Fitch Affs Allied Services Rehab Hosp, PA Bonds at 'BB+'.

Business Editors

NEW YORK--(BUSINESS WIRE)--March 12, 2004

Fitch Ratings affirms the 'BB+' rating on Allied Services Rehabilitation Hospitals' (ASRH) approximately $25 million outstanding Scranton-Lackawanna Health and Welfare Authority revenue bonds (Allied Services Rehabilitation Hospitals project) series 1994A. The obligated group is Allied Services Rehabilitation Hospitals (ASRH), which consists of Allied Services Institute of Rehabilitation Medicine and John Heinz Institute of Rehabilitation Medicine. The Rating Outlook is Stable.

The rating affirmation reflects ASRH's improved operating performance, favorable market position, low-cost structure relative to other Pennsylvania rehabilitation services, and effective length of stay management. ASRH has been able to return to profitability recently since posting losses in fiscal 2001 due to rising utilization and improved reimbursement under Medicare prospective payment system (PPS). For fiscal years ending 2002 and 2003, operating margins were 0.8% and 4.3%, respectively, and 8.5% through the seven months ended Jan. 31, 2004. ASRH has received improved reimbursement under the Medicare PPS since July 1, 2002 which has provided increased reimbursements per discharge due to the hospital's higher patient acuity levels and effective cost management. Admission levels have been stable over the past 4 years, up through 7 months of fiscal 2004.

Fitch's primary credit concerns are ASRH's weak historical financial profile, exposure to changes in Medicare reimbursement, historic and financial losses at the system-wide level until recently, and the nationwide nursing shortage, especially at its non-obligated nursing home. Despite recent operating improvements, ASRH's liquidity levels remain weak with 75 days cash on hand and cash to debt of 50% at fiscal year-end 2003. Allied's high reliance on Medicare payors exposes the system to any adverse changes in the reimbursement methodology.

Financial performance at the system-wide level has historically been weak averaging a negative 4.5% operating margin from fiscal 2001-2003, which was mainly due to losses at its affiliated nursing home. The nursing home has recently been able to reduce losses; however, faces challenges with its nursing staff. Through the 6 months ended December 2003, operating margins for the system were 3.5%, due to improvement at other non-obligated group members. Additionally, the obligated group's defined benefit contribution pension plan's costs have exceeded expectations, and was underfunded by $8.3 million (of $26 million in obligations) at 6/30/03. Management expects to contribute a total $1.5 million in fiscal 2004.

Fitch's outlook is stable due to the lack of competition ASRH faces in its service area, and to its recent financial stability. ASRH continues to be the only freestanding rehabilitation hospital in both Lackawanna County and Luzerne County, and has a good referral network with nearby hospitals. However, Fitch feels management will continue to be challenged in maintaining the improved financial profile of the whole system. ASRH has no major capital plans for the foreseeable future.

Allied Services Institute of Rehabilitation Medicine is located in Scranton (Lackawanna County), PA and John Heinz Institute of Rehabilitation Medicine is located in Wilkes-Barre (Luzerne County), PA. Located approximately 120 miles from Philadelphia, the hospitals together operate 211 rehabilitation beds. Disclosure to Fitch has been adequate in terms of content and timeliness. There is not a separate audit committee, and ASRH does not have a policy to rotate auditors.