-----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, I3pT2mlpv+VD8VVwaDCGLDd08q24Wqn5yMdKvFx59M9TvP3eQQWnGPrBhfZ8U2cT FKMrFuR/PuwnGDkE7wCJuA== 0000950109-95-002161.txt : 19950605 0000950109-95-002161.hdr.sgml : 19950605 ACCESSION NUMBER: 0000950109-95-002161 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940630 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-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-15088 FILM NUMBER: 95544707 BUSINESS ADDRESS: STREET 1: 600 WILSON LN STREET 2: P O BOX 715 CITY: MECHANICSBURG STATE: PA ZIP: 17055 BUSINESS PHONE: 7177908300 10-K/A 1 FORM 10-K/A FORM 10-K/A Amendment No. 1 SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 1994 Commission file number: 0-15088 CONTINENTAL MEDICAL SYSTEMS, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Delaware 51-0287965 - ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 600 Wilson Lane, Post Office Box 715, Mechanicsburg, Pennsylvania 17055 ----------------------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (717) 790-8300 Securities registered Pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------- Common Stock, par value $.01 New York Stock Exchange Securities registered Pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value (based on the last sale price quoted on the New York Stock Exchange) of the voting stock held by non-affiliates of the Registrant as of September 15, 1994 was approximately $350,224,198 (Reference is made to the statement following Part I, Item 4 of this report for the assumptions on which this calculation is based.) The number of shares outstanding of the Registrant's common stock, $.01 par value, as of September 15, 1994 was 38,380,734. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1994 definitive proxy statement (which is expected to be filed with the Commission not later than 120 days after the Registrant's 1994 fiscal year) are incorporated by reference into Part III of this report. ITEM 6. SELECTED FINANCIAL DATA. -----------------------
Five Year Selected Financial Data Fiscal Year Ended June 30, ------------------------------------------------------------------------- 1994 1993 1992 1991 1990 in thousands except per share data Income Statement Data: Net Operating Revenue $1,004,839 $901,397 $681,825 $429,921 $291,712 Income (loss) from operations (40,905)/(1)/ 44,187/(2)/ 45,787/(3)/ 27,642 19,051 Net Income (loss) (34,545)/(1)/ 19,519/(2)/ 27,091/(3)/ 18,501 12,701 Income (loss) per common share: Primary (.92) .51 .73 .63 .48 Fully diluted (.92) .51 .72 .60 .46 Balance Sheet Data: Total assets 766,742 772,228 475,230 327,796 219,676 Long-term debt, net of current portion 353,752 382,602 134,835 57,947 92,292
(1) Reflects a $74,834 special charge related to the impairment of selected assets of the Company's hospital division, the costs associated with the consolidation of its contract therapy companies, the losses related to the termination of certain relationships in the contract therapy business and certain other costs of the restructuring program. See Note 8 of the Company's Consolidated Financial Statements which further discuss the components of, and basis for, the special charge. (2) Reflects $14,556 of special charges related to the write-down of certain rehabilitation facility development costs and $2,598 of merger expenses in connection with the Kron Medical Corporation acquisition and Kron's subsequent consolidation with CompHealth. (3) Reflects $1,000 of merger expenses in connection with the CompHealth acquisition and a one-time charge of $3,319 relating to a terminated merger agreement. The selected financial data has been restated to reflect the results of CompHealth and Kron for the periods prior to their respective acquisitions. CompHealth and Kron were acquired in business combinations accounted for as poolings of interests. -17- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ----------------------------------------------------------------------- OF OPERATIONS. ------------- 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 table sets forth, for the periods indicated, net operating revenues for each of the Company's operating groups (in thousands):
Year Ended June 30, Increase (Decrease) ------------------------------- --------------------- 1994 1993 1992 1993-1994 1992-1993 Net operating revenues: - ---------------------- Rehabilitation group $ 551,699 $514,224 $388,051 7% 33% Contract therapy services 343,300 278,652 186,372 23% 50% Physician services 107,108 108,396 94,905 (1%) 14% Other 2,732 125 12,497 N/M N/M ---------- -------- -------- ------- ------- $1,004,839 $901,397 $681,825 11% 32% ========== ======== ======== ======= =======
"Other" revenues referred to in the above table consist principally of revenues from the Company's new initiatives including SelectRehab, Innovative Health Alliances and Medical Management Associates. Certain percentage changes in "Other" are not meaningful (N/M). Certain reclassifications were made to fiscal 1993 and 1992 net operating revenues to conform to fiscal 1994 presentations. The Company's recent growth in net operating revenues has been the result of expansion of its contract therapy businesses as well as the development of new rehabilitation hospitals, outpatient clinics and acquisitions of contract therapy and physician services companies. In April 1994, the Company sold its 50% interest in the operations of its Rocky Mountain Rehabilitation Institute, located in Aurora, Colorado, and signed a definitive agreement to sell by December 31, 1994 the real property comprising that facility. On June 30, 1994, the Company sold selected assets of its wholly-owned subsidiary which leased and operated its North Valley Rehabilitation Hospital, located in Chico, California. In the fourth quarter of fiscal 1994, the Company also closed or divested twenty-nine of its under performing outpatient centers. -18- RESULTS OF OPERATIONS Net Operating Revenues and Income (loss) from Operations Net operating revenues increased by 11% to $1,004,839,000 for fiscal 1994 from $901,397,000 in fiscal 1993 and increased 32% in fiscal 1993 over fiscal 1992 net operating revenues of $681,825,000. The increase in both periods resulted from the growth in the Company's existing operations and through the addition of new rehabilitation hospitals. Additionally, the increase in fiscal 1993 resulted from the acquisition of a contract therapy company in the fourth quarter of fiscal 1992. Income (loss) from operations declined to ($40,905,000) for fiscal 1994 from $44,187,000 in fiscal 1993 and decreased in fiscal 1993 from $45,787,000 in Fiscal 1992. The loss in fiscal 1994 resulted from the special charge, increases in interest expense, and depreciation and amortization expense, lower contract respiratory services revenue in the contract therapy services group, a decline in higher margin specialty care and allied professional days in the physician services group and increases in certain other operating expenses. The decrease in income from operations in fiscal 1993 from fiscal 1992 resulted from the special charge, increased interest expense, and depreciation and amortization expense, which was offset, in part, by a lower ratio of cost of services as a percentage of revenue and the effect of merger expenses. Approximately 42% of the Company's consolidated net operating revenues during fiscal 1994 was derived from patients covered by the federal government's Medicare program for the aged and chronically disabled and state Medicaid programs for the indigent as compared to 41% and 42% for fiscal 1993 and 1992, respectively. 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. Following is a discussion of each 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):
Year Ended June 30, Increase (Decrease) -------------------------------- ------------------------ 1994 1993 1992 1993-1994 1992-1993 ---- ---- ---- --------- --------- Net operating revenues: Rehabilitation group Hospitals (fiscal year of opening) Pre-1993 (26 hospitals) $403,785 $424,676 $337,520 (5%) 26% Fiscal 1993 (6 hospitals) 69,164 29,845 132% N/A Fiscal 1994 (4 hospitals) 25,327 N/A N/A Divested facilities (2 hospitals) 24,637 31,150 27,102 (21%) 15% --------- -------- --------- ----- ----- 522,913 485,671 364,622 8% 33% Other rehab related 28,786 28,553 23,429 1% 22% --------- -------- --------- ----- ----- Total rehabilitation group $551,699 $514,224 $388,051 7% 33% ======== ======== ======== ===== =====
-19- "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 increases in net operating revenues generated by the rehabilitation hospital group resulted primarily from new hospital openings. Net operating revenues generated by the Company's 26 rehabilitation hospitals in operation during all of fiscal 1994 and 1993 (the "Pre-1993 Hospitals") declined 5% in fiscal 1994 from the prior year. This decline is principally due to lower costs which resulted in lower cost based Medicare reimbursement, shorter inpatient length of stays, and competitive pricing pressures. As of June 30, 1994, the Company had transitional rehabilitation units, with a total of 308 beds, in 20 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. The percentage of net operating revenues generated by Medicare and Medicaid patients at the rehabilitation hospitals was 64% in fiscal 1994, and 62% in each of fiscal 1993 and 1992. With the pressures to control rising healthcare costs, more services are being provided on an outpatient basis. Total outpatient treatments in fiscal 1994 increased to 3,025,820 over the 2,448,866 outpatient treatments in fiscal 1993 and 1,635,606 outpatient treatments in fiscal 1992. Outpatient services represented 16% of the rehabilitation group's net operating revenues in each of fiscal 1994 and 1993 and 15% in fiscal 1992. 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. The Company is a provider to managed care payors in many of its markets. Managed care programs are designed to encourage more efficient and less costly utilization of medical services. Managed care payors are increasingly negotiating discounted or per diem rates directly with the Company's rehabilitation hospitals which have adversely affected the revenue growth and operating margins of the rehabilitation group. The Company is responding to managed care penetration by reducing costs through several measures including the introduction of a new acuity based staffing model within the hospitals. The new staffing model resulted in a reduction of staff and a change in the hospitals' therapy delivery model. The Company has also established and continues to refine cost accounting systems as well as outcomes documentation and resource consumption information in order to demonstrate the cost effectiveness of rehabilitation services. The Company believes this data will be instrumental in its ability to negotiate with managed care payors. Below are selected statistics for the Pre-1993 Hospitals:
