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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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)
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)
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
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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.
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
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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.
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.
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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 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
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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.
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
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possibilities in such states. Of the states in 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
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Fraud and Abuse Laws. In addition, certain Federal and state requirements
generally prohibit certain 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.
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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
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
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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.
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>
<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
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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 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
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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 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
53
<PAGE>
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 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.
54
<PAGE>
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(5)
------------ ----------- ------------- -----------
(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
</TABLE>
<PAGE>
<TABLE>
<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 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 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 affiliates
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.
55
<PAGE>
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 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.
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
and 1999.......................................................................... 60
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
and 1999.......................................................................... 64
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,
------------------------------------------------
1997 1998 1999
------------- ---------- ---------------
<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
<CAPTION>
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>
<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
68
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(o) Management Agreements- (CONTINUED)
expense. In addition, certain management agreements also provide IHS with an
incentive fee based on the 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>
NOTES PAYABLE
COMMON AND OTHER
CASH STOCK ACCRUED TOTAL
MONTH TRANSACTION DESCRIPTION PAID ISSUED(1) LIABILITIES(2) COSTS
- ----------- ------------------------------------------------------------------- ----------- ----------- ---------------- ----------
<S> <C> <C> <C> <C>
January Stock of Paragon Rehabilitative Service, Inc. $ -- $10,758 $ 425 $ 11,183
February Assets of Health Star, Inc. 2,855 -- 310 3,165
February Stock of Medicare Convalescent Aids of Pinellas d/b/a 830 3,654 216 4,700
Medaids, RxStat, Prime Medical Services
February Stock of Michigan Medical Supply 1,900 -- 265 2,165
February Assets of Nutmeg Respiratory Homecare 2,340 -- 217 2,557
March Assets of Chancy Healthcare Serice, Inc., 5,335 -- 355 5,690
Chancy Oxygen Services, CHS Home Infusion Company,
Inc., Chancy Healthcare Services of Waynesboro
April Stock of Magnolia Group, Inc. -- 15,118 1,000 16,118
May Assets of American Mobile Health Systems, Inc. -- 2,800 -- 2,800
May Assets of Eastern Home Care & Oxygen, Inc., Mira Associates,
Altoona Medox Enterprises, Professional Home Care, Keystone Home
Oxygen Services 3,820 -- 405 4,225
May Assets of First Community Care, Inc. 5,630 2,282 988 8,900
June Assets of Metropolitan Lithotripter Associates 3,099 7,802 281 11,182
June Stock of Premiere Associates, Inc. 6,500 29,264 20,127 55,891
June Assets of Apex Home Care, Inc. 2,666 -- 270 2,936
June Assets of Osborne Medical, Inc. 1,960 -- 135 2,095
July Stock of Collins Rentals, Inc. 2,484 -- 411 2,895
August Stock of Home Care Oxygen Services, Inc. 3,650 -- 267 3,917
August Assets of Tri-County Medical Oxygen, Inc. 2,075 -- 161 2,236
August Assets of American Oxygen Services of Tennessee -- 1,981 137 2,118
September Assets of Accucare Medical Corporation -- 2,854 84 2,938
September Assets of Valley Oxygen & Medical Equipment, Inc. 2,464 -- 386 2,850
October Assets of Mark-Daniel Enterprises, Inc. d/b/a Arrowhealth Medical 7,915 -- 765 8,680
Supply
October Assets of Professional Respiratory Care, Inc. 2,180 -- 177 2,357
October Stock of Acadia Home Care 2,180 -- 198 2,378
November Assets of Oakwood Manor Nursing Center, Inc. 5,818 -- -- 5,818
November Assets of Norcare Home Medical, Inc. 2,486 -- 203 2,689
November Stock of RespaCare, Inc. 3,783 -- 302 4,085
November Assets of Caremor Health Services, Inc. 2,219 -- 69 2,288
Various 71 acquisitions, each with total costs of less than $2,000 40,038 16,962 5,031 62,031
Various Cash payments of acquisition costs accrued in 1997 and 1998 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>
NOTES PAYABLE
COMMON AND OTHER
CASH STOCK ACCRUED
MONTH TRANSACTION DESCRIPTION PAID ISSUED(1) LIABILITIES TOTAL COST
- ----------- -------------------------------------------------------------------- ----------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
January Stock of In-Home Health Care, Inc., a home healthcare services $ 3,200 $ -- $ 250 $ 3,450
provider
February Assets of Portable X-Ray Labs, Inc., a mobile x-ray services provider 4,900 -- 1,300 6,200
March Payment of earnout in connection with Achievement Rehab acquisition -- 26,439 -- 26,439
in December 1993
June Stock of Health Care Industries, Inc., a home healthcare services 1,825 -- 500 2,325
provider
June Assets of Rehab Dynamics, Inc. and Restorative Therapy, Ltd., 8,203 11,460 2,500 22,163
contract rehabilitation companies(2)
August Stock of Ambulatory Pharmaceutical Services, Inc. and APS American, 18,125 18,125 1,950 38,200
Inc., home healthcare services providers
August Stock of Arcadia Services, Inc., a home healthcare services provider -- 17,169 3,000 20,169
September Stock and assets of Barton Creek Healthcare, Inc., a home 4,857 -- 280 5,137
healthcare services provider
September Stock of Community Care of America, Inc., an operator of skilled 99,883 -- 5,995 105,878
nursing facilities
October Assets of Coram Lithotripsy Division, an operator of lithotripsy 131,000 -- 7,500 138,500
units
October Stock of RoTech Medical Corporation, a respiratory therapy company -- 506,648 22,597 529,245
November Assets of Durham Meridian Limited Partnership (Treyburn) 4,775 -- -- 4,775
November Stock of HPC America, Inc., an operator of home infusion and 26,127 -- 825 26,952
home healthcare companies
November Assets of Richards Medical Company, Inc., a respiratory therapy 1,993 -- 160 2,153
company
November Assets of Central Medical Supply Company, Inc., a respiratory therapy 1,872 -- 178 2,050
company
November Assets of Hallmark Respiratory Care, a respiratory therapy company 3,768 -- 145 3,913
November Leasehold interest in Shadow Mountain, a skilled nursing facility 4,020 -- 42 4,062
December Assets of certain businesses owned by HEALTHSOUTH Corporation 1,159,142 -- 50,980 1,210,122
December Assets of Sunshine Medical Equipment, Inc., a respiratory therapy 3,290 -- 270 3,560
company
December Assets of Quest, Inc., a respiratory therapy company 33,000 -- 385 33,385
Various 17 acquisitions, each with total costs of less than $2,000 9,010 -- 894 9,904
Various Cash payments of acquisition costs accrued in 1996 and 1997 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:
1998 1999
--------- ---------
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
======= ======
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 ANDVANCES IN 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:
1997 1998 1999
--------- --------- --------
Tutera .............. $ 486 $ 892 $ --
Lyric ............... -- (508) 2,208
Speciality .......... (211) -- --
Other ............... (187) -- --
------ ------ ------
$ 88 $ 384 $2,208
====== ====== ======
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:
DECEMBER 31, DECEMBER 31,
1998 1999
-------------- -------------
Working capital ......... $1,674 $21,448
Total assets ............ 8,524 56,730
Long-term debt .......... 1,559 24,871
Equity .................. 1,074 5,723
------ -------
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
---------- ---------- -----------
Revenues .................... $ 38,621 $77,143 $273,603
Net (loss) earnings ......... (2,133) 869 4,416
======== ======= ========
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: .
DECEMBER 31,
1998
-------------
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
=========
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
84
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(9) LONG-TERM DEBT - (CONTINUED)
outstanding $150,000 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.
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
85
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(9) LONG-TERM DEBT - (CONTINUED)
$114,975 aggregate principal amount of the 9 5/8% Senior Notes pursuant to a
cash tender offer as discussed 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:
2000 ......................................................... $3,369,244
2001 ......................................................... 68,228
2002 ......................................................... 141,415
2003 ......................................................... 42,817
2004 ......................................................... 10,089
86
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(9) LONG-TERM DEBT - (CONTINUED)
Thereafter ................................................... 55,722
------
$3,687,515
==========
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
87
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(10) OTHER LONG-TERM LIABILITIES- (CONTINUED)
combinations 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:
2000 ......................................................... $127,475
2001 ......................................................... 115,220
2002 ......................................................... 102,099
2003 ......................................................... 93,833
2004 ......................................................... 86,294
Subsequent to 2004 ........................................... 473,471
--------
Total .................................................. $998,392
========
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:
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
------------ ------------ -------
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
========= ========= ======
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
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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.
1998 1999
---------- ----------
Change in benefit obligation:
Projected benefit obligation at beginning of
year ..................................... $11,171 $10,769
Service cost ............................... 1,047 960
Interest cost .............................. 708 754
95
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INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(15) OTHER COMMITMENTS AND CONTINGENCIES - (CONTINUED)
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
======== ========
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).
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.
98
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(19) RELATED PARTY TRANSACTIONS - (CONTINUED)
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.
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
99
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(19) RELATED PARTY TRANSACTIONS - (CONTINUED)
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:
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
==========
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.
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
100
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INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(20) NON-RECURRING CHARGES - (CONTINUED)
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
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
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INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(20) NON-RECURRING CHARGES - (CONTINUED)
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
========== ========== ======== ======== ==========
<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
========== ========== ======== ======== ==========
<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
DIRECTOR
The section entitled "Proposal No. 1--Elections of Directors" in the
Company's Proxy Statement for the Annual Meeting of stockholders is
incorporated herein by reference.
EXECUTIVE OFFICERS
See "Part I--Item 1. Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the Company's Proxy
Statement for the Annual Meeting of Stockholders is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Beneficial Ownership of Common Stock" in the
Company's Proxy Statement for the Annual Meeting of Stockholders is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The sections entitled "Executive Compensation--Compensation Committee
Interlocks and Insider Participation" and "Certain Transactions" in the
Company's Proxy Statement for the Annual Meeting of Stockholders is
incorporated herein by reference.
110
<PAGE>
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):
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)
111
<PAGE>
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
112
<PAGE>
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)
113
<PAGE>
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 Ser- vices 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 Proper- ties, 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 Agree- ment 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)
114
<PAGE>
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 Agree- ment, among Integrated Health
Services, Inc., a Delaware corporation (the "Borrower"), the
lend- ers 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 Ser- vices, 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
- ----------
(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.
115
<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.
116
<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:
------------------------------------
Robert N. Elkins
Chairman of the Board, President
and Chief Financial Officer
April 10, 2000
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>
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
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
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 (as defined below), the Subsidiaries (as
defined below) of the Borrower identified on Schedule II hereto, as debtors and
debtors in possession under chapter 11 of the Bankruptcy Code (the "FILING
SUBSIDIARIES"), the Lenders (as defined below), and CITICORP USA, INC. ("CUSA"),
as collateral monitoring agent and administrative agent for the Lenders (in such
capacity, the "AGENT").
W I T N E S S E T H:
WHEREAS, on February 2, 2000 (the "PETITION DATE") the Borrower and the
Filing Subsidiaries each filed a voluntary petition for relief (collectively,
the "CASES") under chapter 11 of the Bankruptcy Code with the United States
Bankruptcy Court for the District of Delaware (the "BANKRUPTCY COURT"); and
WHEREAS, the Borrower and the Filing Subsidiaries are continuing to
operate their respective businesses and manage their respective properties as
debtors in possession under sections 1107 and 1108 of the Bankruptcy Code; and
WHEREAS, the Borrower has requested that the Agent and the Lenders
provide a secured, super-priority revolving credit facility of up to
$300,000,000 in order to fund the continued operation of the Borrower's and the
Filing Subsidiaries' businesses as debtors and debtors in possession under the
Bankruptcy Code; and
WHEREAS, the Agent and the Lenders are willing to make such
postpetition loans and other extensions of credit to the Borrower upon the terms
and conditions set forth herein; and
WHEREAS, each of the Filing Subsidiaries has agreed to guaranty the
obligations of the Borrower hereunder and each of the Borrower and the Filing
Subsidiaries has agreed to secure its obligations to the Agent and the Lenders
hereunder with, inter alia, security interests in, and liens on, all of its
property and assets, whether real or personal, tangible or intangible, now
existing or hereafter arising, all as more fully provided herein.
NOW, THEREFORE, in consideration of the mutual agreements contained
herein and subject to the satisfaction of the conditions set forth herein, the
parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. Certain Defined Terms. As used in this Agreement:
"ACCOMMODATION OBLIGATION" means, as applied to any Person, any direct
or indirect guaranty, endorsement or other liability of that Person with respect
to any Debt, lease, dividend, letter of credit or other obligation (the "PRIMARY
OBLIGATION") of another Person (the "PRIMARY OBLIGOR"), including any obligation
of that Person, whether or not contingent, (i) to purchase, repurchase or
otherwise acquire any such primary obligation or any property constituting
direct or indirect security therefor, or (ii) to advance or provide funds (A)
for the payment or discharge of any such primary obligation, or (B) to maintain
working capital or equity capital of the primary obligor or otherwise to
maintain the net worth or solvency or any balance sheet item, level of income or
financial condition of the primary obligor, or (iii) to purchase property,
securities or services primarily for the purpose of assuring the owner of any
<PAGE>
such primary obligation of the ability of the primary obligor to make payment of
such primary obligation, or (iv) otherwise to assure or hold harmless the holder
of any such primary obligation against loss in respect thereof. The amount of
any Accommodation Obligation shall be deemed to be an amount equal to the
maximum stated or determinable amount of the primary obligation in respect of
which such Accommodation Obligation is made or, if not stated or if
indeterminable, the maximum reasonably estimated potential liability in respect
thereof.
"ACCOUNT" means, with respect to any Loan Party, any and all
"accounts," as such term is defined in Section 9-106 of the UCC, now owned or
hereafter acquired by such Loan Party.
"ACCOUNT DEBTOR" is defined in Section 9-105(1)(a) of the UCC.
"ADJUSTED EBITDA" means, with respect to any Person for any period, the
sum of (i) Cash Flow from Operations of such Person for such period; (ii) all
charges for taxes counted in determining the consolidated net income of such
Person for such period; and (iii) Restructuring Charges for such period.
"ADVANCE" means a Revolving Credit Advance or a Swing Line Advance.
"AFFILIATE" of a specified Person means any other Person that directly
or indirectly through one or more intermediaries controls, is controlled by or
is under common control with the Person specified. For this purpose, "control,"
"controlled by" and "under common control with" with respect to any Person mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities or by contract or otherwise.
"AGENT" is defined in the preamble to this Agreement and includes and
any successor Agent appointed pursuant to Section 10.06.
"AGREEMENT" means this Secured Super-Priority Debtor In Possession
Revolving Credit Agreement.
"APPLICABLE LENDING OFFICE" means, with respect to each Lender, such
Lender's Domestic Lending Office in the case of a Base Rate Advance and such
Lender's Eurodollar Lending Office in the case of a Eurodollar Rate Advance.
"ARRANGER" means Salomon Smith Barney Inc., in its capacity as sole
book runner and lead arranger for the Facility.
"ASSET SALE" means the sale, transfer or other disposition of any
asset, business or property of the Borrower or any of its Subsidiaries, or the
issuance or sale of any capital stock of or other equity, ownership or profit
interest in any Subsidiary of the Borrower (except a dividend on any such stock
or interest declared and payable solely in additional shares of such stock or
interest), to any Person other than the Borrower or a Filing Subsidiary.
"ASSIGNMENT AND ACCEPTANCE" means an assignment and acceptance entered
into by a Lender and an Eligible Assignee, in substantially the form of Exhibit
E-2, and accepted by the Agent, or such other form of assignment and acceptance
agreement acceptable from time to time to the Agent.
"AUTHORIZED OFFICER" means the principal financial officer, the chief
accounting officer, the controller, the treasurer or the executive or senior
vice president-finance of the Borrower.
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<PAGE>
"AVAILABILITY RESERVE" means, as of two Business Days after the date of
written notice of any determination thereof to the Borrower by the Agent, such
amounts as the Agent or the Requisite Lenders may from time to time establish
against the Available Credit, in the Agent's or the Requisite Lenders', as
applicable, sole discretion exercised reasonably, in order either (a) to
preserve the value of the Collateral or the Agent's Lien thereon, or (b) to
provide for the payment of unanticipated liabilities (including, without
limitation, liabilities related to cash management services and agreements
related thereto) of the Borrower or its Subsidiaries arising after the Closing
Date.
"AVAILABLE CREDIT" means, at any time, an amount equal to (a) the
Maximum Credit at such time minus (b) the Outstanding Revolving Credit at such
time.
"BANKRUPTCY CODE" means title 11, United States Code, as amended from
time to time, as applicable to the Cases.
"BANKRUPTCY COURT" is defined in the recitals to this Agreement or
shall mean any other court having competent jurisdiction over the Cases.
"BASE RATE" means, for any period, a fluctuating interest rate per
annum as shall be in effect from time to time, which rate per annum shall be
equal at all times to the highest of:
(a) the rate of interest announced publicly by Citibank in New
York, New York, from time to time, as Citibank's base rate;
(b) the sum (adjusted to the nearest 0.25% or, if there is no
nearest 0.25%, to the next higher 0.25%) of (i) 0.5% per annum plus
(ii) 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 of major United States
money market banks, such three-week moving average being determined
weekly on each Monday (or, if any such day is not a Business Day, on
the next succeeding Business Day) for the three-week period ending on
the previous Friday by Citibank on the basis of such rates reported by
certificate of deposit dealers to and published by the Federal Reserve
Bank of New York or, if such publication shall be suspended or
terminated, on the basis of quotations for such rates received by
Citibank from three New York certificate of deposit dealers of
recognized standing selected by Citibank, 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 (including any emergency, supplemental or
other marginal reserve requirement) for Citibank in respect of
liabilities consisting of or including (among other liabilities)
three-month U.S. dollar nonpersonal time deposits in the United States,
plus (iii) the average during such three-week period of the maximum
annual assessment rates estimated by Citibank for determining the then
current annual assessment payable by Citibank to the Federal Deposit
Insurance Corporation (or any successor) for insuring Dollar deposits
in the United States; and
(c) the sum of (i) 0.5% per annum plus (ii) the Federal Funds
Rate.
"BASE RATE ADVANCE" means an Advance which bears interest by reference
to the Base Rate as provided in Section 2.07(a).
"BASE RATE MARGIN" means 2.0% per annum.
"BLOCKED ACCOUNT LETTER" means any "Blocked Account Letter" entered
into among any Loan Party, a Collection Account Bank and the Agent, in
substantially the form of Exhibit C (with such
3
<PAGE>
changes thereto acceptable to the Borrower and the Agent), which provides, inter
alia, the Agent with the right upon the occurrence of an Event of Default or in
the event that the Available Credit is less than $50,000,000, to require any
Collection Account Bank to wire all amounts received in the applicable
Collection Account to the Citibank Concentration Account on a daily basis.
"BORROWER" is defined in the preamble to this Agreement.
"BORROWING BASE" means (i) the sum of (A) up to 85% of Eligible
Accounts (other than Eligible Medicaid Accounts) (calculated (without
duplication) net of all finance charges, late fees and other fees which are
unearned, sales, excise or similar taxes, and credits or allowances granted at
such time), (B) the lesser of (x) $40,000,000 and (y) up to 85% of Eligible
Medicaid Accounts (calculated (without duplication) net of all finance charges,
late fees and other fees which are unearned, sales, excise or similar taxes, and
credits or allowances granted at such time), (C) the lesser of (x) $25,000,000
and (y) up to 40% of the orderly liquidation value of Eligible Real Property as
set forth in the appraisal delivered pursuant to clause (d) of the definition of
Eligible Real Property, (D) up to 100% of cash and up to 95% of Cash
Equivalents, in each case on deposit or held in the Citibank Collateral Account
(other than deposits held pending application thereof to Eurodollar Rate
Advances in accordance with Sections 2.11(b)(ii) or (iii)) and (E) (x) Adjusted
EBITDA of RoTech and its Subsidiaries for the most recently ended two fiscal
quarter period for which financial statements have been delivered to the Agent
pursuant to Section 6.01(c)(ii) or Section 6.01 (c)(iii), as applicable,
multiplied by two minus (y) the amount of Eligible Accounts attributable to
RoTech in clause (A) above and the amount of Eligible Medicaid Accounts
attributable to RoTech in clause (B) above; provided, however, subject to the
following proviso, that the amount in this clause (E) shall in no event exceed
(1) for the first ninety (90) days after the Closing Date, $150,000,000, (2) for
the next ninety (90) days immediately following the first ninety (90) days after
the Closing Date, $125,000,000 and (3) thereafter, $100,000,000; provided,
further, that the amount in this clause (E) shall in no event exceed
$100,000,000 from and after the effective date, if any, of the Medicare Setoff
Arrangement, minus (ii) any Eligibility Reserves in effect with respect to the
Eligible Accounts included in clause (A) above and any Eligible Medicaid
Accounts included in clause (B) above.
"BORROWING BASE CERTIFICATE" means a certificate to be executed and
delivered from time to time by the Borrower to the Agent in the form of Exhibit
B-5.
"BORROWING DATE" means the Closing Date or any subsequent Business Day
on which a Revolving Credit Advance is requested from the Lenders.
"BREAKAGE COSTS" is defined in Section 2.12.
"BUSINESS DAY" means any day except a Saturday or Sunday or a day when
commercial banks are authorized or required by law to be closed in New York, New
York and, where used in reference to any Eurodollar Rate Advance, means such a
day on which dealings are carried on in the London interbank market.
"BUSINESS PLAN" means a business plan of the Borrower and its
Subsidiaries to be delivered to the Agent on or before July 31, 2000, which
shall contain forecasted expenditures, revenues, net income and cash flow,
prepared by the management of the Borrower, and covering the twelve-month period
immediately following the first twelve months after the Closing Date.
"CALENDAR WEEK" means a period of seven days commencing on any Monday
and ending on the following Sunday.
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<PAGE>
"CAPITAL EXPENDITURES" means expenditures for Hard Costs, whether paid
in cash or accrued as liabilities, made by the Borrower or any Subsidiary of the
Borrower.
"CAPITAL LEASE" means, with respect to any Person, any lease of any
property by that Person as lessee which, in accordance with GAAP, is required to
be accounted for as a capital lease on the balance sheet of that Person.
"CARVE-OUT" means claims of the following parties for the following
amounts: (i) the unpaid fees of the U.S. Trustee or the Clerk of the Bankruptcy
Court pursuant to 28 U.S.C. Section 1930(a) and (ii) the aggregate allowed
unpaid fees and expenses payable under sections 330 and 331 of the Bankruptcy
Code to professional persons retained pursuant to an order of the Bankruptcy
Court by the Borrower, the Guarantors or any Committee not to exceed $7,500,000
in the aggregate; provided, however, that the Carve-Out shall not include, apply
to or be available for any fees or expenses incurred by any party, including the
Borrower, the Guarantors or any Committee, in connection with the investigation
(including discovery proceedings), initiation or prosecution of any claims,
causes of action, adversary proceedings or other litigation against the Agent or
the Lenders, including, without limitation, challenging the amount, validity,
perfection, priority or enforceability of or asserting any defense, counterclaim
or offset to, the Obligations or the security interests and Liens of the Secured
Parties in respect thereof; provided, further, however, that so long as no
Potential Default or Event of Default shall occur and be continuing, the Loan
Parties shall be permitted to pay compensation and reimbursement of expenses
allowed and payable under sections 330 and 331 of the Bankruptcy Code, as the
same may be due and payable, and the same shall not reduce the Carve-Out.
"CASES" is defined in the recitals to this Agreement.
"CASH EQUIVALENTS" means (a) securities issued or fully guaranteed or
insured by the United States government or any agency thereof, (b) certificates
of deposit, eurodollar time deposits, overnight bank deposits and bankers'
acceptances of any commercial bank organized under the laws of the United
States, any state thereof, the District of Columbia, any foreign bank, or its
branches or agencies (fully protected against currency fluctuations) which, at
the time of acquisition, are rated at least "A-1" by S&P or "P-1" by Moody's,
and (c) commercial paper of an issuer rated at least "A-1" by S&P or "P-1" by
Moody's, and (d) shares of any money market fund that (i) has at least 95% of
its assets invested continuously in the types of investments referred to in
clauses (a) through (c) above, (ii) has net assets of not less than $500,000,000
and (iii) is rated at least "A-1" by S&P or "P-1" by Moody's; provided, however,
that the maturities of all obligations of the type specified in clauses (a)
through (c) above shall not exceed 180 days.
"CASH FLOW FROM OPERATIONS" means, with respect to any Person, and for
any period, the sum, determined as of the last day of such period for such
Person and its subsidiaries on a consolidated basis, of (i) net income after
taxes minus any extraordinary gain and any non-recurring gain on any divestiture
plus any extraordinary loss and any non-recurring loss on any divestiture, (ii)
depreciation, amortization, and other noncash charges deducted in determining
net income and (iii) Interest Expense, all determined in accordance with GAAP;
provided, however, that (A) income attributable to any other Person or business
that is not at least 100% owned, directly or indirectly, by such Person shall be
counted, in determining net income, only to the extent such income is received
in cash by such Person or a Subsidiary of such Person in such period and is not
reinvested in such other Person or business (other than as a loan payable on
demand) within six months thereafter, except that, with respect to the Borrower
only, income from minority Investments existing on the Closing Date and
described in Schedule 6.02(c) of this Agreement shall be counted in accordance
with the Borrower's past practice and (B) no adjustments shall be made to
reflect minority interests in Subsidiaries.
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"CHATTEL PAPER" means, with respect to any Loan Party, any and all
"chattel paper", as such term is defined in Section 9-105(1)(b) of the UCC, now
owned or hereafter acquired by such Loan Party.
"CITIBANK" means Citibank, N.A., a national banking association.
"CITIBANK COLLATERAL ACCOUNT" means a general interest bearing deposit
account established at and maintained by Citibank in the name of and for the
benefit of the Agent on behalf of the Lenders and under the exclusive dominion
and control of the Agent (subject to the provisions of Section 6.01(h)), into
which Collateral in the form of cash shall be deposited.
"CITIBANK CONCENTRATION ACCOUNT" means a general deposit account
established at and maintained by Citibank in the name of and for the benefit of
the Agent on behalf of the Lenders and under the exclusive dominion and control
of the Agent (subject to the provisions of Section 2.11(b)(iii)).
"CLAIM" has the meaning ascribed to such term in section 101(5) of the
Bankruptcy Code.
"CLOSING DATE" means the date on which all of the conditions precedent
set forth in Section 3.01 are satisfied or waived in writing by the Lenders;
provided, that such date shall be no later than March 31, 2000 or such later
date as the Agent and the Borrower shall mutually agree.
"CODE" means the Internal Revenue Code of 1986 and the regulations
thereunder.
"CO-DOCUMENTATION AGENTS" means, collectively, Foothill Capital
Corporation and Goldman Sachs Credit Partners, L.P..
"COLLATERAL" is defined in Section 9.01.
"COLLECTION ACCOUNT BANK" means First Union National Bank, Bank of
America, N.A., and SunTrust National Bank.
"COLLECTION ACCOUNTS" means, collectively, each cash collection account
of the Borrower held at Bank of America, First Union National Bank and SunTrust
Bank, which collection accounts shall each be governed by a Blocked Account
Letter.
"COMMITMENT" means, with respect to each Lender, the
commitment of such Lender to make Advances and/or to issue or participate in
Letters of Credit issued on behalf of the Borrower in the aggregate principal
amount outstanding not to exceed the amount set forth opposite such Lender's
name on Schedule I under the caption "Commitment," as amended to reflect each
Assignment and Acceptance executed by such Lender and as such amount may be
reduced or modified pursuant to this Agreement; provided, however, the maximum
principal amount of the Commitments of all the Lenders shall not exceed (x)
$270,000,000 prior to the Entry Date and (y) $300,000,000 from and after the
Entry Date.
"COMMITMENT FEE RATE" means 0.375% per annum.
"COMMITTEE" means the official statutory committee of unsecured
creditors appointed in the Cases pursuant to section 1102 of the Bankruptcy
Code.
"CONTAMINANT" means any material, substance or waste that is
classified, regulated or otherwise characterized under any Environmental Law as
hazardous, toxic, a contaminant or a pollutant
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or by other words of similar meaning or regulatory effect, including any
petroleum or petroleum-derived substance or waste, asbestos and polychlorinated
biphenyls.
"CONSTITUENT DOCUMENTS" means, with respect to any Person, (i) the
articles/certificate of incorporation (or the equivalent organizational
documents) of such Person, (ii) the by-laws (or the equivalent governing
documents) of such Person and (iii) any document setting forth the manner of
election and duties of the directors or managing members of such Person (if any)
and the designation, amount and/or relative rights, limitations and preferences
of any class or series of such Person's Stock.
"CONTRACTS" means, with respect to any Loan Party, any and all
"contracts," as such term is defined in Section 1-201(11) of the UCC, now owned
or hereafter acquired by such Loan Party.
"CONTRACTUAL OBLIGATION" means, as to any Person, any provision of any
security issued by such Person or of any agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
material property is bound.
"CUSA" is defined in the preamble to this Agreement.
"DEBT," as applied to any Person and in each case determined on a
consolidated basis in conformity with GAAP, means (without duplication) (i) all
indebtedness for borrowed money (whether by loan or the issuance of debt
securities or otherwise); (ii) all obligations issued, undertaken or assumed as
the deferred purchase price of property or services or interest thereon, except
accounts and accrued expenses currently payable; (iii) all reimbursement
obligations with respect to surety bonds, letters of credit, bankers'
acceptances and similar instruments, whether or not contingent; (iv) all
monetary obligations under any Capital Lease; (v) all obligations (contingent or
otherwise) to purchase, retire or redeem any capital stock or any other equity
interest of such Person; (vi) all monetary obligations measured by, or
determined on the basis of, the value of any capital stock of such Person; and
(vii) all obligations, whether or not such obligations constitute Debt as
defined in clauses (i) through (vi) above, secured by (or for which the holder
of the obligation has an existing right, contingent or otherwise, to be secured
by) any Lien upon any property of such Person or any Subsidiary of such Person,
except any such obligation secured by a Lien that is imposed by law and not
voluntarily granted.
"DEPOSITARY BANK" means each bank or financial institution at which any
Loan Party maintains any depositary account and which is listed on Schedule 1.01
hereto.
"DOCUMENT" means, with respect to any Loan Party, any and all
"documents," as such term is defined in Section 9-105(1)(f) of the UCC, now
owned or hereafter acquired by such Loan Party.
"DOLLARS" and "$" mean United States dollars or such coin or currency
of the United States of America as at the time of payment shall be legal tender
for the payment of public and private debts in the United States of America.
"DOMESTIC LENDING OFFICE" means, with respect to any Lender, the office
of such Lender specified as its "Domestic Lending Office" opposite its name on
Schedule I hereto or in the Assignment and Acceptance by which it became a
Lender or such other office of such Lender as such Lender may from time to time
specify to the Borrower and the Agent.
"EFFECTIVE DATE" means the date upon which a plan of reorganization in
any of the Cases becomes effective.
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"ELIGIBILITY RESERVES" means, effective as of two Business Days after
the date of written notice of any determination thereof to the Borrower by the
Agent, such amounts as the Agent or the Requisite Lenders, in the Agent's or the
Requisite Lenders', as applicable, sole discretion exercised reasonably, may
from time to time establish against the gross amounts of Eligible Accounts to
reflect risks or contingencies arising after the Closing Date which may affect
such Accounts and which have not already been taken into account in the
determination for eligibility or the calculation of the Borrowing Base.
"ELIGIBLE ACCOUNTS" means, in respect of any Loan Party, the gross
outstanding balance of those Accounts of such Loan Party arising out of sales of
goods or the rendition of Medical Services in the ordinary course of business,
made by such Loan Party to a Person which is not an Affiliate of such Loan
Party, which constitute Collateral in which the Agent has a fully perfected
first priority Lien; provided, however, that an Account shall in no event be an
Eligible Account if:
(a) such Account is more than 120 days past the original
invoice date, thereof; or
(b) any warranty contained in this Agreement or any other Loan
Document with respect to such specific Account is not true and correct
with respect to such Account; or
(c) the Account Debtor on such Account has disputed liability
or made any claim with respect to any other Account due from such
Account Debtor to such Loan Party but only to the extent of such
dispute or claim; or
(d) the Account Debtor on such Account has: (i) filed a
petition for bankruptcy or any other relief under the Bankruptcy Code
or any other law relating to bankruptcy, insolvency, reorganization or
relief of debtors; (ii) made an assignment for the benefit of
creditors; (iii) had filed against it any petition or other application
for relief under the Bankruptcy Code or any such other law; (iv) has
failed, suspended business operations, become insolvent, called a
meeting of its creditors for the purpose of obtaining any financial
concession or accommodation; or (v) had or suffered a receiver or a
trustee to be appointed for all or a significant portion of its assets
or affairs; or
(e) the Account Debtor on such Account or any of its
Affiliates is also a supplier to or creditor of such Loan Party unless
such supplier or creditor has executed a no-offset letter satisfactory
to the Agent, in its sole discretion; or
(f) the sale represented by such Account is to an Account
Debtor located outside the United States, unless the sale is on letter
of credit or acceptance terms acceptable to the Agent, in its sole
judgment; or
(g) the sale to such Account Debtor on such Account is on a
bill-on-hold, guaranteed sale, sale-and-return, sale-on-approval or
consignment basis; or
(h) such Account is subject to a Lien in favor of any Person
other than the Agent for the benefit of the Secured Parties; or
(i) with respect to Accounts (other than Medicare Accounts),
such Account is subject to any deduction, offset, counterclaim,
recoupment, return privilege or other conditions (other than volume
sales discounts given in the ordinary course of such Loan Party's
business); or
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<PAGE>
(j) the Account Debtor on such Account is located in New
Jersey or Minnesota, unless such Loan Party (A) has received a
certificate of authority to do business and is in good standing in such
state or (B) has filed a Notice of Business Activities Report with the
appropriate office or agency of such state for the current year; or
(k) the Account Debtor on such Account (other than a Medicaid
Account or a Medicare Account) is a Governmental Authority, unless the
applicable Loan Party has assigned its rights to payment of such
Account to the Agent pursuant to the Assignment of Claims Act of 1940,
as amended, in the case of a federal Governmental Authority, and
pursuant to applicable law, if any, in the case of any other
Governmental Authority, and such assignment has been accepted and
acknowledged by the appropriate government officers; or
(l) the Agent, in accordance with its customary criteria,
determines, in its sole discretion exercised reasonably, that such
Account may not be paid or otherwise is ineligible; or
(m) with respect to Accounts (other than Medicare Accounts and
Medicaid Accounts), 50% or more of the outstanding Accounts of any
Account Debtor have become, or have been determined by the Agent, in
its sole discretion exercised reasonably, in accordance with the
provisions hereof, to be, ineligible; or
(n) the sale represented by such Account is denominated in a
currency other than Dollars; or
(o) such Account is not evidenced by an invoice or other
writing in form acceptable to the Agent, in its sole discretion
exercised reasonably; or
(p) such Loan Party, in order to be entitled to collect such
Account, is required to perform any additional service for, or perform
or incur any additional obligation to, the Person to whom or to which
it was made; or
(q) the total Accounts (other than Medicare Accounts and
Medicaid Accounts) of such Account Debtor to the Loan Parties represent
more than 20% of the Eligible Accounts individually or in the aggregate
as to the Loan Parties at such time, but only to the extent of such
excess; or
(r) in the case of Medicaid Accounts, the total Medicaid
Accounts owing by Governmental Authorities of any individual State to
the Loan Parties represent more than 10% of the Eligible Medicaid
Accounts individually or in the aggregate as to the Loan Parties at
such time, but only to the extent of such excess; or
(s) in the case of Medicare Accounts, (i) the applicable
Governmental Authority is not bound by a Medicare Setoff Arrangement or
(ii) the applicable Governmental Authority is bound by a Medicare
Setoff Arrangement, but such Medicare Account remains subject to any
deduction, offset, counterclaim, recoupment, return privilege or other
conditions (other than volume sales discounts given in the ordinary
course of such Loan Party's business), notwithstanding the fact that
such applicable Governmental Authority is bound by such Medicare Setoff
Arrangement; or
(t) such Account is a Private Payor Account.
