-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, fNtnG/cSgqSpGvkmjBDf4sbsDZdt1UAqi/aMemi7TNhGaglss56NUlOi1TbTljDb cTXLmszcL9RndYVscd2Qig== 0000950109-95-002159.txt : 19950605 0000950109-95-002159.hdr.sgml : 19950605 ACCESSION NUMBER: 0000950109-95-002159 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950602 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONTINENTAL MEDICAL SYSTEMS INC /DE/ CENTRAL INDEX KEY: 0000802284 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 510287965 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-15088 FILM NUMBER: 95544704 BUSINESS ADDRESS: STREET 1: 600 WILSON LN STREET 2: P O BOX 715 CITY: MECHANICSBURG STATE: PA ZIP: 17055 BUSINESS PHONE: 7177908300 10-Q/A 1 FORM 10-Q/A ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 10-Q/A Amendment No. 1 ------------ (Mark One) X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities ----- Exchange Act of 1934 For the quarterly period ended December 31, 1994 or Transition Report Pursuant to Section 13 or 15(d) of the Securities ----- Exchange Act of 1934 Commission file number 0-15088 CONTINENTAL MEDICAL SYSTEMS, INC. (Exact name of registrant as specified in its charter) Delaware 51-0287965 (State of incorporation) (I.R.S. Employer Identification No.) . . . . . 600 Wilson Lane P.O. Box 715 Mechanicsburg, PA 17055 Telephone Number (717) 790-8300 ---------------------------------- 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 ----- ----- As of January 31, 1995, there were 38,539,746 shares of the Registrant's $.01 par value Common Stock outstanding. ================================================================================ Continental Medical Systems, Inc. and Subsidiaries Index Form 10-Q/A Amendment No. 1 - For the Quarter ended December 31, 1994 - -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION Page No. -------- Item 1. Consolidated Financial Statements: Consolidated Balance Sheets December 31, 1994 and June 30, 1994............................. 1 Consolidated Statements of Operations Three months ended December 31, 1994 and 1993................... 2 Consolidated Statement of Stockholders' Equity Three months ended December 31, 1994............................ 3 Consolidated Statements of Cash Flows Three months ended December 31, 1994 and 1993................. 4-5 Notes to Consolidated Financial Statements...................... 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 8-16 Signature................................................................. 17 Continental Medical Systems, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 1994 and June 30, 1994
December 31, June 30, Assets 1994 1994 - -------------------------------------------------------------------------------------------------------------------- (In thousands, except share data) Current assets: Cash and cash equivalents $ 21,799 $ 54,862 Accounts receivable, net of allowance for doubtful accounts ($19,089 December 31, 1994; $16,685, June 30, 1994) 227,105 232,198 Other receivables 13,266 10,778 Prepaid expenses 15,034 13,720 Prepaid income taxes 4,827 4,319 Deferred income taxes 10,360 5,610 --------- --------- 292,391 321,487 --------- --------- Property and equipment, net 255,622 252,023 --------- --------- Other: Goodwill, net 89,196 72,613 Investments, principally affiliates 17,896 21,804 Notes receivable 28,526 31,454 Deferred income taxes 10,088 14,357 Deferred costs, new facilities, net 17,259 20,885 Other assets 37,829 32,119 --------- --------- 200,794 193,232 --------- --------- $ 748,807 $ 766,742 ========= ========= Liabilities and Stockholders' Equity - -------------------------------------------------------------------------------------------------------------------- Current liabilities: Current portion of long-term debt $ 3,873 $ 4,013 Accounts payable 18,408 28,615 Accrued expenses 95,008 97,780 Due to third-party payors 28,290 24,676 --------- --------- 145,579 155,084 Long-term debt, net of current portion 343,078 353,752 Other liabilities 9,665 7,391 --------- --------- 498,322 516,227 --------- --------- Minority interests 13,365 14,963 --------- --------- Contingencies (Note 3) Stockholders' equity: Preferred stock, $.01 par; authorized 10,000,000 shares; none issued Common stock, $.01 par; authorized 80,000,000 shares; 38,538,552 shares issued and outstanding, December 31, 1994 (38,359,245, June 30, 1994) 385 384 Capital in excess of par 194,048 192,573 Retained earnings 42,687 42,595 --------- --------- 237,120 235,552 --------- --------- $ 748,807 $ 766,742 ========= =========
See notes to consolidated financial statements. Continental Medical Systems, Inc. and Subsidiaries Consolidated Statements of Operations