% 1994 1993 Change ---- ---- ------ Occupancy percentage 65.9% 68.0% (3%) Admissions 19,263 18,101 6% Average length of stay (days) 22.1 23.7 (7%) Patient days 423,106 428,044 (1%) Outpatient treatments 2,325,779 2,074,856 12% Outpatient % of net revenue 18.2% 17.3% 5%
-20- Occupancy percentage for the Pre-1993 Hospitals for fiscal 1994 was 65.9% as compared to 68.0% during fiscal 1993. This decline in occupancy percentage was due to an increase in licensed beds and a lower patient average length of stay in fiscal 1994. Average length of stay declined, in part, due to cost controls, case management review and increased efficiencies in treatments. Average length of stay was also reduced by the increase in the number of transitional rehabilitation beds which have shorter average lengths of stay. 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 June 30, 1994, the Company had 15 hospitals subject to TEFRA regulations. The lower patient average length of stay in fiscal 1994 versus fiscal 1993 was partially offset by a 6% increase in admissions in fiscal 1994. The timing of new hospital openings during fiscal 1993 makes a comparison of occupancy percentages between fiscal 1994 and 1993 for these hospitals not meaningful. The rehabilitation hospitals opened in fiscal 1993 (the "1993 Hospitals") increased their patient days in fiscal 1994 to 87,857 from 35,644 in fiscal 1993. During fiscal 1994, the occupancy percentage for the 1993 Hospitals was 69%. The occupancy percentage for rehabilitation hospitals opened in fiscal 1994 (the "1994 Hospitals") was 42%. The 1994 Hospitals' patient days were 25,112. 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 profitability objectives. The contract therapy companies serve over 2,400 facilities. Approximately 81% of the net operating revenues for fiscal 1994, and 74% and 66% of the net operating revenues for fiscal 1993 and 1992, 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 was 21% for fiscal 1994. This represents an increase from 17% for fiscal 1993 and 20% for fiscal 1992. The principal reason for the increases in fiscal 1994 is the Company's decision to terminate its contractual arrangements with certain third-party providers. Under these arrangements, the Company provided therapy services to Medicare patients through an unrelated Medicare certified provider. As a result of terminating these arrangements, the Company, in many instances, now provides the same services directly to Medicare patients. Physician Services: The declines in the Company's physician services net operating revenues were a result of reduced demand and pricing pressures in the specialist product line of the Company's physician/locum tenens services. Net operating revenues for the specialist product line for fiscal 1994 declined 20% as compared to the prior year. This decline was partially offset by the 26% increase in revenues for the primary care product line during fiscal 1994. The growth in net operating revenues in fiscal 1993 as compared to fiscal 1992 was due to the increase in the number of filled days. Filled days were 151,633 and 134,766 in fiscal 1993 and 1992, respectively. During fiscal 1994 approximately 51% of net operating revenues was generated through services to hospitals while 33% involved contracts with physician groups. The remainder was with managed care programs, clinics and other sources. In fiscal 1993 and 1992, approximately 48% and 52%, respectively, of net operating -21- revenues were generated through services to hospitals while 35% in both years involved contracts with physician groups. The following table sets forth, for the periods indicated, filled days by discipline:
Fiscal 1994 Fiscal 1993 --------------------- --------------- % # of # of Increase days % days % (Decrease) ---- ----- ---- ----- ---------- Physicians: Primary care 47,200 31.7 40,146 26.4 17.6 Specialty care 53,421 35.9 61,520 40.6 (13.2) Allied professionals 48,302 32.4 49,967 33.0 (3.3) ------- ----- ------- ----- ----- 148,923 100.0 151,633 100.0 (1.8) ======= ===== ======= ===== =====
The decline in specialty care and allied professional days is due to reduced demand for specialty physicians locum tenens services and additional competition in local markets. Allied professionals represent approximately 22% of physician services net operating revenues for the year ended June 30, 1994. The increase in primary care filled days and its relative increase as a percentage of total filled days reflects the increased demand for primary care physicians and the Company's increased emphasis of this product line. The Company believes the primary care physician product line has greater growth prospects than its specialist product line. The federal government as well as 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. Cost of Services Cost of services for fiscal 1994 totalled $894,488,000 compared to $787,574,000 for fiscal 1993, an increase of $106,914,000. Cost of services for fiscal 1992 was $607,737,000. The increases in fiscal 1994 and fiscal 1993 over the prior year were due primarily to higher salaries, wages and benefits expenses associated with expansion of the Company's contract therapy businesses, as well as the development of new rehabilitation hospitals, outpatient clinics and acquisitions of contract therapy and physician services companies. The Company's largest component of cost of services is salaries, wages and benefits. Interest Expense Interest expense for fiscal 1994 totalled $38,156,000 compared to $22,747,000 for fiscal 1993, an increase of $15,409,000. Interest expense for fiscal 1992 was $6,216,000. The increases in fiscal 1994 and fiscal 1993 over the prior year were due to a higher average outstanding debt balance and a higher average interest rate resulting from the issuance of $350,000,000 of senior subordinated notes during fiscal 1993. In addition, interest expense was impacted by a reduction in the amount of interest capitalized related to new hospital construction, as the Company had fewer hospitals under construction in fiscal 1994 than in fiscal 1993 and 1992. The effects of the interest rate swap agreements on interest expense was to reduce interest expense by $1,327,000 and $947,000 for fiscal 1994 and 1993, respectively. There were no interest rate swap agreements in effect during fiscal 1992. The Company has exposure under the interest rate swap agreements for fluctuations in short-term interest rates. At June 30, 1994, the Company would be required to pay approximately $6,300,00 in order to terminate the interest rate swap and collar agreements, taking into account current interest rates. This represents an unrealized loss of approximately $6,944,000. The Company intends to hold these investments until maturity. Additionally, the Company has exposure to credit loss in the event of nonperformance by the other party to the interest rate swap agreements. However, the Company does not anticipate nonperformance by the counterparty. -22- Depreciation and Amortization Depreciation and amortization as a percentage of net operating revenues increased for fiscal 1994 to 3.8% from 3.3% and 2.6% in fiscal 1993 and 1992, respectively. This increase resulted from the depreciation on the new rehabilitation hospitals which are owned by the Company and an increase in goodwill amortization resulting from acquisitions. Merger Expenses On February 23, 1993, the Company acquired Kron Medical Corporation ("Kron") in a business combination accounted for as a pooling of interests. In connection with this pooling, the Company incurred $2,598,000 of costs related to the acquisition and combination of Kron with CompHealth. During fiscal 1992 the Company acquired CompHealth in a business combination accounted for as a pooling of interests. In connection with this pooling, the Company incurred $1,000,000 of costs. Additionally, during fiscal 1992, the Company recorded costs of $3,319,000 related to the termination of a merger agreement. Special Charge During the fourth quarter a special pre-tax charge of $74,834,000 was recorded. The special charge resulted from the approval by the Company's Board of Directors of several measures to streamline operations and improve productivity by restructuring the Company into major operating businesses, flattening the management organization structure, writing down certain assets and, where appropriate, divesting unproductive assets. The Company began work on the proposed plan during the fiscal 1994 third quarter as a result of market changes the Company was experiencing. The special charge comprised several items including the impairment of selected assets in the Company's rehabilitation group, the costs associated with the consolidation of its contract therapy companies, the losses related to the termination of certain business relationships in the contract therapy business and certain other costs of the restructuring program. Approximately $50,244,000 of the charge was associated with the impairment of assets at eight rehabilitation hospitals, divestiture of two rehabilitation hospitals, closure of a select group of outpatient locations and miscellaneous other charges. Approximately $12,042,000 of the charge was related to the consolidation of certain contract therapy companies into CMS Therapies and the exit from certain markets and businesses. This consolidation process involved the closure of offices, relocation and severance of personnel and the elimination of duplicative processes. Approximately $10,800,000 of the charge is related to the writedown of uncollectible receivables pertaining to the termination of certain business relationships at the Company's CMS Therapies, Inc. subsidiary. During the second quarter of fiscal 1994, the Company exited business arrangements in which it provided therapists to unrelated Medicare certified agencies which in turn supplied those therapists to non-Medicare certified skilled nursing facilities. For a variety of business reasons, including, among others, the Healthcare Financing Administration's announced intentions to increase their review of the reasonableness of the charges billed by the agencies to the Medicare program, the Company exited those relationships and, in many instances, began to provide the same services directly to Medicare patients upon termination of the contracts with the agencies. Following