UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended September 30, 2000
------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission File Number: 1-12306
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INTEGRATED HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
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<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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ X ] Yes [ ] No
Number of shares of common stock of the registrant outstanding as of November
9, 2000: 48,113,039 shares.
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INTEGRATED HEALTH SERVICES, INC.
INDEX
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<CAPTION>
Page
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PART I. FINANCIAL INFORMATION
Item 1. - Condensed Financial Statements -
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations
for the three and nine months ended September 30, 2000
and 1999 4
Consolidated Statement of Changes in
Stockholders' Equity for the nine
months ended September 30, 2000 5
Consolidated Statements of Cash Flows
for the nine months ended September 30, 2000
and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13
PART II: OTHER INFORMATION
Item 6 Exhibits and Report on Form 8-K 18
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Page 2 of 19
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INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
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<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 26,246 $ 21,627
Temporary investments 78,550 39,321
Patient accounts and third-party payor settlements
receivable, less allowance for doubtful receivables of $189,884
at September 30, 2000 and $164,449 at December 31, 1999 497,525 582,547
Inventories, prepaid expenses and other current assets 88,333 66,884
Income tax receivable 9,983 20,018
------------ -----------
Total current assets 700,637 730,397
------------ -----------
Property, plant and equipment, net 1,135,717 1,164,677
Intangible assets 1,302,403 1,353,920
Other assets 109,519 130,086
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Total assets $ 3,248,276 $ 3,379,080
============ ===========
Liabilities and Stockholders' Equity
Current Liabilities not subject to compromise--
Current maturities of long-term debt $ 10,357 $ 3,369,244
Accounts payable and accrued expenses 98,002 416,582
------------ -----------
Total current liabilities 108,359 3,785,826
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Long-term debt not subject to compromise--
Mortgages and other long term debt, less current maturities 274,775 318,271
Other long-term liabilities 11,150 166,164
Liabilities subject to compromise (note 2) 3,791,239 --
Deferred gain on sale-leaseback transactions 3,333 3,871
Deferred income tax payable 42,029 42,023
Stockholders' equity (deficit):
Preferred stock, authorized 15,000,000 shares; no shares issued
and outstanding -- --
Common stock, $0.001 par value. Authorized 150,000,000 shares;
issued 53,693,568 at September 30, 2000 and 53,175,598 shares at
December 31, 1999 (including 4,868,300 treasury shares at
September 30, 2000 and December 31, 1999) 53 53
Additional paid-in capital 1,392,260 1,374,546
Deficit (2,325,658) (2,262,410)
Treasury stock, at cost (4,868,300 shares at September 30, 2000 and
December 31, 1999) (49,264) (49,264)
------------ -----------
Net stockholders' equity (deficit) (982,609) (937,075)
------------ -----------
Total liabilities and stockholders' equity (deficit) $ 3,248,276 $ 3,379,080
============ ===========
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See accompanying Notes to Consolidated Financial Statements
Page 3 of 19
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INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in Thousands, Except Per Share Data)
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<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------- --------- ------- ----------
<S> <C> <C> <C> <C>
Total revenues $ 579,150 $ 659,900 $ 1,837,580 $ 1,904,386
---------- ----------- ----------- -----------
Costs and expenses:
Operating, general and administrative (including rent) 526,678 571,500 1,668,432 1,585,058
Depreciation and amortization 47,696 46,718 141,410 139,709
Interest, net (excluding post petition contractual interest of
$70,299 and $185,406 for the three and nine months ended
September 30, 2000) 9,476 78,968 53,459 223,705
Loss on impairment of long-lived assets and other non-recurring charges -- 1,778,332 6,500 1,778,332
---------- ----------- ----------- -----------
Total costs and expenses 583,850 2,475,518 1,896,801 3,726,804
---------- ----------- ----------- -----------
Loss before equity in earnings of affiliates, reorganization items
and income taxes (4,700) (1,815,618) (32,221) (1,822,418)
Equity in earnings (loss)of affiliates (1,106) -- (841) 1,345
---------- ----------- ----------- -----------
Loss before reorganization items and income taxes (5,806) (1,815,618) (33,062) (1,821,073)
Reorganization items (note 10) 9,777 -- 22,686 --
---------- ----------- ----------- -----------
Loss before income taxes (15,583) (1,815,618) (55,748) (1,821,073)
Federal and state income taxes 2,500 4,000 7,500 9,764
---------- ----------- ----------- -----------
Net loss $ (18,083) $(1,819,618) $ (63,248) $(1,830,837)
========== =========== =========== ===========
Per Common Share - Basic:
Net loss $ (0.37) $ (37.64) $ (1.30) $ (36.40)
========== =========== =========== ===========
Per Common Share - Diluted:
Net loss $ (0.37) $ (37.64) $ (1.30) $ (36.40)
========== =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements
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Page 4 of 19
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INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
(DOLLARS IN THOUSANDS)
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<CAPTION>
ADDITIONAL
COMMON PAID-IN TREASURY
STOCK CAPITAL DEFICIT STOCK TOTAL
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<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1999 $ 53 1,374,546 (2,262,410) (49,264) (937,075)
Amortization of deferred employee stock compensation. -- 828 -- -- 828
Insuance of 517,970 shares of common stock
in connection with the conversion of
5 3/4% convertible subordinated debentures -- 16,886 -- -- 16,886
Net Loss -- -- (63,248) -- (63,248)
-------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2000 $ 53 1,392,260 (2,325,658) (49,264) (982,609)
=========================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
Page 5 of 19
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INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
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<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2000 1999
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Cash flows from operating activities:
Net loss $(63,248) $(1,830,837)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Non-recurring charges 6,500 1,778,332
Results from joint ventures 841 (1,198)
Depreciation and amortization 141,410 139,709
Deferred income taxes and other non-cash items 2,766 (1,213)
Amortization of gain on sale-leaseback transactions (538) (572)
Decrease in patient accounts and third-party
payor settlements receivable, net 68,728 20,551
Increase in supplies, inventory, prepaid
expenses and other current assets (33,774) (12,437)
