstanding stock of Senior
Life Care Enterprises, Inc., which provides home health, supplemental staffing,
and management services. The total purchase price was $6.0 million representing
the issuance of 189,785 shares of the Company's Common Stock.
In September 1995, the Company merged with IntegraCare, Inc.
("IntegraCare"), which provides physical, occupational and speech therapy to
skilled nursing facilities in Florida and operated seven physician practices, in
a transaction that was accounted for as a pooling of interests. Accordingly, the
Company's historical financial statements for all periods prior to the effective
date of the merger have been restated to include the results of IntegraCare. In
addition, the Company incurred $1.9 million of costs as a result of the
IntegraCare merger. This amount is included as a non-recurring charge in the
Company's Statement of Operations for the year ended December 31, 1995. The
Company subsequently disposed of the physician practices acquired in this
acquisition.
During 1995, the Company acquired 12 companies providing primarily home
healthcare, x-ray and electrocardiagram services. The total purchase price for
these companies was $8.7 million, and no single acquisition had total costs in
excess of $2.0 million.
40
<PAGE>
In March 1996, the Company acquired all of the outstanding stock of Rehab
Management Systems, Inc., which operates outpatient rehabilitative clinics and
inpatient therapy centers. The total purchase price was $10.0 million, including
$8.0 million representing the issuance of 385,542 shares of the Company's Common
Stock.
In May 1996, the Company acquired all of the assets of Hospice of the Great
Lakes, Inc., which provides hospice services in Illinois. The total purchase
price was $8.2 million representing the issuance of 304,822 shares of the
Company's Common Stock.
In July 1996, the Company sold its pharmacy division. See "--
Divestitures."
In August 1996, the Company acquired all of the outstanding stock of J.R.
Rehab Associates, Inc., which provides rehab therapy services to nursing homes,
hospitals and other healthcare providers. The total purchase price was $2.1
million.
In August 1996, the Company acquired the assets of ExtendiCare of
Tennessee, Inc., which provides home healthcare services, for $3.4 million, and
the assets of Edgewater Home Infusion Services, Inc., which provides home
infusion services, for $8.0 million.
In September 1996, the Company acquired the assets of Century Health
Services, Inc., which provides home healthcare services, for $2.4 million, and
all of the outstanding stock of Signature Home Care, Inc., which provides home
healthcare and management services, for $9.2 million, including $4.7 million
representing the issuance of 196,374 shares of the Company's Common Stock. In
addition, the Company repaid approximately $1.6 million of Century's debt and
$1.9 million of Signature's debt.
In October 1996, the Company acquired, through merger, First American
Health Care of Georgia, Inc. ("First American"), a provider of home health
services in 21 states, principally Alabama, California, Florida, Georgia,
Michigan, Pennsylvania and Tennessee. The purchase price for First American was
$154.1 million in cash plus contingent payments of up to $155 million. The
contingent payments were to become payable if (i) legislation was enacted that
changed the Medicare reimbursement methodology for home health services to a
prospectively determined rate methodology, in whole or in part, or (ii) in
respect of any year the percentage increase in the seasonally unadjusted
Consumer Price Index for all Urban Consumers for the Medical Care expenditure
category (the "Medical CPI") was less than 8% or, even if the Medical CPI was
greater than 8% in such year, in any subsequent year prior to 2004 the
percentage increase in the Medical CPI was less than 8%. As a result of the
enactment of the Balanced Budget Act in August 1997, which required the
implementation of a prospective payment system for home nursing services
starting with cost reporting periods beginning after October 1, 1999
(subsequently delayed to October 1, 2000), the contingent payments became
payable and will be paid as follows: $10 million for 1999, which must be paid on
or before February 14, 2000; $40 million for 2000, which must be paid on or
before February 14, 2001; $51 million for 2001, which must be paid on or before
February 14, 2002; $39 million for 2002, which must be paid on or before
February 14, 2003; and $15 million for 2003, which must be paid on or before
February 14, 2004. IHS borrowed the cash purchase price paid at the closing
under its revolving credit facility. $115 million of the $154.1 million paid at
closing was paid to HCFA, the Department of Justice and the United States
Attorney for the Southern District of Georgia in settlement of claims by the
United States government seeking repayment from First American of certain
overpayments and unallowable reimbursements under Medicare. The total settlement
with the United States government was $255 million; the remaining $140 million
will be paid from the contingent payments. IHS discontinued its home nursing
business in 1998 and subsequently disposed of this business in 1999. See "--
Divestitures."
In November 1996, the Company acquired the assets of Mediq Mobile X-ray
Services, Inc., which provides mobile diagnostic services, for $10.1 million,
including $5.2 million representing the issuance of 203,721 shares of the
Company's Common Stock, and the assets of Total Rehab Services, LLC and Total
Rehab Services 02, LLC, which provide contract rehabilitative and respiratory
services, for $8.0 million, including $2.7 million representing the issuance of
106,559 shares of the Company's Common Stock. In addition, the Company repaid
approximately $3.9 million of Total Rehab's debt.
In November 1996, the Company acquired all of the outstanding stock of
Lifeway, Inc., which provides physician and disease management services. The
total purchase price was $900,000 representing
41
<PAGE>
the issuance of 38,502 shares of the Company's Common Stock. IHS also issued
48,129 shares of Common Stock to Robert Elkins, Chairman and Chief Executive
Officer of the Company, in payment of outstanding loans of $1.1 million from Mr.
Elkins to LifeWay.
During 1996, the Company acquired seven companies providing primarily
mobile x-ray services. The total purchase price was $2.6 million, and no single
acquisition had total costs in excess of $2.0 million.
In January 1997, the Company acquired all of the outstanding stock of
In-Home Healthcare, Inc., which provides home healthcare services. The total
purchase price was $3.2 million.
In February 1997, the Company acquired the assets of Portable X-Ray Labs,
Inc., which provides mobile x-ray services, for $4.9 million.
In June 1997, the Company acquired all the outstanding capital stock of
Health Care Industries, Inc., a home health company in Florida, for $1.8
million, and substantially all the assets of Rehab Dynamics, Inc. and
Restorative Therapy, Ltd., related contract rehab companies, for $19.7 million,
including $11.5 million representing the issuance of 331,379 shares of the
Company's Common Stock.
In August 1997, IHS acquired all the outstanding capital stock of Arcadia
Services, Inc., a home health company, for $17.2 million representing the
issuance of 581,451 shares of the Company's Common Stock, and all the
outstanding capital stock of Ambulatory Pharmaceutical Services, Inc. and APS
American, Inc., related home health companies, for $36.3 million, including
$18.1 million representing the issuance of 532,240 shares of the Company's
Common Stock.
In September 1997, the Company acquired all the outstanding capital stock
of Barton Creek Health Care, Inc., a home health company. Total purchase price
was $4.9 million.
In October 1997, IHS acquired RoTech Medical Corporation ("RoTech") through
merger of a wholly-owned subsidiary of IHS into RoTech (the "RoTech Merger"),
with RoTech becoming a wholly-owned subsidiary of IHS. RoTech provides home
healthcare products and services, with an emphasis on home respiratory, home
medical equipment and infusion therapy, primarily to patients in non-urban
areas. IHS issued approximately 15,598,400 shares of Common Stock in the RoTech
Merger, and reserved for issuance approximately 1,737,476 shares of Common Stock
issuable upon exercise of RoTech options. The RoTech Merger consideration
aggregated approximately $506.6 million, substantially all of which was recorded
as goodwill. IHS repaid the $201.0 million of RoTech bank debt assumed in the
transaction and repurchased $107.836 million of RoTech's convertible
subordinated debentures; $1.979 million principal amount of RoTech debentures,
convertible into approximately 43,773 shares of Common Stock, remains
outstanding.
In October 1997, IHS acquired substantially all of the assets of Coram's
Lithotripsy Division, which operated 20 mobile lithotripsy units and 13
fixed-site machines in 180 locations in 18 states. The Coram Lithotripsy
Division also provides maintenance services to its own and third-party
equipment. Lithotripsy is a non-invasive technique that utilizes shock waves to
disintegrate kidney stones. IHS paid approximately $131.0 million in cash for
the Coram Lithotripsy Division, including the payment of $1.0 million of
intercompany debt to Coram.
In November 1997, IHS purchased the remaining 60% interest in HPC America,
Inc., an operator of home infusion and home healthcare companies, for $26.1
million. IHS purchased a 40% interest in HPC America in September 1995 for $8.2
million. The Company also acquired the assets of Richards Medical Company, Inc.
for $2.0 million, Central Medical Supply Company, Inc. for $1.9 million and
Hallmark Respiratory Care for $3.8 million, which are all home respiratory
providers.
In December 1997, the Company purchased the assets of Sunshine Medical
Equipment, Inc., a home respiratory provider, for $3.3 million and the assets
of the Quest entities of Bradley Medical, Inc., home respiratory care
businesses, for $33.0 million.
During 1997, the Company acquired 17 companies providing primarily home
respiratory and diagnostic services. The total purchase price for these
companies was $9.0 million, and no single acquisition had total costs in excess
of $2.0 million.
42
<PAGE>
In January 1998, the Company acquired all the outstanding capital stock of
Paragon Rehabilitative Service, Inc., an Ohio corporation which provides
contract rehabilitation services to nursing homes, long-term care facilities and
other healthcare facilities. The merger consideration was $10.8 million, which
was paid through the issuance of 361,851 shares of the Company's Common Stock.
In February 1998, the Company acquired the assets of Health Star, Inc. for
$2.9 million, the stock of Medicare Convalescent Aids of Pinellas for $4.5
million, the stock of Michigan Medical Supply for $1.9 million, and the assets
of Nutmeg Respiratory Homecare for $2.3 million, which are all home respiratory
providers. The Company issued 122,376 shares of the Company's Common Stock in
connection with the Medicare Convalescent acquisition.
In March 1998, the Company acquired the asset of Chancy Healthcare
Services, Inc., a provider of home respiratory services, for $5.3 million.
In May 1998, the Company acquired the assets of American Mobile Health
Systems, Inc., a provider of diagnostic services. The merger consideration was
$2.8 million, which was paid through the issuance of 89,634 shares of the
Company's Common Stock. The Company also acquired the assets of Eastern Home
Care and Oxygen, Inc. for $3.8 million and the assets of First Community Care,
Inc. ("FCCI"), for $7.9 million, both of which are providers of home respiratory
services. The purchase price for FCCI was paid through the issuance of 90,627
shares of the Company's Common Stock.
In June 1998, the Company acquired the assets of certain entities which
provided office facilities, equipment and management services to Metropolitan
Lithotripter Associates, which is a professional corporation composed of
approximately 200 urologists that provides renal lithotripsy and other services
in the Greater New York metropolitan area. The consideration was $10.9 million,
which was paid through the issuance of 348,974 shares of the Company's Common
Stock and a cash payment of $3.1 million.
In June 1998, the Company acquired the assets of Apex Home Care, Inc. for
$2.7 million and the assets of Osborne Medical, Inc. for $2.0 million, both of
which are providers of home respiratory services.
In July 1998, the Company acquired the stock of Collins Rentals, Inc., a
provider of home respiratory services, for $2.5 million.
In August 1998, the Company acquired the assets of American Oxygen Services
of Tennessee, a provider of home respiratory services. The merger consideration
was $2.0 million, which was paid through the issuance of 61,061 shares of the
Company's Common Stock. The Company also acquired the stock of Home Care Oxygen
Services, Inc. for $3.7 million and the assets of Tri-County Medical Oxygen,
Inc. for $2.1 million, both of which are home respiratory service providers.
In September 1998, the Company acquired the assets of Accucare Medical
Corporation, a provider of home respiratory services. The merger consideration
was $2.9 million, which was paid through the issuance of 128,972 shares of the
Company's Common Stock. The Company also purchased the assets of Valley Oxygen
and Medical Equipment Inc., a provider of home respiratory services, for $2.5
million.
In October 1998, the Company purchased the assets of Arrowhealth Medical
Supply for $7.9 million, the assets of Professional Respiratory Care, Inc. for
$2.2 million and the stock of Acadia Home Care for $2.2 million, which are all
providers of home respiratory services.
In November 1998, the Company acquired the assets of Norcare Home Medical,
Inc. for $2.5 million, the stock of RespaCare, Inc. for $3.8 million and the
assets of Caremor Health Services, Inc. for $2.2 million, which are all
providers of home respiratory services.
During 1998, the Company acquired 71 additional companies providing
primarily home respiratory and diagnostic services. The total purchase price for
these companies was $57.0 million, and no single acquisition had total costs in
excess of $2.0 million. The Company issued 302,718 shares in connection with
these acquisitions.
In January 1999, the Company acquired the assets of Certified Medical
Associates, Inc. The total purchase price was approximately $2.0 million.
43
<PAGE>
In March 1999, the Company acquired the stock of Medical Rental Supply,
Inc. and Andy Boyd's Inhome Medical/Inhome Medical, Inc. The total purchase
price was approxiately $3.3 million.
In May 1999, the Company entered into a management agreement with Novacare,
Inc., a provider of home respiratory services. The total cost was approximately
$2.5 million.
During 1999, the Company acquired 12 additional companies providing
primarily home respiratory services. The total purchase price for these
companies was $6.5 million, and no single acquisition had total costs in excess
of $2.0 million.
Divestitures
On July 11, 1991, the Company sold its audiology business to Hearing Health
Services, Inc., a newly-formed affiliate of privately-held Foster Management
Company. The sale involved all customer lists, license agreements, store leases,
property and equipment, accounts receivable and merchandise inventory. The
Audiology Division's products and services, which were offered at 34 retail
outlets (of which 12 were located in speech pathologist/professional/doctor
offices) in Florida and Illinois, included hearing aids, protective and
assistive listening devices, and hearing, testing and aural rehabilitation
services. The Company received $5 million for substantially all the assets of
the Audiology Division as follows: $1 million in cash and a combination of
common and preferred stock valued by independent financial advisors at $4
million. The common stock was repurchased for $2.6 million plus interest in July
1996 and the preferred stock is convertible under certain conditions and has a
liquidation preference of $2 million. Approximately $450,000 of the cash
proceeds were paid to NovaCare, Inc., an affiliate of Foster Management Company,
representing amounts owed by IHS to NovaCare, Inc. for services rendered. The
Company determined to discontinue the audiology business in June 1990 because it
could not be integrated effectively into its primary business. A substantial
portion of the audiology business had been acquired from Dr. Thomas F. Frist,
Jr., who was a director of the Company until June 1993.
On April 27, 1994, the Company sold its approximate 92% interest in
Professional Community Management International, Inc. ("PCM") to PCM at its book
value of $4.3 million. The Company accepted a promissory note for the full
amount of the purchase price, which bears interest at 6.36% per annum and is
payable by PCM in installments over a 40 year period. The promissory note is
secured by a pledge of PCM stock held by certain PCM stockholders and a security
interest in all tangible and intangible assets of PCM. Certain stockholders of
PCM also executed personal guarantees with respect to the payment of $1.2
million over a period of six years, subject to reduction in an amount equal to
the amortization of the principal amount of the note. PCM manages residential
condominium units in retirement communities in Southern California.
In July 1996, IHS sold its pharmacy division to Capstone Pharmacy Services,
Inc. ("Capstone") for a purchase price of $150 million, consisting of cash of
$125 million and shares of Capstone common stock having a value of $25 million.
In connection with the sale of the pharmacy division, IHS agreed that prior to
July 2001 neither it nor any of its subsidiaries would be involved, directly or
indirectly, in the operation, management or conduct of any business that
provides institutional pharmacy dispensing or consulting services to long-term
care facilities (including skilled nursing facilities) located within a 150 mile
radius of any IHS long-term care facility or any pharmacy sold to, or operated
by, Capstone, except in certain limited circumstances. The Company's pharmacy
division operated institutional pharmacies in eight states providing service to
over 40,000 beds within 379 facilities. Approximately 17% of the beds were then
owned, leased or managed by IHS. IHS' revenues for the year ended December 31,
1996 included revenue generated by the pharmacy division of approximately $63.6
million (of which $11.3 million was revenue from services to IHS facilities).
The Company's earnings before income taxes for the year ended December 31, 1996
included earnings before income taxes generated by the pharmacy division of
approximately $6.4 million.
On October 9, 1996, Integrated Living Communities, Inc. ("ILC"), at the
time a wholly-owned subsidiary of IHS which provided assisted living and
related services to the private pay elderly market, completed an initial public
offering of ILC common stock. IHS sold 1,400,000 shares of ILC common stock in
the offering, for which it received aggregate net proceeds of approximately
$10.4 million. In
44
<PAGE>
addition, ILC used approximately $7.4 million of the proceeds from the offering
to repay outstanding indebtedness to IHS. IHS recorded a pre-tax loss of
approximately $8.5 million in the fourth quarter of 1996 as a result of this
transaction. On July 2, 1997, IHS sold the remaining 2,497,900 shares of ILC
common stock it owned, representing 37.3% of the outstanding ILC common stock,
for $11.50 per share in a cash tender offer (the "ILC Sale"). IHS recorded a
gain of approximately $3.9 million from the ILC Sale in 1997. IHS' revenues for
the year ended December 31, 1996 included revenue generated by ILC of
approximately $17.1 million. The Company's earnings (loss) before income taxes
for the year ended December 31, 1996 included earnings before income taxes
generated by ILC of approximately $1.7 million.
In February 1998, the Company sold its outpatient clinics to Continucare
Rehabilitation Services, Inc. for $10.0 million. During the fourth quarter of
1997, the Company wrote down its basis in its outpatient clinics to net
realizable value. Accordingly, no gain or loss was recognized by the Company
during the first quarter of 1998.
In the first half of 1998 the Company sold ten facilities to Omega, which
leased such facilities to Lyric, which is 50% owned by IHS. The Company manages
these facilities for Lyric. See "-- Acquisitions -- Facility Expansion."
In June 1998, the Company sold 11 long-term care facilities for
approximately $56.7 million, which approximated the Company's basis. The Company
recognized no gain or loss on the transaction.
In July 1998, the Company sold four of its facilities held for sale for
approximately $1.0 million. The Company recognized no gain or loss on the
transaction.
In August 1998, the Company sold portions of its institutional pharmacy
division, which was acquired by IHS as part of the Horizon/CMS assets acquired
from HEALTHSOUTH Corporation in December 1997. The Company recorded no gain or
loss on the transaction.
Effective January 1, 1999, the Company sold 27 facilities and 5 specialty
hospitals to Monarch, which leased such facilities to Lyric. The Company has
accounted for the sale as a financing. The Company manages these facilities for
Lyric. See "-- Acquisitions -- Facility Expansion."
In the first half of 1999, the Company sold its remaining assets of the
home health nursing segment to Medshares/IHS Acquisition, Inc., an affiliate of
Medshares, Inc., for cash of $26.3 million. The Company had previously adopted a
plan of disposition for this business segment and recorded a $204.9 million loss
(net of tax benefit) from discontinued operations in 1998. The results of such
transaction are included in the 1998 loss from discontinued operations.
In September 1999, the Company sold its Jacksonville, Florida nursing
facility to Monarch LP for net proceeds of $3.7 million. Monarch LP then leased
this facility to a subsidiary of Lyric, which the Company is currently managing.
The Company has accounted for the sale as a financing.
On October 1, 1999 the Company sold its infusion division to APS
Enterprises Holding Company ("APS") for a purchase price of $17.35 million and a
20% equity interest in APS valued at one dollar. The Company had determined that
the business was significantly impaired due to a decreasing demand for the goods
and services offered, and it was in the Company's best interest to sell the
division. As a result of the sale, the Company recorded a pretax loss of $383.8
million.
In December 1999, the Company sold its West Broward, Florida nursing
facility to Nationwide Senior Healthcare, Inc. for $3.1 million. The Company
did not record a gain or loss on this transaction.
In developing its post-acute healthcare system, IHS continuously evaluates
whether owning and operating businesses which provide certain ancillary
services, or contracting with third parties for such services, is more
cost-effective. As a result, the Company is continuously evaluating its existing
operations to determine whether to retain or divest operations. To date, IHS has
divested its pharmacy, assisted living services, home nursing and infusion
divisions, and may divest additional divisions or assets in the future.
45
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the fiscal periods indicated the
percentage of net revenues represented by certain items reflected in the
Company's statement of operations and the percentage change in such items from
the prior corresponding fiscal periods.
<TABLE>
<CAPTION>
PERIOD TO PERIOD INCREASE
PERCENTAGE OF NET REVENUES (DECREASE)
--------------------------------- --------------------------
YEAR YEAR
ENDED ENDED
DECEMBER DECEMBER
31, 1998 31, 1999
COMPARED COMPARED
YEARS ENDED DECEMBER 31, TO 1997 TO 1998
--------------------------------- ------------ -------------
1997 1998 1999
----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Total revenues ........................................... 100.0% 100.0% 100% 111.9% ( 13.9)%
Costs and Expenses:
Operating, general and administrative expenses (includ-
ing rent) .............................................. 77.9 78.9 84.5 114.7 ( 7.8)
Depreciation and amortization ........................... 4.0 5.3 7.6 179.0 23.3
Interest, net ........................................... 6.8 8.0 12.6 151.5 34.5
Provision for settlement of of government claims ........ -- -- 1.5 * *
Reorganization costs .................................... -- -- .3 * *
Non-recurring charges ................................... 8.8 -- 81.1 ( 100.0) *
----- ----- ----- ------- ---------
Earnings (loss) from continuing operations before eq-
uity in earnings of affiliates, income taxes, extraor-
dinary items and cumulative effect of accounting
change ................................................ 2.5 7.8 (87.6) 549.6 (1,067.7)
Equity in earnings of affiliates ......................... (0.0) (0.0) .1 336.4 *
----- ----- ----- ------- ---------
Earnings (loss) from continuing operations before in-
come taxes, extraordinary items and cumulative ef-
fect of accounting change ............................. 2.5 7.8 (87.5) 549.1 (1,065.2)
Federal and state income taxes ........................... 2.3 3.2 .4 186.2 ( 89.7)
----- ----- ----- ------- ---------
Earnings (loss) from continuing operations before ex-
traordinary items and cumulative effect of account-
ing change ............................................ 0.2 4.6 (87.9) 5,358.2 (1,743.0)
Loss from discontinued operations ........................ 1.0 6.9 -- 1,403.0 *
----- ----- ----- ------- ---------
Loss before extraordinary items and cumulative ef-
fect of accounting change ............................. ( 0.8) ( 2.3) (87.9) ( 511.1) (3,208.6)
Extraordinary items ...................................... 1.5 -- 0.4 * 100.0
----- ----- ----- ------- ---------
Loss before cumulative effect of accounting change...... ( 2.3) ( 2.3) (87.5) ( 114.6) (3,195.1)
Cumulative effect of accounting change ................... 0.1 -- -- * *
----- ----- ----- ------- ---------
Net loss ............................................... ( 2.4) ( 2.3) (87.5) ( 102.9) (3,195.1)
===== ===== ===== ======= =========
</TABLE>
- - ----------
* Not meaningful.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
The Company's 1999 results of operations were substantially affected by the
implementation of the prospective payment system for Medicare skilled nursing
facilities, which was completed for IHS' facilities on June 1, 1999. The per
diem reimbursement rates under PPS were significantly lower than anticipated by
the industry, and generally have been less than the amount the Company's
facilities received on a daily basis under cost-based reimbursement. Moreover,
since IHS treats a greater percentage of higher acuity patients than many
nursing facilities, IHS has also been adversely affected because the federally
established per diem rates do not adequately compensate the Company for the
additional expenses of caring for such patients. In addition, the implementation
of PPS has resulted in a greater than expected decline in demand for the
Company's therapy services .
Net revenues for the year ended December 31, 1999 decreased $412.89
million, or 13.9% to $2.6 billion from the comparable period in 1998. Such
decrease was attributable to (i) $264.35 million from inpatient services, which
includes inpatient facilities, contract services and management and other, which
were in operations in both periods, as well as, inpatient services disposed of
in 1999 of $245.32 million and (ii) $28.08 million from diagnostic services
companies, which were in operations in both periods, offset by (iii) a net
increase of $18.41 million from home respiratory/infusion/DME companies, which
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were in operations in both periods and home respiratory/infusion/DME companies
acquired during 1998 reduced by services disposed of in 1999, (as well as $19.43
million from the sale of the infusion division), and (iv) an increase of $1.3
million from lithotripsy services, which were in operations in both periods and
lithotripsy services acquired in 1998. Increases in business segments revenues
resulting from 1999 acquisitions are as follows: (i) $107.70 million from
inpatient services, (ii) $14.85 million from home respiratory/infusion/DME, and
(iii) $2.03 million from lithotripsy services.
Operating, general and administrative expense (including rent) decreased
$182.57 million or 7.8%, from the year ended December 31, 1998. Such decrease
was attributable to (i) $76.32 million from inpatient services, which includes
inpatient facilities, contract services and management and other, which were in
operations in both periods, as well as inpatient services disposed of in 1999 of
$215.26 million, (ii) $5.9 million from Diagnostic services, which were in
operations in both periods, offset by (iii) a net increase of $28.1 million from
home respiratory/infusion/DME companies, which were in operations in both
periods and home respiratory/infusion/DME companies acquired in 1998 reduced by
services disposed of in 1999, (as well as $18.3 million from the sale of the
infusion division), and (iv) an increase of $2.48 million from lithotripsy
services, which were in operations in both periods and lithotripsy services
acquired in 1998. Increases in business segment expenses resulting from 1999
acquisitions are as follows: (i) $91.03 million from inpatient services, (ii)
$10.85 million from home respiratory/infusion/DME, and (iii) $752,000 from
lithotripsy services.
Depreciation and amortization increased to $193.20 million during the year
ended December 31, 1999, a 23.3% increase as compared to $156.72 million in
1998. Of the $36.5 million increase, $2.34 million, or 6.41%, was attributable
to depreciation and amortization of businesses acquired in 1999. The remaining
increase was primarily due to the Company changing the estimated life of its
goodwill from 40 to 15-20 years, and depreciation and amortization of inpatient
services and home respiratory companies acquired during 1998.
Net interest expense increased $82.28 million, or 34.5%, during the year
ended December 31, 1999 to $320.92 million. The increase was primarily the
result of increased borrowings and higher interest rates under the revolving
credit facility.
During 1999, the Company recorded non-recurring charges of $2.08 billion
consisting primarily of: (i) a loss on impairment of long-lived assets of $1.64
billion, which applied to the following business segments: nursing/subacute
facilities ($951.31 million), rehabilitative therapy ($402.06 million),
respiratory therapy ($26.20 million) diagnostic ($143.42 million) and
lithotripsy ($118.51 million); (ii) a loss of $383.85 million from its sale of
its infusion business; (iii) a loss of $21.75 million in connection with the
closure of certain diagnostic operations; (iv) a loss of $10.87 million from
abandoned and terminated computer systems; (v) a loss of $7.02 million resulting
from the termination of its proposed sale of RoTech; (vi) a loss of $9.20
million from the settlement of notes receivable, and (vii) $2.17 million of
other charges.
The Company is a defendant in certain actions or the subject of
investigations concerning alleged violations of the False Claims Act or of
Medicare regulations. As a result of the Company's financial position during the
fourth quarter of 1999, various agencies of the federal government accelerated
efforts to reach a resolution of all outstanding claims and issues related to
the Company's alleged violation of healthcare statutes and related causes of
action. These matters involve various government claims, many of which are of
unspecified amounts. Because the government's review of these matters has not
been completed, management is unable to assess fully the merits of the
government's monetary claims. Based on a preliminary evaluation of the
government's estimable claims for which an unfavorable outcome is probable, the
Company recorded a $39.5 million accrued liability for such claims as of
December 31, 1999. However, the ultimate amount of any future settlement could
differ significantly from such provision.
The Company incurred $8.30 million of legal, accounting, consulting and
other fees in 1999 in connection with the Company's financial reorganization.
Earnings (loss) from continuing operations before income taxes,
extraordinary items and the cumulative effect of accounting change decreased by
1,065.2% to a loss of $2.24 billion for the year ended December 31, 1999 from
earnings of $232.02 million for the comparable period in 1998. The increase
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was primarily due to certain non-recurring charges discussed above. Excluding
the non-recurring charges, earnings (loss) before income taxes, extraordinary
items and the cumulative effect of accounting change in 1999 decreased $395.05
million, or 170.3%, from 1998. The decrease is primarily due to the decrease in
therapy services in the Company's contract rehabilitation division within the
long term care division and a decrease in the Company's rates for inpatient
services as a result of the implementation of a Balanced Budget Act mandated
prospective payment system (PPS) for the Company's nursing facilities during
1999. The provision for Federal and state income taxes decreased from $95.13
million in 1998 to $9.76 million in 1999. This decrease was primarily the result
of the non-recurring charge in 1999 and lower operating income.
In October 1998, the Company's Board of Directors adopted a plan to
discontinue operations of the home health nursing segment. Accordingly, 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 in 1998. The operating loss through September 30, 1998 (the
measurement date) was $35.90 million, net of the income tax benefit of $26.0
million. The loss on the disposal of assets, including estimated loss from
measurement date through the expected disposal date (June 30, 1999) is $168.97
million, net of the income tax benefit of $57.3 million.
Net loss and diluted loss per share for 1999 were $2.24 billion and $44.87
per share, respectively, compared to net loss and diluted loss per share for
1998 of $67.98 million and $1.08 per share, respectively. During 1998, the
Company incurred a $204.87 million loss from discontinued operations. Weighted
average shares decreased from 56,257,000 (diluted) in 1998 to 49,924,000
(diluted) in 1999. The weighted average shares decreased in 1999 since dilutive
securities were excluded because the effect is antidilutive.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The Company's 1998 results of operations were substantially affected by the
acquisition of 126 owned, leased or managed facilities (excluding facilities
subsequently sold), 12 specialty hospitals and a contract therapy business
having over 1,000 contracts acquired from HEALTHSOUTH Corporation on December
31, 1997 (the "Facility Acquisition"), the October 1997 acquisition of RoTech in
October 1997, a home respiratory home medical equipment and infusion therapy
company, and the Company's discontinuance of its home health nursing business in
the third quarter of 1998.
Net revenues for the year ended December 31, 1998 increased $1,569.56
million, or 111.9%, to $2,972.19 million from the comparable period in 1997.
Such increase was attributable to (i) $985.72 million from inpatient services,
which includes inpatient facilities, contract services and management and other,
which were in operations in both periods, as well as, inpatient services
acquired during 1997, including certain business from HEALTHSOUTH which were
acquired on December 31, 1997, (ii) $467.86 million from home
respiratory/infusion/DME companies operating in both periods and home
respiratory/infusion/DME companies acquired during 1997, including RoTech, which
was acquired in October 1997, (iii) $4.81 million from diagnostic services in
operation during 1997 and 1998, as well as, diagnostic services companies,
acquired in 1997, and (iv) $34.04 million from lithotripsy services businesses
acquired in 1997, which includes the Coram Lithotripsy Acquisition. Increases in
business segments revenue resulting from 1998 acquisitions are as follows: (i)
$28.78 million from inpatient services, (ii) $40.45 million from home
respiratory/infusion/DME, and (iii) $7.90 million from lithotripsy services.
Operating, general and administrative expense (including rent) increased
$1,252.71 million or 114.7%, from the year ended December 31, 1997. Such
increase was attributable to (i) $833.40 million from inpatient services, which
includes inpatient facilities, contract services and management and other, which
were in operations in both periods, as well as inpatient services businesses
acquired during 1997, including certain businesses acquired from HEALTHSOUTH on
December 31, 1997, (ii) $357.54 million from home respiratory/infusion/DME
companies acquired during 1997, including RoTech acquired in October 1997, and
(iii) $18.32 million from lithotripsy services businesses acquired in 1997,
which includes the Coram Lithotripsy Acquisition. Increases in business segment
expenses resulting from 1998 acquisitions are as follows: (i) $12.89 million
from inpatient services, (ii) $29.06 million from home respiratory/ infusion/DME
and (iii) $5.02 million from lithotripsy services.
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Depreciation and amortization increased to $156.72 million during the year
ended December 31, 1998, a 179.1% increase as compared to $56.16 million in
1997. Of the $100.56 million increase, $4.59 million, or 4.6%, was attributable
to depreciation and amortization of businesses acquired in 1998. The remaining
increase was primarily due to depreciation and amortization related to increased
routine and capital expenditures at existing facilities, increased debt issue
costs and depreciation and amortization of inpatient services and home
respiratory companies acquired during 1997.
Net interest expense increased $143.77 million, or 151.5%, during the year
ended December 31, 1998 to $238.65 million. The increase was primarily the
result of the full year effect of the $750 million term loan borrowed in
September 1997, the $400 million term loan borrowed in December 1997, increased
borrowings under the revolving credit facility and the 9 1/4% Senior
Subordinated Notes due 2008 issued in September 1997.
During 1997, the Company recorded non-recurring charges of $123.46 million,
consisting primarily of: a $27.55 million non-recurring charge resulting from
the termination of its proposed merger with Coram; a $7.58 million gain on the
sale of shares received on the sale of the pharmacy division; a $3.91 million
gain on the sale of its remaining interest in ILC; and a $4.75 million charge
resulting from termination payments in connection with the RoTech acquisition.
In addition, in connection with the acquisitions of CCA, RoTech, the Coram
Lithotripsy Division and certain businesses from HEALTHSOUTH, the Company chose
to dispose of certain business activities, including the Company's physician
practices, outpatient clinics and selected nursing facilities in nonstrategic
markets, as well as all international activities. In addition, the Company
terminated a national purchasing contract and wrote-off a purchase option
deposit on certain managed facilities. As a result the Company recorded a
non-recurring charge of $103.41 million.
Earnings from continuing operations before income taxes and extraordinary
items increased by 549.1% to $232.02 million for the year ended December 31,
1998 from $35.75 million for the comparable period in 1997. The increase was
primarily due to certain non-recurring charges discussed above. Excluding the
non-recurring charges, earnings before income taxes and extraordinary items in
1998 increased $72.82 million, or 45.7%, over 1997. Of this increase, $24.06
million, or 33.0%, resulted from acquisitions consummated subsequent to December
31, 1997. The remaining increase was due to acquisitions consummated during 1997
(principally the Facility Acquisition) and improved operations from inpatient
services and home respiratory companies in operation during both periods. The
provision for state and federal income taxes increased from $33.24 million in
1997 to $95.13 million in 1998. This increase was primarily the result of the
non-recurring charge in 1997.
In October 1998, the Company's Board of Directors adopted a plan to
discontinue operations of the home health nursing segment. Accordingly, 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 through September 30, 1998 (the measurement date)
was $35.90 million, net of the income tax benefit of $26.0 million. The loss on
the disposal of assets, including estimated loss from measurement date through
the expected disposal date (June 30, 1999) is $168.97 million, net of the income
tax benefit of $57.3 million. The Company has reclassified its prior financial
statements to present the operating results of the home health nursing segment
as a discontinued operation.
Net loss and diluted loss per share for 1998 were $67.98 million and $1.08
per share, respectively, compared to net loss and diluted loss per share for
1997 of $33.5 million and $0.60 per share. During 1998, the Company incurred a
$204.87 million loss from discontinued operations, compared to $13.63 million in
1997. During the year ended December 31, 1997, the Company incurred a $20.55
million (net of tax benefit), or 53 cents per share (diluted), extraordinary
loss on the extinguishment of debt and incurred a $1.83 million (net of tax
benefit), or 5 cents per share (diluted), loss on a cumulative effect of
accounting change related to the Company's adoption of EITF 97-13, which
required the Company to write-off the unamortized balance of costs of business
process engineering and information technology projects. There were no
extraordinary items or cummulative effect of accounting change in 1998. Weighted
average shares increased from 38,899,000 (diluted) in 1997 to 56,257,000
(diluted) in 1998. The weighted average shares increased because the
approximately 15.6 million shares issued in the RoTech
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Acquisition in October 1997 were outstanding for all of 1998 and in June 1998
$114.80 million aggregate principal amount of the Company's 6% Convertible
Subordinated Debentures due 2003 were converted into approximately 3.57 million
shares.
LIQUIDITY AND CAPITAL RESOURCES
On February 2, 2000, the Company and substantially all its operating
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court") (case nos. 00-00389 through 00-00825,
inclusive). The Company is currently operating its business as a
debtor-in-possession subject to the jurisdiction of the Bankruptcy Court.
On February 3, 2000, the Company entered into a revolving credit agreement
with Citicorp USA, Inc. and other lenders to provide the Company with up to $300
million in debtor-in-possession financing (the "DIP Financing Agreement"). The
DIP Financing Agreement provides for maximum borrowings by the Company equal to
the sum of (i) up to 85% of the then outstanding domestic eligible accounts
receivable (other than Medicaid accounts receivable), (ii) the lesser of $40
million or 85% of eligible Medicaid accounts receivable, (iii) the lesser of $25
million and 40% of the orderly liquidation value of eligible real estate, (iv)
100% of cash and 95% of cash equivalents on deposit or held in the Citibank
collateral account and (v) the adjusted earnings before interest, taxes,
amortization and depreciation ("EBITDA") of RoTech for the two most recent
fiscal quarters up to a maximum of $150 million through May 3, 2000, $125
million from May 4, 2000 through August 2, 2000 and $100 million thereafter. The
DIP Financing Agreement significantly limits IHS' ability to incur indebtedness
or contingent obligations, to make additional acquisitions, to sell or dispose
of assets, to create or incur liens on assets, to pay dividends, and to merge or
consolidate with any other person. The obligations of the Company under the DIP
Financing Agreement are jointly and severally guaranteed by each of the
Company's filing subsidiaries (the "Filing Subsidiaries"). Pursuant to the
agreement, the Company and each of its Filing Subsidiaries have granted to the
lenders first priority lien and security interest (subject to valid, perfected,
enforceable and nonavoidable liens of record existing immediately prior to the
petition date and other exceptions as described in the DIP Financing Agreement)
in all of the Company's assets including, but not limited to, all accounts,
chattel paper, contracts and documents, equipment, inventory, intangibles, real
property, bank accounts and investment property. On March 6, 2000, the
Bankruptcy Court granted final approval of the DIP Financing Agreement. As of
March 30, 2000, no amounts are outstanding under the DIP Financing Agreement.
The DIP Financing Agreement matures on March 6, 2002.
On February 2, 2000, the Company received approval from the Bankruptcy
Court to pay pre-petition and post-petition employee wages, salaries, benefits
and other employee obligations. The Bankruptcy Court also approved orders
granting authority, among other things, to pay pre-petition claims of certain
critical vendors and patient obligations. The Company intends to pay
post-petition claims of all vendors and providers in the ordinary course of
business.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness are
enjoined and other contractual obligations may not be enforced against the
Company. In addition, the Company may reject executory contracts and lease
obligations. Parties affected by these rejections may file claims with the
Bankruptcy Court in accordance with the reorganization process. If the Company
is able to successfully reorganize, substantially all unsecured liabilities as
of the petition date would be subject to modification under a plan of
reorganization to be voted upon by all impaired classes of creditors and equity
security holders and approved by the Bankruptcy Court.
Due to the failure to make payments and comply with certain financial
covenants, the Company is in default of substantially all its long-term
obligations. These obligations are classified as current liabilities as of
December 31, 1999.
At December 31, 1999, the Company had a net working deficit of $3.06
billion, as compared with net working capital of $341.2 million at December 31,
1998. There are no material capital commitments for capital expenditures as of
the date of this filing. Patient accounts receivable and third-party payor
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settlements receivable decreased $66.56 million to $582.55 million at December
31, 1999, as compared to $649.11 million at December 31, 1998. The decrease was
primarily attributable to the sale of the infusion business unit, exit of
certain diagnostic operations 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 was
$693.61 million at December 31, 1999 as compared with $735.17 million at
December 31, 1998. Third-party payor settlements receivable from Federal and
state governments (i.e., Medicare and Medicaid cost reports) were $82.54 million
at December 31, 1999 as compared to $103.76 million at December 31, 1998.
All remaining balance sheet changes were primarily due to acquisitions,
divestitures and certain non-recurring charges.
The Company has outstanding $496.7 million aggregate principal amount of 9
1/4% Senior Subordinated Notes due 2008 (the "9 1/4% Senior Notes"), $450
million aggregate principal amount of 9 1/2% Senior Subordinated Notes due 2007
(the "9 1/2% Senior Notes"), $144.0 million aggregate principal amount of 10
1/4% Senior Subordinated Notes due 2006 (the "10 1/4% Senior Subordinated
Notes"), $132,000 aggregate principal amount of other senior subordinated notes
and $144.6 million aggregate principal amount of convertible subordinated
debentures. The indentures under which the 10 1/4% Senior Notes, the 9 1/2%
Senior Notes and the 9 1/4% Senior Notes were issued contain certain covenants,
including, but not limited to, covenants with respect to the following matters:
(i) limitations on additional indebtedness unless certain ratios are met; (ii)
limitations on other subordinated debt; (iii) limitations on liens; (iv)
limitations on the issuance of preferred stock by IHS' subsidiaries; (v)
limitations on transactions with affiliates; (vi) limitations on certain
payments, including dividends; (vii) application of the proceeds of certain
asset sales; (viii) restrictions on mergers, consolidations and the transfer of
all or substantially all of the assets of IHS to another person; and (ix)
limitations on investments and loans.
On September 15, 1997, the Company entered into a $1.75 billion revolving
credit and term loan facility with Citibank, N.A., as Administrative Agent, and
certain other lenders (the "New Credit Facility") to replace its existing $700
million revolving credit facility. The New Credit Facility consisted of a $750
million term loan facility (the "Term Facility") and a $1 billion revolving
credit facility, including a $100 million letter of credit subfacility and a $10
million swing line subfacility (the "Revolving Facility"). The Term Facility,
all of which was borrowed on September 17, 1997, was to mature on September 30,
2004. As of December 31, 1999, $736.9 million was outstanding and was to be
amortized as follows: each of 1999 (as to which three of the four payments were
made), 2000, 2001 and 2002 -- $7.5 million (payable in equal quarterly
installments); 2003 -- $337.5 million (payable in equal quarterly installments);
and 2004 -- $375.0 million (payable in equal quarterly installments). Any unpaid
balance will be due on the maturity date. 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 one and three-quarters percent or two 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 one-half percent or three quarters percent
(depending on the Debt/EBITDAR Ratio). The Term Facility can be prepaid at any
time in whole or in part without penalty.