"ELIGIBLE ASSIGNEE" means (i) a commercial bank organized under the
laws of the United States, or any State thereof, and, in the case of any
assignment by a Lender of its Revolving Credit
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Advances and related Commitments hereunder, having total assets in excess of
$5,000,000,000; (ii) a savings and loan association or savings bank organized
under the laws of the United States, or any State thereof having total assets in
excess of $3,000,000,000; (iii) a commercial bank organized under the laws of
any other country which is a member of the OECD, or a political subdivision of
any such country having total assets in excess of $5,000,000,000, if such bank
is acting through a branch or agency located in the United States; (iv) the
central bank of any country which is a member of the OECD; (v) a finance
company, insurance company or other financial institution that is engaged in
making, purchasing or otherwise investing in commercial loans in the ordinary
course of its business having total assets in excess of $1,000,000,000; (vi) a
fund that is engaged in making, purchasing or otherwise investing in commercial
loans in the ordinary course of its business having total assets in excess of
$200,000,000; (vii) any existing Lender and any Affiliates or Related Fund of
such existing Lender; and (viii) any other Person approved by the Agent, the LC
Bank and, except during the continuance of any Event of Default, the Borrower,
which approval in each case shall not be unreasonably withheld or delayed;
provided, however, that no Person who is a non-resident alien or a foreign
entity for United States income tax purposes (except a commercial bank of the
type described in clause (iii) above), may be an Eligible Assignee unless each
Note to be acquired by such Person is reissued in registered form prior to
transfer.
"ELIGIBLE MEDICAID ACCOUNTS" means Medicaid Accounts that are otherwise
Eligible Accounts except for clause (i) of the definition of Eligible Accounts.
"ELIGIBLE REAL PROPERTY" means, in respect of any Loan Party, any
parcel of owned Real Property in the United States of such Loan Party as to
which each of the following conditions has been satisfied at such time:
(a) a first priority Lien on such parcel of Real Property
shall have been granted by such Loan Party in favor of the Agent
pursuant to this Agreement and the Orders and (ii) such Lien shall be
in full force and effect in favor of the Agent at such time;
(b) except as otherwise permitted by the Agent, the Agent and
the title insurance company issuing the policy referred to in clause
(c) of this definition shall have received maps or plats of an as-built
survey of such parcel of Real Property certified to the Agent and such
title insurance company in a manner reasonably satisfactory to them,
dated a date reasonably satisfactory to the Agent and such title
insurance company, by an independent professional licensed land
surveyor reasonably satisfactory to the Agent and such title insurance
company, which maps or plats and the surveys on which they are based
shall be made in form and substance satisfactory to the Agent;
(c) the Agent shall have received in respect of such parcel of
Real Property (i) a mortgagee's title policy (or policies) or marked-up
unconditional binder (or binders) for such insurance (or other evidence
acceptable to the Agent proving ownership thereof) ("MORTGAGEE'S TITLE
INSURANCE POLICY") dated a date reasonably satisfactory to the Agent,
and such policy shall (A) be in an amount not less than the Mortgage
Value (as of the Closing Date) of such parcel of Real Property, (B) be
issued at ordinary rates, (C) insure that the Lien granted pursuant to
this Agreement and the Orders insured thereby creates a valid first
Lien on such parcel of Real Property free and clear of all defects and
encumbrances, except such as may be approved by the Agent and Permitted
Liens, (D) name the Agent for the benefit of the Lenders as the insured
thereunder, (E) be in the form of ALTA Loan Policy - 1992 (or such
local equivalent thereof as is reasonably satisfactory to the Agent),
(F) contain a comprehensive lender's endorsement and (G) be issued by
Chicago Title Insurance Company, First American Title Insurance
Company, Lawyers Title Insurance Corporation or any other title company
reasonably satisfactory to the Agent (including any such title
companies acting as co-insurers or reinsurers), (ii) evidence
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satisfactory to it that all premiums in respect of each such policy,
all recording fees and stamp, documentary, intangible or mortgage
taxes, if any, in connection with the Mortgage have been paid and (iii)
a copy of all documents referred to, or listed as exceptions to title,
in such title policy (or policies);
(d) the Agent shall have received an appraisal with respect to
such parcel of Real Property that is reasonably satisfactory in form
and substance to the Agent and the Requisite Lenders and performed by
an appraiser that is satisfactory to the Agent;
(e) if requested by the Agent, the Agent shall have received a
Phase I environmental report with respect to such parcel of Real
Property, dated a date not more than one year prior to the Closing
Date, showing no material condition of environmental concern, and in
form reasonably satisfactory to the Agent; and
(f) no casualty shall have occurred affecting the use,
operation or value of such parcel of Real Property if such casualty has
not been restored or repaired by the Loan Party granting a Lien on such
parcel of Real Property;
(g) no condemnation or taking by eminent domain shall have
occurred nor shall any notice of any pending or threatened condemnation
or other proceeding against such parcel of Real Property have been
delivered to the owner or lessee of such parcel of Real Property which
would materially affect the use, operation or value of such;
(h) the Loan Party granting a Lien on such parcel of Real
Property shall (i) make such representations and warranties and
covenants as are reasonably required by the Agent, (ii) in all material
respects comply with all Requirements of Law of any Governmental
Authority applicable to such parcel of Real Property or to the use or
occupancy thereof, and (iii) pay and discharge all taxes of every kind
and nature, all assessments, all water and sewer rents and charges and
all other charges which may become a lien on the Real Property; and
(i) if requested by the Agent, the Agent shall have received a
Mortgage duly executed by such Loan Party covering such parcel of Real
Property.
"ENTRY DATE" means the date of the entry of the Final Order.
"ENVIRONMENTAL CLAIMS" means any and all administrative, regulatory or
judicial claims, demands, directives, proceedings, orders, decrees and judgments
relating in any way to any Environmental Law or any Environmental Permit.
"ENVIRONMENTAL LAWS" means all federal, state and local laws (including
common law), statutes, rules, regulations, ordinances and codes, and any binding
judicial or administrative interpretation thereof or requirement thereunder,
including any judicial or administrative order, by any Governmental Authority,
relating to the regulation or protection of human health, safety, the
environment and natural resources.
"ENVIRONMENTAL LIABILITIES AND COSTS" means, with respect to any
Person, all liabilities, obligations, responsibilities, Remedial Actions,
losses, damages, punitive damages, consequential damages, treble damages, costs
and expenses (including all fees, disbursements and expenses of counsel, experts
and consultants and costs of investigation and feasibility studies), fines,
penalties, sanctions and interest incurred as a result of any claim or demand by
any other Person, whether based in contract, tort, implied or express warranty,
strict liability, criminal or civil statute, including any thereof arising under
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any Environmental Law, Permit, order or agreement with any Governmental
Authority or other Person, which relate to any environmental, health or safety
condition or a Release or threatened Release, and result from the past, present
or future operations of, or ownership of property by, such Person or any of its
Subsidiaries.
"ENVIRONMENTAL PERMIT" means any license, permit, authorization,
registration or approval issued or required under any Environmental Law.
"EQUIPMENT" means, with respect to any Loan Party, any and all
"equipment," as such term is defined in Section 9-109(2) of the UCC, now owned
or hereafter acquired by such Loan Party.
"ERISA" means the Employee Retirement Income Security Act of 1974.
"ERISA AFFILIATE" means any entity which is (or at any relevant time
was) a member of a group under "common control" or treated as a single employer
with the Borrower pursuant to Section 414(b), (c) or (m) of the Code.
"ERISA EVENT" means (i) any of the events set forth in Section 4043(b)
of ERISA or the regulations thereunder, with respect to a Pension Plan; (ii) a
withdrawal by the Borrower or any ERISA Affiliate from a Pension Plan subject to
Section 4063 of ERISA during a plan year in which it was a substantial employer
(as defined in Section 4001(a)(2) of ERISA); (iii) a complete or partial
withdrawal by the Borrower or any ERISA Affiliate from a Multiemployer Plan;
(iv) the filing of a notice of intent to terminate, the treatment of a plan
amendment as a termination under Section 4041 or 4041A of ERISA or the
commencement of proceedings by the PBGC to terminate a Pension Plan or
Multiemployer Plan subject to Title IV of ERISA; (v) a failure to make required
contributions to a Pension Plan or Multiemployer Plan; (vi) the imposition of
any liability under Title VI of ERISA, other than PBGC premiums due but not
delinquent under Section 4007 of ERISA, upon the Borrower or any ERISA
Affiliate; (vii) an application for a funding waiver or an extension of any
amortization period pursuant to Section 412 of the Code with respect to any
Pension Plan; (viii) the Borrower or ERISA Affiliate engages in a nonexempt
prohibited transaction or otherwise becomes liable with respect to a nonexempt
prohibited transaction, the consequences of which, in the aggregate, constitute
or could reasonably be expected to result in a Material Adverse Change; or (ix)
a violation of the applicable requirements of Section 404 or 405 of ERISA or the
exclusive benefit rule under Section 401(a) of the Code by the Borrower or any
ERISA Affiliate with respect to any Pension Plan for which the Borrower or any
of its Subsidiaries may be liable, the consequences of which, in the aggregate,
constitute or could reasonably be expected to result in a Material Adverse
Change.
"EUROCURRENCY LIABILITIES" has the meaning assigned to that term in
Regulation D of the Board of Governors of the Federal Reserve System, as in
effect from time to time.
"EURODOLLAR LENDING OFFICE" means, with respect to any Lender, the
office of such Lender specified as its "Eurodollar Lending Office" opposite its
name on Schedule I hereto or in the Assignment and Acceptance by which it became
a Lender (or, if no such office is specified, its Domestic Lending Office) or
such other office of such Lender as such Lender may from time to time specify to
the Borrower and the Agent as its Eurodollar Lending Office.
"EURODOLLAR RATE" means, for any Interest Period for each Eurodollar
Rate Advance comprising part of the same Revolving Credit Advance, an 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
(or such other page as may replace such page on the Telerate Service for the
purpose of displaying interest rates in the London interbank markets) for
deposits in Dollars in an amount
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substantially equal to such Revolving Credit Advance and for a period equal to
such Interest Period, to the extent that such interest rate is unavailable on
the Telerate Service, the Eurodollar Rate for any Interest Period for each
Eurodollar Rate Advance comprising part of the same Revolving Credit 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 a.m. (London
time) two Business Days before the first day of such Interest Period in an
amount substantially equal to Citibank's Eurodollar Rate Advance comprising part
of such Revolving Credit Advance (or, if Citibank is not a Lender, 10% of such
Revolving Credit Advance) and for a period equal to such Interest Period.
"EURODOLLAR RATE ADVANCE" means an Advance which bears interest by
reference to the Eurodollar Rate as provided in Section 2.07(b).
"EURODOLLAR RATE MARGIN" means 3.0% per annum.
"EURODOLLAR RATE RESERVE PERCENTAGE" of any Lender for any day in the
Interest Period for any Eurodollar Rate Advance means the reserve percentage
applicable for such day under regulations issued from time to time by the Board
of Governors of the Federal Reserve System (or any successor) for determining
the maximum reserve requirement (including any emergency, supplemental or other
marginal reserve requirement) for such Lender with respect to liabilities or
assets consisting of or including Eurocurrency liabilities having a term equal
to such Interest Period.
"EVENTS OF DEFAULT" has the meaning provided in Section 7.01.
"FACILITY" means, collectively, the Interim Facility and the Permanent
Facility.
"FACILITY AMOUNT" means, (a) on any date of determination prior to the
Entry Date, (i) the lesser of (A) the aggregate amount of the Commitments in
effect at such time and (B) $100,000,000 minus (ii) all Facility Reductions
which are then effective and (b) on any date of determination from and after the
Entry Date, (i) the aggregate amount of the Commitments in effect at such time
minus (ii) all Facility Reductions which are then effective.
"FACILITY REDUCTION" means each temporary or permanent reduction of the
Facility, whether voluntarily made or scheduled to be made pursuant to Section
2.05 or required to be made pursuant to Section 2.06, Section 7.01 or any other
provision of this Agreement or otherwise becoming effective in accordance with
this Agreement.
"FEDERAL FUNDS RATE" means, for any period, a fluctuating interest rate
per annum equal for each day during such period to the weighted average of the
rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published for such day (or,
if such day is not a Business Day, for the next preceding Business Day) by the
Federal Reserve Bank of New York, or, if such rate is not so published for any
day which is a Business Day, the average of the quotations for such day on such
transactions received by Citibank from three Federal funds brokers of recognized
standing selected by it.
"FEE LETTERS" is defined in Section 2.04(e).
"FILING SUBSIDIARY" is defined in the preamble to this Agreement.
"FINAL ORDER" means an order of the Bankruptcy Court pursuant to
section 364 of the Bankruptcy Code, approving this Agreement, the other Loan
Documents and authorizing the incurrence
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by the Loan Parties of permanent post-petition secured and super-priority Debt
in accordance with this Agreement, and as to which no stay has been entered and
which has not been reversed, modified, vacated or overturned, and which is in
form and substance satisfactory to the Agent and the Requisite Lenders.
"FIRST DAY ORDERS" means all orders entered by the Bankruptcy Court on
the Petition Date or within five Business Days of the Petition Date or based on
motions filed on the Petition Date.
"FISCAL YEAR" means the twelve-month period ending on December 31.
"FUNDED LC EXPOSURE" means the aggregate principal amount, as of any
date of determination, of all payments that were made by the LC Bank under any
Letter of Credit but have not been reimbursed to the LC Bank by the Borrower
pursuant to Section 2.02(c) or converted into Advances pursuant to Section
2.02(e).
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board (or agencies with similar functions of
comparable stature and authority within the accounting profession), or in such
other statements by such entity as may be in general use by significant segments
of the U.S. accounting profession, which are applicable to the facts and
circumstances on the date of determination.
"GENERAL INTANGIBLE" means, with respect to any Loan Party, any and all
"general intangibles," as such term is defined in Section 9-106 of the UCC, now
owned or hereafter acquired by such Loan Party.
"GOVERNMENTAL AUTHORITY" means any nation, state, sovereign or
government, any political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"GUARANTOR" means each Filing Subsidiary.
"GUARANTY" means the guaranty of the Obligations of the Borrower made
by the Guarantors pursuant to Article VIII of this Agreement.
"HARD COSTS" means the direct costs of building, improving or
maintaining any Health Care Facility or other property used by the Borrower or
any of its Subsidiaries (including the cost of land, construction, bricks,
mortar, painting and related building maintenance, carpeting, roof repair and
replacement, parking lot replacement and maintenance, landscaping, HVAC
equipment and sprinkler systems and other items generally considered hard costs
under construction industry practice but not including the purchase price of an
existing Health Care Facility or any allocated overhead and administrative
expenses and other items generally considered soft costs under construction
industry practice) and the purchase price of any fixed, movable or mobile
equipment located on or used in connection with any such Health Care Facility or
otherwise used in conducting business if such equipment is or is required to be
reflected as property, plant and equipment on the consolidated balance sheet of
the Borrower and its Subsidiaries.
"HEALTH CARE COMPANY" means a Person that is principally engaged,
directly or indirectly through its Subsidiaries, in the business of owning,
operating or managing Health Care Facilities or healthcare operations or
providing healthcare services.
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"HEALTH CARE FACILITY" means a facility which provides any healthcare
services at such facility, whether licensed as a skilled nursing facility,
intermediate care facility, personal care facility or a hospital.
"HEALTH CARE PERMIT" means every accreditation, authorization,
certificate of need, license or permit that is required pursuant to applicable
federal or state law to own, lease, operate or manage a Health Care Facility or
conduct the business of a Health Care Company.
"HEDGING CONTRACT" means any interest rate swap agreement, currency
swap agreement, commodities swap agreement, equity option or put arrangement,
cap, floor or collar agreement, insurance relating to the respective risk
protection or other similar agreement or arrangement designed to provide such
risk protection entered into by the Borrower and the Agent or any Lender.
"INDEMNIFIED LIABILITIES" is defined in Section 11.06(a).
"INDEMNIFIED PERSON" is defined in Section 11.06(a).
"INITIAL PROJECTIONS" means the Projections dated November 29, 1999
delivered to the Agent prior to January 13, 2000.
"INSTRUMENT" means, with respect to any Loan Party, any and all
"instruments," as such term is defined in Section 9-105(1)(i) of the UCC, now
owned or hereafter acquired by such Loan Party other than instruments that
constitute, or are a part of a group of writings that constitute, Chattel Paper.
"INSURER" means a Person that insures a Patient against certain of the
costs incurred in the receipt by such Patient of Medical Services, or that has
an agreement with any Loan Party to compensate such Loan Party for providing
services to a Patient.
"INTEREST EXPENSE" means, with respect to any Person, for any period
for such Person and its subsidiaries on a consolidated basis, interest expense
net of interest income, determined in conformity with GAAP.
"INTEREST PERIOD" means, for each Eurodollar Rate Advance comprising
part of the same Revolving Credit Advance the period commencing on the date of
such Advance or the date of the conversion of any Advance into such an Advance
and ending on the last day of the period selected by the Borrower pursuant to
the provisions below and, thereafter, each subsequent period commencing on the
last day of the immediately preceding Interest Period and ending on the last day
of the period selected by the Borrower pursuant to the provisions below. The
duration of each such Interest Period shall be 1, 2, 3 or 6 months, as the
Borrower may select by notice received by the Agent not later than 11:00 a.m.
(New York City time) three Business Days prior to the first day of such Interest
Period; provided, however, that:
(a) the Borrower may not select any Interest Period in respect
of any Revolving Credit Advance which ends after the Maturity Date;
(b) the Borrower may not select any Interest Period which ends
after any date on which any payment on the respective Advances
(including any payment of Revolving Credit Advances which may result
from a Facility Reduction) is due unless, after giving effect to such
selection, the aggregate unpaid principal amount of Revolving Credit
Advances, having Interest Periods which end on or prior to such date is
at least equal to the principal amount of Advances due and payable on
and prior to such date;
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(c) Interest Periods commencing on the same date for Advances
comprising part of the same Revolving Credit Advance shall be of the
same duration;
(d) whenever the last day of any Interest Period would
otherwise occur on a day that is not a Business Day, the last day of
such Interest Period shall be extended to the next succeeding Business
Day, except that if such extension would cause the last day of such
Interest Period to occur in the next following calendar month, the last
day of such Interest Period shall be the next preceding Business Day;
and
(e) the Borrower may not have more than six (6) Interest
Periods in effect at any one time.
"INTERIM FACILITY" means that portion of the Facility made available to
the Borrower prior to the entry of the Final Order, as approved by the Interim
Order.
"INTERIM ORDER" means that certain order issued by the Bankruptcy Court
in substantially the form of Exhibit E-3 and otherwise in form and substance
satisfactory to the Agent.
"INVENTORY" means, with respect to any Loan Party, any and all
"inventory," as such term is defined in Section 9-109(4) of the UCC, now owned
or hereafter acquired by such Loan Party, and wherever located.
"INVESTMENT" means (i) the acquisition of any interest in any property,
assets or business from any Person, whether by sale, lease or otherwise, (ii)
the funding of any loan, extension of credit, accommodation or capital
contribution to or for the benefit of any Person, and (iii) the acquisition of
any debt or equity securities of or claim against or interest in any Person,
whether upon original issuance, by purchase or otherwise.
"INVESTMENT PROPERTY" means, with respect to any Loan Party, any and
all "investment property" as such term is defined in Section 9-115(l)(f) of the
UCC, now owned or hereafter acquired by such Loan Party and wherever located.
"LC APPLICATION" means an application for a Letter of Credit in
substantially the form of Exhibit B-3, setting forth the information described
therein and such other information as the LC Bank may reasonably request, and
signed by an Authorized Officer.
"LC BANK" means Citibank.
"LC EXPOSURE" means the sum, as of any date of determination, of the
Unfunded LC Exposure and the Funded LC Exposure.
"LC FEE RATE" means, for any day, the then Eurodollar Rate Margin minus
0.25% per annum.
"LC SUBCOMMITMENT" means the lesser, as of any date of determination,
of (i) $50,000,000 and (ii) the Facility Amount.
"LEASE EXPENSE" means, with respect to any Person, for any period for
such Person and its subsidiaries on a consolidated basis, lease and rental
expense accrued during such period under all leases and rental agreements, other
than Capital Leases and leases of personal property, of Health Care Facilities,
determined in conformity with GAAP.
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"LENDER" means each financial institution or other entity that (a) is
listed on the signature pages hereof as a "Lender" or (b) from time to time
becomes a party hereto by execution of an Assignment and Acceptance.
"LETTER OF CREDIT" means a letter of credit that (i) is available for
funding in Dollars until an expiry date no later than the thirtieth (30th) day
preceding the Termination Date, (ii) is issued by the LC Bank at the request and
for the account of the Borrower or of any other Loan Party; provided that such
other Loan Party shall be a co-applicant, along with the Borrower, on such
letter of credit, (iii) is governed by the Uniform Customs and Practices for
Documentary Credits (1993 Revision), International Chamber of Commerce
Publication 500, except as otherwise agreed by the LC Bank, (iv) has a term of
one year or less, and (v) is in form reasonably satisfactory to the LC Bank.
"LIEN" means any mortgage, deed of trust, lien, pledge, charge,
security interest, hypothecation, assignment, deposit arrangement or encumbrance
of any kind in respect of any asset, whether or not filed, recorded or otherwise
perfected or effective under applicable law, as well as the interest of a vendor
or lessor under any conditional sale agreement, capital or finance lease or
other title retention agreement relating to such asset.
"LOAN DOCUMENTS" means this Agreement, the Notes, the Blocked Account
Letters, the Letters of Credit, each LC Application, the Fee Letters and all
other guaranties and other agreements, instruments and written indicia of the
Obligations delivered to the Agent or any Lender by or on behalf of the Borrower
or any other Loan Party pursuant to or in connection with the transactions
contemplated hereby and thereby.
"LOAN PARTIES" means the Borrower and each Guarantor.
"MATERIAL ADVERSE CHANGE" means any materially adverse change in (i)
the business, condition (financial or otherwise), operations, performance,
properties or prospects of the Borrower and the other Loan Parties, taken as a
whole, (ii) the ability of the Loan Parties to perform their respective
obligations under the Loan Documents or (iii) the ability of the Agent and the
Lenders to enforce the Loan Documents.
"MATERIAL ENVIRONMENTAL CLAIM" means any Environmental Claim,
regardless of merit, which does or can reasonably be expected to (i) result in
the Borrower or any of its Subsidiaries expending in the aggregate an amount in
excess of $2,500,000 to defend against, settle or satisfy, or (ii) prevent or
enjoin the Borrower or any of its Subsidiaries from operating a Health Care
Facility on any property on which it conducts operations.
"MATERIAL LEASE" means any lease agreement in which the aggregate
annual rental payments due thereunder exceed $2,500,000.
"MATURITY DATE" means the second anniversary of the Closing Date.
"MAXIMUM CREDIT" means at any time, (i) the lesser of (A) the Facility
Amount in effect at such time and (B) the Borrowing Base at such time minus (ii)
any Availability Reserve in effect at such time.
"MEDICAID ACCOUNTS" means all Accounts for which the Account Debtor is
(A) any State acting pursuant to a health plan adopted pursuant to Title XIX of
the Social Security Act or (B) any agent, carrier, administrator or intermediary
for such State in connection with any such plan.
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"MEDICAL SERVICES" means medical and health care services provided to a
Patient, including, but not limited to, medical and health care services
provided to a Patient and performed by or on behalf of any Loan Party which are
covered by a policy of insurance issued by an Insurer, and includes physician
services, nurse and therapist services, dental services, hospital services,
skilled nursing facility services, comprehensive outpatient rehabilitation
services, home health care services, residential and out-patient behavioral
healthcare services, and medicine or health care equipment provided by or on
behalf of any Loan Party to a Patient for a valid and proper medical or health
purpose.
"MEDICARE ACCOUNTS" means all Accounts for which the Account Debtor is
(A) the United States acting under the Medicare program established pursuant to
the Social Security Act or (B) any agent, carrier, administrator or intermediary
for the United States in connection with any such program.
"MEDICARE SETOFF ARRANGEMENT" means (i) an agreement between the
Borrower and the applicable federal Governmental Authorities that are Account
Debtors on all Medicare Accounts, which agreement shall have been approved by an
order of the Bankruptcy Court or (ii) a final, Non-Stayed Order binding on such
federal Governmental Authorities, in each case covering issues of setoff and
recoupment with respect to Medicare Accounts and in each case on terms and
conditions acceptable to the Agent and the Requisite Lenders.
"MOODY'S" means Moody's Investors Service, Inc., and its successors.
"MORTGAGE" means a mortgage, deed of trust or other real estate
security document encumbering Real Property of any Loan Party made or required
herein to be made by such Loan Party.
"MORTGAGE VALUE" means, with respect to any parcel of Eligible Real
Property, the lesser of (a) the maximum stated amount secured by the Lien on
such parcel of Eligible Real Property granted in favor of the Agent pursuant to
the relevant Mortgage and (b) the value of such parcel of Eligible Real Property
set forth in the appraisal delivered with respect thereto.
"MORTGAGEE'S TITLE INSURANCE POLICY" has the meaning specified in the
definition of Eligible Real Property.
"MULTIEMPLOYER PLAN" means any "multiemployer plan," as defined in
Section 4001(a)(3) of ERISA, as to which the Borrower or any of its ERISA
Affiliates has any obligation or liability (contingent or otherwise).
"1934 ACT" means the Securities Exchange Act of 1934 and the
regulations thereunder.
"NET CASH PROCEEDS" means (a) proceeds received by any Loan Party after
the Closing Date in cash or Cash Equivalents from any Asset Sale, other than
Asset Sales permitted under clauses (i) and (ii) of Section 6.02(b), net of (x)
the reasonable cash costs of sale, assignment or other disposition, (y) taxes
paid or payable as a result thereof and (z) any amount required by the
Bankruptcy Court to be paid or prepaid on Debt secured by a perfected and
unavoidable lien on the assets subject to such Asset Sale; provided, however,
that the evidence of each of (x), (y) and (z) are provided to the Agent in form
and substance satisfactory to it; (b) all money and other Cash Equivalents
obtained as a result of any claims against third parties or any legal action or
proceeding with respect to any of the Collateral; and (c) proceeds of fire or
other insurance on account of the loss of or damage to any such assets or
property, and payments of compensation for any such assets or property taken by
condemnation or eminent domain.
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"NON-STAYED ORDER" means an order of the Bankruptcy Court which is in
full force and effect, as to which no stay has been entered and which has not
been reversed, modified, vacated or overturned.
"NOTES" means the revolving notes of the Borrower which may be required
to be delivered pursuant to Section 6.01(m) and all promissory notes and other
evidence of indebtedness at any time delivered by the Borrower in exchange or
substitution therefor or in replacement thereof or as additional evidence of the
Borrower's indebtedness for the Advances.
"NOTICE OF BORROWING" means a notice in substantially the form of
Exhibit B-l.
"NOTICE OF CONTINUANCE/CONVERSION" means a notice in substantially the
form of Exhibit B-2.
"NOTICE OF SWING LINE ADVANCE" means a notice in substantially the form
of Exhibit B-4.
"OBLIGATIONS" means all present and future Debts, obligations and
liabilities of every type and description of the Borrower or any other Loan
Party at any time arising under or in connection with this Agreement, any other
Loan Document, cash management services or any agreement related thereto, or any
Hedging Contract, due or to become due to the Agent, any Lender, any Person
required to be indemnified under any Loan Document or any other Person and shall
include (i) all liability for principal of and interest on any Advances, (ii)
all liability for principal of and interest on any reimbursement owed to the LC
Bank for a payment made by it under a Letter of Credit, and (iii) all liability
under the Loan Documents, such cash management agreements and Hedging Agreements
for any additional interest, fees, taxes, compensation, costs, losses, expense
reimbursements and indemnification.
"OECD" means the Organization for Economic Cooperation and Development.
"ORDERS" means the Interim Order or the Final Order, as applicable.
"OTHER AGENTS" means, collectively, the Syndication Agent and the
Co-Documentation Agents.
"OTHER TAXES" is defined in Section 2.16(b).
"OUTSTANDING REVOLVING CREDIT" means the sum, as of any date of
determination, of (i) the aggregate outstanding principal amount of the Advances
and (ii) the LC Exposure.
"PATIENT" means any Person receiving Medical Services from any Loan
Party and all Persons legally liable to pay any Loan Party for such Medical
Services other than Insurers.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any of its functions under ERISA.
"PENSION PLAN" means any pension plan (other than a Multiemployer Plan)
as to which the Borrower or any of its ERISA Affiliates has any obligation or
liability (contingent or otherwise) and which is subject to Title IV of ERISA or
Section 412 of the Code.
"PERMANENT FACILITY" means the Facility made available to the Borrower
from and after the entry of the Final Order.
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"PERMIT" means any permit, approval, authorization, license, variance
or permission required from a Governmental Authority under an applicable
Requirement of Law.
"PERMITTED LIENS" means Liens permitted under Section 6.02(a).
"PERMITTED PREPETITION CLAIM PAYMENT" means a payment (as adequate
protection or otherwise) on account of any Claim arising or deemed to have
arisen prior to the commencement of the Cases, which is made (i) pursuant to
authority granted by a Non-Stayed Order of the Bankruptcy Court and (ii) when
aggregated with all such payments does not exceed $200,000,000; provided, that
no such payment shall be made after the occurrence and during the continuance of
a Potential Default or an Event of Default.
"PERSON" means an individual, partnership, corporation, limited
liability company, business trust, joint stock company, trust, unincorporated
association, joint venture or other entity, or a government or any political
subdivision or agency thereof.
"PETITION DATE" is defined in the recitals to this Agreement.
"POTENTIAL DEFAULT" means any event or condition described in Section
7.01 which, with any notice or passage of time (or both) expressly described in
Section 7.01, would constitute an Event of Default.
"PRIVATE PAYOR ACCOUNT" means an Account or any portion of an Account
that is payable by an individual beneficiary, recipient or subscriber
individually and not directly to a Loan Party by Medicaid, Medicare or an
Insurer.
"PROCEEDS" means any and all "proceeds," as such term is defined in
Section 9-306 of the UCC.
"PROJECTIONS" means the Borrower's projections to be delivered in a
form consistent with the Initial Projections.
"PRO RATA SHARE" means, in respect of any Lender, the percentage
obtained by dividing (a) the Commitment of such Lender by (b) the aggregate
Commitments of all Lenders (or, at any time after the Termination Date, the
percentage obtained by dividing the aggregate outstanding principal balance of
the Outstanding Revolving Credit owing to such Lender by the aggregate
outstanding principal balance of the Outstanding Revolving Credit owing to all
Lenders).
"QUARTER" means, with respect to any Person, a fiscal quarter of such
Person.
"REAL PROPERTY" means all of those plots, pieces or parcels of land now
owned, leased or hereafter acquired or leased by any Loan Party (the "LAND"),
together with the right, title and interest of such Loan Party, if any, in and
to the streets, the land lying in the bed of any streets, roads or avenues,
opened or proposed, in front of, the air space and development rights pertaining
to the Land and the right to use such air space and development rights, all
rights of way, privileges, liberties, tenements, hereditaments and appurtenances
belonging or in any way appertaining thereto, all fixtures, all easements now or
hereafter benefiting the Land and all royalties and rights appertaining to the
use and enjoyment of the Land, including all alley, vault, drainage, mineral,
water, oil and gas rights, together with all of the buildings and other
improvements now or hereafter erected on the Land, and any fixtures appurtenant
thereto.
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"REGISTER" is defined in Section 11.07(c).
"RELATED FUND" means, with respect to any Lender that is a fund that
invests in loans, any other fund that invests in loans and is managed by the
same investment advisor as such Lender or by an Affiliate of such investment
advisor.
"RELEASE" means, with respect to any Person, any release, spill,
emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal,
leaching or migration, in each case, of any Contaminant into the indoor or
outdoor environment or into or out of any property owned by such Person,
including the movement of Contaminants through or in the air, soil, surface
water, ground water or property.
"REMEDIAL ACTION" means all actions required to (a) clean up, remove,
treat or in any other way address any Contaminant in the indoor or outdoor
environment, (b) prevent the Release or threat of Release or minimize the
further Release so that a Contaminant does not migrate or endanger or threaten
to endanger public health or welfare or the indoor or outdoor environment or (c)
perform pre-remedial studies and investigations and post-remedial monitoring and
care.
"REQUIREMENT OF LAW" means as to any Person, the certificate or
articles of incorporation and bylaws or other organizational or governing
documents of such Person, and any law, statute, ordinance, code, decree, order,
treaty, rule or regulation or determination of an arbitrator or a court or other
Governmental Authority, in each case applicable to or binding upon such Person
or any of its property or to which such Person or any of its property is subject
(including, without limitation, laws, ordinances and regulations pertaining to
the zoning, occupancy and subdivision of real property).