Increase (decrease) in accounts payable and accrued expenses 23,012 (130,229)
Decrease in income taxes receivable 10,035 16,382
-------- ---------
Net cash provided (used) by operating activities of
continuing operations before reorganization items 155,732 (21,512)
-------- ---------
Net cash used by discontinued operations -- (17,669)
-------- ---------
Net cash used by reorganization items (20,742) --
-------- ---------
Cash flows from financing activities:
Proceeds from issuance of capital stock, net -- 759
Proceeds from long-term borrowings -- 457,198
Repayment of long-term debt (5,905) (293,659)
Deferred financing costs (5,370) (9,027)
Purchase of treasury stock -- (24,041)
-------- ---------
Net cash provided (used) by financing activities (11,275) 131,230
-------- ---------
Cash flows from investing activities:
Sale of temporary investments 541,991 292,236
Purchase of temporary investments (581,220) (330,644)
Business acquisitions -- (40,055)
Purchase of property, plant and equipment (87,333) (129,652)
Disposition of assets (Notes 4 and 8) 1,521 141,537
Other assets 5,945 (36,792)
-------- ---------
Net cash used by investing activities (119,096) (103,370)
-------- ---------
Increase (decrease) in cash and cash equivalents 4,619 (11,321)
Cash and cash equivalents, beginning of period 21,627 31,391
-------- ---------
Cash and cash equivalents, end of period $ 26,246 $ 20,070
======== =========
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See accompanying Notes to Consolidated Financial Statements
Page 6 of 19
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NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements included herein do not
contain all information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles. For further
information, such as the significant accounting policies
followed by Integrated Health Services, Inc. ("IHS" or the
"Company"), refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999. In the opinion
of management, the consolidated financial statements include
all necessary adjustments (consisting of normal recurring
accruals and all adjustments pursuant to the adoption in
February 2000 of SOP 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7")) for a
fair presentation of the financial position and results of
operations for the interim periods presented. The results of
operations for the interim periods presented are not
necessarily indicative of the results that may be expected for
the full year.
NOTE 2: PETITION FOR RELIEF UNDER CHAPTER 11
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 filings,
among other factors such as the Company's recurring losses,
raise substantial doubt about the Company's ability to continue
as a going concern.
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 filings. In connection with the Chapter 11
filings, the Company intends to 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 the event the plan of reorganization is
confirmed, continuation of the business thereafter is dependent
on the Company's ability to achieve successful future
operations.
In connection with the Chapter 11 filings, the Company obtained
a commitment for $300 million in debtor-in-possession financing
(the "DIP Facility") from a group of banks led by Citicorp
U.S.A., N.A. As of September 30, 2000, no amounts are
outstanding under the DIP Facility. However, at that date $1.24
million was outstanding under a letter of credit subfacility
("LC Subfacility").
Substantially all of the Company's pre-petition short and long
term debt at September 30, 2000 is in default of the terms of
the applicable loan agreements and is subject to compromise
under the reorganization process. For financial reporting
purposes, the accompanying consolidated financial statements as
of and for the three and nine months ended September 30, 2000
have been prepared in accordance with SOP 90-7. Pursuant to SOP
90-7, the Company has reported liabilities subject to
compromise at September 30, 2000.
The Company has 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, utilities
and patient obligations. All other unsecured pre-pretition
liabilities (other than those paid pursuant to such authority)
are classified in the consolidated balance sheet as liabilities
subject to compromise.
<PAGE>
A summary of the principal categories of claims classified as
liabilities subject to compromise under the Chapter 11 filings
follows (in thousands):
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Long-term debt:
Revolving credit and term loan $ 2,093,789
Senior subordinated notes 1,090,737
Convertible denbentures 127,752
Amounts due under HCFA Agreement 138,054
Promissory notes and other 27,573
-----------
3,477,905
-----------
Accounts payable 152,356
Accrued liabilities:
Interest 121,478
Other 39,500
-----------
160,978
-----------
$ 3,791,239
-----------
</TABLE>
Additional claims may be or have been asserted with respect to
various obligations. The last day on which these claims may be
filed against the Company, with certain exceptions, was August
29, 2000. These claims will be analyzed as part of the claims
reconciliation process and, if allowed, ultimately treated in
accordance with any plan of reorganization.
NOTE 3: LOSS PER SHARE
Basic loss per share is calculated by dividing net loss by the
weighted average number of common shares outstanding for the
applicable period.
For the three and nine months ended September 30, 1999 and
2000, no exercise of options and warrants nor conversion of
subordinated debt is assumed since their effect is
antidilutive. The weighted average number of common shares is
50,295,753 and 48,785,443 for the nine months ended September
30, 1999 and 2000, respectively. The weighted average number of
common shares is 48,345,387 and 48,875,308 for the three months
ended September 30, 1999 and 2000, respectively.
Page 7 of 19
<PAGE>
NOTE 4: TRANSACTIONS WITH LYRIC HEALTH CARE LLC
In each of January and April 1998 (but effective March 31,
1998 in the case of the April 1998 sale), the Company sold five
long-term care facilities to Omega Healthcare Investors, Inc.
for $44.5 million and $50.5 million, respectively, which
facilities were leased back by Lyric Health Care LLC ("Lyric"),
a newly formed subsidiary of IHS, at an annual rent of
approximately $4.5 million and $4.9 million, respectively. IHS
also entered into management and franchise agreements with
Lyric. The management and franchise agreements' initial terms
are 13 years with two renewal options of 13 years each. The
base management fee was 4% of gross revenues in 1999 and 2000
pursuant to the management agreement. In addition, the
agreement provides for an incentive management fee equal to 70%
of annual net cash flow (as defined in the management
agreement). The duties of IHS as manager include the following:
accounting, legal, human resources, operations, materials and
facilities management and regulatory compliance. The annual
franchise fee is 1% of gross revenues, which grants Lyric the
authority to use the Company's trade names and proprietary
materials. In a related transaction, TFN Healthcare Investors,
Inc. ("TFN") purchased a 50% interest in Lyric for $1.0
million, an amount equal to the Company's initial investment in
Lyric and IHS' interest in Lyric was reduced to 50%. Lyric will
dissolve on December 31, 2047 unless extended for an additional
12 months. The transactions with Lyric were approved by the
disinterested members of the Board of Directors.