Three Months Ended Six Months Ended December 31, December 31, 1994 1993 1994 1993 (In thousands, except per share data) - --------------------------------------------------------------------------------------------------------------- Net operating revenues $ 245,639 $ 249,041 $ 489,032 $ 498,803 ---------- --------- ---------- --------- Costs and expenses: Cost of services 220,525 223,217 435,118 441,319 Interest expense 8,928 9,751 17,694 19,003 Depreciation and amortization 9,392 9,734 18,434 18,776 Special charge (Note 4) 13,398 13,398 ---------- --------- ---------- --------- 252,243 242,702 484,644 479,098 ---------- --------- ---------- --------- Income (loss) from operations (6,604) 6,339 4,388 19,705 Other income, principally interest 703 890 1,446 1,762 ---------- --------- ---------- --------- Income (loss) before minority interests and income taxes (5,901) 7,229 5,834 21,467 Minority interests (1,532) (863) (3,071) (2,374) ---------- --------- ---------- --------- Income (loss) before income taxes (7,433) 6,366 2,763 19,093 Income taxes (1,764) 2,578 2,671 7,732 ---------- --------- ---------- --------- Net income (loss) $ (5,669) $ 3,788 $ 92 $ 11,361 ========== ========= ========== ========= Net income (loss) per common share and common equivalent share (Note 5): Primary $ (.15) $ .10 $ .00 $ .30 ========== ========= ========== ========= Fully diluted $ (.15) $ .10 $ .00 $ .29 ========== ========= ========== ========= Weighted average number of shares outstanding: Primary 38,535,381 38,364,233 39,036,334 38,146,140 Fully diluted 38,535,381 38,598,379 39,546,285 38,410,534
See notes to consolidated financial statements. Continental Medical Systems, Inc. and Subsidiaries Consolidated Statement of Stockholders' Equity Six Months Ended December 31, 1994
- ------------------------------------------------------------------------------------------------------------- Common Stock ------------------------- Capital Shares in excess Retained issued Amount of par earnings Total ----------------------------------------------------------------------- (In thousands, except shares issued) Balance, July 1, 1994 38,359,245 $ 384 $ 192,573 $ 42,595 $ 235,552 Stock issued pursuant to: Employee benefit plans 47,798 323 323 Acquisition agreements 131,509 1 1,152 1,153 Net income for the six months 92 92 ---------- ------ ---------- -------- --------- Balance, December 31, 1994 38,538,552 $ 385 $ 194,048 $ 42,687 $ 237,120 ========== ====== ========== ======== =========
See notes to consolidated financial statements. Continental Medical Systems, Inc. and Subsidiaries Consolidated Statements of Cash Flows
Six Months Ended December 31, 1994 1993 - --------------------------------------------------------------------------------------------------------------- (In thousands) Cash flows from operating activities: Net income $ 92 $ 11,361 -------- -------- Adjustments: Depreciation and amortization 18,434 18,776 Other 2,133 (1,049) Special charge 13,398 Increase (decrease) in cash from changes in assets and liabilities, excluding effects of acquisitions and dispositions: Accounts receivable 6,040 (22,230) Other assets (6,317) (4,965) Accounts payable and accrued expenses (16,742) (540) Other liabilities (8,789) (3,524) Income taxes (968) 4,451 -------- -------- Total adjustments 7,189 (9,081) -------- -------- Net cash provided by operating activities 7,281 2,280 -------- -------- Cash flows from investing activities: Payments pursuant to acquisition agreements, net of cash acquired (16,607) (14,010) Cash proceeds from sale of property and equipment 13,464 Deferred costs, new facilities (2,315) (2,654) Acquisition of property and equipment (8,507) (17,660) Notes receivable 2,928 514 Other investing activities (1,698) 726 -------- -------- Net cash used in investing activities (26,199) (19,620) -------- -------- Cash flows from financing activities: Long-term debt borrowing 65,022 88,274 Long-term debt repayment (74,092) (59,193) Deferred financing costs (2,320) (866) Issuance of common stock 323 723 Capital contributions by minority interests 334 1,408 Distributions to minority interests (3,412) (1,892) -------- -------- Net cash provided by (used in) financing activities (14,145) 28,454 -------- -------- Increase (decrease) in cash and cash equivalents (33,063) 11,114 Cash and cash equivalents, beginning of period 54,862 64,444 -------- -------- Cash and cash equivalents, end of period $ 21,799 $ 75,558 ======== ========
Continental Medical Systems, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Cont'd)
Six Months Ended December 31, 1994 1993 - --------------------------------------------------------------------------------------------------------------- (In thousands) Supplemental disclosures of cash flow information: Cash paid during the period for: Interest, net of amounts capitalized ($1,227 in fiscal 1994) $ 19,778 $ 19,894 ======== ======== Income taxes (net of refunds) $ 4,066 $ 3,838 ======== ======== Supplemental schedule of noncash investing and financing activities: The company issued stock pursuant to various acquisition agreements $ 1,153 $ 3,549 ======== ========