In connection with the acquisition of certain businesses from HEALTHSOUTH,
IHS and the lenders under the New Credit Facility amended the New Credit
Facility to provide for an additional $400 million term loan facility (the
"Additional Term Facility") to finance a portion of the purchase price for the
acquisition and to amend certain covenants to permit the consummation of the
acquisition. The Additional Term Facility, which was borrowed at the closing of
the acquisition, matures on December 31, 2005. As of December 31, 1999, $393
million was oustanding and was to be amortized as follows: each of 1999 (as to
which three of the four payments were made) 2000, 2001, 2002 and 2003 -- $4
million (payable in equal quarterly installments); 2004 -- $176 million (payable
in equal quarterly installments); and 2005 -- $200 million (payable in equal
quarterly installments). The Additional Term Facility bears interest at a rate
equal to, at the option of IHS, either (i) in the case of Eurodollar loans, the
sum of (x) two and one quarter percent or two
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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 one
percent or one and one-quarter percent (depending on the Debt/EBITDAR Ratio).
The Additional Term Facility can be prepaid at any time in whole or in part
without penalty.
The Revolving Facility was to reduce to $800 million on January 1, 2001,
$600 million on January 1, 2002, $500 million on September 30, 2002 and $400
million on January 1, 2003, with a final maturity on September 15, 2003;
however, the $100 million letter of credit subfacility and $10 million swing
line subfacility will remain at $100 million and $10 million, respectively,
until final maturity. The Revolving 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). Amounts repaid under
the Revolving Facility may be reborrowed prior to the maturity date.
The New Credit Facility limits IHS' ability to incur indebtedness or
contingent obligations, to make additional acquisitions, to sell or dispose of
assets, to create or incur liens on assets, to pay dividends, and to merge or
consolidate with any other person and prohibits the repurchase of Common Stock.
In addition, the New Credit Facility requires that IHS meet certain financial
ratios, and provides the banks with the right to require the payment of all
amounts outstanding under the facility, and to terminate all commitments under
the facility, if there is a change in control of IHS or if any person other than
Dr. Robert N. Elkins, IHS' Chairman and Chief Executive Officer, or a group
managed by Dr. Elkins, owns more than 40% of IHS' stock. The New Credit Facility
is guaranteed by all of IHS' subsidiaries (other than inactive subsidiaries) and
secured by a pledge of all of the stock of substantially all of IHS'
subsidiaries.
The New Credit Facility replaced the Company's $700 million revolving
credit facility (the "Prior Credit Facility"). As a result, the Company recorded
an extraordinary loss on extinguishment of debt of approximately $2.39 million
(net of related tax benefit of approximately $1.52 million) in the third quarter
of 1997 resulting from the write-off of deferred financing costs of $3.91
million related to the Prior Credit Facility.
Net cash used by operating activities was $37.18 million for the year ended
December 31, 1999 as compared to net cash of $80.4 million provided by operating
activities for the comparable period in 1998. Cash was used in operating
activities for the year ended December 31, 1999 primarily because the Company
had incurred a net loss from continuing operations before non-recurring charges.
Net cash provided by financing activities was $247.83 million for the year
ended December 31, 1999 as compared to $249.57 million for the comparable period
in 1998. In both periods, the Company received proceeds from long-term
borrowings. In 1998 the Company reissued in connection with an acquisition
347,700 shares of its Common Stock in treasury, which shares had been
repurchased during 1997. IHS also reissued 658,824 shares of its Common Stock in
treasury to fund its key employee supplemental executive retirement plans, which
shares were repurchased in 1998. In 1998 IHS repurchased 1,060,500 shares of
Common Stock for approximately $18.47 million. In 1999, IHS repurchased
3,607,000 shares of its Common Stock for approximately $24.04 million, cancelled
the issuance of the 658,824 common shares to fund its key employee supplemental
executive retirement plans and reissued and subsequently cancelled 3,415,556
common shares of treasury stock in connection with its employee deferred
compensation plan. Also in 1999 the Company amended certain loan agreements
which resulted in cash used to pay financing costs of approximately $16.5
million as compared to $1.4 million in 1998.
Net cash used by investing activities was $204.64 million for the year
ended December 31, 1999 as compared to $259.64 million for the year ended
December 31, 1998. Cash used for the purchase of property, plant and equipment
was $154.45 million for the year ended December 31, 1999 and $222.27 million in
the
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comparable period in fiscal 1998. Cash used for business acquisitions was $31.15
million for 1999 as compared to $206.93 million for 1998. The Company received
$41.28 million from the disposition of assets in 1999 and $175.81 million from
the disposition of assets in 1998.
IHS' contingent liabilities (other than liabilities in respect of
litigation and the contingent payments in respect to the First American
acquisition) aggregated approximately $108.72 million as of December 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 $7.13 million or the
facility's fair market value. IHS has established several irrevocable standby
letters of credit with the Bank of Nova Scotia and other financial institutions
totaling $31.93 million at December 31, 1999 to secure certain of the Company's
self-insured workers' compensation obligations, health benefits and other
obligations. In addition, IHS has several surety bonds in the amount of $69.68
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 also obligated to
make contingent payments of $155 million in respect to IHS' acquisition of First
American, of which $131.65 million (representing its present value) was recorded
on the balance sheet at December 31, 1999. 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.
See " -- Acquisition and Divestiture History -- Acquisitions." In addition, IHS
has obligations under operating leases aggregating approximately $998.4 million
at December 31, 1999.
The liquidity of the Company will depend in large part on the timing of
payments by private third-party and governmental payors.
YEAR 2000 COMPLIANCE
The Year 2000 problem (the "Year 2000 Problem" or "Year 2000") was to have
resulted from computer programs and devices that did not differentiate between
the year 1900 and the year 2000 because they were written using two digits
rather than four to define the applicable year; accordingly, computer systems
that have time-sensitive calculations potentially would not properly recognize
the year 2000. This could have resulted in system failures or miscalculations
causing disruptions of the Company's operations, including, without limitation,
manufacturing, distribution, clinical development, research and other business
activities. The Year 2000 Problem potentially affected substantially all of IHS'
business activities. The Company believes that as a result of its Year 2000
remediation and planning programs, the Year 2000 Problem has not, as of March
15, 2000, had a material adverse effect on the operations or financial results
of the Company. As of December 31, 1999, the Company estimates that it had
incurred approximately $10.9 million in its Year 2000 efforts, including without
limitation, outside consulting fees and computer systems upgrades, but excluding
internal staff costs, all of which has been expensed. It is possible that IHS
will experience Year 2000 related problems in the future, particularly with its
non-business critical systems, which may result in failures or miscalculations
resulting in inaccuracies in computer output or disruptions of operations.
However, IHS believes that the Year 2000 Problem will not pose significant
operational problems for its business critical computer systems and equipment.
The financial impact of future remediation activities that may become necessary,
if any, cannot be known precisely at this time, but it is not expected to be
material.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998 the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm
53
<PAGE>
commitment, (b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposures. In 1999, the
Financial Accounting Standards Board issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of SFAS No. 133. The purpose of this statement is to delay the effective date
of SFAS No. 133. SFAS No. 137 states that SFAS No. 133 will be effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. The
adoption of this statement is not expected to have a material impact on the
Company's financial statements.
In March 1998 the Accounting Standards Executive Committee ("ASEC") of the
American Institute of Certified Public Accountants issued Statement of Position
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use ("SOP 98-1"). SOP 98-1 provides guidance as to whether certain
costs for internal use software should be capitalized or expensed when incurred.
In addition, in June 1998 the ASEC issued Statement of Position 98-5, Reporting
on the Costs of Start-up Activities ("SOP 98-5"). SOP 98-5 provides guidance on
the financial reporting of start-up costs. It requires costs of start-up
activities to be expensed as incurred. The adoption of SOP 98-1 and 98-5 are
effective for 1999. The adoption of SOP 98-1 and 98-5 did not have a material
impact on the financial statements.
QUARTERLY RESULTS (UNAUDITED)
Set forth below is certain summary information with respect to the
Company's operations for the last eight fiscal quarters.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
1998
--------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
------------ ----------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues ............................... $761,687 $740,754 $ 750,852 $718,893
-------- -------- ---------- --------
Cost and expenses:
Operating, general and administrative ex-
penses (including rent) .................... 599,011 572,063 578,776 595,334
Depreciation and amortization ............... 35,601 36,595 39,456 45,067
Interest net ................................ 60,658 58,187 59,820 59,982
Provision for settlement of government
claims (1) ................................. -- -- -- --
Reorganization expenses ..................... -- -- -- --
Loss on impairment of long-lived assets
and other non-recurring charges (2) (3). -- -- -- --
-------- -------- ---------- --------
Earnings (loss) from continuing operations
before equity in earnings of affiliates,
extraordinary items and income taxes ....... 66,417 73,909 72,800 18,510
Equity in earnings (loss) of affiliates ...... 270 184 161 (231)
-------- -------- ---------- --------
Earnings (loss) from continuing opera-
tions, before extraordinary items and
income taxes ............................... 66,687 74,093 72,961 18,279
Federal and state income taxes ............... 27,342 30,378 29,914 7,494
-------- -------- ---------- --------
Earnings (loss) from continuing operations
before extraordinary items ................. 39,345 43,715 43,047 10,785
Loss from discontinued operations (4) ........ (1,764) (2,217) (200,889) --
-------- -------- ---------- --------
Earnings (loss) before extraordinary items 37,581 41,498 (157,842) 10,785
Extraordinary items (3) ...................... -- -- -- --
-------- -------- ---------- --------
Net earnings (loss) ......................... $ 37,581 $ 41,498 $ (157,842) $ 10,785
======== ======== ========== ========
Per Common Share-basic:
Earnings (loss) from continuing operations
before extraordinary items ................. $ 0.91 $ 0.95 $ 0.82 $ 0.21
Net earnings (loss) ......................... $ 0.87 $ 0.90 $ (3.02) $ 0.21
Per Common Share-Diluted:
Earnings (loss) from continuing operations
before extraordinary items ................. $ 0.77 $ 0.80 $ 0.77 $ 0.21
Net earnings (loss) ......................... $ 0.73 $ 0.76 $ (2.72) $ 0.21
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
1999
------------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31(5)
------------ ----------- --------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues ............................... $620,235 $624,251 $ 659,900 $ 654,913
-------- -------- ------------ ----------
Cost and expenses:
Operating, general and administrative ex-
penses (including rent) .................... 507,902 505,656 571,500 577,554
Depreciation and amortization ............... 46,374 46,617 46,718 53,493
Interest net ................................ 70,492 74,245 78,968 97,218
Provision for settlement of government
claims (1) ................................. -- -- -- 39,500
Reorganization expenses ..................... -- -- -- 8,296
Loss on impairment of long-lived assets
and other non-recurring charges (2) (3). -- -- 1,778,332 298,000
-------- -------- ------------ ----------
Earnings (loss) from continuing operations
before equity in earnings of affiliates,
extraordinary items and income taxes ....... (4,533) (2,267) (1,815,618) (419,148)
Equity in earnings (loss) of affiliates ...... 147 1,198 -- 863
-------- -------- ------------ ----------
Earnings (loss) from continuing opera-
tions, before extraordinary items and
income taxes ............................... (4,386) (1,069) (1,815,618) (418,285)
Federal and state income taxes ............... 2,202 3,562 4,000 --
-------- -------- ------------ ----------
Earnings (loss) from continuing operations
before extraordinary items ................. (6,588) (4,631) (1,819,618) (418,285)
Loss from discontinued operations (4) ........ -- -- -- --
-------- -------- ------------ ----------
Earnings (loss) before extraordinary items (6,588) (4,631) (1,819,618) (418,285)
Extraordinary items (3) ...................... -- -- -- 9,195
-------- -------- ------------ ----------
Net earnings (loss) ......................... $ (6,588) $ (4,631) $ (1,819,618) $ (409,090)
======== ======== ============ ==========
Per Common Share-basic:
Earnings (loss) from continuing operations
before extraordinary items ................. $ (0.13) $ (0.09) $ (37.64) $ (8.65)
Net earnings (loss) ......................... $ (0.13) $ (0.09) $ (37.64) $ (8.46)
Per Common Share-Diluted:
Earnings (loss) from continuing operations
before extraordinary items ................. $ (0.13) $ (0.09) $ (37.64) $ (8.65)
Net earnings (loss) ......................... $ (0.13) $ (0.09) $ (37.64) $ (8.46)
</TABLE>
- - ----------
(1) As a result of the Company's financial position during the fourth quarter of
1999, various agencies of the federal government accelerated efforts to
reach a resolution of all outstanding claims and issues related to the
Company's alleged violation of healthcare statutes and related causes of
action. These matters involve various government claims, many of which are
of
54
<PAGE>
unspecified amounts. Because the government's review of these matters has not
been completed, management is unable to assess fully the merits of the
government's monetary claims. Based on a preliminary evaluation of the
government's estimable claims, the Company recorded a $39.5 million accrued
liability for such claims, for which an unfavorable outcome is probable, as of
December 31, 1999. However, the ultimate amount of any future settlement could
differ significantly from such provision.
(2) In 1999, consists primarily of (i) a loss on impairment of long-lived assets
of $1,641,487,000, (ii) a loss of $383,846,000 from the sale of the
Company's infusion business, (iii) a loss of $21,754,000 in connection with
the closure of certain diagnostic operations, (iv) a loss of $10,865,000
from abandoned and terminated computer systems, (v) a loss of $7,020,000 on
the termination of its proposed sale of RoTech, (vi) a loss of $9,195,000
from the settlement of notes receivable, and (vii) $2,165,000 of other
charges. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Acquisition and Divestiture History"
and -- "Results of Operations" and Notes 1(g), 1(k) and 20 of Notes to
Consolidated Financial Statements.
(3) In October 1999, B&G Partners Limited Partnership transferred 9 1/4% Senior
Notes, 10 1/4% Senior Notes and 5 3/4% Senior Debentures (collectively
referred to as "Senior Notes") with a face value of approximately
$3,345,000, $6,050,000 and $1,091,000, respectively, to IHS in satisfaction
of its obligation to the Company pursuant to a promissory note dated
December 10, 1993 in the amount of $10,486,000. On the date of transfer to
IHS, the Senior Notes had a fair market value of approximately $1,291,000.
As a result, the Company recorded a loss on settlement of notes receivable,
(which has been reflected as a non-recurring charge), and a gain on
extinguishment of debt, (which has been reflected as an extraordinary item),
of approximately $9,195,000 in 1999.
(4) Represents loss from operations in all periods and loss on disposition in
the third quarter of 1998 of its home health nursing segment which was
discontinued in the third quarter of 1998. See note 8 of Notes to
Consolidated Financial Statements.
(5) In the fourth quarter of 1999, the Company made adjustments to account for
the transfer of 33 facilities to Monarch as a financing and to revise
certain accruals for incentive management fees (and related equity in
earnings of Lyric) and for workers' compensation obligations. These
adjustments had the following effect on operating results in the fourth
quarter: revenues were increased by $12,361,000 (related to rental revenue
and management fee income); operating, general and administrative expenses
were decreased by $1,500,000; depreciation and amortization were increased
by $4,164,000; interest was increased by $9,213,000 and equity in earnings
of affliates was increased by $420,000. These fourth quarter adjustments had
a net effect of $904,000 which related to previous fiscal periods in 1999.
The effect on individual quarterly results was not material.
From January 1, 1998 through December 31, 1999, the Company acquired 12
geriatric care facilities (including 9 facilities it had previously leased),
leased 52 geriatric care facilities and entered into management agreements to
manage 41 geriatric care facilities and 5 specialty hospitals. During this
period, the Company sold or transferred its interest in 59 geriatric care
facilities and 5 specialty hospitals (including 38 geriatric care facilities and
5 specialty hospitals that it currently manages) and agreements to manage 22
facilities were terminated. During this period, the Company sold its infusion
and home health nursing divisions. See "-- Acquisition and Divestiture History
- - -- Divestitures." 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. In September 1999 the Company cancelled the
transaction effective April 1, 1999, because Monarch was unable to obtain
adequate financing, and restored the assets to the Company's balance sheet.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company utilizes interest rate swap agreements to manage interest rate
exposure on its floating rate revolving credit and term loan facility. The
principal objective of such contracts is to minimize the risks and/or costs
associated with financial operating activities. Each interest rate swap is
matched as a hedge against existing floating rate debt. The Company does not
hold derivatives financial instruments for trading or speculative purposes. In
December 1999, the counterparties terminated certain floating to fixed interest
rate swap agreements with a total notional amount of $850,000,000. As a result,
the Company recorded a net settlement liability of $2,622,000 at December 31,
1999 which has been recorded as additional interest expense in the statement of
operations. At December 31, 1999, the Company had outstanding $150 million
notional amount of floating to fixed interest rate swap agreements. Subsequent
to December 31, 1999, such agreements were terminated and resulted in an
immaterial gain to the Company.
The following table provides information as of December 31, 1999, about the
Company's floating rate debt and derivative financial instruments that are
sensitive to changes in interest rates, including interest rate swaps and the
Company's term and revolving credit facilities. For debt obligations, the table
presents principal cash flows and related interest rates by contractual maturity
dates. For interest rate swaps, the table presents notional principal amounts
and weighted average fixed and floating interest rates by contractual maturity
dates. Notional amounts are used to calculate the contractual payments to be
exchanged under the interest rate swaps. All debt and swaps are denominated in
US dollars.
55
<PAGE>
PRINCIPAL PAYMENTS AND INTEREST RATE DETAIL BY CONTRACTUAL MATURITY
<TABLE>
<CAPTION>
FAIR VALUE
AS OF
2000 12/31/99
(IN THOUSANDS) ------------- ---------------
<S> <C> <C>
Floating Rate Debt:
Revolving Credit Facility ................... $ 963,914 $963,914
Floating Interest Rate(a)
Term Loan Facility .......................... 736,875 736,875
Floating Interest Rate(b)
Additional Term Loan Facility ............... 392,889 392,889
Floating Interest Rate(c)
Floating to Fixed Interest Rate Swaps
Notional Amounts ............................ 150,000 (77)(d)
Weighted Average Fixed Rate Payment ......... 5.84%
</TABLE>
- - ----------
(a) Floating rates based on 90-day USD LIBOR plus Revolving Credit Facility
Borrowing Rate Margin. Margin was .50% at December 31, 1999
(b) Floating rates based on 90-day USD LIBOR plus Term Loan Facility Borrowing
Rate Margin. Margin was 1.75% at December 31, 1999.
(c) Floating rates based on 90-day USD LIBOR plus Additional Term Loan Facility
Borrowing Rate Margin. Margin was 2.25% at December 31, 1999.
(d) Due to increases in interest rates during the 1st quarter of 1999, the
negative fair value of the existing swap portfolio has decreased
substantially.
56
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report ........................................................ 58
Consolidated Balance Sheets at December 31, 1998 and 1999 ........................... 59
Consolidated Statements of Operations for the years ended December 31, 1997, 1998 60
and 1999
Consolidated Statements of Comprehensive Income (Loss) for the years ended December
31, 1997, 1998 and 1999 ........................................................... 61
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1997, 1998 and 1999 .................................................. 62
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 64
and 1999
Notes to Consolidated Financial Statements .......................................... 65
Schedule II -- Valuation and Qualifying Accounts .................................... 109
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission have been
omitted because they are not required under the related instructions, are
inapplicable or the information has been provided in the Consolidated Financial
Statements or the Notes thereto.
57
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Integrated Health Services, Inc.:
We have audited the accompanying consolidated financial statements of Integrated
Health Services, Inc. and subsidiaries (the Company) as listed in the
accompanying index. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule listed in the
accompanying index. These consolidated financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Integrated Health
Services, Inc. and subsidiaries at December 31, 1998 and 1999 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 1 to the
financial statements, the Company has suffered recurring losses in each of the
years in the three-year period ended December 31, 1999 and, as of December 31,
1999, has a working capital deficiency of $3.06 billion and a stockholders'
deficit of $937 million. In addition, the Company is in default of various loan
agreements and, on February 2, 2000, the Company and substantially all of its
subsidiaries filed separate voluntary petitions for relief under Chapter 11 of
the U.S. Bankruptcy Code. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management intends to develop
a plan of reorganization for approval by the Company's creditors and
confirmation by the U.S. Bankruptcy Court. If the plan of reorganization is
accepted, continuation of the business thereafter is dependent on the Company's
ability to achieve successful future operations. The consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classifications of liabilities that might result from the outcome of this
uncertainty.
KPMG LLP
Baltimore, Maryland
April 10, 2000
58
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1999
-------------- ---------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .................................................. $ 31,391 $ 21,627
Temporary investments ...................................................... 12,828 39,321
Patient accounts and third-party payor settlements receivable, net
(note 3) ................................................................. 649,106 582,547
Inventories, prepaid expenses and other current assets ..................... 75,945 66,884
Income tax receivable ...................................................... 39,320 20,018
Net assets of discontinued operations (note 8) ............................. 12,500 --
---------- ------------
Total current assets ..................................................... 821,090 730,397
Property, plant and equipment, net (note 5) ................................. 1,469,122 1,164,677
Assets held for sale (note 2) ............................................... 7,500 --
Intangible assets (notes 2 and 6) ........................................... 2,970,163 1,353,920
Investments in and advances to affiliates (note 4) .......................... 16,343 8,669
Other assets ................................................................ 108,910 121,417
---------- ------------
Total assets ............................................................. $5,393,128 $ 3,379,080
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt (note 9) .............................. $ 16,760 $ 3,369,244
Accounts payable and accrued expenses (note 7) ............................. 463,130 416,582
---------- ------------
Total current liabilities ................................................ 479,890 3,785,826
Long-term debt (note 9):
Revolving credit and term loan facility less current maturities ............ 1,893,000 --
Mortgages and other long-term debt less current maturities ................. 227,269 318,271
Subordinated debt .......................................................... 1,245,908 --
---------- ------------
Total long-term debt ..................................................... 3,366,177 318,271
---------- ------------
Other long-term liabilities (note 10) ....................................... 169,099 166,164
Deferred income taxes (note 14) ............................................. 41,355 42,023
Deferred gain on sale-leaseback transactions ................................ 4,642 3,871
Commitments and contingencies (notes 11, 12, 15 and 22) Stockholders' equity
(deficit) (note 12):
Preferred stock, authorized 15,000,000 shares; no shares issued and out-
standing in 1998 and 1999 ................................................ -- --
Common stock, $0.001 par value. Authorized 150,000,000 shares; issued
52,416,527 shares in 1998 and 53,175,598 in 1999 (including 602,476
treasury shares in 1998 and 4,868,300 in 1999) ........................... 53 53
Additional paid-in capital ................................................. 1,370,049 1,374,546
Deficit .................................................................... (22,483) (2,262,410)
Treasury stock, at cost (602,476 shares in 1998 and 4,868,300 shares in
1999) .................................................................... (15,654) (49,264)
---------- ------------
Net stockholders' equity (deficit) ....................................... 1,331,965 (937,075)
---------- ------------
Total liabilities and stockholders' equity (deficit) ..................... $5,393,128 $ 3,379,080
========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
59
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
------------- ------------- ---------------
<S> <C> <C> <C>
Total revenues ............................................................... $1,402,628 $2,972,186 $ 2,559,299
---------- ---------- ------------
Costs and expenses:
Operating, general and administrative expenses (including rent) ............. 1,092,472 2,345,184 2,162,612
Depreciation and amortization ............................................... 56,162 156,719 193,202
Interest (net of investment income of $7,629 in 1997, $1,183 in 1998
and $2,012 in 1999) (note 9) .............................................. 94,880 238,647 320,923
Provision for settlement of government claims (note 22) ..................... -- -- 39,500
Reorganization expenses ..................................................... -- -- 8,296
Non-recurring charges, net (note 20) ........................................ 123,456 -- 2,076,332
---------- ---------- ------------
Total costs and expenses .................................................. 1,366,970 2,740,550 4,800,865
---------- ---------- ------------
Earnings (loss) from continuing operations before equity in earnings of
affiliates, income taxes, extraordinary items and cumulative effect of
accounting change ........................................................ 35,658 231,636 (2,241,566)
Equity in earnings of affiliates (note 4) .................................... 88 384 2,208
---------- ---------- ------------
Earnings (loss) from continuing operations before income taxes, ex-
traordinary items and cumulative effect of accounting change ............. 35,746 232,020 (2,239,358)
Federal and state income taxes (note 14) ..................................... 33,238 95,128 9,764
---------- ---------- ------------
Earnings (loss) from continuing operations before extraordinary items
and cumulative effect of accounting change ............................... 2,508 136,892 (2,249,122)
Loss from discontinued operations (net of tax) (note 8) ...................... (13,631) (204,870) --
---------- ---------- ------------
Loss before extraordinary items and cumulative effect of accounting
change ................................................................... (11,123) (67,978) (2,249,122)
Extraordinary items (note 17) ................................................ (20,552) -- 9,195
---------- ---------- ------------
Loss before cumulative effect of accounting change ........................ (31,675) (67,978) (2,239,927)
Cumulative effect of accounting change (note 21) ............................. (1,830) -- --
---------- ---------- ------------
Net loss .................................................................. $ (33,505) $ (67,978) $ (2,239,927)
========== ========== ============
Per Common Share -- basic:
Earnings (loss) from continuing operations before extraordinary items and
cumulative effect of accounting change .................................... $ 0.09 $ 2.83 $ (45.05)
Loss before extraordinary items and cumulative effect of accounting
change .................................................................... ( 0.39) (1.40) (45.05)
Loss before cumulative effect of accounting change .......................... ( 1.12) (1.40) (44.87)
Net loss .................................................................... $ (1.19) $ (1.40) $ (44.87)
========== ========== ============
Per Common Share -- diluted:
Earnings (loss) from continuing operations before extraordinary items and
cumulative effect of accounting change .................................... $ 0.33 $ 2.56 $ (45.05)
Loss before extraordinary items and cumulative effect of accounting
change .................................................................... ( 0.02) (1.08) (45.05)
Loss before cumulative effect of accounting change .......................... ( 0.55) (1.08) (44.87)
Net loss .................................................................... $ (0.60) $ (1.08) $ (44.87)
========== ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
60
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999
1997 1998 ----
<S> <C> <C> <C>
Net loss .................................................. $ (33,505) $ (67,978) $ (2,239,927)
Other comprehensive loss, net of tax:
Unrealized loss on available for sale securities ......... (5,756) -- --
--------- --------- ------------
Comprehensive loss ........................................ $ (39,261) $ (67,978) $ (2,239,927)
========= ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
61
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN
STOCK STOCK CAPITAL
----------- -------- -------------
<S> <C> <C> <C>
Balance at December 31, 1996 ................. $-- $24 $ 445,667
--- --- -----------
Issuance of 976,504 common shares in
payment of earn-out in connection with
prior acquisition (note 2) ................. -- 1 26,438
Issuance of 16,993,217 common shares in
connection with acquisitions (note 2) ...... -- 17 553,385
Issuance of 81,434 common shares in con-
nection with employee stock purchase
plan ....................................... -- -- 1,757
Exercise of employee stock options for
1,418,968 common shares .................... -- 1 28,169
Tax benefit arising from exercise of em-
ployee stock options ....................... -- -- 7,020
Reversal of unrealized gain on available
for sale securities ........................ -- -- --
Acquisition of 548,500 common shares of
treasury stock (at cost) ................... -- -- --
Declaration of cash dividend, $0.02 per
common share ............................... -- -- --
Net loss .................................... -- -- --
--- --- -----------
Balance at December 31, 1997 ................. -- 43 1,062,436
--- --- -----------
Exercise of employee stock options for
3,511,717 common shares, less 498,407 shares
tendered therefor at a value of $16,286..... -- 3 56,683
Issuance of 51,186 common shares in con-
nection with employee stock purchase
plan ....................................... -- -- 1,079
Issuance of 2,456,746 common shares in
connection with acquisitions (note 2) ...... -- 3 80,764
Issuance of 347,700 common shares of
treasury stock in connection with acqui-
sitions .................................... -- -- (351)
Issuance of 658,824 common shares of
treasury stock to fund key employee
supplemental executive retirement
plans ...................................... -- -- (2,569)
Acquisition of 1,060,500 common shares
of treasury stock (at cost) ................ -- -- --
Issuance of 223,466 common shares in
connection with debt payments .............. -- -- 8,554
Value of 1,841,700 options issued in con-
nection with acquisition of Rotech Med-
ical Corporation ........................... -- -- 32,743
Tax benefit arising from exercise of em-
ployee stock options ....................... -- -- 21,332
UNREALIZED
GAIN ON
RETAINED AVAILABLE FOR
EARNINGS SALE TREASURY
(DEFICIT) SECURITIES STOCK TOTAL
------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 ................. $ 79,814 $ 9,360 $ -- $ 534,865
---------- --------- ---------- -----------
Issuance of 976,504 common shares in
payment of earn-out in connection with
prior acquisition (note 2) ................. -- -- -- 26,439
Issuance of 16,993,217 common shares in
connection with acquisitions (note 2) ...... -- -- -- 553,402
Issuance of 81,434 common shares in con-
nection with employee stock purchase
plan ....................................... -- -- -- 1,757
Exercise of employee stock options for
1,418,968 common shares .................... -- -- -- 28,170
Tax benefit arising from exercise of em-
ployee stock options ....................... -- -- - 7,020
Reversal of unrealized gain on available
for sale securities ........................ -- (9,360) -- (9,360)
Acquisition of 548,500 common shares of
treasury stock (at cost) ................... -- -- (19,813) (19,813)
Declaration of cash dividend, $0.02 per
common share ............................... (814) -- -- (814)
Net loss .................................... (33,505) -- -- (33,505)
---------- --------- ---------- -----------
Balance at December 31, 1997 ................. 45,495 -- (19,813) 1,088,161
---------- --------- ---------- -----------
Exercise of employee stock options for
3,511,717 common shares, less 498,407
shares tendered therefor at a value of
$16,286..................................... -- -- -- 56,686
Issuance of 51,186 common shares in con-
nection with employee stock purchase
plan ....................................... -- -- -- 1,079
Issuance of 2,456,746 common shares in
connection with acquisitions (note 2) ...... -- -- -- 80,767
Issuance of 347,700 common shares of
treasury stock in connection with acqui-
sitions .................................... -- -- 13,059 12,708
Issuance of 658,824 common shares of
treasury stock to fund key employee
supplemental executive retirement
plans ...................................... -- -- 9,569 7,000
Acquisition of 1,060,500 common shares
of treasury stock (at cost) ................ -- -- (18,469) (18,469)
Issuance of 223,466 common shares in
connection with debt payments .............. -- -- -- 8,554
Value of 1,841,700 options issued in con-
nection with acquisition of Rotech Med-
ical Corporation ........................... -- -- -- 32,743
Tax benefit arising from exercise of em-
ployee stock options ....................... -- -- -- 21,332
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN
STOCK STOCK CAPITAL
----------- -------- --------------
<S> <C> <C> <C>
Issuance of 3,573,446 common shares in
connection with the conversion of the
Company's 6% convertible subordi-
nated debentures, less issuance costs of
$5,417....................................... -- 4 109,378
Net loss ..................................... -- -- --
-- -- -------
Balance at December 31, 1998 .................. -- 53 1,370,049
-- -- ---------
Exercise of employee stock options for
2,446 common shares ......................... -- -- 25
Issuance of 95,307 common shares in con-
nection with employee stock purchase
plan ........................................ -- -- 734
Issuance of 270,856 common shares in
connection with 1997 and 1998 acquisi-
tions(note 2) ............................... -- -- --
Issuance of 326,459 common shares in
connection with employee stock com-
pensation of $1,835 less unamortized
cost of $1,104............................... -- -- 731
Acquisition of 3,607,000 common shares
of treasury stock (at cost) ................. -- -- --
Issuance of 64,003 common shares in con-
nection with debt payments .................. -- -- 438
Cancellation of issuance of 658,824 com-
mon shares of treasury stock to fund
key employee supplemental executive
retirement plan ............................. -- 2,569
Issuance of 3,415,556 common shares of
treasury stock in connection with em-
ployee stock compensation of $12,638
less unamortized cost of $11,175............. -- -- (30,745)
Cancellation of issuance of 3,415,556 com-
mon shares of treasury stock in connec-
tion with employee stock compensation -- -- 30,745
Net loss ..................................... -- -- --
-- -- ---------
Balance at December 31, 1999 .................. $-- $53 $1,374,546
=== === ==========
<CAPTION>
UNREALIZED
GAIN ON
RETAINED AVAILABLE FOR
EARNINGS SALE TREASURY
(DEFICIT) SECURITIES STOCK TOTAL
--------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Issuance of 3,573,446 common shares in
connection with the conversion of the
Company's 6% convertible subordi-
nated debentures, less issuance costs of
$5,417....................................... -- -- -- 109,382
Net loss ..................................... (67,978) -- -- (67,978)
------- -- -- -------
Balance at December 31, 1998 .................. (22,483) -- (15,654) 1,331,965
------- -- ------- ---------
Exercise of employee stock options for
2,446 common shares ......................... -- -- -- 25
Issuance of 95,307 common shares in con-
nection with employee stock purchase
plan ........................................ -- -- -- 734
Issuance of 270,856 common shares in
connection with 1997 and 1998 acquisi-
tions(note 2) ............................... -- -- -- --
Issuance of 326,459 common shares in
connection with employee stock com-
pensation of $1,835 less unamortized
cost of $1,104............................... -- -- -- 731
Acquisition of 3,607,000 common shares
of treasury stock (at cost) ................. -- -- (24,041) (24,041)
Issuance of 64,003 common shares in con-
nection with debt payments .................. -- -- -- 438
Cancellation of issuance of 658,824 com-
mon shares of treasury stock to fund
key employee supplemental executive
retirement plan ............................. -- -- (9,569) (7,000)
Issuance of 3,415,556 common shares of
treasury stock in connection with em-
ployee stock compensation of $12,638
less unamortized cost of $11,175............. -- -- 32,208 1,463
Cancellation of issuance of 3,415,556 com-
mon shares of treasury stock in connec-
tion with employee stock compensation -- -- (32,208) (1,463)
Net loss ..................................... (2,239,927) -- -- (2,239,927)
---------- -- ------- ----------
Balance at December 31, 1999 .................. $ (2,262,410) $-- $ (49,264) $ (937,075)
============ === ========= =============
</TABLE>
See accompanying notes to consolidated financial statements.
63
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1998 1999
--------------- ------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ........................................................... $ (33,505) $ (67,978) $ (2,239,927)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities: .........................................
Extraordinary items .............................................. 33,690 -- (9,195)
Non-recurring charges ............................................ 123,456 -- 2,076,332
Cumulative effect of accounting change ........................... 3,000 -- --
Loss from discontinued operations ................................ 13,631 204,870 --
Undistributed results of affiliates .............................. 157 33 (2,208)
Depreciation and amortization .................................... 56,162 156,719 193,202
Deferred income taxes and other non-cash items ................... (31,411) 42,630 (3,861)
Amortization of deferred gain on sale-leaseback .................. (1,046) (673) (494)
Decrease (increase) in patient accounts and third-party payor
settlements receivable .......................................... (62,296) (142,897) 14,667
Decrease (increase) in supplies, inventories, prepaid expenses
and other current assets ........................................ (19,095) (19,848) (8,577)
Decrease in accounts payable and accrued expenses ................ (41,553) (147,973) (76,416)
Decrease in income taxes receivable .............................. 32,207 55,515 19,302
------------ ---------- ------------
Net cash provided (used) by operating activities ................ 73,397 80,398 (37,175)
------------ ---------- ------------
Net cash used by discontinued operations ........................ (16,342) (99,272) (15,780)
Cash flows from financing activities:
Proceeds from issuance of capital stock, net ....................... 29,927 57,765 759
Proceeds from long-term borrowings ................................. 3,280,565 1,097,341 621,924
Repayment of long-term borrowings .................................. (1,532,276) (884,897) (334,352)
Deferred financing costs ........................................... (45,500) (1,355) (16,459)
Payment of prepayment premiums and fees on debt extinguish-
ment ............................................................. (23,598) -- --
Purchase of treasury stock ......................................... (19,813) (18,469) (24,041)
Dividends paid ..................................................... (471) (814) --
------------ ---------- ------------
Net cash provided by financing activities ....................... 1,688,834 249,571 247,831
------------ ---------- ------------
Cash flows from investing activities:
Purchases of temporary investments ................................. (828,505) (74,525) (26,493)
Sales of temporary investments ..................................... 822,507 69,739 --
Business acquisitions .............................................. (1,560,396) (206,926) (31,152)
Purchases of property, plant, and equipment ........................ (126,860) (222,265) (154,449)
Disposition of assets .............................................. 54,137 175,807 41,280
Payment of termination fees and other costs of terminated
merger ........................................................... (27,555) -- (7,020)
Payments of severance fees related to acquisition and other
costs ............................................................ (10,492) -- --
Investment in affiliates and other assets .......................... (43,878) (1,469) (26,806)
------------ ---------- ------------
Net cash used by investing activities .............................. (1,721,042) (259,639) (204,640)
------------ ---------- ------------
Increase (decrease) in cash and cash equivalents ................... 24,847 (28,942) (9,764)
Cash and cash equivalents, beginning of period ...................... 35,486 60,333 31,391
------------ ---------- ------------
Cash and cash equivalents, end of period ............................ $ 60,333 $ 31,391 $ 21,627
============ ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
64
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation, Going Concern and Liquidity Issues
Integrated Health Services, Inc. (IHS), a Delaware corporation, was formed
on March 25, 1986. The consolidated financial statements include the accounts of
IHS and its majority-owned and controlled subsidiaries (the Company). In
consolidation, all significant intercompany balances and transactions have been
eliminated. Investments in affiliates in which the Company has significant
influence but less than majority ownership and control are accounted for by the
equity method (see note 4). As discussed in notes 1(q) and 8, the Company's home
health nursing segment is presented as a discontinued operation.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
suffered recurring losses in each of the years in the three-year period ended
December 31, 1999 and, as of December 31, 1999, has a working capital deficiency
of $3,055,000 and a stockholders' equity deficit of $937,000. In addition, the
Company is in default of various loan agreements and, on February 2, 2000, the
Company and substantially all of its subsidiaries filed separate voluntary
petitions for relief under Chapter 11 of the U.S. Bankruptcy Code with the U.S.
Bankruptcy Court in the District of Delaware. These conditions, among others,
raise substantial doubt about the Company's ability to continue as a going
concern. Management will develop a plan of reorganization that will be submitted
to the U.S. Bankruptcy Court and the Company's creditors for their approval. In
the event the plan of reorganization is accepted, continuation of the business
thereafter is dependent on the Company's ability to achieve successful future
operations.
The Company is in default of its revolving credit and term loan facility
agreement, its subordinated debentures and notes and certain other debt
agreements. Accordingly, such debt has been classified as a current obligation
at December 31, 1999. The Company has not made scheduled interest payments on
such obligations since November 1, 1999.
Except as may be otherwise determined by the Bankruptcy Court overseeing
the Chapter 11 filings, the automatic stay protection afforded by the Chapter 11
filings prevents any creditor or other third parties from taking any action in
connection with any defaults under prepetition obligations of the Company and
those of its subsidiaries which are debtors in the Chapter 11 filing. In
connection with the Chapter 11 filings, the Company must develop a plan of
reorganization that will be approved by its creditors and confirmed by the
Bankruptcy Court overseeing the Company's Chapter 11 filings.
In connection with the Chapter 11 filings, the Company obtained a
commitment for $300,000 in debtor-in-possession financing (the "DIP Facility")
from a group of banks led by Citicorp U.S.A., Inc. As of March 30, 2000, no
amounts are outstanding under the DIP Facility (see Note 9).
The accompanying consolidated financial statements have been prepared on
the basis of accounting principles applicable to going concerns and contemplate
the realization of assets and the settlements of liabilities and commitments in
the normal course of business. The financial statements do not include
adjustments, if any, to reflect the possible future effects on the
recoverability and classification of recorded assets or the amounts and
classifications of liabilities that may result from the outcome of this
uncertainty. In addition, since the Company filed for protection under the
Bankruptcy Code subsequent to December 31, 1999, the accompanying consolidated
financial statements have not been prepared in accordance with SOP 90-7,
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code"
("SOP 90-7"), and do not include disclosures of liabilities subject to
compromise. Financial statements prepared subsequent to the filing date under
Chapter 11 will be prepared reflecting such amounts subject to compromise.
The Company incurred $8,296 in 1999 of legal, accounting, consulting and
other fees in connection with the Company's financial reorganization.
65
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(b) Patient Services Revenues
Patient services revenues represent routine service (room and board)
charges of geriatric and assisted living facilities, ancillary service charges
of geriatric and assisted living facilities, revenues generated by medical
specialty units and revenues of pharmacy, rehabilitation, diagnostic,
respiratory therapy, hospice and similar service operations. Patient services
revenues are recorded at established rates and adjusted for differences between
such rates and estimated amounts reimbursable by third-party payors when
applicable. Estimated settlements under third-party payor retrospective rate
setting programs (primarily Medicare and Medicaid) are accrued in the period the
related services are rendered. Settlements receivable and related revenues under
such programs are based on annual cost reports prepared in accordance with
federal and state regulations, which reports are subject to audit and
retroactive adjustment in future periods. In the opinion of management, adequate
provision has been made for such adjustments and final settlements will not have
a material effect on financial position or results of operations. The Balanced
Budget Act (BBA), enacted in 1997, provided for, among other things, a Medicare
prospective payment system (PPS) for skilled nursing facilities to be
implemented for all cost reporting periods beginning on or after July 1, 1998.
