-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AV1ykRK947D4c9HWaqUTRbOgbH9tlLbDIrDygN70+ZNUWY+Gmnlg5epkC3eXV+je j1mZr4zlVdetVXjemEHNDg== /in/edgar/work/20000814/0001005150-00-001202/0001005150-00-001202.txt : 20000921 0001005150-00-001202.hdr.sgml : 20000921 ACCESSION NUMBER: 0001005150-00-001202 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTEGRATED HEALTH SERVICES INC CENTRAL INDEX KEY: 0000785814 STANDARD INDUSTRIAL CLASSIFICATION: [8300 ] IRS NUMBER: 232428312 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12306 FILM NUMBER: 700592 BUSINESS ADDRESS: STREET 1: 10065 RED RUN BLVD CITY: OWINGS MILLS STATE: MD ZIP: 21117 BUSINESS PHONE: 4109988400 MAIL ADDRESS: STREET 1: 100065 RED RUN BLVD CITY: OWINGS MILLS STATE: MD ZIP: 21117 10-Q 1 0001.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended June 30, 2000 ------------------------------------------ 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 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No Number of shares of common stock of the registrant outstanding as of August 9, 2000: 48,864,146 shares. INTEGRATED HEALTH SERVICES, INC. INDEX
Page ---- PART I. FINANCIAL INFORMATION Item 1. - Condensed Financial Statements - Consolidated Balance Sheets June 30, 2000 and December 31, 1999 3 Consolidated Statements of Operations for the three and six months ended June 30, 2000 and 1999 4 Consolidated Statement of Changes in Stockholders' Equity for the six months ended June 30, 2000 5 Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 PART II: OTHER INFORMATION Item 6 Exhibits and Report on Form 8-K 18
Page 2 of 19 INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31, 2000 1999 ----------- ----------- (Unaudited) Assets Current Assets: Cash and cash equivalents $ 27,484 $ 21,627 Temporary investments 60,743 39,321 Patient accounts and third-party payor settlements receivable, less allowance for doubtful receivables of $172,206 at June 30, 2000 and $164,449 at December 31, 1999 557,544 582,547 Inventories, prepaid expenses and other current assets 96,638 66,884 Income tax receivable 12,483 20,018 ----------- ----------- Total current assets 754,892 730,397 ----------- ----------- Property, plant and equipment, net 1,171,118 1,164,677 Intangible assets 1,322,094 1,353,920 Other assets 113,119 130,086 ----------- ----------- Total assets $ 3,361,223 $ 3,379,080 =========== =========== Liabilities and Stockholders' Equity Current Liabilities not subject to compromise: Current maturities of long-term debt $ 22,262 $ 3,369,244 Accounts payable and accrued expenses 128,698 416,582 ----------- ----------- Total current liabilities 150,960 3,785,826 ----------- ----------- Long-term debt not subject to compromise: Mortgages and other long term debt, less current maturities 312,374 318,271 ----------- ----------- Total long-term debt 312,374 318,271 ----------- ----------- Other long-term liabilities 33,030 166,164 Liabilities subject to compromise 3,784,121 -- Deferred gain on sale-leaseback transactions 3,512 3,871 Deferred income tax payable 42,029 42,023 Stockholders' equity (deficit): Preferred stock, authorized 15,000,000 shares; no shares issued and outstanding -- -- Common stock, $0.001 par value. Authorized 150,000,000 shares; issued 53,963,568 at June 30, 2000 and 53,175,598 shares at December 31, 1999 (including 4,868,300 treasury shares at June 30, 2000 and December 31, 1999) 53 53 Additional paid-in capital 1,391,983 1,374,546 Deficit (2,307,575) (2,262,410) Treasury stock, at cost (4,868,300 shares at June 30, 2000 and December 31, 1999) (49,264) (49,264) ----------- ----------- Net stockholders' equity (deficit) (964,803) (937,075) ----------- ----------- Total liabilities and stockholders' equity (deficit) $ 3,361,223 $ 3,379,080 =========== ===========
See accompanying Notes to Consolidated Financial Statements Page 3 of 19 INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Dollars in Thousands, Except Per Share Data)
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 --------- --------- ------- ---------- Total revenues $ 621,151 $ 624,251 $1,258,430 $1,244,486 --------- --------- ---------- ---------- Costs and expenses: Operating, general and administrative (including rent) 562,761 505,656 1,141,754 1,013,558 Depreciation and amortization 47,360 46,617 93,714 92,991 Interest, net (excluding post petition contractual interest of $69,816 and $116,805 for the three and six months ended June 30, 2000) 10,838 74,245 43,983 144,737 Non-recurring charge 6,500 -- 6,500 -- --------- --------- ---------- ---------- Total costs and expenses 627,459 626,518 1,285,951 1,251,286 --------- --------- ---------- ---------- Loss before equity in earnings of affiliates, reorganization items and income taxes (6,308) (2,267) (27,521) (6,800) Equity in earnings of affiliates 50 1,198 265 1,345 --------- ---------- ---------- ---------- Loss before reorganization items and income taxes (6,258) (1,069) (27,256) (5,455) Reorganization items 8,183 -- 12,909 -- --------- --------- ---------- ---------- Loss before income taxes (14,441) (1,069) (40,165) (5,455) Federal and state income taxes 2,500 3,562 5,000 5,764 --------- --------- ---------- ---------- Net loss $ (16,941) $ (4,631) $ (45,165) (11,219) ========= ========= ========== ========== Per Common Share - Basic: Net loss $ (0.35) $ (0.09) $ (0.93) $ (0.22) ========= ========= ========== ========== Per Common Share - Diluted: Net loss $ (0.35) $ (0.09) $ (0.93) $ (0.22) ========= ========= ========== ========== See accompanying Notes to Consolidated Financial Statements
Page 4 of 19 INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED) (DOLLARS IN THOUSANDS)
ADDITIONAL COMMON PAID-IN TREASURY STOCK CAPITAL DEFICIT STOCK TOTAL ------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1999 $ 53 1,374,546 (2,262,410) (49,264) (937,075) Amortization of deferred employee stock compensation. -- 551 -- -- 551 Insuance of 517,970 shares of common stock in connection with the conversion of 5 3/4% convertible subordinated debentures -- 16,886 -- -- 16,886 Net Loss -- -- (45,165) -- (45,165) ------------------------------------------------------------------------- BALANCE AT JUNE 30, 2000 $ 53 1,391,983 (2,307,575) (49,264) (964,803) =========================================================================
See accompanying Notes to Consolidated Financial Statements Page 5 of 19 INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands)
SIX MONTHS ENDED June 30, ------------------------------ 2000 1999 --------- --------- Cash flows from operating activities: Net loss $ (45,165) $ (11,219) Adjustments to reconcile net loss to net cash provided by operating activities: Non-recurring charges 6,500 -- Results from joint ventures (265) (1,198) Depreciation and amortization 93,714 92,991 Deferred income taxes and other non-cash items 3,037 5,596 Amortization of gain on sale-leaseback transactions (359) (336) Decrease in patient accounts and third-party payor settlements receivable, net 23,523 58,720 Increase in supplies, inventory, prepaid expenses and other current assets (29,754) (3,497) Increase (decrease) in accounts payable and accrued expenses 41,464 (113,038) Decrease in income taxes receivable 7,535 12,917 --------- --------- Net cash provided by operating activities of continuing operations before reorganization items 100,230 40,936 --------- --------- Net cash used by discontinued operations -- (13,469) --------- --------- Net cash used by reorganization items (9,909) -- --------- --------- Cash flows from financing activities: Proceeds from issuance of capital stock, net -- 759 Proceeds from long-term borrowings -- 318,268 Repayment of long-term debt (4,945) (250,775) Deferred financing costs (5,370) (9,027) Purchase of treasury stock -- (24,041) --------- --------- Net cash provided (used) by financing activities (10,315) 35,184 --------- --------- Cash flows from investing activities: Sale of temporary investments 373,723 179,636 Purchase of temporary investments (395,145) (167,719) Business acquisitions -- (43,883) Purchase of property, plant and equipment (59,630) (112,537) Disposition of assets (Notes 4 and 8) 1,521 140,298 Other assets 5,382 (43,801) --------- --------- Net cash used by investing activities (74,149) (48,006) --------- --------- Increase in cash and cash equivalents 5,857 14,645 Cash and cash equivalents, beginning of period 21,627 31,391 --------- --------- Cash and cash equivalents, end of period $ 27,484 $ 46,036 ========= =========
