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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
(X) Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (Fee Required).
For the fiscal year ended February 29, 1996.
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No Fee Required).
For the transition period from ____________ to ____________.
Commission File No. 1-10814
READICARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3775814
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Code)
1322 Orleans Drive 94089
Sunnyvale, California (Zip Code)
(Address of principal executive
offices)
(408) 743-3100
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 par value
(Title of class)
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 .
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
The aggregate market value of voting stock held by nonaffiliates of
the registrant was approximately $35,153,607 as of April 30, 1996.
Number of shares of common stock outstanding as of April 30, 1996:
8,247,949.
PART III INCORPORATES CERTAIN INFORMATION BY REFERENCE FROM THE
COMPANY'S PROXY STATEMENT TO BE USED IN CONJUNCTION WITH ITS 1996 ANNUAL MEETING
OF STOCKHOLDERS.
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PART I
ITEM 1. BUSINESS
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Statements contained in this Annual Report on Form 10-K that are not
based on historical facts are forward-looking statements subject to
uncertainties and risks including, but not limited to, product and service
demand and acceptance, the availability of appropriate acquisition candidates,
economic conditions, the impact of competition and pricing, capacity and supply
constraints or difficulties, government regulations, and other risks described
in this Annual Report on Form 10-K.
INTRODUCTION
ReadiCare, Inc., founded in 1982, is a leading physician practice
management company specializing in the provision of occupational health care
services and related cost-containment programs. At the Company's 37
conveniently located outpatient medical and rehabilitation centers in key
markets in California and Washington state, primary care physicians and support
personnel offer prompt, high quality services designed to reduce workers'
compensation and health care costs, and to improve employee health, safety, and
productivity.
ReadiCare, Inc. provides a wide range of services to employees of over
26,000 client companies, represented by small family-owned businesses, Fortune
500 companies, municipalities, school districts, state and local government
agencies, workers' compensation and health insurers and HMOs. Medical cost
containment programs available through the Company include: medical
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case and claims management; bill and utilization review; safety and injury
prevention; risk management and loss control; employment-related testing, such
as drug screening, pre-placement physical exams, OSHA compliance testing and
others; and, access to the Company's workers' compensation managed care provider
network.
INDUSTRY OVERVIEW
The primary care provider market for occupational health care services
is large and highly fragmented, representing approximately $8 billion in annual
expenditures in the United States. Occupational health care is generally
provided by physicians or other providers who have specialized training in
occupational medicine and related services. Consistent with the trends affecting
most physicians today, these physicians have experienced pressures on pricing
and patient flow from cost containment efforts, reduced demand for their
services, growing regulatory complexity, medical liability concerns, and
increased competition. Physicians and other providers rendering occupational
health care services in the Company's markets are generally reimbursed on a fee-
for-service basis for the treatment of work-related injuries. Such fee schedules
are established and regulated by state agencies. In certain managed care plans
the use of risk-sharing arrangements, such as capitation or case pricing of
services, may emerge as an alternative means of reimbursing providers. The
Company believes that market conditions, legislative trends, and other factors
are encouraging physicians to affiliate with or sell their practices or
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businesses to larger organizations, such as the Company, that are positioned to
assist them to better manage their practices, and that have the ability to enter
into contractual and other arrangements with payors of health care services on a
cost effective and efficient basis.
Workers' compensation is a program mandated and regulated by
individual states which requires employers to assume a broad range of costs for
medical services, lost wages, disability benefits, and other costs resulting
from work-related injuries and claims. The federal government administers a
similar program for federal employees. Workers' compensation programs are
intended to provide prompt, high quality, cost-effective medical benefits to
work accident victims regardless of fault or personal means. Medical and other
costs incurred by employers are reimbursed to service providers, such as the
Company, through the purchase of insurance from private workers' compensation
carriers, participation in a state insurance fund, or by self-insurance.
According to recent industry estimates, the total cost of workers'
compensation benefits has grown by approximately 10% per year for the past
decade in the United States, and is expected to reach $140 billion by the year
2000. Injured employees in need of workers' compensation medical services are
primarily directed by employers and insurance carriers to service providers such
as the Company. Historically, medical costs were a small portion of total
workers' compensation costs and therefore did not receive significant attention
from employers. However, the rapid increase
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in medical costs in recent years for work-related injuries, now representing
nearly 40% of total workers' compensation expenditures, has compelled employers
to develop and implement strategies and programs intended to reduce medical
costs, and improve worker productivity, health and safety.
The occupational medical treatment process begins when a worker who
sustains a job-related injury or illness either is directed to a medical
provider by his employer or, in certain cases, selects a provider of his own
choice. In the Company's experience, however, the majority of injured employees
seek medical services at providers selected and arranged for by their employer
or insurance carrier. Choices of medical service providers include, among
others, managed care networks such as ReadiCare Medical Centers, hospitals,
HMOs, family doctors, urgent care centers, industrial medical clinics, payor-
sponsored PPOs, and IPAs. The savings to employers and workers' compensation
insurance carriers can be significant when claims do not result in lost work-
time or associated disability costs. In California and Washington, lost work-
time for purposes of disability payments generally begins three days from the
date of a claim. The costs associated with an injury which does not involve
lost work-time typically include the costs of medical treatment, rehabilitation,
and reduced worker productivity, as well as the costs associated with
utilization and bill review services, and other related expenses. If the claim
involves lost work-time, higher costs can result, including costs associated
with replacing the injured worker with another worker,
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the payment of extended disability benefits, legal costs, and other
administrative expenses. In the aggregate, these non-medical costs represent
approximately 60% of all costs associated with workers' compensation
expenditures.
BUSINESS SUMMARY
The ReadiCare service delivery system is a cost-effective alternative
to general hospitals, industrial medical clinics, outpatient rehabilitation
centers, and other organizations which offer or arrange for the provision of
similar services. In addition, the Company makes available a full range of
managed care services to those clients who seek a comprehensive approach to
workers' compensation and health care cost containment through, among other
mechanisms, injury prevention and safety programs, and the ReadiCare managed
care provider network. The Company's operating strategies are as follows:
. PROVIDE QUALITY SERVICES IN LOW-COST SETTINGS:
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The Company currently operates a network of thirty-seven (37) low-cost,
conveniently located primary care medical centers each staffed with a
complement of licensed doctors, nurses, physical therapists, and other
professional and technical personnel to provide prompt, high quality medical
services. These health care professionals are experienced in diagnosing,
treating, and rehabilitating common industrial and work-related injuries and
illnesses, as well as
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in caring for routine, non-life-threatening medical problems. Physicians do
not have any financial ownership interests in the Company's medical centers.