termination of the contracts, the Company continued to assess the collectibility of the agency receivables and, due to deteriorating business relations and declining financial condition of the agencies, it was determined a write-down of these receivables was required as of June 30, 1994. The remainder of the charge, $1,748,000, was to reduce the work force at the Company's corporate office and provide for transaction costs to execute the plan. At June 30, 1994, $18,794,000 is included within accrued liabilities to complete the plan associated with certain components of the special charge. The components of this accrual are more fully described in the notes to the Company's financial statements. The Company estimates that the reorganization plan, when fully implemented, will reduce or eliminate approximately $5,500,000 of costs and expenses annually, including approximately $2,500,000 of savings related to consolidation and reorganization of the contract therapy companies, $1,500,000 related to depreciation associated with facility write-downs and $1,500,000 related to other savings associated with the elimination of unprofitable operations. During the fourth quarter of fiscal 1993 the Company recorded a pre-tax charge of $14,556,000 related principally to the write-off of deferred costs for approximately 30 abandoned rehabilitation hospital development projects on which construction had not started. The decision to abandon certain projects and pursue less capital intensive growth than in the past was a result of changes in the Company's rehabilitation hospital development strategy in response to changes in various healthcare delivery markets. Prior to fiscal 1994, the Company deferred certain costs incurred to obtain government approvals and other expenses related to the development of rehabilitation hospitals. Based on a historical high rate of completion, costs of developing a project were charged to operations only when it was probable that the project would be abandoned. As a result of its change in development strategy, the Company changed its accounting for development costs. Ongoing hospital development costs are now expensed until that time when it is probable that construction will commence. -23- Minority Interests Minority interests in net income decreased for the year ended June 30, 1994 to $4,730,000 from $6,663,000 in fiscal 1993. This decline is primarily due to lower earnings during fiscal 1994 at the Company's joint ventured rehabilitation hospitals. In fiscal 1993, minority interests in income decreased $108,000 from $6,771,000 in fiscal 1992. This decrease reflects the Company's July 1992 acquisition of the minority interests in its Communi-Care/Pro-Rehab subsidiary and was offset by an increase in the number of joint venture companies operating rehab hospitals. Income Taxes Income taxes as a percentage of income (loss) before income taxes were (18)%, 44% and 35% respectively for fiscal 1994, 1993 and 1992. These percentages reflect the restatements for the poolings of interests with Kron in fiscal 1993 and CompHealth in fiscal 1992. Both of these entities were S- Corporations prior to the merger and made no provision for income taxes. The pro forma effective tax rate, including Kron and CompHealth taxed at statutory rates prior to their acquisition dates, was (18)%, 45%, and 38% in fiscal 1994, 1993 and 1992. The significant increase in the pro forma effective tax rate from fiscal 1992 to fiscal 1993 results from the loss of various state tax deductions due to one-time charges, the effect of certain transaction-related pooling expenses which are not tax deductible, an increase in non-deductible goodwill costs and a more unfavorable mix of state income. The tax benefit in fiscal 1994 resulted from a pre-tax loss caused by the special charge and was offset by certain non-deductible components of the special charge, prior year tax assessments and a higher effective state tax rate. Adoption of New Accounting Principles Effective July 1, 1993 the Company adopted Financial Accounting Standards Board Statement No. 109 "Accounting for Income Taxes" which changed the method of accounting for income taxes for the Company in fiscal 1994. The statement requires an asset and liability approach for accounting and reporting income taxes. Under this approach, deferred taxes are based on future tax consequences of events that have been recognized on the Company's financial statements or tax return. Accordingly, deferred taxes are adjusted for changes in tax rates when enacted. Under the prior rules, deferred taxes were provided based on their relationship with pre-tax income at the tax rates in effect when the deferral occurs and are not adjusted for changes in those rates. The cumulative effect of this statement was not material. In fiscal 1993 the Company adopted the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Upon issuance of this statement, the Company reviewed the provisions of the new statement and concluded that the statement compelled the write-down to fair value of a long term care investment being held to maturity as a result of the impairment of the investment using a discounted cash flow analysis. Prior to the issuance of this statement, the asset was carried at historical cost which is expected to be recovered upon maturity. The Company recognized an after tax cumulative effect of $3,204,000 in adopting this statement. -24- CAPITAL RESOURCES AND LIQUIDITY For the year ended June 30, 1994, operating activities provided $50,708,000 of cash as compared with $6,789,000 in fiscal 1993, and $12,981,000 in fiscal 1992. 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 companies. The cash flow increase relates principally to the slowdown of capital intensive hospital development projects. Investing activities, primarily development, construction and acquisition activities, resulted in uses of cash of $30,368,000 during fiscal 1994 as compared with $217,276,000 in fiscal 1993 and $96,407,000 in fiscal 1992. Available cash was primarily used to fund the cash requirements for fiscal 1994. Cash inflows of $23,060,000 resulted from the sale of real estate and equipment of one rehabilitation hospital under construction and the sale of the operations of two rehabilitation hospitals and other miscellaneous assets. The Company's current ratio was 2.07:1 at June 30, 1994 compared to 2.90:1 at June 30, 1993. This decrease reflects the accrual of $18,794,000 related to the special charge as well as an increase in the amounts due to third-party payors. See the Consolidated Statements of Cash Flows for a detailed analysis of the components of cash flow. Long-term debt outstanding at June 30, 1994 totalled $357,765,000, including $4,013,000 which represents the current portion of long-term debt. The Company's percentage ratio of long-term debt to total capitalization both at June 30, 1994 and 1993 was 60% 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 June 30, 1994, there were no borrowings and approximately $30,006,000 of letters of credit were 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 a prohibition on paying cash dividends. On August 17, 1992, the Company issued $200,000,000 of 10 7/8% Senior Subordinated Notes due 2002 ("10 7/8% Notes"). The 10 7/8% Notes were sold at 99.25% of their principal amount. On March 16, 1993 the Company issued $150,000,000 of 10 3/8% Senior Subordinated Notes due 2003 ("10 3/8 Notes"). The 10 3/8% Notes were sold at 99.22% of their principal amount. The 10 7/8% Notes are subject to redemption at any time on or after August 15, 1997, at the option of the Company at specified redemption prices plus accrued interest. The 10 3/8% Notes are subject to redemption at any time on or after April 1, 1998, at the option of the Company at specified redemption prices plus accrued interest. The Company used the aggregate net proceeds of the 10 7/8% Notes and 10 3/8% Notes (collectively, the "Notes") to repay all indebtedness outstanding under the credit facility at the time of each such sale (approximately $277,000,000 in the aggregate for both issuances) and the remainder for general corporate purposes including the construction and acquisition of rehabilitation hospitals. Under the terms of the indentures for the Notes, the Company's ability to incur additional indebtedness, provide guarantees and pay cash dividends is limited under certain circumstances. The Company's ongoing capital requirements relate principally to routine capital expenditures, future development projects, potential acquisitions and growth of its contract therapy and physician services companies. The Company constructed fewer free-standing rehabilitation hospitals during fiscal 1994 than in prior years. The Company currently estimates that its fiscal 1995 capital requirements will consist of capital maintenance and improvements at existing 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 estimates that approximately $17,000,000 in cash and the Company's common stock may be required to be paid to the sellers of the acquired companies through fiscal 1997, based upon the earnings of the acquired companies. -25- 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 foreseeable 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 June 30, 1994 the Company had $204,994,000 of unused borrowing capacity (subject to applicable covenants which may limit borrowing capacity) under its credit facility, of which $14,994,000 is available in the form of letters of credit. The Company recorded in fiscal 1994, a special charge of $74,834,000 which included a restructuring of certain elements of its business. The Company expects that the net cash effect of this charge will be minimal. In October 1992, the Company acquired 97% interests in the partnerships which owned the real estate of its Aurora, Colorado, Plano, Texas and Webster, Texas rehabilitation hospitals. The aggregate purchase price was $39,000,000. These hospitals commenced operations in June 1989, March 1991 and October 1991, respectively, and had been operated by the Company under long-term operating leases with third parties prior to their acquisitions. In October 1992, the Company acquired the condominium interest which comprises its San Diego rehabilitation hospital. The purchase price for the condominium interest was $25,200,000. The hospital commenced operations in April 1992 and had been operated by the Company under an interim operating lease prior to its acquisition. These acquisitions were financed with long-term debt borrowings. The Company has agreed to lend up to $3,000,000 for working capital through August 31, 2000 to the purchaser of certain of its long-term care facilities. On August 31, 2000, the outstanding working capital loan balance will be converted into a term loan payable in quarterly installments over a four-year period. As of June 30, 1994, $900,000 has been provided pursuant to this commitment. In June 1994, the Company obtained consents from its bondholders and amended its credit facility to permit purchases of its Senior Subordinated Notes in the open market. During the first two months of fiscal 1995, the Company purchased approximately $26,835,000 of its Senior Subordinated Notes utilizing its operating cash flow. The Company anticipates that it will employ operating cash flow in new growth opportunities within its core businesses and to selectively retire long-term debt. -26- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ------------------------------------------- Continental Medical Systems, Inc. and Subsidiaries Financial Statements June 30, 1994 and 1993 and 1992 -27- Continental Medical Systems, Inc. and Subsidiaries Consolidated Balance Sheets June 30, 1994 and 1993