See notes to consolidated financial statements. Continental Medical Systems, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 1. Basis of presentation: In the opinion of the Company, the accompanying interim consolidated financial statements present fairly the Company's financial position at December 31, 1994, the results of its operations, and its cash flows for the three and six month periods then ended. All adjustments are of a normal and recurring nature. These statements are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission ("SEC"). Accordingly, they are unaudited, and certain information and footnote disclosures normally included in the Company's annual consolidated financial statements have been condensed or omitted, as permitted under the applicable rules and regulations. Readers of these statements should refer to the Company's audited consolidated financial statements and notes thereto which were presented in the Company's Form 10-K for the year ended June 30, 1994. The results of operations presented in the accompanying financial statements are not necessarily representative of operations for an entire year due to, among other things, new hospital development and divestitures, acquisitions, interest rate changes and fluctuations in effective tax rates. Comparisons to the prior year might also be affected for similar reasons. Certain items in the fiscal 1994 financial statements have been reclassified to conform to the classifications in the fiscal 1995 financial statements. 2. Long-term debt: During the first six months of fiscal 1995, the Company purchased approximately $48,585,000 of its Senior Subordinated Notes in a series of open market purchases. 3. Contingencies Outstanding letters of credit aggregated approximately $29,202,000 at December 31, 1994. The Company is subject to legal proceedings and claims which have arisen in the ordinary course of its business and have not been finally adjudicated, which include malpractice claims covered under the Company's insurance policy. In the opinion of management, the outcome of these actions will not have a material effect on the financial position or results of operations of the Company. In the normal course of business, the Company has amounts due to or from the Medicare program, the Medicaid program and other third party payors. The Company has recorded amounts due to or from these third party payors which it believes are reasonable estimates. However, additional changes to these estimates in the future may be appropriate based on facts and circumstances which come to light. Ultimately, the amounts due to or from third party payors may be adjusted by these third party payors upon final settlement. The Company is unable to estimate the likelihood or potential amounts of such adjustments. 4. Special charge: During September through November of 1994, the Company received various unfavorable adjustments upon the final settlement of its 1991 and 1992 CMS Therapies Home Office Cost Reports and other CMS Therapies 1992 cost reports. As a result of the unfavorable settlements, which was the Company's first indication that adjustments to its estimates would be required, the Company performed a detail analysis of its due to/from Continental Medical Systems, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 4. Special charge (continued): third party payors amounts for all open cost reports. Upon completion of its analysis during the second quarter of fiscal 1995, the Company recorded a special pre-tax charge of $13,398,000 to reflect the revision in the Company's estimate of amounts due to/from third party payors. 5. Net income (loss) per share: Net income (loss) per common share and common equivalent share is based upon the weighted average number of common shares outstanding during the period plus the dilutive effect of common shares contingently issuable, primarily from stock options and acquisition agreements requiring the issuance of shares contingent on future earnings. Fully diluted earnings per share are determined on the assumption that the 7 3/4% convertible subordinated debentures were converted July 1, 1993. Net income was adjusted for the interest on the debentures, net of the related income tax benefits. Continental Medical Systems, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q/A Amendment No. 1 - For the Quarter ended December 31, 1994 - -------------------------------------------------------------------------------- OVERVIEW - -------- The Company is a diversified provider of comprehensive medical rehabilitation and physician services. The Company has a significant presence in each of the rehabilitation industry's three principal sectors - inpatient rehabilitation care, contract services and outpatient rehabilitation care. Additionally, the Company is the largest provider of physician locum tenens services in the United States. The following discussion of the Company's financial condition and results of operations for the three and six months ended December 31, 1994 and 1993 should be read in connection with the Management's Discussion and Analysis of Financial Condition and Results of Operations presented in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994. The following table sets forth, for the periods indicated, net operating revenues for each of the Company's operating groups (in thousands):