The Company's owned and leased Medicare certified skilled nursing
facilities were phased into PPS based on their cost report years (159 facilities
on January 1, 1999; 92 facilities on June 1, 1999 and 29 facilities on various
dates between July 1, 1998 and August 1, 1999). At December 31, 1999,
substantially all facilities are being paid by Medicare under PPS, and revenue
consists of aggregate payments from Medicare for individual claims at the
appropriate payment rates, which include reimbursement for ancillary services.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company is aware of certain current
investigations and additional possible investigations involving allegations of
potential wrongdoing with respect to Medicare and Medicaid. (See note 22). While
the Company believes that it is in compliance, in all material respects, with
all applicable laws and regulations, compliance with such laws and regulations
can be subject to future government review and interpretation as well as
significant regulatory action including fines, penalties and an exclusion from
the Medicare and Medicaid programs.
(c) Cash Equivalents and Investments in Debt and Equity Securities
Cash equivalents consist of highly liquid debt instruments with original
maturities of three months or less at the date of investment by the Company.
Temporary investments, consisting primarily of preferred stocks and municipal
bonds, are classified as a trading security portfolio and are recorded at their
fair value, with net unrealized gains or losses included in earnings.
(d) Property, Plant and Equipment
The Company capitalizes costs associated with acquiring health care
facilities and related interests therein. Pre-acquisition costs represent direct
costs of the investigation and negotiation of the acquisition of operating
facilities and ancillary business units; indirect and general expenses related
to such activities are expensed as incurred. Pre-construction costs represent
direct costs incurred to secure control of the development site, including the
requisite certificate of need and other approvals, and to perform other initial
tasks which are essential to the development and construction of a facility.
Pre-acquisition and pre-construction costs are transferred to construction in
progress and depreciable asset categories when the related tasks are completed.
Interest cost incurred during construction is capitalized. Non-refundable
purchase option fees related to operating leases are generally classified as
leasehold interests and treated as deposits until (1) the option is exercised,
whereupon the deposit is applied as a credit against the purchase price, or (2)
the option period expires or the Company concludes the option will not be
exercised, if earlier, whereupon the deposit is written off as lease termination
expense.
66
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(d) Property, Plant and Equipment - (CONTINUED)
Total costs of facilities acquired are allocated to land, land
improvements, equipment and buildings (or leasehold interests therein) based on
their respective fair values determined generally by independent appraisal. Cost
in excess of such identified fair values is classified as intangible assets of
businesses acquired.
(e) Depreciation
Depreciation is provided on the straight-line basis over the estimated
useful lives of the assets, generally 25 years for land improvements, 10 years
for equipment, 40 years for buildings and the term of the lease for costs of
leasehold interests and improvements.
(f) Deferred Financing Costs
The Company defers financing costs incurred to obtain long-term debt and
amortizes such costs over the term of the related obligation using the debt
outstanding (interest) method.
(g) Intangible Assets Acquired
Prior to the fourth quarter of 1999, intangible assets of businesses
acquired (primarily goodwill) were amortized by the straight-line method
primarily over 40 years, the period over which such costs were estimated to be
recoverable through operating cash flows. As discused in previous reports, the
Company has continued to evaluate the impact of the 1997 Balanced Budget Act
(BBA) upon future operating results of each business line, particularly the
impact of the prospective payment system (PPS). Utilizing the Company's
experience with PPS since January 1, 1999 (June 1, 1999 with respect to the
Horizon facilities), the Company performed a preliminary analysis of such impact
in the third quarter of 1999 and a more comprehensive analysis at December 31,
1999. PPS has had a dramatic negative impact on the operating results and
financial condition of the Company. The PPS system has significantly reduced the
revenues, cash flow and liquidity of the Company and the long-term care industry
in 1999. As a result of the negative impact of the provisions of PPS, the
Company changed the estimated life of its goodwill to 15-20 years. This change
has been treated as a change in accounting estimate and is being recognized
prospectively beginning October 1, 1999 (see notes 6 and 20).
(h) Investments in and Advances to Affiliates
Investments in which the Company has significant influence and has a 20% -
50% ownership interest are accounted for using the equity method of accounting.
The investments are carried at the cost of the investment plus the Company's
equity in undistributed earnings (losses). Investments in which the Company does
not exercise significant influence (generally less than a 20% ownership
interest) are accounted for using the cost method of accounting for investments.
(i) Deferred Gains on Sale-Leaseback Transactions
Gains on the sales of nursing facilities which are leased back under
operating leases are initially deferred and amortized over the terms of the
leases in proportion to and as a reduction of related rental expense.
(j) Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") in accounting for
its stock options and warrants issued to employees. Additional information
required by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123") is discussed in note 12.
(k) Impairment of Long-Lived Assets
Management regularly evaluates whether events or changes in circumstances
have occurred that could indicate an impairment in the value of long-lived
assets. In accordance with the provisions of SFAS No. 121, if there is an
indication that the carrying value of an asset is not recoverable, the Company
estimates the
67
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(k) Impairment of Long-Lived Assets - (CONTINUED)
projected undiscounted cash flows, excluding interest, of the related individual
facilities and business units (the lowest level for which there are identifiable
cash flows independent of other groups of assets) to determine if an impairment
loss should be recognized. The amount of impairment loss is determined by
comparing the historical carrying value of the asset to its estimated fair
value. Estimated fair value is determined through an evaluation of recent and
projected financial performance of its facilities and business units using
standard industry valuation techniques. If an asset tested for recoverability
was acquired in a business combination accounted for using the purchase method,
the related goodwill is included as part of the carrying value and evaluated as
described above in determining the recoverability of that asset.
In addition to consideration of impairment upon the events or changes in
circumstances described above, management regularly evaluates the remaining
lives of its long-lived assets. If estimates are changed, the carrying value of
affected assets is allocated over the remaining lives.
In estimating the future cash flows for determining whether an asset is
impaired and if expected future cash flows used in measuring assets are
impaired, the Company groups its assets at the lowest level for which there are
identifiable cash flows independent of other groups of assets. These levels were
each of the individual nursing/subacute facilities, and each of the home
respiratory/infusion/DME, rehabilitation therapy, respiratory therapy,
lithotripsy and mobile diagnostics divisions. In addition, the recoverability of
goodwill is further evaluated under the provisions of APB Opinion No. 17 based
on the undiscounted cash flows. If such costs are impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the estimated fair value of the assets. (See note 20.)
(l) Income Taxes
Deferred income taxes are recognized for the tax consequences of temporary
differences between financial statement carrying amounts and the related tax
bases of assets and liabilities. Such tax effects are measured by applying
enacted statutory tax rates applicable to future years in which the differences
are expected to reverse, and the effect of a change in tax rates is recognized
in the period the legislation is enacted.
(m) Earnings Per Share
Earnings per share is computed in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). Additional
information required by SFAS No. 128 is discussed in note 13.
(n) Business and Credit Concentrations
The Company's revenues are generated through approximately 1,300 service
locations in 46 states and the District of Columbia, including 366 owned, leased
and managed geriatric care facilities. The Company generally does not require
collateral or other security in extending credit to patients; however, the
Company routinely obtains assignments of (or is otherwise entitled to receive)
benefits receivable under the health insurance programs, plans or policies of
patients (e.g., Medicare, Medicaid, commercial insurance and managed care
organizations) (see note 3).
(o) Management Agreements
IHS manages geriatric care facilities under contract for others for a fee
which generally is equal to 4% to 8% of the gross revenue of the geriatric care
facility. Under the terms of the contract, IHS is responsible for providing all
personnel, marketing, nursing, resident care, dietary and social services,
accounting and data processing reports and services for these facilities,
although such services are provided at the facility owner's expense. In
addition, certain management agreements also provide IHS with an incentive fee
based on the
68
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(o) Management Agreements - (CONTINUED)
amount of the facility's operating income in excess of stipulated amounts.
Management fee revenues are recognized when earned and billed, generally on a
monthly basis. Incentive fees are recognized when operating results of managed
facilities exceed amounts required for incentive fees in accordance with the
terms of the management agreement. Management agreements generally have an
initial term of ten years, with IHS having a right to renew in most cases.
Contract acquisition costs for legal and other direct costs incurred by IHS to
acquire long-term management contracts are capitalized and amortized over the
term of the related contract. Management periodically evaluates its deferred
contract costs for recoverability by assessing the projected undiscounted cash
flows, excluding interest, of the managed facilities; any impairment in the
financial condition of the facility will result in a writedown by IHS of its
deferred contract costs.
(p) Assets held for Sale
In 1998, assets held for sale represent the assets of 26 physician
practices acquired in the acquisition of RoTech Medical Corporation which were
sold in 1999. Such amounts are carried at estimated net realizable value, less
estimated carrying costs to be incurred during the holding period.
(q) Discontinued operations
In October 1998, the Company's Board of Directors adopted a plan to
discontinue its home health nursing segment. Accordingly, the Company has
reclassified its financial statements to present the operating results of the
home health nursing segment as a discontinued operation. The operating results
of home health nursing include interest expense (allocated based on debt
specifically identified with acquisition financing) of $20,321 in 1997 and
$25,678 in 1998. During the first and second quarter of 1999, the Company sold
the home nursing segment for approximately $26 million.
(r) Derivative Financial Instruments
The Company utilizes interest rate swap agreements to manage market risks
and reduce its exposure resulting from fluctuations in interest rates. Amounts
currently due to or from interest rate swap counterparties are recorded as
adjustments to interest expense in the period in which they accrue. Gains or
losses on terminated agreements are included in accounts payable and accrued
expenses and amortized to interest expense over the shorter of the original term
of the agreements or the life of the financial instruments to which they are
matched.
(s) Reclassifications
Certain amounts presented in 1997 and 1998 have been reclassified to
conform with the presentation for 1999.
69
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(2) BUSINESS ACQUISITIONS
ACQUISITIONS DURING THE YEAR ENDED DECEMBER 31, 1999
Acquisitions in 1999 and the manner of payment are summarized as follows:
<TABLE>
<CAPTION>
NOTES PAYABLE
AND OTHER
CASH ACCRUED TOTAL
MONTH TRANSACTION DESCRIPTION PAID LIABILITIES (1) COST
- - --------- ------------------------------------------------------------- --------- ----------------- ----------
<S> <C> <C> <C> <C>
January Assets of Suncoast of Manatee, Inc. $ 7,020 $ 4,900 $11,920
January Assets of Certified Medical Associates, Inc. 1,950 810 2,760
March Stock of Medical Rental Supply, Inc. and Andy Boyd's Inhome 3,314 1,583 4,897
Medical/Inhome Medical, Inc.
May Management agreement for Novacare, Inc. 2,548 -- 2,548
Various 12 acquisitions, each with total costs of less than $2,000 6,548 3,385 9,933
Various Earnout payments in connection with 1998 acquisitions 6,380 -- 6,380
Various Cash payments of acquisition costs accrued in 1998 and 1999 3,392 (3,392) --
------- -------- -------
$31,152 $ 7,286 $38,438
======= ======== =======
</TABLE>
- - ----------
(1) Amounts include a note payable of $4,900 to the owners of Suncoast of
Manatee, Inc.
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 Indiana Respiratory Care Inc., respectively, in connection with
share price adjustments on prior business acquisitions.
The allocation of the total costs of the 1999 acquisitions to the assets
acquired and liabilities assumed is summarized as follows:
<TABLE>
<CAPTION>
CURRENT PROPERTY, PLANT OTHER INTANGIBLE CURRENT TOTAL
TRANSACTION ASSETS AND EQUIPMENT ASSETS ASSETS LIABILITIES COST
- - ------------------------------------------------ --------- ----------------- ---------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Suncoast of Manatee, Inc. $ -- $11,920 $ -- $ -- $ -- $11,920
Certified Medical Associates, 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 -- -- 42,776 (70,228) 2,548
Earnout payments in connection with 1998 acqui-
sitions -- -- -- 6,380 -- 6,380
Other acquisitions 654 752 (421) 9,079 (131) 9,933
------- ------- ------ ------- --------- -------
$30,995 $13,123 $ (421) $65,100 $ (70,359) $38,438
======= ======= ====== ======= ========= =======
</TABLE>
70
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(2) BUSINESS ACQUISITIONS- (CONTINUED)
ACQUISITIONS DURING THE YEAR ENDED DECEMBER 31, 1998
Acquisitions in 1998 and the manner of payment are summarized as follows:
<TABLE>
<CAPTION>
MONTH TRANSACTION DESCRIPTION
- - ----------- -------------------------------------------------------------------
<S> <C>
January Stock of Paragon Rehabilitative Service, Inc.
February Assets of Health Star, Inc.
February Stock of Medicare Convalescent Aids of Pinellas d/b/a
Medaids, RxStat, Prime Medical Services February Stock of Michigan
Medical Supply February Assets of Nutmeg Respiratory Homecare March Assets of
Chancy Healthcare Serice, Inc.,
Chancy Oxygen Services, CHS Home Infusion Company,
Inc., Chancy Healthcare Services of Waynesboro
April Stock of Magnolia Group, Inc.
May Assets of American Mobile Health Systems, Inc.
May Assets of Eastern Home Care & Oxygen, Inc., Mira Associates,
Altoona Medox Enterprises, Professional Home Care, Keystone Home
Oxygen Services
May Assets of First Community Care, Inc.
June Assets of Metropolitan Lithotripter Associates
June Stock of Premiere Associates, Inc.
June Assets of Apex Home Care, Inc.
June Assets of Osborne Medical, Inc.
July Stock of Collins Rentals, Inc.
August Stock of Home Care Oxygen Services, Inc.
August Assets of Tri-County Medical Oxygen, Inc.
August Assets of American Oxygen Services of Tennessee
September Assets of Accucare Medical Corporation
September Assets of Valley Oxygen & Medical Equipment, Inc.
October Assets of Mark-Daniel Enterprises, Inc. d/b/a Arrowhealth Medical
Supply
October Assets of Professional Respiratory Care, Inc.
October Stock of Acadia Home Care
November Assets of Oakwood Manor Nursing Center, Inc.
November Assets of Norcare Home Medical, Inc.
November Stock of RespaCare, Inc.
November Assets of Caremor Health Services, Inc.
Various 71 acquisitions, each with total costs of less than $2,000
Various Cash payments of acquisition costs accrued in 1997 and 1998
<CAPTION>
NOTES PAYABLE
COMMON AND OTHER
CASH STOCK ACCRUED TOTAL
MONTH PAID ISSUED(1) LIABILITIES(2) COSTS
- - ----------- ----------- ----------- ---------------- ----------
<S> <C> <C> <C> <C>
January $ -- $10,758 $ 425 $ 11,183
February 2,855 -- 310 3,165
February 830 3,654 216 4,700
February 1,900 -- 265 2,165
February 2,340 -- 217 2,557
March 5,335 -- 355 5,690
April -- 15,118 1,000 16,118
May -- 2,800 -- 2,800
May 3,820 -- 405 4,225
May 5,630 2,282 988 8,900
June 3,099 7,802 281 11,182
June 6,500 29,264 20,127 55,891
June 2,666 -- 270 2,936
June 1,960 -- 135 2,095
July 2,484 -- 411 2,895
August 3,650 -- 267 3,917
August 2,075 -- 161 2,236
August -- 1,981 137 2,118
September -- 2,854 84 2,938
September 2,464 -- 386 2,850
October 7,915 -- 765 8,680
October 2,180 -- 177 2,357
October 2,180 -- 198 2,378
November 5,818 -- -- 5,818
November 2,486 -- 203 2,689
November 3,783 -- 302 4,085
November 2,219 -- 69 2,288
Various 40,038 16,962 5,031 62,031
Various 92,699 -- (92,699) --
--------- --------- ------------ ---------
$206,926 $93,475 $ (59,514) $240,887
========= ========= ============ =========
</TABLE>
- - ----------
(1) Represents shares of IHS Common Stock as follows: 361,851 shares for Paragon
Rehabilitive; 122,376 shares for Medicare Convalescence Aids of Pinellas;
447,419 shares for Magnolia Group; 89,634 shares for American Mobile Health
Systems; 90,627 shares for First Community Care; 348,974 shares for
Metropolitan Lithotripter Associates; 800,561 shares for Premiere
Associates; 61,061 shares for American Oxygen Services of Tennessee; 128,972
shares for Accucare Medical Corporation; and 302,718 shares for other
acquisitions each with total cost less than $2,000. During 1998, the Company
issued an additional 50,253 shares to shareholders of Arcadia Services.
(2) Amounts include note payable of $15,000 to the shareholders of Premiere
Associates.
71
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(2) BUSINESS ACQUISITIONS- (CONTINUED)
The allocation of the total costs of the 1998 acquisitions to the assets
acquired and liabilities assumed is summarized as follows:
<TABLE>
<CAPTION>
CURRENT PROPERTY, PLANT OTHER INTANGIBLE CURRENT LONG-TERM TOTAL
TRANSACTION ASSETS AND EQUIPMENT ASSETS ASSETS LIABILITIES LIABILITIES COSTS
- - --------------------------------------- --------- ----------------- -------- ------------ ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Paragon Rehabilitative Service, Inc. $ 1,505 $ 85 $ 4 $ 13,036 $ (3,427) $ (20) $ 11,183
Health Star, Inc. 323 110 -- 2,732 -- -- 3,165
Medicare Convalescent Aids of Pinellas
d/b/a Medaids, RxStat, Prime Medi-
cal Services 913 366 -- 3,698 (277) -- 4,700
Michigan Medical Supply 215 295 -- 1,801 (131) (15) 2,165
Nutmeg Respiratory Homecare 469 146 -- 1,942 -- -- 2,557
Chancy Healthcare Serice, Inc., Chancy
Oxygen Services, CHS Home Infu-
sion Company, Inc., Chancy Health-
care Services of Waynesboro 575 40 -- 5,075 -- -- 5,690
Magnolia Group, Inc. 4,962 29,101 734 -- (8,989) (9,690) 16,118
American Mobile Health Systems, Inc. 1,112 -- 1 2,575 (888) -- 2,800
Eastern Home Care & Oxygen, Inc.,
Mira Associates, Altoona Medox
Enterprises, Professional Home
Care, Keystone Home Oxygen Serv. 483 859 -- 2,883 -- -- 4,225
First Community Care, Inc. 1,998 639 661 7,102 -- (1,500) 8,900
Metropolitan Lithotripter Associates 2,485 1,860 431 18,846 (11,500) (940) 11,182
Premiere Associates, Inc. 2,986 91,990 -- 39,030 (35,819) (42,296) 55,891
Apex Home Care, Inc. 360 393 -- 2,483 -- (300) 2,936
Osborne Medical, Inc. 6 142 -- 1,947 -- -- 2,095
Collins Rentals, Inc. 234 400 -- 2,261 -- -- 2,895
Home Care Oxygen Services, Inc. 266 369 -- 3,282 -- -- 3,917
Tri-County Medical Oxygen, Inc. 206 47 -- 1,983 -- -- 2,236
American Oxygen Services of Tennes-
see 303 19 -- 1,915 (119) -- 2,118
Accucare Medical Corporation 423 195 -- 2,966 (646) -- 2,938
Valley Oxygen & Medical Equipment,
Inc. 500 46 -- 2,304 -- -- 2,850
Mark-Daniel Enterprises, Inc. d/b/a
Arrowhealth Medical Supply 1,578 1,299 -- 7,043 (1,240) -- 8,680
Professional Respiratory Care, Inc. 178 216 -- 1,963 -- -- 2,357
Acadia Home Care 199 49 -- 2,130 -- -- 2,378
Oakwood Manor Nursing Center, Inc. -- 9,720 -- -- -- (3,902) 5,818
Norcare Home Medical, Inc. 144 141 -- 2,404 -- -- 2,689
RespaCare, Inc. 622 207 -- 4,506 -- (1,250) 4,085
Caremor Health Services, Inc. 286 245 -- 1,757 -- -- 2,288
Other acquisitions 3,664 5,140 5,258 50,090 (1,164) (957) 62,031
------- -------- ------ -------- --------- --------- --------
$26,995 $144,119 $7,089 $187,754 $ (64,200) $ (60,870) $240,887
======= ======== ====== ======== ========= ========= ========
</TABLE>
72
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(2) BUSINESS ACQUISITIONS- (CONTINUED)
ACQUISITIONS DURING THE YEAR ENDED DECEMBER 31, 1997
Acquisitions in 1997 and the manner of payment are summarized as follows:
<TABLE>
<CAPTION>
MONTH TRANSACTION DESCRIPTION
- - ----------- ---------------------------------------------------------------------
<S> <C>
January Stock of In-Home Health Care, Inc., a home healthcare services
provider
February Assets of Portable X-Ray Labs, Inc., a mobile x-ray services pro-
vider
March Payment of earnout in connection with Achievement Rehab acqui-
sition in December 1993
June Stock of Health Care Industries, Inc., a home healthcare services
provider
June Assets of Rehab Dynamics, Inc. and Restorative Therapy, Ltd.,
contract rehabilitation companies(2)
August Stock of Ambulatory Pharmaceutical Services, Inc. and APS Amer-
ican, Inc., home healthcare services providers
August Stock of Arcadia Services, Inc., a home healthcare services provid-
er
September Stock and assets of Barton Creek Healthcare, Inc., a home
healthcare services provider
September Stock of Community Care of America, Inc., an operator of skilled
nursing facilities
October Assets of Coram Lithotripsy Division, an operator of lithotripsy
units
October Stock of RoTech Medical Corporation, a respiratory therapy com-
pany
November Assets of Durham Meridian Limited Partnership (Treyburn)
November Stock of HPC America, Inc., an operator of home infusion and
home healthcare companies
November Assets of Richards Medical Company, Inc., a respiratory therapy
company
November Assets of Central Medical Supply Company, Inc., a respiratory ther-
apy company
November Assets of Hallmark Respiratory Care, a respiratory therapy com-
pany
November Leasehold interest in Shadow Mountain, a skilled nursing facility
December Assets of certain businesses owned by HEALTHSOUTH Corpora-
tion
December Assets of Sunshine Medical Equipment, Inc., a respiratory therapy
company
December Assets of Quest, Inc., a respiratory therapy company
Various 17 acquisitions, each with total costs of less than $2,000
Various Cash payments of acquisition costs accrued in 1996 and 1997
<CAPTION>
NOTES PAYABLE
COMMON AND OTHER
CASH STOCK ACCRUED
MONTH PAID ISSUED(1) LIABILITIES TOTAL COST
- - ----------- ------------ ----------- -------------- -------------
<S> <C> <C> <C> <C>
January $ 3,200 $ -- $ 250 $ 3,450
February 4,900 -- 1,300 6,200
March -- 26,439 -- 26,439
June 1,825 -- 500 2,325
June 8,203 11,460 2,500 22,163
August 18,125 18,125 1,950 38,200
August -- 17,169 3,000 20,169
September 4,857 -- 280 5,137
September 99,883 -- 5,995 105,878
October 131,000 -- 7,500 138,500
October -- 506,648 22,597 529,245
November 4,775 -- -- 4,775
November 26,127 -- 825 26,952
November 1,993 -- 160 2,153
November 1,872 -- 178 2,050
November 3,768 -- 145 3,913
November 4,020 -- 42 4,062
December 1,159,142 -- 50,980 1,210,122
December 3,290 -- 270 3,560
December 33,000 -- 385 33,385
Various 9,010 -- 894 9,904
Various 41,406 -- (41,406) --
---------- -------- ---------- ----------
$1,560,396 $579,841 $ 58,345 $2,198,582
========== ======== ========== ==========
</TABLE>
- - ----------
(1) Represents shares of IHS common stock as follows: 976,504 shares for the
Achievement Rehab earnout; 331,379 shares for Rehab Dynamics and Restorative
Therapy; 532,240 shares for Ambulatory Pharmaceutical Services and APS
American; 531,198 shares for Arcadia Services; and 15,598,400 shares for
RoTech Medical Corporation.
(2) Pursuant to an agreement with the former owners of Rehab Dynamics, Inc., an
earnout of up to $11,700 is potentially payable, 60% of which is to be in
the Company's common stock.
73
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(2) BUSINESS ACQUISITIONS- (CONTINUED)
The allocation of the total costs of the 1997 acquisitions to the assets
acquired and liabilities assumed is summarized as follows:
<TABLE>
<CAPTION>
PROPERTY,
CURRENT PLANT AND ASSETS HELD OTHER
ASSETS EQUIPMENT FOR SALE ASSETS
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
In-Home Health Care, Inc. ......... $ 989 $ 229 $ -- $ 7
Portable X-Ray Labs, Inc. ......... 1,309 -- -- 11
Achievement Rehab ................. -- -- -- --
Health Care Industries, Inc. ...... 805 204 -- 41
Rehab Dynamics, Inc. & Restor-
ative Therapy, Ltd. .............. 4,140 954 -- 107
Ambulatory Pharmaceutical Ser-
vices, Inc. & APS America,
Inc. ............................. 1,987 48 -- 8
Arcadia Services, Inc. ............ 3,980 348 -- 2,464
Barton Creek Healthcare, Inc. ..... 884 96 -- --
Community Care of America,
Inc. ............................. 12,022 39,286 12,030 (11,111)
Coram Lithotripsy Division ........ 6,286 5,775 -- 3,736
RoTech Medical Corporation ........ 95,274 119,724 16,000 10,086
Durham Meridian Limited Part-
nership .......................... 1,325 8,453 -- 102
HPC America, Inc. ................. 3,882 754 -- (5,756)
Richards Medical Company, Inc...... 228 279 -- --
Central Medical Supply Company,
Inc. ............................. 283 173 -- --
Hallmark Respiratory Care ......... 617 391 -- 3
Shadow Mountain ................... -- 4,062 -- --
HEALTHSOUTH Corporation
businesses ....................... 176,031 232,864 80,647 --
Sunshine Medical Equipment, Inc. 374 200 -- --
Quest Inc. ........................ 3,164 2,207 -- 17
Other acquisitions ................ 734 933 -- 38
-------- -------- -------- ----------
$314,314 $416,980 $108,677 $ (247)
======== ======== ======== ==========
<CAPTION>
INTANGIBLE CURRENT LONG-TERM TOTAL
ASSETS LIABILITIES LIABILITIES COST
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
In-Home Health Care, Inc. ......... $ 3,856 $ (797) $ (834) $ 3,450
Portable X-Ray Labs, Inc. ......... 5,653 (297) (476) 6,200
Achievement Rehab ................. 26,439 -- -- 26,439
Health Care Industries, Inc. ...... 2,505 (1,080) (150) 2,325
Rehab Dynamics, Inc. & Restor-
ative Therapy, Ltd. .............. 21,478 (3,204) (1,312) 22,163
Ambulatory Pharmaceutical Ser-
vices, Inc. & APS America,
Inc. ............................. 41,624 (5,467) -- 38,200
Arcadia Services, Inc. ............ 39,233 (24,724) (1,132) 20,169
Barton Creek Healthcare, Inc. ..... 7,293 (3,136) -- 5,137
Community Care of America,
Inc. ............................. 109,682 (38,768) (17,263) 105,878
Coram Lithotripsy Division ........ 162,625 (39,422) (500) 138,500
RoTech Medical Corporation ........ 669,615 (244,665) (136,789) 529,245
Durham Meridian Limited Part-
nership .......................... -- (1,072) (4,033) 4,775
HPC America, Inc. ................. 28,480 -- (408) 26,952
Richards Medical Company, Inc...... 1,646 -- -- 2,153
Central Medical Supply Company,
Inc. ............................. 1,625 (31) -- 2,050
Hallmark Respiratory Care ......... 2,902 -- -- 3,913
Shadow Mountain ................... -- -- -- 4,062
HEALTHSOUTH
Corporation businesses ........... 979,691 (158,068) (101,043) 1,210,122
Sunshine Medical Equipment, Inc. 2,986 -- -- 3,560
Quest Inc. ........................ 27,997 -- -- 33,385
Other acquisitions ................ 9,755 (1,476) (80) 9,904
---------- ---------- ---------- ----------
$2,145,085 $ (522,207) $ (264,020) $2,198,582
========== ========== ========== ==========
</TABLE>
74
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(2) BUSINESS ACQUISITIONS- (CONTINUED)
Unaudited pro forma combined results of operations of the Company giving
effect to the foregoing acquisitions for the years ended December 31, 1998 and
1999 are presented below. Such pro forma presentation has been prepared assuming
that the acquisitions had been made as of January 1, 1998.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------
1998 1999
------------- ---------------
<S> <C> <C>
Revenues ............................................. $3,354,882 $ 2,667,041
Earnings (loss) from continuing operations ........... 159,207 (2,240,153)
Net loss ............................................. (45,663) (2,230,958)
Per Common Share--basic:
Earnings (loss) from continuing operations ......... $ 3.19 $ (44.86)
Net loss ........................................... (0.92) (44.67)
Per Common Share--diluted:
Earnings (loss) from continuing operations ......... $ 2.89 $ (44.86)
Net loss ........................................... (0.66) (44.67)
</TABLE>
The unaudited pro forma results include the historical accounts of the
Company and the historical accounts for the acquired businesses adjusted to
reflect (1) depreciation and amortization of the acquired identifiable tangible
and intangible assets based on the new cost basis of the acquisitions, (2) the
interest expense resulting from the financing of the acquisitions, (3) the new
cost basis for the allocation of corporate overhead expenses and (4) the related
income tax effects. The pro forma results are not necessarily indicative of
actual results which might have occurred had the operations and management teams
of the Company and the acquired companies been combined in prior years.
In connection with its business acquisitions, the Company incurs
transaction costs, costs to exit certain activities and costs to terminate or
relocate certain employees of acquired companies. Liabilities accrued in the
acquisition cost allocations represent direct costs of acquisitions, which
consist primarily of transaction costs for legal, accounting and consulting
fees, of $66,440 in 1997, $13,442 in 1998 and $690 in 1999, as well as exit
costs and employee termination and relocation costs of $33,220 in 1997, $4,743
in 1998 and $510 in 1999. Accrued acquisition liabilities for exit costs and
employee termination and relocation costs are recognized in accordance with EITF
95-3, "Recognition Of Liabilities In Connection With A Purchase Business
Combination" and are summarized as follows for the years ended December 31,
1997, 1998 and 1999:
75
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(2) BUSINESS ACQUISITIONS- (CONTINUED)
<TABLE>
<CAPTION>
EMPLOYEE
TERMINATION AND
EXIT RELOCATION
COSTS COSTS TOTAL
----------- ---------------- ------------
<S> <C> <C> <C>
Balance at December 31, 1996 ............... $ 5,877 $ 5,162 $ 11,039
Acquired companies -- 1997 ................. 10,205 23,015 33,220
Payments charged against liability ......... (3,952) (11,346) (15,298)
Adjustments recorded to:
Cost of acquisitions ...................... (1,925) 160 (1,765)
Operations ................................ -- -- --
--------- --------- ---------
Balance at December 31, 1997 ............... 10,205 16,991 27,196
Acquired companies -- 1998 ................. -- 4,743 4,743
Payments charged against liability ......... (13,032) (31,159) (44,191)
Adjustments recorded to:
Cost of acquisitions ...................... 2,827 11,180 14,007
Operations ................................ -- -- --
--------- --------- ---------
Balance at December 31, 1998 ............... -- 1,755 1,755
Acquired companies -- 1999 ................. -- 510 510
Payments charged against liability ......... -- (2,702) (2,702)
Adjustments recorded to:
Cost of acquisitions ...................... -- 437 437
Operations ................................ -- -- --
--------- --------- ---------
Balance at December 31, 1999 ............... $ -- $ -- $ --
========= ========= =========
</TABLE>
The Company has not finalized its plans to exit activities (exit plans) and
to terminate or relocate employees (termination plans) of certain companies
acquired in 1999. Unresolved issues relate primarily to the finalization of
severance and termination arrangements. Accordingly, unresolved issues could
result in additional liabilities for salaries, benefits and related increases to
the acquisition cost. These adjustments will be reported primarily as an
increase or decrease in goodwill.
There were no significant exit plans at December 31, 1999 and 1998. The
exit plans at December 31, 1997 consisted of the discontinuation of certain
activities of the businesses acquired from HEALTHSOUTH Corporation, Arcadia
Services and Ambulatory Pharmaceutical Services, including estimates for costs
related to the closure of duplicative facilities, lease termination fees and
other exit costs as defined in EITF 95-3. Significant exit activities relating
to the 1997 acquisitions were completed by December 31, 1998.
The termination plans for the year ended December 31, 1999 were completed
by December 31, 1999. The termination plans at December 31, 1998 relate
primarily to the following employee groups with the indicated anticipated dates
of completion of termination/relocation: Paragon Rehabilitative Service by
January 1999; Arrowhealth Medical Supply by October 1999; Eastern Home Care and
Oxygen by May 1999, First Community Care by May 1999 and Valley Oxygen and
Medical Equipment by September 1999. The termination plans at December 31, 1997
relate primarily to the following employee groups with the indicated anticipated
dates of completion of termination/relocation: businesses acquired from
HEALTHSOUTH Corporation by December 1998, RoTech and the Lithotripsy Division of
Coram by October 1998, Portable X-Ray Labs by February 1998, Rehab Dynamics by
June 1998, Arcadia and Ambulatory Pharmaceutical Services by August 1998, and
Community Care of America by September 1998.
In addition to the accrued acquisition liabilities described above, the
Company allocates the cost of its business acquisitions to the respective assets
acquired and liabilities assumed, including preacquisition contingencies, on the
basis of estimated fair values at the date of acquisition. Often the Company
must await
76
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(2) BUSINESS ACQUISITIONS- (CONTINUED)
additional information for the resolution or final measurement of contingencies
and valuation estimates during the allocation period, which usually does not
exceed one year from the date of acquisition. Accordingly, the effect of the
resolution or final measurement of such matters during the allocation period is
treated as an acquisition adjustment primarily to the amount of goodwill
recorded. After the allocation period, such resolution or final measurement is
recognized in the determination of net earnings. Preacquisition contingencies in
connection with the Company's business acquisitions primarily relate to Medicare
and Medicaid regulatory compliance matters, claims subject to intermediary
audits, income tax matters and legal proceedings. During the three years ended
December 31, 1999, the Company resolved or completed the final measurement of
certain preacquisition contingencies related to business acquisitions.
Accordingly, the Company adjusted the original allocation of these businesses by
increasing goodwill, decreasing certain third-party payor settlements
receivable, and increasing certain current liabilities. In 1998, the Company
completed the final measurement of the fair value of assets acquired and
liabilities assumed, including pre-acquisition contingencies, and recorded
adjustments to the December 31, 1997 preliminary estimated amounts. Such
adjustments related primarily to the businesses acquired from HEALTHSOUTH on
December 31, 1997. Such final measurement resulted in adjustments to increase
the obligation for unfavorable leases and contracts by approximately $65,380,
related primarily to certain neuro-rehabilitative facilities in Massachusetts,
to increase accrued liabilities for certain litigation matters by approximately
$23,785 and to increase valuation allowances on certain receivables by
approximately $10,345. In addition, the Company recorded additional liabilities
of approximately $30,920 related to commitments to certain HMO businesses which
were sold by RoTech concurrent with its acquisition by IHS. Such commitments
were finalized in 1998. Management is aware of certain adjustments that might be
required with respect to acquisitions recorded at December 31, 1999;
accordingly, the original allocation could be adjusted to the extent that
finalized amounts differ from the estimates.
(3) PATIENT ACCOUNTS AND THIRD-PARTY PAYOR SETTLEMENTS RECEIVABLE
Patient accounts and third-party payor settlements receivable consist of
the following as of December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Patient accounts receivable ................................................ $735,169 $693,607
Less: Allowance for doubtful accounts ...................................... 165,260 164,449
-------- --------
569,909 529,158
Third party payor settlements, less allowance for contractual adjustments of
$24,565 and $29,151........................................................ 79,197 53,389
-------- --------
$649,106 $582,547
======== ========
</TABLE>
Gross patient accounts receivable and third-party payor settlements
receivable from the Federal government (Medicare) were $215,590 and $219,755 at
December 31, 1998 and 1999, respectively. Amounts receivable from various states
(Medicaid) were $175,414 and $167,190, respectively, at such dates, which relate
primarily to the states of Florida, Nebraska, New Mexico, Texas, Pennsylvania,
Ohio, Georgia, South Carolina, North Carolina, Louisiana and Nevada.
(4) INVESTMENTS IN AND ADVANCES TO AFFILIATES
The Company's investments in and advances to affiliates at December 31,
1998 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Investments accounted for by the equity method:
Lyric Healthcare LLC ......................... $ 3,283 $4,311
------- ------
Other investments:
Craegmoor Healthcare ......................... 6,716 3,358
Other ........................................ 6,344 1,000
------- ------
$16,343 $8,669
======= ======
</TABLE>
Investments in significant unconsolidated affiliates are summarized below.
77
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(4) INVESTMENTS IN AND ADVANCES TO AFFILIATES- (CONTINUED)
TUTERA HEALTH CARE MANAGEMENT, L.P.
In January, 1993, a wholly-owned subsidiary of IHS, Integrated Health
Services of Missouri, Inc. ("IHSM"), invested $4,650 for a 49% interest in
Tutera Health Care Management, L.P. (the "Partnership" or "Tutera"), a
partnership newly formed to manage and operate approximately 8,000 geriatric
care and assisted retirement beds. Cenill, Inc., a wholly owned subsidiary of
Tutera Group, Inc., is the sole general partner of the Partnership and owns a
51% interest therein. Subject to certain material transactions requiring the
approval of IHSM, the business of the Partnership was conducted by its general
partner. In November 1998, the Company sold its 49% interest in Tutera to the
general partner of the Partnership. In addition, the Company purchased one of
the Tutera facilities, exercising its purchase option.
CRAEGMOOR HEALTHCARE
The Company had a 21.3% interest in the common stock and a 63.7% interest
in the 6% cumulative convertible preferred stock of Speciality Care PLC, an
owner and operator of geriatric care facilities in the United Kingdom. The
Preferred Stock had preferences as to liquidation. Upon conversion of the
preferred stock, the Company would have owned approximately 31.4% of Speciality
(assuming no further issuances). In February 1998 Speciality was acquired by
Craegmoor Healthcare Company Limited ("Craegmoor"), an owner and operator of
residential nursing homes in the United Kingdom, through an exchange of capital
stock. As a result of the exchange, IHS owns less than 10% of the outstanding
ordinary shares of Craegmoor. In 1999, the Company incurred a loss on the
impairment on this investment of $3.4 million.
LYRIC HEALTH CARE LLC ("LYRIC")
In January 1998, the Company sold five long-term care facilities to Omega
Healthcare Investors, Inc. for $44,500, which facilities were leased back by
Lyric Health Care LLC ("Lyric"), a newly formed subsidiary of IHS, at an annual
rent of approximately $4,500. The Company recorded a $2,500 loss in 1997 in
anticipation of the sale of these facilities. In a related transaction, TFN
Healthcare Investors, LLC ("TFN"), an entity in which Timothy F. Nicholson, a
director of IHS, is the principal member, purchased a 50% interest in Lyric for
$1,000 and IHS' interest in Lyric was reduced to 50%.
In March 1998, the Company sold an additional five long-term care
facilities to Omega Healthcare Investors, Inc. for approximately $50,000, which
facilities were leased back to Lyric at an annual rent of approximately $4,900.
The Company recorded no gain or loss on this transaction.
In connection with these transactions, IHS also entered into management and
franchise agreements with Lyric which provide for initial terms of 13 years with
two renewal options of 13 years each. The base management fee was 3% of gross
revenues in 1998 and increased to 4% of gross revenues in 1999 pursuant to the
management agreement, as amended. 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.
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
serves as Managing Director of Lyric and has the day-to-day authority for the
management and operation of Lyric and initiates 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. Lyric will dissolve on December
31, 2047 unless extended for an
78
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(4) INVESTMENTS IN AND ADVANCES TO AFFILIATES- (CONTINUED)
additional 12 months. As a result of the aforementioned transactions IHS no
longer controls Lyric and, accordingly, accounts for its investment in Lyric
using the equity method of accounting. Under the equity method of accounting for
Lyric, IHS records 50% of Lyric's earnings and losses pursuant to the amended
operating agreement. The equity method is applied to the Company's investment in
Lyric, including outstanding loans and management and franchise fees.
Cash flow deficiencies, if any, of Lyric may be satisfied by (1) available
working capital loans under a revolving credit facility from Copelco/American
Healthfund, Inc. of $25,000 in 1999 ($10,000 in 1998), (2) obtaining additional
borrowings under new debt arrangements, (3) obtaining additional capital
contributions from IHS and TFN, the existing members of Lyric, although such
contributions are not required and, in the case of IHS, are not permitted under
the DIP agreement, and (4) admission of new members to Lyric.
In connection with the 1999 transactions with Monarch, discussed in note
19, the Company entered into management and franchise agreements with Lyric
which provide an initial term of 10 years with three renewal options of five
years each. The base and incentive management fees are the same as the earlier
transaction discussed above.
The Company's equity in earnings (loss) of affiliates for the years ended
December 31, 1997, 1998 and 1999 is summarized as follows:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- --------
<S> <C> <C> <C>
Tutera .............. $ 486 $ 892 $ --
Lyric ............... -- (508) 2,208
Speciality .......... (211) -- --
Other ............... (187) -- --
------ ------ ------
$ 88 $ 384 $2,208
====== ====== ======
</TABLE>
The Company received cash distributions of equity from its affiliates of
$245 in 1997 and $843 in 1998. The Company did not receive cash distributions of
equity from its affiliates in 1999.