"REQUISITE LENDERS" means Lenders at the time in the aggregate holding
at least 51% of (i) the aggregate Commitments of all the Lenders and/or (ii) the
aggregate outstanding principal amount of the sum of (x) the Advances by all
Lenders and (y) LC Exposure of all Lenders.
"RESTRUCTURING" means (i) the recapitalization and financial
restructuring of the Borrower and its Subsidiaries, including as accomplished in
the Cases, and (ii) the Borrower's facility rationalization process, including
as contemplated in the Initial Projections.
"RESTRUCTURING CHARGES" means all of the following, to the extent
deducted in determining the net income of a Person: fees, charges, expenses,
write-offs and write-downs relating to the Restructuring, incurred prior to or
after the Petition Date, including, without limitation, (i) fees, costs and
expenses, including without limitation, financing costs and fees, attorneys' and
accountants' fees, retention, incentive and downsizing costs, appraisals and
other fees and expenses, incurred in connection with the Restructuring by the
Borrower, any Filing Subsidiary or any other interested person which is payable
by the Borrower or any Filing Subsidiary, (ii) fees paid to Warburg Dillon Read
LLC, KPMG LLP or any other consultants or investment advisors hired or engaged
by or for the benefit of any Borrower or any Filing Subsidiary or any interested
person which are payable by any Borrower or any Filing Subsidiary and (iii)
costs and expenses relating to closed or terminated facilities, or facilities at
which operations have been materially reduced, including , without limitation,
continuing occupancy costs and other related expenses, any payments made to
landlords of closed, terminated or operationally reduced facilities or rejected
leases, in cancellation, reduction or modification of lease obligations,
severance payments to employees and independent contractors and other
miscellaneous expenses related to closed, terminated or operationally reduced
facilities, in each case, including any reserves therefor; provided that the
amount of cash charges with respect to the items described in clauses (i)
through (ii) above shall not exceed an aggregate amount of (A) during the first
twelve months following the Closing
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Date, $30,000,000 and (B) during the twelve month period immediately following
the first twelve months after the Closing Date, $25,000,000.
"REVOLVING CREDIT ADVANCE" is defined in Section 2.01(a).
"ROTECH" means RoTech Medical Corporation, a Florida corporation.
"S&P" means Standard & Poor's Ratings Services, A Division of the
McGraw-Hill Companies, Inc., and its successors.
"SECURED PARTIES" means the Agent, the Lenders, the Swing Line Bank,
the LC Bank, each of their respective successors and assigns, and the
beneficiaries of each indemnification obligation undertaken by the Loan Parties
and the Agent.
"SOCIAL SECURITY ACT" means the Social Security Act as codified at 42
U.S.C. Section 1395 et. seq.
"STATE" means the District of Columbia or any state of the United
States of America.
"STOCK" means shares of capital stock (whether denominated as common
stock or preferred stock), beneficial, partnership or membership interests,
participations or other equivalents (regardless of how designated) of or in a
corporation, partnership, limited liability company or equivalent entity,
whether voting or non-voting.
"SUBSIDIARY" means, with respect to any Person, any corporation,
association, partnership, joint venture or other business entity of which more
than 50% of the voting stock or other equity interests is owned or controlled
directly or indirectly by such Person or one or more Subsidiaries of such Person
or a combination thereof.
"SWING LINE ADVANCE" means an Advance made by (a) the Swing Line Bank
pursuant to Section 2.01(a)(ii) or (b) any Lender pursuant to Section 2.01(h).
"SWING LINE BANK" means CUSA.
"SWING LINE FACILITY" has the meaning specified in Section 2.01(a)(ii).
"SYMPHONY" means Symphony Health Services, Inc., a Delaware
corporation.
"SYNDICATION AGENT" means First Union National Bank.
"TAXES" is defined in Section 2.16(a).
"TERMINATION DATE" means the earliest of (a) the Maturity Date, (b) the
date of termination of the Commitments pursuant to Section 2.06(a), (c) the date
on which the Obligations become due and payable pursuant to Section 7.01 and (d)
the Effective Date.
"'34 ACT COMPANY" means a Person that is a reporting company under the
1934 Act.
"UCC" means, at any time, the Uniform Commercial Code in effect in the
State of New York at such time.
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"UNFUNDED LC EXPOSURE" means the maximum amount which the LC Bank may
be required, under all Letters of Credit outstanding as of any date of
determination, to pay on such date or at any future time.
"UNFUNDED PENSION LIABILITY" means, with respect to any Pension Plan,
the excess of such Pension Plan's accrued benefits, as defined in Section 3(23)
of ERISA, over the current value of such Pension Plan's assets, as defined in
Section 3(26) of ERISA (but excluding from the definition of "current value" of
"assets" of such Pension Plan, accrued but unpaid contributions).
"UNITED STATES" and "U.S." mean the United States of America.
"U.S. TRUSTEE" means the United States Trustee for the District of
Delaware.
"WITHDRAWAL LIABILITIES" means the aggregate amount of the liabilities,
if any, pursuant to Section 4201 of ERISA if the Borrower and each ERISA
Affiliate made a complete withdrawal from all Multiemployer Plans and any
increase in contributions pursuant to Section 4243 of ERISA.
"YEAR 2000 COMPLIANT" means the ability of hardware, firmware or
software systems associated with information processing and delivery, operations
or services, operated by, provided to or otherwise necessary to the business or
operations of the Borrower or the Filing Subsidiaries to recognize and properly
perform date-sensitive functions involving certain dates prior to, and at any
date after, December 31, 1999.
SECTION 1.02. Accounting Terms. All accounting terms not expressly
defined herein shall be construed, except where the context otherwise requires,
and all financial computations required under this Agreement shall be made in
accordance with GAAP applied on a consistent basis. If GAAP changes during the
term of this Agreement so as to affect the calculation of any term defined
herein or any measure of financial performance or financial condition employed
or referred to herein, the Borrower and the Lenders agree to negotiate in good
faith toward an amendment of this Agreement which shall approximate, to the
extent possible, the economic effect of the original provisions hereof after
taking into account such change in GAAP, but until the parties are able to agree
upon such amendment (i) the Borrower shall be deemed in compliance with the
provisions hereof only if and to the extent it would have been in compliance if
such change in GAAP had not occurred and (ii) the Borrower shall deliver to the
Agent, with each financial report delivered by the Borrower hereunder,
information sufficient to confirm such compliance as if such change in GAAP had
not occurred.
SECTION 1.03. Other Definitional Provisionss.
(a) Unless otherwise specified herein or therein, all terms defined in
this Agreement shall have the defined meanings when used in any other Loan
Document or in any certificate or other document made or delivered pursuant
hereto.
(b) The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Agreement refer to this Agreement as a whole and not to
any particular provision of this Agreement, and section, Schedule and Exhibit
references are to this Agreement unless otherwise specified. The meaning of
defined terms shall be equally applicable to the singular and plural forms of
the defined terms. The term "including" is not limiting and means "including
without limitation."
(c) In the computation of periods of time from a specified date to a
later specified date, the word "from" means "from and including"; the words "to"
and "until" each mean "to but excluding"; and the word "through" means "to and
including."
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(d) References to agreements and other documents shall be deemed to
include all subsequent amendments and other modifications thereto, but only to
the extent such amendments and other modifications are not prohibited by the
terms of any Loan Document.
(e) References to statutes or regulations shall be construed as
including all statutory and regulatory provisions consolidating, amending or
replacing the statute or regulation.
(f) The captions and headings of this Agreement are for convenience of
reference only and shall not affect the construction of this Agreement.
ARTICLE II
AMOUNTS AND TERMS OF THE ADVANCES
SECTION 2.01. Revolving Facility and Swing Line Facility.
(a) Advances.
(i) Revolving Credit Advances. On the terms and subject to the
conditions contained in this Agreement, each Lender severally agrees to
make revolving loans (each a "REVOLVING CREDIT ADVANCE") to the
Borrower from time to time on any Borrowing Date during the period from
the Closing Date until the Termination Date in an aggregate amount not
to exceed at any time outstanding for all such loans by such Lender
such Lender's Commitment; provided, however, that at no time shall any
Lender be obligated to make a Revolving Credit Advance to the Borrower
(i) in excess of such Lender's Pro Rata Share of the Available Credit
of the Borrower at such time and (ii) to the extent that the aggregate
Outstanding Revolving Credit, after giving effect to such Revolving
Credit Advance, would exceed the Maximum Credit at such time.
(ii) Swingline Advances. The Borrower may request the Swing
Line Bank to make, and the Swing Line Bank may, if in its sole
discretion it elects to do so, make, on the terms and conditions
hereinafter set forth, Swing Line Advances to the Borrower from time to
time on any Business Day during the period from the Closing Date until
the Termination Date in an aggregate amount not to exceed at any time
outstanding the lesser of (A) $20,000,000 and (B) the Swing Line Bank's
Pro Rata Share of the Available Credit at such time; provided, however,
that no Swing Line Advance may be made to the extent that the aggregate
Outstanding Revolving Credit, after giving effect to such Swing Line
Advance, would exceed the Maximum Credit at such time. No Swing Line
Advance shall be used for the purpose of funding the payment of
principal of any other Swing Line Advance. Each Swing Line Advance
shall be in an amount of $500,000 or an integral multiple thereof and
shall be made as a Base Rate Advance. Within the limits of the Swing
Line Facility and within the limits referred to in this clause (ii), so
long as the Swing Line Bank, in its sole discretion, elects to make
Swing Line Advances, the Borrower may borrow under this Section
2.01(a)(ii), prepay pursuant to Section 2.11 and reborrow under this
Section 2.01(a)(ii).
(b) Amount of Revolving Credit Advances. Each Revolving Credit Advance
shall be in an aggregate amount not less than $2,000,000 or an integral multiple
of $1,000,000 in excess thereof and shall consist of either Base Rate Advances
or Eurodollar Rate Advances. The Borrower may reborrow under Section 2.01(a)(i)
any Advances comprising part of the same Revolving Credit Advance that it has
voluntarily prepaid pursuant to Section 2.11.
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(c) Notice of Borrowing. To request a Revolving Credit Advance, the
Borrower shall deliver a Notice of Borrowing to the Agent not later than 11:00
a.m. New York City time (i) three Business Days prior to the requested Borrowing
Date, in the case of Eurodollar Rate Advances, and (ii) one Business Day prior
to the requested Borrowing Date, in the case of Base Rate Advances. The Agent
shall give each Lender prompt notice thereof by telecopier. The Notice of
Borrowing shall specify (A) the requested Borrowing Date, (B) the amount of the
Revolving Credit Advance and whether it will consist of Base Rate Advances or
Eurodollar Rate Advances, (C) the Available Credit at such time, and (D) in the
case of a Revolving Credit Advance comprised of Eurodollar Rate Advances, the
initial Interest Period for such Eurodollar Rate Advances.
(d) Telephonic Notice of Borrowing. The Borrower may give the Agent
telephonic notice of any proposed Revolving Credit Advance by the time required
under Section 2.01(c) and in such event shall promptly (but in no event later
than the Borrowing Date for the requested Revolving Credit Advance) deliver a
confirmatory Notice of Borrowing to the Agent. The Agent shall give each Lender
prompt notice thereof by telecopier. If the telephonic request differs in any
respect from the written Notice of Borrowing subsequently delivered, the
telephonic request shall govern as to the terms of all Advances made in
accordance with such telephonic request. The Agent's determination of the
contents of any telephonic request shall, absent manifest error, be conclusive
and binding on all parties hereto.
(e) Funding of Advances. Upon fulfillment of the applicable conditions
set forth in Article III, each Lender shall, before 12:00 noon New York City
time on the Borrowing Date, make available for the account of its Applicable
Lending Office to the Agent at its address referred to in Section 11.02, in same
day funds, such Lender's Pro Rata Share of a Revolving Credit Advance. After the
Agent in each case receives such funds, the Agent will, not later than 5:00 p.m.
New York City time on the Borrowing Date, make such funds available to the
Borrower at the Agent's aforesaid address.
(f) Assumption of Funding. Unless the Agent receives notice from a
Lender prior to any Borrowing Date that such Lender will not make available to
the Agent such Lender's Pro Rata Share of the Revolving Credit Advance to be
made on such Borrowing Date, the Agent may assume that such Lender has made its
respective share available to the Agent on such Borrowing Date in accordance
with Section 2.01(e) and the Agent may, in reliance upon such assumption, make
available to the Borrower on such Borrowing Date a corresponding amount. If and
to the extent that such Lender fails to make its respective share available to
the Agent, such Lender and the Borrower severally agree to repay to the Agent
forthwith on demand such corresponding amount together with interest thereon,
for each day from the date such amount is made available to the Borrower until
the date such amount is repaid to the Agent, at (i) in the case of the Borrower,
the interest rate applicable at the time to such Revolving Credit Advance and
(ii) in the case of such Lender, the Federal Funds Rate until the third Business
Day after demand by the Agent to such Lender for such repayment and thereafter
at the rate applicable at the time to such Revolving Credit Advance. If such
Lender shall repay to the Agent such corresponding amount, such amount so repaid
shall constitute such Lender's Advance as part of such Revolving Credit Advance
for purposes of this Agreement and the Borrower shall thereupon be excused from
making the repayment described in the preceding sentence.
(g) Failure of Lender to Fund. All obligations of the Lenders hereunder
shall be several, but not joint. The failure of any Lender to make the Advance
to be made by it as part of any Revolving Credit Advance shall not relieve any
other Lender of its obligation, if any, hereunder to make its Advance as part of
such Revolving Credit Advance, but no Lender shall be responsible for the
failure of any other Lender to make an Advance on any Borrowing Date.
(h) Swing Line Advances. Each Swing Line Advance shall be made on
notice, given not later than 11:00 A.M. (New York City time) on the date of the
proposed Swing Line Advance, by the
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Borrower to the Swing Line Bank and the Agent. Each such notice of a Swing Line
Advance (a "NOTICE OF SWING LINE ADVANCE") shall be by telephone or telecopier,
confirmed (in the case of telephonic notice) immediately in writing, specifying
therein the requested (i) date of such Swing Line Advance, (ii) amount of such
Swing Line Advance, (iii) maturity of such Swing Line Advance (which maturity
shall be no later than the seventh day after the requested date of such Swing
Line Advance) and (iv) the Available Credit at such time. If, in its sole
discretion, it elects to make the requested Swing Line Advance, the Swing Line
Bank will make the amount thereof available to the Agent at the Agent's address
referred to in Section 11.02, in same day funds. After the Agent's receipt of
such funds and upon fulfillment of the applicable conditions set forth in
Article III, the Agent will make such funds available to the Borrower at the
Agent's aforesaid address. Upon written demand by the Swing Line Bank with a
copy of such demand to the Agent, each other Lender shall purchase from the
Swing Line Bank, and the Swing Line Bank shall sell and assign to each such
other Lender, such other Lender's Pro Rata Share of such outstanding Swing Line
Advance as of the date of such demand, by making available for the account of
its Applicable Lending Office to the Agent for the account of the Swing Line
Bank, by deposit to the Agent's address referred to in Section 11.02, in same
day funds, an amount equal to the portion of the outstanding principal amount of
such Swing Line Advance to be purchased by such Lender. The Borrower hereby
agrees to each such sale and assignment. Each Lender agrees to purchase its Pro
Rata Share of outstanding Swing Line Advance on (i) the Business Day on which
demand therefor is made by the Swing Line Bank, provided that notice of such
demand is given not later than 11:00 A.M. (New York City time) on such Business
Day or (ii) the first Business Day next succeeding such demand if notice of such
demand is given after such time. Upon any such assignment by the Swing Line Bank
to any other Lender of a portion of a Swing Line Advance, the Swing Line Bank
represents and warrants to such other Lender that the Swing Line Bank is the
legal and beneficial owner of such interest being assigned by it, but makes no
other representation or warranty and assumes no responsibility with respect to
such Swing Line Advance, the Loan Documents or any Loan Party. If and to the
extent that any Lender shall not have so made the amount of such Swing Line
Advance available to the Agent, such Lender agrees to pay to the Agent forthwith
on demand such amount together with interest thereon, for each day from the date
of demand by the Swing Line Bank until the date such amount is paid to the
Agent, at the Federal Funds Rate. If such Lender shall pay to the Agent such
amount for the account of the Swing Line Bank on any Business Day, such amount
so paid in respect of principal shall constitute a Swing Line Advance made by
such Lender on such Business Day for purposes of this Agreement, and the
outstanding principal amount of the Swing Line Advance made by the Swing Line
Bank shall be reduced by such amount on such Business Day.
SECTION 2.02. Letter of Credit Subfacility.
(a) Issuance of Letters of Credit. Subject to the terms and conditions
set forth herein, the LC Bank agrees to issue one or more Letters of Credit, at
the request and for the account of the Borrower, on any Business Day on or after
the Closing Date and prior to the Termination Date, so long as (i) after giving
effect to the issuance of any Letter of Credit so requested, (A) the Outstanding
Revolving Credit at such time does not exceed the Maximum Credit at such time
and (B) the LC Exposure does not exceed the LC Subcommitment in effect at such
time, and (ii) the LC Bank has not received written notice from the Agent or
Requisite Lenders that an Event of Default or Potential Default is continuing.
(b) LC Application. The Borrower may request issuance of a Letter of
Credit by delivering an LC Application to the Agent not later than two Business
Days prior to the date the Letter of Credit is to be issued. The Agent shall
promptly deliver a copy of the LC Application to the LC Bank and each Lender.
(c) Reimbursement. Any payment made by the LC Bank of a draft drawn
under any Letter of Credit shall constitute for all purposes of this Agreement
the making by the LC Bank of a
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Revolving Credit Advance in the amount of such draft, which Advance shall (i)
constitute a Base Rate Advance until converted, at the Borrower's election, into
a Eurodollar Rate Advance pursuant to Section 2.10, and (ii) satisfy the
Borrower's obligation to reimburse the LC Bank under this Section 2.02. With
respect to each Advance made pursuant to this Section 2.02(c), the Borrower
shall be deemed to have certified the statements contained in Section 3.02(e) as
of the date the payment constituting such Advance was made by the LC Bank;
provided, however, that in the event any such statement was not true and correct
as of such date, such Advance shall be repayable on demand; provided, further,
that upon any such repayment on demand, the failure of any such statement to be
true and correct as of such date shall not constitute an Event of Default under
Section 7.01, unless the failure of any such statement to be true and correct as
of such date would have constituted an Event of Default under Section 7.01 even
if such repaid Advance had never been made.
(d) Reimbursement Obligation Absolute. The conversion of a
reimbursement obligation to an Advance as provided in Section 2.02(c) and the
obligation of the Borrower to reimburse the LC Bank for each payment made by the
LC Bank under any Letter of Credit, and to pay interest thereon as provided
herein, shall be absolute, unconditional and irrevocable and shall be performed
strictly in accordance with the terms of this Agreement under and without regard
to any circumstances, including (i) any lack of validity or enforceability of
any of the Loan Documents; (ii) any amendment or waiver of or any consent to
departure from all or any terms of any of the Loan Documents; (iii) the
existence of any claim, setoff, defense or other right which any Loan Party may
have at any time against any beneficiary or any transferee of any Letter of
Credit (or any Persons for whom any such beneficiary or transferee may be
acting), the LC Bank, the Agent, any Lender or any other Person, whether in
connection with this Agreement, the transactions contemplated herein or any
unrelated transaction; (iv) any breach of contract or dispute among or between
any Loan Party, the Agent, the LC Bank, any Lender, or any other Person; (v) any
demand, statement, certificate, draft or other document presented under any
Letter of Credit proving to be forged, fraudulent, invalid or insufficient in
any respect or any statement therein being untrue or inaccurate in any respect;
(vi) payment by the LC Bank (acting in good faith) under any Letter of Credit
against presentation of any demand, statement, certificate, draft or other
document which does not strictly comply with the terms of any Letter of Credit;
(vii) any non-application or misapplication by any beneficiary or transferee of
the proceeds of any amount paid under any Letter of Credit or any other act or
omission of such beneficiary or such transferee in connection with any Letter of
Credit; (viii) any extension of time for or delay, renewal or compromise of or
other indulgence or modification granted or agreed to by the LC Bank, the Agent,
or any Lender, with or without notice to or approval by any Loan Party; (ix) any
failure to preserve or protect any Collateral, any failure to perfect or
preserve the perfection of any Lien thereon, or the release of any Collateral;
or (x) any other circumstance or event whatsoever relating to any Loan Party or
such Letter of Credit or the reimbursement due therefor, whether or not similar
to any of the foregoing.
(e) Lender Participation. Each Lender severally agrees to participate
with the LC Bank in the extension of credit arising from the issuance of any
Letter of Credit in conformity with Section 2.02(a), in an amount equal to such
Lender's Pro Rata Share of the amount available for payment under such Letter of
Credit. Upon written demand by the LC Bank, with a copy of such demand to the
Agent, each Lender shall promptly fund its participation by paying to the LC
Bank Dollars in an amount equal to such Lender's Pro Rata Share of the payment
made by the LC Bank under any Letter of Credit, together with all interest
accrued and unpaid thereon for the period from the day on which the payment to
be reimbursed was demanded by the LC Bank until the Business Day on which such
funding from such Lender is received by the LC Bank at the rate per annum equal
to the Federal Funds Rate until the second Business Day following such demand,
and thereafter the rate per annum then applicable to Base Rate Advances. Upon
funding its participation in accordance with this Section 2.02(e), each Lender
shall be deemed to have made an Advance pursuant to Section 2.01(a)(i) as of the
date the relevant Letter of Credit was drawn, and the Advance deemed, pursuant
to Section 2.02(c), to have been made by the LC
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Bank upon any such payment shall be reduced, in an amount equal to such Lender's
participation. Each Lender's obligation to make such payment to the LC Bank
shall be absolute, unconditional and irrevocable and shall not be affected by
any circumstance whatsoever, including the occurrence or continuance of any
Potential Default or Event of Default, the failure to meet any condition that
otherwise must be met for the funding of any Advance, or the failure of any
other Lender to make any payment under this Section 2.02(e), and each Lender
further agrees that such payment shall be made without any offset, abatement,
withholding or reduction whatsoever. If after receipt of such funding from any
Lender the LC Bank receives payment from the Borrower or any other source on
account of the reimbursement obligation that was so funded, or the interest
accrued thereon, the LC Bank shall promptly remit such payment to the Agent for
prompt distribution to the Lenders to the extent of their participation therein.
(f) Commercial Practices. Each Loan Party assumes all risks of the acts
or omissions of any beneficiary or transferee of any Letter of Credit with
respect to the use of any Letter of Credit. Each Loan Party agrees that the LC
Bank, the Agent, the Lenders and their respective directors, officers or
employees shall not be liable or responsible for (i) the use which may be made
of any Letter of Credit or for any acts or omissions of any beneficiary or
transferee in connection therewith; (ii) any reference which may be made to this
Agreement or to any Letter of Credit in any agreements, instruments or other
documents; (iii) the validity, sufficiency or genuineness of any document other
than a Letter of Credit, or of any endorsement thereon, even if such document or
endorsement should in fact prove to be in any or all respects invalid,
insufficient, fraudulent or forged or any statement therein prove to be untrue
or inaccurate in any respect whatsoever; (iv) payment by the LC Bank (acting in
good faith) against presentation of documents which do not strictly comply with
the terms of any Letter of Credit; or (v) any other circumstances whatsoever in
making or failing to make payment under any Letter of Credit, except only that
the LC Bank shall be liable to the Borrower for acts or events described in
clauses (i) through (v) above, to the extent, but only to the extent, of any
direct (as opposed to indirect, special or consequential) damages suffered by
the Borrower which the Borrower proves were caused by (A) the LC Bank's willful
misconduct or gross negligence in determining whether a draft or demand
presented under any Letter of Credit strictly complies with the terms and
conditions therefor stated in such Letter of Credit or (B) the LC Bank's willful
failure to pay any draft or demand presented under any Letter of Credit that
strictly complies with the terms and conditions thereof. The LC Bank may accept
any document that appears on its face to be in order, without responsibility for
further investigation. The determination whether a draft or demand is properly
presented under any Letter of Credit prior to its expiration or whether a draft
or demand presented under any Letter of Credit is in proper and sufficient form
may be made by the LC Bank in its sole discretion, and such determination shall
be conclusive and binding upon the Borrower to the extent permitted by law. Each
Loan Party hereby waives any right to object to any payment made under any
Letter of Credit on presentation of any draft or demand that is in the form
provided in the Letter of Credit but varies with respect to punctuation,
capitalization, spelling or similar matters of form.
SECTION 2.03. Evidence of Debt.
(a) Each Lender shall maintain in accordance with its usual practice an
account or accounts evidencing the indebtedness of the Borrower to such Lender
resulting from each Advance owing to such Lender from time to time, including
the amounts of principal and interest payable and paid to such Lender from time
to time hereunder.
(b) The Register maintained by the Agent pursuant to Section 11.07(c)
shall include accounts for each Lender, in which accounts (taken together) shall
be recorded (i) the rate and amount of each Advance made hereunder, (ii) the
terms of each Assignment and Acceptance delivered to and accepted by it, (iii)
the amount of any principal or interest due and payable or to become due and
payable
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from the Borrower to each Lender hereunder and (iv) the amount of any sum
received by the Agent from the Borrower hereunder and each Lender's share
thereof.
(c) The entries made as provided in this Section 2.03 shall be
conclusive and binding for all purposes, absent manifest error.
SECTION 2.04. Fees.
(a) Unused Commitment Fees. The Borrower agrees to pay to each Lender a
commitment fee on the daily average amount by which the Commitment of such
Lender exceeds such Lender's Pro Rata Share of the Outstanding Revolving Credit
from the date hereof until the Termination Date at the Commitment Fee Rate,
payable in arrears (i) monthly on the first day of each month, commencing on the
first such day following the date of this Agreement and (ii) on the Termination
Date.
(b) Facing Fees. On the first day of each month commencing on the
Closing Date and continuing thereafter until the date the Facility Amount and
Unfunded LC Exposure have both been reduced to zero (for the period from the
first day in the respective month through the last day of such month or such
date the Facility Amount and Unfunded LC Exposure have both been reduced to
zero, as the case may be), including on the Termination Date (for the period
from the first day in the immediately preceding month to the Termination Date),
the Borrower shall pay to the Agent for the account of the LC Bank a facing fee
computed by applying 0.25% per annum to the Unfunded LC Exposure from day to day
in the prior month or partial month, as the case may be.
(c) Letter of Credit Fee. On the first day of each month commencing on
the first such day following the Closing Date and continuing thereafter until
the date the Facility Amount and Unfunded LC Exposure have both been reduced to
zero (for the period from the first day in the respective month through the last
day of such month or such date the Facility Amount and Unfunded LC Exposure have
both been reduced to zero, as the case may be), including on the Termination
Date (for the period from the first day in the immediately preceding month to
the Termination Date), the Borrower shall pay to the Agent for the account of
the Lenders, a letter of credit fee computed by applying the LC Fee Rate to the
Unfunded LC Exposure from day to day in the prior month or partial month, as the
case may be. If an Event of Default shall occur and be continuing, the Borrower
shall pay to the Agent a letter of credit fee at a rate equal to the sum of (A)
2.0% per annum and (B) the rate otherwise payable pursuant to this clause (c).
(d) Letter of Credit Administration. The Borrower shall pay the LC
Bank's usual and customary charges for opening, amending, presenting or honoring
any Letter of Credit and for any wire transfers and other administration charges
applicable to each Letter of Credit.
(e) Fees. The Borrower shall pay the Agent and the Arranger when due
all fees payable under the fee letter dated January 13, 2000 and the fee letter
dated the Closing Date (collectively, the "Fee Letters") from Citibank and the
Arranger to the Borrower.
SECTION 2.05. Voluntary and Mandatory Facility Reductions.
(a) Voluntary. The Borrower may, upon at least five Business Days'
prior notice to the Agent, terminate in whole or reduce in part ratably the
unused portions of the respective Commitments of the Lenders; provided, however,
that each partial reduction shall be in the aggregate amount of not less than
$5,000,000 or an integral multiple of $1,000,000 in excess thereof
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(b) RoTech Asset Sale. In the event of an Asset Sale of any of the
Stock of RoTech or all or substantially of the assets of RoTech (which Asset
Sale is subject to the approval of the Requisite Lenders), the Facility shall be
permanently reduced by an amount equal to $50,000,000 on the date of the
consummation of such Asset Sale; provided, however, that if an Event of Default
has occurred and is continuing on such date, the Facility shall be permanently
reduced by $100,000,000 (it being understood and agreed that the Lenders shall
have no obligation to make Advances or issue Letters of Credit unless and until
such Event of Default has been waived pursuant to Section 11.01 or is otherwise
cured).
SECTION 2.06. Principal Payments and Swing Line Payments. The Borrower
shall repay the Advances and reduce the Facility Amount as follows:
(a) Final Maturity. On the Termination Date, all outstanding Advances
shall be due and payable and the Facility Amount and LC Subcommitment shall be
automatically and permanently reduced to zero.
(b) Excess Credit Exposure. If at any time, by reason of any voluntary
or mandatory Facility Reduction or for any other reason, the Outstanding
Revolving Credit exceeds the Maximum Credit, the Borrower shall immediately,
without notice or demand, repay Advances or, if no Advances are outstanding,
deposit Dollars to the Citibank Collateral Account, in the manner described in
Section 7.02.
(c) Excess LC Exposure. If at any time, by reason of any voluntary or
mandatory Facility Reduction or for any other reason, the LC Exposure exceeds
the then LC Subcommitment, the Borrower shall immediately deposit Dollars in an
amount equal to such excess to the Citibank Collateral Account in the manner
described in Section 7.02.
(d) Swing Line Payments. The Borrower shall repay to the Agent for the
account of the Swing Line Bank the outstanding principal amount of each Swing
Line Advance, together with all interest accrued thereon, on the earlier of (i)
the maturity date specified in the applicable Notice of Swing Line Advance
(which maturity shall be no later than the seventh day after the requested date
of such Swing Line Advance) and (ii) the Termination Date.
SECTION 2.07. Interest. The Borrower agrees to pay interest on the
unpaid principal amount of each Revolving Credit Advance made by each Lender
comprising part of the same Revolving Credit Advance (or, in the case of an
Advance made pursuant to Section 2.02(c), by the LC Bank), and each Swing Line
Advance from the date of such Advance until such principal amount shall be
repaid in full, at the following rates per annum:
(a) Base Rate Advances. Whenever such Advance is a Base Rate Advance, a
rate per annum equal on each day to the sum of the Base Rate as in effect on
such day plus the Base Rate Margin determined for such day, with all such
interest accrued in any one month payable monthly on the first day of the next
following month and, in the case of the Revolving Credit Advances, when the
Facility Amount has been reduced to zero and all Advances comprising Revolving
Credit Advances are repaid in full. Interest shall be paid in cash for any Swing
Line Advance at a rate per annum equal on each day to the sum of the Base Rate
as in effect on such day plus the Base Rate Margin with all such interest
payable on the date of payment when such Swing Line Advance is due.
(b) Eurodollar Rate Advances. Whenever such Advance is a Eurodollar
Rate Advance, a rate per annum equal on each day during the Interest Period for
such Eurodollar Rate Advance to the sum of the Eurodollar Rate for such Interest
Period plus the Eurodollar Rate Margin determined for such day with all interest
so accrued payable on the last day of such Interest Period and, if such Interest
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Period has a duration of more than three months, on the day which occurs three
months after the first day of such Interest Period.
(c) Default Interest. For any period of time during which an Event of
Default has occurred and is continuing, (i) the principal amount of all Advances
then outstanding shall bear interest payable upon demand at a rate per annum
equal to the sum of (A) 2.0% per annum and (B) the rate otherwise payable
pursuant to subsection (a) or (b) above, but not to exceed the maximum rate
permitted by applicable law and (ii) the amount of any interest, fee or other
amount payable hereunder which is not paid when due, shall bear interest from
the date such amount shall be due until such amount shall be paid in full,
payable in arrears on the date such amount shall be paid in full and on demand,
at a rate per annum equal at all times to 2.0% per annum above the Base Rate as
in effect from time to time plus the Base Rate Margin.
SECTION 2.08. Additional Interest on Eurodollar Rate Advances. The
Borrower shall pay each Lender additional interest on the unpaid principal
amount of each Advance of such Lender for each day that such Advance is
outstanding as a Eurodollar Rate Advance, at a rate per annum equal to the
remainder obtained by subtracting (a) the Eurodollar Rate for such Interest
Period for such Eurodollar Rate Advance from (b) the rate determined by dividing
such Eurodollar Rate by a percentage equal to 100% minus the Eurodollar Rate
Reserve Percentage of such Lender for such day. Such additional interest shall
be determined by such Lender, notified to the Borrower through the Agent and
payable when and as interest is payable on such Eurodollar Rate Advance or, if
later, five Business Days after the Borrower receives notice thereof. If the
Borrower so requests, such Lender shall provide the Borrower through the Agent a
certificate setting forth the calculation and supporting information for such
additional interest, which shall be conclusive and binding for all purposes,
absent manifest error.
SECTION 2.09. Interest Rate Determination and Protection.
(a) Determination of Eurodollar Rate. The Eurodollar Rate for each
Interest Period for Eurodollar Rate Advances comprising part of the same
Revolving Credit Advance shall be determined by the Agent.
(b) Notice of Eurodollar Rate. The Agent shall give prompt notice to
the Borrower and the respective Lenders of the applicable Eurodollar Rate for
any Interest Period when determined by the Agent.
(c) Failure to Provide Information. If the Agent is unable to obtain
timely information for determining the Eurodollar Rate for any Eurodollar Rate
Advances, the Agent shall forthwith notify the Borrower and the respective
Lenders that the interest rate cannot be determined for such Eurodollar Rate
Advances and the obligation of such Lenders to make or continue, or to convert
Advances into, Eurodollar Rate Advances shall be suspended until the Agent shall
notify the Borrower and such Lenders that the circumstances causing such
suspension no longer exist.
(d) Suspension of Eurodollar Rate Advances. In the event that: (i) the
Agent determines that adequate and fair means do not exist for ascertaining the
applicable interest rates by reference to which the Eurodollar Rate then being
determined is to be fixed; or (ii) the Requisite Lenders notify the Agent that
the Eurodollar Rate for any Interest Period will not adequately reflect the cost
to the Lenders of making or maintaining such Loans for such Interest Period, the
Agent shall forthwith so notify the Borrower and the Lenders, whereupon each
Eurodollar Rate Advance will automatically, on the last day of the current
Interest Period for such Advance, convert into a Base Rate Loan and the
obligations of the Lenders to make Eurodollar Rate Advances or to convert Base
Rate Advances into Eurodollar Rate
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Advances shall be suspended until the Agent shall notify the Borrower that the
Requisite Lenders have determined that the circumstances causing such suspension
no longer exist.