See accompanying Notes to Consolidated Financial Statements Page 6 of 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements included herein do not contain all information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles. For further information, such as the significant accounting policies followed by Integrated Health Services, Inc. ("IHS" or the "Company"), refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. In the opinion of management, the consolidated financial statements include all necessary adjustments (consisting of normal recurring accruals and all adjustments pursuant to the adoption of SOP 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7")) for a fair presentation of the financial position and results of operations for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year. NOTE 2: PETITION FOR RELIEF UNDER CHAPTER 11 On February 2, 2000, the Company and substantially all of its subsidiaries filed separate voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court in the District of Delaware. These filings, among other factors such as the Company's recurring losses, raise substantial doubt about the Company's ability to continue as a going concern. Except as may be otherwise determined by the Bankruptcy Court overseeing the Chapter 11 filings, the automatic stay protection afforded by the Chapter 11 filings prevents any creditor or other third parties from taking any action in connection with any defaults under prepetition obligations of the Company and those of its subsidiaries which are debtors in the Chapter 11 filings. In connection with the Chapter 11 filings, the Company intends to develop a plan of reorganization that will be approved by its creditors and confirmed by the Bankruptcy Court overseeing the Company's Chapter 11 filings. In the event the plan of reorganization is confirmed, continuation of the business thereafter is dependent on the Company's ability to achieve successful future operations. In connection with the Chapter 11 filings, the Company obtained a commitment for $300 million in debtor-in-possession financing (the "DIP Facility") from a group of banks led by Citicorp U.S.A., N.A. As of June 30, 2000, no amounts are outstanding under the DIP Facility. However, at that date $1.24 million was outstanding under a letter of credit subfacility ("LC Subfacility"). Since the Company filed for protection under the Bankruptcy Code, the accompanying consolidated financial statements as of and for the three and six months ended June 30, 2000 have been prepared in accordance with SOP 90-7. Pursuant to SOP 90-7, the Company has reported liabilities subject to compromise at June 30, 2000. The Company has received approval from the Bankruptcy Court to pay pre-petition and post-petition employee wages, salaries, benefits and other employee obligations. The Bankruptcy Court also approved orders granting authority, among other things, to pay pre-petition claims of certain critical vendors, utilities and patient obligations. All other unsecured pre-pretition liabilities (other than those paid pursuant to such authority) are classified in the consolidated balance sheet as liabilities subject to compromise. A summary of the principal categories of claims classified as liabilities subject to compromise under the Chapter 11 cases follows (in thousands):
Long-term debt: Revolving credit and term loan $ 2,093,789 Senior subordinated notes 1,090,737 Convertible denbentures 127,752 Amounts due under HCFA Agreement 136,454 Promissory notes and other 29,788 ----------- 3,478,520 ----------- Accounts payable 141,794 Accrued liabilities: Interest 124,307 Other 39,500 ----------- 163,807 ----------- $ 3,784,121 -----------
A summary of the principal categories of reorganization items follows:
Reorganization Items: Legal, accounting and consulting fees $ 8,537 Severance costs 4,700 Interest Income (328) ----------- $ 12,909 ===========
On July 26, 2000 the Bankruptcy Court approved the separation agreement with Stephen P. Griggs, President of RoTech Medical Corporation, a wholly owned subsidiary of IHS. IHS has agreed to pay to Mr. Griggs $3 million in the following manner: $1 million within 10 days of the effective date and $2 million in equal installments over a period of three years. The agreement imposes upon Mr. Griggs various post termination obligations, including non-compete, non-solicitation and confidentiality requirements. Mr. Griggs also waives all claims against IHS and relinquishes his restricted stock rights in IHS under the pre-petition agreement. In addition, the Company paid $1.7 million in other severance costs. The Company is also reviewing the impact of its bankruptcy filing on reimbursable interest for Medicare and certain state Medicaid programs. NOTE 3: 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. For the three and six months ended June 30, 1999 and 2000, no exercise of options and warrants nor conversion of subordinated debt is assumed since their effect is antidilutive. The weighted average number of common shares is 51,523,079 and 48,740,749 for the six months ended June 30, 1999 and 2000, respectively. The weighted average number of common shares is 51,455,647 and 48,829,477 for the three months ended June 30, 1999 and 2000, respectively. Page 7 of 19 NOTE 4: TRANSACTIONS WITH LYRIC HEALTH CARE LLC In each of January and April 1998 (but effective March 31, 1998 in the case of the April 1998 sale), the Company sold five long-term care facilities to Omega Healthcare Investors, Inc. for $44.5 million and $50.5 million, respectively, which facilities were leased back by Lyric Health Care LLC ("Lyric"), a newly formed subsidiary of IHS, at an annual rent of approximately $4.5 million and $4.9 million, respectively. IHS also entered into management and franchise agreements with Lyric. The management and franchise agreements' initial terms are 13 years with two renewal options of 13 years each. The base management fee was 4% of gross revenues in 1999 and 2000 pursuant to the management agreement. In addition, the agreement provides for an incentive management fee equal to 70% of annual net cash flow (as defined in the management agreement). The duties of IHS as manager include the following: accounting, legal, human resources, operations, materials and facilities management and regulatory compliance. The annual franchise fee is 1% of gross revenues, which grants Lyric the authority to use the Company's trade names and proprietary materials. In a related transaction, TFN Healthcare Investors, Inc. ("TFN") purchased a 50% interest in Lyric for $1.0 million, an amount equal to the Company's initial investment in Lyric and IHS' interest in Lyric was reduced to 50%. Lyric will dissolve on December 31, 2047 unless extended for an additional 12 months. The transactions with Lyric were approved by the disinterested members of the Board of Directors. On February 1, 1998 Lyric also entered into a five-year employment agreement with Timothy F. Nicholson, the principal stockholder of TFN and a director of the Company. Pursuant to Lyric's operating agreement, Mr. Nicholson serves as Managing Director of Lyric and has the day-to-day authority for the management and operation of Lyric and initiates policy proposals for business plans, acquisitions, employment policy, approval of budgets, adoption of insurance programs, additional service offerings, financing strategy, ancillary service usage, changes in material terms of any lease and adoption/amendment of employee health, benefit and compensation plans. As a result of the aforementioned transactions, IHS accounts for its investment in Lyric using the equity method of accounting since IHS no longer controls Lyric. Effective January 1, 1999, the Company and various wholly owned subsidiaries of the Company (the "Lyric Subsidiaries") transferred 27 long-term care facilities and five specialty hospitals to Monarch Properties L.P. ("Monarch L.P.") for $138 million plus contingent earn-out payments of up to a maximum of $67.6 million. Net proceeds from the transaction were approximately $131.24 million. The contingent earn-out payments will be paid to the Company by Monarch L.P. upon a sale, transfer or refinancing of any or all of the facilities or upon a sale, consolidation or merger of Monarch L.P., with the amount of the earn-out payments determined in accordance with a formula described in the Facilities Purchase Agreement among the Company, the Lyric Subsidiaries and Monarch L.P. After the transfer of the facilities to Monarch L.P., the Company retained the working capital of the Lyric Subsidiaries and transferred the stock of each of them to Lyric. Monarch L.P. then leased all of the facilities back to the Lyric Subsidiaries under the long-term master lease and the Company is managing these facilities for Lyric. Dr. Robert N. Elkins, Chairman of the Board, Chief Executive Officer and President of the Company, beneficially owns 28.6% of Monarch