Assets 1994 1993 - ---------------------------------------------------------------------------------------------------------------------- (In thousands, except share data) Current assets: Cash and cash equivalents $ 54,862 $ 64,444 Accounts receivable, net of allowance for doubtful accounts ($16,685 June 30, 1994; $17,426 June 30, 1993) 232,198 220,122 Other receivables 10,778 10,801 Prepaid expenses 13,720 14,243 Prepaid income taxes 4,319 3,412 Deferred income taxes 5,610 5,062 ----------- ---------- Total current assets 321,487 318,084 ----------- ---------- Property and equipment, net (Note 3) 252,023 289,822 ----------- ---------- Goodwill, net (Note 2) 72,613 58,461 Investments, principally affiliates 21,804 16,694 Notes receivable (Note 14) 31,454 29,461 Deferred income taxes 14,357 2,847 Deferred costs, new facilities, net (Notes 4 and 8) 20,885 28,634 Other assets 32,119 28,225 ----------- ---------- 193,232 164,322 ----------- ---------- $ 766,742 $ 772,228 =========== ========== Liabilities and Stockholders' Equity - ---------------------------------------------------------------------------------------------------------------------- Current liabilities: Current portion of long-term debt (Note 6) $ 4,013 $ 3,809 Accounts payable 28,615 27,515 Accrued expenses (Note 5) 97,780 64,602 Due to third-party payors 24,676 13,857 ----------- ---------- Total current liabilities 155,084 109,783 Long-term debt, net of current portion (Note 6) 353,752 382,602 Other liabilities 7,391 8,717 ----------- ---------- Total liabilities 516,227 501,102 ----------- ---------- Minority interests 14,963 13,430 ----------- ---------- Commitments and contingencies (Notes 2 and 7) Stockholders' equity: Preferred stock, $.01 par; authorized 10,000,000 shares; none issued Common stock, $.01 par; authorized 80,000,000 shares; 38,359,245 issued and outstanding, June 30, 1994 (36,934,546 June 30, 1993) (Note 16) 384 369 Capital in excess of par 192,573 180,187 Retained earnings (Note 6) 42,595 77,140 ----------- ---------- 235,552 257,696 ----------- ---------- $ 766,742 $ 772,228 =========== ==========
See notes to consolidated financial statements. -28- Continental Medical Systems, Inc. and Subsidiaries Consolidated Statements of Operations Years ended June 30, 1994, 1993 and 1992
1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------------- (In thousands, except share data) Net operating revenues $ 1,004,839 $ 901,397 $ 681,825 ------------- ------------- ------------- Costs and expenses: Cost of services 894,488 787,574 607,737 Interest expense 38,156 22,747 6,216 Depreciation and amortization 38,266 29,735 17,766 Merger expenses (Note 9) 2,598 4,319 Special charge (Note 8) 74,834 14,556 ------------- ------------- ------------- 1,045,744 857,210 636,038 ------------- ------------- ------------- Income (loss) from operations (40,905) 44,187 45,787 Other income, principally interest 3,442 2,762 2,936 ------------- ------------- ------------- Income (loss) before minority interests, income taxes and cumulative effect of accounting change (37,463) 46,949 48,723 Minority interests (4,730) (6,663) (6,771) ------------- ------------- ------------- Income (loss) before income taxes and cumulative effect of accounting change (42,193) 40,286 41,952 Income taxes (Note 10) (7,648) 17,563 14,861 ------------- ------------- ------------- Income (loss) before cumulative effect of accounting change (34,545) 22,723 27,091 Cumulative effect of accounting change (Note 11) (3,204) ------------- ------------- ------------- Net income (loss) $ (34,545) $ 19,519 $ 27,091 ============= ============= ============= Income (loss) per common share and common equivalent share (Note 17): Primary: Income (loss) before cumulative effect of accounting change $ (.92) $ .59 $ .73 Cumulative effect of accounting change (.08) ------------- ------------- ------------- Net income (loss) $ (.92) $ .51 $ .73 ============= ============= ============= Fully diluted: Income (loss) before cumulative effect of accounting change $ (.92) $ .59 $ .72 Cumulative effect of accounting change (.08) ------------- ------------- ------------- Net income (loss) $ (.92) $ .51 $ .72 ============= ============= ============= Weighted average number of shares outstanding: Primary: 37,662,519 38,050,513 37,169,328 Fully diluted: 37,662,519 38,289,537 37,402,973
See notes to consolidated financial statements. -29- Continental Medical Systems, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity Years ended June 30, 1994, 1993 and 1992
- --------------------------------------------------------------------------------------------------------------------------- Common Stock ----------------------- Capital Shares in excess Retained issued Amount of par earnings Total ---------------------------------------------------------------------------- (In thousands, except shares issued) Balance, June 30, 1991 34,733,028 $ 348 $ 154,819 $ 32,524 $ 187,691 Stock issued pursuant to: Employee benefit plans 632,684 6 7,223 7,229 Acquisition agreements 194,500 2 3,785 3,787 Distributions of pooled companies (1,811) (1,811) Net income for the year 27,091 27,091 ---------- ------- ------------ ------------ ------------ Balance, June 30, 1992 35,560,212 356 165,827 57,804 223,987 Stock issued pursuant to: Employee benefit plans 1,196,859 11 11,260 11,271 Acquisition agreements 177,475 2 3,100 3,102 Distributions of pooled companies (183) (183) Net income for the year 19,519 19,519 ---------- ------- ------------ ------------ ------------ Balance, June 30, 1993 36,934,546 369 180,187 77,140 257,696 Stock issued pursuant to: Employee benefit plans 285,192 3 1,842 1,845 Acquisition agreements 1,139,507 12 10,544 10,556 Net loss for the year (34,545) (34,545) ---------- ------- ------------ ------------ ------------ Balance, June 30, 1994 38,359,245 $ 384 $ 192,573 $ 42,595 $ 235,552 ========== ======= ============ ============ ============
See notes to consolidated financial statements. -30- Continental Medical Systems, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years ended June 30, 1994, 1993 and 1992
1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------- (In thousands) Cash flows from operating activities: Net income (loss) $ (34,545) $ 19,519 $ 27,091 ---------- --------- --------- Adjustments: Depreciation and amortization 38,266 29,735 17,766 Other 1,028 5,867 4,639 Special charge 74,834 14,556 Cumulative effect of accounting change, net of taxes 3,204 Increase (decrease) in cash from changes in assets and liabilities, excluding effects of acquisitions and dispositions: Accounts receivable (27,174) (69,961) (53,751) Other assets (9,497) (2,997) (9,260) Accounts payable and accrued expenses 13,853 19,855 23,294 Other liabilities 5,542 (1,670) 321 Income taxes (11,599) (11,319) 2,881 ---------- --------- --------- Total adjustments 85,253 (12,730) (14,110) ---------- --------- --------- Net cash provided by operating activities 50,708 6,789 12,981 ---------- --------- --------- Cash flows from investing activities: Payments pursuant to acquisition agreements, net of cash acquired (16,363) (57,303) (10,664) Cash proceeds from sale of property and equipment 23,060 Deferred costs, new facilities (3,527) (13,526) (17,699) Acquisition of property and equipment (26,416) (131,185) (72,176) Notes receivable (1,993) (6,938) 2,444 Other investing activities (5,129) (8,324) 1,688 ---------- --------- --------- Net cash used in investing activities (30,368) (217,276) (96,407) ---------- --------- --------- Cash flows from financing activities: Long-term debt borrowings 88,054 528,290 80,454 Long-term debt repayments (118,061) (280,772) (7,263) Deferred financing costs (893) (12,306) (1,142) Issuance of common stock 1,733 6,375 4,131 Capital contributions by minority interests 2,388 555 1,136 Dividends of pooled companies (183) (1,811) Distributions to minority interests (3,143) (2,454) (1,905) ---------- --------- --------- Net cash provided by (used in) financing activities (29,922) 239,505 73,600 ---------- --------- --------- Net increase (decrease) in cash and cash equivalents (9,582) 29,018 (9,826) Cash and cash equivalents, beginning of year 64,444 35,426 45,252 ---------- --------- --------- Cash and cash equivalents, end of year $ 54,862 $ 64,444 $ 35,426 ========== ========= =========
See notes to consolidated financial statements. -31- 1. Summary of Significant Accounting Policies: Principles of consolidation: The consolidated financial statements include the Company and its 50% or greater owned subsidiaries which the Company controls. All significant intercompany accounts and transactions have been eliminated. Investments in affiliates in which the Company owns 20% or more and limited partnerships are carried, primarily, on the equity basis which approximates the Company's equity in their underlying net book value. Other investments are stated at cost. Cash equivalents: The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Cash equivalents are stated at cost. Accounts receivable: The Company receives payment for services rendered from the federal and state governments under the Medicare and Medicaid programs and private pay payors including third-party insurers, workers' compensation plans and healthcare providers. The following table summarizes the percent of net accounts receivable from all payors as of June 30, 1994 and 1993 respectively:
1994 1993 ---- ---- Government 39% 35% Private 61% 65% ---- ---- 100% 100% ==== ====