. OFFER SPECIALIZED SERVICES TO CLIENTS:
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The Company customizes its services to meet the needs of its clients. By
providing services on an unbundled basis and based upon client requirements,
the Company can implement a comprehensive approach to workers' compensation
and health care cost containment.
Customized services include:
- Employee pre-placement testing;
- Occupational Safety & Health Agency (OSHA)compliance testing;
- Drug collection, screening and reporting;
- American Disabilities Act (ADA), Department of
Transportation (DOT),Federal Aviation Administration (FAA) testing;
- Risk management and loss control consulting.
Additionally, the Company has developed a number of educational programs
designed to reduce or prevent work-related injuries by advising employers of
methods by which to alter unsafe work-site conditions and to promote good
health. On an ongoing basis, the Company evaluates existing and new markets
at which it can locate or acquire existing centers, and evaluates new
services and products which may add value to its service model. The Company
intends to expand its operations and services as conditions warrant.
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. ENHANCE THE SERVICE CAPABILITIES OF ITS WORKERS'
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COMPENSATION MANAGED CARE PROVIDER NETWORK:
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The Company has developed a workers' compensation managed care provider
network in its markets enabling employers, insurers, and third-party payors
to benefit from the Company's expertise in workers' compensation and medical
cost containment. Through the managed care network, client companies have
access to the services of selected physician specialists in a variety of
areas, such as hand surgery, orthopedics, neurology, internal medicine,
dermatology and many others. Clients also have access to the full range of
inpatient and outpatient services offered by hospitals and diagnostic centers
participating in the Company's managed care network. These managed care
network providers, which number approximately 117, have agreed to adhere to
the Company's strict cost, utilization, quality control and early return-to-
work guidelines.
Subsequent to the Workers' Compensation Health Care Provider Organization
(HCO) Act of 1993, in April 1994 the Company applied for certification as a
Workers' Compensation Health Care Provider Organization (WCHCPO) to the State
of California. Since 1994 the Company re-submitted several amended
applications, and on May 6, 1996, received WCHCPO certification from the
California Department of Corporations. Pending the outcome of proposed
amended legislation, market
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demand and other factors, the Company may seek additional certification as a
Health Care Organization (HCO). The HCO designation may permit the Company to
operate in certain markets as a "risk-based" services provider similar to an
HMO or health care insurer. Management believes that should it obtain such
certification and should there be market demand for such a product, it
could enjoy a competitive advantage in certain of its California markets.
. LOCATE CENTERS IN CLUSTERS CONVENIENT TO CLIENTS:
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The Company locates its centers in clusters in key markets to better serve
its clients, to increase operating efficiencies, and to more effectively
expand the range of services it can make available. Another benefit of the
cluster approach is that the Company can realize certain economies of scale
in the operation of its centers, such as management oversight and staffing,
purchasing of supplies, marketing and advertising, and others. Further, the
Company is experienced in opening and expanding outpatient medical and
rehabilitation centers as well as acquiring centers to serve existing and new
clients should demand materialize.
. UTILIZE THE COMPANY'S EXPERTISE AND EXPERIENCE AS A COMPETITIVE ADVANTAGE:
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The Company strives to optimize the performance of its operations and to
enhance service levels by utilizing the Company's expertise and experience it
has gained since its formation in 1982, and has developed extensive,
proprietary
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management and information processing systems relating to its operations and
the workers' compensation system in general. These systems have enhanced the
Company's ability to furnish high-quality, efficient services while assisting
its clients in complying with complex regulations governing the workers'
compensation and health care industries. Accordingly, it is the Company's
strategy to promote and constantly upgrade its knowledge and service levels,
as well as its information and other management systems in order to continue
to attract new clients. The Company believes that its expertise and
experience also allow it to efficiently manage all non-medical aspects of its
center operations, including billing and collections, accounting, tax and
financial management, marketing, human resource management, third-party payor
contracting, and others, thus enabling center physicians to focus on
providing quality health care services.
. AFFILIATE WITH INTEGRATED PROVIDERS AND PAYOR NETWORKS:
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The Company is positioning its operations to successfully compete within a
variety of emerging models of health care payment and delivery by actively
expanding its own delivery system, and by affiliating with other integrated
provider and payor networks, such as HMOs, IPAs, and payor-sponsored group
health and workers' compensation PPOs. The Company believes that should
demand warrant, it can develop and implement cost-effective, and
competitively priced risk sharing programs with these entities, such as case
rates and capitation products
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covering a comprehensive range of costs associated with occupational health
care. However, there can be no assurance that the Company can successfully
implement such programs. Additionally, the Company has entered into
contractual relationships with a number of health and life insurers whereby
the Company's services are being made available to such insurers'
policyholders as part of various group health plans and workers' compensation
cost containment programs.
. ENHANCE NEAR-TERM UTILIZATION AND PURSUE EXPANSION AS MARKET
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CONDITIONS WARRANT:
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In the near term, the Company intends to continue to promote and further
enhance utilization and profitability levels at its existing network of
centers, and to develop complimentary workers' compensation and health care
cost containment programs for the marketplace. Additionally, the Company plans
to expand its network of centers in selected geographic markets through the
acquisition of existing physician practices or occupational medical centers,
and to the extent suitable sites are secured and market conditions warrant,
through the opening of new centers. There can be no assurance that suitable
acquisition candidates or sites can be found on terms acceptable to the
Company.
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OPERATIONS
OUTPATIENT PRIMARY CARE MEDICAL AND REHABILITATION CENTER SERVICES
Through the Company's network of outpatient primary care medical and
rehabilitation centers and its managed care network, ReadiCare services are
designed to reduce the overall costs associated with workers' compensation and
health care claims, featuring the following:
. Lower direct medical costs as compared to many alternative sources;
. Early return-to-work or limited work duty programs
developed by the Company which help eliminate or minimize
disability claims, litigation, and related costs;
. Injury prevention, safety, and education programs;
. Early intervention and case management of workers'
compensation claims; and
. Prompt, quality services at convenient locations.