(e) Failure to Specify Duration. If the Borrower fails, prior to the
date the Eurodollar Rate for any Interest Period is determined by the Agent to
specify the duration of any Interest Period for any Eurodollar Rate Advances,
such Interest Period shall be one month.
(f) Agent's Determination Conclusive. Each determination by the Agent
of an interest rate hereunder shall be conclusive and binding for all purposes,
absent manifest error.
SECTION 2.10. Voluntary Conversion of Advances.
(a) Notice of Continuance/Conversion. Subject to the provisions of
Sections 2.09 and 2.14, the Borrower may on any Business Day, by giving the
Agent a Notice of Continuance/Conversion not later than 11:00 a.m. (New York
City time) on the third preceding Business Day, (i) convert Base Rate Advances
comprising the same Revolving Credit Advance into Eurodollar Rate Advances, (ii)
convert Eurodollar Rate Advances comprising the same Revolving Credit Advance
into Base Rate Advances or (iii) continue Eurodollar Rate Advances as Eurodollar
Rate Advances, but (A) the Borrower may convert a Eurodollar Rate Advance into a
Base Rate Advance only on the last day of an Interest Period for such Eurodollar
Rate Advance, (B) the Borrower may continue a Eurodollar Rate Advance as a
Eurodollar Rate Advance only as of the last day of an Interest Period for such
Eurodollar Rate Advance, and (C) no Advance may be converted into or continued
as a Eurodollar Rate Advance at any time when an Event of Default or Potential
Default has occurred and is continuing.
(b) Telephonic Notice. In lieu of delivering a Notice of
Continuance/Conversion, the Borrower may give the Agent telephonic notice of any
proposed conversion or continuance by the time required under Section 2.10(a)
and in such event shall promptly (but in no event later than the date of the
requested conversion or continuance) deliver a confirmatory Notice of
Continuance/Conversion to the Agent. If the telephonic request differs in any
respect from the written Notice of Continuance/Conversion subsequently
furnished, the telephonic request shall govern as to the terms of such notice.
The Agent's determination of the contents of any telephonic request shall,
absent manifest error, be conclusive and binding on all parties hereto.
(c) Requirements. Each Notice of Continuance/Conversion or telephonic
request shall specify (i) the date of the continuance or conversion, (ii) the
Advances to be converted or continued and (iii) when Advances are converted into
or continued as Eurodollar Rate Advances, the duration of the Interest Period
for such Advances.
(d) Base Rate Advances. Unless a Eurodollar Rate has been determined
for a particular Advance and applies to such Advance on a particular day in
accordance with the provisions hereof, such Advance shall be a Base Rate Advance
and shall accrue interest at the rate then applicable to Base Rate Advances.
SECTION 2.11. Prepayments.
(a) Voluntary Prepayments . The Borrower from time to time may prepay,
without premium or penalty, the outstanding principal amounts of Advances, in
whole or ratably in part, so long as (i) the Borrower gives one Business Day's
prior written notice to the Agent stating the proposed date and aggregate
principal amount of the prepayment, (ii) each partial prepayment is made in an
aggregate principal amount of $2,000,000 or an integral multiple of $1,000,000
in excess thereof, (iii) if any Eurodollar Rate Advance is paid prior to the
last day of the Interest Period for such Advances, all unpaid
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interest accrued to the date of prepayment on the principal amount prepaid and
all Breakage Costs incurred as a result of the prepayment are also paid, and
(iv) all unpaid interest accrued to the date of prepayment is paid concurrently
with any prepayment in full. In addition, the Borrower from time to time may
prepay, without premium or penalty, the outstanding principal amount of any
Swing Line Advance in whole, together with all unpaid interest thereon to the
date of prepayment. Notice of any prepayment under this Section 2.11(a), once
given, shall be irrevocable, and the amount of the prepayment specified in the
notice shall accordingly be due and payable on the prepayment date specified
therein.
(b) Mandatory Prepayments.
(i) Upon receipt by any Loan Party of Net Cash Proceeds, the
Borrower shall immediately prepay the Advances (or deposit cash in the
Citibank Collateral Account in respect of Letters of Credit in the
manner described in Section 7.02) in an amount equal to 100% of such
Net Cash Proceeds; provided, however, in the event such Net Cash
Proceeds are less than $10,000,000 in any transaction or series of
related transactions, such proceeds are not required to be applied to
the Advances (or deposited in the Citibank Collateral Account) to the
extent such proceeds are deposited in a Collection Account. Any such
mandatory prepayment shall be applied in accordance with Section
2.11(b)(ii) below.
(ii) Any prepayments made by the Borrower required to be
applied in accordance with Section 2.11(b)(i) shall be applied as
follows: first, to repay the outstanding principal balance of the Swing
Line Advances until such Swing Line Advances shall have been repaid in
full; second, to repay the outstanding principal balance of Revolving
Credit Advances which are Base Rate Advances until such Advances shall
have been paid in full; third, to repay the outstanding principal
balance of Revolving Credit Advances which are Eurodollar Rate Advances
until such Advances shall have been paid in full; provided, however,
that as long as no Potential Default or Event of Default shall occur
and be continuing, such prepayments shall, at the request of the
Borrower, be held in the Citibank Collateral Account pending
application to any Eurodollar Rate Advance on the last day of the
Interest Period with respect thereto; and then, to the Citibank
Collateral Account to provide cash collateral for the then LC Exposure
in the manner set forth in Section 7.02.
(iii) Each Borrower agrees that all available funds in the
Citibank Concentration Account shall be applied on a daily basis first
to repay the outstanding principal amount of the Swing Line Advances
until such Swing Line Advances shall have been repaid in full, second
to repay the outstanding principal balance of Revolving Credit Advances
which are Base Rate Advances until such Advances shall have been repaid
in full, third to repay the outstanding principal balance of Revolving
Credit Advances which are Eurodollar Rate Advances until such Advances
shall have been paid in full; provided, however, that as long as no
Potential Default or Event of Default shall occur and be continuing,
the amount of such Eurodollar Rate Advances shall, at the request of
the Borrower, be transferred to the Citibank Collateral Account pending
application to any Eurodollar Rate Advance on the last day of the
Interest Period with respect thereto; and fourth to any other
Obligations then due and payable. If there are no Advances outstanding
and no other Obligations are then due and payable (and no additional
funds are required to be on deposit in the Citibank Collateral Account
pursuant to Section 2.06(b) or (c) or Section 7.02), the Borrower may
direct the Agent to (and the Agent shall) disburse the excess amount of
such funds on deposit in the Citibank Concentration Account as
requested by the Borrower in writing. Any excess amount on deposit in
the Citibank Concentration Account after giving effect to the
applications required in this Section 2.11(b)(iii) may, at the request
of the Borrower, or shall, upon the occurrence and during the
continuance of any Event of Default and
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notice to the Borrower by the Agent or the Requisite Lenders, be
transferred to, and held on deposit in, the Citibank Collateral
Account.
SECTION 2.12. Funding Losses. If (i) any Eurodollar Rate Advance is
repaid or converted to a Base Rate Advance on any day other than the last day of
an Interest Period for such Eurodollar Rate Advance (whether as a result of any
optional prepayment, mandatory prepayment, payment upon acceleration, mandatory
conversion or otherwise), (ii) after giving the respective notice thereof, the
Borrower fails to borrow any Eurodollar Rate Advance in accordance with a Notice
of Borrowing or a telephonic request delivered to the Agent (whether as a result
of the failure to satisfy any applicable conditions or otherwise), (iii) any
Base Rate Advance is not converted into a Eurodollar Rate Advance or any
Eurodollar Rate Advance is not continued as a Eurodollar Rate Advance in
accordance with a Notice of Continuance/Conversion or telephonic request
delivered to the Agent (whether as a result of the failure to satisfy any
applicable conditions or otherwise), or (iv) the Borrower fails to make any
prepayment in accordance with any notice of prepayment delivered to the Agent,
the Borrower shall, upon demand by any Lender, reimburse such Lender for all
costs and losses incurred by such Lender as a result of such repayment,
prepayment or failure ("BREAKAGE COSTS"), including costs and losses incurred by
a Lender as a result of funding arrangements or contracts entered into by such
Lender to fund Eurodollar Rate Advances. Breakage Costs shall be payable only if
demanded within 90 days after the end of the applicable Interest Period and
shall be due 30 days after demand. Demand shall be made by delivery to the
Borrower and the Agent of a certificate of the Lender making the demand, setting
forth in reasonable detail the calculation of the Breakage Costs for which
demand is made. Such certificate shall, in the absence of manifest error, be
conclusive and binding on the Borrower.
SECTION 2.13. Increased Costs.
(a) Increase in Cost. If, due to either (i) the introduction of or any
change (other than any change by way of imposition or increase of reserve
requirements, in the case of Eurodollar Rate Advances, included in the
Eurodollar Rate Reserve Percentage) in or in the interpretation of any law or
regulation or (ii) the compliance with any guideline or request from any central
bank or other Governmental Authority (whether or not having the force of law),
there shall be any increase in the cost to any Lender or any participant under
Section 11.07(e) of agreeing to make or making, funding or maintaining
Eurodollar Rate Advances, then the Borrower shall from time to time pay to the
Agent for the account of such Lender or participant additional amounts
sufficient to compensate such Lender or participant for such increased cost.
Such costs shall be payable only if demanded within six months after they were
incurred and shall be due 30 days after demand. Demand shall be made by delivery
to the Borrower and the Agent of a certificate of the Lender or participant
making the demand, setting forth in reasonable detail the calculation of the
costs for which demand is made. Such certificate shall, in the absence of
manifest error, be conclusive and binding on the Borrower.
(b) Increase in Capital Requirements. If any Lender determines that
compliance with any law or regulation or any guideline or request from any
central bank or other Governmental Authority (whether or not having the force of
law) affects or would affect the amount of capital required or expected to be
maintained by such Lender or any corporation controlling such Lender and that
the amount of such capital is increased by or based upon the existence of such
Lender's commitment to lend or funding hereunder and other commitments or
funding of this type, then, upon demand by such Lender, the Borrower shall,
within 30 days after demand from time to time by such Lender, pay to the Agent
for the account of such Lender additional amounts sufficient to compensate such
Lender or such corporation in the light of such circumstances, to the extent
that such Lender determines such increase in capital to be allocable to the
existence of such Lender's commitment to lend or funding hereunder. Demand for
such payment may be made at any time but must be made in writing, with a copy to
the Agent. No such compensation may be demanded as to increased capital
maintained by a Lender more than 12 months
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before compensation was first demanded by such Lender under this Section
2.13(b). Demand for such compensation shall be made by delivery to the Borrower
and the Agent of a certificate of the Lender making the demand, setting forth
the amount demanded. Such certificate shall, in the absence of manifest error,
be conclusive and binding on the Borrower.
(c) Replacement Lenders and Participants. If, and on each occasion
that, (i) a Lender or a participant under Section 11.07(e) makes a demand for
compensation pursuant to Section 2.13(a) or Section 2.13(b) with respect to
Eurodollar Rate Advances or (ii) a Lender is excused from funding Eurodollar
Rate Advances pursuant to Section 2.14 or (iii) Taxes are required, pursuant to
Section 2.16(a), to be deducted from or with respect to any amount payable to
any Lender or the Agent, the Borrower may in whole permanently replace such
Lender or participant, as the case may be, with an Eligible Assignee willing to
become a Lender hereunder, on the following terms:
(A) The Borrower shall give the Agent and the Lender or
participant being replaced at least five Business Days' prior written
notice of the replacement. The notice must be given within 180 days
after the date of the event specified in clause (i), (ii) or (iii)
above, as the case may be, pursuant to which such replacement is made,
and must state the day (which must be a Business Day not more than 10
days after the notice is given) on which the replacement will be
effective.
(B) On the effective date of the replacement, (a) the
replacement Lender shall purchase the Advances owed to such replaced
Lender or participant for a purchase price equal to the principal
amount thereof and all interest accrued thereon as of such effective
date, payable in cash on such effective date, (b) an Assignment and
Acceptance in compliance with (this Agreement covering such Advances
shall be delivered to the replacement Lender by the Lender being
replaced or by the participant being replaced and the Lender from which
it holds its participation, and (c) the Borrower shall pay to the Agent
for the account of the replaced Lender or participant all Breakage
Costs resulting from the replacement and all additional interest, fees,
compensation, costs, losses, taxes, expense reimbursements, indemnities
and other Obligations due to the Lender or participant being replaced.
(C) The Borrower will remain liable to each replaced Lender or
participant for all Obligations that survive the repayment of the
Advances.
(D) The Borrower shall have received the written consent of
the Agent (which consent shall not be unreasonably withheld).
SECTION 2.14. Illegality. Notwithstanding any other provision of this
Agreement, if any Lender shall notify the Agent that the introduction of or any
change in or in the interpretation of any law or regulation makes it unlawful,
or any central bank or other Governmental Authority asserts that it is unlawful,
for any Lender or its Eurodollar Lending Office to perform its obligations
hereunder to make Eurodollar Rate Advances or to fund or maintain Eurodollar
Rate Advances hereunder, then (i) the obligation of such Lender to make or
continue, or to convert Advances into Eurodollar Rate Advances shall be
suspended until the Agent shall notify the Borrower and the Lenders that the
circumstances causing such suspension no longer exist, and (ii) the Borrower
shall forthwith either (A) prepay in full all Eurodollar Rate Advances of such
Lender then outstanding, together with interest accrued thereon and Breakage
Costs related thereto or (B) convert all Eurodollar Rate Advances of such Lender
then outstanding into Base Rate Advances and pay all interest accrued thereon to
the date of conversion and all Breakage Costs related thereto.
SECTION 2.15. Payments and Computations.
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(a) Payments.The Borrower shall make each payment hereunder and under
the Notes not later than 11:00 a.m. (New York City time) on the day payment is
due, in Dollars received by the Agent at its address referred to in Section
11.02 in same day funds. Any payment due to a Lender shall be paid to the Agent
for account of such Lender. If the Agent receives a payment for account of a
Lender not later than 11:00 a.m. (New York City time), the Agent will cause like
funds to be distributed to such Lender for account of its Applicable Lending
Office by the close of business on the same day; if the Agent receives a payment
for account of a Lender after 11:00 a.m. (New York City time), the Agent will
cause like funds to be distributed to such Lender for account of its Applicable
Lending Office no later than the close of business on the next succeeding
Business Day.
(b) Charging of Accounts. If and to the extent any payment owed to the
Agent or any Lender is not made within three Business Days after the date it was
due hereunder or under the Note held by such Lender, each Loan Party hereby
authorizes the Agent and such Lender, subject to any notice period provided in
the Orders, to setoff and charge any amount so due against any deposit account
maintained by such Loan Party with the Agent or such Lender, whether or not the
deposit therein is then due.
(c) Computations. All computations of interest, additional interest and
fees accruing at a per annum rate shall be made on the basis of the actual
number of days (including the first day but excluding the last day) occurring in
the period for which such interest, additional interest or commitment fees are
payable and a year of 360 days.
(d) Payment on Business Day. Whenever any payment hereunder or under
the Notes is due on a day other than a Business Day, such payment shall be made
on the next succeeding Business Day, and such extension of time shall be
included in the computation of interest or fees. If, however, such extension
would cause payment of interest on or principal of Eurodollar Rate Advances to
be made in the next following calendar month, such payment shall be made on the
next preceding Business Day.
(e) Presumption of Payment. Unless the Agent receives notice from the
Borrower prior to the date on which any payment is due to the Agent for the
benefit of the Lenders hereunder that the Borrower will not make such payment in
full, the Agent may assume that the Borrower has made such payment in full to
the Agent on such date and the Agent may, in reliance upon such assumption,
cause to be distributed to each Lender on such due date an amount equal to the
amount then due such Lender. If and to the extent the Borrower does not make
such payment to the Agent in full when due, each Lender shall repay to the Agent
forthwith on demand such amount distributed to such Lender, together with
interest thereon for each day from the date such amount was distributed to such
Lender until the Business Day such Lender repays such amount to the Agent, at
the Federal Funds Rate until the third Business Day after such demand and
thereafter at the rate applicable to Base Rate Advances.
SECTION 2.16. Taxes.
(a) Net Payments. Any and all payments by the Borrower hereunder or
under the Notes shall be made free and clear of and without deduction for any
and all present or future taxes, levies, imposts, deductions, charges or
withholdings, and all liabilities with respect thereto, excluding, in the case
of each Lender and the Agent, taxes imposed on its net income, and franchise
taxes imposed on it, by the jurisdiction under the laws of which such Lender or
the Agent (as the case may be) is organized or any political subdivision thereof
and, in the case of each Lender, taxes imposed on its net income, and franchise
taxes imposed on it, by the jurisdiction of such Lender's Applicable Lending
Office or any political subdivision thereof (all such non-excluded taxes,
levies, imposts, deductions, charges, withholdings and liabilities,
collectively, are "TAXES"). If the Borrower is required by law to deduct any
Taxes from or in respect of any sum payable hereunder or under any Note to any
Lender or the Agent,
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(i) the sum payable shall be increased as may be necessary so that after making
all required deductions (including deductions applicable to additional sums
payable under this Section 2.16) such Lender or the Agent (as the case may be)
receives an amount equal to the sum it would have received if no such deductions
had been made, (ii) the Borrower shall make such deductions, and (iii) the
Borrower shall pay the full amount deducted to the relevant taxation authority
or other authority in accordance with applicable law.
(b) Payment of Other Taxes. In addition, the Borrower agrees to pay any
present or future stamp or documentary taxes or any other excise or property
taxes, charges or similar levies which arise from any payment made hereunder or
under the Notes or from the execution, delivery or registration of, or otherwise
similarly with respect to, this Agreement, the Notes or any other Loan Document
("OTHER TAXES").
(c) Indemnification. The Borrower will indemnify each Lender and the
Agent for the full amount of Taxes or Other Taxes (including any Taxes or Other
Taxes imposed by any jurisdiction on amounts payable under this Section 2.16)
paid by such Lender or the Agent (as the case may be) and any liability
(including penalties, interest and expenses, but excluding any liability arising
from the gross negligence or willful misconduct of such Person) arising
therefrom or with respect thereto, whether or not such Taxes or Other Taxes were
correctly or legally asserted. Payment under this indemnity shall be due 30 days
after written demand therefor. Any Person entitled to indemnification by the
Borrower pursuant to this Section 2.16(c) shall give the Borrower written notice
of any matter which such Person has determined has given rise to a right of
indemnification hereunder within 120 days after the earlier of (i) the date on
which such Person makes payment of the Taxes or Other Taxes giving rise to such
right or (ii) the date on which such Person receives written demand for payment
of such Taxes or Other Taxes from the applicable Governmental Authority;
provided, however, that the failure by any Person timely to provide such notice
(A) shall not release the Borrower from any of its obligations under this
Section 2.16(c) except to the extent the Borrower is materially prejudiced by
such failure, or such notice was provided more than 240 days after the latest
date such notice could have been timely given, and (B) shall not relieve the
Borrower from any other obligation or liability that it may have to such Person
otherwise than under this Section 2.16(c).
(d) Evidence of Payments. Within 30 days after the date of any payment
of Taxes hereunder by the Borrower, the Borrower will furnish to the Agent, at
its address referred to in Section 11.02, the original or a certified copy of
any receipt issued to the Borrower evidencing payment thereof.
(e) Withholding Tax Exemption. If any Lender is a "foreign person"
within the meaning of the Code, such Lender shall deliver to the Agent (i) (A)
if such Lender qualifies for an exemption from, or a reduction of, United States
withholding tax under a tax treaty, a properly completed and executed Internal
Revenue Service Form 1001 (or applicable successor form) before the payment of
any interest in the first calendar year and in each succeeding calendar year
during which interest may be paid under this Agreement, (B) if such Lender
qualifies for an exemption from United States withholding tax for interest paid
under this Agreement because it is effectively connected with a United States
trade or business of such Lender, two properly completed and executed copies of
Internal Revenue Service Form 4224 (or applicable successor form) before the
payment of any interest is due in the first taxable year of such Lender, and in
each succeeding taxable year of such Lender, during which interest may be paid
under this Agreement, or (C) if such Lender is not a "bank" as defined in
Section 881(c)(3)(A) of the Code, a properly completed and executed Internal
Revenue Service Form W-8 (or applicable successor form) before the payment of
any interest is due in the first taxable year of such Lender, and in each
succeeding taxable year of such Lender, during which interest may be paid under
this Agreement, certifying that such Lender is a foreign corporation,
partnership, estate or trust, together with a certificate
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of a duly authorized officer representing that such Lender is not a "bank" for
purposes of Section 881(c) of the Code, is not a 10% shareholder (within the
meaning of Section 871(h)(3)(B) of the Code) of the Borrower and is not a
controlled foreign corporation related to the Borrower (within the meaning of
Section 864(d)(4) of the Code), and (ii) such other form or forms as may be
required or reasonably requested by the Agent to establish or substantiate
exemption from, or reduction of, United States withholding tax under the Code or
other laws of the United States. Each Lender agrees to notify the Agent of any
change in circumstances which would modify or render invalid any claimed
exemption or reduction. If any form or document referred to in this subsection
(e) requires the disclosure of information, other than information necessary to
compute the tax payable and information required on the date hereof by Internal
Revenue Service Form 1001, 4224 or W-8 (or applicable successor forms) (or the
related certificate described above), that the Lender reasonably considers to be
confidential, the Lender shall give notice thereof to the Borrower and shall not
be obligated to include in such form or document such confidential information.
(f) Withholding Taxes. Where any Lender which is a "foreign person" is
entitled to a reduction in the applicable withholding tax, the Agent may
withhold from any interest payment to such Lender an amount equivalent to the
applicable withholding tax after taking into account such reduction. If the
forms or other documentation required by Section 2.16(e) are not delivered to
the Agent, then the Agent may withhold from any interest payment to any Lender
not providing such forms or other documentation, an amount equivalent to the
applicable withholding tax.
(g) Subsequent Lenders. For purposes of this Section 2.16, the term
"Lender" shall include any assignee pursuant to, and after compliance with the
requirements of, Section 11.07; provided, however, that no Person acquiring any
participation pursuant to Section 11.07(e) shall be deemed a "Lender" for
purposes of this Section 2.16 unless and until the Borrower has been notified of
such participation. If any Lender grants participation in or otherwise transfers
its rights under this Agreement, the participant or transferee shall be bound by
the terms of Sections 2.16(e) and (f) as though it were such Lender.
(h) Refund, Deduction or Credit of Taxes. If any Lender determines, in
its sole good faith discretion, that it has actually and finally realized, by
reason of a refund, deduction or credit of any Taxes paid or reimbursed by the
Borrower pursuant to subsection (a), (b) or (c) above in respect of payments
under the Loan Documents, a current monetary benefit that it would otherwise not
have obtained, and that would result in the total payments under this Section
2.16 exceeding the amount needed to make such Lender whole, such Lender shall
pay to the Borrower, with reasonable promptness following the date on which it
actually realizes such benefit, an amount equal to the lesser of the amount of
such benefit or the amount of such excess, in each case net of all reasonable
out-of-pocket expenses in securing such refund, deduction or credit, provided
that nothing in this subsection shall require any Lender to provide its tax
returns to the Borrower or to manage its tax affairs in any particular manner.
(i) Exclusion of Certain Taxes. Notwithstanding any other provision of
this Agreement, the Borrower shall not be required to pay any amount hereunder
to any Lender or the Agent in respect of any Taxes to the extent that, on the
date hereof or any other date such Lender became a party to (or participant with
respect to) this Agreement or (with respect to payments to an Applicable Lending
Office) the date such Lender designated which Applicable Lending Office with
respect to this Agreement or any Notes, the obligation to withhold or pay such
Taxes existed or would exist upon the payment of an amount by the Borrower under
this Agreement or any Note; provided, however, that this paragraph shall not
apply (A) to any Lender or Applicable Lending Office that became a Lender or
Applicable Lending Office as a result of an assignment, transfer, or designation
made at the request of the Borrower, or (B) to the extent that the amount
otherwise payable by the Borrower pursuant to this Section 2.16 to any Lender
that is an assignee pursuant to (and in compliance with the requirements of)
Section 11.07 does not
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exceed the amount that would have been payable under this Section 2.16 to the
assigning Lender in the absence of such assignment.
(j) Additional Cooperation. Any Lender claiming any amount pursuant to
this Section 2.16 shall use reasonable efforts (consistent with legal and
regulatory restrictions) to file any certificate or document reasonably
requested by the Borrower or to change the jurisdiction of such Lender's
Applicable Lending Office if such a filing or change would avoid the need for or
reduce the amount payable by the Borrower under this Section 2.16 and would not,
in the good-faith determination of such Lender, otherwise be disadvantageous to
such Lender.
SECTION 2.17. Sharing of Payments. If after the occurrence and during
the continuance of any Event of Default any Lender shall obtain any payment
(whether voluntary, involuntary, through the exercise of any right of set-off,
or otherwise) on account of any Advances owed to it in excess of its Pro Rata
Share of all such payments, such Lender shall forthwith purchase from the other
Lenders such participations in the Advances made by them as shall be necessary
to cause such purchasing Lender to share the excess payment ratably with each of
them. If all or any portion of such excess payment is thereafter recovered from
such purchasing Lender, such purchase from the other Lenders shall be rescinded
and each such other Lender shall repay to the purchasing Lender the purchase
price to the extent of its allocable share of such recovery together with its
allocable share of any interest required to be paid by the purchasing Lender on
the amount so recovered. The Borrower agrees that any Lender purchasing a
participation from another Lender pursuant to this Section 2.17 may, to the
fullest extent permitted by law, exercise collection rights (including the right
of set-off) with respect to such participation as fully as if such Lender were
the direct creditor of the Borrower in the amount of such participation.
ARTICLE III
CONDITIONS OF LENDING
SECTION 3.01. Conditions Precedent on the Closing Date. This Agreement
shall become effective and binding upon the parties hereto only if each of the
following conditions precedent is satisfied by no later than March 31, 2000:
(a) Bankruptcy Court Order. The Bankruptcy Court shall have entered the
Interim Order, certified by the Clerk of the Bankruptcy Court as having been
duly entered, and the Interim Order is in full force and effect and shall not
have been vacated, reversed, modified, amended or stayed without the prior
written consent of the Agent and the Requisite Lenders.
(b) Loan Documents. The Agent must have received, with sufficient
copies for each Lender, and all in form and substance satisfactory to the Agent
and each Lender and each of their respective counsels:
(i) the Revolving Credit Notes (to the extent requested) duly
executed by the Borrower;
(ii) this Agreement duly executed by each of the Loan Parties,
the Agent and each of the Lenders;
(iii) interim unaudited quarterly and monthly financial
statements of the Borrower and its Subsidiaries, consistent with the
Borrower's past practices and in a form satisfactory to the
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Agent, through the Quarter ending September 30, 1999 and each fiscal
month ending thereafter for which financial statements are available;
(iv) the executed legal opinion of Kaye, Scholer, Fierman,
Hays & Handler, LLP, counsel to the Loan Parties, in substantially the
form of Exhibit D;
(v) such other legal opinions as the Agent may reasonably
require;
(vi) copies of the articles or certificate of incorporation
and by-laws or other governing documents of the Borrower, RoTech and
Symphony as in effect on the Closing Date, certified as of the Closing
Date by a Secretary or an Assistant Secretary of the Borrower, RoTech
or Symphony, as applicable;
(vii) copies of resolutions of the Board of Directors of the
Borrower, RoTech and Symphony approving the transactions contemplated
hereby and authorizing the execution, delivery and performance thereof
by the Borrower, RoTech and Symphony, as applicable, certified as of
the Closing Date by a Secretary or an Assistant Secretary of the
Borrower, RoTech or Symphony, as applicable;
(viii) a certificate of the Secretary or an Assistant
Secretary of the Borrower, RoTech and Symphony, certifying the names
and true signatures of the officers of the Borrower, RoTech and
Symphony, as applicable, authorized to sign each Loan Document to which
it is a party and to request an extension of credit hereunder;
(ix) a certificate of the Secretary or an Assistant Secretary
of the Borrower, certifying the names and true signatures of the
officers of each other Loan Party authorized to sign each Loan Document
to which it is a party;
(x) a good standing certificate for the Borrower, RoTech and
Symphony, issued as of a recent date by the Secretary of State of the
state in which the Borrower, RoTech and Symphony, as applicable, is
incorporated or formed and each state in which the Borrower, RoTech and
Symphony is qualified to do business;
(xi) the fee letter dated the Closing Date from Citibank and
the Arranger to the Borrower.
(xii) all documents evidencing other necessary corporate
action and governmental approvals, if any, with respect to this
Agreement or any other Loan Document;
(xiii) such other certificates, agreements, documents or
instruments as the Agent or the Arranger may reasonably request in
writing.
(c) Governmental Consents. Each Loan Party must have obtained (without
the imposition of any conditions that are not reasonably acceptable to the
Agent) all necessary consents, approvals and authorizations required from any
Governmental Authority in connection with the execution, delivery and
performance of its obligations under the Loan Documents and the transactions
contemplated thereby and such consents or approvals shall be in full force and
effect.
(d) No Injunction. No law or regulation shall prohibit, and no order,
judgment or decree of any Governmental Authority shall enjoin, prohibit or
restrain, and no litigation shall be pending or threatened which, in the
reasonable judgment of the Agent, would enjoin, prohibit, prevent or restrain
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or impose materially adverse conditions upon (i) the making of the Advances,
(ii) the issuance of any Letter of Credit or (iii) the consummation of the
transactions contemplated by the Loan Documents.
(e) Material Adverse Change. Other than (i) the filing of the Cases and
(ii) the circumstances and conditions set forth in the Initial Projections,
there shall have occurred no Material Adverse Change since September 30, 1999.
(f) Security. The Agent shall have a valid and perfected lien on and
security interest in the Collateral having the priorities set forth herein and
in the Orders.
(g) Payment of Fees. All fees and expenses (including reasonable fees
and expenses of counsel) due to the Agent, the Lenders and the Arranger and all
fees and expenses provided for in the fee letter dated January 13, 2000 and
referred to in Section 2.04(e) must have been paid.
SECTION 3.02. Conditions Precedent to Each Extension of Credit. The
obligation of each Lender to make an Advance on the occasion of any Revolving
Credit Advance, the obligation of the LC Bank to issue any Letter of Credit and
the right of the Borrower to request a Swing Line Advance is subject to the
conditions precedent that on the date the Revolving Credit Advance or Swing Line
Advance is to be made or Letter of Credit is to be issued, including on the
Closing Date:
(a) Notice. The Borrower shall have delivered a fully completed Notice
of Borrowing, Notice of Swing Line Advance or LC Application, as the case may
be, dated on or before such date.
(b) Borrowing Base. After giving effect to the Advances requested to be
made on any such date, the use of proceeds thereof and any Letters of Credit
requested to be issued on any such date, the Outstanding Revolving Credit at
such time shall not exceed the Maximum Credit at such time.
(c) Borrowing Base Certificate. The Agent shall have received a
Borrowing Base Certificate, executed and delivered by an Authorized Officer of
the Borrower, as required by Section 6.01(c)(xii).
(d) Bankruptcy Court Approval.
(i) With respect to the Interim Facility, the Interim Order
authorizing and approving the Interim Facility and the transactions
contemplated thereby and, with respect to the Permanent Facility, the
Final Order, authorizing and approving the Permanent Facility and the
transactions contemplated thereby, shall have been duly entered and are
in full force and effect and shall not have been vacated, reversed,
modified, amended or stayed without the prior written consent of the
Agent and the Requisite Lenders; and
(ii) the First Day Orders and all motions and other documents
filed with and submitted to the Bankruptcy Court in connection with
this Agreement and the transactions contemplated hereby shall be
satisfactory in form and substance to the Agent.
(e) Statements. Each of the following statements shall be true:
(i) the representations and warranties contained in Article IV
are correct on and as of such date, before and after giving effect to
the extension of credit to be made hereunder on such date and the
application of the proceeds therefrom, as though made on and as of such
date;
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(ii) no event has occurred and is continuing, or would result
from such extension of credit or from the application of the proceeds
therefrom, which constitutes an Event of Default or a Potential
Default;
(iii) other than (A) the filing of the Cases and (B) the
circumstances and conditions set forth in the Initial Projections, no
Material Adverse Change has occurred; and
(iv) the making of such Advance or the issuance of such Letter
of Credit does not violate any Requirements of Law and has not been
enjoined, temporarily, preliminarily or permanently.
The delivery of a Notice of Borrowing, Swing Line Notice of Borrowing or LC
Application and the acceptance by the Borrower of the proceeds of any Advance or
of a Letter of Credit shall constitute a representation and warranty by the
Borrower that, on the date such Advance is made or Letter of Credit is issued,
the foregoing statements are true.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. Representations and Warranties of the Loan Parties. The
Borrower represents and warrants as to itself and as to each other Loan Party,
and each other Loan Party represents and warrants as to such Loan Party, as
follows:
(a) Organization. Each Loan Party is a corporation or partnership duly
organized, validly existing and in good standing (except where the failure of
one or more Loan Parties, other than the Borrower, RoTech or Symphony, to be in
good standing after the Closing Date could not reasonably be expected to result
in a Material Adverse Change) under the laws of the jurisdiction in which it is
organized and is duly qualified to do business as a foreign corporation in each
jurisdiction where the character of its properties or the nature of its
activities makes such qualification necessary.
(b) Power and Authority. Each Loan Party (i) has all the requisite
corporate or partnership power and authority to carry on its business as now
being conducted and as proposed to be conducted by it, (ii) has the legal right
to own, pledge, mortgage and operate its properties and to lease the property it
operates under lease and (iii) subject to the entry of the Orders, has all
requisite power and authority to execute, deliver and perform each Loan Document
to which it is a party and to take all action necessary to consummate the
transactions contemplated under each Loan Document to which it is a party).
(c) Due Authorization. The execution, delivery and performance by each
Loan Party of each Loan Document to which it is or will be a party have been
duly authorized by all necessary action of its board of directors (or, in case
of a partnership, of its governing authority).
(d) Subsidiaries and Ownership of Capital Stock and Ownership
Interests. Set forth in Part I of Schedule 4.01(d) hereto is a complete list, as
of the Closing Date, of all direct and indirect Subsidiaries of the Borrower.