L.P. and is the Chairman of the Board of Managers of Monarch Properties, LLC, the parent company of Monarch L.P. The Company has accounted for this transaction as a financing. In September 1999, the Company transferred its Jacksonville, Florida nursing facility to Monarch LP for net proceeds of $3.7 million. Monarch LP then leased this facility to a subsidiary of Lyric, which the Company is currently managing. The Company has accounted for the transaction as a financing. As of June 30, 2000, Lyric has had a dramatic decrease in its ability to borrow from its revolving line of credit and its vendors have imposed accelerated payment terms. As a result, IHS has not received payment for management fees or other costs paid by IHS on Lyric's behalf (i.e. health and workers' compensation insurance) of approximately $21.0 million for the six months ended June 30, 2000. IHS is working with Lyric management and the lender to negotiate extending the line of credit. The Company will continue to evaluate its investment in Lyric and Lyric's ability to fund cash flows from operations on an ongoing basis. NOTE 5: CREDIT FACILITY AMENDMENT In March 1999, the Company amended its Credit Facility, which amendments loosened the financial convenants, increased interest rates and accelerated the reduction in the availability under the Credit Facility. As amended: o The Term Facility bears interest at a rate equal to, at the option of IHS, either (i) in the case of Eurodollar loans, the sum of (x) between two and three quarters percent and three and one quarter percent (depending on the ratio of the Company's debt) (as defined in the Credit Facility) to earnings before interest, taxes, depreciation, amortization and rent pro forma for any acquisitions or divestitures during the measurement period (the "Debt/EBITDAR Ratio")) and (y) the interest rate in the London interbank market for loans in an amount substantially equal to the amount of borrowing and for the period of borrowing selected by IHS or (ii) the sum of (a) the higher of (1) Citibank, N.A.'s base rate or (2) one percent plus the latest overnight federal funds rate plus (b) a margin of between one and one half percent and two percent (depending on the Debt/EBITDAR Ratio). o The Additional Term Facility bears interest at a rate equal to, at the option of IHS, either (i) in the case of Eurodollar loans, the sum of (x) between three percent and three and one half percent (depending on the Debt/EBITDAR Ratio) and (y) the interest rate in the London interbank market for loans in an amount substantially equal to the amount of borrowing and for the period of borrowing selected by IHS or (ii) the sum of (a) the higher of (1) Citibank, N.A.'s base rate or (2) one percent plus the latest overnight federal funds rate plus (b) a margin of Page 8 of 19 between one and three quarters percent and two and one quarter percent (depending on the Debt/EBITDAR Ratio). The Term Facility and the Additional Term Facility can be prepaid at any time in whole or in part without penalty. o The Revolving Facility was scheduled to reduce to $800,000,000 on January 1, 2001, $600,000,000 on January 1, 2002, $500,000,000 on September 30, 2002 and $400,000,000 on January 1, 2003, with a final maturity on September 15, 2003; however, the $100,000,000 letter of credit subfacility and $10,000,000 swing line subfacility were scheduled to remain at $100,000,000 and $10,000,000, respectively, until final maturity. The Revolving Credit Facility bears interest at a rate equal to, at the option of IHS, either (i) in the case of Eurodollar loans, the sum of (x) between two percent and two and three quarters percent (depending on the Debt/EBITDAR Ratio) and (y) the interest rate in the London interbank market for loans in an amount substantially equal to the amount of borrowing and for the period of borrowing selected by IHS or (ii) the sum of (a) the higher of (1) Citibank, N.A.'s base rate or (2) one percent plus the latest overnight federal funds rate plus (b) a margin of between three quarters of one percent and one and one-half percent (depending on the Debt/EBITDAR Ratio). o The Credit Facility prohibits IHS from purchasing or redeeming IHS stock. As a result of the Company's bankruptcy filing (see note 2 above) the Company is no longer able to make any borrowings under the credit facility. NOTE 6: DEBTOR-IN-POSSESSION FINANCING On February 2, 2000, the Company and substantially all of its subsidiaries filed voluntary petitions in the United States Bankruptcy Court for the District of Delaware under Title 11 of the United States Code, 11 U.S.C. (S)(S) 101, et seq. (the "Bankruptcy Code"). The Company's need to seek relief afforded by the Bankruptcy Code was due, in part, to the significant financial pressure created by the Balanced Budget Act of 1997 and its implementation. In connection with the Chapter 11 filings, the Company entered into a secured super-priority debtor-in-possession revolving credit agreement with a group of banks led by Citicorp USA, Inc., N.A. to obtain up to $300 million of debtor-in-possession financing (the "DIP Facility") to fund the Company's operations. On March 6, 2000, the United States Bankruptcy Court for the District of Delaware approved the $300 million DIP Facility. The DIP Facility matures on March 6, 2002. The DIP Facility provides for maximum borrowings by the Company equal to the sum of (i) up to 85% of the then outstanding domestic eligible accounts receivable (other than Medicaid accounts receivable), (ii) the lesser of $40 million or 85% of eligible Medicaid accounts receivable, (iii) the lesser of $25 million and 40% of the orderly liquidation value of eligible real estate, (iv) 100% of cash and 95% of cash equivalents on deposit or held in the Citibank collateral account and (v) the adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") of RoTech for the two most recent fiscal quarters up to a maximum of $100 million. The DIP Facility significantly limits IHS' ability to incur indebtedness or contingent obligations, to make additional acquisitions, to sell or dispose of assets, to create or incur liens on assets, to pay dividends and to merge or consolidate with any other person. Pursuant to the DIP Facility advances to the Company are classified as either swing line or revolving credit facility advances. Swing line advances are considered to be Base Rate advances as defined by the agreement. Revolving credit advances consist of either Base Rate or Eurodollar Rate advances. As described below Base Rate and Eurodollar Rate advances bear interest at different rates. The DIP Facility bears interest on Base Rate advances at a rate per annum equal to the greater of (1) the rate of interest announced publicly by Citibank in New York, New York from time to time, as Citibank's base rate, (2) the sum of 0.5% per annum plus a weighted average of the rates on overnight Page 9 of 19 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. NOTE 7: SEGMENT REPORTING In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for the way public business enterprises report information about operating segments in annual and interm financial statements issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. IHS has four primary reportable segments: inpatient services, home respiratory/infusion/DME, diagnostic services and lithotripsy services. Inpatient services include: (a) inpatient facilities which provide basic medical services primarily on an inpatient basis at skilled nursing facilities, as well as hospice services, (b) contract services that provide specialty medical services (e.g., rehabilitation and respiratory services), primarily on an inpatient basis at skilled nursing facilities, (c) contracted services that provide specialty medical services under contract to other healthcare providers, and (d) management of skilled nursing Page 10 of 19 facilities owned by third parties. Home respiratory/infusion/DME provides respiratory and infusion therapy, as well as the sale and/or rental of home medical equipment. The Company sold its infusion business in October 1999. Diagnostic services provide mobile x-ray and electrocardiogram services on an inpatient basis at skilled nursing facilities. Lithotripsy services is a non-invasive technique that uses shock waves to disintegrate kidney stones, primarily on an outpatient basis. Certain services with similar economic characteristics have been aggregated pursuant to SFAS No. 131. No other individual business segment exceeds the 10% quantitative thresholds of SFAS No. 131. IHS management evaluates the performance of its operating segments on the basis of earnings before interest, income taxes, depreciation and amortization and non-recurring charges.