Management does not believe that there are any credit risks associated with receivables from governmental agencies. Private and other receivables consist of receivables from a large number of payors, involved in diverse activities, subject to differing economic conditions, and do not represent any concentrated credit risks to the Company. Management continually monitors and adjusts its reserves and allowances associated with these receivables. Property and equipment and depreciation: Property and equipment are stated at the lower of cost or net realizable value. Depreciation is being provided on the straight-line method primarily over the estimated useful lives of the assets as follows: Buildings and improvements 30 to 40 years Furniture and equipment 3 to 20 years Accelerated methods and shorter lives are used for income tax purposes. Goodwill: Goodwill is being amortized using the straight-line method over 15 to 40 years. Accumulated amortization is $8,220,000 and $5,787,000 on June 30, 1994 and 1993, respectively. -32- Deferred costs, new facilities: Hospital development costs are expensed until it is probable that construction will commence. For completed facilities owned by third parties and leased by the Company, deferred costs are amortized over the lease term, principally 10 years. For internally developed and owned facilities, these costs become part of the fixed asset and are amortized over its estimated useful life. Start-up expenses ("pre-opening costs") incurred prior to the opening of new facilities are capitalized and amortized on a straight-line basis over periods of 24 to 60 months upon the commencement of operations. Pre-opening costs consist of all costs relating to a specific new operating facility which are incurred in the period prior to admitting patients. Asset impairment: The carrying value of long-lived assets including identifiable intangibles and goodwill related to those assets are reviewed if the facts and circumstances suggest that an item may be impaired. If this review indicates that a long-lived asset will not be recoverable, as determined based on the future undiscounted cash flows of the asset, the Company's carrying value of the long-lived asset is reduced to fair value. Due to third-party payors: Due to third-party payors represents the difference between amounts received under interim payment plans from third-party payors for services rendered and amounts estimated to be reimbursed by those third-party payors upon settlement of cost reports. Net operating revenues: Revenues consist of patient revenue and contract therapy and physician services revenue. Revenues are recognized as services are rendered. Patient revenue includes amounts estimated to be reimbursable by third- party payors under the provisions of cost reimbursement formulas in effect. Final determination of amounts earned is subject to review by third-party payors and their agents. Any adjustments which may result at the time of settlement are not expected to be material. Differences between estimated provisions and final settlements are recorded in operations in the year finalized. Contract therapy and physician services revenues represent revenues from services provided by therapists and other healthcare professionals to healthcare facilities and other institutions. Income taxes: The Company files a consolidated federal income tax return with all 80% or more owned subsidiaries. Separate federal returns are filed for subsidiaries owned less than 80%. Effective July 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. See Note 10. Restatement and reclassification: Certain items in the fiscal 1993 and 1992 consolidated financial statements have been reclassified to conform to the classifications used in the fiscal 1994 consolidated financial statements. -33- 2. Acquisitions: On March 31, 1994, the Company acquired all of the outstanding stock of Medical Management Associates, Inc. ("MMA"), for $1,500,000 in cash relating to certain non-compete agreements and 647,500 shares of the Company's common stock. The acquisition was accounted for by the purchase method of accounting. In addition, certain costs of approximately $162,000 related to the transaction were capitalized into the acquisition cost. Pursuant to the acquisition agreement, additional shares of the Company's common stock may be issued over the next three years, subject to the achievement of certain pre-tax earnings levels. On February 23, 1993, the Company acquired all of the outstanding stock of Kron Medical Corporation ("Kron") in exchange for 1,268,331 shares of the Company's common stock. The acquisition was accounted for as a pooling of interests, and, accordingly, the Company's financial statements have been restated to include the results of Kron for all periods presented. The effect of the Kron acquisition on the consolidated results of operations of the Company for the periods prior to the combination is immaterial. On November 4, 1991, the Company acquired all of the outstanding stock of CompHealth, Inc. ("CompHealth") in exchange for 3,007,890 shares of the Company's common stock. CompHealth offers contract staffing services by physicians and other allied health professionals. The acquisition was accounted for as a pooling of interests and, accordingly, the Company's financial statements have been restated to include the results of CompHealth for all periods presented. Prior to their respective mergers, Kron and CompHealth (the "pooled companies") were treated as S-Corporations for federal and, with some exceptions in the case of CompHealth, for state tax purposes. Therefore, no provision for income taxes was made except for those states where CompHealth did not qualify for S-Corporation status. Prior to their respective mergers, the pooled companies made regular cash dividend distributions to their shareholders, in part, to offset tax liabilities which accrued directly to their shareholders. Distributions for fiscal 1993 and 1992 were $183,000 and $1,811,000, respectively. During fiscal 1993 and 1992, the Company acquired the entities, described below, which were accounted for by the purchase method of accounting. The pro forma effects of the acquisitions on the consolidated results of operations of the Company for the periods prior to the acquisition dates are not material. Prior to fiscal 1992, the Company acquired 80% of the outstanding stock of Communi-Care/ProRehab, Inc. ("Communi-Care") and on July 1, 1992 acquired the remaining 20% of the outstanding stock. The initial purchase price was approximately $5,654,000, paid in cash and the Company's common stock. The purchase price for the remaining 20% of the outstanding stock was approximately $4,831,000, paid in cash and the Company's common stock. As additional purchase price under the purchase agreement, cash and common stock totalling $8,589,000, $2,504,000 and $2,639,000 was paid during fiscal 1994, 1993 and 1992, respectively. Additional cash and common stock may be paid over the next two years as additional purchase price, subject to adjustment based upon future earnings. On May 28, 1992 the Company acquired all the outstanding stock of Advanced Care Medicine, Inc. ("AcMed") which provides respiratory therapy in long-term care settings. The initial purchase price was approximately $3,100,000 paid in cash and the Company's common stock. As additional purchase price under the purchase agreement, cash and common stock totalling $960,000 was paid in fiscal 1993 and additional contingent payments may be paid based on earnings levels through December 1996. Additionally, the Company paid the former AcMed stockholders $2,000,000 in cash and the Company's common stock in consideration for certain non-compete agreements. -34- On October 19, 1992 the Company acquired a majority ownership in three partnerships which owned the real estate of three of the Company's rehabilitation hospitals for $39,000,000. The hospitals had been operated by the Company under long-term operating leases prior to their acquisition. On October 28, 1992, the Company acquired a condominium interest which comprises another of its rehabilitation hospitals for $25,200,000. The hospital had been operated under an interim operating lease prior to the acquisition. During fiscal 1994 and 1993, the Company acquired various other outpatient and contract rehabilitation services providers for $7,339,000 and $10,785,000, respectively. The Company paid the former owners of these businesses $940,000 and $1,529,000, respectively, in consideration for certain non-compete agreements. Pursuant to other acquisitions consummated prior to 1992, cash and common stock totaling $1,920,000, $2,162,000 and $2,937,000 was paid during fiscal 1994, 1993 and 1992, respectively. Contingent payments estimated under all of the Company's acquisition agreements approximate $17,000,000 and may be paid in cash and the Company's common stock through fiscal 1997. These amounts are subject to adjustment based upon the achievement of certain earnings levels. 3. Property and Equipment: Property and equipment comprise the following (in thousands):
June 30, -------------- 1994 1993 -------- -------- Land $ 24,448 $ 15,426 Buildings and improvements 189,349 185,999 Furniture and equipment 87,079 74,035 Construction in progress 2,487 47,650 -------- -------- 303,363 323,110 Less: accumulated depreciation 51,340 33,288 -------- -------- $252,023 $289,822 ======== ========
4. Deferred Costs, New Facilities: Deferred costs, new facilities comprise the following (in thousands):
June 30, -------------- 1994 1993 -------- -------- Deferred development costs $ 4,705 $ 7,028 Pre-opening costs 50,706 46,784 ------- ------- 55,411 53,812 Less: accumulated amortization 34,526 25,178 ------- ------- $20,885 $28,634 ======= =======
-35- 5. Accrued Expenses: Accrued expenses comprise the following (in thousands):
June 30, -------------- 1994 1993 -------- -------- Salaries, wages and benefits $44,269 $37,215 Interest 12,136 13,133 Accrual for special charge 18,794 Other 22,581 14,254 ------- ------- $97,780 $64,602 ======= =======
6. Long-term Debt: Long-term debt comprises the following (in thousands, except interest rates):
June 30, 1994 ----------------------------------------------------- Current Long-term Rate Portion Portion Maturity ---- ------- ---------- -------- 10 7/8% Senior Subordinated Notes (b) 10 7/8% $200,000 2002 10 3/8% Senior Subordinated Notes (b) 10 3/8% 150,000 2003 Convertible subordinated debenture (c) 7 3/4% 2,000 2012 Notes, other (d) 5% to 14% $4,013 5,157 1994-2000 Unamortized discount (2,405) ------ --------- 4,013 354,752 Less: note receivable on convertible debenture 1,000 ------ -------- $4,013 $353,752 ====== ========