The following table indicates the number of primary care medical and
rehabilitation centers ("Medical Centers") owned and operated by the Company for
the respective periods:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28,
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1994 1995 1996
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<S> <C> <C> <C>
Centers in operation
at year-end 41 40 37
Centers opened during year 1 - -
Centers discontinued during year 2 1 3
</TABLE>
The Medical Centers operate under the trade names "ReadiCare Medical
Centers" in California, and "CHEC Medical Centers" in
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Washington. The Medical Centers specialize in the delivery of cost-effective,
outpatient primary medical care and rehabilitation services to individuals for
the treatment of work-related medical problems, and to the general public for
routine non-life-threatening, outpatient health care needs. For the year ended
February 29, 1996, approximately 71% of revenues at the Medical Centers were
derived from the provision of workers' compensation medical and related services
and, therefore, were paid for by an employer or insurance carrier. The
remaining 29% of revenues were derived from the treatment of non-work-related
injuries or illnesses, such as urgent care, and individual and family health
care services, and were paid for by the patient directly, or through his or her
group health insurer.
The Medical Centers are an attractive alternative to traditional acute and
episodic sites of service, such as hospital emergency rooms, because of their
accessibility, convenience, ambiance, and focus on quality service and medical
cost containment. The Company believes that prices in the Medical Centers are
lower than those of hospital emergency rooms and competitive with most general
physicians' offices, industrial clinics, primary or urgent care centers, or
other service providers. Hours of operation vary depending upon location and
client company requirements, and range from 8 to 15 hours per day. No
appointments are necessary at the Medical Centers and generally most patients
receive services within 15 minutes of arrival.
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MEDICAL CENTER SERVICES
Typical services offered to the general public and to employers and their
employees at the Company's centers include:
. Outpatient primary medical care, such as physician services for the
treatment of work-related injuries and illnesses;
. Medical surveillance, executive, and special physical examinations;
. Physical and rehabilitation therapy, such as ultrasound, whirlpool, manual
therapy and other treatment modalities;
. Outpatient medical services, such as treatment of fractures and sprains,
and minor surgery procedures;
. Medical consultation and rehabilitation services in areas such as
orthopedics and hand surgery;
. Diagnostic testing, such as X-ray, spirometry, laboratory tests,
audiometry, and others;
. Disability and occupational health evaluations;
. Drug testing, collection and reporting services;
. Dispensing of prescription medicines, general medical supplies and
products;
. OSHA and regulatory compliance services; and
. Urgent care, and routine individual and family health care.
DESCRIPTION AND SIZE
The Medical Centers range in size from approximately 2,400 square feet to
15,000 square feet, and are generally designed to accommodate a minimum of five
examining or treatment rooms, various ancillary service areas, such as drug
collection, testing and reporting, laboratory, X-ray, audiometry and diagnostic
testing,
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physical rehabilitation, pharmacy and supply, and other support functions. The
Company owns debt-free the land and buildings occupied by its Everett and
Tacoma, Washington centers and its Rocklin, California center. All other
centers operated by the Company are located in leased premises. More recently
opened centers have generally ranged in size from 4,000 to 6,000 square feet.
WORKERS' COMPENSATION MANAGED CARE PROVIDER NETWORK
The Company operates a workers' compensation managed care provider network
to enable employers and insurers to further benefit from the Company's expertise
in workers' compensation cost containment. Through the managed care network,
client companies have access to the services of a broad array of physician
specialists in such areas as orthopedics, neurology, hand surgery, dermatology,
ophthalmology, internal medicine, and others. Clients can also access inpatient
and outpatient services offered by selected hospitals and diagnostic centers
that participate in the Company's managed care network. Network providers
include only those medical service providers who have agreed to adhere to the
Company's cost, utilization and quality control guidelines, and who have agreed
to conform to the Company's early return-to-work, injury prevention and
rehabilitation, case management, utilization review, bill review and other cost
containment practices. As a result, the Company believes that its expanded role
as a "gatekeeper" for its clients in organizing and monitoring the utilization,
delivery and costs of these medical services will
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result in greater efficiencies and savings to its clients. As of April 30,
1996, the Company had contracted with approximately 117 physicians or physician
specialist groups, diagnostic facilities and hospital providers to provide
services not available in its Medical Centers. Revenues derived from managed
care network provider services were $1,431,000, or 4% of total revenues.
OUTPATIENT PHYSICAL REHABILITATION SERVICES
In the majority of its centers, the Company offers a full range of
outpatient physical rehabilitation services which are provided by licensed
physical therapists. In 1992, the Company developed four (4) free-standing
outpatient rehabilitation centers as part of a business strategy to expand this
business segment. As part of a restructuring plan adopted in late 1993, the
Company closed one of these centers and has integrated the provision of physical
rehabilitation services available at the other three centers into the Company's
existing medical centers. Typical physical rehabilitation services offered
include:
. Work capacity evaluations, including isometric computerized testing;
. Risk assessments and job task analysis, including review of the work
environment, and recommendations for evaluation and modification of body
mechanics in job performance;
. Development of comprehensive work specific profiles which indicate job task
capability and functional limitations for an employee;
. Symptom magnification and behavioral assessments to identify potential
malingerers; and
. Work simulated reconditioning and education, featuring job specific
strength and endurance training.
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For fiscal year 1996, physical rehabilitation services accounted for
approximately 17% of total revenues.
MANAGEMENT AND CONSULTING SERVICES FOR EMPLOYERS AND THIRD-PARTY PAYORS
The Company offers management and consulting services for the development
and operation of workers' compensation cost containment programs organized or
administered by employers, health insurers, and third-party payors. Under this
program, a client is able to contract for one or more of the following services:
. Medical case management;
. General consulting in the operation of an employer's workers' compensation
medical program;
. Recruiting and provision of medical personnel, including the placement of
physicians and medical personnel on a part or full-time basis at the
employer's work site;
. Development and management of a full-service workers' compensation medical
center located on the employer's premises, including implementation of
staffing and administrative support systems;
. Early intervention, safety, injury prevention and loss control programs;
and
. Bill and utilization review services with respect to service provided by
various managed care network providers.
MEDICAL SERVICES PROVIDED TO THE GENERAL PUBLIC
For the year ended February 29, 1996, approximately 29% of revenues at the
Company's primary care centers were derived from the provision of non-workers'
compensation outpatient medical and rehabilitation services to the general
public, such as urgent care and routine individual or family health care
services. Individuals
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choose the Medical Centers, among other reasons, due to their low-cost,
convenience, extended hours, as a result of their participation in employer-
sponsored group accident and health plans, or through PPO and managed care
programs in which the Company's Medical Centers participate.