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,
changes in material terms of any lease and adoption/amendment
of employee health, benefit and compensation plans. As a result
of the aforementioned transactions, IHS accounts for its
investment in Lyric using the equity method of accounting since
IHS no longer controls Lyric.
Effective January 1, 1999, 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 L.P. ("Monarch L.P.") for $138
million plus contingent earn-out payments of up to a maximum of
$67.6 million. Net proceeds from the transaction were
approximately $131.24 million. The contingent earn-out payments
will be paid to the Company by Monarch L.P. upon a sale,
transfer or refinancing of any or all of the facilities or upon
a sale, consolidation or merger of Monarch L.P., 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 L.P. After the
transfer of the facilities to Monarch L.P., the Company
retained the working capital of the Lyric Subsidiaries and
transferred the stock of each of them to Lyric. Monarch L.P.
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 L.P. and is the
Chairman of the Board of Managers of Monarch Properties, LLC,
the parent company of Monarch L.P. The Company has accounted
for this transaction as a financing.
In September 1999, the Company transferred 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 transaction as a financing.
As of September 30, 2000, Lyric's ability to borrow under its
revolving line of credit has been significantly restricted and
its vendors have imposed accelerated payment terms. As a
result, IHS has not received payment for management fees or
other costs paid by IHS on Lyric's behalf (i.e., health and
workers' compensation insurance) of approximately $22.9 million
for the nine months ended September 30, 2000. The Company
discontinued revenue recognition on management fees from Lyric
effective July 01, 2000, accordingly fees of $3.3 million were
not recognized in the third quarter. IHS is working with Lyric
management and the lender to increase Lyric's availability
under the line of credit. The Company will continue to evaluate
its investment in Lyric and Lyric's ability to fund cash flows
from operations on an ongoing basis.
NOTE 5: CREDIT FACILITY AMENDMENT
The Company's Credit Facility, as amended, provides for the
following:
o The Term Facility bears interest at a rate equal to, at
the option of IHS, either (i) in the case of Eurodollar
loans, the sum of (x) between two and three quarters
percent and three and one quarter percent (depending on
the ratio of the Company's debt) (as defined in the
Credit Facility) to earnings before interest, taxes,
depreciation, amortization and rent pro forma for any
acquisitions or divestitures during the measurement
period (the "Debt/EBITDAR Ratio")) and (y) the interest
rate in the London interbank market for loans in an
amount substantially equal to the amount of borrowing
and for the period of borrowing selected by IHS or (ii)
the sum of (a) the higher of (1) Citibank, N.A.'s base
rate or (2) one percent plus the latest overnight
federal funds rate plus (b) a margin of between one and
one half percent and two percent (depending on the
Debt/EBITDAR Ratio).
o The Additional Term Facility bears interest at a rate
equal to, at the option of IHS, either (i) in the case
of Eurodollar loans, the sum of (x) between three
percent and three and one half percent (depending on
the Debt/EBITDAR Ratio) and (y) the interest rate in
the London interbank market for loans in an amount
substantially equal to the amount of borrowing and for
the period of borrowing selected by IHS or (ii) the sum
of (a) the higher of (1) Citibank, N.A.'s base rate or
(2) one percent plus the latest overnight federal funds
rate plus (b) a margin of
Page 8 of 19
<PAGE>
between one and three quarters percent and two and one
quarter percent (depending on the Debt/EBITDAR Ratio).
The Term Facility and the Additional Term Facility can
be prepaid at any time in whole or in part without
penalty.
o The Revolving Facility was scheduled to reduce to
$800,000,000 on January 1, 2001, $600,000,000 on
January 1, 2002, $500,000,000 on September 30, 2002 and
$400,000,000 on January 1, 2003, with a final maturity
on September 15, 2003; however, the $100,000,000 letter
of credit subfacility and $10,000,000 swing line
subfacility were scheduled to remain at $100,000,000
and $10,000,000, respectively, until final maturity.
The Revolving Credit Facility bears interest at a rate
equal to, at the option of IHS, either (i) in the case
of Eurodollar loans, the sum of (x) between two percent
and two and three quarters percent (depending on the
Debt/EBITDAR Ratio) and (y) the interest rate in the
London interbank market for loans in an amount
substantially equal to the amount of borrowing and for
the period of borrowing selected by IHS or (ii) the sum
of (a) the higher of (1) Citibank, N.A.'s base rate or
(2) one percent plus the latest overnight federal funds
rate plus (b) a margin of between three quarters of one
percent and one and one-half percent (depending on the
Debt/EBITDAR Ratio).
o The Credit Facility prohibits IHS from purchasing or
redeeming IHS stock.
As a result of the Company's bankruptcy filing (see note 2
above) the Company is no longer able to make any borrowings
under the credit facility and interest has been suspended.
NOTE 6: DEBTOR-IN-POSSESSION FINANCING
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. SS 101, et seq. (the
"Bankruptcy Code"). The Company's need to seek relief afforded
by the Bankruptcy Code was 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 million 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 $300 million
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 $100 million. The DIP
Facility 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 Rate
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
Page 9 of 19
<PAGE>
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. At
September 30, 2000 $1.24 million was outstanding under the LC
Subfacility.
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.
NOTE 7: SEGMENT REPORTING
IHS has four primary reportable segments: inpatient services,
home respiratory/infusion/DME, diagnostic services and
lithotripsy services. Inpatient services include: (a) inpatient
facilities which provide basic medical services primarily on an
inpatient basis at skilled nursing facilities, as well as
hospice services, (b) contract services that provide specialty
medical services (e.g., rehabilitation and respiratory
services), primarily on an inpatient basis at skilled nursing
facilities, (c) contracted services that provide specialty
medical services under contract to other healthcare providers,
and (d) management of skilled nursing
Page 10 of 19
<PAGE>
facilities owned by third parties. Home
respiratory/infusion/DME provides respiratory and infusion
therapy, as well as the sale and/or rental of home medical
equipment. The Company sold its infusion business in October
1999. Diagnostic services provide mobile x-ray and
electrocardiogram services on an inpatient basis at skilled
nursing facilities. Lithotripsy services is a non-invasive
technique that uses shock waves to disintegrate kidney stones,
primarily on an outpatient basis. Certain services with similar
economic characteristics have been aggregated pursuant to SFAS
No. 131. No other individual business segment exceeds the 10%
quantitative thresholds of SFAS No. 131.