Each Filing Subsidiary is a wholly-owned Subsidiary of the Borrower. Except as
set forth in such schedules, no capital stock of or other equity, ownership or
profit interest in any such Subsidiary is subject to issuance or sale under any
warrant, option or purchase right, conversion or exchange right, call,
commitment or claim of any right, title or interest therein or thereto. The
outstanding capital stock of each such Subsidiary is duly authorized, validly
issued, fully paid and
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nonassessable and is not "margin stock," as that term is defined in Regulations
T, U and X of the Board of Governors of the Federal Reserve System.
(e) Health Care Facilities. Set forth in Schedule 4.01(e) hereto is a
complete list, as of the Closing Date, of each Health Care Facility owned,
leased, managed or operated by the Borrower or any Subsidiary of the Borrower
which is a skilled nursing facility, hospital, assisted living facility or
retirement facility, and Schedule 4.01(e) hereto, as it may be so amended,
specifically sets forth, with respect to each such Health Care Facility, whether
such Health Care Facility is a leased facility or an owned facility.
(f) Governmental Approval. No authorization or approval or other action
by, and no notice to or filing with, any Governmental Authority is required for
the due execution, delivery and performance by each of the Loan Parties of any
Loan Document to which it is or will be a party, except for those listed on
Schedule 4.01(f) hereto, each of which has been duly obtained or made and is in
full force and effect.
(g) Binding and Enforceable. Subject to the entry of the Orders, this
Agreement is, and each other Loan Document to which any Loan Party is or will be
a party is the legal, valid and binding obligation of the Loan Parties
enforceable against the Loan Parties in accordance with their respective terms.
(h) Government Regulation. No Loan Party is an "investment company" or
an "affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in the Investment Company Act of
1940. No Loan Party is subject to regulation under the Public Utility Holding
Company Act of 1935, the Federal Power Act, or any other federal or state
statute that restricts or limits its ability to incur Debt or to perform its
obligations hereunder. The making of the Advances by the Lenders to the
Borrower, the issuance of the Letters of Credit on behalf of the Borrower and
the application of the proceeds and repayment thereof will not violate any
provision of any such statute or any rule, regulation or order issued by the
Securities and Exchange Commission.
(i) Financial Information. The consolidated balance sheet of the
Borrower and its Subsidiaries as at September 30, 1999 and their related income
and cash flow statements for the period then ended, each other financial
statement of the Borrower and its Subsidiaries delivered to the Lenders on or
prior to the Closing Date, and each financial statement delivered to the Lenders
pursuant to Section 6.01(c), as and when delivered to the Lenders fairly
presents the consolidated financial condition of the Borrower and its
Subsidiaries as at the date thereof and the consolidated results of their
operations for the period then ended, all in accordance with GAAP consistently
applied.
(j) Material Adverse Change. Other than (i) the filing of the Cases and
(ii) the circumstances and conditions set forth in the Initial Projections,
there has been no Material Adverse Change since September 30, 1999.
(k) Compliance. Except as permitted pursuant to Section 6.02(n) and
Section 6.02(p), each Loan Party is in compliance in all material respects with
all material Requirements of Law.
(l) Litigation. Other than the Cases, there is no pending or overtly
threatened action or proceeding affecting any Loan Party before any court,
governmental agency or arbitrator, which would, if adversely determined, result
in a Material Adverse Change or which relates to or could reasonably be expected
to affect the legality, validity or enforceability of any Loan Document.
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(m) No Conflict. Subject to the entry of the Orders, the execution,
delivery and performance by each Loan Party of each of the Loan Documents to
which it is a party do not and will not (i) conflict with, result in a breach
of, or constitute (with or without notice or the lapse of time or both) a
default under, any Contractual Obligation of any Loan Party or enforceable
against it or any of its property or assets, except under immaterial agreements
for supplies or services which are readily replaceable without any adverse
effect on such Loan Party or its business, (ii) conflict with or contravene any
Requirement of Law, (iii) contravene its Constituent Documents or (iv) require
any approval of its stockholders (if applicable).
(n) No Default. No event has occurred and is continuing which
constitutes an Event of Default or a Potential Default.
(o) Payment of Taxes. Each Loan Party has filed all federal income tax
returns and all other material tax returns required to be filed by it and has
paid all material taxes and assessments payable by it which have become due
except to the extent being contested.
(p) Margin Regulations. No proceeds of any Advance or Letter of Credit
will be used for any purpose that requires any Lender to deliver or obtain any
certification under, or to comply with any margin requirement or other provision
of, Regulations T, U or X of the Board of Governors of the Federal Reserve
System.
(q) Conduct of Business. The Borrower is a holding company engaged
primarily in the business of (i) holding stock of and claims against its
Subsidiaries; (ii) managing and developing corporate opportunities related to
the business of its Subsidiaries; (iii) administering and coordinating the
overall operating business of its Subsidiaries and other investments permitted
hereunder; (iv) obtaining of financing for the business of its Subsidiaries; and
(v) holding interests in and title to assets and property necessary or
appropriate to conduct such business in the ordinary course. Each Subsidiary of
the Borrower is either (i) inactive or (ii) engaged in the business of a Health
Care Company, including making Investments in Subsidiaries or Persons that are
Health Care Companies.
(r) Health Care Permits.
(i) Except as permitted pursuant to Section 6.01(k) and
Section 6.02(n), (A) each Loan Party now has, and except solely as a
result of the filing of the Cases, has no reason to believe it will not
be able to maintain in effect, all Health Care Permits necessary for
the lawful conduct of its business or operations wherever now conducted
and as planned to be conducted, including the ownership and operation
of its Health Care Facilities, pursuant to all applicable laws and all
requirements of Governmental Authorities having jurisdiction over such
Loan Party or over any part of its operations; (B) all such Health Care
Permits are in full force and effect and have not been amended or
otherwise modified (except for modifications which do not constitute
and cannot reasonably be expected to result in a Material Adverse
Change), rescinded, revoked or assigned; (C) no Loan Party is in
default in any material respect under, or in violation in any material
respect of, any such Health Care Permit (and to the best knowledge of
the Borrower, no event has occurred, and no condition exists, which,
with the giving of notice or passage of time or both, would constitute
a default thereunder or violation thereof) that has caused or could
reasonably be expected to cause the loss of any such Health Care
Permit; (D) neither the Borrower nor any other Loan Party has received
any notice of any violation of applicable laws which has caused or
could reasonably be expected to cause any such Health Care Permit to be
modified, rescinded or revoked (except for modifications, rescissions
or revocations not amounting to a Material Adverse Change); (E) to the
best knowledge of the Borrower, no condition exists or event has
occurred which could reasonably be expected to result in the
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suspension, revocation, impairment, forfeiture or non-renewal of any
such Health Care Permit; and (F) the continuation, validity and
effectiveness of all such Health Care Permits will not in any way be
adversely affected by the transactions contemplated by this Agreement,
except that the exercise by the Agent of its rights and remedies in
respect of the Collateral may be subject to the licensing power of
health care regulatory authorities.
(ii) Except as permitted pursuant to Section 6.01(k) and
Section 6.02(n), all Health Care Facilities owned, leased, managed or
operated by any Loan Party are entitled to participate in, and receive
payment under, the appropriate Medicare, Medicaid and related
reimbursement programs and in any similar state or local
government-sponsored program, to the extent that such Loan Party has
decided to participate in any such state or local program, and to
receive reimbursement from private and commercial payers and health
maintenance organizations to the extent applicable thereto.
(s) Environmental Matters. Except as set forth in Schedule 4.01(s)
hereto, as it may from time to time be amended by the Borrower, (i) no Material
Environmental Claim is pending or, to the knowledge of the Borrower, overtly
threatened against the Borrower or any of its Subsidiaries, or any property or
assets currently owned or leased thereby, and (ii) to the knowledge of the
Borrower, no Material Environmental Claim is pending or overtly threatened
against any property or assets previously owned, leased or otherwise used by the
Borrower or any of its Subsidiaries. Except in respect of matters that, in the
aggregate, are not and cannot reasonably be expected to result in a Material
Environmental Claim or a Material Adverse Change, (i) the operations of the
Borrower and its Subsidiaries comply and have complied with all applicable
Environmental Laws, (ii) no facts, circumstances or conditions exist that could
reasonably be expected to result in the assertion of a Material Environmental
Claim against the Borrower or its Subsidiaries or to prevent continued
compliance by the Borrower and its Subsidiaries with Environmental Laws, and
(iii) to the knowledge of the Borrower, no material capital expenditures not
disclosed on Schedule 4.01(s) are anticipated or necessary to achieve or
maintain compliance with existing or promulgated, but not yet effective,
Environmental Laws.
(t) ERISA Compliance.
(i) Except as set forth on Schedule 4.01(t), each Pension Plan
is in compliance in all material respects with the applicable
provisions of ERISA, the Code and other applicable Federal or state
law.
(ii) Each Pension Plan which is intended to be tax-qualified
under Section 401(a) of the Code has been determined by the IRS to
qualify under Section 401 of the Code, and the trusts created
thereunder have been determined to be exempt from tax under the
provisions of Section 501 of the Code, and to the best knowledge of the
Borrower nothing has occurred which would cause the loss of such
qualification or tax-exempt status.
(iii) Except as set forth in Schedule 4.01(t) hereto, (A) none
of the Pension Plans has any material Unfunded Pension Liability as to
which the Borrower or any ERISA Affiliate is or may be liable; (B)
neither the Borrower nor any ERISA Affiliate has nor reasonably expects
to incur any material liability (and no event has occurred which, with
the giving of notice under Section 4219 of ERISA, would result in such
material liability) under Section 4201 or 4243 of ERISA with respect to
any Multiemployer Plan; and (C) other than the Cases, no ERISA Event
has occurred or, to the best knowledge of the Borrower, is reasonably
expected to occur.
(iv) Neither the Borrower nor any ERISA Affiliate has engaged,
directly or indirectly, in a prohibited transaction (as defined in
Section 4975 of the Code or Section 406 of
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ERISA) for which no statutory or administrative exemption is applicable
in connection with any Plan the consequences of which, in the
aggregate, constitute or can reasonably be expected to result in a
Material Adverse Change.
(u) Title to Assets. Each Loan Party has title, as of the date of each
of its financial statements delivered hereunder, to all of its material assets
reflected therein, except assets leased to it under a Capital Lease, free and
clear of all Liens except Permitted Liens.
(v) Loan Documents. On and after the Closing Date, the provisions of
the Loan Documents and the Orders are effective to create in favor of the Agent,
for the benefit of the Secured Parties, legal, valid and perfected Liens on and
security interests (having the priority provided for herein) in all right, title
and interest in the Collateral, enforceable against each Loan Party that owns an
interest in such Collateral.
(w) Security. Pursuant to subsections 364(c)(2) and (3) of the
Bankruptcy Code and the Orders, all amounts owing by the Borrower under the
Facility and by the Guarantors in respect thereof (including, without
limitation, any exposure of a Lender or any of its affiliates in respect of cash
management or hedging transactions incurred on behalf of the Borrower or any
Guarantor) will be secured by a first priority perfected Lien on the Collateral,
subject only to (i) valid, perfected, nonavoidable and enforceable Liens
existing as of the Petition Date and (ii) the Carve-Out.
(x) Priority. Pursuant to section 364(c) of the Bankruptcy Code and the
Orders, all Obligations and all Obligations of the Guarantors in respect thereof
(including, without limitation, any exposure of a Lender in respect of cash
management or hedging transactions incurred on behalf of the Borrower or any
Guarantor) at all times will constitute allowed super-priority administrative
expense claims in each of the Cases having priority over all administrative
expenses of the kind specified in sections 503(b) or 507(b) of the Bankruptcy
Code, subject only to the Carve-Out.
(y) Orders. The Orders and the transactions contemplated hereby and
thereby, are in full force and effect and have not been vacated, reversed,
modified, amended or stayed without the prior written consent of the Agent.
(z) Accounts Receivable Each Account is genuine and in all respects
what it purports to be, and is not evidenced by a judgment. Each Account arises
from an actual and bona fide sale and delivery of goods or rendition of Medical
Services to customers, made by a Loan Party in the ordinary course of its
business, in accordance with the terms and conditions of all purchase orders,
contracts, certifications, participations, certificates of need or other
documents relating thereto and forming a part of the contract between the
relevant Loan Party and Account Debtor. Each Account covers the sale or the
rendition of services that gave rise to the Account and each invoice relating to
the Account and such services has been forwarded to the relevant Account Debtor
for payment in accordance with applicable laws and in compliance and conformity
with any and all requisite procedures, requirements and regulations governing
payment by such Account Debtor with respect to such Account, and all Medicare
Accounts and Medicaid Accounts are properly payable directly to a Loan Party in
the amount stated as the balance of such Account. The invoices evidencing the
Accounts are in the name of the Loan Party to which such Account is owed and are
available to the Agent. The customers of the Loan Parties have accepted the
goods or Medical Services the sale or rendition of which gave rise to the
Accounts, owe and are obligated to pay the full amounts stated in the related
invoices according to their terms. There are no facts, events or occurrences
which in any way impair the validity or enforceability of any Accounts or tend
to reduce the amount payable thereunder from the face amount of the claim or
invoice and statements related thereto. None of the Loan Parties has knowledge
of information that would lead it to believe that any of the following
statements is incorrect: (1) the Account Debtor under each Account had
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the capacity to contract at the time any contract or other document giving rise
to such Account was executed; and (2) there are no proceedings or actions known
to the Borrower which are threatened or pending against any Account Debtor which
might result in any material adverse change in such Account Debtor's financial
condition or the collectibility of any Account owing by such Account Debtor.
(aa) Year 2000 Compliance. The Loan Parties are Year 2000 Compliant in
all material respects.
(bb) Full Disclosure. The information prepared or furnished by or on
behalf of the Borrower or any Loan Party in connection with this Agreement or
the consummation of the transactions contemplated hereby taken as a whole does
not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements contained therein or herein not
misleading. All facts known to the Borrower which are material to any
understanding of the financial condition, business, properties or prospects of
the Borrower and its Subsidiaries taken as one enterprise have been disclosed to
the Lenders.
(cc) Liens.As of the date hereof, there are no existing Liens on any
assets of the Loan Parties other than Permitted Liens and there are no existing
Liens on any material portion of the Accounts of any Loan Party.
(dd) Debt. As of the date hereof, there is no Debt of the Borrower or
any of its Subsidiaries other than Debt permitted by Section 6.02(d).
(ee) Depositary Banks. Schedule 1.01 sets forth a complete list as of
the Closing Date of each bank or financial institution at which any Loan Party
maintains any depositary account.
ARTICLE V
FINANCIAL COVENANTS OF THE BORROWER
SECTION 5.01. Financial Covenants. So long as any Obligation remains
unpaid, any Letter of Credit remains outstanding or any Lender is obligated to
extend credit hereunder, unless the Requisite Lenders otherwise consent in
writing the Borrower will:
(a) Minimum Adjusted EBITDA. Have during any period set forth below
Adjusted EBITDA for such period in an amount not less than the amount set forth
opposite such period:
For the period beginning
on January 1, 2000 Minimum Cumulative
and ending on: Adjusted EBITDA
March 31, 2000 $45,000,000
June 30, 2000 $90,000,000
September 30, 2000 $145,000,000
December 31, 2000 $200,000,000
For the period beginning
on January 1, 2001 Minimum Cumulative
and ending on: Adjusted EBITDA
March 31, 2001 $52,500,000
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June 30, 2001 $105,000,000
September 30, 2001 $157,500,000
December 31, 2001 $210,000,000
(b) Maximum Capital Expenditures. The Borrower will not permit Capital
Expenditures to be made or incurred during any period set forth below in excess
of the amount set forth opposite such period:
For the period beginning
on January 1, 2000 Maximum Cumulative
and ending on: Capital Expenditures
March 31, 2000 $37,500,000
June 30, 2000 $75,000,000
September 30, 2000 $112,500,000
December 31, 2000 $150,000,000
For the period beginning
on January 1, 2001 Maximum Cumulative
and ending on: Capital Expenditures
March 31, 2001 $37,500,000
June 30, 2001 $75,000,000
September 30, 2001 $112,500,000
December 31, 2001 $150,000,000
ARTICLE VI
COVENANTS OF THE BORROWER
SECTION 6.01. Affirmative Covenants. So long as any Obligation remains
unpaid, any Letter of Credit remains outstanding or any Lender is obligated to
extend credit hereunder, unless the Requisite Lenders otherwise consent in
writing, the Loan Parties will, and will cause their respective Subsidiaries to:
(a) Compliance with Laws. Comply in all material respects with all
Requirements of Law.
(b) Inspection of Property and Books and Records. (i) Maintain proper
books of record and account, in which full, true and correct entries in
conformity with GAAP consistently applied shall be made of all financial
transactions and matters involving its assets and business, and (ii) permit
representatives of the Agent or any Lender to visit and inspect any of its
properties, to examine its corporate, financial and operating records and make
copies thereof or abstracts therefrom, and to discuss its affairs, finances and
accounts with its officers, employees and independent public accountants, all at
the expense of the Borrower, in the case of visits or inspections by the Agent
and, if an Event of Default is then continuing, by any Lender, and at such
reasonable times during normal business hours and as often as may be reasonably
requested, upon reasonable advance notice to the Borrower, except that when an
Event of Default exists the Agent or any Lender may take any such action at any
time during business hours and on same-day notice.
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(c) Reporting Requirements. Furnish to the Lenders, all in form and
substance satisfactory to the Agent:
(i) within 40 days after the end of each fiscal month in each
Fiscal Year (other than the third month in each Quarter), financial
information regarding the Borrower and its Subsidiaries consisting of
consolidated unaudited balance sheets as of the close of such month and
the related statements of income and cash flow for such month and that
portion of the current Fiscal Year ending as of the close of such month
(including separate balance sheets and income statements by business
line), setting forth in comparative form the figures contained in the
Initial Projections and the Business Plan, as applicable, for the
current Fiscal Year, in each case certified by an Authorized Officer of
the Borrower as fairly presenting the consolidated financial position
of the Borrower and its Subsidiaries as at the dates indicated and the
results of their operations and cash flow for the periods indicated in
accordance with GAAP (subject to the absence of footnote disclosure and
normal year-end audit adjustments).
(ii) within 55 days after the end of each of the first three
Quarters of each Fiscal Year, financial information regarding the
Borrower and its Subsidiaries consisting of consolidated unaudited
balance sheets as of the close of such Quarter and the related
statements of income and cash flow for such Quarter and that portion of
the Fiscal Year ending as of the close of such Quarter (including
separate balance sheets and income statements by business line),
setting forth in comparative form the figures for the corresponding
period in the prior year and the figures contained in the Initial
Projections and the Business Plan, as applicable, for the current
Fiscal Year, in each case certified by an Authorized Officer of the
Borrower as fairly presenting the consolidated financial position of
the Borrower and its Subsidiaries as at the dates indicated and the
results of their operations and cash flow for the periods indicated in
accordance with GAAP (subject to the absence of footnote disclosure and
normal year-end audit adjustments).
(iii) within 100 days after the end of each Fiscal Year,
financial information regarding the Borrower and its Subsidiaries
consisting of consolidated balance sheets of the Borrower and its
Subsidiaries as of the end of such year and related statements of
income and cash flows of the Borrower and its Subsidiaries for such
Fiscal Year, all prepared in conformity with GAAP and certified, in the
case of such consolidated financial statements, without qualification
as to the scope of the audit by KPMG LLP or other independent public
accountants acceptable to the Administrative Agent, together with the
report of such accounting firm stating that (A) such financial
statements fairly present the consolidated financial position of the
Borrower and its Subsidiaries as at the dates indicated and the results
of their operations and cash flow for the periods indicated in
conformity with GAAP applied on a basis consistent with prior years
(except for changes with which such independent certified public
accountants shall concur and which shall have been disclosed in the
notes to the financial statements), and (B) the examination by such
accountants in connection with such consolidated financial statements
has been made in accordance with generally accepted auditing standards,
and accompanied by a certificate stating that in the course of the
regular audit of the business of the Borrower and its Subsidiaries such
accounting firm has obtained no knowledge that an Event of Default in
respect of the financial covenants contained in Article V has occurred
and is continuing, or, if in the opinion of such accounting firm, a
Potential Default or Event of Default has occurred and is continuing in
respect of such financial covenants, a statement as to the nature
thereof.
(iv) together with each delivery of any financial statement
pursuant to clauses (ii) and (iii) of this Section 6.01(c), a
certificate of an Authorized Officer of the Borrower in substantially
the form of Exhibit E-1 (A) demonstrating compliance with each of the
financial covenants contained in Article V and (B) stating that no
Potential Default or Event of Default has occurred
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and is continuing or, if a Potential Default or an Event of Default has
occurred and is continuing, stating the nature thereof and the action
which the Borrower proposes to take with respect thereto.
(v) no later than July 31, 2000, the Business Plan (including
updated Projections for the balance of the Facility);
(vi) promptly after the filing thereof, copies of all reports
on Form 10-K, 10-Q or 8-K and all other documents filed with the
Securities and Exchange Commission or any national securities exchange;
(vii) notice when, but in no event later than ten days after,
it becomes aware of any pending or threatened Material Environmental
Claim or the presence of any Hazardous Material in, on or under any of
its property that is likely to prohibit or restrict materially the
occupancy, transferability or use of such property under any
Environmental Laws or result in a Material Environmental Claim;
(viii) notice upon, but in no event later than ten days after,
the occurrence of any ERISA Event affecting the Borrower or any ERISA
Affiliate, together with (A) a copy of any notice with respect to such
ERISA Event that may be required to be filed with the PBGC and (B) any
notice delivered by the PBGC to the Borrower or any ERISA Affiliate
with respect to such ERISA Event;
(ix) As soon as practicable, and in any event within five
Business Days after any executive officer of any Loan Party has actual
knowledge of the existence of any Potential Default, Event of Default
or other event which has resulted in a Material Adverse Change or which
has any reasonable likelihood of causing or resulting in a Material
Adverse Change, the Borrower shall give the Agent notice specifying the
nature of such Default or Event of Default or other event, including
the anticipated effect thereof, which notice, if given by telephone,
shall be promptly confirmed in writing on the next Business Day;
(x) as soon as possible, and in any event within five Business
Days (A) after becoming aware thereof, notice of the occurrence of any
event that is or would (with the passage of time, notice or both) be a
default under or a violation of any Health Care Permit necessary for
the lawful conduct of the business or operations of any Loan Party,
including the ownership and operation of its Health Care Facilities;
(B) after receipt thereof, any notice of any violation of applicable
laws that causes or could reasonably be expected to cause any such
Health Care Permit to be materially modified, rescinded or revoked; and
(C) after becoming aware thereof, notice of the occurrence of any event
that constitutes or can reasonably be expected to result in a Material
Adverse Change;
(xi) as soon as possible, but in no event later than ten days
after becoming aware thereof, notice of any contingent liabilities of
the Borrower or any of its Subsidiaries that could reasonably be
expected to result in a Material Adverse Change;
(xii) within five days after the end of each fiscal month of
the Borrower, the Borrowing Base Certificate, together with all
appropriate supporting data pursuant to such Borrowing Base
Certificate; provided, that if the Available Credit shall be less than
$100,000,000, such Borrowing Base Certificate shall be delivered within
two days after the end of each Calendar Week of the Borrower;
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(xiii) within five days after the end of each fiscal month of
the Borrower, average RUG rate and other payor rates for such fiscal
month;
(xiv) within three days after the end of each Calendar Week of
the Borrower, (A) rolling 13-week cash flow forecast, (B) facility
census by payor for such week; provided, that the delivery of such
census required pursuant to this clause (B) shall commence thirty days
after the Closing Date, (C) PIP collections in total for such week, (D)
Medicaid collections wired to the Borrower's corporate office during
such week, (E) daily collections compared to the Initial Projections
and the Business Plan, as applicable, for such week and (F)
consolidated facility occupancy rate for such week;
(xv) promptly after the commencement thereof, written notice
of the commencement of all actions, suits and proceedings before any
domestic or foreign Governmental Authority or arbitrator, affecting the
Borrower or any of its Subsidiaries, which in the reasonable judgment
of the Borrower, expose the Borrower or any such Subsidiary to
liability in an amount aggregating $1,000,000 or more or which, if
adversely determined, could reasonably be expected to result in having
a Material Adverse Change.
(xvi) promptly after the sending or filing thereof, copies of
all material notices, certificates or reports delivered pursuant to the
Existing Agreement;
(xvii) as soon as available, all schedules of assets and
liabilities, all statements of financial affairs, all operating
reports, all claims registers and all other pleadings, in each case
filed in the Cases by or on behalf of any Loan Party; and
(xviii) such other information respecting the condition or
operations, financial or otherwise, of the Borrower or any of its
Subsidiaries as the Agent (on behalf of itself or any Lender) from time
to time may reasonably request.
(d) Preservation of Corporate Existence, Etc. Subject to Section
6.02(k), (i) preserve and maintain in full force and effect its corporate or
partnership existence and good standing under the laws of its State or
jurisdiction of incorporation or organization and all rights, privileges,
qualifications, permits, licenses and franchises necessary or desirable in the
normal conduct of its business (provided, that the failure at any one time to
maintain Health Care Permits with respect to any seven Health Care Facilities
owned or leased by any one or more Filing Subsidiaries shall not constitute a
failure to comply with this Section 6.02(d)(i)), (ii) conduct its business
consistent with past practice, (iii) use its reasonable efforts, in the ordinary
course and consistent with past practice, to preserve its business organization
and preserve the goodwill and business of the customers, suppliers and others
doing business with it, and (iv) preserve or renew all of its registered
trademarks, trade names, patents, permits, material licenses, service marks and
other intellectual property, the non-preservation of which constitutes or could
reasonably be expected to result in a Material Adverse Change.
(e) Maintenance of Property. Except as otherwise required by the
Bankruptcy Code, maintain and preserve all its property which is necessary for
use in its business in good working order and condition, except ordinary wear
and tear and except as permitted under Section 6.02(b), and use the standard of
care typical in the industry in the operation of the Health Care Facilities.
(f) Bankruptcy Court. Use its best efforts to obtain the approval of
the Bankruptcy Court of this Agreement and the other Loan Documents and deliver
to the Agent and the Agent's counsel all material pleadings, motions and other
documents filed on behalf of the Loan Parties with the Bankruptcy Court.
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(g) Insurance. Maintain insurance with financially sound and reputable
insurers with respect to its properties and business against loss or damage of
the kinds customarily insured against by Persons engaged in the same or similar
business, of such types and in such amounts as are customarily carried under
similar circumstances by such other Persons, including workers' compensation
insurance, public liability and property and casualty insurance, except that the
Borrower shall be permitted to maintain self insurance with respect to health
care benefits provided to employees and with respect to workers' compensation
insurance so long as the Borrower also maintains, with financially sound and
reputable insurers, stop loss insurance of the type and in amounts customarily
maintained by Persons engaged in the same or similar business as are customarily
carried under similar circumstances by such other Persons. Upon request of the
Agent, the Borrower shall furnish the Agent, with copies for each Lender, at
reasonable intervals (but not more than once per calendar year), a certificate
of an Authorized Officer (and, if requested by the Agent, any insurance broker
of the Borrower) setting forth the nature and extent of all insurance maintained
by the Borrower and its Subsidiaries in accordance with this Section 6.01(g)
(and which, in the case of a certificate of a broker, was placed through such
broker).
(h) Cash Management
(i) The Loan Parties shall maintain a cash management system
acceptable to the Agent including one or more lockboxes, which cash
management system shall provide for all funds received by any Loan
Party to be deposited in a Collection Account covered by a Blocked
Account Letter, the Citibank Concentration Account or into a bank
account the deposits in which are swept into a Collection Account or
the Citibank Concentration Account a periodic basis (no less frequently
than bi-weekly).
(ii) Within 45 days of the Closing Date (or by such later date
as the Borrower may request in writing and the Agent may agree), the
Borrower shall deliver to the Agent the Blocked Account Letters, duly
executed by all of the applicable Collection Account Banks, the
Borrower and the appropriate Loan Party;
(iii) Notwithstanding anything to the contrary contained in
this Section 6.01(h), to the extent that at the close of any Business
Day (x) cash and Cash Equivalents of any Loan Party held in any
Collection Account or other cash deposit account exceeds $10,000,000,
or (y) cash and Cash Equivalents of all Loan Parties held in all
Collection Accounts and cash deposit accounts exceeds $50,000,000 in
the aggregate, such excess , in the case of clause (x) or (y) shall be
transferred to the Citibank Concentration Account on the following
Business Day. All funds on deposit in the Citibank Concentration
Account shall be applied in the manner specified in Section
2.11(b)(iii).
(iv) If at any time prior to the Termination Date no Event of
Default or Potential Default has occurred and is continuing and the
amount on deposit in the Citibank Collateral Account exceeds the amount
of cash collateral required to be deposited in respect of the then LC
Exposure pursuant to Section 2.06(b) or (c) or otherwise pursuant to
Section 2.11(b)(ii) or (iii), the Agent shall, if so directed in
writing by the Borrower, cause such deposit to be released to the
Borrower to the extent, but only to the extent, such deposit exceeds
the sum of (A) 105% of the then LC Exposure required to be cash
collateralized pursuant to Section 2.06(b) or (c) and (B) the amount of
cash collateral required to be deposited in the Citibank Collateral
Account pursuant to Section 2.11(b)(ii) or (iii).
(v) As long as no Event of Default has occurred and is
continuing, the Agent shall, upon the request of the Borrower, use all
funds on deposit in the Citibank Collateral Account to make Investments
in Cash Equivalents selected by the Borrower.
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(i) Environmental Laws. Except as otherwise required by the Bankruptcy
Code or by a Final Order of the Bankruptcy Court, conduct its operations and
keep and maintain its property in compliance in all material respects with all
applicable Environmental Laws and Environmental Permits; and prepare at the
Borrower's sole cost and expense and deliver to the Agent and the Lenders such
updates as the Agent or the Requisite Lenders may reasonably request relating to
any Material Environmental Claim.
(j) Use of Proceeds. Use the proceeds of the Advances solely (i) to
fund post-petition operating expenses of the Loan Parties incurred in the
ordinary course of business, (ii) to pay certain other costs and expenses of
administration of the Cases to be specified in writing to the Agent (including
by notice of application for Orders), (iii) for working capital, capital
expenditures and other general corporate purposes of the Loan Parties not in
contravention of any Requirement of Law or the Loan Documents and (iv) as long
as no Potential Default or Event of Default has occurred and is continuing, to
pay certain Permitted Prepetition Claim Payments. The Borrower shall use the
entire amount of the proceeds of each Advance in accordance with this Section
6.01(j); provided, however, that nothing herein shall in any way prejudice or
prevent the Agent or the Lenders from objecting, for any reason, to any
requests, motions or applications made in the Bankruptcy Court, including any
applications for interim or final allowances of compensation for services
rendered or reimbursement of expenses incurred under section 105(a), 330 or 331
of the Bankruptcy Code, by any party in interest, and provided, further, that
the Borrower shall not use the proceeds from any Advances for any purpose that
is prohibited under the Bankruptcy Code.
(k) Health Care Permits and Approvals. Take all action necessary (i) to
maintain in full force and effect all Health Care Permits necessary for the
lawful conduct of its business or operations wherever now conducted and as
planned to be conducted, including the ownership and operation of its Health
Care Facilities, pursuant to all applicable laws and all requirements of
Governmental Authorities having jurisdiction over it or any part of its
operations; and (ii) ensure that all Health Care Facilities owned or leased by
it are entitled to participate in, and receive payment under, the appropriate
Medicare, Medicaid and related reimbursement programs, and any similar state or
local government-sponsored program to the extent that it has decided to
participate in any such state or local program, and to receive reimbursement
from private and commercial payers and health maintenance organizations to the
extent applicable thereto; provided, that the failure at any one time to
maintain Health Care Permits with respect to any seven Health Care Facilities
owned or leased by any one or more Filing Subsidiaries shall not constitute a
failure to comply with this Section 6.01(k).
(l) Further Assurances.
(i) Promptly and in no event later than five Business Days
after becoming aware thereof, notify the Lenders if any written
information, exhibits and reports furnished to the Lenders contain any
untrue statement of a material fact or omit to state any material fact
or any fact necessary to make the statements contained therein not
misleading in light of the circumstances in which made, and correct any
defect or error that may be discovered therein or in the execution,
acknowledgement or recordation of any Loan Document.
(ii) Promptly upon request by the Agent or the Requisite
Lenders, execute, deliver, acknowledge, file, re-file, register and
re-register any and all such further acts, security agreements,
assignments, estoppel certificates, financing statements and
continuations thereof, termination statements, notices of assignment,
transfers, certificates, assurances, Federal Reserve Forms U-1 or G-3
or similar forms and other instruments as the Agent or the Requisite
Lenders may reasonably require from time to time in order (A) to carry
out more effectively the purposes of this Agreement or any other Loan
Document, (B) to subject to the Liens created by any of the
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Loan Documents and the Orders any of the properties, rights or
interests described in or intended to be covered by any Loan Document,
(C) to establish and maintain the validity, effectiveness, perfection
and priority of any Loan Document or any Liens intended to be created
thereby, or (D) to better assure, convey, grant, assign, transfer,
preserve, protect and confirm to the Agent and the Lenders the rights
granted or now or hereafter intended to be granted to the Lenders under
any Loan Document or under any other instrument executed in connection
therewith.
(m) Delivery of Promissory Note. If requested by any Lender, execute
and deliver a promissory note, in substantially the form of Exhibit A, payable
to the order of such Lender in a principal amount equal to such Lender's
Commitment, duly executed by the Borrower.
(n) Licensure; Medicaid/Medicare Cost Reports. If required by
applicable law or any Governmental Authority, properly file all
Medicaid/Medicare cost reports; and maintain all certificates of need, provider
numbers and licenses that are necessary to conduct such Loan Party's business as
currently conducted, and take any steps required to comply with any such new or
additional requirements that may be imposed on providers of medical products and
Medical Services.