MEDICAL AND OTHER PROFESSIONAL STAFF
Medical services are provided at the Company's centers by licensed
physicians who are employed by or under contract with ReadiCare Medical
Group(s). As of February 29, 1996 there were 68 full time equivalent physicians
providing services at the Company's centers. The ReadiCare Medical Group(s),
which are independently owned professional medical corporations, do not have any
ownership interests in any of the Company's medical facilities. Physicians are
generally trained and experienced in occupational and industrial medicine, or
have emergency, family practice, internal medicine or general medicine
backgrounds. The ReadiCare Medical Groups have not to date experienced any
material difficulty in hiring such physicians. Rehabilitation services are
performed by licensed physical therapists or rehabilitation specialists. Demand
for services at a typical Medical Center requires a staff of up to 15 full-time
persons per week, or their part-time equivalents. Categories of non-physician
staff members include: registered X-ray technicians, certified medical
assistants, licensed vocational nurses, physical therapy aides, physical therapy
assistants, licensed physical therapists, and administrative and support
personnel. The Company has not experienced significant difficulty
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in attracting such individuals or in retaining personnel in sufficient numbers
to staff its facilities. The Company's continuing success, however, will depend
on its ability to attract and retain key physicians and other employees.
Competition for highly skilled physicians as well as medical and management
personnel is intense. There can be no assurance that the Company will be
successful in retaining its existing personnel or in attracting additional
qualified physicians and other employees.
SALES AND MARKETING
ReadiCare employs a staff of 12 full-time managed care consultants and
sales personnel who market ReadiCare services to insurers, brokers, third-party
administrators and employer representatives. These individuals also initiate
direct mail campaigns, implement local sales strategies, and focus their sales
efforts on representatives of employer-sponsored workers' compensation, group
accident and health plans, and HMOs. The Company also commits significant
resources to building relationships with those individuals at its client
companies who are responsible for workers' compensation and health care programs
and who are in a position to recommend or arrange for the location of treatment
for an injured employee. The Company's marketing program emphasizes the
following:
. Quality service,
. Focus on cost containment,
. Accessibility,
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. Convenience,
. Extended hours of operation,
. Early return-to-work programs (in the case of workers' compensation),
. Licensed, experienced and trained staff,
. Depth of service capabilities when the Company's Managed
Care Program and Network are fully accessed, and
. Absence of physician ownership of the Company's centers, thus eliminating
financial conflicts of interest.
PRIMARY CARE CENTER REIMBURSEMENT
Generally, increases in the Company's operating costs approximate the rate
of inflation. In California, the Company's largest operating territory, state-
authorized reimbursement levels for workers' compensation outpatient medical
services have not been increased since July 1987. In March 1994, a revised fee
schedule was adopted by the Department of Workers' Compensation, however,
reimbursement levels were not increased. In Washington, state-authorized
workers' compensation medical reimbursement levels were increased by 6%
effective March 1, 1994, and by approximately 10% on May 1, 1995. Inadequate
reimbursement levels have, in the past, adversely affected operating margins at
the Company's California centers, and they may adversely affect operating
margins in the future. Future operating results depend in part on the effects of
inflation and the extent to which reimbursement levels are adjusted to keep pace
with increases in the Company's operating costs.
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The following table illustrates the Medical Centers' sources of revenues as
a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
SOURCES OF REVENUE YEARS ENDED FEBRUARY 29 OR 28,
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<S> <C> <C> <C>
1994 1995 1996
------ ------ ------
Workers' Compensation
Insurance Payors 60% 56% 56%
Corporate Accounts 14% 15% 15%
Self-pay and 26% 29% 29%
Group Health Plans
</TABLE>
Charges for the treatment of work-related injuries or illnesses are billed
to the client company's workers' compensation insurance carrier or to the client
company, when self-insured. For the treatment of non-work-related medical care,
such as urgent care, or routine individual or family health care services, the
Medical Centers accept major credit cards, cash, personal checks, assignment of
benefits from patients under selected group health insurance plans and HMOs,
and, to a limited extent, Medicare and Champus. Services provided to patients
pursuant to a contract with an employer are billed directly to the employer.
AGREEMENTS WITH READICARE MEDICAL GROUPS
Under agreements (the Management Agreements) between the Company and the
ReadiCare Medical Groups, the ReadiCare Medical Groups' physicians provide all
medical services at the Company's centers. The Company, in addition to other
administrative services, selects sites, manages and maintains all the Medical
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Centers, provides capital, leases space, constructs all necessary improvements,
and obtains (by lease or purchase) all necessary equipment and supplies. In
many cases, the Company has acquired an existing center. The Company then makes
available the fully equipped Medical Center to the ReadiCare Medical Group so
that Medical Group physicians can provide the necessary medical services. The
Company also provides a variety of other administrative services to the
ReadiCare Medical Groups, including assisting in the recruitment of physicians,
employing all non-physician personnel, training all personnel in the operation
of the Medical Centers, marketing, quality control, purchasing, accounting, data
processing, and payroll operations. The ReadiCare Medical Groups, which employ
or contract with approximately 160 full and part-time physicians, were organized
expressly for entering into the relationship set forth in the Management
Agreements, and are not engaged in any other activities. The ReadiCare Medical
Groups employ or contract with licensed physicians to provide the necessary
medical services at the Medical Centers and review the performance of the
Medical Centers' physicians to monitor compliance at all times with quality
medical and ethical standards.
Pursuant to the Management Agreements, the ReadiCare Medical Groups retain
from net revenues (all billings for medical services, ancillary charges,
facility charges, and supplies, less contractual discounts and bad debt
allowances): (i) an amount sufficient to compensate those physicians who are
employed by or are under
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contract to the ReadiCare Medical Groups; and (ii) an amount equal to fifty
dollars ($50.00) per month for each Medical Center at which the ReadiCare
Medical Groups provide medical services. Additionally, for all Medical Centers
at which ReadiCare Medical Groups provide services, the ReadiCare Medical Groups
retain from net revenues as additional compensation three tenths of one percent
(0.30%) of the net revenues during any ReadiCare, Inc. fiscal year; provided,
however, that such additional compensation shall not exceed the Company's (or
its applicable subsidiary's) profits before taxes, determined as of the end of
the Company's fiscal year.