June 30, 1993 ----------------------------------------------------- Current Long-term Rate Portion Portion Maturity ---- ------- ---------- -------- Revolving line of credit (a) (a) $ 27,000 1996-1999 10 7/8% Senior Subordinated Notes (b) 10 7/8% 200,000 2002 10 3/8% Senior Subordinated Notes (b) 10 3/8% 150,000 2003 Convertible subordinated debenture (c) 7 3/4% 2,000 2012 Prime + 1 1/2% Notes, other (d) to 16.3% $3,809 7,175 1994-1999 Unamortized discount (2,573) ------ --------- Less: note receivable on convertible 3,809 383,602 debenture 1,000 ------ -------- $3,809 $382,602 ====== ========
Annual maturities for the next five years are as follows: 1995, $4,013,000; 1996, $2,858,000; 1997, $1,220,000; 1998, $838,000; and 1999, $13,000. -36- (a) The Company is party to a credit facility with Citibank, N.A., as agent for a group of several banks (the "Facility"). The 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. The Facility provides for a revolving loan period through December 31, 1996 and the subsequent conversion of the revolving loan into a term loan. At June 30, 1994, $30,006,000 of letters of credit were outstanding. The Company has pledged its ownership interests in certain of its operating subsidiaries as collateral under the Facility. At the Company's option, the interest rate on any loan under the Facility will be based on the London Interbank Offered Rate (LIBOR) or a base rate as specified in the agreement as adjusted for a margin. There were no borrowings under the facility at June 30, 1994. At June 30, 1993, the weighted average interest rate for all borrowings under the facility was 5.17%. Under the terms of the Facility, the Company must, among other things, maintain certain financial covenants. The Company is also limited in the amount of other indebtedness it may incur and may not declare or pay cash dividends. (b) On August 17, 1992, the Company issued its 10 7/8% Senior Subordinated Notes due 2002 ("10 7/8% Notes") in the amount of $200,000,000 in a public offering in which the Company received net proceeds of $192,500,000. The 10 7/8% Notes were priced at 99.25%, to yield 11% annually to maturity. On March 16, 1993 the Company issued its 10 3/8% Senior Subordinated Notes due 2003 ("10 3/8% Notes") in the amount of $150,000,000 in a private placement in which the Company received net proceeds of $144,586,000. The 10 3/8% Notes were priced at 99.22% to yield 10 1/2% annually to maturity. The 10 3/8% Notes were subsequently registered in a registered exchange offer. Of the difference between the face amount of each issue of the Notes and the net proceeds of the offerings, $2,664,000 represented original issue discount. The remaining $10,250,000 represented various issuance costs and is recorded within other assets and is amortized over the life of the notes. The 10 7/8% Notes are subject to redemption at any time on or after August 15, 1997 at the option of the Company at specified redemption prices plus accrued interest. The 10 3/8% Notes are subject to redemption at any time on or after April 1, 1998, at the option of the Company at specified redemption prices plus accrued interest. The indentures for the Notes contain certain covenants which include a limitation on the Company's ability to incur additional indebtedness, provide guarantees and pay cash dividends. (c) In November 1987, a 7 3/4% convertible subordinated debenture was sold to the Company's Chairman and Chief Executive Officer. This $2,000,000 debenture is convertible into shares of common stock at a conversion price of $8.56 per share. Simultaneously, the Company loaned the Chairman and Chief Executive Officer $2,000,000 to purchase the debenture. The loan is evidenced by a promissory note bearing interest at 7 3/4%, payable on the maturity date of the debenture or earlier to the extent that he converts or sells the debenture. At June 30, 1994, $1,000,000 is outstanding on the note. (d) These notes, primarily related to capitalized leases, require periodic payments of principal and interest through maturity. In order to reduce the impact of changes in interest rates on its long-term debt, the Company, during fiscal 1994 and 1993, entered into four, seven year, interest rate swap agreements with notional amounts of $25,000,000 each which mature in 1999 and 2000 where the Company receives yields of between 5.16% and 6.65% and pays a six month LIBOR yield. These interest rate swap agreements are subject to one year counter swap agreements where the Company receives a six month LIBOR yield and pays a yield of between 3.62% and 4.08%. The Company has limited its exposure under each interest rate swap agreement for interest rate increases through the purchase of interest rate caps which impose limits of between 5.25% and 8.00% which expire in 1996 and 1997. The differential to be paid or received is accrued as interest rate changes and is recognized over the life of the agreements. The counterparty to the interest rate swap agreements and interest rate cap agreements is a large international financial institution. While the -37- Company may be exposed to losses in the event of nonperformance, it does not anticipate nonperformance under the agreements. 7. Commitments and Contingencies: Leases: The Company leases 18 of its rehabilitation hospitals under non-cancelable operating leases. These leases have terms of ten to fifteen years. Future minimum lease payments under all non-cancelable operating leases as of June 30, 1994, are as follows (in thousands): 1995 $ 47,600 1996 44,541 1997 40,465 1998 36,213 1999 28,867 Thereafter 67,775 -------- $265,461 ========
Substantially all of the above leases have optional renewal terms based upon fair market rentals at the time of renewal. Certain facility operating leases require contingent lease payments based upon net patient revenues. Total rental expense under operating leases for 1994, 1993 and 1992 was $62,686,000, $64,648,000 and $56,014,000, respectively. The rental expense for 1994, 1993 and 1992 included contingent payments of $5,138,000, $6,982,000 and $6,066,000, respectively. Other: The Company guarantees payment throughout the term of a bond issue to an economic development authority, of amounts due and payable by the owner of a long-term care facility previously managed by the Company. The outstanding bonds total approximately $6,177,000 at June 30, 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. 8. Special Charge and Change in Accounting Principle: During the fourth quarter a special pre-tax charge of $74,834,000 was recorded. The special charge resulted from the approval by the Company's Board of Directors of several measures to streamline operations and improve productivity by restructuring the Company into major operating businesses, flattening the management organization structure, writing down certain assets and, where appropriate, divesting of unproductive assets. The Company began working on the proposed plan during the fiscal 1994 third quarter as a result of market changes the Company was experiencing. The special charge comprised several items including the impairment of selected assets in the Company's hospital division, the costs associated with the consolidation of its contract therapy -38- companies, the losses related to the termination of certain business relationships in the contract therapy business and certain other costs of the restructuring program. At June 30, 1994, $18,794,000 represents the balance of the special charge, (excluding the write down of assets which are reflected as a reduction of the related asset account), which is included within accrued liabilities. The components of the special charge are as follows (in thousands): Original Fiscal 1994 Balance Provision Activity June 30, 1994 --------- ----------- ------------- Impairment of assets Consolidation and restructuring $50,244 $(41,406) $ 8,838 Employee and other costs 22,842 (13,807) 9,035 1,748 ( 827) 921 ------- -------- ------- $74,834 $(56,040) $18,794 ======= ======== =======
Approximately $50,244,000 of the special charge was associated with the impairment of assets at eight rehabilitation hospitals, divestiture of two rehabilitation hospitals, closure of a select group of outpatient locations and miscellaneous other charges. The impaired assets were identified in accordance with the Company's policy and based upon a review of the facts and circumstances related to the assets and a determination that the assets would not be recoverable, as determined based upon the future undiscounted cash flows resulting from the assets. The impairment loss was measured as the difference between the carrying amount of the assets and their fair value as determined by independent appraisals. Approximately $12,042,000 of the charge is related to the consolidation of certain contract therapy companies into CMS Therapies and the exit from certain markets and businesses. This consolidation process involved the closure of offices, relocation and severance of personnel and elimination of duplicative processes. Approximately $10,800,000 of the charge is related to the writedown of uncollectible receivables pertaining to the termination of certain business relationships at the Company's CMS Therapies, Inc. subsidiary. During the second quarter of fiscal 1994, the Company exited business arrangements in which it provided therapists to unrelated Medicare certified agencies which in turn supplied those therapists to non-Medicare certified skilled nursing facilities. For a variety of business reasons, including, among others, the Healthcare Financing Administration's announced intentions to increase their review of the reasonableness of the charges billed by the agencies to the Medicare program, the Company exited those relationships and, in many instances, began to provide the same services directly to Medicare patients upon termination of the contracts with the agencies. Following termination of the contracts, the Company continued to assess the collectibility of the agency receivables and, due to deteriorating business relations and declining financial condition of the agencies, it was determined a write-down of these receivables was required as of June 30, 1994. The remainder of the charge, $1,748,000, was to reduce the work force at the Company's corporate office and provide for transaction costs to execute the plan. During the fourth quarter of fiscal 1993 the Company recorded a pre-tax charge of $14,556,000 related principally to the write-off of deferred costs for approximately 30 abandoned rehabilitation hospital development projects for which construction had not started. The decision to write-down or abandon certain projects and pursue less capital-intensive growth than in the past, was a result of changes in the Company's rehabilitation hospital development strategy in response to changes in various healthcare delivery markets. Previously, the Company had deferred certain costs incurred to obtain government approvals and other expenses related to the development of rehabilitation hospitals. Based on a historical high rate of completion, costs of developing a project were charged to operations only when it was determined that the project would be abandoned. As a result of the change in development strategy, the Company changed its accounting for development costs. Hospital development costs are expensed until that time when it is probable that construction will commence. 