Selected unaudited financial information for the combined affiliates
accounted for under the equity method is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
-------------- -------------
<S> <C> <C>
Working capital ......... $1,674 $21,448
Total assets ............ 8,524 56,730
Long-term debt .......... 1,559 24,871
Equity .................. 1,074 5,723
------ -------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Revenues .................... $ 38,621 $77,143 $273,603
Net (loss) earnings ......... (2,133) 869 4,416
======== ======= ========
</TABLE>
79
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1998 and 1999 are summarized
as follows:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Land .................................................... $ 62,247 $ 44,394
Buildings and improvements .............................. 572,265 321,584
Leasehold improvements and leasehold interests .......... 434,461 319,717
Equipment ............................................... 515,188 513,662
Rental property ......................................... -- 195,934
Construction in progress ................................ 59,452 1,129
Pre-construction and pre-acquisition costs .............. 8,043 1,120
---------- ----------
1,651,656 1,397,540
Less accumulated depreciation and amortization .......... 182,534 232,863
---------- ----------
Net property, plant and equipment ...................... $1,469,122 $1,164,677
========== ==========
</TABLE>
Included in leasehold improvements and leasehold interests are purchase
option deposits on 63 facilities of $47,917 at December 31, 1999, of which
$43,702 is refundable and 64 facilities of $71,415 at December 31, 1998 of which
$46,411 is refundable.
At December 31, 1999, rental property includes $196 million of land,
buildings, improvements and equipment relating to 33 facilities transferred to
Monarch Properties, LP in January and September 1999 and leased to subsidiaries
of Lyric Health Care LLC. The Company is managing these facilities for Lyric
under long-term management agreements. This transaction has been accounted for
as a financing in the financial statements consistent with generally accepted
accounting principles. Thus, solely for purposes of the financial statements,
the proceeds received from Monarch on the transfer of the 33 facilities have
been treated as debt and the assets of these facilities are reported on the
balance sheet of the Company as rental property. Consistent with the Company's
original purposes for entering into the transactions with Monarch, the Company
believes that there is no debt obligation recognizable under law owing to
Monarch. Under the transaction documents, Monarch has no recourse to assets or
income of the Company (other than the transferred properties). In addition,
Monarch's commercial lender that assisted in funding these transactions has no
recourse to assets or income of the Company (other than the transferred
properties). Consistent with the transaction documents, Monarch has legal title
to the facilities which are leased to Lyric under an operating lease. (See notes
9 and 19)
(6) INTANGIBLE ASSETS
Intangible assets are summarized as follows at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
------------- -------------
<S> <C> <C>
Intangible assets of businesses acquired, primarily goodwill .......... $3,033,290 $1,372,027
Deferred financing costs .............................................. 57,487 73,801
---------- ----------
3,090,777 1,445,828
Less accumulated amortization ......................................... 120,614 91,908
---------- ----------
Net intangible assets ................................................ $2,970,163 $1,353,920
========== ==========
</TABLE>
Management regularly evaluates whether events or circumstances have
occurred that would indicate an impairment in the value or the life of goodwill.
In accordance with SFAS No. 121, if there is an indication that the carrying
value of an asset, including goodwill, is not recoverable, the Company estimates
the projected undiscounted cash flows, excluding interest, of the related
business unit to determine if an impairment loss should be recognized. Such
impairment loss is determined by comparing the carrying amount of the asset,
including goodwill, to its estimated fair value. The Company performs the
impairment analysis at the individual facility and business unit level. See note
20 for information regarding impairment of assets in the year ended December 31,
1999.
80
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1998 and 1999 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Accounts payable ................................................ $218,718 $165,476
Accrued salaries and wages ...................................... 69,114 49,698
Accrued workers' compensation and other claims .................. 13,226 12,615
Accrued interest ................................................ 69,347 91,162
Accrued acquisition liabilities (exit costs and employee termina-
tion and relocation costs) .................................... 1,755 --
Accrued transaction costs ....................................... 720 --
Other accrued expenses .......................................... 90,250 97,631
-------- --------
$463,130 $416,582
======== ========
</TABLE>
(8) DISCONTINUED OPERATIONS
In October 1998, the Company's Board of Directors adopted a plan to
discontinue operations of the home health nursing segment. Accordingly, in 1998,
the operating results of the home health nursing segment have been segregated
from continuing operations and reported as a separate line item in the statement
of operations. The loss from the discontinued operations is summarized as
follows:
<TABLE>
<S> <C>
Operating loss through September 30, 1998 (the measurement
date) of $61,902 less income tax benefit of $25,999............ $ 35,903
Loss on disposal of assets, including estimated losses from mea-
surement date through the expected disposal date (June 30,
1999) of $68,556, less income tax benefit of $57,292........... 168,967
--------
$204,870
========
</TABLE>
The assets and liabilities of the home health nursing segment at December
31, 1998 have been reflected as a net non-current asset based substantially on
the original classification of such assets and liabilities which are summarized
as follows: .
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Current assets ................................ $ 64,916
Property, plant and equipment ................. 10,337
Current liabilities ........................... (59,826)
Non-current liabilities ....................... (2,927)
---------
Net assets of discontinued operations ......... $ 12,500
=========
</TABLE>
Operating results including the effects of interest expense incurred in
connection with acquisition financing are as follows:
<TABLE>
<CAPTION>
1997 1998(1)
------------- -------------
<S> <C> <C>
Net revenue ........................................ $ 590,569 $ 230,104
Operating, general and administrative expenses...... 537,713 242,702
Depreciation and amortization ...................... 14,588 12,627
Rent ............................................... 30,781 18,186
Interest ........................................... 20,321 18,491
Non-recurring charges(2) ........................... 9,586 --
--------- ---------
Loss before income taxes ........................... (22,420) (61,902)
Income tax benefit ................................. 8,789 25,999
--------- ---------
Loss from operations ............................... $ (13,631) $ (35,903)
========= =========
</TABLE>
81
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(8) DISCONTINUED OPERATIONS- (CONTINUED)
- - ----------
(1) Represents results for the nine months ended September 30, 1998 (the
measurement date).
(2) Non-recurring charge represents an $8,199 charge to exit a home health
management contract, and a $1,387 charge resulting from the closure of
certain redundant operations.
The loss from operations of the home health nursing segment for the period
from the measurement date through December 31, 1998 was $31,063. Such loss
reflects the effects of provisions for estimated lease termination costs and
other costs incurred to close home health agencies during this period.
In the first half of 1999, the Company sold the remaining assets of the
home health nursing segment for cash of $26,300. The estimated loss on disposal
gives effect to the terms of these contracts.
(9) LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1999 is summarized as follows:
<TABLE>
<CAPTION>
1998 1999
------------- ------------
<S> <C> <C>
Revolving credit and term loan facility notes:
Revolving credit loans .................................................................. $ 766,000 $ 963,914
Term loans .............................................................................. 1,138,500 1,129,764
---------- ----------
1,904,500 2,093,678
Less current portion .................................................................... 11,500 2,093,678
---------- ----------
Total revolving credit and term loan facility notes, less current portion ............... $1,893,000 $ --
========== ==========
Mortgages and other long-term debt:
Loans payable to Monarch at LIBOR plus 2.875% (8.70% at December 31, 1999), due January
2003 (see note 19) ..................................................................... $ -- $ 137,509
Loans payable to Monarch at LIBOR plus 3.5% (9.32% at December 31, 1999), due Septem-
ber 2004 (see note 19) ................................................................. -- 5,185
8.094% note payable, due December 2001 .................................................. 9,037 --
Prime plus 1.25% note payable (9.75% at December 31, 1999), due December 2000 ........... 7,788 --
Mortgages payable in monthly installments of $62, including interest at rates ranging
from 9%to 14% .......................................................................... 3,143 2,877
Prime plus 1% (9.5% at December 31, 1999) note payable in monthly installments of $89,
including interest, with final payment in January 2020 ................................. 9,535 9,386
Seller notes, interest rates ranging from 10% to 14%, with final payment due in July
2000 ................................................................................... 1,489 1,450
LIBOR plus 1.75% (7.57% at December 31, 1999) mortgage note payable in monthly install-
ments of $51, including interest, with final payment due December 2000.................. 6,142 5,997
Mortgages payable in monthly installments of $89, including interest at rates ranging
from 10.09% to 10.64% .................................................................... 8,762 8,685
10.89% mortgage note payable in monthly installments of $41, including interest, due
April 2015 ............................................................................. 3,827 3,796
11.5% mortgage note payable in monthly installments of $65, including interest, due
January 2006............................................................................ 4,966 4,930
11% mortgage note payable in monthly installments of $216, including interest, due
December 2010 .......................................................................... 19,123 18,777
11.5% mortgage note payable in monthly installments of $55, including interest, due
January 2006............................................................................ 4,184 4,156
11% mortgage note payable in monthly installments of $41, including interest, due
December 2006 .......................................................................... 2,808 2,736
8.6% mortgage note payable in monthly installments of $30, including interest, due July
2034 ................................................................................... 4,015 3,997
7.89% mortgage payable in monthly installments of $409 including interest, due July 2023. 52,674 52,006
9.95% mortgage payable due December 2003, interest payable monthly ...................... 37,500 37,500
9.5% mortgage notes payable due March 2008, interest payable monthly .................... 12,000 12,000
8% mortgages payable in annual installments of $880 including interest, due January 2003. 3,000 2,200
8.69% mortgages payable in monthly installments of $35 including interest due September
2004 ................................................................................... 3,902 3,770
11.25% mortgages payable in monthly installments of $47 including interest due November
2006 ................................................................................... 4,925 4,917
7.75% notes payable due September 2024 .................................................. 13,159 12,989
3% to 6% seller notes with final payment due June 2001 .................................. 3,373 4,930
</TABLE>
82
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(9) LONG-TERM DEBT - (CONTINUED)
<TABLE>
<CAPTION>
1998 1999
------------- ------------
<S> <C> <C>
Other ................................................................................... 17,177 18,669
---------- ----------
Total mortgages and other debt .......................................................... 232,529 358,462
Less current portion .................................................................... 5,260 40,191
---------- ----------
Total mortgages and other long-term debt, less current portion .......................... $ 227,269 $ 318,271
========== ==========
Subordinated debt:
5 3/4% Convertible Senior Subordinated Debentures due January 1, 2001, with interest
payable semi-annually on January 1 and July 1 .......................................... $ 143,750 $ 142,659
5 1/4% Convertible Subordinated Debentures due June 1, 2003 of RoTech Medical Corpora-
tion, with interest payable semi-annually on June 1 and December 1 ..................... 2,026 1,979
9 5/8% and 10 3/4% Senior Subordinated Notes due May 31, 2002, and July 15, 2004 with
interest payable semi-annually ......................................................... 132 132
10 1/4% Senior Subordinated Notes due April 30, 2006, with interest payable
semi-annually on April 30 and October 30 ............................................... 150,000 143,950
9 1/2% Senior Subordinated Notes due September 15, 2007, with interest payable
semi-annually on March 15 and September 15 ............................................. 450,000 450,000
9 1/4% Senior Subordinated Notes due January 15, 2008, with interest payable
semi-annually on January 15 and July 15 ................................................ 500,000 496,655
---------- ----------
Total subordinated debt, included in current portion .................................... 1,245,908 1,235,375
---------- ----------
Less current portion .................................................................... -- 1,235,375
---------- ----------
Total subordinated debt, less current portion ........................................... $1,245,908 $ --
========== ==========
</TABLE>
Due to the failure of the Company to make interest payments and comply with
certain financial covenants, the Company is in default under the revolving
credit and term loan facility, all subordinated debt and a portion of its
mortgages and other debt. Accordingly, these obligations are classified as
current liabilities at December 31, 1999.
REVOLVING CREDIT AND TERM LOAN FACILITY
The Company has a $2,150,000 revolving credit and term loan facility
consisting of a $1,150,000 term loan facility and a $1,000,000 revolving credit
facility with Citibank, N.A., as Administrative Agent, and certain other lenders
(the "New Credit Facility"), which replaced its prior $700,000 revolving credit
facility. The New Credit Facility consisted of a $750,000 term loan facility
(the "Term Facility") and a $1,000,000 revolving credit facility, including a
$100,000 letter of credit subfacility and a $10,000 swing line subfacility (the
"Revolving Facility"). As of December 31, 1999, $736,875 was outstanding under
the term facility and was payable as follows (in equal quarterly installments):
each of 1999, (as to which three of the four payments were made), 2000, 2001 and
2002 -- $7,500; 2003 -- $337,500 and 2004 -- $375,000. 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) one and three-quarters percent or two 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 one-half percent or
three-quarters of one percent (depending on the Debt/EBITDAR Ratio).
In connection with the December 1997 acquisition of certain businesses from
HEALTHSOUTH Corporation (see note 2), IHS and the lenders under the New Credit
Facility amended the New Credit Facility to provide for an additional $400,000
term loan facility (the "Additional Term Facility") to finance a portion of the
purchase price for the acquisition and to amend certain covenants to permit the
83
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(9) LONG-TERM DEBT - (CONTINUED)
consummation of the acquisition. The Additional Term Facility, which was
borrowed at the closing of the acquisition, matures on December 31, 2005. As of
December 31, 1999, $392,889 was outstanding and payable as follows (in equal
quarterly installments): 1999, (as to which three of the four payments were
made), 2000, 2001, 2002 and 2003 -- $4,000; 2004 -- $176,000; and 2005 --
$199,889. The Additional Term Facility bears interest at a rate equal to, at the
option of IHS, either (i) in the case of Eurodollar loans, the sum of (x) two
and one-quarter percent or two and one-half percent (depending on the
Debt/EBITDAR Ratio) and (y) the interest rate in the London interbank market for
loans in an amount substantially equal to the amount of borrowing and for the
period of borrowing selected by IHS or (ii) the sum of (a) the higher of (1)
Citibank, N.A.'s base rate or (2) one percent plus the latest overnight federal
funds rate plus (b) a margin of one percent or one and one-quarter percent
(depending on the Debt/EBITDAR Ratio). The Term Facility and the Additional Term
Facility can be prepaid at any time in whole or in part without penalty.
The Revolving Facility was to reduce to $800 million on January 1, 2001,
$600 million on January 1, 2002, $500 million on September 30, 2002 and $400
million on January 1, 2003, with a final maturity on September 15, 2003;
however, the $100 million letter of credit subfacility and $10 million swing
line subfacility will remain at $100 million and $10 million, respectively,
until final maturity. The Revolving 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). Amounts repaid under
the Revolving Facility may be reborrowed prior to the maturity date.
The New Credit Facility limits IHS' ability to incur indebtedness or
contingent obligations, to make additional acquisitions, to sell or dispose of
assets, to create or incur liens on assets, to pay dividends, to purchase or
redeem IHS' stock and to merge or consolidate with any other person. In
addition, the New Credit Facility requires that IHS meet certain financial
covenants (which the Company did not meet at December 31, 1999), and provides
the lenders with the right to require the payment of all amounts outstanding
under the facility, and to terminate all commitments under the facility, if
there is a change in control of IHS or if any person other than Dr. Robert N.
Elkins, IHS' Chairman and Chief Executive Officer, or a group managed by Dr.
Elkins, owns more than 40% of IHS' stock. The New Credit Facility is guaranteed
by all of IHS' subsidiaries (other than inactive subsidiaries) and secured by a
pledge of all of the stock of substantially all of IHS' subsidiaries.
The New Credit Facility replaced the Company's $700,000 revolving credit
facility (the "Prior Credit Facility"). As a result, the Company recorded an
extraordinary loss on extinguishment of debt of approximately $2,384 (net of
related tax benefit of approximately $1,524) in the third quarter of 1997
resulting from the write-off of deferred financing costs of $3,908 related to
the Prior Credit Facility. See note 17.
The Company utilizes interest rate swap agreements to manage interest rate
exposure on its floating rate revolving credit and term loan facility. The
principal objective of such contracts is to minimize the risks and/or costs
associated with financial operating activities. Each interest rate swap is
matched as a hedge against existing floating rate debt. The Company does not
hold derivative financial instruments for trading or speculative purposes. In
December 1999, the counterparties terminated certain floating to fixed interest
rate swap agreements with a total notional amount of $850,000. As a result, the
Company recorded a net settlement liability of $2,622 at December 31, 1999,
which has been recorded as additional interest expense in the statement of
operations. At December 31, 1999, the Company had outstanding $150,000 notional
amount of
84
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(9) LONG-TERM DEBT - (CONTINUED)
floating to fixed interest rate swap agreements. Subsequent to December 31,
1999, such agreements were terminated and resulted in an immaterial gain to the
Company.
SUBORDINATED DEBT
On September 11, 1997, IHS issued $500,000 aggregate principal amount of
its 9 1/4% Senior Subordinated Notes due 2008 (the "9 1/4% Senior Notes").
Interest on the 9 1/4% Senior Notes is payable semi-annually on January 15 and
July 15. The 9 1/4% Senior Notes are redeemable in whole or in part at the
option of IHS at any time on or after January 15, 2003, at a price, expressed as
a percentage of the principal amount, initially equal to 104.625% and declining
to 100% on January 15, 2006, plus accrued interest thereon. In addition, IHS may
redeem up to $166,667 aggregate principal amount of 9 1/4% Senior Notes at any
time and from time to time prior to January 15, 2001 at a redemption price equal
to 109.25% of the aggregate principal amount thereof, plus accrued interest
thereon, out of the net cash proceeds of one or more Public Equity Offerings (as
defined in the indenture under which the 9 1/4% Senior Notes were issued). IHS
used approximately $321,500 of the net proceeds to repay all amounts outstanding
under the Company's $700,000 revolving credit facility and used the remaining
approximately $164,900 of net proceeds to pay a portion of the purchase price
for the acquisition of the businesses acquired from HEALTHSOUTH and for general
corporate purposes, including working capital.
In May 1997, the Company issued $450,000 aggregate principal amount of its
9 1/2% Senior Subordinated Notes due 2007 (the "9 1/2% Senior Notes"). Interest
on the 9 1/2% Senior Notes is payable semiannually on March 15 and September 15.
The 9 1/2% Senior Notes are redeemable for cash at any time on or after
September 15, 2002, at the option of the Company, in whole or in part, initially
at the redemption price equal to 104.75% of principal amount, declining to 100%
of principal amount on September 15, 2005, plus accrued interest thereon to the
date fixed for redemption. In addition, IHS may redeem up to $150,000 aggregate
principal amount of 9 1/2% Senior Notes at any time and from time to time prior
to September 15, 2000 at a redemption price equal to 108.50% of the aggregate
principal amount thereof, plus accrued interest thereon, out of the net cash
proceeds of one or more Public Equity Offerings (as defined in the indenture
under which the 9 1/2% Senior Notes were issued). The Company used approximately
$247,200 of the net proceeds from the sale of the 9 1/2% Senior Notes to
repurchase substantially all of its outstanding 9 5/8% Senior Subordinated Notes
due 2002 and 10 3/4% Senior Subordinated Notes due 2004 and to pay pre-payment
premiums, consent fees and accrued interest related to the repurchase; the
remainder was used to repay a portion of the balance then outstanding under its
revolving credit facility. In connection with the repurchase, the Company
recorded an extraordinary loss of $18,168 (net of tax). See note 17.
On May 29, 1996, the Company issued $150,000 aggregate principal amount of
its 10 1/4% Senior Subordinated Notes due 2006 (the "10 1/4% Senior Notes").
Interest on the 10 1/4% Senior Notes is payable semi-annually on April 30 and
October 30. The 10 1/4% Senior Notes are redeemable for cash at any time after
April 30, 2001, at IHS' option, in whole or in part, initially at a redemption
price equal to 105.125% of the principal amount, declining to 100% of the
principal amount on April 30, 2004, plus accrued interest thereon to the date
fixed for redemption. Because certain actions were not taken to effect an
exchange offer within specified periods whereby each holder of 10 1/4% Senior
Notes would be offered the opportunity to exchange such notes for new notes
identical in all material respects to the 10 1/4% Senior Notes, except that the
new notes would be registered under the Securities Act, the interest rate on the
10 1/4% Senior Notes increased to 10.5% beginning November 25, 1996, and
continued to increase by 0.25% each 90 days until the exchange offer was
commenced, which occurred on November 26, 1997.
On May 18, 1995, the Company issued $115,000 aggregate principal amount of
its 9 5/8% Senior Subordinated Notes due 2002, Series A (the "9 5/8% Senior
Notes"). On May 30, 1997, the Company repurchased $114,975 aggregate principal
amount of the 9 5/8% Senior Notes pursuant to a cash tender offer as discussed
85
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(9) LONG-TERM DEBT - (CONTINUED)
above. On July 7, 1994, the Company issued $100,000 aggregate principal amount
of its 10 3/4% Senior Subordinated Notes due 2004 (the "10 3/4% Senior Notes").
On May 30, 1997, the Company repurchased $99,893 aggregate principal amount of
the 10 3/4% Senior Notes pursuant to a cash tender offer as discussed above. As
a condition of the Company's obligation to repurchase tendered notes, tendering
holders consented to amendments to the related indentures under which the notes
were issued which eliminated or modified most of the restrictive covenants
previously contained in such indentures.
The Company's 5 3/4% convertible senior subordinated debentures (the "5
3/4% Debentures") in the aggregate principal amount of $142,659 are due January
1, 2001. The $1,979 aggregate principal amount of 5 1/4% convertible
subordinated debentures of RoTech Medical Corporation (the "5 1/4% Debentures")
are due June 1, 2003. At any time prior to redemption or final maturity, the 5
3/4% Debentures and the 5 1/4% Debentures are convertible into approximately
4,376,043 shares and 43,773 shares, respectively, of Common Stock of the Company
at $32.60 per share and $45.21 per share, respectively, at the option of the
holder, subject to adjustment upon the occurrence of certain events. The 5 3/4%
Debentures and 5 1/4% Debentures are redeemable in whole or in part at the
option of the Company at any time after January 2, 1997 and June 4, 1999,
respectively, at initial redemption prices expressed as a percentage of
principal of 103.29% and 103.0%, respectively.
On May 29, 1998, the Company called for redemption on June 29, 1998 all of
its outstanding 6% Convertible Subordinated Debentures due 2003 (the "6%
Debentures"). Of the $115,000 principal amount of 6% Debentures outstanding,
holders of $114,799 principal amount of the 6% Debentures converted their 6%
Debentures into an aggregate of 3,573,446 shares of Common Stock. Holders of the
remaining $201 principal amount of 6% Debentures received a cash redemption
aggregating $213 ($1.06 per $1 principal amount of the 6% Debentures), equal to
approximately $34.05 per underlying share of Common Stock in lieu of conversion.
In the event of a change in control of IHS (as defined), each debt holder
may require the Company to repurchase the debt, in whole or in part, at
redemption prices of 100% of the principal amount in the case of the 5 3/4%
Debentures and the 5 1/4% Debentures and 101% of the principal amount in the
case of the 10 3/4% Senior Notes, 9 5/8% Senior Notes, 10 1/4% Senior Notes, 9
1/2% Senior Notes and 9 1/4% Senior Notes.
The indentures under which each of the 10 1/4% Senior Notes, the 9 1/2%
Senior Notes and the 9 1/4% Senior Notes were issued contain certain covenants,
including but not limited to, covenants with respect to the following matters:
(i) limitations on additional indebtedness unless certain coverage ratios are
met; (ii) limitations on other subordinated debt; (iii) limitations on liens;
(iv) limitations on the issuance of preferred stock by IHS' subsidiaries; (v)
limitations on transactions with affiliates; (vi) limitations on certain
payments, including dividends; (vii) application of the proceeds of certain
asset sales; (viii) restrictions on mergers, consolidations and the transfer of
all or substantially all of the assets of IHS to another person; and (ix)
limitations on investments and loans. The indentures under which each of the 10
3/4% Senior Notes and 9 5/8% Senior Notes were issued contain certain limited
covenants, including a covenant with respect to the application of the proceeds
of certain asset sales.
At December 31, 1999, the aggregate maturities of long-term debt
(reflecting all debt in default as currently payable) for the five years ending
December 31, 2004 and thereafter are as follows:
<TABLE>
<S> <C>
2000 ............... $3,369,244
2001 ............... 68,228
2002 ............... 141,415
2003 ............... 42,817
2004 ............... 10,089
Thereafter ......... 55,722
----------
</TABLE>
86
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(9) LONG-TERM DEBT - (CONTINUED)
<TABLE>
<S> <C>
$3,687,515
==========
</TABLE>
Interest capitalized to construction in progress was $3,600 in 1997, $5,000
in 1998 and $2,090 in 1999.
(10) OTHER LONG-TERM LIABILITIES
CONTINGENT PAYMENTS RELATED TO FIRST AMERICAN ACQUISITION
The Company acquired all of the outstanding stock of First American Health
Care of Georgia, Inc. in October 1996. The purchase price included contingent
payments which have been determined to be probable, and the present value
thereof is recorded as other long-term liabilities.
Prior to its acquisition by the Company, First American was under
protection of the U.S. Bankruptcy Court, with which it had filed a petition for
reorganization under Chapter 11 of the Bankruptcy Code on February 21, 1996 (the
petition date) following its and its two principal shareholders' convictions on
multiple counts of having made improper Medicare reimbursement claims.
Immediately preceding the Chapter 11 filing, First American and its principal
shareholders had entered into a merger agreement with the Company. In connection
with the bankruptcy proceedings and the establishment and approval of First
American's plan of reorganization, the merger agreement was amended and
confirmed by the Bankruptcy Court on October 4, 1996.
Pursuant to the terms of the First American plan of reorganization and the
amended merger agreement, the purchase price included contingent payments of up
to $155,000. The merger agreement provided that the contingent payments will be
payable (1) if legislation is enacted that changes the Medicare reimbursement
methodology for home health services to a prospectively determined rate
methodology, in whole or in part, or (2) if, in respect to payments contingently
payable for any year through 2003, the percentage increase through 2004 in the
seasonally unadjusted Consumer Price Index for all Urban Consumers for the
Medical Care expenditure category (the "Medical CPI") is less than 8%. With the
enactment of the Balanced Budget Act of 1997, which mandated the implementation
of a prospective payment system for Medicare home health nursing for cost
reporting periods beginning October 1, 1999 (subsequently extended to October 1,
2000) the contingent payments are payable on February 14 of each year as
follows: $10,000 in 2000; $40,000 in 2001; $51,000 in 2002; $39,000 in 2003; and
$15,000 in 2004. The contingent payments are payable to the Health Care
Financing Administration ("HCFA") for $140,000 and to the former shareholders of
First American for $15,000.
The contingent payments to HCFA and $95,000 of the cash purchase price paid
by the Company, which was paid to HCFA, are in full settlement of HCFA's claims
made to the Bankruptcy Court related to First American's Medicare reimbursement
claims for all periods prior to the petition date and of any claims by HCFA
related to First American's Medicare reimbursement claims made after the
petition date through December 31, 1996.
The Company has accrued the present value of the contingent payments
payable to HCFA and the former shareholders of First American. The present value
of these payments of $122,054 at December 31, 1998 and $131,654 at December 31,
1999 was determined using a discount rate of 8% per annum from the dates of
payment.
The Company subsequently disposed of First American Health Care of
Georgia, Inc. See note 8.
UNFAVORABLE LEASES AND CONTRACTS
In connection with certain business acquisitions, the Company assumed
certain unfavorable lease and other contract obligations. Accordingly, the
Company recorded approximately $75,380 in other long-term liabilities in
accordance with Accounting Principles Board Opinion No. 16 concerning business
combinations
87
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(10) OTHER LONG-TERM LIABILITIES- (CONTINUED)
accounted for by the purchase method. Such obligations relate primarily to
certain neuro-rehabilitation facilities in Massachusettes acquired from
HEALTHSOUTH Corporation on December 31, 1997. The value of the obligations was
determined based on the present value of amounts to be paid, using a 10%
discount rate. With respect to the leases of real estate, the Company's
valuation is based on estimates of fair market rentals provided by an
independent appraiser. The obligation for unfavorable leases is payable
primarily through 2005, and other contract obligations expire on December 31,
2000. The balance payable at December 31, 1998 and 1999 was $47,045 and $34,510,
respectively.
(11) LEASES
The Company has entered into operating leases as lessee of 227 health care
facilities and certain office facilities expiring at various dates through July
2023. Minimum rent payments due under operating leases in effect at December 31,
1999 are summarized as follows:
<TABLE>
<S> <C>
2000 ....................... $127,475
2001 ....................... 115,220
2002 ....................... 102,099
2003 ....................... 93,833
2004 ....................... 86,294
Subsequent to 2004 ......... 473,471
--------
Total .................... $998,392
========
</TABLE>
The Company also leases equipment under short-term operating leases having
rentals of approximately $33,141 per year.
The leases of health care facilities generally provide renewal options for
various terms at fair market rentals at the expiration of the initial term. The
Company generally has the option or right of first refusal to purchase the
facilities at fair market value determined by independent appraisal (or by
formula based upon the cash flow of the facility, as defined) or, with respect
to certain leases, at a fixed price representing the fair market value at the
inception of the lease. Under certain default conditions, the Company may be
required to exercise the options to buy certain facilities. In connection with
51 leases the Company has paid purchase option deposits aggregating $54,868 at
December 31, 1999, of which $41,764 is refundable. Minimum rentals are generally
subject to adjustment based on the consumer price index or the annual rate of
five year U.S. Treasury securities. Also, the leases generally provide for
contingent rentals, based on gross revenues of the facilities in excess of base
year amounts, and additional rental obligations for real estate taxes,
utilities, insurance and repairs. Contingent rentals were $2,744 in 1997, $2,778
in 1998 and $1,592 in 1999.
On December 1, 1999 the Company entered into a synthetic lease with a
special purpose entity (SPE) which was formed and financed by a group of
commercial banks. The SPE developed and owns the buildings and land which the
Company uses for its headquarters facility in Sparks, Maryland. For financial
statement purposes, this lease has been treated as an operating lease. Minimum
rent under this lease is based on the SPE's total facility commitment of
approximately $59,993 and a choice of various LIBOR rates plus a fixed
percentage ranging from 2.75% to 5.00% depending on the Company's ratio of debt
to earnings before interest, taxes, depreciation, amortization and rent. Such
rental was $5,576 based on a rate of 9.3% at December 31, 1999. As lessee, the
Company is also responsible for real estate taxes, utilities, insurance,
maintenance and repairs, and certain other costs. The lease will expire on July
1, 2003. Upon termination of the lease, the Company may be obligated for certain
residual guarantee payments based on the value of the property and the
outstanding amount of certain debt of the SPE at such date. However, the Company
has the right to purchase the property for an amount based on the outstanding
balance of debt of the SPE.
88
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(11) LEASES- (CONTINUED)
The Company incurred rent expense of $74,355, $126,247 and $130,042 for the
years ended December 31, 1997, 1998 and 1999 respectively.
(12) CAPITAL STOCK
The Company is authorized to issue up to 150,000,000 shares of common stock
and 15,000,000 shares of preferred stock. The Board of Directors is authorized
to issue shares of preferred stock in one or more series and to determine and
fix the rights, preferences and privileges of each series, including dividend
rights and preferences, conversion rights, voting rights, redemption rights and
the terms of any sinking fund. The issuance of such preferred stock may have the
effect of delaying, deferring or preventing a change in control of the Company
without further action by the stockholders and may adversely affect the voting
and other rights of the holders of common stock, including the loss of voting
control to others. As of December 31, 1998 and 1999, there were no shares of
preferred stock outstanding.
IHS has designated 750,000 shares of preferred stock as Series A Junior
Participating Cumulative Preferred Stock, $.01 par value per share. The IHS
Stockholders' Rights Plan ("IHS Rights Plan") provides that one preferred stock
purchase right ("Right") will be issued with each share of IHS common stock
prior to the earlier of (a) 10 days following a public announcement that an
individual or group has acquired beneficial ownership of 20% or more of the
outstanding common stock or (b) 10 business days following the commencement of a
tender or exchange offer resulting in the beneficial ownership by a person or
group of 20% or more of the outstanding common stock. When exercisable, each
Right entitles the registered holder to purchase from IHS one one-hundredth of a
share of Series A preferred stock at a price of $135.00 per one one-hundredth of
a share of Series A preferred stock, subject to adjustment.
Series A preferred stock purchasable upon exercise of the Rights will not
be redeemable and is junior to any other series of preferred stock that may be
authorized and issued by IHS. In addition, the Series A preferred stockholders
will be entitled to the following:
o Minimum preferential quarterly dividend payment of $1 per share and an
aggregate dividend of 100 times the dividend declared per share of common
stock;
o Preferential liquidation payment of $100 per share and an aggregate payment of
100 times the payment made per share of common stock;
o 100 votes per share, voting together with common stock;
o In the event of merger, consolidation or other transaction in which common
stock is exchanged, each share of Series A preferred stock will receive 100
times the amount received per share of common stock.
These rights are protected by customary antidilution provisions.
The Company declared a $0.02 per share cash dividend in 1997; none in 1998
and 1999.
89
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(12) CAPITAL STOCK - (CONTINUED)
At December 31, 1998 and 1999 the Company had outstanding stock options as
follows:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Stock options outstanding pursuant to:
1990 Employee Stock Option Plan ................................... 161,559 161,521
1992 Employee Stock Option Plan ................................... 369,631 378,056
1994 Stock Incentive Plan ......................................... 837,879 649,434
Senior Executives' Stock Option Plan .............................. 620,000 620,000
Stock Option Compensation Plan for Non-Employee Directors ......... 73,082 73,082
1995 Board of Director's Plan ..................................... 200,000 200,000
1996 Employee Stock Option Plan ................................... 5,129,104 8,455,405
RoTech converted options .......................................... 951,971 949,068
Other options ..................................................... 89,118 77,729
--------- ---------
Total stock options outstanding ................................. 8,432,344 11,564,295
========= ==========
</TABLE>
The 1990 Employee Stock Option Plan, the 1992 Employee Stock Option Plan
and the 1996 Employee Stock Option Plan provide that options may be granted to
certain employees at a price per share not less than the fair market value at
the date of grant. In 1993, the Company adopted the Senior Executives' Stock
Option Plan and the 1994 Stock Incentive Plan, which provide for the issuance of
options with terms similar to the 1992 plan. In addition, the Company has
adopted the 1995 Board of Director's Plan and a Stock Option Compensation Plan
for Non-Employee Directors. The Board of Directors has authorized the issuance
of 17,278,571 shares of Common Stock under all plans. Such options have been
granted with exercise prices equal to or greater than the estimated fair market
value of the common stock on the date of grant; accordingly, the Company has
recorded no compensation expense related to such grants. The options' maximum
term is 10 years. Vesting for the 1990, 1992 and 1994 Employee Stock Option
Plans is over four to six years. Vesting for the 1996 Plan is over two to four
years. Vesting for the Directors' plans is one year after the date of grant.
Vesting for the Senior Executives' Plan is generally over three years. In
addition, the Company provides an Employee Stock Purchase Plan whereby employees
have the right to purchase the Company's common stock at 90% of the quoted
market price, subject to certain limitations.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE WEIGHTED
EXERCISE EXERCISE AVERAGE
SHARES PRICE SHARES PRICE SHARES EXERCISE
--------------- ---------- --------------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding-beginning of period 8,750,099 $ 20.94 10,161,408 $ 22.24 8,432,344 $ 17.62
Granted .................................... 2,975,272 25.15 6,898,701 18.66 3,895,500 3.70
Exercised .................................. (1,418,968) 19.81 (3,511,717) 19.46 (2,446) 10.25
Cancelled .................................. (144,995) 21.67 (5,116,048) 26.94 (761,103) 16.83
---------- -------- ---------- -------- --------- --------
Options outstanding--end of period ......... 10,161,408 22.24 8,432,344 17.62 11,564,295 12.98
---------- -------- ---------- -------- ---------- --------
Options exercisable--end of period ......... 7,515,449 $ 21.70 4,770,058 $ 19.61 7,309,098 $ 15.68
========== ======== ========== ======== ========== ========
</TABLE>
90
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(12) CAPITAL STOCK - (CONTINUED)
The following summarizes information about stock options outstanding as of
December 31, 1999.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/99 LIFE PRICE AT 12/31/99 PRICE
- - ------------------- ------------- ------------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
under $5........... 3,806,325 9.30 $ 3.70 1,430,000 $ 3.70
$5 to 10........... 1,019,775 8.96 9.50 336,510 9.50
$10 to $15......... 3,080,856 6.65 10.32 2,390,593 10.31
$15 to $20......... 188,119 2.32 18.12 156,800 17.98
$20 to $25......... 1,698,448 5.09 21.33 1,572,498 21.31
over $25........... 1,770,772 7.69 31.04 1,422,697 31.75
--------- ---- ------- --------- -------
Totals ........... 11,564,295 7.58 $ 12.98 7,309,098 $ 15.68
========== ==== ======= ========= =======
</TABLE>
The Company applies APB No. 25 and related interpretations in accounting
for its employee stock options and warrants. Accordingly, no compensation
expense has been recognized in connection with its employee stock options and
warrants. Had compensation expense for the Company's employee stock options and
warrants been determined consistent with SFAS No. 123, the Company's loss and
loss per share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998 1999
--------------------------- --------------------------- -------------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------- ------------- ------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net loss ..................... $ (33,505) $ (48,994) $ (67,978) $ (81,574) (2,239,927) (2,261,041)
Basic loss per share ......... (1.19) (1.73) (1.40) (1.68) (44.87) (45.29)
Diluted loss per share ....... (0.60) (1.00) (1.08) (1.32) (44.87) (45.29)
</TABLE>
The fair value of the employee options and warrants (including the Employee
Stock Purchase Plan) for purposes of the above pro forma disclosure was
estimated on the date of grant or modification using the Black-Scholes option
pricing model and the following assumptions: a risk-free interest rate of 5.80%
in 1997, 4.65% in 1998, and 6.46% in 1999; weighted average expected lives of 2
to 9 years for options and 6 months for the Employee Stock Purchase Plan; 0.1%
dividend yield and volatility of 30.1% in 1997, 79.45% in 1998 and 296.13% in
1999. The effects of applying SFAS No. 123 in the pro forma net loss and loss
per share may not be representative of the effects on such pro forma information
for future years. In December 1998, the Board of Directors authorized a
modification to the options outstanding under certain of the Company's option
plans for certain employees which resulted in the change of the exercise price
to $10.25, the market price on the date of the modification, for option holders
who chose to participate in the option modification. In order to participate,
certain option holders were required to surrender two existing options for each
modified option. The effect of this modification has been included in the pro
forma loss and loss per share amounts above. In September 1997, the Board of
Directors authorized a modification to the options outstanding under the
Company's option plans which resulted in a two year acceleration of the options
held by senior and executive vice presidents. Under SFAS 123, compensation cost
of $1,229 in 1997 is recognized immediately for the vested options. The effect
of this modification has been included in the pro forma per share amounts above.
91
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(12) CAPITAL STOCK - (CONTINUED)
Warrant transactions are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
1997 PRICE 1998 PRICE 1999 PRICE
------------- ---------- ------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Warrants outstanding--
beginning of year ......... 498,000 $ 31.03 1,275,000 $ 32.34 1,275,000 $ 19.09
Granted .................... 780,000 33.12 750,000 10.63 -- --
Exercised .................. (3,000) 20.00 -- -- -- --
Cancelled .................. -- -- (750,000) 33.16 -- --
------- -------- --------- -------- --------- -------
Warrants outstanding--end of
year ...................... 1,275,000 $ 32.34 1,275,000 $ 19.09 1,275,000 $ 19.09
========= ======== ========= ======== ========= =======
</TABLE>
The warrants granted in 1997 consist primarily of warrants granted to
Stephen P. Griggs, the President of RoTech. In connection with the acquisition
of RoTech and as a condition of his five-year employment agreement, Mr. Griggs
was issued warrants to purchase 750,000 shares of IHS Common Stock at a per
share exercise price equal to the average closing sales price of IHS Common
Stock for the 15 business days prior to the acquisition closing date. Such
warrants vest at a rate of 20% per year beginning one year from the acquisition
closing date. The warrants were granted in consideration of future services to
be rendered by Mr. Griggs. As such, the Company applied the guidance provided in
APB Opinion No. 25. Since the exercise price of the warrants was equal, on the
date of grant, to the market value of the stock, no compensation expense was
recognized or deferred. In 1998, the exercise price of these warrants was
reduced from $33.16 to $10.63.
In 1997, 1998 and 1999, the Company's Board of Directors authorized the
repurchase in the open market of up to $62,323 of the Company's Common Stock.
The purpose of the repurchase program was to have available treasury shares of
common stock to (i) satisfy contingent earn-out payments under prior business
combinations accounted for by the purchase method, (ii) issue in connection with
acquisitions and (iii) issue upon exercise of outstanding options. The
repurchases were funded from cash from operations and proceeds from the sale of
the Company's debt securities. The Company repurchased 548,500 shares for
$19,813 in 1997, 1,060,500 shares for $18,469 in 1998 and 3,607,000 shares for
$24,041 in 1999. In 1998, the Company reissued 658,824 shares and 347,700 shares
in connection with funding the Company's key employee supplemental executive
retirement plans and earn-out payment, respectively. In 1999, the Company
cancelled the issuance of the 658,824 common shares of treasury stock issued to
fund the key employee supplemental executive retirement plans, and reissued and
subsequently cancelled 3,415,556 common shares of treasury stock in connection
with the employee deferred compensation plan.
92
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(13) 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
---------------- --------------- ------------
<S> <C> <C> <C>
For the Year ended December 31, 1997
Basic EPS ................................................ $ 2,508 28,253,217 $ 0.09
Adjustment for interest on and incremental shares from
assumed conversion of the convertible subordinated de-
bentures ............................................... 10,216 8,292,655 --
Incremental shares from assumed exercise of dilutive op-
tions and warrants (net of tax benefits related thereto)
and issuance of contingent shares ...................... -- 2,352,966 --
------------ ---------- --------
Diluted EPS .............................................. $ 12,724 38,898,838 $ 0.33
============ ========== ========
For the Year ended December 31, 1998
Basic EPS ................................................ $ 136,892 48,445,979 $ 2.83
Adjustment for interest on and incremental shares from
assumed conversion of the convertible subordinated de-
bentures ............................................... 7,396 6,232,546 --
Incremental shares from assumed exercise of dilutive op-
tions and warrants (net of tax benefits related thereto)
and issuance of contingent shares ...................... -- 1,578,520 --
------------ ---------- --------
Diluted EPS .............................................. $ 144,288 56,257,045 $ 2.56
============ ========== ========
For the Year ended December 31, 1999 ......................