The Management Agreements with the ReadiCare Medical Groups provide for
annual renegotiation of the compensation terms, taking into account the size the
operation has then achieved, the direct and indirect costs of providing such
services, the financial results of operations, the amount of inflation which has
occurred, and other factors. Either party may terminate the agreements at any
time without cause on 60 days prior written notice to the other party.
HEALTH CARE REFORM AND REGULATIONS
Virtually all aspects of the practice of medicine and the provisions of
workers' compensation and health care services are regulated by federal or state
statutes, state medical boards, local boards of health, codes established by
various medical associations, and other state or federal agencies. These
entities
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prescribe, among other things, who may engage in the practice of medicine, the
manner in which patients may be solicited and the requirements that must be
satisfied prior to the establishment of facilities for the delivery of certain
types of health care services. In addition, various states, including the states
of California and Washington, regulate pricing, billing and other aspects of the
delivery of medical services to injured workers eligible for benefits under such
states' workers' compensation systems. The Company believes it has structured
its operations to comply with these regulations and that these regulations have
not had an adverse effect on the Company's business.
In recent years, both the states of California and Washington have enacted
various health care and workers' compensation reform measures. These measures
are designed to reduce the costs of health care and workers' compensation,
improve access and broaden coverage to more individuals, minimize abuses, and
create more efficient delivery systems. The Company believes its approach,
which combines the benefits of its low-cost, quality service oriented delivery
system, complemented by a broad array of managed care programs offered by the
Company, has enabled the Company to respond favorably to such reform measures.
Subsequent to the Workers' Compensation Health Care Provider Organization
(HCO) Act of 1993, in April 1994 the Company applied for certification as a
Workers' Compensation Health Care Provider Organization (WCHCPO) to the State of
California. Since 1994 the Company re-submitted several amended applications,
and on May 6,
-24-
<PAGE>
1996, received WCHCPO certification from the California Department of
Corporations. Pending the outcome of proposed amended legislation, market
demand and other factors, the Company may apply for additional certification as
a Health Care Organization (HCO). The HCO designation may permit the Company to
operate in certain markets as a "risk-based" service provider similar to that of
an HMO or health care insurer. Management believes that should it obtain such
certification, and should there be market demand for such a product, it could
enjoy a competitive advantage in certain of its California markets.
Additionally, in view of ongoing health care reform initiatives in both
Washington State and California, the Company is engaged in discussions with a
number of insurance companies, HMOs, third party payors, and others to develop
strategic alliances and relationships to improve its competitive market
position.
The health care industry in the United States continues to be subject to
fundamental changes resulting from political, economic and regulatory
influences. Various state and federal government sponsored initiatives to
reform the workers' compensation health care systems and to control escalation
of such expenditures within the economy are expected to continue. Due to
uncertainties regarding the outcome of reform initiatives and their enactment
and implementation, the Company cannot predict which, if any, of such reform
proposals will be adopted, when they might be adopted or what impact they might
have on the Company. The actual announcement of reform proposals and the
investment community's reaction to such proposals, announcements by competitors
or payors of their strategies to respond to reform initiatives and general
industry conditions could produce volatility in the trading and
-25-
<PAGE>
market price of the Company's common stock.
COMPETITION
The Company faces intense competition from hospitals, outpatient primary
care and rehabilitation center providers, physicians' offices, industrial
medical clinics, HMOs, and others, such as IPAs and PPOs. Many competitors are
well established sources of health care services. To compete successfully with
these entities and to facilitate its growth, the Company must overcome potential
customers' attachments to existing sources of health care. In the Company's
present markets, hospital-owned competitors and HMOs generally have much greater
financial and marketing resources than the Company. However, the Company
believes generally it has greater financial and marketing resources than
individual service providers such as single-location industrial medical clinics,
and many non-hospital affiliated operators of outpatient primary care medical
and rehabilitation centers. In addition, increased competitive pressures could
lead to intensified price-based competition, which could adversely affect the
Company's operating results.
EMPLOYEES
At April 30, 1996, 381 full-time equivalent personnel were employed by the
Company, consisting of management, administrative and support personnel, and
non-physician medical and technical staff. There are no collective bargaining
agreements with employees, and management believes that relations with its
employees are good.
The executive officers of the Company are as follows:
-26-
<PAGE>
DENNIS G. DANKO, 49, the Company's founder and Chairman, has been
President, Chief Executive Officer and Director since the inception of the
Company in 1982. Mr. Danko received a bachelor's degree in economics from
Clemson University and a master's degree in health care management from the
University of Pittsburgh. Mr. Danko has over 20 years of management experience
in the health care field, holding executive management positions with various
publicly-held health care organizations, including American Medical
International, Inc., and National Medical Enterprises, Inc.
STEVE E. BUSBY, 48, has been Senior Vice President, Finance since July
1993, Vice President, Finance from May 1992 to June 1993, Vice President,
Controller from March 1988 to April 1992, and Corporate Controller from June
1987 to February 1988. Prior to joining the Company, he was a co-founder of CHEC
Medical Centers, Inc. and held the position of Vice President, Finance when CHEC
merged with the Company in December 1986. Mr. Busby received bachelor's and
master's degrees in mathematics from Mississippi State University and a master's
degree in business administration from the University of Washington.
THOMAS P. CAREY, 42, has been Senior Vice President, Operations since April
1992. Mr. Carey was Group Vice President, Operations from July 1991 to March
1992, and Vice President, Operations from March 1987 to June 1991. From April
1982 to February 1987, Mr. Carey held other management positions with the
Company, and with an entity acquired by the Company.