Three Months Ended Six Months Ended December 31, Increase December 31, Increase 1994 1993 (Decrease) 1994 1993 (Decrease) - --------------------------------------------------------------------------------------------------------- Net operating revenues: - ----------------------- Rehabilitation group $134,972 $137,928 (2.1%) $267,328 $275,015 (2.8%) Contract therapy services 86,263 85,172 1.3% 172,180 168,689 2.1% Physician services 22,584 25,619 (11.8%) 47,275 54,698 (13.6%) Other 1,820 322 N/M 2,249 401 N/M -------- -------- ------- -------- -------- ------ $245,639 $249,041 (1.4%) $489,032 $498,803 (2.0%) ======== ======== ======= ======== ======== ======
"Other" referred to in the above table consist principally of the Company's new initiatives including SelectRehab, Innovative Health Alliances, Medical Management Associates and Keystone Medical Systems. The percentage changes in "Other" are not meaningful (N/M). Certain reclassifications were made to the comparative quarter of the prior year net operating revenues to conform to the second quarter of fiscal 1995 presentations. Continental Medical Systems, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q/A Amendment No. 1 - For the Quarter ended December 31, 1994 - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Net Operating Revenues and Income (Loss) from Operations Net operating revenues decreased by 1.4% to $245,639,000 for the three months ended December 31, 1994 from $249,041,000 in the comparative quarter of the prior year. During the six months ended December 31, 1994, net operating revenues decreased 2.0% to 489,032,000 from $498,803,000 for the same period in the prior year. The decrease from the prior year's second quarter and six months resulted from operations sold or discontinued as part of the Company's previously announced restructuring program which included the divestiture of two rehabilitation hospitals during the fourth quarter of fiscal 1994. The decrease also resulted from lower physician filled days in the Company's locum tenens business. Income (loss) from Operations declined to ($6,604,000) for the three months ended December 31, 1994 from $6,339,000 in the comparative quarter of the prior year. During the six months ended December 31, 1994, income from operations decreased to $4,388,000 from $19,705,000 for the same period in the prior year. The decrease in the Company's income (loss) from operations for the second quarter and six months of fiscal 1995 resulted from the Company's fiscal 1995 second quarter special charge, offset, in part, by lower interest and depreciation and amortization expenses. Approximately 43% of the Company's consolidated net operating revenues during the second quarter of fiscal 1995 and fiscal 1994, respectively, was provided from patients covered by the federal government's Medicare program for the aged and chronically disabled and state Medicaid programs for the indigent. The balance of the Company's net operating revenues was provided by private pay sources, non-governmental payors, such as commercial insurance companies, and non-patient related revenues. The federal government, state governments, business and labor continue to discuss, propose and implement various measures to control rising healthcare costs, improve quality and provide funding for those who currently lack health insurance. The Company is unable to predict what form these measures will take and, as a result, cannot estimate how they might affect future operating results. Following is a discussion of the Company's operating groups. Certain operating results related to new initiatives and management services companies have been excluded from the discussion due to their immateriality in relation to the consolidated results. Rehabilitation Group: The following table sets forth, for the periods indicated, net operating revenues for the rehabilitation group (in thousands): Continental Medical Systems, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q/A Amendment No. 1 - For the Quarter ended December 31, 1994 - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Net Operating Revenues and Income (Loss) from Operations (continued)
Three Months Ended % Six Months Ended % December 31, Increase December 31, Increase 1994 1993 (Decrease) 1994 1993 (Decrease) - ---------------------------------------------------------------------------------------------------------------- Net operating revenues: Rehabilitation group Hospitals (fiscal year of opening) Pre-1994 (32 hospitals) $117,559 $116,829 0.6% $235,236 $234,942 0.1% Fiscal 1994 (4 hospitals) 11,456 5,466 109.6% 22,040 8,710 153.0% Fiscal 1995 (1 hospital) 2,337 100.0% 2,469 100.0% Divested facilities (2 hospitals) 6,876 N/M 13,662 N/M -------- -------- ------ -------- -------- ------ 131,352 129,171 1.7% 259,745 257,314 0.9% Other rehab related 3,620 8,757 (58.7%) 7,583 17,701 (57.2%) -------- -------- ------- -------- -------- ------ Total rehabilitation group $134,972 $137,928 (2.1%) $267,328 $275,015 (2.8%) ======== ======== ======= ======== ======== ======