Basic EPS ................................................ $ (2,239,927) 49,923,765 $ (44.87)
Diluted EPS** ............................................ $ (2,239,927) 49,923,765 $ (44.87)
</TABLE>
- - ------------------
* Represents earnings (loss) from continuing operations before extraordinary
items and cumulative effect of accounting change.
** The effect of dilutive securities for the year ended December 31, 1999 has
been excluded because the effect is antidilutive .
(14) INCOME TAXES
The provision for income taxes on earnings before income taxes and
extraordinary items is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
------------ ------------ ---------
<S> <C> <C> <C>
Continuing operations ........... $ 33,238 $ 95,128 $9,764
Discontinued operations ......... (8,789) (83,291) --
--------- --------- ------
$ 24,449 $ 11,837 $9,764
========= ========= ======
Federal ......................... 20,783 10,393 --
State ........................... 3,666 1,444 9,764
--------- --------- ------
$ 24,449 $ 11,837 $9,764
========= ========= ======
Current ......................... 39,042 (29,518) 9,096
Deferred ........................ (14,593) 41,355 668
--------- --------- ------
$ 24,449 $ 11,837 $9,764
========= ========= ======
</TABLE>
93
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(14) INCOME TAXES- (CONTINUED)
The amount computed by applying the Federal corporate tax rate of 35% in
1997, 1998 and 1999 to earnings from continuing operations before income taxes,
extraordinary items and cumulative effect of accounting change is summarized as
follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- --------------
<S> <C> <C> <C>
Income tax (benefit) computed at statu-
tory rates .............................. $12,511 $ 81,207 $ (783,775)
State income taxes (benefit), net of Fed-
eral tax benefit ........................ 3,325 6,033 6,347
Permanent differences:
Amortization of intangibles ............. 5,568 8,601 12,474
Loss on impairment of long lived as-
sets .................................. -- -- 174,157
Basis difference on assets sold ......... 5,784 -- 116,241
Merger costs and other special charges 6,362 1,112 77
Valuation allowance adjustment ........... -- -- 501,989
Other .................................... (312) (1,825) (17,746)
------- -------- ----------
$33,238 $ 95,128 $ 9,764
======= ======== ==========
</TABLE>
Deferred income tax liabilities (assets) at December 31, 1998 and 1999 are
as follows:
<TABLE>
<CAPTION>
1998 1999
------------ --------------
<S> <C> <C>
Difference in tax basis and book basis of intangible assets .......... $ 29,871 $ (221,882)
Excess of book basis over tax basis of assets ........................ 181,412 126,135
Insurance reserves ................................................... (7,344) (7,560)
Deferred gain on sale-leaseback ...................................... (1,782) (1,485)
Allowance for doubtful accounts ...................................... (72,246) (74,536)
Accrued Medicare settlement .......................................... (46,991) (65,894)
Accrued litigation ................................................... (5,889) (14,020)
Accrued vacation ..................................................... (1,244) (1,888)
Other accrued expenses not yet deductible for tax .................... 1,998 (9,763)
Equity in earnings of affiliates ..................................... -- 1,286
Pre-acquisition separate company net operating loss carryforwards (25,827) (27,724)
Loss on discontinued operations ...................................... (5,775) --
Net operating loss carryforwards ..................................... (29,231) (187,037)
--------- ----------
$ 16,952 $ (484,368)
Valuation allowance .................................................. 24,403 526,391
--------- ----------
Net deferred tax liabilities ....................................... $ 41,355 $ 42,023
========= ==========
</TABLE>
At December 31, 1999, certain subsidiaries of the Company had
pre-acquisition net operating loss carryforwards available for Federal and state
income tax purposes of approximately $72,010 which expire in the years 2000
through 2009. The annual utilization of these net operating loss (NOL)
carryforwards is subject to certain limitations under the Internal Revenue Code.
Also, at December 31, 1999, the Company has consolidated net operating loss
carryforwards for federal and state income tax purposes of approximately
$485,814 which expire in the years 2017 and 2019. Realization of net deferred
tax assets related to the Company's NOL carryforwards and other items is
dependent on future earnings, which are uncertain. Accordingly, a valuation
allwance has been established equal to deferred tax assets which are not likely
to be realized in the future, resulting in net deferred tax liabilities of
$42,023 and $41,355 at December 31, 1999 and 1998, respectively. The change in
the valuation allowance was an increase of $501,989 and $0 in 1999 and 1998,
respectively.
94
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(15) OTHER COMMITMENTS AND CONTINGENCIES
IHS' contingent liabilities (other than liabilities in respect of
litigation and the contingent payments in respect of the First American
acquisition) aggregated approximately $108,717 as of December 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 $7,130 or the facility's
fair market value. IHS has established several irrevocable standby letters of
credit with the Bank of Nova Scotia and other financial institutions to secure
certain of IHS' self-insured workers' compensation obligations, health benefits
and other obligations. The maximum obligation was $31,934 at December 31, 1999.
In addition, IHS has several surety bonds in the amount of $69,683 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. In addition, IHS has future lease
obligations aggregating approximately $998,392 at December 31, 1999. (See note
11).
IHS leases ten facilities from Meditrust, a publicly-traded real estate
investment trust. With respect to all the facilities leased from Meditrust, IHS
is obligated to pay additional rent in an amount equal to a specified percentage
(generally five percent) of the amount by which the facility's gross revenues
exceed a specified amount (generally based on the facility's gross revenues
during its first year of operation). If an event of default occurs under any
Meditrust lease or any other agreement IHS has with Meditrust, Meditrust has the
right to require IHS to purchase the leased facility at a price equal to the
higher of the then current fair market value of the facility or the original
purchase price of the facility paid by Meditrust plus (i) the cost of certain
capital expenditures paid for by Meditrust, (ii) an adjustment for the increase
in the cost of living index since the commencement of the lease and (iii) all
rent then due and payable (all such amounts to be determined pursuant to the
prescribed formula contained in the lease). In addition, each Meditrust lease
provides that a default under any other Meditrust lease or any other agreement
IHS has with Meditrust constitutes a default under such lease. Upon such
default, Meditrust has the right to terminate the leases and to seek damages
based upon lost rent.
The Company maintains a 401(k) plan available to substantially all
employees who have been with the Company for more than six months. In general,
employees may defer up to 20% of their salary subject to the maximum permitted
by law. The Company may make a matching contribution, at its discretion, equal
to a portion of the employee's contribution. Employee and employer contributions
are vested immediately. The Company has made no contributions in 1997, 1998 and
1999.
The Company also maintains supplemental executive retirement ("SERP") plans
for certain of its senior officers. At December 31, 1998, the SERP plans
consisted of two defined contribution plans and one defined benefit plan. The
Company's chief executive officer is the sole participant in the defined benefit
plan. In 1999, the Company revoked prior year contributions of $3,000 to the
defined benefit plan and $4,000 to a defined contribution plan, which were made
in Company stock. Also, the Company elected to terminate the two defined
contribution plans. Expenses recognized for the defined benefit plan were $2,080
in 1997, $1,097 in 1998, and $1,610 in 1999. Expenses recognized for the defined
contribution plans were $1,174 in 1997, $1,801 in 1998, and $1,665 in 1999.
The following table sets forth the defined benefit plan's benefit
obligations, fair value of plan assets, and funded status at December 31, 1998
and 1999.
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Change in benefit obligation:
Projected benefit obligation at beginning of
year ..................................... $11,171 $10,769
Service cost ............................... 1,047 960
Interest cost .............................. 708 754
</TABLE>
95
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(15) OTHER COMMITMENTS AND CONTINGENCIES - (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C>
Actuarial loss ..................................... 314 597
Benefits paid ..................................... (2,471) --
------ --
Projected benefit obligation at end of year ....... 10,769 13,080
------ ------
Change in plan assets:
Fair value of plan assets at beginning of year..... 17,992 17,685
Actual return on plan assets ...................... (1,799) (632)
Employer contribution (revocation) ................ 3,963 (3,000)
Benefits paid ..................................... (2,471) --
------ ------
Fair value of plan assets at end of year .......... 17,685 14,053
------ ------
Funded status ..................................... 6,916 973
Unrecognized net actuarial loss ................... 4,464 6,537
Unrecognized prior service cost ................... 4,774 4,035
------ ------
Prepaid benefit cost .............................. $ 16,154 $ 11,545
======== ========
Weighted-average assumptions as of December 31:
Discount rate ..................................... 7.00% 7.50%
Expected return on plan assets .................... 8.00% 8.00%
Rate of compensation increase ..................... 0.00% 0.00%
Components of net periodic benefit costs:
Service cost ...................................... $ 1,046 $ 960
Interest cost ..................................... 708 754
Expected return on plan assets .................... (1,326) (1,415)
Recognized net actuarial (gain) loss .............. (70) 572
Amortization of prior service cost ................ 739 739
-------- --------
Net periodic benefit cost ......................... $ 1,097 $ 1,610
======== ========
</TABLE>
The benefit obligation at December 31, 1999 is based on the assumption that
the participant will not retire or terminate employment for any reason until
June 5, 2005. If such events or a change of control of the Company occurred, the
plan's benefit obligation would increase and may produce a significant increase
in accrued pension expense. Such obligation will depend on age, reason for
termination and other factors. The actuary's estimate of the lump sum benefit
obligation, in the event of a change of control at or within twelve months of
termination, ranges from $27.6 million to $32.2 million at July 1, 2000,
decreasing thereafter. Such estimated obligation in the event of retirement,
termination, death or disability ranges from $13.0 to $16.3 million at July 1,
2000, increasing to $25.0 to $29.1 million at July 1, 2001.
The Company is subject to workers' compensation and employee health benefit
claims, which are primarily self-insured; however, the Company does maintain
certain stop-loss and other insurance coverage which management believes to be
appropriate. Provisions for estimated settlements relating to the workers'
compensation and health benefit plans are provided in the period of the related
claim on a case by case basis plus an amount for incurred but not reported
claims. Differences between the amounts accrued and subsequent settlements are
recorded in operations in the period of settlement.
96
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(16) SUPPLEMENTAL CASH FLOW INFORMATION
See note 2 for information concerning significant non-cash investing and
financing activities related to business acquisitions and note 20 for such
information related to non-recurring charges for the years ended December 31,
1997, 1998, and 1999. Other significant non-cash investing and financing
activities are as follows:
o A decrease in other assets of $7,000 offset by an increase in Treasury
stock of $9,569 and an increase in additional paid in capital of $2,569 as
a result of the reversal of the Company's contribution to the key
supplemental executive retirement plan in 1999.
o The sale of the infusion business unit in 1999 resulted in an increase to
notes receivable of approximately $17,350 of which approximately $7,500
remains classified in other assets at December 31, 1999.
o The Company declared a cash dividend, which resulted in increases in
current liabilities offset by a decrease in earnings of $814 in 1997.
o The sale of certain non-strategic assets (including assets held for sale)
in 1998 resulted in an increase in notes receivable of approximately $7,000
which is classified in other assets at December 31, 1998.
o An increase in additional paid-in capital of $7,020 and $21,332 in 1997 and
1998, respectively, resulted from the exercise of stock options under the
Company's various plans, which increased the Company's current taxes
receivable by such amounts.
o An increase in goodwill and other long-term liabilities of $75,000 in 1997
resulted from the Company recording the present value of the remaining
contingent payments to HCFA. (See note 10).
o An increase in goodwill and additional paid in capital of $32,743 in 1998
resulted from the Company's recording of the value of 1,841,700 options
issued in connection with the Rotech Medical Corporation acquisition.
Cash payments for interest were $104,747 in 1997, $209,013 in 1998 and
$286,687 in 1999. Cash payments for income taxes were $24,971 in 1997, $15,809
in 1998 and $26,427 in 1999.
(17) EXTRAORDINARY ITEMS
In the third quarter of 1997, the Company replaced its $700,000 revolving
credit facility with the $1,750,000 revolving credit and term loan facility (see
note 9). This event has been accounted for as an extinguishment of debt and the
Company has recorded a loss on extinguishment of debt of $3,908, relating
primarily to the write-off of deferred financing costs. Such loss, reduced by
the related income tax effect of $1,524, is presented in the statement of
operations as an extraordinary item of $2,384.
In the second quarter of 1997, the Company recorded a pre-tax loss of
$29,782 representing (1) approximately $23,600 of cash payments for pre-payment
premium and tender and consent fees relating to the early extinguishment of debt
resulting from the Company's repurchase pursuant to cash tender offers of
$99,893 principal amount of the Company's $100,000 aggregate principal amount of
outstanding 10 3/4% Senior Subordinated Notes due 2004 and $114,975 of the
Company's $115,000 aggregate principal amount of outstanding 9 5/8% Senior
Subordinated Notes due 2002 and (2) approximately $6,200 relating to the
write-off of deferred financing costs. Such loss, reduced by the related income
tax effect of $11,614, is presented in the statement of operations as an
extraordinary loss of $18,168.
During 1999, B&G Partners Limited Partnership transferred 9 1/4% Senior
Notes, 10 1/4% Senior Notes and 5 3/4% Senior Debentures (collectively referred
to as "Senior Notes") with a face value of approximately $3,345, $6,050 and
$1,091, respectively, to IHS in full satisfaction of its obligation to the
Company pursuant to a promissory note dated December 10, 1993 in the amount of
$10,486. On the
97
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(17) EXTRAORDINARY ITEMS - (CONTINUED)
date of transfer to IHS, the Senior Notes had a fair market value of
approximately $1,291. As a result, the Company recorded a loss on settlement of
notes receivable, which has been reflected as a non-recurring charge, and a gain
on extinguishment of debt, which has been reflected as an extraordinary item, of
approximately $9,195 in the fourth quarter of 1999.
(18) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, patient accounts
receivable, other current assets, accounts payable and accrued expenses
approximate fair value because of the short-term maturity of these instruments.
The fair value of temporary investments is estimated based on quoted market
prices for these or similar investments. The fair value of third-party payor
settlements receivable is estimated by discounting anticipated cash flows using
estimated market discount rates to reflect the time value of money and
approximate the carrying amount. Due to the Company's financial condition,
management of the Company believes it is not practical to estimate the fair
value of long term debt instruments. The Company has investments in
unconsolidated affiliates described in note 4, which are untraded companies and
joint ventures. The Company has notes receivable from unaffiliated individuals
and untraded companies totaling $28,477 and $14,722 at December 31, 1998 and
1999, respectively. Also, the Company has purchase option deposits of $71,415
and $47,917 on 64 and 63 leased and managed facilities of which $46,411 and
$43,702 is refundable at December 31, 1998 and 1999, respectively, and has
guaranteed the indebtedness of two of its leased facilities. It is not
practicable to estimate the fair value of these investments, notes and
guarantees since they are not traded, no quoted values are readily available for
similar financial instruments and the Company believes it is not cost-effective
to have valuations performed. However, management believes that adequate
provision has been made for any permanent impairment in the value of such
investments and that there has been no indication of probable loss on such
guarantees.
(19) RELATED PARTY TRANSACTIONS
Effective January 1, 1999, the Company and various wholly owned
subsidiaries of the Company (the "Lyric Subsidiaries") transferred 27 long-term
care facilities and five specialty hospitals to Monarch Properties LP ("Monarch
LP") for $138,000 plus contingent earn-out payments of up to a maximum of
$67,600. Net proceeds from the transaction were approximately $131,239. 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 LP. After the
transfer of the facilities to Monarch LP, the Company retained the working
capital of the Lyric subsidiaries and transferred the stock of each of them to
Lyric. Monarch LP then leased all of the facilities back to the Lyric
Subsidiaries under the long-term master lease and 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 28.6% of
Monarch LP and is the Chairman of the Board of Managers of Monarch Properties,
LLC, the parent company of Monarch LP. The Company has accounted for this
transaction as a financing.
On September 23, 1999, the Company transferred its Jacksonville, Florida
nursing facility to Monarch LP for net proceeds of $3,709. Monarch LP then
leased this facility to a subsidiary of Lyric, which the Company is currently
managing. The Company has accounted for this transaction as a financing.
The transactions with Monarch LP and Lyric were approved by the
disinterested members of the Board of Directors.
In 1998, IHS began to manage ten facilities leased from a real estate
investment trust by Lyric, an entity equally owned by IHS and an entity
controlled by Timothy Nicholson, a director of the Company. Five facilities were
sold to the real estate investment trust by IHS in each of January and March
1998 (see note 4).
98
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(19) RELATED PARTY TRANSACTIONS - (CONTINUED)
Management fee revenue from Lyric was $2,830 in 1998 and $18,654 in 1999.
Rental revenue from Lyric was $14,261 in 1999 and interest expense to Monarch LP
was $12,571 in 1999.
In December 1997, the Company sold its aircraft to RNE Skyview LLC, a
limited liability company in which Dr. Robert N. Elkins, IHS' chairman, chief
executive officer and president, is the sole member, and simultaneously entered
into a lease agreement for such aircraft with RNE Skyview LLC. No gain or loss
was recorded on the sale.
In September 1997, the Company purchased the Naples, Florida residence of
Lawrence P. Cirka, the former President of the Company, for approximately
$4,800. During 1998, Mr. Cirka repurchased the residence from the Company. No
gain or loss resulted from this transaction.
In September 1997, the Company acquired through a cash tender offer and
subsequent merger Community Care of America, Inc. ("CCA") for a purchase price
of $4.00 per share, for an aggregate of $34,300. Dr. Robert N. Elkins, chairman,
chief executive officer and president of the Company, was a director of CCA and
beneficially owned approximately 21% of CCA's shares, and John Silverman, a
director and at the time an employee of the Company, was chairman of the board
of directors of CCA. In December 1996, the Company loaned $2,000 to CCA and
received a management agreement and warrants to purchase up to 9.9% of CCA's
common stock at a price of $3.25 per share. The loan bore interest at the annual
rate of interest set forth in the Company's revolving credit agreement plus 2%
and was due on December 27, 1998.
In October 1996, the Company loaned $3,445 to, Integrated Living
Communities, Inc. ("ILC"), the Company's assisted living subsidiary (see note
20); ILC repaid the loan in 1997. Dr. Robert N. Elkins, chairman, chief
executive officer and president of the Company, was chairman of the board of
directors of ILC and Lawrence P. Cirka, at the time president and chief
operating officer of the Company, was a director of ILC.
In April 1993, a wholly-owned subsidiary of the Company acquired a 21.28%
interest in the common stock and a 47.64% interest in the 6% cumulative
preferred stock of Speciality Care PLC, an owner and operator of geriatric care
facilities in the United Kingdom. In 1995 the Company invested an additional
$4,384 in Speciality Care PLC. As a result of the Company's additional
investment, the Company had a 21.3% interest in the Common Stock and a 63.65%
interest in the 6% cumulative convertible preferred stock. Robert N. Elkins,
chairman of the board, chief executive officer and president of the Company, was
a director and stockholder of Speciality Care PLC, and Timothy Nicholson, a
director of the Company, was chairman, managing director and stockholder of
Speciality Care PLC. In connection with the sale and as discussed in note 4,
shareholders of Speciality Care PLC received outstanding ordinary shares of
Craegmoor. IHS now owns less than 10% of the outstanding ordinary shares of
Craegmoor. The Company's investment in Craegmoor at December 31, 1998 and 1999
was $6,716 and $3,358, respectively. (See note 4).
In 1999, the Company adopted an Employee Loan Plan (the "Loan Plan") to
assist the Company in retaining its senior management on a long-term basis in
light of the significantly reduced stock price and loss of equity incentives by
such executives and to encourage stock ownership by senior management. Under the
Loan Plan, the Company loaned an aggregate of $25.0 million to 27 officers
holding the title of senior vice president or above to enable them to acquire
and hold shares of common stock. The Loan Plan provides that each loan will bear
interest at a rate of 7% per annum, with interest only being paid at maturity,
and have a maturity date five years after the date of the loan. Each loan is
unsecured. In order to encourage the borrowers to remain with the Company and to
reduce or eliminate the pressure to sell common stock upon maturity of the loan,
the Loan Plan provides that 20% of principal and accrued interest will be
forgiven on the second, third and fourth anniversaries of the date of the
borrowing if the borrower is still employed by the Company, and the remainder
will be forgiven on the fifth anniversary if the borrower is still employed by
the Company. The Company has the right under certain circumstances to require
that a participant immediately repay any amounts outstanding under the Loan Plan
if such participant's employment with the Company terminates.
99
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(19) RELATED PARTY TRANSACTIONS - (CONTINUED)
Prior to 1999, the Company had loaned Dr. Robert N. Elkins, IHS' chairman
and chief executive officer, approximately $29 million (the "Prior Loans"). Dr.
Elkins used the cash proceeds from the loans to purchase stock, to exercise
stock options and to pay taxes associated with option exercises. In addition,
the Company had made loans to members of senior management in order to purchase
stock in the open market and/or to exercise stock options. Such loans aggregated
approximately $3.8 million.
In July 1999, a loan to Dr. Elkins of $15.5 million was amended to reflect
the forgiveness of $4.2 million of principal and accrued interest and to amend
the schedule for forgiveness so that the remaining principal balance of the loan
of $11.8 million will be automatically forgiven at 25% per year, provided that
Dr. Elkins remains a full-time active employee of the Company, beginning in July
2000, rather than at a rate of 20% per year beginning in January 1999 (pursuant
to the loan agreements approved in 1997). Also, loans aggregating $13.2 million
were amended, reflecting foregiveness of principal of $0.3 million (plus accrued
interest) and providing for automatic forgiveness on terms identical to the Loan
Plan described above.
The Loan Plan and the Prior Loans as amended in 1999 are treated as
deferred compensation costs and are amortized over the terms of the loans on a
straight-line basis. Compensation expense, reflecting the amortization of
deferred compensation costs as well as the forgiveness of the Prior Loans, was
$15.4 million for the year ended December 31, 1999.
(20) NON-RECURRING CHARGES
Non-recurring charges in 1999 are summarized as follows:
<TABLE>
<S> <C>
Loss on impairment of long lived assets ................... $1,641,487
Loss on sale of infusion business unit .................... 383,846
Loss on closure of certain diagnostic operations .......... 21,754
Loss on abandoned and terminated computer systems ......... 10,865
Loss on termination of sale of Rotech ..................... 7,020
Loss from settlement of notes receivable .................. 9,195
Other ..................................................... 2,165
----------
Total ..................................................... $2,076,332
==========
</TABLE>
As mentioned in previous reports, the Company has continued to evaluate the
impact of the 1997 Balanced Budget Act (BBA) upon future operating results of
each business line, particularly the impact of the prospective payment system
(PPS). Utilizing the Company's experience with PPS since January 1, 1999 (June
1, 1999 with respect to the Horizon facilities), the Company performed a
preliminary analysis of such impact in the third quarter of 1999. PPS has had a
dramatic impact on the operating results and financial condition of the Company.
The PPS system has significantly reduced the revenues, cash flow and liquidity
of the Company and the industry in 1999. As a result of the negative impact of
the provisions of PPS and the loss incurred on the sale of the infusion business
unit, the Company applied Statement of Financial Accounting Standards No. 121 in
the third quarter of 1999. In accordance with SFAS No. 121, the Company
estimated the future cash flows expected to result from those assets to be held
and used.
In estimating the future cash flows for determining whether an asset is
impaired, and if expected future cash flows used in measuring assets are
impaired, the Company grouped its assets at the lowest level for which there are
identifiable cash flows independent of other groups of assets. These levels were
each of the individual nursing/subacute facilities, and each of the
rehabilitative therapy, respiratory therapy, pharmacy, diagnostics and hospice
business units.
100
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(20) NON-RECURRING CHARGES - (CONTINUED)
After determining the facilities and divisions eligible for an impairment
charge, the Company determined the estimated fair value of such facilities and
divisions. The carrying value of buildings and improvements, leasehold
improvements, equipment, goodwill and other intangible assets exceeded the fair
value by $1.64 billion (of which $1.26 billion represented goodwill). The loss
on impairment applied to the following business units: nursing/subacute
facilities of $951,306, rehabilitative therapy of $402,059, respiratory therapy
of $26,195, diagnostic of $143,417, and lithotripsy of $118,510.
On October 1, 1999, the Company sold its infusion business unit to APS
Enterprises Holding Company ("APS") for a purchase price of $17,350 and a 20%
equity interest in APS valued at one dollar. The Company had determined that the
business was significantly impaired due to decreasing demand for the products
and services offered. The Company recorded a pretax loss of $383,846 in 1999.
In 1999, the Company recorded a $21,754 charge to exit certain diagnostic
businesses of Symphony.
The Company recorded a $10,865 loss as a result of the conversion of
computer systems, the termination of certain systems development projects and
related relocation costs.
On October 19, 1999 the Company suspended its efforts to sell its Rotech
division. The Company had incurred significant costs in legal, consulting and
accounting fees related to this transaction of approximately $7,020. Such costs
were not considered recoverable and were written off in 1999.
In October 1999, B&G Partners Limited Partnership transferred 9 1/4% Senior
Notes, 10 1/4% Senior Notes and 5 3/4% Senior Debentures (collectively referred
to as "Senior Notes") with a face value of approximately $3,345, $6,050, $1,091,
respectively, to IHS in satisfaction of its obligation to the Company pursuant
to a promissory note dated December 10, 1993 in the amount of $10,486. On the
date of transfer to IHS, the Senior Notes had a fair market value of
approximately $1,291. As a result, the Company recorded a loss on settlement of
notes receivable, which has been reflected as a non-recurring charge, and a gain
on extinguishment of debt, which has been reflected as an extraordinary item, of
approximately $9,195 in the fourth quarter of 1999.
Non-recurring charges in 1997 are summarized as follows:
<TABLE>
<S> <C>
Loss from nursing facilities management contract terminations ......... $ 3,700
Gain on sale of pharmacy division ..................................... (7,580)
Gain on sale of Integrated Living Communities, Inc. (ILC) ............. (3,914)
Loss on closure of redundant rehabilitation operations ................ 2,929
Termination of Coram merger and related settlement costs .............. 27,555
Termination payments in connection with RoTech acquisition ............ 4,750
Write-down to net realizable value of assets to be sold:
Physician practice and outpatient clinic operations .................. 58,912
Nursing facilities ................................................... 2,500
Termination of other business activities:
International investment and development activities .................. 5,490
Pre-acquisition activities ........................................... 4,500
Purchase options on nursing facilities ............................... 6,268
National purchasing contract ......................................... 5,742
Other ................................................................ 12,604
--------
Total ................................................................ $123,456
========
</TABLE>
On July 30, 1996, the Company sold its pharmacy division to Capstone
Pharmacy Services, Inc. ("Capstone") for a purchase price of $150,000,
consisting of cash of $125,000 and unregistered shares of Capstone common stock
having a value of approximately $25,000. The Company had determined that its
101
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(20) NON-RECURRING CHARGES - (CONTINUED)
ownership of pharmacy operations is not critical to the development and
implementation of its post-acute care network strategy. As a result of the sale,
the Company recorded a $34,298 pre-tax gain ($298 gain after income taxes).
Because IHS's investment in the pharmacy division had a very small tax basis,
the taxable gain on the sale significantly exceeded the gain for financial
reporting purposes, thereby resulting in a disproportionately higher income tax
provision related to the sale (see note 14). The Capstone common stock received
in the sale was recorded at its carryover cost of $14,659. During the first
quarter of 1997, the Company recorded the remaining gain of $7,580 on its
investment in the Capstone shares when such shares were registered. Previously,
such gain was accounted for as an unrealized gain on available for sale
securities.
On October 9, 1996, ILC, a wholly owned subsidiary of IHS, completed an
initial public offering of ILC common stock. The Company had determined that the
direct operation of assisted-living communities is not required for its
post-acute care network strategy. In connection with the ILC offering the
Company sold 1,400,000 of ILC common stock and recorded a $8,497 loss. Following
the offering, the Company continued to own 2,497,900 shares of ILC Common Stock,
representing 37.3% of the outstanding ILC common stock. In the third quarter of
1997, the Company sold its remaining interest in ILC. The sale resulted in a
non-recurring gain of $3,914.
On October 19, 1996, the Company and Coram Healthcare Corporation ("Coram")
entered into a definitive agreement and plan of merger (the "Merger Agreement")
providing for the merger of a wholly-owned subsidiary of IHS into Coram, with
Coram becoming a wholly-owned subsidiary of IHS. Under the terms of the Merger
Agreement, holders of Coram common stock were to receive for each share of Coram
common stock 0.2111 of a share of the Company's common stock, and IHS would have
assumed approximately $375,000 of indebtedness. On April 4, 1997, IHS notified
Coram that it had exercised its rights to terminate the Merger Agreement. IHS
also terminated the March 30, 1997 letter amendment, setting forth proposed
revisions to the terms of the merger (which included a reduction in the exchange
ratio to 0.15 of a share of IHS common stock for each share of Coram common
stock), prior to the revisions becoming effective at the close of business on
April 4, 1997. On May 5, 1997, IHS and Coram entered into a settlement agreement
pursuant to which the Company paid Coram $21,000 in full settlement of all
claims Coram might have against IHS pursuant to the Merger Agreement, which the
Company recognized as a non-recurring charge in the second quarter. In addition,
during the first quarter the Company incurred a non-recurring charge of $6,555
relating to accounting, legal and other costs related to the merger.
In September 1997, the Company recorded a non-recurring charge of $4,750
resulting from termination payments in connection with its fourth quarter merger
with RoTech Medical Corporation.
In connection with the consummation of certain recent acquisitions, IHS has
incurred costs to discontinue or dispose of certain activities previously
performed by the Company. In addition, the Company has elected to exit certain
activities acquired over the past several years that are no longer considered a
part of core operations. Such businesses include physician practices, outpatient
clinics, selected nursing facilities in non-strategic markets and international
investment and development activities.
In the fourth quarter of 1997, IHS recorded a $3,700 charge to exit eleven
California nursing facilities under management. The components of this charge
were to write-off the following assets: a $602 management fee receivable, a
$2,250 purchase option deposit, a $550 cash advance for capital improvements and
other working capital requirements of the owner, and $298 in deferred
acquisition costs.
In the fourth quarter of 1997, the Company incurred other costs of $12,604,
which included: (i) $1,300 in termination and severance costs associated with
the sale of outpatient and physician practices, (ii) $1,100 in lease termination
costs associated with the sale of outpatient and physician practices, (iii)
$3,800 in investments and loans related to other start-up joint ventures, (iv)
$3,500 in obsolete information systems for acquisitions completed prior to 1997,
(v) $975 prior owner litigation settlements subsequent to one year after the
acquisition date, (vi) $970 in lease termination costs associated with the
closing of six mobile diagnostic locations in non-strategic markets, and (vii)
$959 in other miscellaneous charges.
102
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(21) CUMULATIVE EFFECT OF ACCOUNTING CHANGE
In November 1997, the Emerging Issues Task Force ("EITF") reached consensus
on Issue 97-13 concerning costs of projects that combine business process
reengineering and information technology transformation. EITF Issue 97-13 now
requires that certain costs of business process reengineering and information
technology projects be expensed as incurred. These costs include costs related
to the formulation, evaluation and selection of alternative software, costs of
the determination of needed technology, certain data conversion costs, training
costs and post-implementation application maintenance and support costs. In
accordance with EITF Issue 97-13, the unamortized balance of these costs of
$3,000 was written-off in the fourth quarter of 1997 and reported as the
cumulative effect of a change in accounting principle (net of income taxes of
$1,170) of $1,830.
(22) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
The following information is provided in accordance with the AICPA
Statement of Position No. 94-6, "Disclosure of Certain Significant Risks and
Uncertainties."
The Company and others in the healthcare business are subject to certain
inherent risks, including the following:
o Substantial dependence on revenues derived from reimbursement by the
Federal Medicare and state Medicaid programs which have been drastically
cut in recent years and which entail exposure to various healthcare fraud
statutes;
o Government regulations, government budgetary constraints and proposed
legislative and regulatory changes; and
o Lawsuits alleging malpractice and related claims.
Such inherent risks require the use of certain management estimates in the
preparation of the Company's financial statements and it is reasonably possible
that a change in such estimates may occur.
The Company receives payment for a significant portion of services rendered
to patients from the Federal government under Medicare and from the states in
which its facilities and/or services are located under Medicaid. Revenue derived
from Medicare and various state Medicaid reimbursement programs represented
27.4% and 33.7%, respectively, of the Company's patient revenue for the year
ended December 31, 1999. The Company's operations are subject to a variety of
Federal, state and local legal and regulatory risks, including without
limitation the federal Anti-Kickback statute and the federal Ethics in Patient
Referral Act (so-called "Stark Law"), many of which apply to virtually all
companies engaged in the health care services industry. The Anti-Kickback
statute prohibits, among other things, the offer, payment, solicitation or
receipt of any form of remuneration in return for the referral of Medicare and
Medicaid patients. The Stark Law prohibits, with limited exceptions, financial
relationships between ancillary service providers and referring physicians.
Other regulatory risks assumed by the Company and other companies engaged in the
health care industry are as follows:
o False Claims -- "Operation Restore Trust" is a major anti-fraud
demonstration project of the Office of the Inspector General. The primary
purpose for the project is to scrutinize the activities of healthcare
providers which are reimbursed under the Medicare and Medicaid programs.
False claims are prohibited pursuant to criminal and civil statutes and
are punishable by imprisonment and monetary penalties.
o Regulatory Requirement Deficiencies -- In the ordinary course of business
health care facilities receive notices of deficiencies for failure to
comply with various regulatory requirements. In some cases, the reviewing
agency may take adverse actions against a facility, including the
imposition of fines, temporary suspension of admission of new patients,
suspension or decertification from participation in the Medicare and
Medicaid programs and, in extreme cases, revocation of a facility's
license.
103
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(22) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES - (CONTINUED)
o Changes in laws and regulations -- Changes in laws and regulations could
have a material adverse effect on licensure, eligibility for participation
in government programs, permissable activities, operating costs and the
levels of reimbursement from governmental and other sources.
In response to the aforementioned regulatory risks, the Company formed a
Corporate Compliance Department in 1996 to help identify, prevent and deter
instances of Medicare and Medicaid noncompliance. Although the Company strives
to manage these regulatory risks, there can be no assurance that federal and/or
state regulatory agencies that currently have jurisdiction over matters
including, without limitation, Medicare, Medicaid and other government
reimbursement programs, will take the position that the Company's business and
operations are in compliance with applicable law or with the standards of such
regulatory agencies.
In some cases, violation of such applicable law or regulatory standards by
the Company can carry significant civil and criminal penalties and can give rise
to qui tam litigation. In this connection, the Company is a defendant in certain
actions or the subject of investigations concerning alleged violations of the
False Claims Act or of Medicare regulations. As a result of the Company's
financial position during the fourth quarter of 1999, various agencies of the
federal government accelerated efforts to reach a resolution of all outstanding
claims and issues related to the Company's alleged violation of healthcare
statutes and related causes of action. These matters involve various government
claims, many of which are of unspecified amounts. Because the government's
review of these matters has not been completed, management is unable to assess
fully the merits of the government's monetary claims. Based on a preliminary
evaluation of the government's estimable claims for which an unfavorable outcome
is probable, the Company recorded a $39,500 accrued liability for such claims as
of December 31, 1999. However, the ultimate amount of any future settlement
could differ significantly from such provision.
The Balanced Budget Act of 1997 (BBA), enacted in August 1997, made
numerous changes to the Medicare and Medicaid programs that are significantly
affecting the Company. With respect to Medicare, the BBA provides, among other
things, for a prospective payment system for skilled nursing facilities and
reductions in reimbursement for oxygen and oxygen equipment for home respiratory
therapy. As a result, in 1999 the Company bore the cost risk of providing care
inasmuch as it receives specified reimbursement for each treatment regardless of
actual cost. With respect to Medicaid, the BBA repeals the so-called Boren
Amendment, which required state Medicaid programs to reimburse nursing
facilities for the costs that are incurred by efficiently and economically
operated providers in order to meet quality and safety standards. As a result,
states now have considerable flexibility in establishing payment rates and the
Company believes many states are moving toward a prospective payment type system
for skilled nursing facilities.
The BBA mandates the establishment of a prospective payment system ("PPS")
for Medicare skilled nursing facility services, under which facilities are paid
a fixed fee for virtually all covered services. PPS is being phased in over a
four-year period, effective January 1, 1999 for IHS' owned and leased skilled
nursing facilities other than the facilities acquired in the HEALTHSOUTH
acquisition, which became subject to PPS on June 1, 1999. Prospective payment
for facilities managed by IHS became effective for each facility at the
beginning of its first cost reporting period on or after July 1, 1998. During
the first three years, payments will be based on a blend of the facility's
historical costs and federal costs. Thereafter, the per diem rates will be based
100% on federal costs. Under PPS, each patient's clinical status is evaluated
and placed into a payment category. The patient's payment category dictates the
amount that the provider will receive to care for the patient on a daily basis.
The per diem rate covers (i) all routine inpatient costs currently paid under
Medicare Part A, (ii) certain ancillary and other items and services currently
covered separately under Medicare Part B on a "pass-through" basis, and (iii)
certain capital costs. The Company's ability to offer the ancillary services
required by higher acuity patients, such as those in its subacute care programs,
in a cost-effective manner will continue to be critical to the Company's
services and will affect the profitability of the Company's Medicare patients.
To date the per diem reimbursement rates have generally been significantly
104
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(22) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES - (CONTINUED)
less than the amount the Company received on a daily basis under cost based
reimbursement, particularly in the case of higher acuity patients. As a result,
PPS has had a material adverse impact on IHS' results of operations and
financial condition (see note 1).
The Company is also subject to malpractice and related claims, which arise
in the normal course of business and which could have a significant effect on
the Company. As a result, the Company maintains occurrence basis professional
and general liability insurance with coverage and deductibles which management
believes to be appropriate.
The Company is also subject to certain inherent risks related to the
acquisition of businesses. Since its inception, the Company has grown through
acquisitions, and realization of acquisition costs, including intangible assets
of businesses acquired, is dependent initially upon the consummation of the
acquisitions and subsequently upon the Company's ability to successfully
integrate and manage acquired operations.
The Company believes that adequate provision for the aforementioned items
has been made in the accompanying consolidated financial statements and that
their ultimate resolution will not have a material effect on the consolidated
financial statements.
(23) SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
way public business enterprises are to 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 which provide specialty medical
services (e.g., rehabilitation and respiratory services), primarily on an
inpatient basis at skilled nursing facilities, (C) contracted services which
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.
105
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(23) SEGMENT REPORTING- (CONTINUED)
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>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------------
INPATIENT HOME RESPIRATORY/ DIAGNOSTIC LITHOTRIPSY
SERVICES INFUSION/DME SERVICES SERVICES CONSOLIDATED
------------- ------------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues ...................................... $1,160,095 $ 116,013 $112,441 $ 14,079 $1,402,628
Operating, general and administrative ex-
penses (including rent) ...................... 914,317 76,350 94,992 6,813 1,092,472
---------- ---------- -------- -------- ----------
Earnings from continuing operations before
non-recurring charges, equity in earnings of
affiliates, interest, taxes, depreciation
and amortization, extraordinary items and cu-
mulative effect of an accounting change ...... $ 245,778 $ 39,663 $ 17,449 $ 7,266 $ 310,156
========== ========== ======== ======== ==========
Total Assets .................................. $3,256,836 $1,389,554 $172,382 $183,380 $5,002,152
========== ========== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------
INPATIENT HOME RESPIRATORY/ DIAGNOSTIC LITHOTRIPSY
SERVICES INFUSION/DME SERVICES SERVICES CONSOLIDATED
------------- ------------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues ...................................... $2,174,592 $ 624,325 $117,248 $ 56,021 $2,972,186
Operating, general and administrative ex-
penses (including rent) ...................... 1,760,603 462,950 91,477 30,154 2,345,184
---------- ---------- -------- -------- ----------
Earnings from continuing operations before
non-recurring charges, equity in earnings
of affiliates, interest, taxes, depreciation
and amortization ............................. $ 413,989 $ 161,375 $ 25,771 $ 25,867 $ 627,002
========== ========== ======== ======== ==========
Total assets .................................. $3,330,250 $1,638,545 $215,658 $208,675 $5,393,128
========== ========== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
INPATIENT HOME RESPIRATORY/ DIAGNOSTIC LITHOTRIPSY
SERVICES INFUSION/DME SERVICES SERVICES CONSOLIDATED
------------- ------------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues ...................................... $1,772,614 $ 638,167 $89,167 $59,351 $2,559,299
Operating, general and administrative ex-
penses (including rent) ...................... 1,560,087 483,599 85,542 33,384 2,162,612
---------- ---------- ------- ------- ----------
Earnings from continuing operations before
non-recurring charges, equity in earnings
of affiliates, interest, taxes, depreciation
and amortization and extraordinary items ..... $ 212,527 $ 154,568 $ 3,625 $25,967 $ 396,687
========== ========== ======= ======= ==========
Total assets .................................. $1,955,379 $1,283,983 $54,554 $85,164 $3,379,080
========== ========== ======= ======= ==========
</TABLE>
There are no material inter-segment revenues or receivables. Revenues
derived from Medicare and various state Medicaid reimbursement programs
represented 26% and 22%, respectively, for the year ended December 31, 1997, 30%
and 32%, respectively, for the year ended December 31, 1998 and 27% and 34%,
respectively, for the year ended December 31, 1999. The Company does not
evaluate its operations on a geographic basis.
(24) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative
106
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(24) RECENT ACCOUNTING PRONOUNCEMENTS - (CONTINUED)
and the resulting designation. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of foreign currency exposures. In 1999, the Financial Accounting
Standards Board issued SFAS No. 137, Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of SFAS No. 133. The purpose
of this statement is to delay the effective date of SFAS No. 133. SFAS No. 137
states that SFAS No. 133 will be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. The adoption of this statement is not
expected to have a material impact on the Company's financial statements.