-27-
<PAGE>
ITEM 2. PROPERTIES
--------------------
As of April 30, 1996, ReadiCare, Inc. operated thirty-seven (37)
outpatient medical and rehabilitation centers, of which seventeen (17) were
located in Washington state in the greater Seattle and Tacoma metropolitan
areas; eight (8) were located in California in the greater San Francisco, San
Jose, and Oakland metropolitan areas; five (5) were located in the greater
Sacramento, and Stockton and Modesto metropolitan areas; and, seven (7) were
located in the greater San Diego metropolitan area. The Company owns debt-
free, the land and buildings occupied by its Everett and Tacoma, Washington
centers, and its Rocklin, California center. All other operating facilities are
leased. ReadiCare's medical facilities range in size from approximately 2,400
square feet to 15,000 square feet and typically are leased for three to five
year periods with multiple renewal options. The medical centers are generally
designed to accommodate a minimum of five examining or treatment rooms, various
ancillary service areas, such as laboratory, X-ray, audiometry, drug testing,
collection and reporting, physical rehabilitation areas, pharmacy and supply
areas, and others. The centers are designed to efficiently meet the needs of
patients and client companies in a pleasing environment. The Company occupies
approximately 18,400 square feet of space in Sunnyvale, California for its
corporate offices under a lease which expires in August 2000. The Company's
regional administrative offices are located in San Diego, California, and in
Renton, Washington.
-28-
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
---------------------------
The Company is, and may in the future be, party to various claims and
routine litigation arising out of the ordinary course of business and vigorously
defends itself in such matters. There is no material legal proceedings to which
the Company is a party or to which any of its properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-------------------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
-----------------------------------------------------------
STOCKHOLDER MATTERS
-------------------
The Company's common stock is traded on the Nasdaq, National Market System
under the symbol (RDIC). Before December 6, 1995, the Company's common stock
was listed on the American Stock Exchange (symbol RDI). The following table
sets forth, for the fiscal quarters indicated, the high, low and last prices
reported.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 1996 FEBRUARY 28, 1995
----------------- -----------------
Common Stock HIGH LOW LAST HIGH LOW LAST
------------ ---- --- ---- ---- --- ----
<S> <C> <C> <C> <C> <C> <C>
First Quarter $2.75 $1.31 $2.25 $2.00 $1.25 $1.50
Second Quarter $3.75 $2.12 $3.63 $2.00 $1.38 $1.50
Third Quarter $4.06 $2.75 $2.94 $1.88 $1.19 $1.38
Fourth Quarter $4.50 $2.88 $4.00 $1.81 $1.00 $1.50
</TABLE>
-29-
<PAGE>
There were approximately 422 stockholders of record as of April 30, 1996.
No dividends have been paid on the Company's common stock since inception. The
Company does not anticipate that dividends will be paid on common stock in the
foreseeable future. Additionally, dividend payments are restricted by loan
covenants.
-30-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-------------------------------
The following selected consolidated financial data is derived from the Company's
consolidated financial statements. Historical results should not be taken as
necessarily indicative of the results that may be expected for any future
period. This data should be read in conjunction with the consolidated financial
statements, related notes, and other financial information appearing herein or
incorporated by reference.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------------------------------------------
FEB. 29, FEB. 28, FEB. 28, FEB. 28, FEB. 29,
1996 1995 1994 1993 1992
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenues .................... $36,200,537 $35,515,747 $36,633,838 $38,458,704 $36,243,055
Costs and expenses:
Center operating expenses.. 28,730,177 29,283,368 30,857,114 31,140,224 28,152,575
Marketing, general and
administrative expenses.. 4,687,001 4,419,289 3,966,945 4,040,663 4,169,497
Depreciation
and amortization......... 1,381,700 1,368,590 1,835,951 1,741,737 1,421,186
Nonrecurring charges....... - (85,000) 8,443,165 - (290,000)
Cost of terminated stock
offering................. - - - - 152,939
Interest expense,(net)..... 10,626 92,158 154,669 183,804 38,699
----------- ----------- ----------- ----------- ------------
Income (loss) before taxes,
cumulative effect of
change in accounting
principle.................. 1,391,033 437,342 (8,624,006) 1,352,276 2,598,159
Provision for income taxes... 167,000 52,000 681,323 589,000 965,000
----------- -------- ----------- ---------- -----------
Income (loss) before
cumulative effect of
change in accounting
principle.................. 1,224,033 385,342 (9,305,329) 763,276 1,633,159
Cumulative effect of
change in accounting
principle.................. - - 176,471 - -
----------- -------- ----------- ---------- -----------
Net income (loss)............ $ 1,224,033 $385,342 $(9,128,858) $ 763,276 $ 1,633,159
=========== ======== =========== ========== ===========
Per share data:
Income (loss) before
cumulative effect of
change in accounting
principle ............... 0.15 0.05 (1.13) 0.09 0.20
Cumulative effect of change
in accounting principle - - 0.02 - -
----------- ----------- ----------- ----------- -----------
Net income (loss) ......... $ 0.15 $ 0.05 $ (1.11) $ 0.09 $ 0.20
=========== =========== =========== =========== ===========
Weighted average
common shares
and equivalents ............ 8,319,000 8,178,000 8,195,000 8,309,000 8,329,000
=========== =========== =========== =========== ===========
BALANCE SHEET DATA AT YEAR-END:
Working capital............ $ 6,888,238 $ 4,378,704 $ 4,129,753 $ 4,508,963 $ 6,261,463
Total assets............... 17,358,635 16,860,468 19,530,287 29,645,604 25,964,511
Long-term debt............. - - 1,041,669 1,700,000 1,750,000
Stockholders' equity....... 14,399,169 13,125,072 12,720,330 22,155,193 21,387,874
</TABLE>
-31-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
GENERAL
The following discussion should be read in conjunction with the
consolidated financial statements and the related notes thereto. Historical
results and percentage relationships are not necessarily indicative of the
results that may be expected for any future period.
The Company has experienced and may in the future experience period-to-
period fluctuations in revenues and operating results due to a number of
factors, including continuing pricing pressure in the health care industry,
delays in increases in reimbursement levels, regulatory developments,
competition, general economic conditions, and seasonality.
The Company's stock price may be subject to significant volatility,
particularly on a quarterly basis. Any shortfall in revenues or earnings from
levels expected by securities analysts or others could have an immediate and
significant adverse effect on the trading price of the Company's common stock in
any given period. Additionally, the Company may not learn of, or be able to
confirm, revenues or earnings shortfalls until late in the fiscal quarter or
following the end of the quarter, which could result in an even more immediate
and adverse effect on the trading of the Company's common stock. Finally, the
Company participates in a highly dynamic industry, which often results in
significant volatility of the Company's common stock price.