IHS management evaluates the performance of its operating
segments on the basis of earnings before interest, income
taxes, depreciation and amortization and non-recurring charges.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2000
HOME
INPATIENT RESPIRATORY/ DIAGNOSTIC LITHOTRIPSY
SERVICES DME SERVICES SERVICES CONSOLIDATED
-------- ------------ -------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues $ 400,108 $ 147,332 $16,415 $15,295 $ 579,150
Operating, general and administrative
expenses (including rent) 386,843 113,591 15,712 10,532 526,678
--------- --------- ------ ------ ---------
Earnings from continuing operations
before non-recurring charges, reorganization items,
equity in earnings of affiliates, interest, taxes,
depreciation and amortization $ 13,265 $ 33,741 $ 703 $ 4,763 $ 52,472
========= ========= ====== ====== =========
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000
HOME
INPATIENT RESPIRATORY/ DIAGNOSTIC LITHOTRIPSY
SERVICES DME SERVICES SERVICES CONSOLIDATED
-------- ------------ -------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues $1,293,516 $ 443,084 $57,121 $43,859 $1,837,580
Operating, general and administrative
expenses (including rent) 1,238,123 345,819 54,606 29,884 1,668,432
--------- ------- ------ ------ ---------
Earnings from continuing operations
before non-recurring charges, equity in
earnings of affiliates, interest, taxes,
depreciation and amortization $ 55,393 $ 97,265 $ 2,515 $13,975 $ 169,148
========= ======= ====== ====== =========
Total Assets at end of period $1,848,813 $1,260,816 $48,513 $90,134 $3,248,276
========= ========= ====== ====== =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999
HOME
INPATIENT RESPIRATORY/ DIAGNOSTIC LITHOTRIPSY
SERVICES INFUSION/DME SERVICES SERVICES CONSOLIDATED
-------- ------------ -------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues $ 461,067 $ 162,414 $ 20,928 $ 15,491 $ 659,900
Operating, general and administrative
expenses (including rent) 416,713 126,125 20,050 8,612 571,500
---------- ---------- ---------- ---------- ----------
Earnings from continuing operations
before non-recurring charges, reorganization items,
equity in earnings of affiliates, interest, taxes,
depreciation and amortization $ 44,354 $ 36,289 $ 878 $ 6,879 $ 88,400
---------- ---------- ---------- ---------- ----------
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
HOME
INPATIENT RESPIRATORY/ DIAGNOSTIC LITHOTRIPSY
SERVICES INFUSION/DME SERVICES SERVICES CONSOLIDATED
-------- ------------ -------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues $1,298,222 $ 492,585 $ 68,643 $ 44,936 $1,904,386
Operating, general and administrative
expenses (including rent) 1,135,224 367,390 57,215 25,229 1,585,058
---------- ---------- ---------- ---------- ----------
Earnings from continuing operations
before non-recurring charges, equity in
earnings of affiliates, interest, taxes,
depreciation and amortization $ 162,998 $ 125,195 $ 11,428 $ 19,707 $ 319,328
========== ========== ========== ========== ==========
Total Assets at end of period $1,992,599 $1,301,558 $ 95,549 $ 205,908 $3,595,614
========== ========== ========== ========== ==========
There are no material inter-segment revenues or receivables.
Sources of Revenues are summarized as follows:
<CAPTION>
Private pay Government programs
----------- -------------------
<S> <C> <C>
Three months ended 9/30/99 40.3% 59.7%
Three months ended 9/30/00 38.7% 61.3%
Nine months ended 9/30/99 40.3% 59.7%
Nine months ended 9/30/00 39.5% 60.5%
</TABLE>
The Company does not evaluate its operations on a geographic
basis.
Page 11 of 19
<PAGE>
NOTE 8: DISPOSITION OF ASSETS
During the nine months ended September 30, 2000, the Company
terminated the lease agreements of 4 long-term care facilities
while retaining the working capital. There was no gain or loss
recorded on these transactions. However, as a result of the
transactions the Company will lose control of the collection
process for the retained accounts receivable. The Company has
evaluated the collectibility of the retained accounts
receivable and has recorded a loss on the disposal of assets of
$4.9 million.
During 2000 IHS ceased making rent and and interest payments to
Senior Housing Properties Trust (SNH) with respect to 23
facilities. Under a settlement agreement, which was approved by
the Bankruptcy Court on July 7, 2000 and effective as of July
1, 2000, IHS cancelled leases for 23 facilities and management
agreements for 3 facilities, conveyed its right, title and
interest in 20 owned facilities (of which 11 were encumbered by
mortgages aggregating $17.9 million) and conveyed a leasehold
interest in one facility. In addition, a mortgage in the amount
of $19.1 million encumbering one facility retained by IHS was
cancelled.
The net proceeds on the transaction were $33.5 million,
representing the mortgages cancelled of $37.0 million and
unpaid rent and mortgage interest due to SNH of $7.9 million,
reduced by unpaid management fees due to IHS of $11.4 million.
Costs of the transaction included $25.5 million representing
the net carrying amount of property, plant and equipment
conveyed and $8.0 million representing a provision for
additional losses estimated to be incurred on the collection of
facility patient receivables retained by IHS. In addition, the
Company wrote-off the net carrying amount of the unfavorable
lease liability of $21.2 million associated with this
transaction.
In addition, the Company recorded a provision for loss on the
disposition of the Preferred Care Contract of $15.8 million in
the third quarter (see note 11).
In addition, the Company sold the corporate airplane hangar for
$1,100,000 and other property and equipment for $421,000. No
gain or loss resulted from these transactions.
NOTE 9: NON-RECURRING CHARGE
During the second quarter of 2000, the Company recorded a
non-recurring charge of $6.5 million, representing a provision
against a promissory note due from APS Enterprise Holding
Company, which purchased the Company's infusion division in
October 1999, due to the impact that Medicare reimbursement has
had on the cash flows from operations of APS.