9. Merger Expenses: Costs of $2,598,000 related to the merger with Kron and Kron's subsequent consolidation with the Company's other physician services company, CompHealth, were charged to expense in the third quarter of fiscal 1993. -39- Costs of $1,000,000 related to the merger with CompHealth were charged to expense in the second quarter of fiscal 1992. In the fourth quarter of fiscal 1992, the Company incurred expenses of $3,319,000 related to the termination of a merger agreement. 10. Income Taxes: Effective July 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes." The adoption of FAS 109 changes the Company's method of accounting for income taxes from the deferred method (APB 11) to an asset and liability approach. Under the deferred method, tax expense was based on items of income and expense that were reported in different years in the financial statements and tax returns, and were measured at the rate in effect in the year the difference originated. Under FAS 109 the deferred tax assets and liabilities are measured using the tax rates and laws that will be in effect when the differences are expected to be realized or settled. As permitted, the Company has elected not to restate the financial statements of prior years. The cumulative effect of adopting FAS 109 was not material and has been included in the operating income tax provision. There was no effect on pre-tax income for this prospective adoption. On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 increased the top corporate tax rate from 34% to 35% effective retroactive to January 1, 1993 and made certain other tax law changes. The effects of these tax law changes were not material and have been included in the operating income tax provision. At June 30, 1994, the Company has an estimated $2,800,000 capital loss carryforward as a result of certain restructuring transactions. The loss is only available to offset future capital gain income and will expire in fiscal 1999. Deferred tax liabilities (assets) were comprised of the following at June 30, 1994 (in thousands): Depreciation and amortization $ 10,441 Other 3,973 --------- Total deferred tax liabilities 14,414 --------- Special charges (20,511) Bad debt reserves (2,888) Other non-deductible accruals (7,673) Tax carryforward items (1,889) Other (3,220) --------- Total deferred tax assets (36,181) --------- Valuation allowance 1,800 --------- Excess of deferred tax assets over liabilities $(19,967) ========= Deferred Tax Balance Sheet Classification: Current $ (5,610) Noncurrent (14,357) --------- Total $(19,967) =========
-40- The valuation allowance is the result of: (1) The uncertain state tax benefits resulting from states requiring separate return filings or with no or limited loss carryover provisions; and (2) limitations on the Company's ability to absorb the estimated $2,800,000 capital loss in the five year carryforward period. The valuation allowance increased by approximately $900,000 during fiscal 1994 primarily as a result of the capital loss limitation. Income taxes comprise the following (in thousands): Liability Method Deferred Method ------- --------------- 1994 1993 1992 ---- ---- ---- Current: Federal $ 4,513 $19,180 $14,698 State and local 1,306 3,641 3,293 Deferred: Federal (11,360) (3,681) (1,769) State and local (1,103) (214) 78 Less: Minority interest (1,004) (1,363) (1,439) ------- ------- ------- $(7,648) $17,563 $14,861 ======= ======= =======
A reconciliation of the statutory federal income tax rates with the effective income tax rate is as follows: Liability Method Deferred Method ------- --------------- 1994 1993 1992 ---- ---- ---- Federal income tax at statutory rates (35.0%) 34.0% 34.0% State income taxes, net of federal tax benefit (.1%) 6.9% 4.4% Amortization of goodwill 1.4% 1.5% .8% Merger costs 1.2% .2% Assessments 6.9% Adjustment for inclusion of pooled companies (Note 2) (.8%) (2.6%) Special charge 4.1% Capital loss valuation allowance 2.3% Other 2.3% .8% (1.4%) ------- ------ ----- (18.1%) 43.6% 35.4% ======= ====== =====
The components of the provision for deferred income taxes for fiscal years 1993 and 1992 are as follows (in thousands): 1993 1992 ------- ------- Conversion from cash basis of accounting $ (267) $ (454) Depreciation 1,094 790 Deferred costs (3,228) (53) Bad debts (1,038) (119) Accrued expenses and other (456) (1,855) ------- ------- $(3,895) $(1,691) ======= =======
-41- 11. Adoption of New Accounting Principle: In fiscal 1993 the Company adopted the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Upon issuance of this statement, the Company reviewed the provisions of the new statement and concluded that the statement compelled the write-down to fair value of a long term care investment being held to maturity as a result of the impairment of the investment using a discounted cash flow analysis. Prior to the issuance of this statement, the asset was carried at historical cost which is expected to be recovered upon maturity. In applying this statement, the Company recognized a $5,000,000 write-down to fair value of the long-term care investment. The cumulative effect of this change in accounting principle, on an after-tax basis, was $3,204,000 or $.08 per share on a fully diluted basis. 12. Consolidated Statements of Cash Flow: Supplementary information for the consolidated statements of cash flows is set forth below (in thousands): 1994 1993 1992 ---- ---- ---- Cash paid during the year for: Interest, net of amounts capitalized ($1,615, $5,918 and $1,226 in 1994, 1993 and 1992, respectively) $39,202 $10,356 $ 5,252 ======= ======= ======= Income taxes $ 4,955 $27,819 $11,200 ======= ======= ======= The sales of long-term care facilities resulted in the following: Assets disposed of $15,344 Liabilities assumed by buyer ======= Notes received from buyers $2,995 12,349 ------ $15,344 =======
In fiscal 1992, the Company purchased 100% of the capital stock of AcMed for $5,100,000 in cash and the Company's common stock. In fiscal 1994, the Company purchased 100% of the capital stock of MMA for $8,668,000 in cash and the Company's common stock. (in thousands): MMA AcMed ----- ----- Fair value of assets acquired $9,525 $7,424 Less: Cash payments (1,662) (3,200) Fair value of stock issued (7,006) (1,900) -------- -------- Liabilities assumed $ 857 $2,324 ======= =======
In fiscal 1993, the Company purchased the 20% minority interest of Communi- Care for $3,941,000 in cash and $890,000 in stock, plus future payments based on earnings. -42- 13. Fair Value of Financial Instruments: The estimated fair values of the Company's financial instruments at June 30, 1994 are as follows (in thousands): Carrying Fair Amount Value -------- ----- Cash and cash equivalents $54,862 $54,862 Notes Receivable $31,165 $30,643 Investments $11,367 Long-term debt $354,272 $339,927 Interest rate swap agreements / interest rate collar agreements $644 $(6,300)
Cash and cash equivalents' carrying amount approximates fair value because of the short maturity of these instruments. The fair value of notes receivable was estimated by discounting the future cash flows using current rates available to similar borrowers under similar circumstances. It is not practicable to estimate the fair value of the Company's investments, which comprise certain short-term and equity investments because of the lack of a quoted market price, and the inability to estimate fair value without incurring excessive costs. The $11,367,000 carrying amount at June 30, 1994 represents the original cost of the investments, which management believes it not impaired. The fair value of the Company's long-term debt, excluding capital leases, was estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The fair values of interest rate swaps and interest rate collars are the estimated amounts that the Company would receive or pay to terminate the swap agreements, taking into account current interest rates. 14. Disposition of Long-term Care Facilities: On March 31, 1992, the Company sold substantially all of the property and equipment of two of its long-term care facilities to Renaissance Healthcare Corporation ("RHC"), a long-term care company owned and operated by former management employees of the Company. The aggregate sales price was approximately $9,700,000 and was financed through installment sales agreements. In addition, the Company sold all of the outstanding stock of another facility to RHC for approximately $2,600,000 financed through a promissory note. There were no gains or losses on the sales. As part of the transactions, the Company increased a previously agreed upon working capital loan commitment to $3,000,000 and extended its payment terms. The Company has notes receivable and other investments, related to its divestiture of its free-standing long-term care facilities totaling $22,078,000 including notes receivable of $16,765,000 from RHC. Repayment of those amounts are dependent upon the cash flows of the individual companies. Collateral on certain notes receivable and investments aggregating $4,129,000 consists of first or second mortgages, personal guarantees and pledges of certain other assets. Certain notes receivable from RHC aggregating $13,265,000 reflect future installment sales obligations under which the Company holds title to the sold assets until all payments are made. All notes receivable bear interest at 5% to 12% and require future principal payments of approximately $547,000 in 1995, $3,742,000 in 1996, $1,015,000 in 1997, $683,000 in 1998, $661,000 in 1999, and $25,353,000 thereafter. The current portion of these long-term notes are included in other receivables in the consolidated balance sheets. -43- 15. Related Party Transactions: The Company has been party to various contracts with Commercial Construction Company, Inc. ("CCI") for the construction of new rehabilitation hospitals to be owned and operated by the Company. CCI is wholly owned by the son of the Company's Chairman and Chief Executive Officer and brother of the President of the Company. In addition, the Company purchases other development and maintenance services, equipment, furniture and supplies for its rehabilitation hospitals through CCI and its affiliates. In fiscal 1994, 1993 and 1992, the Company made payments aggregating approximately $16,950,000, $75,220,000 and $14,994,000, respectively, to CCI and its affiliates. Of these payments, $7,189,000, $66,204,000, and $12,470,000 were recorded in Property and Equipment for fiscal 1994, 1993 and 1992, respectively, and $9,761,000, $9,016,000 and $2,524,000 were charged to Cost of Services for fiscal 1994, 1993, and 1992 respectively. As of June 30, 1994, commitments under outstanding contracts with CCI and its affiliates were $7,273,000 plus reimbursement of certain personnel costs. 