Generally, increases in the Company's operating costs
-32-
<PAGE>
approximate the rate of inflation. In California, the Company's largest
operating territory, state-authorized medical reimbursement levels for workers'
compensation outpatient medical services have not been increased since July
1987. In March 1994, a revised fee schedule was adopted by the Department of
Workers' Compensation, however, reimbursement levels were not increased. In
Washington, state-authorized workers' compensation medical reimbursement levels
were increased by 6% effective March 1, 1994, and by approximately 10% on May 1,
1995. Inadequate reimbursement levels have in the past and may in the future
adversely affect the Company's revenues and operating results. Future operating
results depend in part on the effects of inflation and the extent to which
reimbursement levels are adjusted to keep pace with increases in the Company's
operating costs.
-33-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth key income statement account balances
pertaining to operations, percentage changes between periods, and the
relationship of such balances to revenues for the respective periods.
<TABLE>
<CAPTION>
(In thousands) Years Ended Years ended
February 29, or 28, February 28,
------------------------------ ------------------------------
1996 1995 % change 1995 1994 % change
------- ------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues: $36,201 $35,516 2% $35,516 $36,634 (3%)
Costs and expenses
Center operating expenses 28,730 29,284 (2%) 29,284 30,857 (5%)
% of revenues 79% 83% 83% 84%
-------------------------------------------------------------------------------------------------
Gross Operating Margin 7,471 6,232 20% 6,232 5,777 8%
% of revenues 21% 17% 17% 16%
-------------------------------------------------------------------------------------------------
Marketing, general and
administrative expenses 4,687 4,419 6% 4,419 3,967 11%
% of revenues 13% 12% 12% 11%
Depreciation and
Amortization 1,382 1,369 1% 1,369 1,836 (25%)
% of revenues 4% 4% 4% 5%
Interest expense (net) 11 92 (88%) 92 155 (40%)
% of revenues -% -% -% -%
Nonrecurring charges - (85) (100%) (85) 8,443 n/m*
% of revenues -% -% -% 23%
Income (loss) before
taxes and cumulative
effect of change in
accounting principle 1,391 437 218% 437 (8,624) n/m*
% of revenues 4% 1% 1% (23%)
Provision for
income taxes 167 52 221% 52 681 (92%)
% of revenues 1% -% -% 2%
Income (loss) before
cumulative effect of change
in accounting principle 1,224 385 218% 385 (9,305) n/m*
% of revenues 3% 1% 1% (25%)
Cumulative effect of change
in accounting principle - - -% - 176 (100%)
% of revenues -% -% -% -%
Net income (loss) 1,224 385 218% 385 (9,129) n/m*
% of revenues 3% 1% 1% (25%)
--------------------------------------------------------------------------------------------------
</TABLE>
* not meaningful
-34-
<PAGE>
YEAR ENDED FEBRUARY 29, 1996 COMPARED TO YEAR ENDED FEBRUARY 28, 1995.
----------------------------------------------------------------------
Revenues for the fiscal year ended February 29, 1996, which include
revenues from center operations and from the provision of managed care and other
services, were $36,201,000, a 2% increase compared to revenues of $35,516,000
reported for the fiscal year ended February 28, 1995. On a "same-center" basis,
revenues increased by 3%. The Company experienced a 6% and 4% increase,
respectively, in revenues at its Washington state, and San Diego, California
area centers. This increase in revenues was partially offset by a 2% decrease in
revenues at the Company's Northern California centers, which was due primarily
to shortened hours of operation which went into effect in early 1995 at a
majority of such centers. The impact of the streamlined operating hours and a
corresponding decrease in center operating expenses in the Northern California
centers, steady performance experienced by the Washington state centers, and a
return to profitability of the Company's San Diego, California area centers
resulted in a 20% improvement in gross operating profit margins to $7,471,000 or
21% of revenues, compared to gross profit margins $6,232,000 or 17% of revenues
in the prior year.
Center operating expenses decreased by $554,000 or 2% primarily as a result
of the shortened operating hours as described above. Marketing, general and
administrative expenses increased by $268,000 or 6% due primarily to higher
employee fringe benefit costs and corporate expenses. Interest expense
decreased by $81,000 or 88% due to lower borrowings, which resulted in the
elimination of bank debt as of the fiscal year-end. Depreciation and
amortization expense increased by $13,000 or 1% over the previous year.
-35-
<PAGE>
Income before taxes increased $954,000 or 218% primarily as a result of
improved operating performance at each of the Company's regional clusters of
centers, and the recognition of $121,000 in management fee income relating to
previously terminated management services contracts.
The provision for income taxes for the year ended February 29, 1996
increased by 221% to $167,000 or 12% of pretax income, compared to $52,000 or
12% of pretax income for the year ended February 28, 1995.
Net income increased $839,000 or 218% primarily as a result of improved
operating performance at each of the Company's regional clusters of centers.
YEAR ENDED FEBRUARY 28, 1995 COMPARED TO YEAR ENDED FEBRUARY 28, 1994.
----------------------------------------------------------------------
Revenues for the fiscal year ended February 28, 1995 were $35,516,000, a
decrease of $1,118,000, or 3%, compared to revenues of $36,634,000 for the
fiscal year ended February 28, 1994.
From owned centers, the Company experienced an increase in revenues of
$138,000. This increase resulted from a 7% improvement in revenues at the
Company's Northern California centers due primarily to higher utilization
levels, and a 2% improvement in revenues at its Washington State centers due to
higher revenue per patient visit. Revenues were also favorably impacted by
lower reimbursement disallowances due to improvements in the Company's billing
and collections system, and a lower provision for doubtful accounts. The
aggregate increases in center revenues were partially offset by a 19% decline in
revenues at the Company's San Diego area centers due to lower utilization levels
experienced at such centers and the closure of two centers.
-36-
<PAGE>
The decrease in revenues from managed care services, amounting to
$1,256,000, or 43%, resulted from lower demand for managed care services
primarily in the San Diego market and the Company's election not to renew
certain management services contracts which expired during the fiscal year ended
February 28, 1994.
Center operating expenses decreased by $1,574,000, or 5%, primarily as a
result of reduced operating costs at the Company's centers and managed care
network, and discontinued activities. Marketing, general and administrative
expenses increased by $452,000, or 11%, due primarily to additional sales and
marketing programs. Depreciation and amortization expenses decreased $467,000,
or 25%, due to the reduced amortization expense resulting from the write-down of
intangible assets during the year ended February 28, 1994. Interest expense
decreased $63,000, or 40%, due to reduced borrowing levels. During fiscal year
1994 the Company incurred restructuring charges of $8,443,000 of which
$6,675,000 related to the noncash write-down of intangible assets and $1,768,000
related to discontinued activities.