"Other rehab related" revenues referred to in the above table include revenues from long-term care operations, Medicare reimbursement of certain home office costs and certain outpatient operations. The decreases in net operating revenues generated by the rehabilitation hospital group resulted primarily from operations closed or divested as part of the Company's previously announced restructuring program, including the two hospitals divested during the fourth quarter of fiscal 1994. The decline in other rehab related net operating revenues is principally due to the Company's decision to discontinue the provision of skilled nursing services at two of its rehabilitation hospitals. Net operating revenues generated by the Company's 32 rehabilitation hospitals in operation during all of fiscal 1994 and the first six months of fiscal 1995 (the "Pre-1994 Hospitals") increased slightly from the prior comparable quarter. As of December 31, 1994, the Company had transitional rehabilitation units, with a total of 405 beds, in 23 of its rehabilitation hospitals. Transitional rehabilitation units provide a lower level of care and consequently generate lower revenues per occupied bed than an acute rehabilitation bed. However, there are less costs related to providing transitional rehabilitation services. The Company believes that its transitional rehabilitation units will increase its overall inpatient utilization at its hospitals and expand its continuum of services at various levels of care and cost, an important factor in dealing with managed care payors. Continental Medical Systems, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q/A Amendment No. 1 - For the Quarter ended December 31, 1994 - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Net Operating Revenues and Income (Loss) from Operations (continued) Rehabilitation Group (continued): The percentage of net operating revenues generated by Medicare and Medicaid patients within the rehabilitation group was 66% and 63% for the three months ended December 31, 1994 and 1993, respectively, and 65% and 62% for the six months ended December 31, 1994 and 1993, respectively. With the pressures to control rising healthcare costs, more services are being provided on an outpatient basis. Total outpatient treatments in the second quarter of fiscal 1995 increased to 776,876 over the 756,734 outpatient treatments in the comparative quarter of the prior year. For the six months ended December 31, 1994 outpatient treatments were 1,562,023, a 4.6% increase over the same period of the prior year. Outpatient services represented 16.8% and 16.1% of the rehabilitation group's net operating revenues in the second quarters of fiscal 1995 and 1994, respectively. While the volume of outpatient treatments continues to increase, pricing of outpatient services has declined over the prior year due to several factors including changes in the Company's marketing strategy and changes in regulatory requirements affecting pricing in selected states' workers compensation programs. Below are selected statistics for the Pre-1994 Hospitals:
Three Months Ended Six Months Ended December 31, December 31, 1994 1993 % Change 1994 1993 % Change - ----------------------------------------------------------------------------------------------------------------- Occupancy percentage 69.4% 64.3% 7.9% 69.2% 64.3% 7.6% Admissions 5,839 5,561 5.0% 11,702 10,898 7.4% Average length of stay (days) 22.6 22.4 0.9% 22.5 22.6 (0.4%) Patient days 133,586 123,605 8.1% 266,354 245,149 8.6% Outpatient treatments 702,968 636,929 10.4% 1,417,742 1,276,950 11.0% Outpatient % of net operating revenue 17.5% 16.6% 5.4% 17.6% 17.1% 2.9%
Occupancy percentage for the Pre-1994 Hospitals for the second quarter of fiscal 1995 was 69.4% as compared to 64.3% during the comparative quarter of the prior year. Those same facilities' occupancy percentage for the six months ended December 31, 1994 was 69.2% compared to 64.3% during the same period in the prior year. This increase in occupancy percentage was primarily due to an increase in admissions during the first six months of fiscal Continental Medical Systems, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q/A Amendment No. 1 - For the Quarter ended December 31, 1994 - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Net Operating Revenues and Income (Loss) from Operations (continued) Rehabilitation Group (continued): 1995. Average length of stay remained relatively consistent for the comparative three and six months ended December 31, 1994 and 1993. Certain reimbursement methodologies, including those under the Tax Equity and Fiscal Responsibility Act ("TEFRA") regulations, applicable to Medicare reimbursement, make the number of admissions, in addition to occupancy percentages and average length of stay, important in monitoring the results of the hospitals as revenue growth becomes increasingly dependent upon patient volume. As of December 31, 1994, the Company had 18 hospitals subject to TEFRA regulations. The