16. Stock Options: Under various Company stock option plans, shares of common stock have been reserved for issuance to officers, key employees and directors. The following summary covers options under these plans as adjusted for the three-for-two stock split paid November 15, 1991: Fiscal Year ---------------------------------------- 1994 1993 1992 ---------- ---------- ----------- Shares under options at beginning of period 5,441,563 6,469,567 2,843,190 Options granted during the period 1,135,003 3,633,932 4,252,031 Options canceled or terminated (364,571) (3,465,812) (25,099) Options exercised: 1994 ($5.25 to $7.33) (206,125) 1993 ($.18 to $13.00) (1,196,124) 1992 ($5.25 to $13.00) (600,555) --------- --------- --------- Shares under option, end of period 6,005,870 5,441,563 6,469,567 Shares available for future grants 2,733,698 2,004,877 180,866 Shares reserved --------- --------- --------- 8,739,568 7,446,440 6,650,433 ========= ========= ========= Options exercisable 2,054,179 1,502,507 1,745,552 ========= ========= =========
The Company has the following stock compensation plans at June 30, 1994: The 1986 Stock Option Plan (1986 Plan), the 1989 Non-Qualified Stock Option Agreement, the 1989 Non-Employee Directors' Stock Option Plan, the 1992 CEO Stock Option Plan (1992 Plan), the 1993 Non-Qualified Stock Option Plan (1993 Plan), and the 1994 Stock Option Plan (1994 Plan). Options outstanding at June 30, 1994 are at prices ranging from $5.25 to $21.84 per share, the fair market value of the stock at the date of grant. Accordingly, no compensation expense has been recorded for these awards. Options become exercisable in four to seven annual installments commencing on the first anniversary of the date of grant, and expire between November 1994 and August 2003, five to ten years from the date of grant. In August 1993, the Board of Directors approved adoption of the 1994 Plan which authorized options of 1,500,000 shares. No options were granted under the Plan as of June 30, 1994. In May 1993, the Board of Directors approved adoption of the 1993 Plan which authorized options of 1,000,000 shares. Officers and directors of the Company are not eligible to receive options under the 1993 Stock Option Plan. In May 1993, the Company's Board of Directors granted options, exercisable at the market price on the date of grant ($11 per share), to substantially all employees holding outstanding options with exercise prices higher than such current market price. The number of shares subject to the options granted to each employee was equal in number to the shares covered by options previously granted to such employee at higher exercise prices. The new -44- options were granted to each employee conditioned on such employee's agreement to cancel their previously granted options for an equal number of shares at the higher exercise prices. The term, vesting rate and other provisions of the new options were otherwise identical to the options canceled. As a result, options on 3,339,187 shares with exercise prices per share ranging from $13 to $22.88 per share were canceled and the same number of new options were granted at an exercise price of $11 per share. During fiscal 1993, the Company loaned its Chairman and Chief Executive Officer $4,548,000 for the exercise of stock options and the payment of the resulting income taxes, and loaned its President $530,000 for the payment of income taxes resulting from the exercise of stock options. The tax loans were authorized under the 1986 Plan, and the remaining loan was authorized by the Company's Board of Directors. The loans are repayable upon demand with interest payable monthly at the IRS' Applicable Federal Rate, adjusted semi-annually on January 1, and July 1. 17. 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 on July 1, 1991. Net income was adjusted for the interest on the debentures, net of the related income tax benefits. 18. Shareholders' Rights Plan: On March 11, 1991, the Company declared a distribution of Preferred Stock Purchase Rights ("Rights") to holders of the Company's common stock and authorized the issuance of additional Rights for common stock issued after that date. The Company may redeem the Rights at $.001 per right at any time until they become exercisable. The rights become exercisable only if (with certain exceptions and limitations) a person or group attempts to obtain beneficial ownership of 20% or more of the Company's common stock or is determined to be an "adverse person" by the Board of Directors. Each Right, if and when it becomes exercisable, may be exchanged for 1/1000th of a share of Series A Junior Participating Preferred Stock, at an exercise price of $85, subject to adjustment. In certain actual or potential takeover situations if the Rights have not been redeemed, Rights holders will be entitled to purchase common stock or other securities or property of the Company or an acquiring company. 19. Subsequent Event In June 1994, the Company obtained consents from its bondholders and amended its credit facility to permit purchases of its Senior Subordinated Notes in the open market. During the first two months of fiscal 1995, the Company purchased approximately $26,835,000 of its Senior Subordinated Notes in a series of open market purchases utilizing its operating cash flow. -45- 20. Quarterly Results of Operations (unaudited): The following is a summary of the unaudited quarterly results of operations for (in thousands, except per share data):
Fiscal Year 1994 --------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter -------- -------- -------- -------- Net operating revenues $249,762 $249,041 $252,986 $253,050 Income (loss) before income taxes 12,727 6,366 7,010 (68,296) (a) Net income (loss) 7,573 3,788 4,170 (50,076) (a) Income (loss) per share $ .20 $ .10 $ .11 $ (1.31) Fiscal Year 1993 --------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Net operating revenues $209,889 $218,536 $232,305 $240,667 Income before income taxes and cumulative effect of accounting change 14,676 16,122 13,002(b) (3,514)(c) Income before cumulative effect of accounting change 9,095 9,996 7,764(b) (4,132)(c) Net income 9,095 9,996 7,764(b) (7,336)(c) Income per share: Income before cumulative effect of accounting change $.24 $.26 $.20 $(.11) Cumulative effect of accounting change ---- ---- ---- (.08) ----- Net income $.24 $.26 $.20 $(.19) ==== ==== ==== ======
(a) Includes $74,834 pre-tax special charge related to the impairment of selected assets of the Company's hospital division, the costs associated with the consolidation of its contract therapy companies, the losses related to the termination of certain relationships in the contract therapy business and certain other costs of the restructuring program. (b) Includes $2,598 of pre-tax merger expense related to the Kron acquisition and its subsequent consolidation with CompHealth. (c) Includes $14,556 pre-tax special charge related to the write-down of certain rehabilitation facility development costs. -46- Report of Independent Auditors The Board of Directors and Stockholders of Continental Medical Systems, Inc. We have audited the consolidated balance sheet of Continental Medical Systems, Inc. and subsidiaries as of June 30, 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. Our audit also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audit. The consolidated financial statements of Continental Medical Systems, Inc. and subsidiaries for each of the two years in the period ended June 30, 1993 were audited by other auditors whose report dated August 10, 1993 on those statements included an explanatory paragraph that described the change in the Company's method of accounting for development costs and the adoption of the provisions of Statement of Financial Accounting Standards No. 115 discussed in Notes 8 and 11 to the consolidated financial statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement and schedule presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1994 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Continental Medical Systems, Inc. and subsidiaries at June 30, 1994, and the consolidated results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 10 to the consolidated financial statements, in fiscal 1994 the Company changed its method of accounting for income taxes. Ernst & Young LLP Harrisburg, Pennsylvania August 9, 1994 Report of Independent Accountants To the Board of Directors of Continental Medical Systems, Inc. In our opinion, the consolidated financial statements listed in the accompanying index, present fairly, in all material respects, the financial position, results of operations and cash flows of Continental Medical Systems, Inc. and its subsidiaries as of and for each of the two years in the period ended June 30, 1993, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of Continental Medical Systems, Inc. for any period subsequent to June 30, 1993. As discussed in Notes 8 and 11 to the consolidated financial statements, in fiscal 1993 the Company changed its method of accounting for development costs and adopted the provisions of Statement of Financial Accounting Standards No. 115. Our audits of the consolidated financial statements referred to above also included an audit of the related financial statement schedules. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Price Waterhouse Philadelphia, PA August 10, 1993 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities 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. June 1, 1995 By:/s/ Dennis L. Lehman ------------------------------------ Dennis L. Lehman, Senior Vice President-Finance and Chief Financial Officer (Principal financial and accounting officer) -----END PRIVACY-ENHANCED MESSAGE-----