In March 1998 the Accounting Standards Executive Committee ("ASEC") of the
American Institute of Certified Public Accountants issued Statement of Position
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use ("SOP 98-1"). SOP 98-1 provides guidance as to whether certain
costs for internal use software should be capitalized or expensed when incurred.
In addition, in June 1998 the ASEC issued Statement of Position 98-5, Reporting
on the Costs of Start-up Activities ("SOP 98-5"). SOP 98-5 provides guidance on
the financial reporting of start-up costs. It requires costs of start-up
activities to be expensed as incurred. SOP 98-1 and 98-5 are effective in 1999.
The adoption of SOP 98-1 and 98-5 had no material impact on the financial
statements.
(25) SUBSEQUENT EVENTS
On February 2, 2000, the Company and substantially all of its subsidiaries,
filed voluntary petitions in the United States Bankruptcy Court for the District
of Delaware under Title 11 of the United States Code, 11 U.S.C. (S)(S) 101, et
seq. (the "Bankruptcy Code"). While this action constituted a default under the
Company's and such subsidiaries various financing arrangements, Section 362 of
the Bankruptcy Code imposes an automatic stay that will generally preclude the
creditors and other interested parties under such arrangements from taking any
remedial action in response to any such resulting default without prior
Bankruptcy Court approval. The Company's need to seek relief afforded by the
Bankruptcy Code is due, in part, to the significant financial pressure created
by the Balanced Budget Act of 1997 and its implementation.
In connection with the Chapter 11 Filings, the Company entered into a
secured super-priority debtor-in-possession revolving credit agreement with a
group of banks led by Citicorp USA, Inc., N.A. to obtain up to $300,000 of
debtor-in-possession financing (the "DIP Facility") to fund the Company's
operations. On March 6, 2000, the United States Bankruptcy Court for the
District of Delaware approved the full $300,000 DIP Facility. The DIP Facility
matures on March 6, 2002. The DIP Facility provides for maximum borrowings by
the Company equal to the sum of (i) up to 85% of the then outstanding domestic
eligible accounts receivable (other than Medicaid accounts receivable), (ii) the
lesser of $40 million or 85% of eligible Medicaid accounts receivable, (iii) the
lesser of $25 million and 40% of the orderly liquidation value of eligible real
estate, (iv) 100% of cash and 95% of cash equivalents on deposit or held in the
Citibank collateral account and (v) the adjusted earnings before interest,
taxes, depreciation and amortization ("EBITDA") of RoTech for the two most
recent fiscal quarters up to a maximum of $150 million through May 3, 2000, $125
million from May 4, 2000 through August 2, 2000 and $100 million thereafter. The
DIP financing agreement significantly limits IHS' ability to incur indebtedness
or contingent obligations, to make additional acquisitions, to sell or dispose
of assets, to create or incur liens on assets, to pay dividends and to merge or
consolidate with any other person. Pursuant to the DIP Facility advances to the
Company are classified as either swing line or revolving credit facility
advances. Swing line advances are considered to be Base Rate advances as defined
by the agreement. Revolving credit advances consist of either Base Rate or
Eurodollar Rate advances. As described below Base Rate and Eurodollar advances
bear interest at different rates.
The DIP Facility bears interest on Base Rate advances at a rate per annum
equal to the greater of (1) the rate of interest announced publicly by Citibank
in New York, New York from time to time, as Citibank's base rate, (2) the sum of
0.5% per annum plus a weighted average of the rates on overnight
107
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(25) SUBSEQUENT EVENTS- (CONTINUED)
Federal funds transactions ("Federal Funds Rate") or (3) the sum of 0.5% per
annum plus (i) the rate per annum obtained by dividing (a) the latest three-week
moving average of secondary market morning offering rates in the United States
for three-month certificates of deposit, by (b) a percentage equal to 100% minus
the average of the daily percentages specified during such three-week period by
the Federal Reserve Board for determining the maximum reserve requirement for
Citibank in respect to liabilities consisting of or including three-month U.S.
dollar nonpersonal time deposits in the United States, plus (ii) the average
during such three-week period of the maximum annual assessment payable by
Citibank to the Federal Deposit Insurance Corporation for insuring dollar
deposits in the United States.
The DIP Facility bears interest on Eurodollar Rate advances at a rate per
annum equal to the interest rate per annum equal to the displayed rate at 11:00
am (London time) two business days before the first day of such interest period
on Telerate page 3750 for deposits in dollars in an amount substantially equal
to the Eurodollar Rate advance and for a period equal to such interest period.
To the extent that such interest rate is not available on the Telerate Service,
the Eurodollar Rate for any interest period for each Eurodollar Rate advance
shall be an interest rate per annum equal to the rate per annum at which
deposits in dollars are offered by the principal office of Citibank in London to
prime banks in the interbank market for dollar deposits at 11:00 am
substantially equal to Citibank's Eurodollar Rate Advance comprising part of
such revolving credit facility advance and for a period equal to such interest
period. As described in the DIP Facility agreement, Eurodollar Rate advances are
subject to additional interest at a rate per annum equal to the remainder
obtained by subtracting (1) the Eurodollar Rate for such interest period from
(2) the rate determined by dividing such Eurodollar Rate by a percentage equal
to 100% minus the Eurodollar Rate Reserve for such lenders.
The DIP Facility also provides for a letter of credit subfacility ("LC
Subfacility"). The LC Subfacility provides for the issuance of one or more
letters of credit subject to certain conditions as set forth in the DIP
Facility.
The obligations of the Company under the DIP Facility are jointly and
severally guaranteed by each of the Company's filing subsidiaries (the "Filing
Subsidiaries"). Pursuant to the agreement, the Company and each of its Filing
Subsidiaries have granted to the lenders first priority liens and security
interests (subject to valid, perfected, enforceable and nonavoidable liens of
record existing immediately prior to the petition date and other exceptions as
described in the DIP Facility) in all of the Company's assets including, but not
limited to, all accounts, chattel paper, contracts and documents, equipment,
inventory, intangibles, real property, bank accounts and investment property.
The DIP Facility contains customary representations, warranties and
covenants of the Company, as well as certain financial covenants relating to
minimum EBITDA and capital expenditures. The breach of such representations,
warranties or covenants, to the extent not waived or cured within any applicable
grace or cure periods, could result in the Company being unable to obtain
further advances under the DIP Facility and possibly the exercise of remedies by
the DIP Facility lenders, either of which events could materially impair the
ability of the Company to successfully reorganize under Chapter 11.
108
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999
-------------- -------------- -------------
<S> <C> <C> <C>
Allowance for doubtful accounts:
Balance at beginning of period .............................. $ 31,439 $ 148,957 165,260
Provisions for bad debts .................................... 38,509 53,123 70,073
Acquired (disposed) companies ............................... 105,198 39,304 (11,850)
Accounts receivable written-off (net of recoveries) ......... (26,189) (76,124) (59,034)
--------- --------- -------
$ 148,957 $ 165,260 $ 164,449
========= ========= =========
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable
109
<PAGE>
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The directors, their ages, the year in which each first became a director
and their principal occupations or employment during the past five years are:
<TABLE>
<CAPTION>
YEAR FIRST PRINCIPAL OCCUPATION
DIRECTOR AGE BECAME DIRECTOR DURING THE PAST FIVE YEARS
- - -------------------------------- ----- ----------------- ----------------------------------------------------------
<S> <C> <C> <C>
Robert N. Elkins, M.D. ......... 56 1986 Chairman of the Board and Chief Executive Officer
of the Company since March 1986; President of the
Company since March 1998 and from March 1986 to
July 1994; from 1980 to 1986, Vice President of Conti-
nental Care Centers, Inc., an owner and operator of
long-term healthcare facilities; from 1976 to 1980, a
practicing physician.(1)(2)
Kenneth M. Mazik ............... 59 1995 Private investor involved in numerous enterprises;
Chairman of the Jovius Foundation; President
of Au Clair Programs and Orlando Financial
Corporation, specializing in investments in
long-term care of the disabled.(3)(4)(5)
Robert A. Mitchell ............. 45 1995 Attorney, Law Offices of Robert A. Mitchell, 1986 to
present, with an emphasis on corporate and entertain-
ment law, as well as finance and public relations matters
concerning healthcare acquisitions; a founder, director
and treasurer of the Bone Marrow Foundation.(2)
Timothy F. Nicholson ........... 51 1986 Managing Director of Lyric Health Care LLC since
February 1998; Chairman and Managing Director of
Speciality Care PLC from May 1993 to February 1998;
Executive Vice President of the Company from March
1986 to May 1993; from 1980 to 1986, Executive Vice
President of Continental Care Centers, Inc.; from 1973
to 1980, a practicing attorney.
John L. Silverman .............. 58 1986 Private investor in, and consultant to, healthcare com-
panies; Chief Executive Officer and President of Asia
Care, Inc., a subsidiary of the Company, from June
1995 to December 1997; President of VentureCorp,
Inc., a venture capital and investment management com-
pany, from 1985 to June 1995; Vice President and Chief
Financial Officer of Chi Systems, Inc. (formerly the Chi
Group, Inc.), a healthcare consulting company, from
1990 to 1997.(5)
</TABLE>
- - ----------
(1) Dr. Elkins is the brother of Marshall A. Elkins, Executive Vice President
and General Counsel of the Company.
(2) Member of the Acquisitions Committee of the Board of Directors.
(3) Member of the Finance Committee of the Board of Directors.
(4) Member of the Compensation and Stock Option Committee of the Board of
Directors.
(5) Member of the Audit Committee of the Board of Directors.
110
<PAGE>
Mr. Silverman is a director of Superior Consultant Holdings Corporation
and MHM Services, Inc.
During the fiscal year ended December 31, 1999, the Board of Directors held
thirteen meetings (six of which were regularly scheduled meetings) and acted
three times by unanimous written consent in lieu of a meeting. Each director
attended at least 75% of the meetings of the Board of Directors held and of all
committees of the Board of Directors on which he served while he was director of
the Company.
In September 1990, the Board of Directors established an Audit Committee to
review the internal accounting procedures of the Company and to consult with and
review the Company's independent auditors and the services provided by such
auditors. Messrs. Mazik and John Silverman are the current members of the Audit
Committee. The Audit Committee met 3 times in 1999.
In September 1990, the Board of Directors formed the Stock Option Plan
Committee to administer the Company's stock option plans. In July 1992, the
Board of Directors formed the Executive Compensation Committee to administer the
Company's executive compensation policies. In July 1993, the Board of Directors
merged the Executive Compensation Committee and the Stock Option Plan Committee
to form the Compensation and Stock Option Committee, which took on the
responsibilities previously held by its predecessor committees. Mr. Mazik is the
current member of this committee. The Compensation and Stock Option Committee
held two meetings and acted two times by unanimous written consent in lieu of a
meeting in 1999.
On February 1, 1996, the Board of Directors formed the Finance Committee to
oversee the treasury operations and supervise the financial affairs of the
Company and approve debt offerings and matters relating to the Company's line of
credit. Mr. Mazik is the current member of this committee. The Finance Committee
held one meeting in 1999.
On July 24, 1997, the Board of Directors formed the Acquisitions Committee
to approve transactions for the acquisition or disposition by the Company of
assets or businesses in which the consideration paid or received includes
capital stock of the Company or the purchaser, respectively, without the
necessity for further Board approval, as long as (i) the consideration to be
paid or received by the Company in connection with any such acquisition or
disposition does not exceed $50 million and (ii) the aggregate consideration to
be paid or received by the Company in any calendar year does not exceed $300
million. In March 2000 the amount of consideration was reduced to $5 million.
Messrs. Elkins and Mitchell are the current members of this committee. The
Acquisitions Committee held no meetings in 1999.
On November 8, 1999 the Board of Directors appointed Mr. Mitchell to
monitor the Company's efforts to restructure its debt obligations and regularly
advise members of the Board regarding the status of the restructuring.
COMPENSATION OF DIRECTORS
Directors currently receive $5,000 per regularly scheduled meeting and
$1,250 per special meeting and committee meetings for services provided in that
capacity and are reimbursed for out-of-pocket expenses incurred in connection
with attendance at Board of Directors and committee meetings. Directors who are
also employees of or consultants to the Company participate in the Equity
Incentive Plan, the 1990 Employee Stock Option Plan, the 1992 Stock Option Plan,
the 1994 Stock Incentive Plan and the 1996 Stock Incentive Plan. Dr. Elkins
participates in the Senior Executives' Stock Option Plan.
In July 1993 the Company adopted a Stock Option Plan for New Non-Employee
Directors (the "Directors' Plan") pursuant to which options to acquire a maximum
aggregate of 300,000 shares of Common Stock could be granted to non-employee
directors. The Directors' Plan provided for an automatic one-time grant to each
of the Company's non-employee directors of an option to purchase 50,000 shares
of Common Stock on the date of such director's initial election or appointment
to the Board of Directors. The options have an exercise price of 100% of the
fair market value of the Common Stock on the date of grant, have a ten-year term
and became exercisable on the first anniversary of the grant thereof, subject to
acceleration in the event of a change of control (as defined in the Directors'
Plan). Messrs. Nicholson and Silverman, who were each directors of the Company
on the date the Directors' Plan was adopted by the Board of Directors, each
received an option to purchase 50,000 shares of
111
<PAGE>
Common Stock at an exercise price of $23.50 per share under the Directors' Plan
on July 29, 1993, the date the Directors' Plan was adopted by the Board of
Directors. No options remain available for issuance under the Directors' Plan.
In December 1993, the Company adopted a Stock Option Compensation Plan for
Non-Employee Directors (the "Directors' Compensation Plan") pursuant to which
options to acquire a maximum aggregate of 300,000 shares of Common Stock could
be granted to non-employee directors. The Directors' Compensation Plan provided
for the automatic grant to each of the Company's non-employee directors of an
option to purchase 25,000 shares of Common Stock on the date of such director's
initial election or appointment to the Board of Directors and provided for the
automatic grant to each such director of an option to purchase 25,000 shares of
Common Stock on each anniversary date of such director's initial election or
appointment to the Board of Directors (or the date the plan was adopted by the
Board of Directors in the case of non-employee directors on the date the plan
was adopted). The options have an exercise price of 100% of the fair market
value of the Common Stock on the date of grant, have a ten-year term and become
exercisable on the first anniversary of the grant thereof, subject to
acceleration in the event of a change of control (as defined in the Directors'
Compensation Plan). Messrs. Nicholson and Silverman, who were each directors of
the Company on the date the Directors' Compensation Plan was adopted by the
Board of Directors, each received under the Directors' Compensation Plan options
to purchase 25,000 shares of Common Stock on each of December 23, 1993 and 1994,
the date of adoption of the Directors' Compensation Plan by the Board of
Directors and the anniversary of the date of adoption, respectively, at an
exercise price of $27.88 per share and $38.00 per share, respectively. No
options remain available for issuance under the Directors' Compensation Plan.
On November 27, 1995, the Board of Directors determined that the options
granted to that date under the Directors' Plan and the Directors' Compensation
Plan were exercisable at prices significantly in excess of the then current
market price of the Common Stock, and accordingly were not fulfilling their
designated purposes under such plans of providing incentive for such directors
to work for the best interests of the Company and its stockholders through the
ownership of Common Stock. Accordingly, to restore the purpose for which such
options were granted, the Board of Directors amended the Directors' Plan and the
Directors' Compensation Plan, subject to stockholder approval, to provide that
each option granted prior to November 27, 1995 to non-employee directors of the
Company in office on November 27, 1995 would be exercisable at an exercise price
of $20.88, the fair market value of the Common Stock on November 27, 1995. The
Company's stockholders approved such action at the 1996 Annual Meeting of
Stockholders.
In 1995 the Company adopted, subject to stockholder approval, the 1995
Stock Option Plan for Non-Employee Directors (the "1995 Directors' Plan")
pursuant to which options to acquire a maximum aggregate of 350,000 shares of
Common Stock can be granted to non-employee directors. The 1995 Directors' Plan
provides for an automatic one-time grant to each of the Company's non-employee
directors of an option to purchase 50,000 shares of Common Stock on the date of
such director's initial election or appointment to the Board of Directors. The
options have an exercise price of 100% of the fair market value of the Common
Stock on the date of such director's initial election or appointment to the
Board of Directors, have a ten-year term and become exercisable on the first
anniversary of the grant thereof, subject to acceleration in the event of a
change of control (as defined in the 1995 Directors' Plan). The 1995 Directors'
Plan also provided that Messrs. Mazik, Mitchell, and Nicholson, who were
non-employee directors of the Company on the date the 1995 Directors' Plan was
adopted by the Board of Directors, each receive an option to purchase 50,000
shares of Common Stock at an exercise price of $20.88 per share under the 1995
Directors' Plan on November 27, 1995, the date the 1995 Directors' Plan was
adopted by the Board of Directors. The 1995 Directors' Plan was approved at the
1996 Annual Meeting of Stockholders. Options to purchase 50,000 shares of Common
Stock remain available for issuance under the 1995 Directors' Plan.
In September 1996, the Company adopted the 1996 Stock Incentive Plan. On
November 27, 1996, January 28, 1998, and April 19, 1999 each director, with the
exception of Dr. Elkins, was granted an option to purchase 25,000 shares of
Common Stock at an exercise price of $22.63, $28.25, and $3.70, respectively,
per share. These options became exercisable after one year from the date of
grant if the director attended in person four out of the five regularly
scheduled meetings of the Board of Directors in the year following the grant.
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<PAGE>
Mr. Nicholson has received compensation for services rendered from
entities in which the Company had an interest. See "Item 13. Certain
Relationships and Related Transactions."
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors, and persons who beneficially own more than ten percent of the
Company's Common Stock, to file initial reports of ownership and reports of
changes in ownership with the Commission and the Exchange on which the Company's
Common Stock is listed. Executive officers, directors and greater than ten
percent beneficial owners are required by the Commission to furnish the Company
with copies of all Section 16(a) forms they file.
Based upon a review of the copies of such forms furnished to the Company
and written representations from the Company's executive officers and directors,
the Company believes that all Section 16(a) filing requirements applicable to
its executive officers, directors and greater than ten percent beneficial owners
were complied with during fiscal 1999.
EXECUTIVE OFFICERS
See "Item 1. Business - Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to (i) the Company's chief executive
officer, and (ii) each of the four other most highly compensated executive
officers of the Company who were serving at the end of 1999 for services in all
capacities to the Company and its subsidiaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) (1)
- - --------------------------------- ------ ------------------ ----------------------
<S> <C> <C> <C>
Robert N. Elkins ................ 1999 $ 809,935 -- (6)
Chairman of the Board, Chief 1998 $ 809,935 (5) -- (7)
Chief Executive Officer and 1997 $ 752,277 $ 3,250,000 (8)
President (4)
Stephen P. Griggs ............... 1999 $ 500,000 $ 2,000,000
President - RoTech 1998 $ 500,000 $ 500,000
Medical Corporation (12) 1997 $ 95,890(13) $ 3,595,890(14)
John F. Heller .................. 1999 $ 345,343 $ 250,000
Executive Vice President and 1998 $ 325,000 --
President of Facility Operations 1997 $ 276,933 $ 250,000
(17)
C. Taylor Pickett ............... 1999 $ 337,951 --
Executive Vice President 1998 $ 312,604 --
Chief Financial Officer (19) 1997 $ 310,000 $ 93,000
Sally Weisberg .................. 1999 $ 383,500 --
Executive Vice President and 1998 $ 349,920 --
President of Symphony Health 1997 $ 324,000 $ 175,000
Services Division (24)
<CAPTION>
LONG TERM COMPENSATION
---------------------------------------
RESTRICTED SECURITIES
STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION AWARD (2) OPTIONS/SAR (#) COMPENSATION ($) (3)
- - --------------------------------- -------------------- ------------------ ---------------------
<S> <C> <C> <C>
Robert N. Elkins ................ -- 1,430,000 $ 516,177 (9)
Chairman of the Board, Chief -- -- $ 11,598 (10)
Chief Executive Officer and -- 1,100,000 $ 3,162 (11)
President (4)
Stephen P. Griggs ............... -- --
President - RoTech -- 1,243,510 (15) --
Medical Corporation (12) -- 750,000 (16) --
John F. Heller .................. -- 220,000 --
Executive Vice President and $ 202,184 (18) 75,000 --
President of Facility Operations -- -- --
(17)
C. Taylor Pickett ............... -- 220,000 $ 93,864 (21)
Executive Vice President $ 202,184 (20) 75,000 $ 6,442 (22)
Chief Financial Officer (19) -- -- $ 43,958 (23)
Sally Weisberg .................. -- 235,000 --
Executive Vice President and $ 202,184 (25) 75,000 $ 5,341 (26)
President of Symphony Health -- -- --
Services Division (24)
</TABLE>
- - ----------
(1) Represents cash portion of bonus. In addition, in 1999 Messrs. Heller and
Pickett and Ms. Weisberg received their 1998 bonuses in shares issued
pursuant to the Company's Cash Bonus Replacement Plan. These shares are
listed under "Restricted Stock Awards."
(2) Represents the value of shares issued pursuant to the Company's Cash Bonus
Replacement Plan at $5.56 per share, the fair market value on the date of
issuance. One half of the shares were subject to forfeiture if the
individual was not employed by the Company on January 1, 2000, the
remaining one half are subject to forfeiture if the individual is not
employed by the Company on January 1, 2001.
113
<PAGE>
(3) Does not include perquisites paid to the listed officers, such as
automobile allowances, which did not exceed the lesser of $50,000 or 10% of
total compensation.
(4) The Company is a party to an employment and related agreements with Dr.
Elkins. See "-- Employment Agreements" and "Item 13. Certain Relationships
and Related Transactions."
(5) Dr. Elkins used all salary and bonus in excess of $500,000 received by him
in 1998, net of taxes on his entire compensation, to repay outstanding
indebtedness to the Company.
(6) Pursuant to Dr. Elkins' employment agreement, he is entitled to a bonus
equal to 100% of his base salary if the Company's annual earnings generally
equal or exceed the earnings per share targets set by the Board of
Directors. Twelve and one-half percent of the bonus is payable each
quarter; however, if the Company's annual earnings do not exceed the Board
of Directors' targets, these quarterly payments are treated as prepayments
of salary or must be repaid to the Company, net of all taxes paid or
payable (except to the extent Dr. Elkins receives tax benefits, through
deductions, for the repayment), with interest at the prime rate. The
remaining fifty percent of the bonus is payable at the end of the year if
the Company's annual earnings exceed the Board of Directors' targets. Dr.
Elkins was not entitled to a bonus in 1999 pursuant to the terms of his
employment agreement and no bonus was awarded to Dr. Elkins during 1999
because of the Company's performance. See "-- Employment Agreements."
(7) During 1998, Dr. Elkins received $303,275 as a bonus pursuant to the
provisions of his employment agreement described in note 6 above. Because
the Company did not equal or exceed the earnings per share targets set by
the Board of Directors, Dr. Elkins elected to repay this amount (net of all
taxes paid or payable (except to the extent Dr. Elkins received tax
benefits, through deductions, for the repayment)) with interest at the
prime rate.
(8) Includes the bonus earned in accordance with Dr. Elkins' employment
agreement $750,000 and $2,500,000 of the $5,000,000 bonus granted in 1996
which became payable in 1997 upon the satisfaction of certain conditions.
In 1996, Dr. Elkins was granted a bonus of $5,000,000 which would become
payable if certain conditions were met. The conditions for the bonus, as
amended, were as follows: (i) 25% of the bonus would be paid if the Company
met the Company's earnings per share projections for the 12 months ended
June 30, 1997 before taking into account the payment of the bonus and any
non-recurring non-cash charges; (ii) 25% of the bonus would be paid if the
proposed sale of the Company's pharmacy division to Capstone Pharmacy
Services, Inc. pursuant to the Asset Purchase Agreement dated as of June
20, 1996 was consummated; (iii) 25% of the bonus would be paid if the
proposed initial public offering of the Company's subsidiary Integrated
Living Communities, Inc. ("ILC") was consummated at a price of at least
$9.00 per share or, if after the proposed initial public offering of ILC at
a lower price, the price per share of ILC traded at a price of at least
$9.00 per share; and (iv) 25% of the bonus would be paid if the proposed
acquisition of First American Health Care of Georgia, Inc. pursuant to the
Merger Agreement dated as of February 21, 1996 was consummated. Conditions
(ii) and (iv) were met in 1996, and conditions (i) and (iii) were met in
1997. Dr. Elkins was required to use 50% of the after-tax amount of the
bonus (including the advance) to purchase shares of the Company's Common
Stock.
(9) Includes $23,115 of life insurance premium payments made by the Company on
behalf of Dr. Elkins and $493,062 of payments made pursuant to the
termination of the Supplemental Deferred Compensation Plans. This amount
does not include accrued interest and principal of 4,158,065 on loans from
the Company forgiven in 1999. See "-- Supplemental Deferred Compensation
Plans," " -- Employment Agreements"."
(10) Represents life insurance premium payments made by the Company on behalf
of Dr. Elkins. Does not include 282,353 shares of Common Stock, having a
value of $3,000,000 at the time of contribution, contributed by the
Company to the Key Employee Supplemental Executive Retirement Plan for the
benefit of Dr. Elkins, which contribution was rescinded in April 1999 with
Dr. Elkins' consent. See "-- Supplemental Deferred Compensation Plans" and
"Item 13. Certain Relationships and Related Transactions."
(11) Represents $3,162 of life insurance premium payments made by the Company
on behalf of Dr. Elkins. Does not include $281,432 of loan forgiveness and
$14,169,200 contributed by the Company to the Key Employee Supplemental
Executive Retirement Plan, which amount was contributed to a Trust which
is subject to claims of the Company's creditors in the event of
insolvency. See "-- Supplemental Deferred Compensation Plans" and "Item
13. Certain Relationships and Related Transactions."
(12) Mr. Griggs joined the Company on October 21, 1997 upon consummation of the
Company's acquisition (the "RoTech Acquisition") of RoTech Medical
Corporation ("RoTech"). Mr. Griggs was President of RoTech at the time of
the RoTech Acquisition. The Company is a party to an employment agreement
with Mr. Griggs. See "-- Employment Agreements."
(13) Does not include amounts paid to Mr. Griggs by RoTech prior to consummation
of the RoTech Acquisition.
(14) Includes a sign-on bonus of $3,500,000 paid to Mr. Griggs upon
consummation of the RoTech Acquisition. See "-- Employment Agreements."
(15) Includes (i) options to purchase 348,360 shares of Common Stock, the
exercise price of which was reduced from $29.71 per share to $10.63 per
share in November 1998, (ii) options to purchase 145,150 shares of Common
Stock at an exercise price of $10.23 per share, the expiration date of
which were extended in November 1998 from December 31, 1998 to December 31,
2001, and (iii) a warrant to purchase 750,000 shares of Common Stock, the
exercise price of which was reduced from $33.16 to $10.63 per share in
November 1998. See Note 16 below.
114
<PAGE>
(16) Consists of 750,000 shares which may be acquired upon the exercise of
warrants issued to Mr. Griggs in connection with the RoTech Acquisition.
Does not include 493,510 shares which may be acquired upon the exercise of
options granted under stock option plans of RoTech and converted into
options to purchase shares of the Company's Common Stock in connection with
the RoTech Acquisition. See "-- Employment Agreements."
(17) The Company is a party to an employment agreement with Mr. Heller. See " --
Employment Agreements."
(18) Represents the fair market value on the date of issuance of 36,364 shares
of the Company's Common Stock, issued pursuant to the Cash Bonus
Replacement Plan.
(19) The Company is a party to an employment agreement with Mr. Pickett. See "--
Employment Agreements."
(20) Represents the fair market value on the date of issuance of 36,364 shares
of the Company's Common Stock, issued pursuant to the Cash Bonus Plan.
(21) Consists of payments made pursuant to the termination of Supplemental
Deferred Compensation Plans. Does not include $100,000 of principal and
accrued interest on loans from the Company forgiven in 1999. See "--
Supplemental Deferred Compensation Plans" and "Item 13. Certain
Relationships and Related Transactions."
(22) Consists of life insurance premium payments made by the Company on behalf
of Mr. Pickett. Does not include a $632,989 contribution by the Company to
the Supplemental Deferred Compensation Plan, in the form of shares of
Common Stock, for the benefit of Mr. Pickett, which contribution was
rescinded in April 1999 with Mr. Pickett's consent, or $134,000 of
principal and accrued interest on loans from the Company forgiven in 1998.
See "-- Supplemental Deferred Compensation Plans" and "Item 13. Certain
Relationships and Related Transactions."
(23) Represents a $39,613 contribution by the Company to the Supplemental
Deferred Compensation Plan and $4,345 of life insurance premium payments
made by the Company on behalf of Mr. Pickett. See "-- Supplemental
Deferred Compensation Plans."
(24) The Company is a party to an employment agreement with Ms. Weisberg. See
"-- Employment Agreements."
(25) Represents the fair market value on the date of issuance of 36,364 shares
of the Company's Common Stock issued pursuant to the Cash Bonus Replacement
Plan.
(26) Represents life insurance premium payments made by the Company on behalf
of Ms. Weisberg. Does not include a $492,212 contribution by the Company
to the Supplemental Deferred Compensation Plan, in the form of shares of
Common Stock, for the benefit of Ms. Weisberg, which contribution was
rescinded in April 1999 with Ms. Weisberg's consent. See
"-- Supplemental Deferred Compensation Plans."
The following table sets forth information with respect to option grants in
1999 to persons named in the Summary Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
------------------------------ AT ASSUMED ANNUAL RATES OF
NUMBER OF PERCENT OF TOTAL STOCK PRICE APPRECIATION
SECURITIES OPTIONS GRANTED EXERCISE FOR OPTION TERM (B)
UNDERLYING TO EMPLOYEES IN OR BASE EXPIRATION ----------------------------
NAME OPTION(#) FISCAL YEAR (A) PRICE ($/SH) DATE 5%($) 10%($)
- - --------------------------- ------------ ----------------- -------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert N. Elkins .......... 1,430,000 36.7% $ 3.70 04/19/09 $3,311,900 $8,437,000
Stephen P. Griggs ......... -- -- -- -- -- --
John F. Heller ............ 220,000 5.6% $ 3.70 04/19/09 $ 512,600 $1,298,000
C. Taylor Pickett ......... 220,000 5.6% $ 3.70 04/19/09 $ 512,600 $1,298,000
Sally Weisberg ............ 235,000 6.0% $ 3.70 04/19/09 $ 547,550 $1,386,500
</TABLE>
- - ----------
(A) Based on options to purchase 3,895,500 shares granted to all employees in
fiscal 1999.
(B) These amounts represent assumed rates of appreciation in the price of the
Company's Common Stock during the terms of the options in accordance with
rates specified in applicable federal securities regulations. Actual gains,
if any, on stock option exercises will depend on the future price of the
Company's Common Stock and overall market conditions. The 5% rate of
appreciation over the 10-year term of
115
<PAGE>
the $3.70 option would result in a stock price of $6.03. The 10% rate of
appreciation over the 10-year term of the $3.70 option would result in a
stock price of $9.60. As a result of the Company's bankruptcy proceedings,
the Company does not expect that these options will have any value.
The following table sets forth information with respect to unexercised stock
options held by the persons named in the Summary Compensation Table at
December 31, 1999. None of these individuals exercised any options during
1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS IN-THE-MONEY OPTIONS AT
AT FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
----------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - -------------------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Robert N. Elkins ...... 3,150,000 -- -- --
Stephen P. Griggs ..... 793,510 450,000 -- --
John F. Heller ........ 37,750 276,250 -- --
C. Taylor Pickett ..... 36,450 282,850 -- --
Sally Weisberg ........ 48,750 291,250 -- --
</TABLE>
----------
(1) Computed based upon the difference between the closing price of the
Company's Common Stock on December 31, 1999 ($.09) and the exercise
price.
EMPLOYMENT AGREEMENTS
The Company is a party to an employment agreement with Robert N. Elkins.
The agreement provides for a five-year term (which commenced January 1, 1994)
with an automatic one-year extension at the end of each year, unless 90 days'
notice is given by either party. Under the agreement Dr. Elkins currently
receives an annual base salary of $809,935, with annual increases of at least
the increase in the consumer price index. Dr. Elkins will receive a bonus of
100% of his base salary if the Company's annual earnings generally equal or
exceed the earnings per share targets set by the Board of Directors. Twelve and
one-half percent of the bonus is payable each quarter; however, if the Company's
annual earnings do not exceed the Board of Directors' targets, these quarterly
payments are treated as prepayments of salary or must be repaid to the Company,
net of all taxes paid or payable (except to the extent Dr. Elkins receives tax
benefits, through deductions, for the repayment), with interest at the prime
rate. The remaining fifty percent of the bonus is payable at the end of the year
if the Company's annual earnings exceed the Board of Directors' targets. The
agreement may be terminated by either party on 90 days' notice. Upon termination
of Dr. Elkins' employment by the Company without "Cause" or by Dr. Elkins for
"Good Reason" or if the Company elects not to extend the term of the agreement,
Dr. Elkins will be entitled (i) to a lump-sum cash payment on the effective date
of termination equal to five times the sum of (a) his salary, (b) the "Bonus
Amount" and (c) a pro rata portion of the Bonus Amount through the date of
termination minus any bonus payments made for the fiscal year in which
termination occurs that are not required to be repaid and (ii) to receive
certain employee and other benefits for five years after termination. In
addition, upon termination of Dr. Elkins' employment by the Company without
Cause or by Dr. Elkins for Good Reason or upon the Company giving notice that it
elects not to extend the term of employment for another year, all stock options,
other equity-based rights and other benefits (including benefits under the
Company's Supplemental Deferred Compensation Plans) will become fully vested.
Upon termination of Dr. Elkins' employment for any reason other than (i) by the
Company for Cause or (ii) by Dr. Elkins before he attains the age of 55 and not
due to death, permanent disability or Good Reason, and upon any change of
control that occurs while Dr. Elkins is employed with the Company or within
one-year following his termination (other than for Cause, death, permanent
disability or Good Reason), he is entitled to exercise any outstanding stock
option until the earlier of five years following such event (or, if later, five
years after the date of termination of employment following a change of control)
or the stated term of the option. The agreement also provides that if Dr. Elkins
is required to pay an excise tax on "excess parachute payments" (as defined in
Section 280G
116
<PAGE>
of the Internal Revenue Code of 1986, as amended (the "Code")), the Company is
required to pay Dr. Elkins one hundred percent of the amounts that are necessary
to place him in the same after-tax financial position that he would have been in
if such excise tax had not been applicable. The agreement contains a two year
non-competition provision (one-year in the case of a termination of employment
other than for Cause within one year after a change of control). In addition,
Dr. Elkins' employment agreement provides that upon termination without Cause or
resignation for Good Reason or if the Company fails to renew the agreement, Dr.
Elkins shall have the right to acquire from the Company for no additional
consideration an assignment of the Company's leasehold interest in certain
floors of the Company's offices and to be provided with an office, secretarial
assistance, automobile insurance, an automobile allowance and use of a Company
plane for five years following termination. The agreement also grants Dr. Elkins
the right, at any time during his term of employment and for one year
thereafter, to purchase the aircraft owned by the Company at a price equal to
book value, and to lease or purchase from the Company at fair market rental, or
purchase from the Company at book value, the hangar space for such aircraft at
the Naples, Florida airport. Upon a change of control or termination of Dr.
Elkins' employment (other than a termination by the Company for Cause or by Dr.
Elkins for other than permanent disability or Good Reason), Dr. Elkins also has
the right to purchase from the Company the current automobile furnished to him
at book value.
Dr. Elkins' employment agreement also provides for his participation in the
Company's Key Employee Supplemental Executive Retirement Plan (the "Key Employee
SERP"), and requires the establishment of a separate trust under the Key
Employee SERP to which the Company shall make irrevocable contributions at
specified times through January 2, 2001 such that, at January 2, 2001, there
would be $23,900,000 in such trust. Pursuant to the employment agreement, the
Company is required to use reasonable efforts to obtain an insurance policy or
letter of credit guaranteeing its obligations to make contributions to the
trust, although to date IHS has not done so. Upon a change of control of the
Company, the Company is obligated to irrevocably fund the trust in the amount
necessary to fund Dr. Elkins' pension benefit under the Key Employee SERP. In
addition, upon a change of control, Dr. Elkins is entitled to a vested,
nonforfeitable right to retirement benefits under the Key Employee SERP as if he
had retired with 15 years of service on the date the change of control occurred
(without reduction for retirement prior to attaining age 62), payable (i) in a
lump sum if he is an employee at the time of the change of control and (ii) in
the lump sum actuarial equivalent less the sum of all retirement benefits
previously received under the Key Employee SERP if the change of control occurs
within one year after he ceases to be an employee. See "-- Supplemental Deferred
Compensation Plans -- Key Employee Supplemental Executive Retirement Plan."
For purposes of Dr. Elkins' employment agreement: (a) "Cause" is defined as
(i) conviction of a felony involving moral turpitude or (ii) willful gross
neglect or willful gross misconduct resulting in material economic harm to the
Company, unless Dr. Elkins believed in good faith that such conduct was in or
not opposed to the best interests of the Company; (b) "Good Reason" is defined
as (i) a material breach of the agreement by the Company, (ii) any termination
of Dr. Elkins' employment within one year following a change of control of the
Company, (iii) removal, dismissal from or failure of Dr. Elkins to be elected
Chairman of the Board of Directors or (iv) the relocation of Dr. Elkins to an
office which is more than 15 miles from his then principal residence; and (c)
"Bonus Amount" is defined as the highest of (i) Dr. Elkins' salary in the year
of termination, (ii) his bonus in the immediately preceding calendar year or
(iii) his bonus in the calendar year which was immediately prior to the year
immediately preceding the year of termination. The agreement provides that the
determination that Cause exists must be approved by 75% of the members of the
Board and that Dr. Elkins has a 60 day cure period. For purposes of the
agreement, the term "change of control" means the occurrence of one or more of
the following: (i) any person (as such term is used in Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than
Dr. Elkins and any group (as such term is used in Section 13(d)(3) of the
Exchange Act) of which he is a member, becomes a beneficial owner (as such term
is used in Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the
capital stock of the Company of any class or classes having general voting power
under ordinary circumstances, in the absence of contingencies, to elect
directors ("Voting Stock"); (ii) the majority of the Board of Directors of the
Company consists of individuals other than individuals who were members of the
Board
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of Directors on November 18, 1997 ("Incumbent Directors"), provided that any
person becoming a director subsequent to such date whose election or nomination
for election was supported by two-thirds of the directors who then comprised the
Incumbent Directors shall be considered to be an Incumbent Director, unless such
election or nomination was the result of any actual or threatened election
contest of a type contemplated by Regulation 14a-11 under the Exchange Act;
(iii) the Company adopts any plan of liquidation providing for the distribution
of all or substantially all of its assets; (iv) there is consummated any
consolidation, reorganization or merger of the Company in which the Company is
not a continuing or surviving corporation or pursuant to which all or
substantially all of the Voting Stock is converted into cash, securities or
other property (unless the stockholders of the Company immediately prior to such
consolidation, reorganization or merger beneficially own, directly or
indirectly, in substantially the same proportion as they owned the Voting Stock,
all of the voting stock or other ownership interests of the entity or entities,
if any, that succeed to the business of the Company); (v) in any transaction not
described in preceding clause (iv), all or substantially all of the assets or
business of the Company is disposed of pursuant to a merger, consolidation or
other transaction (unless the stockholders of the Company immediately prior to
such merger, consolidation or other transaction beneficially own, directly or
indirectly, in substantially the same proportion as they owned the Voting Stock,
all of the voting stock or other ownership interests of the entity or entities,
if any, that succeed to the business of the Company); or (vi) the Company
combines with another company and is the surviving corporation but, immediately
after the combination, the stockholders of the Company immediately prior to the
combination hold, directly or indirectly, 50% or less of the shares of Voting
Stock of the combined company (there being excluded from the number of such
shares held by such stockholders, but not from the Voting Stock of the combined
company, any such shares received by "affiliates," as such term is defined in
the rules of the Securities and Exchange Commission, of such other company in
exchange for stock of such other company).
Pursuant to the supplemental agreement between Dr. Elkins and the Company,
the Company has agreed to forgive, on each January 28 from 1999 to 2003, an
amount equal to the principal and interest due on such date on a $15,535,000
loan made to him by the Company to exercise options less, for the amount
forgiven on January 28, 1999, the amount of his salary and bonus for the prior
calendar year in excess of $500,000. The principal amount of the note is due in
five equal installments of $3,107,000. On January 28, 1999, the Company forgave
accrued interest and principal of $4,158,065 on the note. The January 28
forgiveness date in 2000, 2001, 2002 and 2003 was subsequently changed to July 8
in each such year. See "Item 13. Certain Relationships and Related Transactions"
In connection with the RoTech Acquisition on October 21, 1997, RoTech
entered into a five-year employment agreement with Stephen P. Griggs, the
President of RoTech. Pursuant to the agreement, Mr. Griggs serves as the
President of RoTech and currently receives an annual base salary of $500,000 per
year and an annual bonus of $500,000 for each year in which RoTech's net income
contribution to the Company equals or exceeds specified targets, with an
additional bonus determined by the Company to be paid if the net income
contribution target is exceeded. In addition, pursuant to the agreement Mr.