NOTE 10: REORGANIZATION ITEMS
A summary of the principal categories of reorganization items
follows:
<TABLE>
<CAPTION>
<S> <C>
Reorganization Items:
Legal, accounting and consulting fees $ 13,217
Retention Bonuses 2,255
Severance costs and other 9,321
Interest Income (2,107)
-----------
$ 22,686
===========
</TABLE>
On July 26, 2000 the Bankruptcy Court approved the separation agreement with
Stephen P. Griggs, President of RoTech Medical Corporation, a wholly owned
subsidiary of IHS. IHS has agreed to pay to Mr. Griggs $3 million in the
following manner: $1 million which was paid in September 2000, and $2 million
will be paid in equal monthly installments over a period of three years. The
agreement imposes upon Mr. Griggs various post termination obligations,
including non-compete, non-solicitation and confidentiality requirements. Mr.
Griggs also waived all claims against IHS and relinquished his restricted stock
rights in IHS under his pre-petition agreements with the Company. In addition,
the Company paid $2.0 million in severance costs to other employees.
In July, the Bankruptcy Court approved payment of $10.94 million for retention
bonuses for certain employees. The bonuses will be paid in three equal
installments. The first payment was made by the Company on August 2, 2000. The
remaining two payments will be made on February 2, 2001 and the date of
emergence from Bankruptcy. None of such unpaid bonuses were accrued at September
30, 2000.
On July 27, 2000, Joseph A. Bondi of the turnaround consulting firm of Alvarez &
Marsal, Inc., was named as the Chief Restructuring Officer of the Company. In
connection with this appointment, Robert N. Elkins, a founder of IHS, has agreed
to step down as Chairman, CEO and President upon the closing of the transaction
contemplated by an agreement between Dr. Elkins and IHS. The agreement is
subject to approval by the bankruptcy court. At such time, Mr. Bondi will be
named as CEO.
If Dr. Elkins' agreement is approved by the Bankruptcy Court:
-- Dr. Elkins will resign as an officer and director of the
Company, his employment agreement will be terminated and he
will surrender his equity interests in the Company. Dr. Elkins
currently beneficially owns approximately 8.1% of the
outstanding Common Stock.
-- Dr. Elkins will become a consultant to the Company for one
year
-- The Company will pay Dr. Elkins $1.49 million at closing
-- Dr. Elkins will not, for a period of three years, compete
with the Company (although he is permitted to continue in his
activities with Monarch LP) and will not solicit the Company's
employees and will hold trade secrets in confidence.
-- All outstanding principal and accrued interest on loans made
by the Company to Dr. Elkins to allow him, among other things,
to purchase stock, exercise options and pay taxes associated
with option exercises, which unamortized balance aggregated
approximately $25.8 million at September 30, 2000, will be
forgiven, and the Company will pay to the appropriate tax
authorities for the account of Dr. Elkins an amount equal to
it's federal tax liability for withholding taxes that arises as
a result of the forgiveness of the loans.
-- The Company and its subsidiaries will release Dr. Elkins his
family and certain other entities from all claims they may have
against such parties, other than claims giving rise to a loss
from wrongful acts defined in the Company's director and
officers' insurance policies (but only to the extent of the
coverage of such policy), conduct constituting criminal fraud
and Elkins' obligations under the agreement.
-- Dr. Elkins and the other released parties will release the
Company and its subsidiaries from all claims they may have
against them.
The Company will obtain an option to acquire Elkins' interest
in Monarch for $1.
In addition, certain loans made by the Company to its senior executives will
automatically be forgiven. As a result, the Company will incur a charge of
approximately $58 million (of which approximately $10 million relates to loans
to senior executives) in the quarter in which the agreement is approved by the
Bankruptcy Court.
NOTE 11: Subsequent Events
On October 31, 2000 the Company canceled 715,296 shares of
stock which had been issued to former employees. These shares
are designated as treasury shares.
On November 6, 2000, the Bankruptcy Court approved the
agreement with Huff Entities to terminate the management
agreement between the two parties, pursuant to which the
Company manages 6 facilities. Under the agreement, the Company
will receive $3.6 million to satisfy outstanding management
fees and other receivables due to the Company. The Company has
historically derived approximately $265,000 in management fee
revenue from this contract. No gain or loss is expected to be
recorded on this transaction.
Effective December 1, 2000, the Company terminated 9 (of the
original 13) facility management contracts with Preferred Care
Inc. The Company has historically derived approximately
$340,000 in management fee revenue from these facilities. Under
the agreement, the Company will not be reimbursed for past due
management fees. Therefore, the Company has recorded a $4.3
million provision against management fee receivables. In
addition the Company recorded a $11.5 million provision against
the Preferred Care purchase option deposit.
Page 12 of 19
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Statements in this Quarterly Report on Form 10-Q concerning the
Company's business outlook and future economic performance; reorganization under
the bankruptcy laws; anticipated profitability, revenues, expenses or other
financial items; and business segment growth, together with other statements
that are not historical facts, are "forward-looking statements" as that term is
defined under Federal Securities Laws. Forward-looking statements are subject to
risks, uncertainties and other factors which could cause actual results to
differ materially from those stated in such statements. Such risks,
uncertainties and factors include, but are not limited to, the Company's
bankruptcy filing, substantial indebtedness, growth strategy, capital
requirements and recent acquisitions as well as the Company's ability to operate
profitably under the newly implemented Medicare Prospective Payment System
("PPS"), competition, government regulation, general economic conditions and the
other risks detailed in the Company's filings with the Securities and Exchange
Commission, including the Annual Report on Form 10-K for the year ended December
31, 1999.
The Company's 1999 and 2000 results of operations have been
substantially affected by the implementation of the prospective payment system
("PPS") 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 volume 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 contract therapy services.
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 was due, in part, to the significant
financial pressure created by the implementation of PPS. The changes in Medicare
reimbursement resulting from the implementation of a prospective payment system
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 PPS. PPS 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.
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 Company's debtor-in-possession financing agreement and the ability
to generate sufficient cash from operations and financing arrangements to meet
obligations.