THREE MONTHS ENDED JUNE 30, 2000 HOME INPATIENT RESPIRATORY/ DIAGNOSTIC LITHOTRIPSY SERVICES INFUSION/DME SERVICES SERVICES CONSOLIDATED -------- ------------ -------- -------- ------------ (DOLLARS IN THOUSANDS) Revenues $ 440,528 $ 147,879 $ 17,980 $ 14,764 $ 621,151 Operating, general and administrative expenses (including rent) 420,818 115,510 17,000 9,433 562,761 ---------- ---------- ---------- ---------- ---------- Earnings from continuing operations before non-recurring charges, reorganization items, equity in earnings of affiliates, interest, taxes, depreciation and amortization $ 19,710 $ 32,369 $ 980 $ 5,331 $ 58,390 ========== ========== ========== ========== ========== SIX MONTHS ENDED JUNE 30, 2000 HOME INPATIENT RESPIRATORY/ DIAGNOSTIC LITHOTRIPSY SERVICES DME SERVICES SERVICES CONSOLIDATED -------- ------------ -------- -------- ------------ (DOLLARS IN THOUSANDS) Revenues $ 893,408 $ 295,752 $ 40,706 $ 28,564 $1,258,430 Operating, general and administrative expenses (including rent) 852,453 231,829 38,618 18,854 1,141,754 ---------- ---------- ---------- ---------- ---------- Earnings from continuing operations before non-recurring charges, equity in earnings of affiliates, interest, taxes, depreciation and amortization $ 40,955 $ 63,923 $ 2,088 $ 9,710 $ 116,676 ========== ========== ========== ========== ========== Total Assets at end of period $1,952,059 $1,267,542 $ 50,698 $ 90,925 $3,361,223 ========== ========== ========== ========== ==========
THREE MONTHS ENDED JUNE 30, 1999 HOME INPATIENT RESPIRATORY/ DIAGNOSTIC LITHOTRIPSY SERVICES INFUSION/DME SERVICES SERVICES CONSOLIDATED -------- ------------ -------- -------- ------------ (DOLLARS IN THOUSANDS) Revenues $ 417,816 $ 165,406 $ 25,743 $ 15,286 $ 624,251 Operating, general and administrative expenses (including rent) 353,751 121,226 21,495 9,184 505,656 ---------- ---------- ---------- ---------- ---------- Earnings from continuing operations before non-recurring charges, reorganization items, equity in earnings of affiliates, interest, taxes, depreciation and amortization $ 64,065 $ 44,180 $ 4,248 $ 6,102 $ 118,595 ========== ========== ========== ========== ========== SIX MONTHS ENDED JUNE 30, 1999 HOME INPATIENT RESPIRATORY/ DIAGNOSTIC LITHOTRIPSY SERVICES DME SERVICES SERVICES CONSOLIDATED -------- ------------ -------- -------- ------------ (DOLLARS IN THOUSANDS) Revenues $ 836,663 $ 324,526 $ 53,852 $ 29,445 $1,244,486 Operating, general and administrative expenses (including rent) 718,025 236,089 42,827 16,617 1,013,558 ---------- ---------- ---------- ---------- ---------- Earnings from continuing operations before non-recurring charges, equity in earnings of affiliates, interest, taxes, depreciation and amortization $ 118,638 $ 88,437 $ 11,025 $ 12,828 $ 230,928 ========== ========== ========== ========== ========== Total Assets at end of period $3,315,628 $1,658,310 $ 219,942 $ 210,032 $5,403,912 ========== ========== ========== ========== ==========
There are no material inter-segment revenues or receivables. Revenues derived from private pay sources and various government reimbursement programs represented 40% and 61%, respectively, for the three months ended June 30, 2000 and 40% and 60%, respectively, for the three months June 30, 1999 and, the six months ended June 30, 1999 and June 30, 2000. The Company does not evaluate its operations on a geographic basis. Page 11 of 19 NOTE 8: DISPOSITION OF ASSETS During the six months ended June 30, 2000, the Company terminated the lease agreements of 4 long-term care facilities while retaining the working capital. There was no gain or loss recorded on these transactions. However, as a result of the transactions the Company will lose control of the collection process for the retained accounts receivable. The Company will continue to evaluate the collectibility of the retained accounts receivable. This evaluation may result in future losses from termination of these leased facilities. In addition, the Company sold the corporate airplane hangar for $1,100,000 and other property and equipment for $421,000. No gain or loss resulted from these transactions. NOTE 9: NON-RECURRING CHARGE During the second quarter of 2000, the Company recorded a non-recurring charge of $6.5 million against a promissory note due from APS Enterprise Holding Company, which purchased the Company's infusion division in October 1999, due to the impact that Medicare reimbursement has had on the cash flows from operations of APS. NOTE 10: SUBSEQUENT EVENTS On July 27, 2000, Joseph A. Bondi of the turnaround consulting firm of Alvarez & Marsal, Inc., was named as the Chief Restructuring Officer of the Company. In connection with this appointment, Robert N. Elkins, a founder of IHS, has agreed to step down as Chairman, CEO and President upon the closing of the transaction contemplated by an - subject to approval by the U.S. Bankruptcy Court for the District of Delaware - agreement between Dr. Elkins and IHS. At such time, Mr. Bondi will be named as CEO. If Dr. Elkins' agreement is approved by the Bankruptcy Court: -- Dr. Elkins will resign as an officer and director of the Company, his employment agreement will be terminated and he will surrender his equity interests in the Company. Dr. Elkins currently beneficially owns approximately 8.1% of the outstanding Common Stock. -- Dr. Elkins will become a consultant to the Company for one year at a fee of $2.6 million, payable on the first day of the consulting period. -- Dr. Elkins will not, for a period of one year, compete with the Company (although he is permitted to continue in his activities with Monarch LP) and will not solicit the Company's employees. -- All outstanding principal and accrued interest on loans made by the Company to Dr. Elkins to allow him to purchase stock, exercise options and pay taxes associated with option exercises, which unamortized balance aggregated approximately $27.4 million at July 31, 2000, will be forgiven, and the Company will pay to the appropriate federal and state tax authorities for the account of Dr. Elkins an amount equal to the federal tax liability Dr. Elkins will incur as a result of the forgiveness of the loans. -- The Company's lease of an airplane from an entity owned by Dr. Elkins will be cancelled. -- The Company and its subsidiaries will release Dr. Elkins and his family, Monarch LP and its affiliates and Lyric and its affiliates, from all claims they may have against such parties, other than claims arising under agreements between the entities and certain wrongful acts defined in one of the Company's director and officers' insurance policies (but only to the extent of the coverage of such policy). -- Dr. Elkins will release the Company and its subsidiaries from all claims he may have against them. In addition, certain loans made by the Company to its senior executives will automatically be forgiven. As a result, the Company will incur a charge of approximately $70 million (of which approximately $10 million relates to loans to senior executives) in the quarter in which the agreement is approved by the Bankruptcy Court. None of such bonuses were accrued at June 30, 2000. In July, the Bankruptcy Court approved payment of $10.94 million for retention bonuses for certain employees. The bonuses will be paid in three equal installments; August 2, 2000, February 2, 2001 and the date of emergence from Bankruptcy. None of such bonuses were accrued at June 30, 2000. In January 2000, IHS ceased making rent and interest payments to Senior Housing Properties Trust (SNH) on various facilities. In conjunction with IHS' bankruptcy proceedings, the companies negotiated a settlement agreement, which was approved by the Bankruptcy Court on July 7, 2000 and effective July 1, 2000. The agreement cancelled IHS' lease and mortgage obligations to SNH. In addition, IHS conveyed nine nursing homes and one parcel of non-operating real property to SNH. As a result, SNH has obtained the operations of 42 facilities previously operated by IHS. The estimated net impact of this transaction will result in a reduction of debt of approximately $36.7 million, reduction of accounts payable and accrued expenses of approximately $8.1 million offset