SECTION 6.02. Negative Covenants. So long as any Obligation remains
unpaid, any Letter of Credit remains outstanding or any Lender is obligated to
extend credit hereunder, without the written consent of the Requisite Lenders,
neither the Borrower nor any other Loan Party will, and the Borrower will not
cause or permit any of its Subsidiaries to:
(a) Liens. Directly or indirectly make, create, incur, permit, assume
or suffer to exist any Lien upon or with respect to any part of its properties
or assets, whether now owned or hereafter acquired, or become or remain bound by
any agreement to do so or assign any right to receive income, except:
(i) any Lien existing on the Closing Date and described in
Schedule 6.02(d) hereto;
(ii) any Lien created under any Loan Document;
(iii) any Lien for the payment of taxes, fees, assessments or
other governmental charges which are not delinquent and remain payable
without penalty or which are being contested in good faith by
appropriate proceedings and with respect to which adequate reserves or
other appropriate provisions are being maintained to the extent
required by GAAP;
(iv) any carriers', warehousemen's, mechanics', landlords', or
materialmen's, or other similar Lien imposed by law arising in the
ordinary course of business which is not delinquent or remains payable
without penalty or which is being contested in good faith by
appropriate proceedings and with respect to which adequate reserves or
other appropriate provisions are being maintained to the extent
required by GAAP;
(v) any Lien (other than a Lien imposed by ERISA) on deposits
required by law pursuant to worker's compensation, unemployment
insurance and other social security benefits;
(vi) any easement, right-of-way, restriction and other similar
encumbrance with respect to Real Property incurred in the ordinary
course of business which does not materially detract from the value of
such Real Property or interfere with the ordinary conduct of the
business conducted and proposed to be conducted at such Real Property;
and
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(vii) purchase money Liens granted by the Borrower or any
Subsidiary of the Borrower (including the interest of a lessor under a
Capital Lease and Liens to which any property is subject at the time of
the Borrower's or such Subsidiary's acquisition thereof) securing Debt
permitted under Section 6.01(d)(iii)and limited in each case to the
property purchased with the proceeds of such purchase money
Indebtedness or subject to such Capital Lease.
(b) Disposition of Assets. Engage in any Asset Sale or otherwise
directly or indirectly sell, assign, lease, convey, transfer or otherwise
dispose of all or any portion of its assets, business or property (including,
without limitation, in connection with a sale and leaseback transaction or the
sale or factoring at maturity or collection of any accounts) or any interest
therein, or agree to do any of the foregoing, except:
(i) the disposition of inventory or used, worn-out or surplus
property or equipment in the ordinary course of business;
(ii) the sale of equipment in the ordinary course of business
for credit against the purchase price of similar replacement equipment
or if the proceeds of the sale are reasonably promptly applied to the
purchase price of similar replacement equipment; and
(iii) any other Asset Sale (other than any Asset Sale of any
of the Stock of RoTech or all or substantially all of the assets, of
RoTech) made for fair market value; so long as (A) the sum of the
aggregate consideration received pursuant to such Asset Sale plus the
aggregate consideration received pursuant to all such other Asset Sales
in any Fiscal Year is less than $10,000,000, (B) the consideration
received in such Asset Sale is solely in cash, and (C) at the time of
or after giving effect to such Asset Sale, no Event of Default or
Potential Default exists;
provided, however, that the foregoing limitations are not intended to prevent
the Borrower from rejecting unexpired leases or executory contracts pursuant to
section 365 of the Bankruptcy Code in connection with the Cases.
(c) Investments. Directly or indirectly make, acquire, carry or
maintain any Investment, or become or remain bound by any agreement to make,
acquire, carry or maintain any Investment, except:
(i) Investments in cash and Cash Equivalents;
(ii) Investments in accounts or notes receivable or other
claims arising from the sale or lease of goods or services in the
ordinary course of business;
(iii) Investments held on the Closing Date and described in
Schedule 6.02(c) hereto; and
(iv) Investments by (A) the Borrower in any Guarantor, or by
any Guarantor in the Borrower or any other Guarantor, (B) a Subsidiary
that is not a Guarantor in the Borrower or any other Subsidiary, (C)
the Borrower or any Guarantor in a Subsidiary that is not a Guarantor;
provided, however, that the aggregate outstanding amount of such
Investments pursuant to this clause (iv)(C) shall not exceed
$20,000,000 at any time; provided further, however, that no such
Investments shall be made in Monarch Properties LP, Lyric Health Care
LLC or any of their respective Subsidiaries.
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(d) Limitation on Debt. Directly or indirectly create, incur, assume,
guarantee or suffer to exist, or otherwise become or remain directly or
indirectly liable with respect to, any Debt, except:
(i) the Obligations;
(ii) Debt existing on the Closing Date and described in
Schedule 6.02(d);
(iii) obligations in respect of Capital Leases and purchase
money Debt incurred by the Borrower or its Subsidiaries to finance the
acquisition of fixed assets in the ordinary course of business in an
aggregate outstanding principal amount not to exceed $25,000,000 at any
time; provided, however, that the Capital Expenditure related thereto
is otherwise permitted by Section 5.01(b); and
(iv) Debt arising from intercompany loans (A) from the
Borrower to any Guarantor or from any Guarantor to the Borrower or any
other Guarantor and (B) from the Borrower or any Guarantor to any
Subsidiary of the Borrower that is not a Guarantor; provided, however,
that the Investment in the intercompany loan to such Subsidiary is
permitted under Section 6.02(c)(iv).
(e) Transactions with Affiliates. Enter or agree to enter into any
transaction with any Affiliate of the Borrower or of any Subsidiary of the
Borrower except (i) under the Loan Documents, (ii) in the ordinary course of
business and pursuant to the reasonable requirements of the business of the
Borrower or such Subsidiary and upon fair and reasonable terms no less favorable
to the Borrower or such Subsidiary than the Borrower or such Subsidiary would
obtain in a comparable arm's-length transaction with a Person not an Affiliate
of the Borrower or such Subsidiary; provided, that if such Affiliate is not a
Subsidiary of the Borrower, the Borrower or such Loan Party shall give written
notice of any such transaction to the Agent and the Lenders and such transaction
shall be subject to the approval of the Requisite Lenders or (iii) salaries and
other employee compensation to officers or directors of the Borrower or any of
its Subsidiaries commensurate with current compensation levels or as part of an
employee retention or incentive program approved by the Bankruptcy Court.
(f) Accommodation Obligations. Create, incur, assume or suffer to exist
any Accommodation Obligations except:
(i) endorsements of checks for collection or deposit in the
ordinary course of business;
(ii) Accommodation Obligations of the Borrower and its
Subsidiaries existing as of the Closing Date and described in Schedule
6.02(f) hereto; and
(iii) the Obligations.
(g) Leases of Health Care Facilities. Enter into or become obligated as
lessee under any lease of a Health Care Facility, whether or not it is a Capital
Lease, unless (i) the lease is free from provisions pursuant to which the lease
is violated or put into default by reason of any breach, default or event of
default under any indenture or agreement governing any Debt of, or other lease
binding on, the Borrower or any of its other Subsidiaries, except another lease
entered into by the same lessor or by one of its Affiliates, (ii) the lease
permits the Borrower and such Subsidiary to comply with this Section 6.01(g) and
does not include any provision that is or would be violated or put in default by
reason of such compliance or by reason of the enforcement of the claims and
Liens of the Agent and Lenders arising from such compliance, and (iii) the lease
is free from provisions pursuant to which the lease is or
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would be violated or put into default, or any prepayment would be required, by
reason of any change in control of the Borrower or such Subsidiary except, if
required by the lessor despite best efforts by the Borrower to the contrary, a
right to consent to a change of ownership of such Subsidiary if such consent may
not unreasonably be withheld.
(h) Subsidiaries. Directly or indirectly, by operation of law or
otherwise, form or acquire any Subsidiary.
(i) Restricted Payments. Directly or indirectly (A) declare or make any
dividend payment or other distribution of assets, properties, cash, rights,
obligations or securities on account of any shares of any class of its capital
stock or any other equity, ownership or profit interests; (B) purchase, redeem
or otherwise acquire for value any shares of any class of capital stock of, or
other equity, ownership or profit interests in, the Borrower or any of its
Subsidiaries or any warrants, rights or options to acquire any such shares or
interests, now or hereafter outstanding; (C) enter into any agreement
restricting the ability of any Subsidiary of the Borrower to declare or make any
dividend payment or other distribution of assets, properties, cash, rights,
obligations or securities to its stockholders; (D) except in respect of
Permitted Prepetition Claim Payments, agree to or permit any amendment or
modification of, or change in, any of the terms of prepetition Debt; or (E)
except in respect of Permitted Prepetition Claim Payments, pay, prepay, redeem,
or purchase or otherwise acquire any prepetition Debt, or make any deposit to
provide for the payment of any prepetition Debt, or exchange any prepetition
Debt, or otherwise make any payment (as adequate protection or otherwise) on
account of any Claim arising or deemed to have arisen prior to the Petition
Date, or give any notice in respect thereof.
(j) Capital Structure/Modification of Constituent Documents. Change its
capital structure (including the terms of its outstanding Stock) or otherwise
amend its Constituent Documents, except for changes and amendments which do not
materially affect the rights and privileges of any Loan Party, or the interests
of the Agent and the Lenders under the Loan Documents or in the Collateral.
(k) Mergers, Etc. Merge or consolidate with or into or enter into any
agreement to merge or consolidate with or into any Person except that a
wholly-owned Subsidiary of the Borrower may engage in a merger or consolidation
with any one or more other wholly-owned Subsidiaries of the Borrower if the
surviving corporation is a wholly-owned Subsidiary of the Borrower and is a
Guarantor.
(l) Conduct of Business. Engage in any business other than the
businesses of the Loan Parties described in Section 4.01(q) and any business or
activity substantially similar thereto.
(m) Compliance with ERISA. Directly or indirectly (or permit any ERISA
Affiliate directly or indirectly to) (i) terminate any Plan subject to Title IV
of ERISA so as to result in liability to the Borrower or any ERISA Affiliate in
excess of $2,000,000; (ii) permit any ERISA Event to exist; (iii) make a
complete or partial withdrawal (within the meaning of ERISA Section 4201) from
any Multiemployer Plan so as to result in liability to the Borrower or any ERISA
Affiliate in excess of $2,000,000; or (iv) permit the total Unfunded Pension
Liabilities (using the actuarial assumptions utilized by the PBGC) for all
Pension Plans (other than Pension Plans which have no Unfunded Pension
Liabilities) to exceed $2,000,000.
(n) Health Care Permits and Approvals. Engage in any activity that (i)
is or could reasonably be expected to result in a material default under or
violation of any Health Care Permit necessary for the lawful conduct of its
business or operations or (ii) causes or could reasonably be expected to cause
the loss by any Health Care Company or Health Care Facility owned, leased,
managed or operated by it of the right to participate in, and receive payment
under, the appropriate Medicare, Medicaid and related reimbursement programs,
and any similar state or local government-sponsored
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program to the extent that it has decided to participate in any such state or
local program, or to receive reimbursement from private and commercial payers
and health maintenance organizations to the extent applicable thereto; provided,
that the failure at any one time to maintain Health Care Permits with respect to
any seven Health Care Facilities owned or leased by any Filing Subsidiary shall
not constitute a failure to comply with this Section 6.02(n).
(o) Payment Restrictions Affecting Subsidiaries. Cause, permit or
suffer any Subsidiary to become or remain subject to any Contractual Obligation
that in any manner limits or restricts its right to pay dividends or make
distributions, whether in cash or in property, to its stockholders or to make
loans or sell assets to the Borrower or any of its Subsidiaries or to enter into
any other lawful transaction with the Borrower or any of its Subsidiaries,
except limitations and restrictions set forth in this Agreement or the other
Loan Documents.
(p) The Orders. Make or permit to be made any change, amendment or
modification, or any application or motion for any change, amendment or
modification, to either Order without the prior written consent of the Requisite
Lenders.
(q) Application to Bankruptcy Court. Apply to the Bankruptcy Court for
the authority to take any action that is prohibited by or inconsistent with the
terms of this Agreement or any of the other Loan Documents or refrain from
taking any action that is required to be taken by the terms of this Agreement or
any of the other Loan Documents.
(r) Ownership. Make or permit to be made any change in the ownership or
control of any Guarantor.
(s) Accounting Changes; Fiscal Year. Change its (i) accounting
treatment and reporting practices or tax reporting treatment, except as required
by GAAP or any Requirement of Law and disclosed to the Lenders and the Agent or
(ii) Fiscal Year.
(t) Cancellation of Indebtedness Owed to It. Cancel any Claim or Debt
owed to it except (i) in the ordinary course of business consistent with past
practice or (ii) as otherwise approved by the Bankruptcy Court.
(u) No Speculative Transactions. Engage in any speculative transaction
or in any transaction involving Hedging Contracts, except for the sole purpose
of hedging in the normal course of the Loan Parties' businesses and consistent
with industry practices.
(v) Chapter 11 Claims. Incur, create, assume, suffer to exist or permit
any administrative expense, unsecured claim, or other super-priority claim or
lien which is pari passu with or senior to the claims of the Secured Parties
against the Loan Parties hereunder, or apply to the Bankruptcy Court for
authority to do so, except for the Carve-Out.
(w) Cash Management. Make any change in the system or method by which
all funds held in the lockboxes and cash collection accounts of the Loan Parties
are transferred on a timely basis from such lockboxes and cash collection
accounts into the Collection Accounts or the Citibank Concentration Account,
without the prior written consent of the Agent, or otherwise provide for any
such funds to be transferred to any other deposit or collection account other
than the Collection Accounts, the Citibank Collateral Account or the Citibank
Concentration Account.
(x) Environmental Allow a Release of any Contaminant in violation of
any Environmental Law; provided, however, that any Loan Party shall not be
deemed in violation of this Section 6.02(x) if, as the consequence of all such
Releases, such Loan Party would not incur Environmental Liabilities and Costs in
excess of $5,000,000 in the aggregate.
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ARTICLE VII
EVENTS OF DEFAULT
SECTION 7.01. Events of Default. If any of the following events
("EVENTS OF DEFAULT") shall occur and be continuing:
(a) Non-Payment of Principal or Interest. The Borrower fails to pay
when due (i) any principal of any Advance, (ii) any Funded LC Exposure, (iii)
any interest payable under Section 2.07 or (iv) any additional interest payable
under Section 2.08; or
(b) Non-Payment of Fees. The Borrower fails to pay when due , any fee
payable under Section 2.04 or any other Obligation owing hereunder or under any
Loan Document and such failure continues for three Business Days; or
(c) Representations and Warranties. Any representation or warranty made
by any Loan Party under or in connection with any Loan Document proves to have
been incorrect in any material respect when made or deemed made; or
(d) Covenants. The Borrower or any other Loan Party fails to perform or
observe any term, covenant or agreement set forth in Section 5.01, Section
6.01(b), (c), (d), (h) or (j) or Section 6.02; or
(e) Other Covenants. The Borrower or any other Loan Party fails to
perform or observe any term, covenant or agreement contained in this Agreement
or any other Loan Document (other than those specifically referred to in
subsections (a), (b), (c) and (d) of this Section 7.01) and such failure
continues for 30 days; or
(f) Leases. (i) Any Loan Party (A) fails to make any payment within the
period required under any Material Lease, and such failure continues for longer
than the period of grace, if any, specified for such failure in such Material
Lease, or (B) fails to perform or observe any other term, covenant or agreement
that (a) is contained in any Material Lease and (b) requires the payment of
money or can be performed or observed by the payment of money, and such failure
continues for longer than the period of grace, if any, specified for such
failure in such Material Lease; or (ii) any Material Lease is terminated as a
result of any failure by any Loan Party to perform or observe any term, covenant
or agreement contained therein; or
(g) Judgments. Any judgment or order for the payment of money is
rendered against any of the Loan Parties or any of their Subsidiaries in an
amount in excess of $500,000 for any single judgment or order or in excess of
$1,000,000 for all such judgments or orders and either (i) enforcement
proceedings are commenced by any creditor upon such judgment or order and are
not stayed, or (ii) there is any period of 10 consecutive days during which a
stay of enforcement of such judgment or order, by reason of a pending appeal or
otherwise, is not in effect; or
(h) Loan Documents. (x) The Loan Documents and the Orders shall, for
any reason, cease to create a valid Lien on any of the Collateral purported to
be covered thereby or such Lien shall cease to be a perfected Lien having the
priority provided herein pursuant to section 364 of
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the Bankruptcy Code against each Loan Party, or any Loan Party shall so allege
in any pleading filed in any court or
(y) Any material provision of any Loan Document shall, for any
reason, cease to be valid and binding on each Loan Party party thereto
or any Loan Party shall so state in writing; or
(i) Material Adverse Change. Any Material Adverse Change shall occur;
or
(j) ERISA. (i) The Borrower or any ERISA Affiliate shall fail to
satisfy its contribution requirements under Section 412(c)(11) of the Code,
whether or not it has sought a waiver under Section 4 12(d) of the Code; or (ii)
in the case of an ERISA Event (other than the Cases) involving the withdrawal
from a Pension Plan of a "substantial employer" (as defined in Section
4001(a)(2) or Section 4062(e) of ERISA), the withdrawing employer's
proportionate share of that Pension Plan's Unfunded Pension Liabilities is more
than $2,000,000; or (iii) in the case of an ERISA Event (other than the Cases)
involving the complete or partial withdrawal from a Multiemployer Plan, the
withdrawing employer incurs a withdrawal liability in an aggregate amount
exceeding $2,000,000; or (iv) a Pension Plan that is intended to be qualified
under Section 401(a) of the Code loses its qualification, and with respect to
such loss of qualification, the Borrower or any ERISA Affiliate can reasonably
be expected to be required to pay (for additional taxes, payments to or on
behalf of Pension Plan participants, or otherwise) an aggregate amount exceeding
$2,000,000; or (v) any combination of events listed in clauses (ii) through (iv)
occurs that involves a net increase in aggregate Unfunded Pension Liabilities
and unfunded liabilities in excess of $5,000,000; or
(k) Trustee. A trustee shall be appointed in any of the Cases; or
(l) Environmental Liabilities. Environmental Liabilities shall exceed
$5,000,000; or
(m) Cases. Any of the Cases shall be dismissed, suspended or converted
to a case under chapter 7 of the Bankruptcy Code, or any Loan Party shall file
any pleading requesting any such relief;or an application shall be filed by any
Loan Party for the approval of, or there shall arise, (i) any other Claim having
priority senior to or pari passu with the claims of the Agent and the Lenders
under the Loan Documents or any other claim having priority over any or all
administrative expenses of the kind specified in sections 503(b) or 507(b) of
the Bankruptcy Code (other than the Carve-Out) or (ii) any Lien on the
Collateral having a priority senior to or pari passu with the liens and security
interests granted herein, except as expressly provided herein; or
(n) Prepetition Claims. Any Loan Party shall file a motion seeking, or
the Bankruptcy Court shall enter, an order (i) approving payment of any
prepetition Claim other than a Permitted Prepetition Claim Payment, (ii)
approving a First Day Order not approved by the Agent, (iii) granting relief
from the automatic stay applicable under section 362 of the Bankruptcy Code to
any holder of any security interest to permit foreclosure on any assets (other
than certain assets identified by the Borrower and agreed to by the Agent)
having a book value in excess of $1,000,000 in the aggregate, or (iv) except to
the extent the same would not constitute a default under any of the previous
clauses, approving any settlement or other stipulation with any creditor of any
Loan Party, other than the Agent and the Lenders, or otherwise providing for
payments as adequate protection or otherwise to such creditor individually or in
the aggregate in excess of $100,000 for any and all such creditors; or
(o) Court Orders. (i) The Interim Order shall cease to be in full force
and effect and the Final Order shall not have been entered prior to such
cessation, or (ii) the Final Order shall not have been entered by the Bankruptcy
Court on or before the 45th day following the Closing Date or (iii) from and
after the date of entry thereof, the Final Order shall cease to be in full force
and effect, or (iv) any
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Loan Party shall fail to comply with the terms of the Interim Order or the Final
Order in any material respect, or (v) the Interim Order or the Final Order shall
be amended, supplemented, stayed, reversed, vacated or otherwise modified (or
any of the Loan Parties shall apply for authority to do so) without the written
consent of the Requisite Lenders; or
(p) Examiner. The Bankruptcy Court shall enter an order appointing a
responsible officer or an examiner with powers beyond the duty to investigate
and report, as set forth in section 1106(a)(3) and (4) of the Bankruptcy Code,
in any of the Cases; or
(q) Forfeiture; Seizure. The Agent or any Lender receives any
indication or evidence that any Loan Party may have directly or indirectly been
engaged in any type of activity that the Agent, in its reasonable discretion,
determines might result in the forfeiture of any material property of any Loan
Party to any Governmental Authority, or any Governmental Authority takes any
action to seize or require the turnover of any Health Care Facility of any Loan
Party;
then, and in any such event, without further order of, application to, or action
by, the Bankruptcy Court: (i) with the consent of the Requisite Lenders, the
Agent may, or upon the request of the Requisite Lenders, the Agent shall, by
notice to the Borrower declare the Commitments to be terminated forthwith,
whereupon such Commitments shall immediately terminate; and (ii) with the
consent of the Requisite Lenders, the Agent may, or upon the request of the
Lenders, the Agent shall, by notice to the Borrower, declare the Advances
hereunder (with accrued interest thereon) and all other amounts owing under this
Agreement (including, without limitation, all LC Exposure, whether or not the
beneficiaries of the then outstanding Letters of Credit shall have presented the
documents required thereunder) to be due and payable forthwith, whereupon the
same shall immediately become due and payable, without presentment, demand,
protest or further notice of any kind, all of which are expressly waived by the
Loan Parties. In addition, subject solely to any requirement of the giving of
notice by the terms of the Interim Order or the Final Order, the automatic stay
provided in section 362 of the Bankruptcy Code shall be deemed automaticallly
vacated without further action or order of the Bankruptcy Court and the Agent
and the Lenders shall be entitled to exercise all of their respective rights and
remedies under the Loan Documents, including, without limitation, all rights and
remedies with respect to the Collateral and the Guarantors.
SECTION 7.02. Actions in Respect of Letters of Credit. Upon the
Termination Date or as required by Section 2.06 (b) or (c) or Section
2.11(b)(ii) or (iii), the Borrower shall pay to the Agent in immediately
available funds, for deposit in the Citibank Collateral Account, an amount so
that the balance in the Citibank Collateral Account shall equal 105% of the sum
of all outstanding LC Exposure. The Agent may, from time to time after funds are
deposited in the Citibank Collateral Account, apply funds then held in the
Citibank Collateral Account to the payment of any amounts as shall have become
or shall become due and payable by the Borrower to the Lenders in respect of the
LC Exposure or other Obligations that become due and payable. The Agent shall
promptly give written notice of any such application; provided, however, that
the failure to give such written notice shall not invalidate any such
application. Except as permitted under Section 6.01(h)(iv), neither the
Borrower, any other Loan Party, nor any Person claiming on behalf of or through
the Borrower shall have any right to withdraw any of the funds held in the
Citibank Collateral Account at any time prior to the termination of all
outstanding Letters of Credit and the payment in full of all then outstanding
and payable monetary Obligations.
SECTION 7.03. Rights Not Exclusive. The rights provided for in this
Agreement and the other Loan Documents are cumulative and are not exclusive of
any other rights, powers or privileges or remedies provided by law or in equity,
or under any other instrument, document or agreement.
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ARTICLE VIII
GUARANTY
SECTION 8.01. The Guaranty. In order to induce the Lenders to enter
into this Agreement and to extend credit hereunder and in recognition of the
direct benefits to be received by each Guarantor from the proceeds of the
Advances and the issuance of the Letters of Credit, each Guarantor hereby agrees
with the Agent and Lenders as follows: each Guarantor hereby unconditionally and
irrevocably, jointly and severally, guarantees as primary obligor and not merely
as surety the full and prompt payment when due, whether upon maturity, by
acceleration or otherwise, of any and all of the Obligations of the Borrower to
the Lenders. If any or all of the Obligations of the Borrower to the Lenders
become due and payable hereunder, each Guarantor, jointly and severally,
unconditionally promises to pay such Obligations to the Lenders, or order, on
demand, together with any and all reasonable expenses which may be incurred by
the Agent or the Lenders in collecting any of the Obligations.
SECTION 8.02. Nature of Liability. The liability of each Guarantor
hereunder is exclusive and independent of any security for or other guaranty of
the Obligations of the Borrower whether executed by such Guarantor, any other
Guarantor, any other guarantor or by any other party, and the liability of each
Guarantor hereunder shall not be affected or impaired by (a) any direction as to
application of payment by the Borrower or by any other party, or (b) any other
continuing or other guaranty, undertaking or maximum liability of a guarantor or
of any other party as to the Obligations of the Borrower, or (c) any payment on
or in reduction of any such other guaranty or undertaking, or (d) any
dissolution, termination or increase, decrease or change in personnel by the
Borrower, or (e) any payment made to the Agent or the Lenders on the
indebtedness which the Agent or such Lenders repay to the Borrower pursuant to
court order in any bankruptcy, reorganization, arrangement, moratorium or other
debtor relief proceeding, and each Guarantor waives any right to the deferral or
modification of its obligations hereunder by reason of any such proceeding.
SECTION 8.03. Independent Obligation. The obligations of each Guarantor
hereunder are independent of the obligations of any other Guarantor, any other
guarantor or the Borrower, and a separate action or actions may be brought and
prosecuted against each Guarantor whether or not action is brought against any
other Guarantor, any other guarantor or the Borrower and whether or not any
other Guarantor, any other guarantor or the Borrower be joined in any such
action or actions. Each Guarantor waives, to the fullest extent permitted by
law, the benefit of any statute of limitations affecting its liability hereunder
or the enforcement thereof. Any payment by the Borrower or other circumstance
which operates to toll any statute of limitations as to the Borrower shall
operate to toll the statute of limitations as to the Guarantor.
SECTION 8.04. Authorization. Each Guarantor authorizes the Agent and
the Lenders without notice or demand (except as shall be required by applicable
statute and cannot be waived), and without affecting or impairing its liability
hereunder, from time to time to:
(a) change the manner, place or terms of payment of, and/or change or
extend the time of payment of, renew, increase, accelerate or alter, any of the
Obligations (including any increase or decrease in the rate of interest
thereon), any security therefor, or any liability incurred directly or
indirectly in respect thereof, and the Guaranty herein made shall apply to the
Obligations as so changed, extended, renewed or altered;
(b) take and hold security for the payment of the Obligations and sell,
exchange, release, surrender, realize upon or otherwise deal with in any manner
and in any order any property by
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whomsoever at any time pledged or mortgaged to secure, or howsoever securing,
the Obligations or any liabilities (including any of those hereunder) incurred
directly or indirectly in respect thereof or hereof, and/or any offset
thereagainst;
(c) exercise or refrain from exercising any rights against the Borrower
or others or otherwise act or refrain from acting;
(d) release or substitute any one or more endorsers, guarantors, the
Borrower or other obligors;
(e) settle or compromise any of the Obligations, any security therefor
or any liability (including any of those hereunder) incurred directly or
indirectly in respect thereof or hereof, or subordinate the payment of all or
any part thereof to the payment of any liability (whether due or not) of the
Borrower to its creditors;
(f) apply any sums by whomsoever paid or howsoever realized to any
liability or liabilities of the Borrower to the Lenders regardless of what
liability or liabilities of such Guarantor or the Borrower remain unpaid; and/or
(g) consent to or waive any breach of, or any act, omission or default
under, this Agreement or any of the instruments or agreements referred to
herein, or otherwise amend, modify or supplement this Agreement or any of such
other instruments or agreements.
SECTION 8.05. Reliance. It is not necessary for the Agent or the
Lenders to inquire into the capacity or powers of the Borrower or its
Subsidiaries or the officers, directors, partners or agents acting or purporting
to act on its behalf, and any Obligations made or created in reliance upon the
professed exercise of such powers shall be guaranteed hereunder.
SECTION 8.06. Subordination. Any of the Debt of the Borrower now or
hereafter owing to any Guarantor is hereby subordinated to the Obligations of
the Borrower; provided that payment may be made by the Borrower on any such Debt
owing to such Guarantor so long as the same is not prohibited by this Agreement
and provided, further, that if the Agent so requests at a time when an Event of
Default exists, all such Debt of the Borrower to such Guarantor shall be
collected, enforced and received by such Guarantor as trustee for the Lenders
and be paid over to the Agent on behalf of the Lenders on account of the
Obligations of the Borrower to Lenders, but without affecting or impairing in
any manner the liability of such Guarantor under the other provisions of this
Guaranty. Prior to the transfer by any Guarantor of any note or negotiable
instrument evidencing any of the Debt of the Borrower to such Guarantor, such
Guarantor shall mark such note or negotiable instrument with a legend that the
same is subject to this subordination.
SECTION 8.07. Waiver. (a) Each Guarantor waives any right (except as
shall be required by applicable statute and cannot be waived) to require the
Agent or the Lenders to (i) proceed against the Borrower, any other Guarantor,
any other guarantor or any other party, (ii) proceed against or exhaust any
security held from the Borrower, any other Guarantor, any other guarantor or any
other party or (iii) pursue any other remedy in the Agent's or the Lenders'
power whatsoever. Each Guarantor waives (except as shall be required by
applicable statute and cannot be waived) any defense based on or arising out of
any defense of the Borrower, any other Guarantor, any other guarantor or any
other party other than payment in full of the Obligations, including, without
limitation, any defense based on or arising out of the disability of the
Borrower, any other Guarantor, any other guarantor or any other party, or the
unenforceability of the Obligations or any part thereof from any cause, or the
cessation from any cause of the liability of the Borrower other than payment in
full of the Obligations. Subject to the giving
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of three Business Days prior written notice in accordance with the Orders, the
Agent and the Lenders may, at their election, foreclose on any security held by
the Agent or the Lenders by one or more judicial or nonjudicial sales, whether
or not every aspect of any such sale is commercially reasonable (to the extent
such sale is permitted by applicable law), or exercise any other right or remedy
the Agent and the Lenders may have against the Borrower or any other party, or
any security, without affecting or impairing in any way the liability of any
Guarantor hereunder except to the extent the Obligations have been paid. Each
Guarantor waives any defense arising out of any such election by the Agent and
the Lenders, even though such election operates to impair or extinguish any
right of reimbursement or subrogation or other right or remedy of such Guarantor
against the Borrower or any other party or any security.
(b) Each Guarantor waives all presentments, demands for performance,
protests and notices, including without limitation notices of nonperformance,
notices of protest, notices of dishonor, notices of acceptance of this Guaranty,
and notices of the existence, creation or incurring of new or additional
Obligations. Each Guarantor assumes all responsibility for being and keeping
itself informed of the Borrower's financial condition and assets, and of all
other circumstances bearing upon the risk of nonpayment of the Obligations and
the nature, scope and extent of the risks which such Guarantor assumes and
incurs hereunder, and agrees that the Agent and the Lenders shall have no duty
to advise such Guarantor of information known to them regarding such
circumstances or risks.
SECTION 8.08. Limitation on Enforcement. The Lenders agree that this
Guaranty may be enforced only by the action of the Agent, in each case acting
upon the instructions of the Requisite Lenders, and that no Lender shall have
any right individually to seek to enforce or to enforce this Guaranty it being
understood and agreed that such rights and remedies may be exercised by the
Agent for the benefit of the Lenders upon the terms of this Agreement.
ARTICLE IX
SECURITY
SECTION 9.01. Security. (a) To induce the Lenders to make the Revolving
Credit Advances, the LC Bank to issue Letters of Credit, and the Swing Line Bank
to make the Swing Line Advances, each Loan Party hereby grants to the Agent, for
itself and for the ratable benefit of the Secured Parties, as security for the
full and prompt payment when due (whether at stated maturity, by acceleration or
otherwise) of the Obligations of such Loan Party (including, without limitation,
all Obligations of the Guarantors hereunder), a continuing first priority Lien
and security interest (subject only to (i) valid, perfected, enforceable and
nonavoidable Liens of record existing immediately prior to the Petition Date,
(ii) the Carve-Out, and (iii) Liens permitted under Section 6.02(a)(vii)) in
accordance with sections 364(c)(2) and (3) of the Bankruptcy Code in and to all
Collateral of such Loan Party. "Collateral" means all of the property and assets
of each Loan Party and its estate, real and personal, tangible and intangible,
whether now owned or existing or hereafter acquired or arising and regardless of
where located, including, but not limited to:
(i) all Accounts;
(ii) all Chattel Paper;
(iii) all Contracts and any and all claims of such Loan Party
for damages arising out of or for breach of or a default under any
Contract and the right of such Loan Party to perform or to compel
performance under any Contract and to exercise all remedies thereunder
(iv) all Documents;
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(v) all Equipment;
(vi) all General Intangibles;
(vii) all Instruments;
(viii) all Inventory;
(ix) all Real Property;
(x) all bank accounts, deposit accounts, securities accounts,
commodities accounts and other similar accounts, including, without
limitation, the Collection Accounts, the Citibank Concentration Account
and the Citibank Collateral Account and all cash, deposits, Cash
Equivalents and other instruments from time to time on deposit or held
therein;
(xi) all Investment Property, including, without limitation,
shares of Stock owned by such Loan Party and any and all dividends or
distributions, in respect thereof;
(xii) all other goods, real and personal property of such Loan
Party, whether tangible or intangible or whether now owned or hereafter
acquired by such Loan Party and wherever located;
(xiii) to the extent not otherwise included, all monies and
other property of any kind which is, after the Petition Date, received
by such Loan Party in connection with refunds with respect to taxes,
assessments and governmental charges imposed on such Loan Party or any
of its property or income;
(xiv) to the extent not otherwise included, all causes of
action (other than claims of the Loan Parties under sections 544, 545,
547 and 548 of the Bankruptcy Code) and all monies and other property
of any kind received therefrom, and all monies and other property of
any kind recovered by any Loan Party; and
(xv) to the extent not otherwise included, all Proceeds of
each of the foregoing and all accessions to, substitutions and
replacements for, and rents, profits and products of each of the
foregoing including, without limitation, proceeds in the form of
Accounts, Chattel Paper, Contracts, Documents, Equipment, General
Intangibles, Instruments and Investment Property.
(b) In addition, as collateral security for the prompt and complete
payment when due of the Obligations (including, without limitation, all
Obligations of the Guarantors hereunder) and in order to induce Lenders and the
LC Bank as aforesaid, each Loan Party hereby further grants to the Agent, for
itself and for the ratable benefit of the Secured Parties, a first priority lien
on and security interest in all property of such Loan Party held by the Agent or
any other Secured Party or any Affiliate of the Agent or any other Secured
Party, including, without limitation, all property of every description, now or
hereafter in the possession or custody of or in transit to the Agent or such
Secured Party or Affiliate of the Agent or other Secured Party for any purpose,
including safekeeping, collection or pledge, for the account of such Loan Party
or as to which such Loan Party may have any right or power.