timing of new hospital openings during fiscal 1994 makes a comparison of occupancy percentages between the second quarter of fiscal 1995 and 1994 for these hospitals not meaningful. The rehabilitation hospitals opened in fiscal 1994 (the "1994 Hospitals") increased their patient days in the second quarter of fiscal 1995 to 12,406 from 4,893 in the comparative quarter of the prior year. Year to date, their patient days increased to 23,268 from 7,997 in the prior year. During the second quarter of fiscal 1995, the occupancy percentage for the 1994 Hospitals was 58.6% and 55.0% for the six months ended December 31, 1994. Contract Therapy Services: The increases in net operating revenues generated by contract therapy services resulted from same company growth through the addition of new contracts with both existing and new providers. The net number of facilities served remained relatively unchanged over the same period in the prior year. The Company continues to add contracts with new facilities and terminate business with certain facilities that do not meet the Company's business objectives. The contract therapy companies serve over 2,300 facilities. Approximately 84% and 85% of the net operating revenues for both the three and six months ended December 31, 1994, respectively, were generated through the provision of therapist services to skilled nursing facilities, while the remainder was generated by therapy services to hospitals, schools, clinics and other institutions. The percentage of net operating revenues generated from direct services to Medicare/Medicaid patients remained relatively constant at 20% for the three and six months ended December 31, 1994 and 1993. Continental Medical Systems, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q/A Amendment No. 1 - For the Quarter ended December 31, 1994 - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Physician Services: The decline in the Company's physician services net operating revenues was a result of reduced demand, additional competition in local markets and pricing pressures in the Company's physician/locum tenens services. Net operating revenues for the three and six months ended December 31, 1994 declined 11.8% and 13.6% as compared to the same periods of the prior year. During the three and six months ended December 31, 1994 approximately 59% and 57%, respectively, of net operating revenues was generated through services to hospitals, while 28% and 32%, respectively, involved contracts with physician groups. The remainder was with managed care programs, clinics and other sources. The following tables set forth, for the periods indicated, filled days by discipline:
Three Months Ended December 31, ________________________________________________________________________________ 1994 1993 % # of # of Increase days % days % (Decrease) ------ ----- ------ ----- ---------- Physicians: Primary care 9,431 28.1 11,963 33.0 (21.2%) Specialty care 11,752 35.0 12,586 34.8 ( 6.6%) Allied professionals 12,360 36.9 11,638 32.2 6.2% ------ ----- ------ ----- ------- 33,543 100.0 36,187 100.0 ( 7.3%) ====== ===== ====== ===== =======
Six Months Ended December 31, ________________________________________________________________________________ 1994 1993 % # of # of Increase days % days % (Decrease) ------ ----- ------ ----- ---------- Physicians: Primary care 19,426 28.1 23,225 30.6 (16.4%) Specialty care 25,318 36.6 27,805 36.6 ( 8.9%) Allied professionals 24,497 35.3 24,889 32.8 ( 1.6%) ------ ----- ------ ----- ------- 69,241 100.0 75,919 100.0 ( 8.8%) ====== ===== ====== ===== =======
The decline in total filled days is due to reduced demand for specialty physicians locum tenens services and additional competition in local markets along with the effect of the consolidation of the Company's primary care Continental Medical Systems, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q/A Amendment No. 1 - For the Quarter ended December 31, 1994 - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS physician product lines. Allied professionals represent approximately 22% of physician services net operating revenues for the three and six months ended December 31, 1994. The Company believes the primary care physician product line has greater long-term growth prospects than its specialist product line. Cost of Services Cost of services for the second quarter of fiscal 1995 totalled $220,525,000 compared to $223,217,000 for the comparative quarter of the prior year. Cost of services year to date in fiscal 1995 totalled $435,118,000 compared to $441,319,000 for the comparative prior year. Decreases in cost of services over both the comparative second quarter and year to date time periods were due primarily to operations divested during the prior fiscal year and lower lease and other operating expenses as a result of the Company's fourth quarter fiscal 1994 restructuring. The Company's largest component of cost of services are salaries, wages and benefits. Interest Expense Interest expense year to date in fiscal 1995 totalled $17,694,000 