IHS has four primary reportable segments: inpatient services,
home respiratory/infusion/DME, diagnostic services and lithotripsy services. The
inpatient services segment includes: (a) inpatient facilities which provide
basic medical services primarily on an inpatient basis at skilled nursing
facilities, as well as hospice services, (b) contract services that provide
specialty medical services (e.g., rehabilitation and respiratory services),
primarily on an inpatient basis at skilled nursing facilities, (c) contracted
services that provide specialty medical services under contract to other
healthcare providers, and (d) management of skilled nursing facilities owned by
third parties. The home respiratory/infusion/DME segment provides respiratory
and infusion therapy, as well as the sale and/or rental of home medical
equipment. The Company sold its infusion business in October 1999. The
diagnostic services segment provides mobile x-ray and electrocardiogram services
on an inpatient basis at skilled nursing facilities. The lithotripsy services
segment provides lithotripsy, 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.
On July 27, 2000, Joseph A. Bondi of the turnaround consulting
firm of Alvarez & Marsal, Inc., was named as the Chief Restructuring Officer of
the Company. In connection with this appointment, Robert N. Elkins, a founder
of IHS, has agreed to step down as Chairman, CEO and President upon approval by
the U.S. Bankruptcy Court for the District of Delaware of an agreement between
Dr. Elkins and IHS. At such time, Mr. Bondi will be named as CEO.
If Dr. Elkins' agreement is approved by the Bankruptcy Court,
Dr. Elkins will resign as an officer and director of the Company and surrender
to the Company his equity interests in the Company, Dr. Elkins will become a
consultant to the Company, and the Company will forgive the repayment of loans
made to Dr. Elkins, make certain payments to Dr. Elkins and release Dr. Elkins
from certain potential claims. In addition, certain loans made by the Company to
its senior executives will automatically be forgiven. As a result, the Company
will incur a charge of approximately $58 million (of which approximately
$10 million relates to loans to senior executives) in the quarter in which
the agreement is approved by the Bankruptcy Court. (See Note 10)
THREE MONTHS ENDED SEPTEMBER 30, 2000
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999
Total revenues for the three months ended September 30, 2000
decreased $80.75 million, or 12.24%, to $579.15 million from the comparable
period in 1999. Such decrease was attributable to (i) a decrease of $34.47
million in inpatient service revenues from inpatient services in operations in
both periods due to a decline in occupancy rates and a decrease in average daily
inpatient service rates, a decrease in management fees (see note 4), and the
loss of contract therapy service contracts, partially offset by a full quarter
of revenues from a third quarter 1999 acquisition, (ii) a decrease of $26.48
million in inpatient revenues resulting from the settlement agreement with
Senior Housing Properties Trust (SNH), whereby the Company conveyed the
operations of 47 facilities previously operated by IHS, (iii) a decrease of
$14.46 million in home respiratory/infusion/DME revenues attributable to the
infusion business sold in October 1999 and a decrease of $636,000 in home
respiratory and DME revenues from services in operations in both periods, (iv) a
decrease of $4.51 million from diagnostic services in operations in both periods
and (v) a decrease of $196,000 from lithotripsy services in operation in both
periods. Customers of the Company's contract rehabilitation division are
admitting fewer Medicare patients and reduced utilization of rehabilitation
services to a far greater degree than the Company had expected.
Operating, general and administrative expense (including rent)
decreased $44.82 million, or 7.84%, in the three months ended September 30, 2000
compared to the three months ended September 30, 1999. Such decrease was
attributable to (i) a decrease in expenses of $3.84 million from inpatient
services in operations in both periods primarily due to a reduction in staffing
and a decrease in ancilary services partially offset by a full quarter of
expenses from a third quarter 1999 acquisition, (ii) a decrease of $26.03
million in inpatient services expenses resulting from the settlement agreement
with SNH as discussed above, (iii) a decrease in expenses of $16.05 million from
the sale of the infusion business subsequent to September 30, 1999 and (iv) a
decrease in expenses from diagnostic services in operation in both periods of
$4.34 million, partially offset by (i) an increase in expenses of $3.52 million
from home respiratory and DME services in operation in both periods and (ii) a
$1.92 million increase from lithotripsy services in operations in both periods.
Page 13 of 19
<PAGE>
Net interest expense decreased $69.49 million, or 88.00%,
during the three months ended September 30, 2000. The decrease is due to the
Company reporting interest under SOP 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code," which allows interest expense to be
reported only to the extent that it will be paid during the Chapter 11
proceeding or if it is probable that it will be an allowed (other than those
paid pursuant to said authority) priority, secured or unsecured claim.
The Company recorded a loss on impairment of long lived assets
and other non-recurring charges of $1,778.33 million in the three months ended
September 30, 1999. The loss was primarily related to the loss on the impairment
of long lived assets caused by the implementation of Medicare's Prospective
Payment System and the estimated loss from the sale of the infusion business
unit.
The Company's 50% equity share of the operation results of
Lyric resulted in a loss of $1.1 million in the third quarter 2000.
During the third quarter of 2000 the Company recorded
reorganization items of $9.78 million consisting primarily of costs related to
the bankruptcy filing and financial reorganization. (See Note 10)
In 1999, the Company paid Federal taxes despite a loss due to
the non-deductibility of certain amortization and other costs. In the third
quarter of 2000, the Company recorded state income tax expense related to
certain non-unitary subsidiaries of $2.5 million.
Net loss and loss per share for the three months ended
September 30, 2000 were $18.08 million and $0.37 per share, respectively,
compared to net loss and loss per share for the same period in 1999 of $1.82
billion and $37.64 per share. Weighted average shares increased from 48,345,000
in 1999 to 48,875,000 in 2000. In the third quarter of 1999 and 2000 no exercise
of options and warrants nor conversion of subordinated debt is assumed since
their effect is antidilutive. Subsequent to September 30, 1999, the Company
issued an aggregate of 517,970 shares of Common Stock in connection with a
conversion of $16.89 million principal amount of 5 3/4% convertible subordinated
debentures.