(c) The Citibank Collateral Account and the Citibank Concentration
Account shall be under the sole dominion and control of the Agent. No Person or
entity claiming by, through or under the Borrower or any other Loan Party shall
have any control over the use of, or any right to effect a
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withdrawal from, the Citibank Collateral Account or the Citibank Concentration
Account, except as expressly permitted in Section 2.11(b)(iii) or Section 7.02.
SECTION 9.02. Perfection of Security Interests. (a) Each Loan Party
shall, at its expense, perform any and all steps requested by the Agent at any
time to perfect, maintain, protect, and enforce the Lenders' security interest
in the Collateral of such Loan Party, including, without limitation, (i)
executing and filing financing or continuation statements, and amendments
thereof, in form and substance satisfactory to the Agent, (ii) maintaining
complete and accurate stock records, (iii) using its best efforts in delivering
to the Agent negotiable warehouse receipts, if any, and, upon the Agent's
request therefor, non-negotiable warehouse receipts covering any portion of the
Collateral located in warehouses and for which warehouse receipts are issued,
(iv) placing notations on such Loan Party's books of account to disclose the
Agent's security interest therein, (v) delivering to the Agent all documents
necessary or desirable to perfect the Agent's Lien in letters of credit on which
such Loan Party is named as beneficiary and all acceptances issued in connection
therewith, (vi) after the occurrence and during the continuation of an Event of
Default, transferring Inventory maintained in warehouses to other warehouses
designated by the Agent and (vii) taking such other steps as are deemed
necessary or desirable to maintain the Agent's security interest in the
Collateral.
(b) Each Loan Party hereby authorizes the Agent to execute and file
financing statements or continuation statements on such Loan Party's behalf
covering the Collateral. The Agent may file one or more financing statements
disclosing the Agent's security interest under this Agreement without the
signature of such Loan Party appearing thereon. Each Loan Party shall pay the
costs of, or incidental to, any recording or filing of any financing statements
concerning the Collateral. Each Loan Party agrees that a carbon, photographic,
photostatic, or other reproduction of this Agreement or of a financing statement
is sufficient as a financing statement. If any Collateral is at any time in the
possession or control of any warehouseman, bailee or such Loan Party's agents or
processors, such Loan Party shall notify such warehouseman, bailee, agents or
processors of the Agent's security interest, which notification shall specify
that such Person shall, upon the occurrence and during the continuance of an
Event of Default, hold all such Collateral for the Agent's account subject to
the Agent's instructions. From time to time, each Loan Party shall, upon the
Agent's request, execute and deliver written instruments pledging to the Agent
the Collateral described in any such instruments or otherwise, but the failure
of such Loan Party to execute and deliver such confirmatory instruments shall
not affect or limit the Agent's security interest or other rights in and to the
Collateral. Until all Obligations have been fully satisfied and the Commitments
shall have been terminated, the Agent's security interest in the Collateral, and
all Proceeds and products thereof, shall continue in full force and effect.
(c) Notwithstanding subsections (a) and (b) of this Section 9.02, or
any failure on the part of any Loan Party or the Agent to take any of the
actions set forth in such subsections, the Liens and security interests granted
herein shall be deemed valid, enforceable and perfected by entry of the Interim
Order and the Final Order, as applicable. No financing statement, notice of
lien, mortgage, deed of trust or similar instrument in any jurisdiction or
filing office need be filed or any other action taken in order to validate and
perfect the Liens and security interests granted by or pursuant to this
Agreement, the Interim Order or the Final Order.
SECTION 9.03. Rights of Lender; Limitations on Lenders' Obligations.
(a) Subject to each Loan Party's rights and duties under the Bankruptcy Code
(including section 365 of the Bankruptcy Code), it is expressly agreed by each
Loan Party that, anything herein to the contrary notwithstanding, such Loan
Party shall remain liable under its Contracts to observe and perform all the
conditions and obligations to be observed and performed by it thereunder.
Neither the Agent nor any Secured Party shall have any obligation or liability
under any Contract by reason of or arising out of this Agreement, the Loan
Documents, or the granting to the Agent of a security interest therein or the
receipt
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by the Agent or any Lender of any payment relating to any Contract pursuant
hereto, nor shall the Agent be required or obligated in any manner to perform or
fulfill any of the obligations of any Loan Party under or pursuant to any
Contract, or to make any payment, or to make any inquiry as to the nature or the
sufficiency of any payment received by it or the sufficiency of any performance
by any party under any Contract, or to present or file any claim, or to take any
action to collect or enforce any performance or the payment of any amounts which
may have been assigned to it or to which it may be entitled at any time or
times.
(b) Subject to Section 9.05 hereof, the Agent authorizes each Loan
Party to collect its Accounts, provided that such collection is performed in
accordance with such Loan Party's customary procedures, and the Agent may, upon
the occurrence and during the continuation of any Event of Default and without
notice, other than any requirement of notice provided in the Orders, limit or
terminate said authority at any time.
(c) Subject to any requirement of notice provided in the Orders, the
Agent may at any time, upon the occurrence and during the continuation of any
Event of Default, after first notifying the Borrower of its intention to do so,
notify Account Debtors, notify the other parties to the Contracts of the
Borrower or any Loan Party, notify obligors of Instruments and Investment
Property of the Borrower or any Loan Party and notify obligors in respect of
Chattel Paper of the Borrower that the right, title and interest of the Borrower
or such Loan Party in and under such Accounts, such Contracts, such Instruments,
such Investment Property and such Chattel Paper have been assigned to the Agent
and that payments shall be made directly to the Agent. Subject to any
requirement of notice provided in the Orders, upon the request of the Agent, the
Borrower or any Loan Party will so notify such Account Debtors, such parties to
Contracts, obligors of such Instruments and Investment Property and obligors in
respect of such Chattel Paper. Subject to any requirement of notice provided in
the Orders, upon the occurrence and during the continuation of an Event of
Default, the Agent may in its own name, or in the name of others, communicate
with such parties to such Accounts, such Contracts, such Instruments, such
Investment Property and such Chattel Paper to verify with such Persons to the
Agent's reasonable satisfaction the existence, amount and terms of any such
Accounts, such Contracts, Instruments, Investment Property or Chattel Paper.
(d) The Agent shall have the right to make test verification of the
Accounts in any manner and through any medium that it considers advisable, and
each Loan Party agrees to furnish all such assistance and information as the
Agent may require in connection therewith. Each Loan Party, at its expense, will
cause certified independent public accountants satisfactory to the Requisite
Lenders to prepare and deliver to the Agent at any time and from time to time,
promptly upon the Agent's request, the following reports: (i) a reconciliation
of all Accounts of such Loan Party, (ii) an aging of all Accounts of such Loan
Party, (iii) trial balances, and (iv) a test verification of such Accounts as
the Agent may request. The Agent shall have the right at any time to conduct
periodic audits of the Accounts of any Loan Party at the expense of the
Borrower.
SECTION 9.04. Covenants of the Loan Parties with Respect to Collateral.
Each Loan Party hereby covenants and agrees with the Agent that from and after
the date of this Agreement and until the Obligations are fully satisfied:
(a) Maintenance of Records. Each Loan Party will keep and maintain, at
its own cost and expense, satisfactory and complete records of the Collateral,
in all material respects, including, without limitation, a record of all
payments received and all credits granted with respect to the Collateral and all
other dealings concerning the Collateral. For the Agent's further security, each
Loan Party agrees that the Agent shall have a property interest in all of such
Loan Party's books and records pertaining to the Collateral and, upon the
occurrence and during the continuation of an Event of Default, such Loan
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Party shall deliver and turn over any such books and records to the Agent or to
its representatives at any time on demand of the Agent.
(b) Indemnification With Respect to Collateral. In any suit, proceeding
or action brought by the Agent relating to any Account, Chattel Paper, Contract,
General Intangible, Investment Property, Instrument or other Collateral for any
sum owing thereunder or to enforce any provision of any Account, Chattel Paper,
Contract, General Intangible, Investment Property, Instrument, or other
Collateral, each Loan Party will save, indemnify and keep the Secured Parties
harmless from and against all expense, loss or damage suffered by the Secured
Parties by reason of any defense, setoff, counterclaim, recoupment or reduction
of liability whatsoever of the obligor thereunder, arising out of a breach by
such Loan Party of any obligation thereunder or arising out of any other
agreement, indebtedness or liability at any time owing to, or in favor of, such
obligor or its successors from such Loan Party, and all such obligations of such
Loan Party shall be and remain enforceable against and only against such Loan
Party and shall not be enforceable against the Agent.
(c) Limitation on Liens on Collateral. Each Loan Party will not create,
permit or suffer to exist, and will defend the Collateral against and take such
other action as is necessary to remove, any Lien on the Collateral except
Permitted Liens and will defend the right, title and interest of the Agent in
and to any of such Loan Party's rights under the Chattel Paper, Leases, Real
Estate, Contracts, Documents, General Intangibles, Instruments, Investment
Property and to the Equipment and Inventory and in and to the Proceeds thereof
against the claims and demands of all Persons whomsoever other than claims or
demands arising out of Permitted Liens.
(c) Limitations on Modifications of Accounts. Each Loan Party will not,
without the Agent's prior written consent, grant any extension of the time of
payment of any of the Accounts, Chattel Paper or Instruments, compromise,
compound or settle the same for less than the full amount thereof, release,
wholly or partly, any Person liable for the payment thereof, or allow any credit
or discount whatsoever thereon other than any of the foregoing which are done in
the ordinary course of business, consistent with past practices and trade
discounts granted in the ordinary course of business of such Loan Party.
(d) Notices. Each Loan Party will advise the Lenders promptly, in
reasonable detail, (i) of any Lien asserted against any of the Collateral other
than Permitted Liens, and (ii) of the occurrence of any other event which would
result in a Material Adverse Change with respect to the aggregate value of the
Collateral or on the security interests created hereunder.
(e) Maintenance of Equipment. Each Loan Party will keep and maintain
the Equipment in good operating condition sufficient for the continuation of the
business conducted by such Loan Party on a basis consistent with past practices,
ordinary wear and tear excepted.
SECTION 9.05. Performance by Agent of the Loan Parties' Obligations. If
any Loan Party fails to perform or comply with any of its agreements contained
herein and the Agent, as provided for by the terms of this Agreement, shall
itself perform or comply, or otherwise cause performance or compliance, with
such agreement, the expenses of the Agent incurred in connection with such
performance or compliance, together with interest thereon at the rate then in
effect in respect of the Revolving Credit Advance, shall be payable by such Loan
Party to the Agent on demand and shall constitute Obligations secured by the
Collateral. Performance of such Loan Party's obligations as permitted under this
Section 9.05 shall in no way constitute a violation of the automatic stay
provided by section 362 of the Bankruptcy Code and each Loan Party hereby waives
applicability thereof. Moreover, the Agent shall in no way be responsible for
the payment of any costs incurred in connection with
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preserving or disposing of Collateral pursuant to section 506(c) of the
Bankruptcy Code and the Collateral may not be charged for the incurrence of any
such cost.
SECTION 9.06. Limitation on Agent's Duty in Respect of Collateral.
Neither the Agent nor any Lender shall have any duty as to any Collateral in its
possession or control or in the possession or control of any agent or nominee of
it or any income thereon or as to the preservation of rights against prior
parties or any other rights pertaining thereto, except that the Agent shall,
with respect to the Collateral in its possession or under its control, deal with
such Collateral in the same manner as the Agent deals with similar property for
its own account. Upon request of any Loan Party, the Agent shall account for any
moneys received by it in respect of any foreclosure on or disposition of the
Collateral of such Loan Party.
SECTION 9.07. Remedies, Rights Upon Default. (a) If any Event of
Default shall occur and be continuing, the Agent may exercise in addition to all
other rights and remedies granted to it in this Agreement and in any other Loan
Document, all rights and remedies of a secured party under the UCC. Without
limiting the generality of the foregoing, each Loan Party expressly agrees that
in any such event the Agent, without demand of performance or other demand,
advertisement or notice of any kind (except the notice required by the Interim
Order or Final Order or the notice specified below of time and place of public
or private sale) to or upon such Loan Party or any other Person (all and each of
which demands, advertisements and/or notices are hereby expressly waived to the
maximum extent permitted by the UCC and other applicable law), may forthwith
collect, receive, appropriate and realize upon the Collateral, or any part
thereof, and/or may forthwith sell, lease, assign, give an option or options to
purchase, or sell or otherwise dispose of and deliver said Collateral (or
contract to do so), or any part thereof, in one or more parcels at public or
private sale or sales, at any exchange or broker's board or at any of the
Agent's offices or elsewhere at such prices at it may deem best, for cash or on
credit or for future delivery without assumption of any credit risk. The Agent
shall have the right upon any such public sale or sales to purchase the whole or
any part of said Collateral so sold, free of any right or equity of redemption,
which equity of redemption each Loan Party hereby releases. Each Loan Party
further agrees, at the Agent's request, to assemble the Collateral make it
available to the Agent at places which the Agent shall reasonably select,
whether at such Loan Party's premises or elsewhere. The Agent shall apply the
proceeds of any such collection, recovery, receipt, appropriation, realization
or sale (net of all expenses incurred by the Agent in connection therewith,
including, without limitation, attorney's fees and expenses), to the Obligations
in any order deemed appropriate by the Agent, such Loan Party remaining liable
for any deficiency remaining unpaid after such application, and only after so
paying over such net proceeds and after the payment by the Agent of any other
amount required by any provision of law, including Section 9-504(l)(c) of the
UCC, need the Agent account for the surplus, if any, to such Loan Party. To the
maximum extent permitted by applicable law, each Loan Party waives all claims,
damages, and demands against the Agent and the Lenders arising out of the
repossession, retention or sale of the Collateral except such as arise out of
the gross negligence or willful misconduct of the Agent. Each Loan Party agrees
that the Agent need not give more than seven (7) days' notice to the Borrower
(which notification shall be deemed given when mailed or delivered on an
overnight basis, postage prepaid, addressed to the Borrower at its address
referred to in Section 11.02) of the time and place of any public sale or of the
time after which a private sale may take place and that such notice is
reasonable notification of such matters. The Borrower and the other Loan Parties
shall remain liable for any deficiency if the proceeds of any sale or
disposition of the Collateral are insufficient to pay all amounts to which the
Agent is entitled, the Borrower and the other Loan Parties also being liable for
the fees and expenses of any attorneys employed by the Agent to collect such
deficiency.
(b) Each Loan Party hereby waives presentment, demand, protest or any
notice (to the maximum extent permitted by applicable law) of any kind in
connection with this Agreement or any Collateral.
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SECTION 9.08. The Agent's Appointment as Attorney-in-Fact. (a) Each
Loan Party hereby irrevocably constitutes and appoints the Agent and any officer
or agent thereof, with full power of substitution, as its and its Subsidiaries
true and lawful attorney-in-fact with full irrevocable power and authority in
the place and stead of such Loan Party and in the name of such Loan Party, or in
its own name, from time to time in the Agent's discretion, for the purpose of
carrying out the terms of this Agreement, to take any and all appropriate action
and to execute and deliver any and all documents and instruments which may be
necessary and desirable to accomplish the purposes of this Agreement and the
transactions contemplated hereby, and, without limiting the generality of the
foregoing, hereby give the Agent the power and right, on behalf of such Loan
Party, without notice to or assent by such Loan Party to do the following:
(i) to ask, demand, collect, receive and give acquittances and
receipts for any and all moneys due and to become due under any
Collateral and, in the name of such Loan Party, its own name or
otherwise, to take possession of and endorse and collect any checks,
drafts, notes, acceptances or other Instruments for the payment of
moneys due under any Collateral and to file any claim or to take any
other action or proceeding in any court of law or equity or otherwise
deemed appropriate by the Agent for the purpose of collecting any and
all such moneys due under any Collateral whenever payable and to file
any claim or to take any other action or proceeding in any court of law
or equity or otherwise deemed appropriate by the Agent for the purpose
of collecting any and all such moneys due under any Collateral whenever
payable;
(ii) to pay or discharge taxes, liens, security interests or
other encumbrances levied or placed on or threatened against the
Collateral, to effect any repairs or any insurance called for by the
terms of this Agreement and to pay all or any part of the premiums
therefor and the costs thereof; and
(iii) (A) to direct any party liable for any payment under any
of the Collateral to make payment of any and all moneys due, and to
become due thereunder, directly to the Agent or as the Agent shall
direct; (B) to receive payment of and receipt for any and all moneys,
claims and other amounts due, and to become due at any time, in respect
of or arising out of any Collateral; (C) to sign and indorse any
invoices, freight or express bills, bills of lading, storage or
warehouse receipts, drafts against debtors, assignments, verifications
and notices in connection with accounts and other documents
constituting or relating to the Collateral; (D) to commence and
prosecute any suits, actions or proceedings at law or equity in any
court of competent jurisdiction to collect the Collateral or any part
thereof and to enforce any other right in respect of any Collateral;
(E) to defend any suit, action or proceeding brought against any Loan
Party with respect to any Collateral of such Loan Party; (F) to settle,
compromise or adjust any suit, action or proceeding described above
and, in connection therewith, to give such discharges or releases as
the Agent may deem appropriate; (G) to license or, to the extent
permitted by an applicable license, sublicense, whether general,
special or otherwise, and whether on an exclusive or non-exclusive
basis, any trademarks, throughout the world for such term or terms, on
such conditions, and in such manner, as the Agent shall in its sole
discretion determine; and (H) generally to sell, transfer, pledge, make
any agreement with respect to or otherwise deal with any of the
Collateral as fully and completely as though the Agent were the
absolute owner thereof for all purposes, and to do, at the Agent's
option and such Loan Party's expense, at any time, or from time to
time, all acts and things which the Agent reasonably deems necessary to
protect, preserve or realize upon the Collateral and the Agent's Lien
therein, in order to effect the intent of this Agreement, all as fully
and effectively as such Loan Party might do.
(b) The Agent agrees that it will forbear from exercising the power of
attorney or any rights granted to the Agent pursuant to this Section 9.08,
except upon the occurrence or during the continuation of an Event of Default.
The Borrower and the other Loan Parties hereby ratify, to the extent permitted
by law, all that said attorneys shall lawfully do or cause to be done by virtue
hereof. Exercise
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by the Agent of the powers granted hereunder is not a violation of the automatic
stay provided by section 362 of the Bankruptcy Code and each Loan Party waives
applicability thereof. The power of attorney granted pursuant to this Section
9.08 is a power coupled with an interest and shall be irrevocable until the
Obligations are indefeasibly paid in full.
(c) The powers conferred on the Agent hereunder are solely to protect
the Agent's and the Lenders' interests in the Collateral and shall not impose
any duty upon it to exercise any such powers. The Agent shall be accountable
only for amounts that it actually receives as a result of the exercise of such
powers and neither it nor any of its officers, directors, employees or agents
shall be responsible to any Loan Party for any act or failure to act, except for
its own gross negligence or willful misconduct.
(d) Each Loan Party also authorizes the Agent, at any time and from
time to time upon the occurrence and during the continuation of any Event of
Default or as otherwise expressly permitted by this Agreement, (i) to
communicate in its own name or the name of its Subsidiaries with any party to
any Contract with regard to the assignment of the right, title and interest of
such Loan Party in and under the Contracts hereunder and other matters relating
thereto and (ii) to execute any endorsements, assignments or other instruments
of conveyance or transfer with respect to the Collateral.
(e) All Obligations, including all Obligations of the Guarantors
hereunder, shall constitute, in accordance with section 364(c)(1) of the
Bankruptcy Code, claims against each Loan Party in its Case which are
administrative expense claims having priority over any all administrative
expenses of the kind specified in sections 503(b) or 507(b) of the Bankruptcy
Code.
SECTION 9.09. Modifications.
(a) The liens and security interests, lien priority, administrative
priorities and other rights and remedies granted to the Agent for the benefit of
the Lenders pursuant to this Agreement, the Interim Order and/or the Final Order
(specifically, including, but not limited to, the existence, perfection and
priority of the Liens and security interests provided herein and therein and the
administrative priority provided herein and therein) shall not be modified,
altered or impaired in any manner by any other financing or extension of credit
or incurrence of Debt by any of the Loan Parties (pursuant to section 364 of the
Bankruptcy Code or otherwise), or by any dismissal or conversion of any of the
Cases, or by any other act or omission whatsoever. Without limitation,
notwithstanding any such order, financing, extension, incurrence, dismissal,
conversion, act or omission:
(i) except for the Carve-Out having priority over the
Obligations, no costs or expenses of administration which have been or
may be incurred in any of the Cases or any conversion of the same or in
any other proceedings related thereto, and no priority claims, are or
will be prior to or on a parity with any claim of the Agent or the
Lenders against the Loan Parties in respect of any Obligation;
(ii) the liens and security interests granted herein shall
constitute valid and perfected first priority liens and security
interests, (subject only to (A) the Carve-Out, (B) valid, perfected,
enforceable and nonavoidable Liens of record existing immediately prior
to the Petition Date and (C) Liens permitted under Section
6.02(a)(vii)) in accordance with sections 364(c)(2) and (3) of the
Bankruptcy Code, and shall be prior to all other liens and security
interests, now existing or hereafter arising, in favor of any other
creditor or any other Person whatsoever; and
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(iii) the liens and security interests granted hereunder shall
continue valid and perfected without the necessity that financing
statements be filed or that any other action be taken under applicable
nonbankruptcy law.
(b) Notwithstanding any failure on the part of any Loan Party or the
Agent or the Lenders to perfect, maintain, protect or enforce the liens and
security interests in the Collateral granted hereunder, the Interim Order and
the Final Order (when entered) shall automatically, and without further action
by any Person, perfect such liens and security interests against the Collateral.
ARTICLE X
THE AGENT, THE OTHER AGENTS AND THE ARRANGER
SECTION 10.01. Authorization and Action. Each Lender hereby appoints
and authorizes the Agent to take such action as agent on its behalf and to
exercise such powers under this Agreement as are delegated to the Agent by the
terms hereof, together with such powers as are reasonably incidental thereto. As
to any matters not expressly provided for by this Agreement (including
enforcement or collection of the Notes), the Agent shall not be required to
exercise any discretion or take any action, but shall be required to act or to
refrain from acting (and shall be fully protected in so acting or refraining
from acting) upon the instructions of the Requisite Lenders, and such
instructions shall be binding upon all Lenders and all holders of Notes;
provided, however, that the Agent shall not be required to take any action which
exposes the Agent to personal liability or which is contrary to this Agreement
or applicable law. The Agent shall not be liable to any Lender if, in accordance
with the terms of this Agreement, it takes or omits to take any action pursuant
to the instructions of the Requisite Lenders. The Agent agrees to give to each
Lender prompt notice of each notice given to it by the Borrower pursuant to the
terms of this Agreement. The Agent agrees to perform and discharge the duties
and powers delegated to it under this Agreement and the other Loan Documents in
accordance with the terms hereof and thereof.
SECTION 10.02. Agent Not Liable. Neither the Agent nor any of its
directors, officers, agents or employees shall be liable for any action taken or
omitted to be taken by it or any of them under or in connection with this
Agreement, except for its or their own gross negligence or willful misconduct.
Without limiting the generality of the foregoing, the Agent (i) may treat the
payee of any Note as the holder thereof until the Agent receives written notice
of the assignment or transfer thereof signed by such payee and including the
agreement of the assignee or transferee to be bound hereby as it would have been
if it had been an original Lender party hereto, in form satisfactory to the
Agent; (ii) may consult with legal counsel (including counsel for the Borrower),
independent public accountants and other experts selected by it and shall not be
liable for any action taken or omitted to be taken in good faith by it in
accordance with the advice of such counsel, accountants or experts; (iii) makes
no warranty or representation to any Lender and shall not be responsible to any
Lender for any statements, warranties or representations (whether written or
oral) made in or in connection with this Agreement; (iv) shall not have any duty
to ascertain or to inquire as to the performance or observance of any of the
terms, covenants or conditions of this Agreement on the part of the Borrower or
to inspect the property (including the books and records) of the Borrower; (v)
shall not be responsible to any Lender for the due execution, legality,
validity, enforceability, genuineness, sufficiency or value of this Agreement or
any other Loan Document or any other instrument or document furnished pursuant
to any Loan Document or for the creation, validity, enforceability, sufficiency,
value, perfection or priority of any Lien purported to be granted to the Agent,
whether pursuant to any of the Loan Documents or otherwise; and (vi) shall incur
no liability under or in respect of this Agreement by acting upon any notice,
consent, certificate or other instrument or writing (which may be by telecopier)
believed by it in good faith to be genuine and signed or sent by the proper
party or parties.
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SECTION 10.03. Rights as Lender. With respect to its commitment and the
Advances and Notes held by it and all other rights, claims and interests
accorded it as Lender, CUSA shall have the same rights and powers under this
Agreement as any other Lender and may exercise the same as though it were not
the Agent; and the term "Lender" or "Lenders" shall include CUSA in its
individual capacity. CUSA and its Affiliates may accept deposits from, lend
money to, act as trustee under indentures of, and generally engage in any kind
of business with, the Borrower, any of its Subsidiaries and any Person who may
do business with or own securities of the Borrower or any such Subsidiary, all
as if CUSA were not the Agent and without any duty to account therefor to the
Lenders. Any Lender and its respective Affiliates may accept deposits from, lend
money to, act as trustee under indentures of, and generally engage in any kind
of business with, the Borrower, any of its Subsidiaries and any Person who may
do business with or own securities of the Borrower or any such Subsidiary, all
as if such Lender were not a Lender hereunder and without any duty to account
therefor to the other Lenders.
SECTION 10.04. Lender Credit Decision. Each Lender acknowledges that it
has, independently and without reliance upon the Agent or any other Lender and
based on the financial statements referred to in Section 4.01(i) and such other
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon the Agent or
any other Lender and based on such documents and information as it deems
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement.
SECTION 10.05. Indemnification. The Lenders agree to indemnify the
Agent and the Other Agents (to the extent not reimbursed by the Borrower)
ratably according to their Pro Rata Shares from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever which may be
imposed on, incurred by, or asserted against the Agent in any way relating to or
arising out of this Agreement or the other Loan Documents or any action taken or
omitted by the Agent under this Agreement or the other Loan Documents; provided
that no Lender shall be liable for any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements resulting from the Agent's gross negligence or willful misconduct.
Without limiting the foregoing, each Lender agrees to reimburse the Agent
promptly upon demand for its Pro Rata Share of any reasonable out-of-pocket
expenses (including reasonable fees and expenses of counsel) incurred by the
Agent in connection with the preparation, execution, delivery, modification,
amendment, protection or enforcement (whether through negotiations, by legal
proceedings, in bankruptcy or otherwise) of, or legal advice in respect of
rights or responsibilities under, this Agreement or the other Loan Documents, to
the extent that the Agent is not reimbursed for such expenses by the Borrower.
SECTION 10.06. Successor Agent. The Agent may resign at any time by
giving written notice thereof to the Lenders and the Borrower and may be removed
at any time with or without cause by the Requisite Lenders. Upon any such
resignation or removal, the Requisite Lenders shall, subject to the written
consent of the Borrower, which consent shall not be required during the
continuance of an Event of Default and shall not otherwise be unreasonably
withheld or delayed, have the right to appoint a successor Agent. If no
successor Agent shall have been so appointed by the Requisite Lenders, and shall
have accepted such appointment, within 30 days after the retiring Agent's giving
of notice of resignation or the Requisite Lenders' removal of the retiring
Agent, then the retiring Agent may, on behalf of the Lenders, appoint a
successor Agent, which shall be a commercial bank organized under the laws of
the United States of America or of any State and having total assets of at least
$20,000,000,000. Upon the acceptance of any appointment as Agent hereunder by a
successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and obligations under
this Agreement. After any retiring Agent's resignation or removal hereunder as
Agent, the provisions of this
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Article X shall inure to its benefit as to any actions taken or omitted to be
taken by it while it was Agent under this Agreement.
SECTION 10.07. Release of Collateral. The Agent is hereby irrevocably
authorized to release any Lien granted to or held by the Agent upon (i) any and
all Collateral when the Facility Amount has been permanently reduced to zero,
all Letters of Credit issued hereunder have expired or been discharged, all
outstanding Advances and LC Exposure have been repaid, and all other Obligations
that are then due and payable and of which the Agent then has written notice
demanding payment prior to release of Collateral have been paid, (ii) any
Collateral constituting property sold or to be sold or disposed of as part of or
in connection with any disposition permitted under Section 6.02(b) or consented
to by the Requisite Lenders, or (iii) any Collateral consisting of an instrument
evidencing Debt or other debt instrument, if the indebtedness evidenced thereby
has been paid in full. Upon request by the Agent or the Borrower at any time,
each Lender shall confirm in writing the Agent's authority to release
Collateral, or particular types or items of Collateral, as set forth in this
Section 10.07. The Agent shall not be obligated to release any Collateral unless
it receives such written confirmation from the Requisite Lenders.
SECTION 10.08. The Other Agents and the Arranger. Each Lender hereby
appoints First Union National Bank as "Syndication Agent" and Foothill Capital
Corporation and Goldman Sachs Credit Partners, L.P. as "Co-Documentation
Agents". Notwithstanding anything to the contrary contained in this Agreement,
the Syndication Agent is a Lender designated as "Syndication Agent" and the
Co-Documentation Agents are each a Lender designated as "Co-Documentation
Agent", in each case for title purposes only and, in such capacity, neither the
Syndication Agent nor the Co-Documentation Agents shall have any obligations or
duties whatsoever under this Agreement or any other Loan Document to any Loan
Party, any Lender or the LC Bank or shall have any rights separate from their
respective rights as Lenders, except as expressly provided in this Agreement.
The Arranger shall have no obligations or duties whatsoever in such capacity
under this Agreement or any other Loan Document and shall incur no liability
hereunder or thereunder in such capacity.
ARTICLE XI
MISCELLANEOUS
SECTION 11.01. Amendments. No amendment or waiver of any provision of
this Agreement or the Notes, nor consent to any departure by the Borrower or any
other Loan Party therefrom, shall be effective unless it is in writing and
signed by the Requisite Lenders (and any such waiver or consent shall in any
case be effective only in the specific instance and for the specific purpose for
which given), except that
(a) no amendment, waiver or consent shall, unless in writing and signed
by each Lender, do any of the following:
(i) change the obligation of any Lender to extend credit
hereunder or subject any Lender to any additional obligations;
(ii) reduce the principal of or interest on any Advance or any
fees or other amounts payable to any Lender hereunder or under any
other Loan Document;
(iii) postpone any date fixed for any payment (including any
mandatory prepayment) of principal of or interest on any Advances or LC
Exposure held by any Lender or any fees or other amounts payable to any
Lender under any Loan Document;
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(iv) waive, reduce or postpone any Facility Reduction required
hereunder;
(v) amend the definition of "Facility Amount," "Pro Rata
Share," or "Requisite Lenders";
(vi) waive any Event of Default that is continuing under
Section 7.01(a) or 7.01(b) in respect of a payment due to any Lender;
(vii) release any substantial portion of the Collateral other
than in accordance with the terms of this Agreement;
(viii) release or limit the liability of any Guarantor under
the Guaranty other than in accordance with the terms of the Guaranty;
(ix) amend Section 2.13, Section 2.17 or Section 7.01(a);
(x) increase the advance rates in the definition of "Borrowing
Base" above the rates set forth in such definition;
(xi) create any Lien or super-priority claim senior to the
Liens and claims of the Lenders under this Agreement or any other Loan
Document; or
(xii) amend this Section 11.01;
(b) no amendment, waiver or consent shall, unless in writing and signed
by the Agent in addition to the Lenders required above to take such action,
affect the rights or duties of the Agent under this Agreement or any Loan
Document;
(c) no amendment, waiver or consent shall, unless in writing and signed
by the LC Bank in addition to the Lenders required above to take such action,
affect the rights or duties of the LC Bank under this Agreement.
SECTION 11.02. Notices. All notices and other communications provided
for hereunder shall be in writing (including telecopier communication) and
mailed, telecopied, or delivered, if to the Borrower, at Integrated Health
Services, Inc., 910 Ridgehook Road, Sparks, Maryland 21152, Attention: General
Counsel and Attention: Marshall Elkins, Executive Vice President, with a copy
to: Kaye, Scholer, Fierman, Hays & Handler, LLP, 425 Park Avenue, New York, New
York 10022, Attention: A.J. Bianco, Esq.; if to any Lender, at its Domestic
Lending Office specified opposite its name on Schedule I hereto; and if to the
Agent, at Citicorp USA, Inc., 399 Park Avenue, - New York, New York 10043,
Attention: Shawn Hendrickson, with a copy to: Weil, Gotshal & Manges LLP, 767
Fifth Avenue, New York, New York 10153, Attention: Daniel S. Dokos, Esq., or, as
to each party, at such other address as shall be designated by such party in a
written notice to the other parties. All such notices and communications shall,
when mailed or telecopied, be effective when deposited in the mails or
telecopied, respectively, except that notices and communications to the Agent
pursuant to Article II or VII shall not be effective until received by the
Agent.
SECTION 11.03. No Waiver; Remedies. No failure on the part of any
Lender, the LC Bank or the Agent to exercise, and no delay in exercising, any
right under any Loan Document shall operate as a waiver thereof; nor shall any
single or partial exercise of any such right preclude any other or further
exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.
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SECTION 11.04. Costs and Expenses. The Borrower agrees to pay on demand
all reasonable costs and expenses incurred by the Agent and the Arranger in
connection with (a) the preparation, negotiation, execution, delivery,
modification and amendment of the Loan Documents and the other documents to be
delivered under the Loan Documents, including the reasonable fees and
out-of-pocket expenses and disbursements of counsel for the Agent with respect
thereto and with respect to advising the Agent as to its rights and
responsibilities under the Loan Documents, (b) the funding of all Advances under
the Facility, including, without limitation, all due diligence, syndication
(including printing, distribution and bank meetings), transportation, computer,
duplication, messenger, audit, appraisal and consultant costs and expenses and
all search, filing and recording fees, incurred or sustained by the Agent or the
Arranger in connection with the Facility, the Loan Documents or the transactions
contemplated thereby, the administration of the Facility and any amendment or
waiver of any provision of any Loan Documents, and (c) any review of pleadings
and documents related to the Cases, attendance at meetings or court hearings
related to the Cases and general monitoring of the Cases and any subsequent
chapter 7 cases of the Loan Parties. The Borrower further agrees to pay on
demand (i) all reasonable costs and expenses, including reasonable fees and
expenses of attorneys (including allocable costs of in-house counsel),
accountants, advisors and other experts, incurred by the Agent or the Lenders in
respect of any Event of Default or while any Event of Default is continuing or
in connection with the protection, resolution or enforcement (whether through
negotiations, by legal proceedings, in bankruptcy or otherwise) of the
Obligations or the Collateral or any right, remedy, power, interest or claim of
the Agent or any Lender under any Loan Document and (ii) all costs and expenses
of the Lenders (including reasonable fees, expenses and disbursements of
counsel) in connection with the enforcement or protection of any of their rights
and remedies under the Loan Documents.