compared to $19,003,000 for the comparative time period of the prior year, a decrease of $1,309,000. This decrease was primarily due to a lower average outstanding debt balance as a result of the retirement of approximately $48,585,000 of the Company's Senior Subordinated Notes during the first six months of fiscal 1995. The decrease was offset, in part, by bank credit facility borrowings. Depreciation and Amortization Depreciation and amortization were unchanged over the comparative quarter of the prior year as an increase in depreciation expense resulting from the openings of new hospitals was offset by the lower depreciation expense from facilities impaired through the special charge recorded in the fourth quarter of fiscal 1994. Special Charge The Company has taken a special pre-tax charge of $13,398,000 in the second quarter and expects to record an increase in this special charge in its third quarter. Based on current information, the third quarter charge is estimated to be $5,000,000 before taxes and will reflect the elimination of staff positions, office lease terminations and certain other costs of the changes being implemented during the third quarter. During September through November of 1994, the Company received various unfavorable adjustments upon the final settlement of its 1991 and 1992 CMS Therapies Home Office Cost Reports and other CMS Therapies 1992 cost reports. As a result of the unfavorable settlement, which was the Company's first indication that adjustments to its estimates would be required, the Company performed a detail analysis of its due to/from third party payor amounts for all open cost reports. Upon completion of its analysis during the second quarter of fiscal 1995, the Company recorded a $13,398,000 special pre-tax charge to reflect the revision in the Company's estimate of amounts due to/from third party payors. The final settlement of the various cost reports will take place over a period of several years. Management expects cash flow from operations will be sufficient to meet additional estimated amounts due to third party payors when the respective cost reports are final settled and believes the effect of the estimated $5,000,000 third quarter charge on liquidity to be minimal. Continental Medical Systems, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q/A Amendment No. 1 - For the Quarter ended December 31, 1994 - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Minority Interests Minority interests in net income increased for both the three and six months ended December 31, 1994. This increase was primarily due to improved profitability in fiscal 1995 at the Company's joint ventured rehabilitation hospitals. Income Taxes Income taxes as a percentage of income (loss) before income taxes was (23.7%) and 96.7% for the three and six months ended December 31, 1994, respectively. These percentages reflect the effect of the special charge taken in the second quarter. Without the effect of the special charge, pro forma income taxes as a percentage of income before income taxes was 50.3% and 46.0% for the three and six months ended December 31, 1994, respectively. The percentage for each of the comparable periods in the prior year was 40.5%. The Company's higher pro forma effective tax rate resulted primarily from a higher effective state tax rate, a reduction in the tax exempt interest income, a higher proportion of income from subsidiaries not consolidated for tax purposes and a relative increase in non-deductible costs such as goodwill amortization. CAPITAL RESOURCES AND LIQUIDITY For the six months ended December 31, 1994, operating activities provided $7,281,000 of cash as compared with $2,280,000 in the six months ended December 31, 1993. In the past, the Company has utilized cash from operations to fund the working capital of new hospital openings as well as the expansion of certain contract therapy and physician services operations. The cash flow increase relates principally to the slowdown of capital intensive hospital development projects. Available cash was primarily used to fund the cash requirements for the six months of fiscal 1995. See the Consolidated Statements of Cash Flows for a detailed analysis of the components of cash flow. Long-term debt outstanding at December 31, 1994 totalled $346,951,000, including $3,873,000 representing the current portion of long-term debt. During the first six months of fiscal 1995, the Company purchased approximately $48,585,000 of its Senior Subordinated Notes in a series of open market purchases. The Company anticipates that it will employ operating cash flow in new growth opportunities within its core businesses and, where market opportunities are available on favorable terms, to selectively retire long-term debt. During the third quarter of fiscal 1995, the Company made additional purchases of its Senior Subordinated Notes in the open market. The Company's credit facility provides up to $235,000,000 in a revolving line of credit, of which up to $45,000,000 is available in the form of letters of