by a reduction of Property Plant and Equipment of $25.5 million and a reduction of accounts receivable and management fees of approximately $19.2 million. Therefore, the Company expects that no gain or loss will be recorded on this transaction. Page 12 of 19 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements in this Quarterly Report on Form 10-Q concerning the Company's business outlook or future economic performance; reorganization under the bankruptcy laws; anticipated profitability, revenues, expenses or other financial items; and business segment growth, together with other statements that are not historical facts, are "forward-looking statements" as that term is defined under Federal Securities Laws. Forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from those stated in such statements. Such risks, uncertainties and factors include, but are not limited to, the Company's bankruptcy filing, substantial indebtedness, growth strategy, capital requirements and recent acquisitions as well as the Company's ability to operate profitably under the newly implemented Medicare Prospective Payment System ("PPS"), competition, government regulation, general economic conditions and the other risks detailed in the Company's filings with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the year ended December 31, 1999. The Company's 1999 and 2000 results of operations have been substantially affected by the implementation of the prospective payment system ("PPS") for Medicare skilled nursing facilities, which was completed for IHS' facilities on June 1, 1999. The per diem reimbursement rates under PPS were significantly lower than anticipated by the industry, and generally have been less than the amount the Company's facilities received on a daily basis under cost-based reimbursement. Moreover, since IHS treats a greater 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 contract therapy services. On February 2, 2000, the Company and substantially all of its subsidiaries filed voluntary petitions (the "Bankruptcy Filings") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") under Chapter 11 of the United States Bankruptcy Code. The Company's need to seek relief under the Bankruptcy Code was due, in part, to the significant financial pressure created by the implementation of PPS. The changes in Medicare reimbursement resulting from the implementation of a prospective payment system have had a material adverse effect on the Company, rendering IHS unable to service its debt obligations to its senior lenders and subordinated noteholders while at the same time meeting its operating expenses. The Company hopes to use the Bankruptcy Filings to restructure its capital structure to better position the Company to address the changed economics resulting from the implementation of PPS. PPS has also materially adversely affected the Company's competitors, several of which have also filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code. The accompanying financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Bankruptcy Filings and circumstances relating to this event, including the Company's leveraged financial structure and losses from operations, such realization of assets and liquidation of liabilities is subject to significant uncertainty. While under the protection of Chapter 11, the Company may sell or otherwise dispose of assets, and liquidate or settle liabilities, for amounts other than those reflected in the financial statements. Further, a plan of reorganization could materially change the amounts reported in the financial statements, which do not give effect to all adjustments of the carrying value of assets or liabilities that might be necessary as a consequence of a plan of reorganization. The Company's ability to continue as a going concern is dependent upon, among other things, confirmation of a plan of reorganization, future profitable operations, the ability to comply with the terms of the Company's debtor-in-possession financing agreement and the ability to generate sufficient cash from operations and financing arrangements to meet obligations. IHS has four primary reportable segments: inpatient services, home respiratory/infusion/DME, diagnostic services and lithotripsy services. Inpatient services include: (a) inpatient facilities which provide basic medical services primarily on an inpatient basis at skilled nursing facilities, as well as hospice services, (b) contract services that provide specialty medical services (e.g., rehabilitation and respiratory services), primarily on an inpatient basis at skilled nursing facilities, (c) contracted services that provide specialty medical services under contract to other healthcare providers, and (d) management of skilled nursing facilities owned by third parties. Home respiratory/infusion/DME provides respiratory and infusion therapy, as well as the sale and/or rental of home medical equipment. The Company sold its infusion business in October 1999. Diagnostic services provide mobile x-ray and electrocardiogram services on an inpatient basis at skilled nursing facilities. Lithotripsy services is a non-invasive technique that uses shock waves to disintegrate kidney stones, primarily on an outpatient basis. Certain services with similar economic characteristics have been aggregated pursuant to SFAS No. 131. No other individual business segment exceeds the 10% quantitative thresholds of SFAS No. 131. On July 27, 2000, Joseph A. Bondi of the turnaround consulting firm of Alvarez & Marsal, Inc., was named as the Chief Restructuring Officer of the Company. In connection with this appointment, Robert N. Elkins, a founder of IHS, has agreed to step down as Chairman, CEO and President upon approval by the U.S. Bankruptcy Court for the District of Delaware of an agreement between Dr. Elkins and IHS. At such time, Mr. Bondi will be named as CEO. If Dr. Elkins' agreement is approved by the Bankruptcy Court, Dr. Elkins will resign as an officer and director of the Company and surrender to the Company his equity interests in the Company, Dr. Elkins will become a consultant to the Company, and the Company will forgive the repayment of loans made to Dr. Elkins, make certain payments to Dr. Elkins and release Dr. Elkins from certain potential claims. In addition, certain loans made by the Company to its senior executives will automatically be forgiven. As a result, the Company will incur a charge of approximately $70 million (of which approximately $10 million relates to loans to senior executives) in the quarter in which the agreement is approved by the Bankruptcy Court. (See Note 10) THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999 Total revenues for the three months ended June 30, 2000 decreased $3.1 million, or 0.50%, to $621.15 million from the comparable period in 1999. Such decrease was attributable to (i) a decrease of $14.36 million in inpatient service revenues from inpatient services in operations in both periods due to a decrease in the Company's rates and decreased demand for the Company's contract therapy services as a result of PPS, (ii) a decrease of $18.3 million in home respitory/infusion/DME revenues attributable to the infusion business sold in October 1999 and a decrease of $890,000 from home respiratory and DME revenues from service providers in operations in both periods, (iii) a decrease of $7.8 million from diagnostic services in operation in both periods and a (iv) a decrease of $500,000 from lithotripsy services in operation in both periods partially offset by revenues from (i) acquisitions of inpatient facilities subsequent to June 30, 1999 of $37.08 million and (ii) acquisitions of home respiratory and DME service providers, subsequent to June 30, 1999 of $1.67 million. Customers of the Company's contract rehabilitation division are admitting fewer Medicare patients and reduced utilization of rehabilitation services to a far greater degree than the Company had expected. Operating, general and administrative expense (including rent) increased $57.11 million, or 11.29%, in the three months ended June 30, 2000 compared to the three months ended June 30, 1999. Such increase was attributable to (i) expenses from