SECTION 11.05. Right of Set-off. Whenever any Event of Default is
continuing, each Lender may at any time or from time to time, with the consent
of the Requisite Lenders but without any prior notice to the Borrower or any
other Person, set off and apply any and all deposits (general or special, time
or demand, provisional or final) at any time held and other debt at any time
owing by such Lender to or for the credit or the account of the Borrower,
whether or not then due, and whether or not then fully secured, against any and
all Advances, LC Exposure and other Obligations then owing to such Lender,
whether or not then due. After any such set-off and application is made, the
Lender that made it shall promptly notify the Borrower thereof, but the failure
to do so shall not affect the validity of the set-off and application and shall
not expose such Lender to any liability. The Lenders' right of setoff under this
Section 11.05 is cumulative with and additional to all other rights and remedies
(including other rights of set-oft) of the Lenders.
SECTION 11.06. Indemnity.
(a) General Indemnity. The Borrower shall pay, defend, indemnify, and
hold the Arranger, each Lender, the Agent, the Other Agents, their respective
Affiliates and each of their respective officers, directors, employees, counsel,
agents, advisors, representatives and attorneys-in-fact (each, an "INDEMNIFIED
PERSON") harmless from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, charges, expenses or
disbursements (including reasonable fees, disbursements and expenses of counsel
and allocated costs of internal counsel incurred in defending any such action or
incurred in enforcing this Section 11.06(a)), joint or several, that may be
incurred by or asserted or awarded against any Indemnified Person, of any kind
or nature whatsoever with respect to the execution, delivery, enforcement and
performance of this Agreement and any other Loan Document or the transactions
contemplated herein, and with respect to any investigation, litigation or
proceeding or the preparation of any defense related to this Agreement or the
Advances or the Letters of Credit or the use of the proceeds thereof, whether or
not any Indemnified Person is a party thereto (all the foregoing, collectively,
the "INDEMNIFIED LIABILITIES") and whether or not such investigation, litigation
or proceeding is brought by the Borrower, any Guarantor, any of their respective
shareholders or creditors,
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an Indemnified Person, or any other person, except that no Indemnified Person
shall have any liability (whether direct or indirect, in contract, tort or
otherwise) to the Borrower, any Guarantor or any of their respective
shareholders or creditors for or in connection with the transactions
contemplated hereby, except to the extent that such liability is found in a
final non-appealable judgment by a count of competent jurisdiction to have
resulted from the gross negligence or willful misconduct of such Indemnified
Person. In no event shall any Indemnified Person be liable on any theory of
liability for any special, indirect, consequential or punitive damages.
(b) Environmental Indemnity. The Borrower shall pay, defend, indemnify,
and hold harmless each Indemnified Person from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, charges, expenses or disbursements (including reasonable fees and
expenses of counsel and the allocated cost of internal counsel), which may be
incurred by or asserted against any Indemnified Person in connection with or
arising out of any pending or threatened investigation or Environmental Claim
arising out of or related to any acts or omissions or any property of the
Borrower or any of its Subsidiaries. In no event shall any site visit,
observation, or testing by the Agent or any Lender be a representation that
Contaminants are or are not present in, on, or under the site, or that there has
been or shall be compliance with any Environmental Law. Neither the Borrower nor
any other party is entitled to rely on any site visit, observation, or testing
by the Agent or any Lender. Neither the Agent nor any Lender owes any duty of
care to protect the Borrower or any other Person against, or to inform the
Borrower or any other Person of, any adverse condition affecting any site or
property.
SECTION 11.07. Assignments and Participations.
(a) Permitted Assignment. Each Lender may assign, subject to the
Agent's approval (such approval not to be unreasonably withheld or delayed), to
one or more banks, financial institutions or other entities acceptable to the
Arranger all or a portion of its rights and obligations under this Agreement,
but (i) each such assignment shall be of a constant, and not a varying,
percentage of all of the assigning Lender's rights and obligations under this
Agreement, unless otherwise consented to by the Agent; (ii) the amount of the
commitment, if any, and outstanding Advances of the assigning Lender being
assigned pursuant to each such assignment (determined as of the date of the
Assignment and Acceptance with respect to such assignment) shall not be less
than $5,000,000 or the total amount of the remaining commitment, if any, and
outstanding Advances of such Lender, except that an assignment to an existing
Lender or an Affiliate of a Lender or a Related Fund may be in an amount less
than $5,000,000, (iii) each such assignment shall be to an Eligible Assignee and
(iv) the parties to each such assignment shall execute and deliver to the Agent,
for its acceptance and recording in the Register, an Assignment and Acceptance,
together with any Note or Notes subject to such assignment and a processing and
recordation fee payable to the Agent of $3,500; provided, that unless such
assignee is one of the seven institutions previously identified in writing to
the Borrower by the Arranger or an Event of Default has occurred and is
continuing, such assignee shall be reasonably acceptable to the Borrower (such
acceptance not to be unreasonably withheld or delayed). Upon such execution,
delivery, acceptance and recording, from and after the effective date specified
in each Assignment and Acceptance, (A) the assignee thereunder shall be a party
hereto and, to the extent that rights and obligations hereunder have been
assigned to it pursuant to such Assignment and Acceptance, have the rights and
obligations of a Lender hereunder and (B) the Lender assignor thereunder shall,
to the extent that rights and obligations hereunder have been assigned by it
pursuant to such Assignment and Acceptance, relinquish its rights and be
released from its obligations under this Agreement (and, in the case of an
Assignment and Acceptance covering all or the remaining portion of an assigning
Lender's rights and obligations under this Agreement, such Lender shall cease to
be a party hereto).
(b) Effect of Assignment. By executing and delivering an Assignment and
Acceptance, the Lender assignor thereunder and the assignee thereunder confirm
to and agree with each
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other and the other parties hereto that (i) other than as provided in such
Assignment and Acceptance, such assigning Lender makes no representation or
warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with this Agreement or
the execution, legality, validity, enforceability, genuineness, sufficiency or
value of this Agreement or any other instrument or document furnished pursuant
hereto or as to the Collateral or the validity, enforceability, perfection or
priority of any Lien upon the Collateral; (ii) such assigning Lender makes no
representation or warranty and assumes no responsibility with respect to the
financial condition of the Borrower or the performance or observance by the
Borrower of any of its obligations under this Agreement or any other instrument
or document furnished pursuant hereto; (iii) such assignee confirms that it has
received a copy of this Agreement, together with copies of the financial
statements referred to in Section 4.01(i) and such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into such Assignment and Acceptance; (iv) such assignee will,
independently and without reliance upon the Agent, such assigning Lender or any
other Lender and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement; (v) such assignee confirms that it is an
Eligible Assignee; (vi) such assignee appoints and authorizes the Agent to take
such action as agent on its behalf and to exercise such powers under this
Agreement as are delegated to the Agent by the terms hereof, together with such
powers as are reasonably incidental thereto; (vii) such assignee agrees that it
will perform in accordance with their terms all of the obligations which by the
terms of this Agreement are required to be performed by it as a Lender; and
(viii) such assignee confirms and agrees that it shall have no greater
indemnification rights pursuant to Section 2.16(c) than its Lender assignor.
(c) Maintenance of Agreements. The Agent, acting for this purpose (but
only for this purpose) as the agent of the Borrower (and in such capacity
neither the Agent nor any of its directors, officers, agents or employees shall
be liable for any action taken or omitted to be taken by it or any of them under
or in connection with this Section 11.07(c), except for its or their own gross
negligence or willful misconduct), shall maintain at its address referred to in
Section 11.02 a copy of each Assignment and Acceptance delivered to and accepted
by it and a register for the recordation of the names and addresses of the
Lenders and the commitments and Pro Rata Shares of, and principal amount of the
Advances owing to, each Lender from time to time (the "REGISTER"). The entries
in the Register shall be conclusive and binding for all purposes, absent
manifest error, and the Borrower, the Agent and the Lenders shall treat each
Person whose name is recorded in the Register as a Lender hereunder for all
purposes of this Agreement. The Register shall be available for inspection by
the Borrower or any Lender at any reasonable time and from time to time upon
reasonable prior notice.
(d) Procedure. Upon its receipt of an Assignment and Acceptance
executed by an assigning Lender and an assignee Lender representing that it is
an Eligible Assignee, together with any Note or Notes subject to such
assignment, the Agent shall, if such Assignment and Acceptance has been
completed and is in substantially the form of Exhibit E-2, (i) accept such
Assignment and Acceptance, (ii) record the information contained therein in the
Register and (iii) give prompt notice thereof to the Borrower. Within five
Business Days after its receipt of such notice, the Borrower, at its own
expense, shall execute and deliver to the Agent in exchange for the surrendered
Note or Notes a new Note or Notes to the order of such Eligible Assignee in an
aggregate amount equal to the interest in the surrendered Note or Notes assigned
to it pursuant to such Assignment and Acceptance and, if the assigning Lender
has retained an interest in the surrendered Note or Notes, a new Note or Notes
to the order of the assigning Lender in an aggregate amount equal to the
interest so retained. Such new Note or Notes shall be in an aggregate principal
amount equal to the aggregate principal amount of such surrendered Note or
Notes, shall be dated the effective date of such Assignment and Acceptance and
shall otherwise be in substantially the form of Exhibit A.
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(e) Participations. Each Lender may sell participations to one or more
banks or other entities in all or a portion of its rights (other than voting
rights) and obligations under this Agreement, but (i) such Lender's obligations
under this Agreement (including its commitment to the Borrower hereunder) shall
remain unchanged, (ii) such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations, (iii) such Lender shall
remain the holder of any such Note or Notes for all purposes of this Agreement,
and (iv) the Borrower, the Agent and the other Lenders shall continue to deal
solely and directly with such Lender in connection with such Lender's rights and
obligations under this Agreement; provided, that to the extent any matter
requires the consent of 100% of the Lenders, such purchasing bank or other
entity may vote upon such matter.
(f) Additional Information. Any Lender may, in connection with any
assignment or participation or proposed assignment or participation pursuant to
this Section 11.07, disclose to the assignee or participant or proposed assignee
or participant or to any Person who evaluates, approves, structures or
administers the loans on behalf of a Lender, any information relating to the
Borrower furnished to such Lender by or on behalf of the Borrower, but only if
such Person, the assignee or participant or proposed assignee or participant is
obligated to preserve the confidentiality of any confidential information
relating to the Borrower received by it from such Lender.
(g) Affiliated Assignments Any Lender may assign any of its rights and
obligations under this Agreement to any of its Affiliates without notice to or
consent of the Borrower or the Agent, and such Lender or any of its Affiliates
may assign any of its rights (including, without limitation, rights to payment
of principal and/or interest under the Notes) under this Agreement to any
Federal Reserve Bank without notice to or consent of the Borrower or the Agent.
(h) Subsequent Lenders. Each of the parties hereto agrees that on the
Entry Date and upon the prior written consent of the Agent, any Eligible
Assignee may become party to this Agreement as a Lender and be subject to all of
the obligations and entitled to all of the rights of a Lender under the Loan
Documents upon such Eligible Assignee's execution and delivery of a counterpart
of this Agreement containing the amount of its Commitment; provided, that in no
event shall the maximum amount of the Commitments of all the Lenders exceed
$300,000,000 after giving effect to the Commitment of each additional Lender
becoming a party to this Agreement pursuant to this Section 11.07(h); provided
further, however, that such Eligible Assignee shall not become a Lender party to
this Agreement unless (x) all fees and expenses provided for in the fee letter
dated the Closing Date and referred to in Section 2.04(e) shall have been paid
and (y) the payment of such fees and expenses shall have been approved, to the
extent required, by the Bankruptcy Court. The Agent shall be authorized to amend
or supplement Schedule I to set forth the Commitment of each Lender becoming a
party to this Agreement pursuant to this Section 11.07(h). Any Lender becoming a
party to this Agreement pursuant to this Section 11.07(h) shall be required on
the Entry Date to purchase a portion of the then outstanding Revolving Credit
Advances such that after giving effect to such purchase, each Lender shall have
its Pro Rata Share (adjusted to give effect to the increased Commitments) of the
Revolving Credit Advances on such date. In addition, on the Entry Date each
Lender's participation in the LC Exposure shall be adjusted to reflect any
adjustment in such Lender's Pro Rata Share.
SECTION 11.08. Binding Effect. This Agreement shall become effective
when it has been executed by the parties hereto and the conditions set forth in
Section 3.01 have been satisfied and thereafter shall be binding upon and inure
to the benefit of the Borrower, the Agent and each Lender and their respective
successors and assigns, except that the Borrower shall not have the right to
assign its rights hereunder or any interest herein without the prior written
consent of each of the Lenders and the Agent.
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SECTION 11.09. Governing Law. This Agreement and the other Loan
Documents shall be governed by, and construed in accordance with, the laws of
the State of New York.
SECTION 11.10. Waiver of Jury Trial. THE BORROWER, THE LENDERS AND THE
AGENT WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OTHER
LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY IN ANY ACTION,
PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST
ANY OTHER PARTY OR PARTIES, WHETHER BASED ON CONTRACT, TORT, STATUTORY LIABILITY
OR OTHERWISE. THE BORROWER, THE LENDERS AND THE AGENT AGREE THAT ANY SUCH CLAIM
OR CAUSE OF ACTION SHALL BE TRIED BY THE COURT WITHOUT A JURY. THIS WAIVER SHALL
APPLY TO EACH FUTURE AMENDMENT, RENEWAL, SUPPLEMENT OR MODIFICATION OF ANY LOAN
DOCUMENT AND TO EACH FUTURE LOAN DOCUMENT.
SECTION 11.11. Limitation of Liability. No claim may be made by the
Borrower, any Subsidiary of the Borrower, any Lender, the Agent or any other
Person against the Agent or any other Lender or the Affiliates, directors,
officers, employees, attorneys or agents of any of them for any special,
indirect or consequential damages or, to the fullest extent permitted by law,
for any punitive damages in respect of any claim or cause of action (whether
based on contract, tort, statutory liability, or any other ground) based on,
arising out of or related to any Loan Document or the transactions contemplated
hereby or any act, omission or event occurring in connection therewith, and the
Borrower (for itself and on behalf of each of its Subsidiaries), the Agent and
each Lender hereby waive, release and agree never to sue upon any claim for any
such damages, whether such claim now exists or hereafter arises and whether or
not it is now known or suspected to exist in its favor.
SECTION 11.12. Entire Agreement. This Agreement, together with the
other Loan Documents, embodies the entire Agreement and understanding among the
Borrower, the Lenders and the Agent and supersedes all prior or contemporaneous
agreements and understandings of such persons, verbal or written, relating to
the subject matter hereof and thereof except for the Fee Letters and any prior
arrangements made with respect to the payment by the Borrower of (or any
indemnification for) any fees, costs or expenses payable to or incurred (or to
be incurred) by or on behalf of the Agent or any Lender.
SECTION 11.13. Survival. The Borrower's liability for any and all
additional interest, fees, taxes, compensation, costs, losses, expense
reimbursements, indemnification and other similar Obligations arising under any
Loan Document shall survive the expiration or termination of the commitments of
the Lenders to extend credit hereunder, the repayment and retirement of all
Advances and LC Exposure at any time outstanding hereunder and the assignment by
a Lender of all or the remaining portion of its rights and obligations under
this Agreement.
SECTION 11.14. Execution in Counterparts. This Agreement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement.
SECTION 11.15. Acknowledgements. The Borrower hereby acknowledges that
(i) it has been advised by counsel in the negotiation, execution and delivery of
this Agreement and the other Loan Documents, (ii) neither the Agent nor any
Lender has any fiduciary relationship with or fiduciary duty to the Borrower
arising out of or in connection with this Agreement or any of the Loan
Documents, and the relationship between the Agent and the Lender, on the one
hand, and the Borrower, on the other
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hand, in connection herewith or therewith is solely that of debtor and creditor
and (iii) no joint venture is created hereby or by the other Loan Documents or
otherwise by virtue of the transaction contemplated hereby among the Lenders or
among the Borrower and the Lenders or among the Borrower and the Agent.
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
INTEGRATED HEALTH SERVICES, INC.,
as Borrower
By:
-------------------------------
Name:
Title:
CITICORP USA, INC.,
as Agent, Swing Line Bank and Lender
By:
-------------------------------
Name:
Title:
EACH OF THE GUARANTORS LISTED ON SCHEDULE II
HERETO,
as Guarantors
By:
-------------------------------
Name:
Title:
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FOOTHILL CAPITAL CORPORATION,
as Lender
By:
-------------------------------
Name:
Title:
<PAGE>
BANKERS TRUST COMPANY,
as Lender
By:
-------------------------------
Name:
Title:
<PAGE>
FIRST UNION NATIONAL BANK,
as Lender
By:
-------------------------------
Name:
Title:
<PAGE>
BANK OF AMERICA, N.A.,
as Lender
By:
-------------------------------
Name:
Title:
<PAGE>
TORONTO DOMINION (TEXAS) INC.,
as Lender
By:
-------------------------------
Name:
Title:
<PAGE>
THE BANK OF NOVA SCOTIA,
as Lender
By:
-------------------------------
Name:
Title:
<PAGE>
GOLDMAN SACHS CREDIT PARTNERS, L.P.,
as Lender
By:
-------------------------------
Name:
Title:
<PAGE>
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ARTICLE I DEFINITIONS AND ACCOUNTING TERMS..................................................1
SECTION 1.01. Certain Defined Terms........................................................1
SECTION 1.02. Accounting Terms............................................................23
SECTION 1.03. Other Definitional Provisions...............................................23
ARTICLE II AMOUNTS AND TERMS OF THE ADVANCES................................................24
SECTION 2.01. Revolving Facility and Swing Line Facility..................................24
(a) Advances....................................................................24
(b) Amount of Revolving Credit Advances.........................................24
(c) Notice of Borrowing.........................................................25
(d) Telephonic Notice of Borrowing..............................................25
(e) Funding of Advances.........................................................25
(f) Assumption of Funding.......................................................25
(g) Failure of Lender to Fund...................................................25
(h) Swing Line Advances.........................................................25
SECTION 2.02. Letter of Credit Subfacility................................................26
(a) Issuance of Letters of Credit...............................................26
(b) LC Application..............................................................26
(c) Reimbursement...............................................................26
(d) Reimbursement Obligation Absolute...........................................27
(e) Lender Participation........................................................27
(f) Commercial Practices........................................................28
SECTION 2.03. Evidence of Debt............................................................28
SECTION 2.04. Fees........................................................................29
(a) Unused Commitment Fees......................................................29
(b) Facing Fees.................................................................29
(c) Letter of Credit Fee........................................................29
(d) Letter of Credit Administration.............................................29
(e) Fees........................................................................29
SECTION 2.05. Voluntary and Mandatory Facility Reductions.................................29
(a) Voluntary...................................................................29
(b) RoTech Asset Sale...........................................................30
SECTION 2.06. Principal Payments and Swing Line Payments..................................30
(a) Final Maturity..............................................................30
(b) Excess Credit Exposure......................................................30
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(c) Excess LC Exposure..........................................................30
(d) Swing Line Payments.........................................................30
SECTION 2.07. Interest....................................................................30
(a) Base Rate Advances..........................................................30
(b) Eurodollar Rate Advances....................................................30
(c) Default Interest............................................................31
SECTION 2.08. Additional Interest on Eurodollar Rate Advances.............................31
SECTION 2.09. Interest Rate Determination and Protection..................................31
(a) Determination of Eurodollar Rate............................................31
(b) Notice of Eurodollar Rate...................................................31
(c) Failure to Provide Information..............................................31
(d) Suspension of Eurodollar Rate Advances......................................31
(e) Failure to Specify Duration.................................................32
(f) Agent's Determination Conclusive............................................32
SECTION 2.10. Voluntary Conversion of Advances............................................32
(a) Notice of Continuance/Conversion............................................32
(b) Telephonic Notice...........................................................32
(c) Requirements................................................................32
(d) Base Rate Advances..........................................................32
SECTION 2.11. Prepayments.................................................................32
(a) Voluntary Prepayments.......................................................32
(b) Mandatory Prepayments.......................................................33
SECTION 2.12. Funding Losses..............................................................34
SECTION 2.13. Increased Costs.............................................................34
(a) Increase in Cost............................................................34
(b) Increase in Capital Requirements............................................34
(c) Replacement Lenders and Participants........................................35
SECTION 2.14. Illegality..................................................................35
SECTION 2.15. Payments and Computations...................................................35
(a) Payments....................................................................36
(b) Charging of Accounts........................................................36
(c) Computations................................................................36
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(d) Payment on Business Day.....................................................36
(e) Presumption of Payment......................................................36
SECTION 2.16. Taxes.......................................................................36
(a) Net Payments................................................................36
(b) Payment of Other Taxes......................................................37
(c) Indemnification.............................................................37
(d) Evidence of Payments........................................................37
(e) Withholding Tax Exemption...................................................37
(f) Withholding Taxes...........................................................38
(g) Subsequent Lenders..........................................................38
(h) Refund, Deduction or Credit of Taxes........................................38
(i) Exclusion of Certain Taxes..................................................38
(j) Additional Cooperation......................................................39
SECTION 2.17. Sharing of Payments.........................................................39
ARTICLE III CONDITIONS OF LENDING............................................................39
SECTION 3.01. Conditions Precedent on the Closing Date....................................39
(a) Bankruptcy Court Order......................................................39
(b) Loan Documents..............................................................39
(c) Governmental Consents.......................................................40
(d) No Injunction...............................................................40
(e) Material Adverse Change.....................................................41
(f) Security....................................................................41
(g) Payment of Fees.............................................................41
SECTION 3.02. Conditions Precedent to Each Extension of Credit............................41
(a) Notice......................................................................41
(b) Borrowing Base..............................................................41
(c) Borrowing Base Certificate..................................................41
(d) Bankruptcy Court Approval...................................................41
(e) Statements..................................................................41
ARTICLE IV REPRESENTATIONS AND WARRANTIES...................................................42
SECTION 4.01. Representations and Warranties of the Loan Parties..........................42
(a) Organization................................................................42
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(b) Power and Authority.........................................................42
(c) Due Authorization...........................................................42
(d) Subsidiaries and Ownership of Capital Stock and Ownership Interests.........42
(e) Health Care Facilities......................................................42
(f) Governmental Approval.......................................................43
(g) Binding and Enforceable.....................................................43
(h) Government Regulation.......................................................43
(i) Financial Information.......................................................43
(j) Material Adverse Change.....................................................43
(k) Compliance..................................................................43
(l) Litigation..................................................................43
(m) No Conflict.................................................................43
(n) No Default..................................................................44
(o) Payment of Taxes............................................................44
(p) Margin Regulations..........................................................44
(q) Conduct of Business.........................................................44
(r) Health Care Permits.........................................................44
(s) Environmental Matters.......................................................45
(t) ERISA Compliance............................................................45
(u) Title to Assets.............................................................46
(v) Loan Documents..............................................................46
(w) Security....................................................................46
(x) Priority....................................................................46
(y) Orders......................................................................46
(z) Accounts Receivable.........................................................46
(aa) Year 2000 Compliance........................................................47
(bb) Full Disclosure.............................................................47
(cc) Liens.......................................................................47
(dd) Debt........................................................................47
(ee) Depositary Banks............................................................47
ARTICLE V FINANCIAL COVENANTS OF THE BORROWER..............................................47
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SECTION 5.01. Financial Covenants.........................................................47
(a) Minimum Adjusted EBITDA.....................................................47
(b) Maximum Capital Expenditures................................................48
ARTICLE VI COVENANTS OF THE BORROWER........................................................48
SECTION 6.01. Affirmative Covenants.......................................................48
(a) Compliance with Laws........................................................48
(b) Inspection of Property and Books and Records................................48
(c) Reporting Requirements......................................................49
(d) Preservation of Corporate Existence, Etc....................................51
(e) Maintenance of Property.....................................................51
(f) Bankruptcy Court............................................................51
(g) Insurance...................................................................52
(h) Cash Management.............................................................52
(i) Environmental Laws..........................................................53
(j) Use of Proceeds.............................................................53
(k) Health Care Permits and Approvals...........................................53
(l) Further Assurances..........................................................53
(m) Delivery of Promissory Note.................................................54
(n) Licensure; Medicaid/Medicare Cost Reports...................................54
SECTION 6.02. Negative Covenants..........................................................54
(a) Liens.......................................................................54
(b) Disposition of Assets.......................................................55
(c) Investments.................................................................55
(d) Limitation on Debt..........................................................56
(e) Transactions with Affiliates................................................56
(f) Accommodation Obligations...................................................56
(g) Leases of Health Care Facilities............................................56
(h) Subsidiaries................................................................57
(i) Restricted Payments.........................................................57
(j) Capital Structure/Modification of Constituent Documents.....................57
(k) Mergers, Etc................................................................57
(l) Conduct of Business.........................................................57
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(m) Compliance with ERISA.......................................................57
(n) Health Care Permits and Approvals...........................................57
(o) Payment Restrictions Affecting Subsidiaries.................................58
(p) The Orders..................................................................58
(q) Application to Bankruptcy Court.............................................58
(r) Ownership...................................................................58
(s) Accounting Changes; Fiscal Year.............................................58
(t) Cancellation of Indebtedness Owed to It.....................................58
(u) No Speculative Transactions.................................................58
(v) Chapter 11 Claims...........................................................58
(w) Cash Management.............................................................58
(x) Environmental...............................................................58
ARTICLE VII EVENTS OF DEFAULT................................................................59
SECTION 7.01. Events of Default...........................................................59
(a) Non-Payment of Principal or Interest........................................59
(b) Non-Payment of Fees.........................................................59
(c) Representations and Warranties..............................................59
(d) Covenants...................................................................59
(e) Other Covenants.............................................................59
(f) Leases......................................................................59
(g) Judgments...................................................................59
(h) Loan Documents..............................................................59
(i) Material Adverse Change.....................................................60
(j) ERISA.......................................................................60
(k) Trustee.....................................................................60
(l) Environmental Liabilities...................................................60
(m) Cases.......................................................................60
(n) Prepetition Claims..........................................................60
(o) Court Orders................................................................60
(p) Examiner....................................................................61
(q) Forfeiture; Seizure.........................................................61
SECTION 7.02. Actions in Respect of Letters of Credit.....................................61
</TABLE>
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SECTION 7.03. Rights Not Exclusive........................................................61
ARTICLE VIII GUARANTY.........................................................................62
SECTION 8.01. The Guaranty................................................................62
SECTION 8.02. Nature of Liability.........................................................62
SECTION 8.03. Independent Obligation......................................................62
SECTION 8.04. Authorization...............................................................62
SECTION 8.05. Reliance....................................................................63
SECTION 8.06. Subordination...............................................................63
SECTION 8.07. Waiver......................................................................63
SECTION 8.08. Limitation on Enforcement...................................................64
ARTICLE IX SECURITY.........................................................................64
SECTION 9.01. Security....................................................................64
SECTION 9.02. Perfection of Security Interests............................................66
SECTION 9.03. Rights of Lender; Limitations on Lenders' Obligations.......................66
SECTION 9.04. Covenants of the Loan Parties with Respect to Collateral....................67
SECTION 9.05. Performance by Agent of the Loan Parties' Obligations.......................68
SECTION 9.06. Limitation on Agent's Duty in Respect of Collateral.........................69
SECTION 9.07. Remedies, Rights Upon Default...............................................69
SECTION 9.08. The Agent's Appointment as Attorney-in-Fact.................................70
SECTION 9.09. Modifications...............................................................71
ARTICLE X THE AGENT, THE OTHER AGENTS AND THE ARRANGER.....................................72
SECTION 10.01 Authorization and Action....................................................72
SECTION 10.02 Agent Not Liable............................................................72
SECTION 10.03 Rights as Lender............................................................73
SECTION 10.04 Lender Credit Decision......................................................73
SECTION 10.05 Indemnification.............................................................73
SECTION 10.06 Successor Agent.............................................................73
SECTION 10.07 Release of Collateral.......................................................74
SECTION 10.08 The Other Agents and the Arranger...........................................74
ARTICLE XI MISCELLANEOUS....................................................................74
SECTION 11.01 Amendments..................................................................74
SECTION 11.02 Notices.....................................................................75
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SECTION 11.03 No Waiver; Remedies.............................................................75
SECTION 11.04 Costs and Expenses..............................................................76
SECTION 11.05 Right of Set-off................................................................76
SECTION 11.06 Indemnity.......................................................................76
(a) General Indemnity...........................................................76
(b) Environmental Indemnity.....................................................77
SECTION 11.07 Assignments and Participations..................................................77
(a) Permitted Assignment........................................................77
(b) Effect of Assignment........................................................77
(c) Maintenance of Agreements...................................................78
(d) Procedure...................................................................78
(e) Participations..............................................................79
(f) Additional Information......................................................79
(g) Affiliated Assignments......................................................79
(h) Subsequent Lenders..........................................................79
SECTION 11.08 Binding Effect..................................................................79
SECTION 11.09 Governing Law...................................................................79
SECTION 11.10 Waiver of Jury Trial............................................................79
SECTION 11.11 Limitation of Liability.........................................................80
SECTION 11.12 Entire Agreement................................................................80
SECTION 11.13 Survival........................................................................80
SECTION 11.14 Execution in Counterparts.......................................................80
SECTION 11.15 Acknowledgements................................................................80
</TABLE>
viii
<PAGE>
EXHIBITS
Exhibit A Form of Revolving Credit Note
Forms of Loan Administration Documents
Exhibit B-1 Form of Notice of Borrowing
Exhibit B-2 Form of Notice of Continuance/Conversion
Exhibit B-3 Form of LC Application
Exhibit B-4 Form of Notice of Swing Line Advance
Exhibit B-5 Form of Borrowing Base Certificate
Forms of Certain Loan Documents
Exhibit C Form of Blocked Account Letter
Forms of Opinion of Counsel
Exhibit D Form of Opinion of Counsel for the Loan Parties
Other Forms
Exhibit E-1 Form of Compliance Certificate
Exhibit E-2 Form of Assignment and Acceptance
Exhibit E-3 Form of Interim Order
<PAGE>
SCHEDULES
Schedule I List of Lenders, Commitments and Pro Rata Shares
Schedule II List of Guarantors
Schedule 1.01 List of Depositary Banks
Schedule 4.01(d) List of Subsidiaries
Schedule 4.01(e) List of Health Care Facilities
Schedule 4.01(f) List of Government Approvals
Schedule 4.01(s) List of Environmental Matters
Schedule 4.01(t) List of ERISA Matters
Schedule 6.02(c) List of Loans and Investments
Schedule 6.02(d) List of Liens and Debt
Schedule 6.02(f) List of Accommodation Obligations
<PAGE>
SECURED SUPER-PRIORITY
DEBTOR IN POSSESSION
REVOLVING CREDIT AGREEMENT
DATED AS OF FEBRUARY 3, 2000
AMONG
INTEGRATED HEALTH SERVICES, INC.,
A DEBTOR AND DEBTOR IN POSSESSION,
AS BORROWER,
THE SUBSIDIARIES PARTY HERETO AS GUARANTORS,
AS DEBTORS AND DEBTORS IN POSSESSION,
THE LENDERS FROM TIME TO TIME PARTY HERETO,
AND
CITICORP USA, INC.,
AS COLLATERAL MONITORING AGENT AND ADMINISTRATIVE AGENT
* * *
SALOMON SMITH BARNEY INC.,
AS LEAD ARRANGER AND SOLE BOOK RUNNER
FIRST UNION NATIONAL BANK,
AS SYNDICATION AGENT
FOOTHILL CAPITAL CORPORATION
AND
GOLDMAN SACHS CREDIT PARTNERS, L.P.,
AS CO-DOCUMENTATION AGENTS
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Integrated Health Services, Inc.:
We consent to incorporation by reference in the registration statements
(Nos. 33-44648, 33-44649, 33-44650, 33-44651, 33-44653, 33-53914, 33-53912,
33-53916, 33-86684, 33-97190, 333-1432, 333-28289, 333-28293, 333-28317,
333-28321 and 333-47853) on Form S-8 and (Nos. 33-66126, 33-68302, 33-77380,
33-81378, 33-87890, 33-98764, 333-4053, 333-12685, 333-31121, 333-35577,
333-35851, 333-41973, 333-48947, 333-59891 and 333-42169) on Forms S-3 or S-4 of
Integrated Health Services, Inc. of our report dated April 10, 2000, relating to
the consolidated balance sheets of Integrated Health Services, Inc. and
subsidiaries as of December 31, 1998 and 1999 and the related consolidated
statements of operations, comprehensive income (loss), stockholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1999 and the related schedule, which report appears in the December
31, 1999 annual report on Form 10-K of Integrated Health Services, Inc.
Our reported dated April 10, 2000, contains an explanatory paragraph that
states that 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. The consolidated financial statements
and the related schedule do not include any adjustments that might result from
the outcome of that uncertainty.
KPMG LLP
Baltimore, Maryland
April 10, 2000
<TABLE> <S> <C>
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<NAME> Integrated Health Services, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 21,627
<SECURITIES> 39,321
<RECEIVABLES> 776,147
<ALLOWANCES> 193,600
<INVENTORY> 0
<CURRENT-ASSETS> 730,397
<PP&E> 1,164,677
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,379,080
<CURRENT-LIABILITIES> 3,785,826
<BONDS> 0
0
0
<COMMON> 53
<OTHER-SE> (937,075)
<TOTAL-LIABILITY-AND-EQUITY> 3,379,080
<SALES> 2,559,299
<TOTAL-REVENUES> 2,559,299
<CGS> 0
<TOTAL-COSTS> 4,800,865
<OTHER-EXPENSES> 2,076,332
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 320,923
<INCOME-PRETAX> (2,239,358)
<INCOME-TAX> 9,764
<INCOME-CONTINUING> (2,249,122)
<DISCONTINUED> 0
<EXTRAORDINARY> 9,195
<CHANGES> 0
<NET-INCOME> (2,239,927)
<EPS-BASIC> (44.87)
<EPS-DILUTED> (44.87)
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