NINE MONTHS ENDED SEPTEMBER 30, 2000
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999
Total revenues for the nine months ended September 30, 2000
decreased $66.81 million, or 3.51%, to $1,837.58 million from the comparable
period in 1999. Such decrease was attributable to (i) a decrease of $26.48
million in inpatient revenues resulting from the settlement agreement with SNH,
resulting in the transfer to SNH of the operations of 47 facilities previously
operated by IHS, (ii) a decrease of $49.12 million in home
respiratory/infusion/DME revenues attributable to the infusion business sold in
October 1999 and a decrease of $378,000 from home respiratory and DME services
in operations in both periods, (iii) a decrease of $11.52 million from
diagnostic services in operations in both periods and (iv) a decrease of $1.08
million from lithotripsy services in operations in both periods. The decrease is
partially offset by an increase of $21.78 million primarily due to a full nine
months of revenues from 1999 acquisitions partially offset by a decline in
occupancy rates, a decrease in average daily inpatient service rates, a decrease
in management fees (see note 4), and the loss of therapy services contracts.
Customers of the Company's contract rehabilitation division are admitting fewer
Medicare patients and reduced utilization of rehabilitation services to a far
greater degree than the Company had expected.
Operating, general and administrative expense (including rent)
increased $83.37 million, or 5.26%, in the nine months ended September 30, 2000
compared to the nine months ended September 30, 1999. Such increase was
attributable to (i) an increase of $128.93 million from inpatient services in
operations in both periods, primarily due to a full nine months of operating
expenses from 1999 acquisitions partially offset by a decrease in expenses from
a reduction in staffing and ancilary services, (ii) an increase of $4.66 million
from lithotripsy services in operations in both periods and (iii) an increase of
$22.12 million from home respiratory and DME services in operations in both
periods, partially offset by (i) a decrease of $26.03 million in inpatient
services expenses from the settlement agreement with SNH, as described above,
(ii) a decrease of $43.69 million from the sale of the infusion business segment
subsequent to September 30, 1999 and (iii) a decrease of $2.61 million from
diagnostic services in operations in both periods.
Net interest expense decreased $170.25 million, or 76.10%,
during the nine months ended September 30, 2000. The decrease is due to the
Company reporting interest under SOP 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code," which allows interest expense to be
reported only to the extent that it will be paid during the Chapter 11
proceeding or if it is probable that it will be an allowed (other than those
paid pursuant to such authority) priority, secured or unsecured claim. Of the
$53.46 million interest expense reported at September 30, 2000, $27.40 million
represents interest incurred up to February 2, 2000, the date of the Chapter 11
filing.
During the first nine months of 2000 the Company recorded a
non-recurring charge of $6.50 million, representing a provision against a
promissory note due from APS Enterprise Holding Company, which purchased the
Company's infusion division in October 1999, due to the impact that Medicare
reimbursement has had on the cash flows from operations of APS.
The Company recorded a loss on impairment of long lived assets
and other non-recurring charges of $1,778.33 million in the three months ended
September 30, 1999. The loss was primarily related to the loss on the impairment
of long lived assets caused by the implementation of Medicare's Prospective
Payment System and the estimated loss from the sale of the infusion business
unit.
The Company's 50% equity share of the operations of Lyric
resulted in a loss of $841,000 for the nine months ended 2000 compared with
income of $1.35 million in the prior year.
During the first nine months of 2000 the Company recorded
reorganization items of $22.69 million consisting primarily of costs related to
the bankruptcy filing and financial reorganization. (See Note 10)
In 1999, the Company paid Federal taxes despite a loss due to
the non-deductibility of certain amortization and other costs. In the first nine
months of 2000, the Company recorded state income tax expense related to certain
non-unitary subsidiaries of $7.50 million.
Net loss and loss per share for the first nine months of 2000
were $63.25 million and $1.30 per share, respectively, compared to net loss and
loss per share for 1999 of $1.83 billion and $36.40 per share. Weighted average
shares decreased from 50,296,000 in 1999 to 48,785,000 in 2000. In the first
nine months of 1999 and 2000 no exercise of options and warrants nor conversion
of subordinated debt is assumed since their effect is antidilutive. Subsequent
to September 30, 1999, the Company issued an aggregate of 517,970 shares of
Common Stock in connection with a conversion of $16.89 million principal amount
of 5 3/4% convertible subordinated debentures.
Page 14 of 19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
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 $100 million. 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
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 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 September 30, 2000, no
amounts were outstanding under the DIP Financing Agreement, however, at that
date $1.24 million was outstanding under the LC subfacility. The DIP Financing
Agreement matures on March 6, 2002.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness are
enjoined and certain 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
approved by the Bankruptcy Court.
The Company has 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, utilities and patient obligations. All other unsecured pre-pretition
liabilities are classified in the consolidated balance sheet as liabilities
subject to compromise.
A summary of the principal categories of claims classified as liabilities
subject to compromise under the Chapter 11 Cases follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Long-term debt:
Revolving credit and term loan $ 2,093,789
Senior subordinated notes 1,090,737
Convertible denbentures 127,752
Amounts due under HCFA Agreement 138,054
Promissory notes and other 27,573
-----------
3,477,905
-----------
Accounts payable 152,356
Accrued liabilities:
Interest 121,478
Other 39,500
-----------
160,978
-----------
$ 3,791,239
-----------
</TABLE>
At September 30, 2000, the Company had working capital of $592.28 million
as compared with a net working capital deficit of $3.06 billion at December 31,
1999 primarily because most current liabilities at December 31, 1999 (which
included substantially all of the Company's debt obligations) are now classified
as liabilities subject to compromise. There are no material capital commitments
for capital expenditures as of the date of this filing. Patient accounts
receivable and third-party payor settlements receivable decreased $85.02 million
to $497.53 million at September 30, 2000, as compared to $582.55 million at
December 31, 1999. Gross
Page 15 of 19
<PAGE>
patient accounts receivable were $610.19 million at September 30, 2000 as
compared with $693.61 million at December 31, 1999. Net third-party payor
settlements receivable from Federal and state governments (i.e., Medicare and
Medicaid cost reports) were $77.22 million at September 30, 2000 as compared to
$53.39 million at December 31, 1999. Management is in the process of evaluating
the effect of several matters related to the bankruptcy filing on the
collectibility of the Company's accounts receivable. The resolution and
settlement of third party payor settlements receivable (primarily Medicare cost
reports of prior years) have been delayed pending the resolution of pre-petition
claims the federal government has asserted against the Company. Also, the
Company's contract therapy and diagnostic services business units are
experiencing delays in the collection of receivables from nursing facilities.