inpatient facility acquisitions subsequent to June 30, 1999 of $33.71 million and an increase in expenses of $33.37 million from inpatient services in operations in both periods, (ii) expenses from home respiratory and DME service provider acquisitions subsequent to June 30, 1999 of $1.33 million and a $9.82 million increase in expenses from home respiratory and DME services in operation in both periods and (iii) an increase of $250,000 in expenses from lithotripsy service in both periods, partially offset by (i) a decrease in expenses of $16.87 million from the sale of the infusion business subsequent to June 30, 1999 and (ii) a $4.50 million decrease from diagnostic services in operation in both periods. Depreciation and amortization of $47.36 million for the three months ended June 30, 2000 is comparable to $46.62 million for the same period in 1999. Page 13 of 19 Net interest expense decreased $63.41 million, or 85.40%, during the three months ended June 30, 2000. The decrease is due to the Company reporting interest under SOP 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code," which allows interest expense to be reported only to the extent that it will be paid during the Chapter 11 proceeding or if it is probable that it will be an allowed (other than those paid pursuant to said authority) priority, secured or unsecured claim. During the second quarter of 2000, the Company recorded a non-recurring charge of $6.5 million against a promissory note due from APS Enterprise Holding Company, which purchased the Company's infusion division in October 1999, due to the impact that Medicare reimbursement has had on the cash flows from operations of APS. During the second quarter of 2000 the Company recorded reorganization items of $8.19 million consisting primarily of costs related to the bankruptcy filing and financial reorganization. (See Note 2) In 1999, the Company paid Federal taxes despite a loss due to the non-deductibility of certain amortization and other costs. In the second quarter of 2000, the Company recorded state income tax expense related to certain non-unitary subsidiaries of $2.5 million. Net loss and loss per share for the three months ended June 30, 2000 were $16.94 million and $0.35 per share, respectively, compared to net loss and loss per share for the same period in 1999 of $4.63 million and $0.09 per share. Weighted average shares decreased from 51,455,647 in 1999 to 48,829,477 in 2000. In the second quarter of 1999 and 2000 no exercise of options and warrants nor conversion of subordinated debt is assumed since their effect is antidilutive. Subsequent to June 30, 1999, the Company issued an aggregate of 517,970 shares of Common Stock, in connection with a conversion of $16.89 million principal amount of 5 3/4% convertible subordinated debentures. Subsequent to June 30, 1999, the Company cancelled the issuance of 4,074,380 shares of treasury stock. SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 Total revenues for the six months ended June 30, 2000 increased $13.94 million, or 1.12%, to $1,258.43 million from the comparable period in 1999. Such increase was attributable to revenues from (i) acquisitions of inpatient facilities subsequent to June 30, 1999 of $84.54 million, and (ii) acquisitions of home respiratory and DME service providers subsequent to June 30, 1999 of $3.36 million partially offset by (i) a decrease of $27.79 million in inpatient service revenues from inpatient services in operations in both periods due to a decrease in the Company's rates and decreased demand for the Company's contract therapy services as a result of PPS, (ii) a decrease of $18.32 million in home respitory/infusion/DME revenues attributable to the infusion business sold in October 1999 and a decrease of $13.82 million from home respiratory and DME services in operation in both periods, (iii) a decrease of $13.15 million from diagnostic services in operations in both periods and a (iv) a decrease of $881,000 from lithotripsy services in operations in both periods. Customers of the Company's contract rehabilitation division are admitting fewer Medicare patients and reduced utilization of rehabilitation services to a far greater degree than the Company had expected. Operating, general and administrative expense (including rent) increased $128.20 million, or 12.65%, in the six months ended June 30, 2000 compared to the six months ended June 30, 1999. Such increase was attributable to (i) inpatient facility acquisitions subsequent to June 30, 1999 of $71.50 million and an increase of $62.93 million from inpatient services in operation in both periods, (ii) home respiratory and DME service provider acquisitions subsequent to June 30, 1999 of $2.41 million and a $10.20 million increase from home respiratory and DME services in operation in both periods, and (iii) an increase of $2.24 million from lithotripsy services in operation in both periods, partially offset by (i) a decrease of $16.87 million from the sale of the infusion business subsequent to June 30, 1999 and (ii) a $4.21 million decrease from diagnostic services in operations in both periods. Depreciation and amortization of $93.71 million for the six months ended June 30, 2000 is comparable to $92.99 million for the same period in 1999. Net interest expense decreased $100.75 million, or 69.61%, during the six months ended June 30, 2000. The decrease is due to the Company reporting interest under SOP 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code," which allows interest expense to be reported only to the extent that it will be paid during the Chapter 11 proceeding or if it is probable that it will be an allowed (other than those paid pursuant to such authority) priority, secured or unsecured claim. Of the $43.98 million interest expense reported at June 30, 2000, $27.40 million represents interest incurred up to February 2, 2000, the date of the Chapter 11 filing. During the second quarter of 2000 the Company recorded a non-recurring charge of $6.5 million against a promissory note due from APS Enterprise Holding Company, which purchased the Company's Infusion Division in October 1999, due to the impact that Medicare reimbursement has had on the cash flows from operations of APS. During the first six months of 2000 the Company recorded reorganization items of $12.91 million consisting primarily of costs related to the bankruptcy filing and financial reorganization. (See Note 2) In 1999, the Company paid Federal taxes despite a loss due to the non-deductibility of certain amortization and other costs. In the first half of 2000, the Company recorded state income tax expense related to certain non-unitary subsidiaries of $5.00 million. Net loss and loss per share for the first six months of 2000 were $45.17 million and $0.93 per share, respectively, compared to net loss and loss per share for 1999 of $11.22 million and $0.22 per share. Weighted average shares decreased from 51,523,079 in 1999 to 48,740,749 in 2000. In the first six months of 1999 and 2000 no exercise of options and warrants nor conversion of subordinated debt is assumed since their effect is antidilutive. Subsequent to June 30, 1999, the Company issued an aggregate of 517,970 shares of Common Stock in connection with a conversion of $16.89 million principal amount of 5 3/4% convertible subordinated debentures. Subsequent to June 30, 1999, the Company cancelled the issuance of 4,074,380 shares of treasury stock. Page 14 of 19 LIQUIDITY AND CAPITAL RESOURCES The Company is currently operating its business as a debtor-in-possession subject to the jurisdiction of the Bankruptcy Court. On February 3, 2000, the Company entered into a revolving credit agreement with Citicorp USA, Inc. and other lenders to provide the Company with up to $300 million in debtor-in-possession financing (the "DIP Financing Agreement"). The DIP Financing Agreement provides for maximum borrowings by the Company equal to the sum of (i) up to 85% of the then outstanding domestic eligible accounts receivable (other than Medicaid accounts receivable), (ii) the lesser of $40 million or 85% of eligible Medicaid accounts receivable, (iii) the lesser of $25 million and 40% of the orderly liquidation