Griggs received a one-time cash sign-on bonus of $3,500,000 and a warrant to
purchase 750,000 shares of Common Stock of the Company at an exercise price of
$33.16 per share (subsequently reduced to $10.63 per share in 1998), which
warrant becomes exercisable at a rate of 20% per year beginning on October 21,
1998 (subject to acceleration upon Mr. Griggs' death or the occurrence of a
change of control of the Company). Upon termination of Mr. Griggs' employment by
RoTech without "Cause" or in case Mr. Griggs resigns for Cause, Mr. Griggs'
unpaid base salary under the agreement and the pro-rated portion of his
performance-based bonus, if any, will become payable in one lump sum and all of
Mr. Griggs' unvested stock options will fully vest. For purposes of the
agreement, RoTech may terminate Mr. Griggs' employment for Cause if Mr. Griggs
(i) fails to perform any of his duties in any material respect or breaches any
material term of the agreement, which failure or breach is not corrected within
30 days of notice, (ii) breaches any representation or warranty under the
agreement in any material respect, (iii) dies or becomes disabled for 90 days or
more and RoTech has provided Mr. Griggs with disability insurance which is
payable after such 90-day period, (iv) is convicted of a felony or commits an
act of theft, larceny or embezzlement or a similar act of material misconduct
with respect to property of RoTech, the Company, their subsidiaries or employees
or (v) commits a material act of malfeasance,
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dishonesty or breach of trust with respect to RoTech, the Company or any of
their subsidiaries. Mr. Griggs may terminate his employment for Cause if RoTech
(i) fails to perform any of its duties under the agreement in any material
respect, (ii) fails to provide Mr. Griggs with a work environment reasonably
similar to Mr. Griggs' past work environment or (iii) substantially changes Mr.
Griggs' job responsibilities, each of which failure or action is not corrected
by RoTech within 15 days of notice. Under the agreement Mr. Griggs is subject to
a non-competition provision prohibiting him, for a period of three years
following the termination or expiration of his employment, from being employed
by, being a director or manager of, acting as a consultant for, being a partner
in, having a proprietary interest in, giving advice to, loaning money to or
otherwise associating with any entity which competes with RoTech or its
subsidiaries in the continental United States, subject to certain limited
exceptions. Pursuant to a related agreement, RoTech and the Company have agreed
to pay to Mr. Griggs the amount of any excise tax payable by him under Section
4999 of the Code, or any corresponding provisions of state or local tax law, as
a result of any payments to him pursuant to his employment agreement or in
connection with the RoTech Acquisition, as well as the income tax and excise tax
on such additional compensation such that, after the payment of income and
excise taxes, Mr. Griggs is in the same economic position in which he would have
been if the provisions of Section 4999 of the Code (or any corresponding
provisions of state or local tax law) had not been applicable.
As of July 1, 1997, the Company entered into an employment agreement with
C. Taylor Pickett, its Executive Vice President -- Chief Financial Officer.
Pursuant to the agreement, as amended as of January 4, 2000, Mr. Pickett
currently receives an annual base salary of $400,000 (subject to adjustment
based on changes in the consumer price index) plus a non-discretionary
performance bonus based on the Company's achievement of objective performance
goals set by the CEO for each year, which will include targets related to the
Company's earnings before interest, taxes, depreciation and amortization. If the
Company meets or exceeds the performance goals for the year 2000, the
performance bonus will be no less than $200,000. The agreement has an initial
term of three years, is automatically extended for an additional year on each
January 1st unless either party gives 120 days' prior notice, and can be
terminated by either party on 90 days' notice. Upon Mr. Pickett's termination
without Cause or resignation for Good Reason, Mr. Pickett is entitled to a
one-time lump sum severance payment equal to his preceeding twelve months'
compensation and will be released from all obligations related to his
employment, including his non-compete obligation and his obligation to repay
loans under the Company's 1999 Employee Loan Program described below. If Mr.
Pickett is required to pay an excise tax on "excess parachute payments" (as
defined in Section 280G of the Code), the Company has agreed to pay any amounts
necessary to place Mr. Pickett in the same after-tax financial position that he
would have been in if such excise tax had not been applicable. The agreement
contains an 18-month non-competition provision (one year upon termination for
Cause or upon termination within a year after a change of control of the
Company). For purposes of the agreement, "Cause" is defined as Mr. Pickett's (i)
material failure to perform his duties, (ii) material breach of his
non-competition or confidentiality covenants, (iii) conviction of a felony
involving moral turpitude, or (iv) disparaging IHS or any its stockholders,
officers, or directors, in any case which is not corrected within 60 days after
notice, and "Good Reason" is defined as (i) a material breach of the agreement
by the Company, (ii) Mr. Pickett's resignation within one year after a change in
control of the Company or the resignation or termination of the persons who were
the Chief Executive Officer, Chairman of the Board or President of the Company
on July 1, 1997, in any case which is not corrected within 60 days after notice
(10 days with respect to a failure to pay), (iii) assignment of duties
inconsistent with his current position, duties, responsibilities or status, (iv)
a material change in reporting responsibilities, (v) failure to be included in
any compensation plan or benefit plan provided by IHS to any of its Executive
Vice Presidents, (vi) the occurrence of any event which would constitute a "Good
Reason" or a "Change of Control" under the employment agreement of IHS' CEO or
President; or (vii) the failure of IHS to obtain or deliver promptly, after any
change of control an agreement to assume and perform the employment agreement.
The employment agreement provides that if Mr. Pickett is still employed by IHS
on March 1, 2001 and his division has met or exceeded the performance goals for
calendar year 2000, IHS will make a good faith effort to implement a stock
ownership program (such as a stock option program or a stock loan purchase
program that will permit Mr. Pickett to acquire an equity position in IHS
consistent with that of similarly experienced and similarly situated senior
management in the nursing home industry. IHS has agreed to secure the unin-
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sured portion of the Company's Director's and Officer's insurance policy by a
trust or letter of credit although it has not done so to date.
As an inducement to amend his employment agreement, in recognition of his
past contributions to IHS and in consideration of his release of all claims he
may have had against the Company, Mr. Pickett was paid a one-time initial bonus
of $250,000 on January 4, 2000. In addition, Mr. Pickett will be entitled to
participate in the retention bonus program that the Company intends to adopt,
and his retention bonus for the fiscal year beginning October 1, 1999 (on an
annualized basis) will be no less than $375,000 payable in equal quarterly
installments in arrears, beginning on January 1, 2000.
As of July 1, 1998, the Company entered into an employment agreement with
Sally Weisberg, its Executive Vice President and President -- Symphony Health
Services Division. Pursuant to the agreement, as amended as of January 4, 2000,
Ms. Weisberg currently receives an annual base salary of $400,000 (subject to an
annual increase in the amount of the greater of 8% or the percentage increase in
the consumer price index) plus a non-discretionary performance bonus based on
the Company's achievement of objective performance goals set by the CEO for each
year, which will include targets related to the Company's earnings before
interest, taxes, depreciation and amortization. If the Company meets or exceeds
the performance goals for the year 2000, the performance bonus will be no less
than $200,000. The agreement has an initial term of three years, is
automatically extended for an additional year on each July 1st unless either
party gives 120 days' prior notice, and can be terminated by either party on 90
days' notice. In addition, the agreement automatically terminates on the 180th
day following the anniversary date of a change of control of the Company. In the
event Ms. Weisberg's employment is terminated without Cause or due to a change
of control of the Company, Ms. Weisberg resigns for Good Reason, Ms. Weisberg is
entitled to a one-time lump sum severance payment equal to her preceding twelve
months' compensation and will be released from all obligations related to her
employment, including her non-compete obligation and her obligation to repay
loans under the Company's 1999 Employee Loan Program described below. Ms.
Weisberg will also be entitled to receive certain benefits for 36 months after
termination. The agreement contains an 18-month non-competition provision (one-
year upon termination for Cause), which does not apply if Ms. Weisberg is
terminated without Cause before the anniversary of a change of control of the
Company. For purposes of the agreement, "Cause" is defined as Ms. Weisberg's (i)
material failure to perform her duties, (ii) material breach of her
non-competition or confidentiality covenants, (iii) conviction of or pleading
guilty or confessing to a felony involving moral turpitude, (iv) conviction of
or pleading guilty or confessing to theft, larceny or embezzlement of the
Company's tangible or intangible property or (v) disparaging IHS or any of its
stockholders, officers or directors, in any case which is not corrected within
60 days after notice, and "Good Reason" is defined as (i) a material diminution
of Ms. Weisberg's responsibilities, title, authority or status, (ii) the
Company's failure to pay amounts owing under the agreement when due, (iii) Ms.
Weisberg's removal or dismissal from the position of Executive Vice President or
President -- Symphony Health Services (iv) a reduction in Ms. Weisberg's salary
or a material reduction of her benefits, in any case which is not corrected
within 60 days after notice 10 days with respect to a failure to pay), (v)
assignment of duties inconsistent with her current position, duties,
responsibilities or status, (vi) a material change in reporting
responsibilities, (vii) failure to be included in any compensation plan or
benefit plan provided by IHS to any of its Executive Vice Presidents, (viii) the
occurrence of any event which would constitute a "Good Reason" or a "Change of
Control" under the employment agreement of IHS' CEO or President; or (ix) the
failure of IHS to obtain or deliver promptly, after any change of control, an
agreement to assume and perform the employment agreement. The employment
agreement provides that if Ms. Weisberg is still employed by IHS on March 1,
2001 and her division has met or exceeded the performance goals for calendar
year 2000, IHS will make a good faith effort to implement a stock ownership
program (such as a stock option program or a stock loan purchase program) that
will permit Ms. Weisberg to acquire an equity position in IHS consistent with
that of similarly experienced and similarly situated senior management in the
nursing home industry. IHS has agreed to secure the uninsured portion of the
Company's Director's and Officer's insurance policy by a trust or letter of
credit although it has not done so to date.
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As an inducement to amend her employment agreement, in recognition of past
contributions to IHS and in consideration of her release of all claims she may
have had against the Company, Ms. Weisberg was paid a one-time initial bonus of
$250,000. In addition, Ms. Weisberg will be entitled to participate in the
retention bonus program that the Company intends to adopt, and her retention
bonus for the fiscal year beginning October 1, 1999 (on an annualized basis)
will be no less than $375,000 payable in equal quarterly installments in
arrears, beginning on January 1, 2000.
As of July 1, 1998, the Company entered into an employment agreement with
John F. Heller, its Executive Vice President - Operations. Pursuant to the
agreement, as amended as of December 16, 1999, Mr. Heller currently receives an
annual base salary of $400,000 (subject to adjustment based on changes in the
consumer price index) plus a non-discretionary performance bonus based on the
Company's achievement of objective performance goals set by the CEO for each
year, which will include targets related to the Company's earnings before
interest, taxes, depreciation and amortization. If the Company meets or exceeds
the performance goals for the year 2000, the Performance Bonus will be no less
than $200,000. The agreement has an initial term of three years and contains an
"evergreen" provision providing that the agreement is automatically extended for
an additional year at the end of each year unless either party gave 120 days'
prior notice of non-renewal. The agreement can be terminated by either party on
90 days' notice. Upon termination without Cause or in case Mr. Heller resigns
for Good Reason, Mr. Heller is entitled to a one-time lump-sum severance payment
equal to his preceeding twelve months' compensation and will be released from
all obligations related to his employment, including his non-compete obligation
and his obligation to repay loans under the Company's 1999 Employee Loan Program
described below. The agreement contains an 18-month non-competition provision
(one- year upon termination for Cause), which does not apply if Mr. Heller is
terminated without Cause before the anniversary of a change of control of the
Company. For purposes of the agreement, "Cause" is defined as (i) material
failure to perform duties, (ii) material breach of confidentiality or
non-compete provisions, (iii) conviction of a felony involving moral turpitude,
(iv) conviction of theft, larceny or embezzlement of Company property, or (v)
disparaging IHS or any of its stockholders, officers or directors, and "Good
Reason" is defined as (i) a material breach of the agreement by the Company,
(ii) resignation within one year after a change in control, (iii) assignment of
duties inconsistent with his current position, duties, responsibilities or
status, (iv) a material change in reporting responsibilities, (v) failure to be
included in any compensation plan or benefit plan provided by IHS to any of its
Executive Vice Presidents, (vi) the occurrence of any event which would
constitute a "Good Reason" or a "Change of Control" under the employment
agreement of IHS' CEO or President; or (vii) the failure of IHS to obtain or
deliver promptly, after any change of control, an agreement to assume and
perform the employment agreement. The employment agreement provides that if Mr.
Heller is still employed by IHS on March 1, 2001 and his division has met or
exceeded the performance goals for calendar year 2000, IHS will make a good
faith effort to implement a stock ownership program (such as a stock option
program or a stock loan purchase program that will permit Mr. Heller to acquire
an equity position in IHS consistent with that of similarly experienced and
similarly situated senior management in the nursing home industry. IHS has
agreed to secure the uninsured portion of the Company's Director's and Officer's
insurance policy by a trust or letter or credit although it has not done so to
date.
As an inducement to amend his employment agreement, in recognition of his
past contributions to IHS, and in consideration of his release of all claims he
may have had against the Company, Mr. Heller was paid a one-time initial bonus
of $250,000. In addition, Mr. Heller will be entitled to participate in the
retention bonus program that the Company intends to adopt, and his retention
bonus for the fiscal year beginning October 1, 1999 (on a annualized basis) will
be no less than $375,000 payable in equal quarterly installments in arrears,
beginning on January 1, 2000.
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SUPPLEMENTAL DEFERRED COMPENSATION PLANS
KEY EMPLOYEE SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
In 1997 the Company amended and restated its Key Employee Supplemental
Executive Retirement Plan (the "Key Employee SERP"), which was adopted in 1996,
to provide retirement benefits to certain key employees based on the highest
annual earnings in the ten most recent calendar years of employment. Assets of
the trust associated with the plan are considered general assets of the Company
and are subject to claims of the Company's creditors in the event of insolvency.
The following table shows the estimated annual benefit payable (rounded to the
nearest thousand) upon retirement to participants in the Key Employee SERP at
the specified compensation and years-of-service classifications. The benefit
amounts listed in the following table are not subject to any deduction for
Social Security benefits or other offset amounts.
<TABLE>
<CAPTION>
FINAL AVERAGE EARNINGS* YEARS OF SERVICE
- - -------------------------- -----------------------------------------
5 10 15 OR MORE
----------- ----------- -------------
<S> <C> <C> <C>
$1,750,000.............. $ 87,500 $280,000 $1,225,000
$2,000,000.............. $100,000 $320,000 $1,400,000
$2,250,000.............. $112,500 $360,000 $1,575,000
$2,500,000.............. $125,000 $400,000 $1,750,000
$2,750,000.............. $137,500 $440,000 $1,925,000
$3,000,000.............. $150,000 $480,000 $2,100,000
$3,250,000.............. $162,500 $520,000 $2,275,000
$3,500,000.............. $175,000 $560,000 $2,450,000
$3,750,000.............. $187,500 $600,000 $2,625,000
$4,000,000.............. $200,000 $640,000 $2,800,000
$4,250,000.............. $212,500 $680,000 $2,975,000
$4,500,000.............. $225,000 $720,000 $3,150,000
$4,750,000.............. $237,500 $760,000 $3,325,000
$5,000,000.............. $250,000 $800,000 $3,500,000
</TABLE>
----------
* Represents the highest annual compensation in the ten most recent
calendar years of employment.
Notwithstanding the foregoing, if the employment of a participant who has
at least five years of service terminates before the participant has attained
the age of 58 or, in the case of Robert N. Elkins, the age of 62, such
participant will be entitled to receive an annual benefit equal to the actuarial
equivalent of the benefit he would have received had he continued employment to
age 58 (62 in the case of Dr. Elkins), but based on years of service and
compensation at the time of termination. If Dr. Elkins' employment is terminated
after he attains the age of 58 but before he attains the age of 62, he is
entitled to receive an annual benefit equal to the benefit he would have
received had he attained the age of 62, reduced by two-twelfths of one percent
for each full calendar month by which the date of his termination precedes the
month of his 62nd birthday. Pursuant to a Supplemental Agreement entered into by
the Company and Dr. Elkins (the "Supplemental Agreement"), Dr. Elkins shall be
deemed to have completed 15 years of service if his employment is terminated
because of death, permanent disability, qualified medical termination, by Dr.
Elkins for Good Reason or by the Company without Cause (as such terms are
defined in the Supplemental Agreement or Dr. Elkins' employment agreement).
Compensation covered by the Key Employee SERP is the aggregate calendar
year earnings included in the participant's income for federal tax purposes
(including bonuses but excluding stock option gains). Benefits under the Key
Employee SERP vest upon the earliest to occur of (i) participant's completion of
five years of service, (ii) attainment of age 58 (62 in the case of Dr. Elkins)
or, in the case of participants other than Dr. Elkins, completion of five years
of service if later, (iii) death or disability (as defined in the Key Employee
SERP or the participant's employment agreement) while actively employed by the
Company or (iv) a change of control of the Company (substantially as defined in
Dr.
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Elkins' employment agreement (see "-- Employment Agreements"), except that the
date for determining Incumbent Directors is March 1, 1996). Notwithstanding the
foregoing, no retirement benefits are payable to a participant if his employment
with the Company terminates prior to his benefits vesting. Benefits under the
Key Employee SERP are payable in a lump sum distribution (based on the 1983
group annuity mortality table for males and an interest rate equal to the
average yield on 30-year U.S. Treasury securities for the month preceding the
month in which the participant's employment terminates) or, if the participant
so elects, in the form of annual installments over a period not to exceed 10
years, in a joint and 50% survivor annuity or in an annuity for the life of the
participant. Participants in the Key Employee SERP also have the right to defer
a portion of their annual compensation into the Key Employee SERP, although such
amounts are immediately fully vested.
The Key Employee SERP is technically unfunded, and the Company will pay all
benefits from its general revenues and assets. To facilitate the payment of
benefits and provide participants with a measure of benefit security without
subjecting the Key Employee SERP to various rules under the Employee Retirement
Income Security Act of 1974, as amended, the Company has established two
irrevocable trusts, one for the benefit of Robert N. Elkins ("Trust 1") and one
for the benefit of other participants ("Trust A"). The Company intends to make
contributions to the trusts from time to time, and is obligated, within 30 days
following a change of control of the Company, to make an irrevocable
contribution to each trust in an amount sufficient to pay each participant their
full retirement benefit. Dr. Elkins' employment agreement requires that the
Company make irrevocable contributions to Trust 1 at specified times through
January 2, 2001 such that, at January 2, 2001, there would be $23,900,000 in
such trust. Pursuant to Dr. Elkins' employment agreement, the Company is
required to use its reasonable efforts to obtain an insurance policy or letter
of credit guaranteeing its obligations to make contributions to the trust.
Assets of such trust are considered general assets of the Company and are
subject to claims of the Company's creditors in the event of insolvency. As of
December 31, 1999, the Company had contributed $485,242 to Trust A. As of such
date, the Company had contributed $18,776,306 to Trust 1, of which $3,773,958
represents transfers of amounts previously contributed to Trust A or to the
trust established in connection with the Company's Supplemental Deferred
Compensation Plans on behalf of Dr. Elkins. In April 1999 the Company's
contribution to the Key Employee SERP for the benefit of Dr. Elkins of 282,353
shares of Common Stock, having a value of $3 million (based on the fair market
value of the Common Stock on the date of contribution), was rescinded with Dr.
Elkins' consent due to the Company's financial performance in 1998. No
contribution was made to the Key Employee SERP during 1999.
Dr. Robert N. Elkins is currently the only participant in the Key Employee
SERP. Dr. Elkins currently has 13 years of service under the Key Employee SERP.
See " - Employment Agreements."
SUPPLEMENTAL DEFERRED COMPENSATION PLANS
The Company's Supplemental Deferred Compensation Plans (the "SERP") are
unfunded deferred compensation plans, which offer certain executive and other
highly compensated employees an opportunity to defer compensation until the
termination of their employment with the Company. Contributions to the SERP by
the Company, which vest over a period of five years, are determined by the Board
upon recommendation of the Compensation and Stock Option Committee and are
allocated to participants' accounts on a pro rata basis based upon the
compensation of all participants in the SERP in the year such contribution is
made. During 1998, the Company contributed 376,471 shares of Common Stock,
having a value of $4,000,000, to the SERP, none of which was allocated to the
account of Dr. Elkins. However, because of the Company's financial performance
in 1998 this contribution was rescinded in April 1999 with the consent of the
participants. In addition, a participant may elect to defer a portion of his or
her compensation and have that amount added to his or her SERP account.
Participants may direct the investments in their respective SERP accounts. All
participant contributions and the earnings thereon, plus the participant's
vested portion of the Company's contribution account, are payable upon
termination of a participant's employment with the Company. In October 1999 the
Company terminated the SERP, and distributions were made to each participant,
including $493,062, $0, $0, $93,864 and $0 to Messrs. Elkins, Griggs, Heller and
Pickett and Ms. Weisberg, respectively.
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EMPLOYEE LOAN PROGRAM
The Company adopted in 1999 an Employee Loan Program (the "Loan Plan") to
assist the Company in retaining its senior management on a long-term basis in
light of the significantly reduced stock price and loss of equity incentives by
such executives and to encourage stock ownership by senior management. Under the
Loan Plan, the Company was authorized to loan an aggregate of $25 million to all
officers holding the title of senior vice president or above to enable them to
acquire and hold shares of Common Stock. The Loan Plan provides that each loan
will bear interest at a rate of 7% per annum, with interest only being paid at
maturity, and have a maturity date five years after the date of the loan. Each
loan is unsecured. In order to encourage the borrowers to remain with the
Company and to reduce or eliminate the pressure to sell Common Stock upon
maturity of the loan, the Loan Plan provides that 20% of principal and accrued
interest will be forgiven on the second, third and fourth anniversaries of the
date of borrowing if the borrower is still employed by the Company, and the
remainder will be forgiven on the fifth anniversary if the borrower is still
employed by the Company. The Company has the right under certain circumstances
to require that a participant immediately repay any amounts outstanding under
the Loan Plan if such participant's employment with the Company terminates. At
December 31, 1999, an aggregate of $25 million had been loaned to the 27
officers who elected to participate in the Loan Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 1, 2000 (except as
otherwise noted in the footnotes) regarding the beneficial ownership (as defined
by the Securities and Exchange Commission (the "Commission")) of the Company's
Common Stock of: (i) each person known by the Company to own beneficially more
than five percent of the Company's outstanding Common Stock; (ii) each director
of the Company; (iii) each executive officer named in the Summary Compensation
Table (see "Item 11. Executive Compensation"); and (iv) all current directors
and executive officers of the Company as a group. Except as otherwise specified,
the named beneficial owner has sole voting and investment power over the shares
listed.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL
OWNERSHIP OF PERCENTAGE OF
NAME OF BENEFICIAL OWNER COMMON STOCK COMMON STOCK
- - --------------------------------------------------------------------- ------------------ --------------
<S> <C> <C>
Robert N. Elkins .................................................... 4,620,302(1) 8.1%
Integrated Health Services, Inc.
8889 Pelican Bay Boulevard
Naples, FL 34108
Stephen P. Griggs ................................................... 1,245,991(2) 2.2%
John Heller ......................................................... 353,475(3) *
Kenneth M. Mazik .................................................... 125,000(4) *
Robert A. Mitchell .................................................. 125,000(4) *
Timothy F. Nicholson ................................................ 279,783(5) *
C. Taylor Pickett ................................................... 388,926(6) *
John L. Silverman ................................................... 90,000(4) *
Sally Weisberg ...................................................... 451,364(7) *
All directors and executive officers as a group (9 persons) ......... 7,679,841(8) 13.4%
</TABLE>
- - ----------
* Less than one percent
(1) Includes 3,150,000 shares of Common Stock issuable to Dr. Elkins upon the
exercise of options granted under the Company's stock option plans. These
options have exercise prices ranging from $3.70 to $33.44, which prices are
substantially above the current market price of the Common Stock.
(2) Includes 870 shares owned by his spouse, 391 shares owned by his spouse's
trust, 750,000 shares which may be acquired upon the exercise of warrants
issued to Mr. Griggs in connection with the RoTech Acquisition, of which
warrants to purchase 450,000 shares of Common Stock are not
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exercisable within 60 days of March 1, 2000, and 493,510 shares which may
be acquired upon the exercise of options granted under stock option plans
of RoTech and converted into options to purchase shares of the Company's
Common Stock in connection with the RoTech Acquisition. These warrants and
options have exercise prices ranging from $10.23 to $33.16, which prices
are substantially above the current market price of the Common Stock. See
"Item 11. Executive Compensation - Employment Agreements."
(3) Includes 314,000 shares of Common Stock which may be acquired upon the
exercise of options granted under the Company's stock option plans,
including 184,900 shares issuable upon the exercise of options which are
not exercisable within 60 days of March 1, 2000. These options have
exercise prices ranging from $3.70 to $28.25, which prices are
substantially above the current market price of the Common Stock.
(4) Represents shares of Common Stock which may be acquired upon the exercise
of options granted under the Company's stock option plans. These options
have exercise prices ranging from $3.70 to $28.25, which prices are
substantially above the current market price of the Common Stock.
(5) Includes 120,000 shares of Common Stock which may be acquired upon the
exercise of options granted under the Company's stock option plans and
2,250 shares owned in trust for the benefit of Mr. Nicholson's minor
children. These options have exercise prices ranging from $3.70 to $28.25,
which prices are substantially above the current market price of the Common
Stock.
(6) Includes 319,300 shares of Common Stock which may be acquired upon the
exercise of options granted under the Company's stock option plans,
including 191,500 shares issuable upon the exercise of options which are
not exercisable within 60 days of March 1, 2000. These options have
exercise prices ranging from $3.70 to $28.25, which prices are
substantially above the current market price of the Common Stock.
(7) Includes 340,000 shares of Common Stock which may be acquired upon the
exercise of options granted under the Company's stock option plans,
including 194,950 shares issuable upon the exercise of options which are
not exercisable within 60 days of March 1, 2000. These options have
exercise prices ranging from $3.70 to $28.25, which prices are
substantially above the current market price of the Common Stock.
(8) Includes 5,076,810 shares of Common Stock which may be acquired upon the
exercise of options granted under the Company's stock option plans
(including 571,350 shares issuable upon the exercise of options which are
not exercisable within 60 days of March 1, 2000), 750,000 shares which may
be acquired upon the exercise of warrants issued to Mr. Griggs in
connection with the RoTech Acquisition, of which warrants to purchase
450,000 shares are not exercisable within 60 days of March 1, 2000, and
493,510 shares which may be acquired upon the exercise of options granted
under stock option plans of RoTech and converted into options to purchase
shares of the Company's Common Stock in connection with the RoTech
Acquisition. These warrants and options have exercise prices ranging from
$3.70 to $33.44, which prices are substantially above the current market
price of the Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 12, 1997, the Company entered into an Aircraft Lease Agreement
(the "Lease") with RNE Skyview, LLC ("Skyview"), which is wholly owned by Dr.
Elkins. Pursuant to the Lease, the Company has agreed to lease one aircraft from
Skyview for seven years, commencing on December 12, 1997 and terminating on
December 12, 2004, with automatic one-year extensions unless either party
notifies the other in writing six months prior to termination. Under the Lease,
the Company has agreed to pay Skyview a commercially reasonable base rent, which
shall be no less than $89,675.81 per month and $1,076,109.72 per year. The
Company must also pay additional rent of $2,150 per block hour for any month in
which the number of block hours flown is more than 42 hours. The Company is
responsible for all maintenance and operation expenses of the aircraft during
the term of the Lease. The Lease provides that Dr. Elkins shall have exclusive
first use of the aircraft throughout the term of the Lease, even if Dr. Elkins
is terminated as an employee of the Company for any reason, including, without
limitation, as a
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result of a change of control of the Company (as defined in the Company's credit
facility). The Lease further provides that in the event of the termination of
Dr. Elkins' employment with the Company, including, without limitation, as a
result of a change of control of the Company, the members of the aircraft's
cockpit crew shall become employees of Skyview; however, the salaries, expenses
and benefits of such crew members shall be a cost and expense of the Company
throughout the term of the Lease. Dr. Elkins is obligated to reimburse the
Company for its out-of-pocket costs associated with use of the aircraft if, at
any time during the term of the Lease, Dr. Elkins uses the aircraft for his own
personal use. The Lease and the aircraft are subject to a security interest in
favor of BTM Capital Corporation securing a loan in the amount of $9,177,159
made to Skyview. Dr. Elkins has also pledged all of his membership interests in
Skyview to secure such loan. In connection with the Lease, Skyview purchased the
Gulfstream II airplane then owned by the Company, which aircraft was traded in.
The Company recognized no gain or loss on the sale of the aircraft to Skyview.
In 1997, the Company began to explore various options to deleverage the
Company without adversely affecting earnings. As part of its deleveraging
strategy, in each of January and April 1998, the Company sold five long-term
care facilities to Omega Healthcare Investors, Inc. ("Omega") for $44,500,000
and $50,500,000, respectively, which facilities were leased back by Lyric Health
Care LLC ("Lyric"), a newly formed subsidiary of the Company, at an annual rent
of approximately $4,500,000 and $4,949,000, respectively. The Company also
entered into management and franchise agreements with Lyric, which agreements
have initial terms of 13 years with two renewal options of 13 years each. The
base management fee was 3% of gross revenues in 1998 and increased to 4% of
gross revenues in 1999 pursuant to the management agreement. In addition, the
management agreement provides for an incentive management fee equal to 70% of
annual net cash flow (as defined in the management agreement). The duties of the
Company 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., an entity in which Mr. Nicholson is
the principal stockholder ("TFN Healthcare"), purchased a 50% interest in Lyric
for $1,000,000, an amount equal to the Company's initial investment in Lyric,
and the Company's 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.
In February 1998, Mr. Nicholson entered into an employment agreement with
Lyric pursuant to which Mr. Nicholson serves as Managing Director of Lyric,
having day-to-day authority for the management and operation of Lyric. Mr.
Nicholson currently receives a base salary of $300,000, which may be increased
from time to time with the Company's approval and shall be increased to $350,000
upon Lyric achieving annual fiscal year revenues of $450 million. Mr. Nicholson
also receives benefits similar to those provided to the Company's executive
officers. The agreement has an initial term through December 31, 2002, subject
to automatic one-year extensions thereafter unless the Company or Mr. Nicholson
elects not to extend. The agreement may be terminated by Lyric for Cause or by
Mr. Nicholson for Good Reason. Upon termination by Lyric without Cause or by Mr.
Nicholson for Good Reason, Mr. Nicholson will be entitled to a severance payment
equal to one year's salary plus the average of his last two annual bonuses,
payable 50% within 10 days of termination and 50% monthly in 12 equal
installments unless such termination occurs within one year following a change
of control of the Company or the Company and TFN Healthcare cease to own in
aggregate 50% of Lyric, in which case the entire severance payment shall be made
in one lump sum. If Mr. Nicholson resigns within 30 days after TFN Healthcare's
interest in Lyric is diluted below 33 1/3% and TFN Healthcare sells its interest
in Lyric, then Mr. Nicholson will be entitled to severance in an amount equal to
up to three times his annual salary. The employment agreement contains
confidentiality and non-compete provisions. For purposes of the agreement,
"Cause" means (i) Mr. Nicholson materially fails to perform his duties, (ii) Mr.
Nicholson materially breaches his confidentiality or non-compete covenants,
(iii) Mr. Nicholson is convicted of any felony or any misdemeanor involving
moral turpitude, or commits larceny, embezzlement or theft of Lyric's tangible
or intangible property, or (iv) TFN Healthcare disposes of more than 50% of its
interest in Lyric, and "Good Reason" is defined as (i) a material breach of the
agreement by Lyric, (ii) a change of control of the Company (similar to the
change of control definition contained in Dr.
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<PAGE>
Elkins' employment agreement (see "Executive Compensation - Employment
Agreements")), (iii) the Company and TFN Healthcare no longer own in aggregate
50% of Lyric or (iv) TFN Healthcare's interest in Lyric is diluted below 33 1/3%
and TFN Healthcare sells its interest in Lyric.
Effective January 1, 1999, the Company and various wholly owned
subsidiaries of the Company (the "Lyric Subsidiaries") transferred 27 long-term
care facilities and five specialty hospitals to Monarch Properties, LP ("Monarch
LP"), a newly formed private company, for approximately $138 million plus
contingent earn-out payments of up to a maximum of $67.6 million. Net cash
provided from this transaction were approximately $131,239. 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 LP. Dr. Robert
N. Elkins, Chairman of the Board, Chief Executive Officer and President of the
Company, beneficially owns approximately 28.6% of Monarch LP and is the Chairman
of the Board of Managers of Monarch Properties, LLP, the parent company of
Monarch LP. After the transfer of the facilities to Monarch LP, the Company
retained the working capital of the Lyric Subsidiaries and 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 a long-term master lease. In
September 1999, the Company transferred one additional facility to Monarch LP
for net cash proceeds of $3.7 million. Monarch LP then leased this facility to a
subsidiary of Lyric. The Company is managing these facilities for Lyric pursuant
to the above-described agreements. The Company accounted for these transactions
as a financing. The transactions with Monarch LP and Lyric were approved by the
disinterested members of the Board of Directors.
During 1999 the Law Offices of Robert A. Mitchell, a director of the
Company, performed legal services for the Company for which such firm received
$67,500.
At March 1, 2000, the Company had four outstanding loans to Robert N.
Elkins, the Company's Chairman, President and Chief Executive Officer,
aggregating $36,439,305. One loan, in the original principal amount of
$4,690,527 and with a current principal amount of $4,409,095 ("Loan A"), was
used primarily to purchase shares of the Company's Common Stock, bears interest
at a rate per annum equal to the higher of 7.5% or the Company's cost of
borrowing under its bank credit facility, is unsecured and is due July 8, 2004.
Twenty percent of the principal amount of Loan A, and all accrued and unpaid
interest on Loan A, will be forgiven on each of July 8, 2001, 2002 and 2003 if
Dr. Elkins is then an employee of the Company, and the remainder will be
forgiven on July 8, 2004 if he is then an employee of the Company. In addition,
Loan A will be forgiven upon a change in control of the Company (as defined in
Dr. Elkins' employment agreement) or the termination by IHS of Dr. Elkins'
employment or employment agreement for any reason (including a rejection of such
agreement in a reorganization proceeding) other than for Cause. The largest
amount of indebtedness (including accrued interest) outstanding under Loan A
during fiscal 1999 was $4,792,402. The second loan was in the original principal
amount of $15,535,000 and has a current principal amount of $11,780,210
outstanding ("Loan B"). Loan B, which was used to exercise options, bears
interest at 6.8% per annum, is due January 28, 2003 and is unsecured. The
largest amount of indebtedness outstanding under Loan B during fiscal 1999 was
$16,891,614. Twenty-five percent of the principal amount of Loan B, and all
accrued and unpaid interest on Loan B, will be forgiven on each of July 8, 2000,
2001 and 2002 if Dr. Elkins is then an employee of the Company and the remainder
will be forgiven on July 8, 2003 if he is then an employee of the Company. In
addition, Loan B provides that upon the occurrence of any change of control of
the Company or the termination of Dr. Elkins' employment with the Company by
death, for permanent disability, by Dr. Elkins for Good Reason or by the Company
without Cause (as such terms are defined in Dr. Elkins' employment agreement),
any amounts outstanding and not then due under Loan B shall be automatically and
immediately discharged. On January 28, 1999, the Company forgave accrued
interest and principal of $4,158,065 Loan B.The third loan, $4,250,000 of which
was made in October 1998 and $4,500,000 of which was made in November 1998, has
a current principal amount of $8,750,000 ("Loan C"). Loan C, which was used to
pay taxes resulting from the exercise of options, bears interest at 6.8% per
annum, is due July 8, 2004 and is unsecured. Twenty percent of the principal
amount of Loan C, and all accrued and unpaid interest on Loan C, will be
forgiven on each of July 8, 2001, 2002, and 2003 if Dr.
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Elkins is then an employee of the Company, and the remainder will be forgiven on
July 8, 2004 if he is then an employee of the Company. In addition, Loan C will
be forgiven upon a change in control of the Company (as defined in Dr. Elkins'
employment agreement) or the termination by IHS of Dr. Elkins' employment or
employment agreement for any reason (including a rejection of such agreement in
a reorganization proceeding) other than for Cause. In March 1999 the Company
loaned Dr. Elkins $11,500,000 under the Loan Plan ("Loan D") to assist the
Company in retaining Dr. Elkins on a long-term basis in light of the
significantly reduced stock price and loss of equity incentives by Dr. Elkins
and the fact that Dr. Elkins' options were not repriced as well as to encourage
stock ownership by Dr. Elkins. Loan D bears interest at the rate of 7% per
annum, is unsecured and is due April 8, 2004. Twenty percent of the principal
amount of Loan D, and all accrued and unpaid interest on Loan D, will be
forgiven on each of April 8, 2001, 2002, and 2003 if Dr. Elkins is then an
employee of the Company, and the remainder will be forgiven on April 8, 2004 if
he is then an employee of the Company. In addition, Loan D will be forgiven upon
a change in control of the Company (as defined in Dr. Elkins' employment
agreement) or the termination by IHS of Dr. Elkins' employment or employment
agreement for any reason (including a rejection of such agreement in a
reorganization proceeding) other than for Cause. In addition, because the
Company did not meet the earnings per share goals for 1998 set by the Committee,
Dr. Elkins' was not entitled to a bonus under his employment agreement for 1998.
Accordingly, Dr. Elkins elected to repay, with interest at the prime rate, the
$303,275 paid to him in 1998 as an advance on his bonus in accordance with the
terms of his employment agreement, net of all taxes paid or payable (except to
the extent Dr. Elkins received tax benefits, through deductions, for the
repayment). See "Item 11. Executive Compensation - Employee Loan Program" and
"-- Employment Agreements." The largest amount of indebtedness outstanding in
1999 was $37,925,608.
At March 1, 2000, the Company had two outstanding loans to C. Taylor
Pickett, the Company's Executive Vice President -- Chief Financial Officer,
aggregating $1,700,000. One such loan, in the original principal amount of
$400,000, bears interest at 6.8%, is unsecured and is due on November 13, 2002.
In November 1999, the Company forgave $100,000 of the principal amount of this
loan and accrued interest pursuant to the terms of the note. In March 1999, the
Company loaned Mr. Pickett $1,400,000 under the Loan Plan to assist the Company
in retaining Mr. Pickett on a long-term basis in light of the significantly
reduced stock price and loss of equity incentives by Mr. Pickett and the fact
that Mr. Pickett's options were not repriced in 1998 as well as to encourage
stock ownership by Mr. Pickett. This loan bears interest at the rate of 7% per
annum, is unsecured and is due March 23, 2004. Twenty percent of the principal
amount of the loan and all accrued and unpaid interest on the loan will be
forgiven on each of March 23, 2001, 2002, and 2003 if Mr. Pickett is then an
employee of the Company, and the remainder will be forgiven on March 23, 2004 if
he is then an employee of the Company. In addition, the loan will be forgiven
upon a change in control of the Company (as defined in Mr. Pickett's employment
agreement) or the termination by IHS of Mr. Pickett's employment or employment
agreement for any reason (including a rejection of such agreement in a
reorganization proceeding) other than for Cause. See "Item 11. Executive
Compensation -- Employee Loan Program." The largest amount of indebtedness
outstanding during fiscal 1999 was $1,901,927.
At March 1, 2000, the Company had outstanding one loan to John Heller, the
Company's Executive Vice President -- Operations, aggregating $1,200,000. In
March 1999, the Company loaned Mr. Heller $1,200,000 under the Loan Plan to
assist the Company in retaining Mr. Heller on a long-term basis in light of the
significantly reduced stock price and loss of equity incentives by Mr. Heller
and the fact that Mr. Heller's options were not repriced in 1998 as well as to
encourage stock ownership by Mr. Heller. This loan bears interest at the rate of
7% per annum, is unsecured and is due March 23, 2004. Twenty percent of the
principal amount of the loan, and all accrued and unpaid interest on the loan
will be forgiven on each of March 23, 2001, 2002, and 2003 if Mr. Heller is then
an employee of the Company, and the remainder will be forgiven on March 23, 2004
if he is then an employee of the Company. In addition, the loan will be forgiven
upon a change in control of the Company (as defined in Mr. Heller's employment
agreement) or the termination by IHS of Mr. Heller's employment or employment
agreement for any reason (including a rejection of such agreement in a
reorganization proceeding) other than for Cause. See "Item 11. Executive
Compensation -- Employee Loan Program." The largest amount of debtedness
outstanding during fiscal 1999 was $1,265,129.
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At March 1, 2000, the Company had outstanding one loan to Sally Weisberg,
the Company's Executive Vice President -- Symphony, aggregating $1,200,000. In
March 1999, the Company loaned Ms. Weisberg $1,200,000 under the Loan Plan to
assist the Company in retaining Ms. Weisberg on a long-term basis in light of
the significantly reduced stock price and loss of equity incentives by Ms.
Weisberg and the fact that Ms. Weisberg's options were not repriced in 1998 as
well as to encourage stock ownership by Ms. Weisberg. This loan bears interest
at the rate of 7% per annum, is unsecured and is due March 23, 2004. Twenty
percent of the principal amount of the loan, and all accrued and unpaid interest
on the loan will be forgiven on each of March 23, 2001, 2002, and 2003 if Ms.
Weisberg is then an employee of the Company, and the remainder will be forgiven
on March 23, 2004 if she is then an employee of the Company. In addition, the
loan will be forgiven upon a change in control of the Company (as defined in Ms.
Weisberg's employment agreement) or the termination by IHS of Ms. Weisberg's
employment or employment agreement for any reason (including a rejection of such
agreement in a reorganization proceeding) other than for Cause. See "Item 11.
Executive Compensation -- Employee Loan Program." The largest amount of
debtedness outstanding during fiscal 1999 was $1,265,129.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
(1) and (2) See "Index to Consolidated Financial Statements and
Supplemental Schedules" at Item 8 of this Annual Report on Form 10-K.