credit. At December 31, 1994, there were approximately $38,000,000 of borrowings and approximately $29,202,000 of letters of credit outstanding under the credit facility. The credit facility provides for a revolving loan period through December 31, 1996 and the subsequent conversion of the revolving loan into a four-year term loan. The Company has pledged its ownership interests in certain of its operating subsidiaries as collateral under the facility. The Company is also subject to certain financial and other covenants, including, without limitation, restrictions on the amount of other indebtedness it may incur and on paying cash dividends. The Company's ongoing working capital requirements relate principally to routine capital expenditures, future development projects, potential acquisitions and activities within its contract therapy and physician services companies. The Company currently has no new hospital construction in progress. The Company currently estimates that its fiscal 1995 capital requirements will consist of capital maintenance and improvements at existing Continental Medical Systems, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q/A Amendment No. 1 - For the Quarter ended December 31, 1994 - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS CAPITAL RESOURCES AND LIQUIDITY (continued) facilities in the normal course of business and will be funded through the Company's operating cash flow or its credit facility. Pursuant to contingent deferred payment provisions of certain acquisition agreements, the Company expects that additional capital may be required to pay the sellers of the acquired companies through fiscal 1997, based upon the earnings of the acquired companies. The Company has historically expanded its business, in part, through selective acquisitions and intends to pursue additional acquisition opportunities from time to time. It is anticipated that future acquisitions will be funded through the issuance of capital stock and payment of cash and other consideration. Management believes that current sources of capital are sufficient to meet the needs of the Company's business for fiscal 1995 and for the future. Liquidity on a short-term basis will be provided internally from the Company's operating cash flow and externally from its bank credit facility. At December 31, 1994 the Company had $167,798,000 of unused borrowing capacity (subject to applicable covenants which may limit borrowing capacity) under its credit facility, of which $15,798,000 is available in the form of letters of credit. In fiscal 1994 the Company recorded a special charge of $74,834,000, which included a charge for restructuring certain elements of its business. At December 31, 1994 an accrual of $14,143,000 remains to complete the plan associated with certain components of the special charge. The Company believes that the remaining accrual related to the special charge will be materially liquidated by June 30, 1995. The components of the special charge are as follows (in thousands):
Original Fiscal 1994 Balance Fiscal 1995 Balance Provision Activity 6/30/94 Activity 12/31/94 --------- -------- ------- -------- -------- Impairment of Assets $50,244 ($41,406) $ 8,838 $ 337 $ 9,175 Consolidation and Reorganization 22,842 ( 13,807) 9,035 ( 4,490) 4,545 Employee and Other Costs 1,748 ( 827) 921 ( 498) 423 ------- --------- ------- -------- ------- Total $74,834 ($56,040) $18,794 ($4,651) $14,143 ======= ========= ======= ======== =======
In October 1994, the Company announced that many of its operating facilities and office locations were visited or contacted by representatives of the U.S. Justice Department for the purpose of interviewing certain of its employees. The Company has contacted representatives of the Justice Department to offer the Company's cooperation to respond to its inquiries. The Company's management is not aware of any Company practices of the type covered by the Justice Department inquiries, or otherwise, that are not in compliance with the rules and regulations applicable to its operations. The Company is unable to predict what effect, if any, these inquiries will have on the Company's business. In the normal course of its business, certain contingencies have the potential to affect the Company's operating results and financial position. These contingencies are discussed in Note 3 of the Company's financial statements included in this report. Continental Medical Systems, Inc. and Subsidiaries Signature Form 10-Q/A - Amendment No. 1 - For the Quarter ended December 31, 1994 - -------------------------------------------------------------------------------- Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to be signed on its behalf by the undersigned thereunto duly authorized. CONTINENTAL MEDICAL SYSTEMS, INC. Date: June 1, 1995 By: /S/ Dennis L. Lehman -------------------------- Dennis L. Lehman Senior Vice-President - Finance and Chief Financial Officer Signing on the behalf of the registrant and as principal financial officer. -----END PRIVACY-ENHANCED MESSAGE-----