value of eligible real estate, (iv) 100% of cash and 95% of cash equivalents on deposit or held in the Citibank collateral account and (v) the adjusted earnings before interest, taxes, amortization and depreciation ("EBITDA") of RoTech for the two most recent fiscal quarters up to a maximum of $100 million. The DIP Financing Agreement significantly limits IHS' ability to incur indebtedness or contingent obligations, to make additional acquisitions, to sell or dispose of assets, to create or incur liens on assets, to pay dividends, and to merge or consolidate with any other person. The obligations of the Company under the DIP Financing Agreement are jointly and severally guaranteed by each of the Company's filing subsidiaries (the "Filing Subsidiaries"). Pursuant to the agreement, the Company and each of its Filing Subsidiaries have granted to the lenders first priority liens and security interests (subject to valid, perfected, enforceable and nonavoidable liens of record existing immediately prior to the petition date and other exceptions as described in the DIP Financing Agreement) in all of the Company's assets including, but not limited to, all accounts, chattel paper, contracts and documents, equipment, inventory, intangibles, real property, bank accounts and investment property. On March 6, 2000, the Bankruptcy Court granted final approval of the DIP Financing Agreement. As of June 30, 2000, no amounts were outstanding under the DIP Financing Agreement, however, at that date $1.24 million was outstanding under the LC subfacility. The DIP Financing Agreement matures on March 6, 2002. Under the Bankruptcy Code, actions to collect pre-petition indebtedness are enjoined and certain other contractual obligations may not be enforced against the Company. In addition, the Company may reject executory contracts and lease obligations. Parties affected by these rejections may file claims with the Bankruptcy Court in accordance with the reorganization process. If the Company is able to successfully reorganize, substantially all unsecured liabilities as of the petition date would be subject to modification under a plan of reorganization to be voted upon by all impaired classes of creditors and approved by the Bankruptcy Court. The Company has received approval from the Bankruptcy Court to pay pre-petition and post-petition employee wages, salaries, benefits and other employee obligations. The Bankruptcy Court also approved orders granting authority, among other things, to pay pre-petition claims of certain critical vendors, utilities and patient obligations. All other unsecured pre-pretition liabilities are classified in the consolidated balance sheet as liabilities subject to compromise. A summary of the principal categories of claims classified as liabilities subject to compromise under the Chapter 11 Cases follows (in thousands):
Long-term debt: Revolving credit and term loan $ 2,093,789 Senior subordinated notes 1,090,737 Convertible denbentures 127,752 Amounts due under HCFA Agreement 136,454 Promissory notes and other 29,788 ----------- 3,478,520 ----------- Accounts payable 141,794 Accrued liabilities: Interest 124,307 Other 39,500 ----------- 163,807 ----------- $ 3,784,121 -----------
At June 30, 2000, the Company had working capital of $603.93 million as compared with a net working capital deficit of $3.06 billion at December 31, 1999 primarily because most current liabilities at December 31, 1999 (which included substantially all of the Company's debt obligations) are now classified as liabilities subject to compromise. There are no material capital commitments for capital expenditures as of the date of this filing. Patient accounts receivable and third-party payor settlements receivable decreased $25.01 million to $557.54 million at June 30, 2000, as compared to $582.55 million at December 31, 1999. Gross Page 15 of 19 patient accounts receivable were $656.24 million at June 30, 2000 as compared with $693.61 million at December 31, 1999. Net third-party payor settlements receivable from Federal and state governments (i.e., Medicare and Medicaid cost reports) were $73.51 million at June 30, 2000 as compared to $53.39 million at December 31, 1999. The Company has outstanding $496.7 million aggregate principal amount of 9 1/4% Senior Subordinated Notes due 2008 (the "9 1/4% Senior Notes"), $450 million aggregate principal amount of 9 1/2% Senior Subordinated Notes due 2007 (the "9 1/2% Senior Notes"), $144.0 million aggregate principal amount of 10 1/4% Senior Subordinated Notes due 2006 (the "10 1/4% Senior Subordinated Notes"), $37,000 aggregate principal amount of other senior subordinated notes and $127.75 million aggregate principal amount of convertible subordinated debentures. The indentures under which the 10 1/4% Senior Notes, the 9 1/2% Senior Notes and the 9 1/4% Senior Notes were issued contain certain covenants, including, but not limited to, covenants with respect to the following matters: (i) limitations on additional indebtedness unless certain ratios are met; (ii) limitations on other subordinated debt; (iii) limitations on liens; (iv) limitations on the issuance of preferred stock by IHS' subsidiaries; (v) limitations on transactions with affiliates; (vi) limitations on certain payments, including dividends; (vii) application of the proceeds of certain asset sales; (viii) restrictions on mergers, consolidations and the transfer of all or substantially all of the assets of IHS to another person; and (ix) limitations on investments and loans. The Company is in default under these indentures. On September 15, 1997, the Company entered into a $1.75 billion revolving credit and term loan facility with Citibank, N.A., as Administrative Agent, and certain other lenders (the "New Credit Facility") to replace its existing $700 million revolving credit facility. The New Credit Facility consisted of a $750 million term loan facility (the "Term Facility") and a $1 billion revolving credit facility, including a $100 million letter of credit subfacility and a $10 million swing line subfacility (the "Revolving Facility"). The Term Facility, all of which was borrowed on September 17, 1997, was to mature on September 30, 2004. As of June 30, 2000, $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). In connection with the acquisition of certain businesses from HEALTHSOUTH Corporation, IHS and the lenders under the New Credit Facility amended the New Credit Facility to provide for an additional $400 million term loan facility (the "Additional Term Facility") to finance a portion of the purchase price for the acquisition and to amend certain covenants to permit the consummation of the acquisition. The Additional Term Facility, which was borrowed at the closing of the acquisition, matures on December 31, 2005. As of June 30, 2000, $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 installment's); 2004 -- $176 million (payable in equal quarterly installments); and 2005 -- $200 million (payable in equal quarterly installments). The Additional Term Facility bears interest at a rate equal to, at the option of IHS, either (i) in the case of Eurodollar loans, the sum of (x) two and one quarter percent or two and one half percent (depending on the Debt/EBITDAR Ratio) and (y) the interest rate in the London interbank market for loans in an amount substantially equal to the amount of borrowing and for the period of borrowing selected by IHS or (ii) the sum of (a) the higher of (1) Citibank, N.A.'s base rate or (2) one percent plus the latest overnight federal funds rate plus (b) a margin of one percent or one and one-quarter Page 16 of 19 percent (depending on the Debt/EBITDAR Ratio). The Revolving Facility was scheduled to reduce to $800 million on January 1, 2001, $600 million on January 1, 2002, $500 million on September 30, 2002 and $400 million on January 1, 2003, with a final maturity on September 15, 2003; however, the $100 million letter of credit subfacility and $10 million swing line subfacility were scheduled to remain at $100 million and $10 million, respectively, until final maturity. The Revolving Facility bears interest at a rate equal to, at the option of IHS, either (i) in the case of