Such facilities are experiencing difficulties related to the continuing adverse
effects of PPS on their operations. The Company expects to conclude its
evaluation of these matters in the fourth quarter of 2000.
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"), $37,000 aggregate principal amount of other senior subordinated notes
and $127.75 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. The Company is in default under these
indentures.
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 September 30, 2000, $736.9 million was outstanding and was to have
been 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).
In connection with the acquisition of certain businesses from HEALTHSOUTH
Corporation, 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 September 30, 2000, $393
million was oustanding and was to have been 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 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
Page 16 of 19
<PAGE>
percent (depending on the Debt/EBITDAR Ratio).
The Revolving Facility was scheduled 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 were scheduled to 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).
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 substantially 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 Company is in default under the New Credit Facility.
As a result of the Company's bankruptcy filing, the Company is no longer able to
make any borowings under the New Credit Facility.
Net cash provided by operating activities of continuing operations before
reorganization items for the nine months ended September 30, 2000, was $155.73
million as compared to net cash used by operating activities of $21.51 million
for the comparable period in 1999. Cash provided by operating activities in the
first nine months of 2000 increased compared to the comparable period in 1999
primarily because of an increase in accounts payable and accrued expenses and a
decrease in accounts receivable and third party payor settlements and income
taxes receivable, net partially offset by an increase primarily from management
fee receivables, supplies, inventory, prepaid expenses and other current assets.
IHS has a 50% ownership interest in, and manages 45 facilities owned or leased
by, Lyric Health Care LLC ("Lyric") (See Note 4). As of September 30, 2000,
Lyric's ability to borrow from its revolving line of credit has been
significantly restricted and its vendors have imposed accelerated payment terms.
As a result, IHS has not received payment for management fees or other costs
paid by IHS on Lyric's behalf (i.e., health and workers' compensation insurance)
for 2000. The Company recorded a provision of $3.3 million against Lyric's third
quarter 2000 management fee revenue. IHS is working with Lyric management and
the lender to increase Lyric's availability under the line of credit. The
Company will continue to evaluate its investment in Lyric on an ongoing basis
and Lyric's ability to fund cash flows from operations.
Net cash used by financing activities was $11.28 million for the nine month
period in 2000 as compared to $131.23 million provided by financing activities
for the comparable period in 1999. In 2000, the Company incurred costs of
obtaining the DIP financing discussed above and made repayments on certain debt
of $5.91 million. In 1999, the Company received net proceeds from long-term
borrowings of $457.20 million and made repayments on certain debt of $293.66
million. During the nine months ended September 30, 1999, the Company
repurchased 3.6 million shares of its stock for approximately $24.04 million.
Net cash used by investing activities was $119.10 million for the nine
month period ended September 30, 2000 as compared to $103.37 million used by
investing activities for the nine month period ended September 30, 1999. Cash
used for the acquisition of facilities and ancillary company acquisitions was
$40.06 million for the first nine months of 1999; the Company made no
acquisitions in the first nine months of 2000. Cash used for the purchase of
property, plant and equipment was $87.33 million in 2000 and $129.65 million in
1999. In the first nine months of 1999, the Company received $114.3 million
related to the transfer of 32 long-term care facilities to Monarch LP (See Note
4). Also during the first nine months of 1999, the Company sold its discontinued
home nursing segment for approximately $26.0 million. The net proceeds from such
sales were used to repay debt outstanding under the revolving credit facility
and for other corporate purposes, including acquisitions.
As a result of the implementation of a prospective payment system for home
nursing beginning with cost report periods beginning on or after October 1,
1999, contingent payments in respect of the acquisition of First American Health
Care of Georgia, Inc. in October 1996, aggregating $155 million, became payable
over five years beginning in 2000. The present value of such payments at
September 30, 2000 is $138.05 million and is recorded on the balance sheet under
the caption liabilities subject to compromise. At December 31, 1999 the present
value of such payments was $131.65 million and was recorded on the balance sheet
under the caption other long term liabilities.
IHS' contingent liabilities (other than liabilities in respect of
litigation) aggregated approximately $84.4 million as of September 30, 2000. IHS
is required, upon certain defaults under the lease, to purchase its Orange Hills
facility at a purchase price equal to the greater of $7.1 million or the
facility's fair market value. IHS has established several irrevocable standby
letters of credit with the Bank of Nova Scotia totaling $9.9 million at
September 30, 2000 to secure certain of the Company's workers' compensation
obligations, health benefits and other obligations. In addition, IHS has several
surety bonds in the amount of $67.4 million to secure certain of the Company's
health benefits, patient trust funds and other obligations. In addition, with
respect to certain acquired businesses IHS is obligated to make certain
contingent payments if earnings of the acquired business increase or earnings
targets are met. The Company is obligated to purchase the remaining interests in
its lithotripsy partnerships at a defined price in the event legislation is
passed or regulations adopted that would prevent the physician partners from
owning an interest in the partnership and using the partnership's lithotripsy
equipment for the treatment of his or her patients. In addition, IHS has
obligations under operating leases aggregating approximately $780.54 million at
September 30, 2000.
Page 17 of 19
<PAGE>
Item 6. - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits 10.1 Agreement between Robert N. Elkins and
Integrated Health Services, Inc. (incorporated
by reference to the Company's Current Report
on Form 8-k dated July 27, 2000)
10.2 Indemnification Agreement between Alvarez and
Marsal, Joseph A. Bondi and Integrated Health
Services, Inc. (incorporated by reference to
the Company's Current Report on Form 8-k dated
July 27, 2000)
10.3 Engagement Agreement between Alvarez and
Marsal, Inc., Joseph A. Bondi and Integrated
Health Services, Inc. (incorporated by
reference to the Company's Current Report on
Form 8-k dated July 27, 2000)
10.4 Agreement between Stephen P. Griggs and
Integrated Health Services, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K
Page 18 of 19
<PAGE>
- SIGNATURES -
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
By: /s/ Robert N. Elkins
------------------------------------
Robert N. Elkins
Chief Executive Officer
By: /s/ C. Taylor Pickett
------------------------------------
C. Taylor Pickett
Executive Vice President-Chief Financial
and Accounting Officer
Date: December 13, 2000
Page 19 of 19