(3) The following exhibits are filed or incorporated by reference as part
of this Annual Report (Exhibit Nos. 10.27, 10.28, 10.29, 10.30, 10.31, 10.32,
10.33, 10.34, 10.35, 10.36, 10.37, 10.38, 10.39, 10.40, 10.41, 10.43, 10.44,
10.45, 10.46, 10.47, 10.48, 10.49, 10.50, 10.51, 10.52, 10.53, 10.74, 10.76
10.80, 10.81, 10.82. 10.83. 10.84, 10.85, 10.86, 10.87, 10.90, 10.91 and 10.92
are management contracts, compensatory plans or arrangements):
<TABLE>
<S> <C>
2.1 -- Agreement and Plan of Merger, dated as of July 6, 1997, among Integrated Health Services, Inc.,
IHS Acquisition XXIV, Inc. and RoTech Medical Corporation. (1)
2.2 -- Agreement and Plan of Merger, dated as of August 1, 1997, among Integrated Health Services,
Inc., IHS Acquisition XXVI, Inc. and Community Care of America, Inc. (2)
2.3 -- Purchase and Sale Agreement, entered into as of November 3, 1997, between HEALTHSOUTH
Corporation, Horizon/CMS Healthcare Corporation and Integrated Health Services, Inc. (3)
2.4 -- Facilities Purchase Agreement, dated as of December 31, 1998, among Monarch Properties, LP,
Integrated Health Services, Inc. and the entities listed on Schedule A thereto.
3.1 -- Third Restated Certificate of Incorporation, as amended. (4)
3.2 -- Amendment to the Third Restated Certificate of Incorporation, dated May 26, 1995. (5)
3.3 -- Certificate of Designation of Series A Junior Participating Cumulative Preferred Stock (6)
3.4 -- By-laws, as amended. (7)
4.1 -- Indenture, dated as of December 1, 1992, between Integrated Health Services, Inc. and Signet
Trust Company, as Trustee, relating to the Company's 6% Convertible Subordinated Deben-
tures. (8)
4.2 -- Form of 6% Debenture (included in 4.1). (8)
4.3 -- Indenture, dated as of December 15, 1993, from Integrated Health Services, Inc., as Issuer, to
The Bank of New York (as successor in interest) to NationsBank of Virginia, N.A., as Trustee,
relating to the Company's 5 3/4% Convertible Senior Subordinated Debentures due 2001. (9)
4.4 -- Form of 5 3/4% Debenture (included in 4.3) (9)
4.5 -- Registration Rights Agreement, dated as of December 17, 1993, between Integrated Health Ser-
vices, Inc. and Smith Barney Shearson Inc. relating to the Company's 5 3/4% Convertible Senior
Subordinated Debentures due 2001. (9)
4.6 -- Supplemental Indenture dated as of September 15, 1994 between Integrated Health Services, Inc.
and The Bank of New York (as successor in interest) to NationsBank of Virginia N.A. (10)
4.7 -- Amended and Restated Supplemental Indenture, dated as of May 15, 1997, between Integrated
Health Services, Inc. and Signet Trust Company, Inc., as Trustee, relating to the Company's
10 3/4% Senior Subordinated Notes due 2004. (11)
4.8 -- Form of Note (included in 4.7). (11)
4.9 -- Second Amended and Restated Supplemental Indenture, dated as of May 15, 1997, from Inte-
grated Health Service, Inc. to Signet Trust Company, as trustee, relating to the Company's
9 5/8% Senior Subordinated Notes due 2002 and 9 5/8% Senior Subordinated Notes due 2002,
Series A. (11)
4.10 -- Form of 9 5/8% Senior Subordinated Notes (included in 4.9). (11)
4.11 -- Indenture, dated as of May 15, 1996 between the Company and Signet Trust Company, as Trustee.(12)
4.12 -- Form of 10 1/4% Senior Subordinated Notes (included in 4.11). (12)
</TABLE>
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<TABLE>
<S> <C>
4.13 -- Indenture, dated as of May 30, 1997, between Integrated Health Services, Inc. and First Union
National Bank of Virginia, as Trustee, relating to the Company's 9 1/2% Senior Subordinated
Notes due 2007. (11)
4.14 -- Form of 9 1/2% Senior Subordinated Note (included in 4.13). (11)
4.15 -- Indenture, dated as of September 11, 1997, between Integrated Health Services, Inc. and First
Union National Bank of Virginia, as Trustee, relating to the Company's 9 1/4% Senior Subordi-
nated Notes due 2008. (13)
4.16 -- Form of 9 1/4% Senior Subordinated Note (included in 4.15). (13)
4.17 -- Indenture, dated as of June 1, 1996, between RoTech Medical Corporation and PNC Bank,
Kentucky, Inc., as Trustee, relating to RoTech's 5 1/4% Convertible Subordinated Debentures due
2003. (14)
4.18 -- Form of 5 1/4% Convertible Subordinated Debentures (included in 4.17). (14)
10.1 -- Letter dated March 28, 1991 from Integrated Health Services of Brentwood, Inc., Integrated
Health Services, Inc., Alpine Manor, Inc., Briarcliff Nursing Home, Inc., Cambridge Group, Inc.,
Integrated Health Services of Riverbend, Inc., Integrated Health Services of Cliff Manor, Inc.,
Integrated Health Group, Elm Creek of IHS, Inc., Spring Creek of IHS, Inc., Carriage-By-The-
Lake of IHS, Inc. and Firelands of IHS, Inc. to Meditrust Mortgage Investments, Inc. (15)
10.2 -- Loan and Security Agreement dated as of May 1, 1990 by and between Sovran Bank/Central
South and Integrated of Amarillo, Inc. (15)
10.3 -- Amended and Restated Promissory Note dated April 8, 1991 made by Integrated of Amarillo,
Inc. in favor of Sovran Bank/Tennessee in the aggregate principal amount of $300,000. (15)
10.4 -- Construction Loan Agreement dated November, 1990 by and between First National Bank of
Vicksburg and River City Limited Partnership. (15)
10.5 -- Guaranty and Suretyship Agreement, dated as of January 1, 1992, between Integrated Health
Services, Inc. and Nationsbank of Tennessee. (15)
10.6 -- Deed of Trust Note from Integrated Health Services at Alexandria, Inc. to Oakwood Living
Centers of Virginia, Inc., dated June 4, 1993. (16)
10.7 -- Loan Agreement dated as of December 30, 1993, by and among Integrated Health Services at
Colorado Springs, Inc. as Borrower, Integrated Health Services, Inc., as Guarantor, and Bell
Atlantic Tricon Leasing Corp. (9)
10.8 -- Promissory Note, dated December 30, 1993 made by Integrated Health Services at Colorado
Springs, Inc. in favor of Bell Atlantic Tricon Leasing Corp. (9)
10.9 -- Guaranty Agreement, dated as of December 30, 1993, made by Integrated Health Services, Inc.
in favor of Bell Atlantic Tricon Leasing Corp. (9)
10.10 -- Intentionally Omitted
10.11 -- Intentionally Omitted
10.12 -- Guaranty by Integrated Health Services, Inc. dated December 16, 1993 to IFIDA Healthcare
Group, Ltd., Morris Manor Associates, Plymouth House Health Care Center, Inc., Chateau As-
sociates, Broomall Associates, Lake Ariel Associates, Winthrop House Associates, Limited Part-
nership, Mill Hill Associates, Limited Partnership, Hillcrest Associates and Kent Associates, L.P. (8)
10.13 -- Loan Agreement, dated December 20, 1993, by and between Integrated Health Services at Central
Florida, Inc. and Southtrust Bank of Alabama, National Association. (9)
10.14 -- Mortgage and Security Agreement, dated December 20, 1993, between Integrated Health Services of
Central Florida, Inc. and Southtrust Bank of Alabama, National Association. (18)
10.15 -- Guaranty Agreement, dated December 20, 1993, by Integrated Health Services, Inc. in favor of
Southtrust Bank of Alabama, National Association. (18)
10.16 -- Assignment and Pledge of Deposit Account, dated December 20, 1993, from Integrated Health Ser-
vices at Central Florida, Inc. in favor of Southtrust Bank of Alabama, National Association. (18)
10.17 -- Intentionally Omitted
10.18 -- Intentionally Omitted
</TABLE>
131
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10.19 -- Promissory Note, dated October 1, 1992, made by Integrated Health Services of Green Briar, Inc. to
the order of Skilled Rehabilitative Services, Inc. (8)
10.20 -- Letter dated February 18, 1994, to IFIDA Health Care Group, Ltd. from Integrated Health Services,
Inc. (18)
10.21 -- Facilities Agreement dated as of August 31, 1994 by and among Litchfield Asset Management Corp.,
Integrated Health Services of Lester, Inc and Integrated Health Services, Inc. (19)
10.22 -- First Amendment to Facilities Agreement, dated as of September 30, 1997, among Litchfield Invest-
ment Company, L.L.C., Integrated Health Services of Lester, Inc. and Integrated Health Services,
Inc. (7)
10.23 -- Purchase Option Agreement dated as of August 31, 1994 between Litchfield Asset Management
Corp. and Integrated Health Services of Lester, Inc. As permitted by the instructions of Item 601 of
Regulation S-K, the 42 additional Purchase Option Agreements between subsidiaries of Integrated
Health Services, Inc. and Litchfield Asset Management Corp. have been omitted because each such
agreement is substantially identical in all material respects to the aforementioned Purchase Option. (19)
10.24 -- Guaranty dated as of August 31, 1994 by Integrated Health Services, Inc. for the benefit of Litchfield
Asset Management Corp. (19)
10.25 -- Warrant to Purchase Shares of Common Stock of Integrated Health Services, Inc. dated as of August
31, 1994 issued to Litchfield Asset Management Corp. (19)
10.26 -- Participation Agreement dated as of August 31, 1994 between Litchfield Asset Management Corp.
and Integrated Health Services of Lester, Inc. (19)
10.27 -- Form of Indemnity Agreement. (15)
10.28 -- Integrated Health Services, Inc. Equity Incentive Plan, as amended. (20)
10.29 -- Integrated Health Services, Inc. 1990 Employee Stock Option Plan, as amended. (20)
10.30 -- Integrated Health Services, Inc. 1992 Stock Option Plan (20)
10.31 -- Integrated Health Services, Inc. Employee Stock Purchase Plan (20)
10.32 -- Senior Executives' Stock Option Plan. (21)
10.33 -- Cash Bonus Replacement Plan (22)
10.34 -- Integrated Health Services, Inc. Stock Option Plan for New Non-Employee Directors, as amended. (23)
10.35 -- Integrated Health Services, Inc. Stock Option Compensation Plan for Non-Employee Directors, as
amended. (23)
10.36 -- Integrated Health Services, Inc. 1995 Stock Option Plan for Non-Employee Directors. (23)
10.37 -- Stock Option Agreement, dated as of November 27, 1995, by and between Integrated Health Ser-
vices, Inc. and John Silverman. (23)
10.38 -- Integrated Health Services, Inc. 1994 Stock Incentive Plan, as amended. (23)
10.39 -- 1996 Stock Incentive Plan of Integrated Health Services, Inc., as amended. (7)
10.40 -- 1998 Stock Compensation Plan. (7)
10.41 -- Integrated Health Services, Inc. Amended and Restated Key Employee Supplemental Executive
Retirement Plan ("Plan A"). (7)
10.42 -- Intentionally Omitted
10.43 -- Integrated Health Services, Inc. Supplemental Deferred Compensation Plan ("Plan Z") (24)
10.44 -- Employment Agreement dated January 1, 1994 between Integrated Health Services, Inc. and Robert
N. Elkins. (25)
10.45 -- Amendment No. 1 to Employment Agreement dated as of January 1, 1995 between Integrated
Health Services, Inc. and Robert N. Elkins. (25)
10.46 -- Amendment No. 2 to Employment Agreement, effective as of November 18, 1997, between Inte-
grated Health Services, Inc. and Robert N. Elkins. (7)
10.47 -- Supplemental Agreement, effective as of November 18, 1997, by and between Integrated Health
Services, Inc. and Robert N. Elkins. (7)
</TABLE>
132
<PAGE>
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<S> <C>
10.48 -- Promissory Note, dated September 29, 1997, made by Robert N. Elkins in favor of Integrated Health Services, Inc.
(7)
10.49 -- Employment Agreement dated as of January 1, 1994 between Integrated Health Services, Inc. and Lawrence P. Cirka.
(25)
10.50 -- Amendment to Employment Agreement dated as of January 1, 1995 between Integrated Health Services, Inc. and Lawrence
P. Cirka. (25)
10.51 -- Relocation Agreement, dated as of August 5, 1997, between Integrated Health Services, Inc. and Lawrence P. Cirka.
(7)
10.52 -- Employment Agreement dated as of October 1, 1996 between Integrated Health Services, Inc. and C. Christian
Winkle.(26)
10.53 -- Employment Agreement, dated as of October 21, 1997, between RoTech Medical Corporation and Stephen Griggs. (7)
10.54 -- Revolving Credit and Security Agreements, dated as of December 30, 1992, between Integrated Health Services, Inc.
and Morgan Hill Health Care Investors, Inc. (27)
10.55 -- Purchase Option and Right of First Refusal Agreement, dated January 20, 1993, among Integrated
Health Services of Missouri, Inc., Dominic F. Tutera, Joseph C. Tutera, and Michael J. Tutera. (27)
10.56 -- Purchase Option and Right of First Refusal Agreement dated January 20, 1993, between Integrated Health Services of
Missouri, Inc. and Dominic F. Tutera. (27)
10.57 -- Revolving Credit and Security Agreement dated January 20, 1993, between Integrated Health Services of Missouri,
Inc. and Cenill, Inc. (27)
10.58 -- Guaranty dated July 1, 1992 made by Integrated Health Services, Inc. (27)
10.59 -- Guaranty dated September 15, 1992 made by Integrated Health Services, Inc. (27)
10.60 -- Aircraft Lease Agreement between RNE Skyview LLC and Integrated Health Services, Inc., dated as of December 12,
1997. (7)
10.61 -- Assignment Agreement dated May 28, 1993 among Square D Company, Integrated Health Services, Inc., Manekin at Owings
Mills I Limited Partnership, and McDonough School, Inc. (16)
10.62 -- Assignment dated June 1, 1993 among Integrated Health Services, Inc., Rouse-Teachers Properties, Inc., Rouse Office
Management, Inc. and Square D Company. (16)
10.63 -- Intentionally omitted.
10.64 -- Credit Amendment, dated as of September 15, 1997, by and among Integrated Health Services, Inc., the lenders named
therein, and Citibank, N.A., as administrative agent. (28)
10.65 -- Amendment No. 1 dated as of December 1, 1997, to the Revolving Credit and Term Loan Agreement among Integrated
Health Services, Inc., the lenders parties to the Credit Agreement and Citbank, N.A., as administrative agent for
the lenders. (29)
10.66 -- Settlement Agreement and Mutual Release, made and entered into as of Monday, May 5, 1997, by and between Integrated
Health Services, Inc. and Coram Healthcare Corporation.(17)
10.67 -- Purchase Agreement, dated as of January 13, 1998, between Omega Healthcare Investors, Inc. and Gainesville Health
Care Center, Inc., Rest Haven Nursing Center (Chestnut Hill), Inc., Rikad Properties, Inc., Integrated
Management-Governor's Park, Inc. and Lyric Health Care LLC and Lyric Health Care Holdings, Inc. (7)
10.68 -- Amended and Restated Master Franchise Agreement, dated as of December 31, 1998, between Integrated Health Services
Franchising Co., Inc. and Lyric Health Care LLC.
10.69 -- Amended and Restated Master Management Agreement, dated as of December 31, 1998, between Lyric Health Care LLC and
IHS Facility Management, Inc.
10.70 -- Indemnity Agreement, dated as of January 13, 1998 by and between Integrated Health Services, Inc. and Omega
Healthcare Investors, Inc. (7)
10.71 -- Master Lease, dated as of January 13, 1998, between Omega Healthcare Investors, Inc. and Lyric Health Care
Holdings, Inc. (7)
10.72 -- Amended and Restated Operating Agreement of Lyric Health Care LLC, dated as of February 1, 1998, by and between
Integrated Health Services, Inc. and TFN Healthcare Investors, LLC. (7)
10.73 -- Employment Agreement, effective as of February 1, 1998, by and between Lyric Health Care LLC and Timothy F.
Nicholson. (7)
</TABLE>
133
<PAGE>
<TABLE>
<S> <C>
10.74 -- Warrant to purchase shares issued to Shephen Griggs. (7)
10.75 -- Share Acquisition Agreement relating to Speciality Care Limited. (7)
10.76 -- Employment Agreement dated as of June 1, 1994 between Integrated Health Services, Inc. and Anthony Masso. (26)
10.77 -- Master Lease, dated as of December 31, 1998, between Monarch Properties, LP and Lyric Health Care Holdings, III,
Inc.
10.78 -- Indemnity Agreement, dated as of December 31, 1998, between Integrated Health Services, Inc. and Monarch
Properties, LP (Environmental)
10.79 -- Indemnity Agreement, dated as of December 31, 1998, among Integrated Health Services, Inc., Lyric Health Care LLC,
Lyric Health Care Holdings III, Inc. and the entities listed on the attached Exhibit A (Litigation)
10.80 -- Integrated Health Services, Inc. Supplemental Executive Retirement Plan ("Plan B")
10.81 -- Integrated Health Services, Inc., Deferred Compensation Plan for Senior Vice Presidents and Highly Compensated
Employees (30)
10.82 -- Employment Agreement, dated as of July 1, 1997 between Integrated Health Services, Inc. and C. Taylor Pickett. (31)
10.83 -- Employment Agreement, dated as of July , 1998, between Integrated Health Services, Inc. and John F. Heller. (31)
10.84 -- Integrated Health Services, Inc. Non-Employee Director Stock Unit and Deferred Compensation Plan. (31)
10.85 -- Employment Agreement, dated as of July 1, 1998, between Integrated Health Services, Inc. and Sally Weisberg. (31)
10.86 -- Amendment No. 1 to Amended and Restated Integrated Health Services, Inc. Key Employee Supplemental Executive
Retirement Plan ("Plan A"). (31)
10.87 -- Amendment No. 1 to Supplemental Agreement, effective November 18, 1997, by and between Integrated Health Services,
Inc. and Robert N. Elkins. (31)
10.88 -- 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 for the Lenders. (34)
10.89 -- Secured Super-Priority Debtor In Possession Revolving Credit Agreement, dated as of February 3, 2000, among
Integrated Health Services, Inc. (the "Borrower"), a Delaware corporation, as debtor and debtor in possession under
chapter 11 of the Bankruptcy Code, the certain subsidiaries of the Borrower identified on Schedule II thereto, as
debtors and debtors in possession under chapter 11 of the Bankruptcy Code (the "Filing Subsidiaries"), the lenders
named therein, and Citicorp USA, Inc., as collateral monitoring agent and administrative agent for the Lenders.
10.90 -- Amendment, dated January 4, 2000, to Employment Agreement between Integrated Health Services, Inc. and Sally
Weisberg.
10.91 -- Amendment, dated January 4, 2000, to Employment Agreement between Integrated Health Ser- vices, Inc. and C. Taylor
Pickett.
10.92 -- Amendment, dated December 16, 1999, to Employment Agreement between Integrated Health Services, Inc. and John
Heller.
21 -- Subsidiaries of Registrant.
23.1 -- Consent of KPMG LLP.
27.1 -- Financial Data Schedule -- Year Ended December 31, 1999
27.2 -- Restated Financial Data Schedule -- Year Ended December 31, 1998
27.3 -- Restated Financial Data Schedule -- Year Ended December 31, 1997
</TABLE>
- - ----------
(1) Incorporated herein by reference to the Company's Current Report on Form
8-K dated July 6, 1997.
(2) Incorporated herein by reference to the Company's Tender Offer Statement on
Schedule 14D-1 filed with the Securities and Exchange Commission on August
7, 1997.
(3) Incorporated herein by reference to the Company's Current Report on Form
8-K dated November 3, 1997.
134
<PAGE>
(4) Incorporated by reference to the Company's Registration Statement on Form
S-3, Nos 33-77754, effective June 29, 1994.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-4, No. 33-94130, effective September 15, 1995.
(6) Incorporated by reference to the Company's Current Report on Form 8-K dated
September 27, 1995.
(7) Filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
(8) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 33-54458, effective December 9, 1992.
(9) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 33-76322, effective June 29, 1994.
(10) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 33-81378, effective September 21, 1994.
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1997.
(12) Incorporated by reference to the Company's Quarterly Report on From 10-Q
for the period ended June 30, 1994.
(13) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997.
(14) Incorporated by reference to RoTech Medical Corporation's Registration
Statement on Form S-3, No. 333-10915, effective September 10, 1996.
(15) Incorporated by reference to the Company's Registration Statement on Form
S-1, No. 33-39339, effective April 25, 1991.
(16) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1993.
(17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1997.
(18) Incorporated by reference the Company's Annual Report on Form 10-K for the
year ended December 31, 1993.
(19) Incorporated by reference to the Company's Current Report on Form 8-K dated
August 31, 1994.
(20) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1992.
(21) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1994.
(22) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1995.
(23) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1996.
(24) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(25) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1996.
(26) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(27) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.
(28) Incorporated by reference from the Company's Current Report on Form 8-K
dated September 15, as amended.
(29) Incorporated by reference to the Company's Current Report on Form 8-K,
dated December 31, 1993.
(30) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1998.
(31) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
(32) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1999.
(b) Reports on Form 8-K
None
(c) Exhibits
See (a) (3) above.
(d) Financial Statement Schedules
See "Index to Consolidated Financial Statements and Supplemental
Schedule" at Item 8 of this Annual Report on Form 10-K. Schedules not
included herein are omitted because they are not applicable or the
required information appears in the Consolidated Financial Statements
or notes thereto.
135
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(c) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
INTEGRATED HEALTH SERVICES, INC.
(Registrant)
By:
------------------------------------
April 10, 2000 Robert N. Elkins
Chairman of the Board, President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- -----
<S> <C> <C>
/s/ ROBERT N. ELKINS Chairman of the Board, President April 10, 2000
- - --------------------------- and Chief Executive Officer
Robert N. Elkins (Principal Executive Officer)
/s/ KENNETH M. MAZIK Director April 10, 2000
- - ---------------------------
Kenneth M. Mazik
/s/ ROBERT A. MITCHELL Director April 10, 2000
- - ---------------------------
Robert A. Mitchell
/s/ TIMOTHY F. NICHOLSON Director April 10, 2000
- - ---------------------------
Timothy F. Nicholson
/s/ JOHN L. SILVERMAN Director April 10, 2000
- - ---------------------------
John L. Silverman
/s/ C. TAYLOR PICKETT Executive Vice President--Chief April 10, 2000
- - --------------------------- Financial Officer (Principal
C. Taylor Pickett Financial and Accounting Officer)
</TABLE>
January 4, 2000
Ms. Sally Weisberg
Executive Vice President
Integrated Health Services, Inc.
910 Ridgebrook Road
Sparks, MD 21152
Re: Amendment to Employment Agreement between Integrated Health Services,
Inc. and Sally Weisberg
Dear Sally:
This letter agreement amends and supplements the employment agreement
dated December 1, 1998 (the "Employment Agreement") between you and Integrated
Health Services, Inc. ("IHS"). Unless otherwise defined in this letter, all
capitalized terms used have the meaning given to them in the Employment
Agreement. To the extent of any inconsistency between your employment agreement
and this letter, the terms of this letter agreement will control.
1. SALARY & INITIAL BONUS
A. Base Salary
Effective October 1, 1999 your annual base salary is $400,000.
B. Initial Bonus
In recognition of your past contributions to IHS, your release of all
claims you may have against IHS through the date of this agreement, and to
induce you to enter into this agreement, upon execution of this letter, IHS will
pay you an initial bonus (the "Initial Bonus") of $250,000. This is a one-time
bonus that IHS will not include in any other calculation under your Employment
Agreement.
<PAGE>
2. BONUS PROGRAMS
A. Retention Bonus
IHS intends to adopt a Retention Bonus Program. After the program is
adopted, you will participate in the Program until the earlier of: (i) the date
IHS cancels the Retention Bonus Program or (ii) you are no longer a full time
IHS employee. Pursuant to the Retention Bonus Program, IHS will pay you
quarterly retention bonuses in such amounts as shall be determined by the Chief
Executive Officer; provided, however, that, if the Retention Bonus Program is
adopted your Retention Bonus for the fiscal year beginning October 1, 1999 (on
an annualized basis) will be no less than $375,000, payable in equal quarterly
installments in arrears, beginning on January 1, 2000. The Retention Bonus is in
addition to the Performance Bonus referred to below.
B. Performance Bonus
IHS has cancelled to discretionary bonus referred to in Paragraph 2.2.
of the Employment Agreement. Instead of the discretionary bonus referred to in
Paragraph 2.2 of the Employment Agreement, IHS will pay you a non-discretionary
annual performance bonus (the "Annual Bonus") based on the achievement by IHS of
the performance goals (the "Performance Goals") established by the Chief
Executive Officer for each year (or portion thereof), which will include targets
related to the earnings before interest, taxes, depreciation and amortization
("EBITDA") of IHS. The Chief Executive Officer will establish objective criteria
to be used to determine the extent to which the Performance Goals have been
satisfied; provided, however, if IHS meets or exceeds the year 2000 Performance
Goals your Annual Bonus will be no less than $200,000.
3. PARTICIPATION IN MANAGEMENT WELFARE PLANS
IHS has cancelled the SERP referred to in Paragraph 2.3(f) of the
Employment Agreement. In consideration of your release and waiver of any claims
you may have against IHS relating to IHS' failure to continue the SERP, IHS
promises that during your employment, you will be entitled to participate in all
benefit plans and programs established or maintained by IHS for the benefit of
its Executive Vice Presidents including, without limitation, all pension,
retirement, savings, stock option and other employee benefit plans and programs.
4. OPTIONS AND EQUITY OWNERSHIP
IHS has cancelled the Employee Loan Plan. Instead, provided (a) you are
still a full time IHS employee and (b) your division has met or exceeded the
Performance Goals for the calendar year 2000, IHS agrees that, on or before
March 1, 2001, it will review your equity ownership position in IHS and design
(or include you in) a plan that will, to the maximum extent allowed by Delaware
law, ameliorate, the dilutive effect of recent events on your ownership position
in IHS. Specifically, if you are still employed by IHS on March 1, 2001, IHS
will make a good faith effort to implement a stock ownership program (e.g., a
stock option program or a stock-loan purchase program) that will permit you to
acquire an equity position in IHS consistent with that of similarly experienced
and similarly situated senior management in the nursing home industry.
<PAGE>
5. TERMINATION FOR GOOD REASON
The definition of "Good Reason" set forth in Paragraph 3.2 of your
Employment Agreement shall be supplemented as follows:
"Good Reason" shall also include the occurrence of any of the following
without your express written consent:
(1) a material change in your reporting responsibilities (i.e.,
reporting to anyone other than Dr. Robert Elkins);
(2) the failure by IHS to include you in any compensation plan or
benefit plan provided by IHS to any of its Executive Vice Presidents;
(3) the occurrence of any event which would constitute a "Good
Reason" or a "Change of Control" under the employment agreement of IHS'
Chief Executive Officer or President; or
(4) the failure of the IHS to obtain (and deliver to you) promptly
after any Change in Control an agreement to assume and agree to perform
this Agreement; provided, further, that in addition to any rights
accruing because of the successor's failure to assume your employment
agreement, a successor's failure to assume this Agreement after a
Change of Control shall release you from all obligations related to
your employment by IHS including but not limited to all covenants
against competition contained in any agreement between you and IHS.
6. SEVERANCE
Paragraphs 3.4 (a) & (b) of your Employment Agreement are deleted.
Instead, if you resign for Good Reason or are terminated without cause:
(i) You are released from all obligations related to your employment. This
release includes but is not limited to your obligation to repay those
advances made to you conditioned on your acquiring or maintaining an
equity position in IHS pursuant to the 1999 Employee Loan Program or
any successor program established referred to in Paragraph 4 hereof.
(2) Within fifteen days of your termination, IHS will make a one-time lump
sum severance payment equal to your preceding twelve months
compensation.
Your severance is deemed "earned" on the day after you resign for Good Reason or
you receive a notice of termination. All payments hereunder will be subject to
any required withholding of Federal, state and local taxes pursuant to any
applicable law or regulation.
<PAGE>
7. DEFINITION OF "CAUSE"
The definition of "Cause" in Paragraph 3.2 shall be supplemented by
adding as "(v)":
Executive will, at any time after the date of this Agreement, disparage
IHS, any of its subsidiaries, or any of their shareholders, directors
or officers.
8. INDEMNIFICATION AS AN OFFICER
In addition to the indemnities set forth in Paragraph 6.7, IHS agrees
to secure the uninsured portion of all Director's and Officer's liability
insurance policy by a trust or letter of credit.
IHS appreciates your continued loyalty and dedication. Please memorialize your
acceptance of these changes to the Employment Agreement by signing and returning
one copy of this letter to me.
Sincerely,
Robert N. Elkins
President & CEO
I have reviewed and understand this letter and have had the opportunity to
review this letter with my attorneys. I accept the changes to the terms and
conditions of my employment contained in this letter.
- - -------------------------
Sally Weisberg
April 6, 2000
Mr. C. Taylor Pickett
Executive Vice President
& Chief Financial Officer
Integrated Health Services, Inc.
910 Ridgebrook Road
Sparks, MD 21152
Re: Amendment to Employment Agreement between Integrated Health Services,
Inc. and C. Taylor Pickett
Dear Taylor:
This letter agreement amends and supplements the employment agreement
dated July 1, 1997 (the "Employment Agreement") between you and Integrated
Health Services, Inc. ("IHS"). Unless otherwise defined in this letter, all
capitalized terms used have the meaning given to them in the Employment
Agreement. To the extent of any inconsistency between your employment agreement
and this letter, the terms of this letter agreement will control.
1. SALARY & INITIAL BONUS
A. Base Salary
Effective October 1, 1999 your annual base salary is $400,000.
B. Initial Bonus
In recognition of your past contributions to IHS, your release of all
claims you may have against IHS through the date of this agreement, and to
induce you to enter into this agreement, upon execution of this letter, IHS will
pay you an initial bonus (the "Initial Bonus") of $250,000. This is a one-time
bonus that IHS will not include in any other calculation under your Employment
Agreement.
<PAGE>
2. BONUS PROGRAMS
A. Retention Bonus
IHS intends to adopt a Retention Bonus Program. After the program is
adopted, you will participate in the Program until the earlier of: (i) the date
IHS cancels the Retention Bonus Program or (ii) you are no longer a full time
IHS employee. Pursuant to the Retention Bonus Program, IHS will pay you
quarterly retention bonuses in such amounts as shall be determined by the Chief
Executive Officer; provided, however, that, if the Retention Bonus Program is
adopted your Retention Bonus for the fiscal year beginning October 1, 1999 (on
an annualized basis) will be no less than $375,000, payable in equal quarterly
installments in arrears, beginning on January 1, 2000. The Retention Bonus is in
addition to the Performance Bonus referred to below.
B. Performance Bonus
IHS has cancelled to discretionary bonus referred to in Paragraph 2.2.
of the Employment Agreement. Instead of the discretionary bonus referred to in
Paragraph 2.2 of the Employment Agreement, IHS will pay you a non-discretionary
annual performance bonus (the "Annual Bonus") based on the achievement by IHS of
the performance goals (the "Performance Goals") established by the Chief
Executive Officer for each year (or portion thereof), which will include targets
related to the earnings before interest, taxes, depreciation and amortization
("EBITDA") of IHS. The Chief Executive Officer will establish objective criteria
to be used to determine the extent to which the Performance Goals have been
satisfied; provided, however, if IHS meets or exceeds the year 2000 Performance
Goals your Annual Bonus will be no less than $200,000.
3. PARTICIPATION IN MANAGEMENT WELFARE PLANS
IHS has cancelled the SERP referred to in Paragraph 2.3(g) of the
Employment Agreement. In consideration of your release and waiver of any claims
you may have against IHS relating to IHS' failure to continue the SERP, IHS
promises that during your employment, you will be entitled to participate in all
benefit plans and programs established or maintained by IHS for the benefit of
its Executive Vice Presidents including, without limitation, all pension,
retirement, savings, stock option and other employee benefit plans and programs.
4. OPTIONS AND EQUITY OWNERSHIP
IHS has cancelled the Employee Loan Plan. Instead, provided (a) you are
still a full time IHS employee and (b) your division has met or exceeded the
Performance Goals for the calendar year 2000, IHS agrees that, on or before
March 1, 2001, it will review your equity ownership position in IHS and design
(or include you in) a plan that will, to the maximum extent allowed by Delaware
law, ameliorate, the dilutive effect of recent events on your ownership position
in IHS. Specifically, if you are still employed by IHS on March 1, 2001, IHS
will make a good faith effort to implement a stock ownership program (e.g., a
stock option program or a stock-loan purchase program) that will permit you to
acquire an equity position in IHS consistent with that of similarly experienced
and similarly situated senior management in the nursing home industry.
<PAGE>
5. TERMINATION FOR GOOD REASON
The definition of "Good Reason" set forth in Paragraph 3.2 of your
Employment Agreement shall be supplemented as follows:
"Good Reason" shall also include the occurrence of any of the following
without your express written consent:
(1) a material change in your reporting responsibilities (i.e.,
reporting to anyone other than Dr. Robert Elkins);
(2) the failure by IHS to include you in any compensation plan or
benefit plan provided by IHS to any of its Executive Vice Presidents;
(3) the occurrence of any event which would constitute a "Good
Reason" or a "Change of Control" under the employment agreement of IHS'
Chief Executive Officer or President; or
(4) the failure of the IHS to obtain (and deliver to you) promptly
after any Change in Control an agreement to assume and agree to perform
this Agreement; provided, further, that in addition to any rights
accruing because of the successor's failure to assume your employment
agreement, a successor's failure to assume this Agreement after a
Change of Control shall release you from all obligations related to
your employment by IHS including but not limited to all covenants
against competition contained in any agreement between you and IHS.
6. SEVERANCE
Paragraphs 3.4 (a) and 3.7 of your Employment Agreement are deleted.
Instead, if you resign for Good Reason or are terminated without cause:
(i) You are released from all obligations related to your employment. This
release includes but is not limited to your obligation to repay those
advances made to you conditioned on your acquiring or maintaining an
equity position in IHS pursuant to the 1999 Employee Loan Program or
any successor program established referred to in Paragraph 4 hereof.
(2) Within fifteen days of your termination, IHS will make a one-time lump
sum severance payment equal to your preceding twelve months
compensation.
Your severance is deemed "earned" on the day after you resign for Good Reason or
you receive a notice of termination. All payments hereunder will be subject to
any required withholding of Federal, state and local taxes pursuant to any
applicable law or regulation.
<PAGE>
7. DEFINITION OF "CAUSE"
The definition of "Cause" in Paragraph 3.2 shall be supplemented by
adding as "(v)":
Executive will, at any time after the date of this Agreement, disparage
IHS, any of its subsidiaries, or any of their shareholders, directors
or officers.
8. INDEMNIFICATION AS AN OFFICER
In addition to the indemnities set forth in Paragraph 6.7, IHS agrees
to secure the uninsured portion of all Director's and Officer's liability
insurance policy by a trust or letter of credit.
IHS appreciates your continued loyalty and dedication. Please memorialize your
acceptance of these changes to the Employment Agreement by signing and returning
one copy of this letter to me.
Sincerely,
Robert N. Elkins
President & CEO
I have reviewed and understand this letter and have had the opportunity to
review this letter with my attorneys. I accept the changes to the terms and
conditions of my employment contained in this letter.
- - -------------------------
C. Taylor Pickett
April 6, 2000
Mr. John F. Heller
Executive Vice President
of Facility Operations
Integrated Health Services, Inc.
910 Ridgebrook Road
Sparks, MD 21152
Re: Amendment to Employment Agreement between Integrated Health Services,
Inc. and John F. Heller
Dear John:
This letter agreement amends and supplements the employment agreement
dated July 1, 1998 (the "Employment Agreement") between you and Integrated
Health Services, Inc. ("IHS"). Unless otherwise defined in this letter, all
capitalized terms used have the meaning given to them in the Employment
Agreement. To the extent of any inconsistency between your employment agreement
and this letter, the terms of this letter agreement will control.
1. SALARY & INITIAL BONUS
A. Base Salary
Effective October 1, 1999 your annual base salary is $400,000.
B. Initial Bonus
In recognition of your past contributions to IHS, your release of all
claims you may have against IHS through the date of this agreement, and to
induce you to enter into this agreement, upon execution of this letter, IHS will
pay you an initial bonus (the "Initial Bonus") of $250,000. This is a one-time
bonus that IHS will not include in any other calculation under your Employment
Agreement.
<PAGE>
2. BONUS PROGRAMS
A. Retention Bonus
IHS intends to adopt a Retention Bonus Program. After the program is
adopted, you will participate in the Program until the earlier of: (i) the date
IHS cancels the Retention Bonus Program or (ii) you are no longer a full time
IHS employee. Pursuant to the Retention Bonus Program, IHS will pay you
quarterly retention bonuses in such amounts as shall be determined by the Chief
Executive Officer; provided, however, that, if the Retention Bonus Program is
adopted your Retention Bonus for the fiscal year beginning October 1, 1999 (on
an annualized basis) will be no less than $375,000, payable in equal quarterly
installments in arrears, beginning on January 1, 2000. The Retention Bonus is in
addition to the Performance Bonus referred to below.
B. Performance Bonus
IHS has cancelled to discretionary bonus referred to in Paragraph 2.2.
of the Employment Agreement. Instead of the discretionary bonus referred to in
Paragraph 2.2 of the Employment Agreement, IHS will pay you a non-discretionary
annual performance bonus (the "Annual Bonus") based on the achievement by your
division of the performance goals (the "Performance Goals") established by the
Chief Executive Officer for each year (or portion thereof), which will include
targets related to the earnings before interest, taxes, depreciation and
amortization ("EBITDA") of IHS. The Chief Executive Officer will establish
objective criteria to be used to determine the extent to which the Performance
Goals have been satisfied; provided, however, if your division meets or exceeds
the year 2000 Performance Goals your Annual Bonus will be no less than $200,000.
3. PARTICIPATION IN MANAGEMENT WELFARE PLANS
IHS has cancelled the SERP referred to in Paragraph 2.3(f) of the
Employment Agreement. In consideration of your release and waiver of any claims
you may have against IHS relating to IHS' failure to continue the SERP, IHS
promises that during your employment, you will be entitled to participate in all
benefit plans and programs established or maintained by IHS for the benefit of
its Executive Vice Presidents including, without limitation, all pension,
retirement, savings, stock option and other employee benefit plans and programs.
No similarly situated Executive Vice President will receive a greater benefit
under any benefit plans and programs established or maintained by IHS for the
benefit of its Executive Vice Presidents.
4. OPTIONS AND EQUITY OWNERSHIP
IHS has cancelled the Employee Loan Plan. Instead, provided (a) you are
still a full time IHS employee and (b) your division has met or exceeded the
Performance Goals for the calendar year 2000, IHS agrees that, on or before
March 1, 2001, it will review your equity ownership position in IHS and design
(or include you in) a plan that will, to the maximum extent allowed by Delaware
law, ameliorate, the dilutive effect of recent events on your ownership position
in IHS. Specifically, if you are still employed by IHS on March 1, 2001, IHS
will make a good faith effort to implement a
<PAGE>
stock ownership program (e.g., a stock option program or a stock-loan purchase
program) that will permit you to acquire an equity position in IHS consistent
with that of similarly experienced and similarly situated senior management in
the nursing home industry. No similarly situated Executive Vice President will
receive a greater benefit under any stock ownership plan established or
maintained by IHS for the benefit of its Executive Vice Presidents.
5. TERMINATION FOR GOOD REASON
The definition of "Good Reason" set forth in Paragraph 3.2 of your
Employment Agreement shall be supplemented as follows:
"Good Reason" shall also include the occurrence of any of the following
without your express written consent:
(1) the assignment to you of any duties materially inconsistent
with your current position, duties, responsibilities or status with
IHS;
(2) a material change in your reporting responsibilities (i.e.,
reporting to anyone other than Dr. Robert Elkins);
(3) the failure by IHS to include you in any compensation plan or
benefit plan provided by IHS to any of its Executive Vice Presidents;
(4) the occurrence of any event which would constitute a "Good
Reason" or a "Change of Control" under the employment agreement of
IHS's Chief Executive Officer or President; or
(5) the failure of the IHS to obtain (and deliver to you) promptly
after any Change in Control an agreement to assume and agree to perform
this Agreement; provided, further, that in addition to any rights
accruing because of the successor's failure to assume your employment
agreement, a successor's failure to assume this Agreement after a
Change of Control shall release you from all obligations related to
your employment by IHS including but not limited to all covenants
against competition contained in any agreement between you and IHS.
6. SEVERANCE
Paragraphs 3.4 (a), (b) and (c) of your Employment Agreement are
deleted. Instead, if you resign for Good Reason or are terminated without cause:
(i) You are released from all obligations related to your employment. This
release includes but is not limited to your obligation to repay those
advances made to you conditioned on your acquiring or maintaining an
equity position in IHS pursuant to the 1999 Employee Loan Program or
any successor program established referred to in Paragraph 4 hereof.
<PAGE>
(2) Within fifteen days of your termination, IHS will make a one-time lump
sum severance payment equal to your preceding twelve (12) months'
compensation.
Your severance is deemed "earned" on the day after you resign for Good Reason or
you receive a notice of termination. All payments hereunder will be subject to
any required withholding of Federal, state and local taxes pursuant to any
applicable law or regulation.
7. DEFINITION OF "CAUSE"
The definition of "Cause" in Paragraph 3.2 shall be supplemented by
adding as "(v)":
Executive will, at any time after the date of this Agreement, disparage
IHS, any of its subsidiaries, or any of their shareholders, directors
or officers.
IHS appreciates your continued loyalty and dedication. Please memorialize your
acceptance of these changes to the Employment Agreement by signing and returning
one copy of this letter to me.
Sincerely,
Robert N. Elkins
President & CEO
I have reviewed and understand this letter and have had the opportunity to
review this letter with my attorneys. I accept the changes to the terms and
conditions of my employment contained in this letter.
- - -------------------------
John F. Heller