Eurodollar loans, the sum of (x) between two percent and two and three-quarters percent (depending on the Debt/ EBITDAR Ratio) and (y) the interest rate in the London interbank market for loans in an amount substantially equal to the amount of borrowing and for the period of borrowing selected by IHS or (ii) the sum of (a) the higher of (1) Citibank, N.A.'s base rate or (2) one percent plus the latest overnight federal funds rate plus (b) a margin of between three quarters of one percent and one and one-half percent (depending on the Debt/EBITDAR Ratio). The New Credit Facility limits IHS' ability to incur indebtedness or contingent obligations, to make additional acquisitions, to sell or dispose of assets, to create or incur liens on assets, to pay dividends, and to merge or consolidate with any other person and prohibits the repurchase of Common Stock. In addition, the New Credit Facility requires that IHS meet certain financial ratios, and provides the banks with the right to require the payment of all amounts outstanding under the facility, and to terminate all commitments under the facility, if there is a change in control of IHS or if any person other than Dr. Robert N. Elkins, IHS' Chairman and Chief Executive Officer, or a group managed by Dr. Elkins, owns more than 40% of IHS' stock. The New Credit Facility is guaranteed by all of IHS' subsidiaries (other than inactive subsidiaries) and secured by a pledge of all of the stock of substantially all of IHS' subsidiaries. The Company is in default under the New Credit Facility. As a result of the Company's bankruptcy filing, the Company is no longer able to make any borowings under the New Credit Facility. Net cash provided by operating activities of continuing operations before reorganization items for the six months ended June 30, 2000, was $100.23 million as compared to $40.94 million for the comparable period in 1999. Cash provided by operating activities in the first six months of 2000 increased compared to the comparable period in 1999 primarily because of an increase in accounts payable and accrued expenses and a decrease in accounts receivable and third party payor settlements, net partially offset by an increase primarily from management fees, supplies, inventory, prepaid expenses and other current assets. As of June 30, 2000, Lyric has had a dramatic decrease in its ability to borrow from its revolving line of credit and has accelerated payment terms with many of its vendors. As a result, IHS has not received payment for management fees or other costs paid by IHS on Lyric's behalf (i.e. health and workers' compensation insurance) for the year 2000. IHS is working with Lyric management and the lender to negotiate extending the line of credit. The Company will continue to evaluate its investment in Lyric on an ongoing basis and Lyric's ability to fund cash flows from operations. In addition, Medicare reimbursement has had a negative impact on the cash flows of the Preferred Care management contract and its ability to pay management fees of approximately $4.0 million at June 30, 2000. The Company will continue to evaluate the contract. Net cash used by financing activities was $10.32 million for the six month period in 2000 as compared to $35.18 million provided by financing activities for the comparable period in 1999. In 2000, the Company incurred costs of obtaining the DIP financing discussed above and made repayments on certain debt of $4.95 million. In 1999, the Company received net proceeds from long-term borrowings of $318.27 million and made repayments on certain debt of $250.78 million. During the six months ended June 30, 1999, the Company repurchased 3.6 million shares of its stock for approximately $24.04 million. Net cash used by investing activities was $74.15 million for the six month period ended June 30, 2000 as compared to $48.01 million used by investing activities for the six month period ended June 30, 1999. Cash used for the acquisition of facilities and ancillary company acquisitions was $43.88 million for the first six months of 1999; the Company made no acquisitions in the first six months of 2000. Cash used for the purchase of property, plant and equipment was $59.63 million in 2000 and $112.54 million in 1999. In the first six months of 1999, the Company received $114.3 million related to the transfer of 32 long-term care facilities to Monarch LP (See Note 4). Also during the first six months of 1999, the Company sold its discontinued home nursing segment for approximately $26.0 million. The net proceeds from such sales were used to repay debt outstanding under the revolving credit facility and other corporate purposes, including acquisitions. As a result of the implementation of a prospective payment system for home nursing beginning with cost report periods beginning on or after October 1, 1999, contingent payments in respect of the acquisition of First American Health Care of Georgia, Inc. in October 1996, aggregating $155 million, became payable over five years beginning in 2000. The present value of such payments at June 30, 2000 is $136.45 million and is recorded on the balance sheet under the caption liabilities subject to compromise. At December 31, 1999 the present value of such payments was $131.65 million and was recorded on the balance sheet under the caption other long term liabilities. IHS' contingent liabilities (other than liabilities in respect of litigation) aggregated approximately $104.5 million as of June 30, 2000. IHS is required, upon certain defaults under the lease, to purchase its Orange Hills facility at a purchase price equal to the greater of $7.1 million or the facility's fair market value. IHS has established several irrevocable standby letters of credit with the Bank of Nova Scotia totaling $24.2 million at June 30, 2000 to secure certain of the Company's workers' compensation obligations, health benefits and other obligations. In addition, IHS has several surety bonds in the amount of $69.6 million to secure certain of the Company's health benefits, patient trust funds and other obligations. In addition, with respect to certain acquired businesses IHS is obligated to make certain contingent payments if earnings of the acquired business increase or earnings targets are met. The Company is obligated to purchase the remaining interests in its lithotripsy partnerships at a defined price in the event legislation is passed or regulations adopted that would prevent the physician partners from owning an interest in the partnership and using the partnership's lithotripsy equipment for the treatment of his or her patients. In addition, IHS has obligations under operating leases aggregating approximately $931.74 million at June 30, 2000. Page 17 of 19 Item 6. - Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits 10.1 Agreement between Robert N. Elkins and Integrated Health Services, Inc. (incorporated by reference to the Company's Current Report on Form 8-k dated July 27, 2000) 10.2 Indemnification Agreement between Alvarez and Marsal, Joseph A. Bondi and Integrated Health Services, Inc. (incorporated by reference to the Company's Current Report on Form 8-k dated July 27, 2000) 10.3 Engagement Agreement between Alvarez and Marsal, Inc., Joseph A. Bondi and Integrated Health Services, Inc. (incorporated by reference to the Company's Current Report on Form 8-k dated July 27, 2000) 27 Financial Data Schedule (b) Reports on Form 8-K Page 18 of 19 - SIGNATURES - Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTEGRATED HEALTH SERVICES, INC. -------------------------------- By: /s/ Robert N. Elkins ------------------------------------ Robert N. Elkins Chief Executive Officer By: /s/ C. Taylor Pickett ------------------------------------ C. Taylor Pickett Executive Vice President-Chief Financial and Accounting Officer Date: August 14, 2000 Page 19 of 19 EX-27 2 0002.txt FDS
5 1,000 US DOLLARS 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 1 27,484 60,743 729,750 172,206 0 754,892 1,171,118 92,991 3,361,223 150,960 0 0 0 53 (964,803) 3,361,223 1,258,430 1,258,430 0 1,285,951 12,909 0 43,983 (40,165) 5,000 (45,165) 0 0 0 (45,165) (0.93) (0.93)
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