For the year ended February 28, 1995, income before taxes was $437,000, as
compared to a loss of $181,000 before taxes, the cumulative effect of a change
in accounting principle, and the restructuring charges for the year ended
February 28, 1994.
The provision for income taxes of $52,000 for the year ended February 28,
1995 consists in part of taxes payable of $31,000, and a decrease in net
deferred tax assets of $21,000. Results for the prior year period included a
noncash benefit of $176,000 resulting from the Company's adoption of Statement
of Financial Accounting Standards No. 109.
-37-
<PAGE>
For the year ended February 28, 1995, net income was $385,000 as compared
to a loss for the year ended February 28, 1994 of $9,129,000, which included
restructuring charges of $8,443,000.
LIQUIDITY, CAPITAL RESOURCES AND INFLATION
The Company's primary source of liquidity is cash provided by operating
activities, which amounted to $2,869,000, $423,000 and $3,342,000 during the
fiscal years 1996, 1995 and 1994. Cash provided by operating activities is
significantly higher than net income due to the noncash expense relating to
depreciation of fixed assets and amortization of intangible assets, which
amounted to $1,382,000 for the fiscal year ended February 29, 1996. The Company
has a $5.0 million revolving bank line of credit facility expiring on June 30,
1997 which is available for working capital and general corporate purposes.
Borrowings under the credit facility bear interest, at the option of the
Company, at either the bank's prime lending rate, or the bank's Eurodollar base
rate, plus 2%. There was no outstanding balance on the line of credit as of
February 29, 1996. The Company's maximum borrowing capacity at year-end was
$4.5 million. The Company anticipates that internally generated cash and
borrowing capacity under its credit facility will be sufficient to finance short
and long term internal growth and capital expenditure requirements. There were
no material capital commitments outstanding as of February 29, 1996.
In fiscal 1994 and prior years, the Company recorded restructuring charges
and established reserves for discontinued activities. The following table sets
forth activities related to those reserves for the two years ended February 29,
1996.
-38-
<PAGE>
<TABLE>
<CAPTION>
BALANCE AMOUNT AMOUNT(C) BALANCE AMOUNT AMOUNT(C) BALANCE
2/28/94 UTILIZED REVERSED 2/28/95 UTILIZED REVERSED 2/29/96
-------- -------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Provision for
the closure
and relocation
of facilities
(a) $ 403,000 $(157,000) $( 35,000) $ 211,000 $(142,000) $ (46,000) $ 23,000
Provision for
phase-down
of various
business
ventures
(b) 574,000 (97,000) (50,000) 427,000 (38,000) (389,000) -
-------- --------- --------- --------- --------- --------- ---------
Reserve for
discontinued
activities $ 977,000 $(254,000) $ (85,000) $ 638,000 $(180,000) $(435,000) $ 23,000
========= ========== ========== ========= ========== ========== =========
</TABLE>
(a) Amounts utilized represent both cash and noncash items. The fiscal 1995
amount utilized of $157,000 represents $176,000 of cash disbursements
offset by a $19,000 noncash recovery. The fiscal 1996 amount of $142,000
represents $171,000 of cash disbursements offset by a $29,000 noncash
recovery.
(b) Amounts utilized represent cash payments.
(c) Amounts reversed represent noncash expense reversals.
-39-
<PAGE>
Another factor that could affect liquidity is the Company's effective tax
rate which was 12% for fiscal year 1996, and which is expected to be the same
for fiscal year 1997 absent any significant changes in the Company's business.
In fiscal year 1997, cash flows may benefit from the utilization of $915,000 of
operating loss carryforwards for federal tax purposes, and the utilization,
subject to certain restrictions, of $748,000 of operating loss carryforwards for
federal tax purposes available in the Company's CHEC Medical Centers, Inc.
subsidiary. These benefits would be limited if certain changes in the ownership
of the Company were to occur.
-40-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of ReadiCare, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholder's equity and cash
flows present fairly in all material respects, the financial position of
ReadiCare, Inc. and its subsidiaries at February 29, 1996 and February 28, 1995
and the results of their operations and their cash flows for each of the three
years in the period ended February 29, 1996 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.
As discussed in Note 2 to the financial statements, the Company changed its
method of measuring impairment of assets.
Our audits of the consolidated financial statements of ReadiCare, Inc. also
included an audit of the Financial Statement Schedule on page 61. In our
opinion, the Financial Statement Schedule presents fairly in all material
respects the information set forth therein when read in conjunction with the
related consolidated financial statements.
PRICE WATERHOUSE LLP
San Jose, California
April 10, 1996
-41-
<PAGE>
READICARE, INC.
CONSOLIDATED BALANCE SHEETS
A S S E T S
-----------
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents............ $ 2,211,194 $ 426,315
Accounts receivable, less
allowance of $2,247,294
and $1,612,372...................... 6,363,136 6,531,800
Supplies............................. 703,135 664,635
Other current assets................. 570,239 491,350
----------- ------------
Total current assets............... 9,847,704 8,114,100
----------- ------------
Equipment, property and improvements
at cost:
Equipment............................ 7,279,008 7,165,889
Property and improvements............ 7,115,121 7,677,635
----------- ------------
14,394,129 14,843,524
Less: accumulated depreciation....... ( 7,848,348) ( 7,164,586)
----------- ------------
6,545,781 7,678,938
----------- ------------
Acquired intangible assets, net........ 599,729 662,878
Other assets........................... 365,421 404,552
----------- ------------
$17,358,635 $16,860,468
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable..................... $ 1,164,781 939,370
Salaries and other accrued
employee benefits................... 1,182,424 947,267
Managed care provider payable........ 252,107 286,185
Other current liabilities............ 337,036 224,253
Notes payable to bank................ -- 700,000
Reserves for discontinued
activities.......................... 23,118 638,321
---------- -----------
Total current liabilities.......... 2,959,466 3,735,396
---------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value,
1,000,000 shares authorized and
unissued............................ - -
Common stock, $0.01 par value,
20,000,000 shares authorized;
8,210,199 and 8,184,574
shares issued and
outstanding.......................... 82,102 81,846
Additional paid-in capital............ 20,208,621 20,158,814
Accumulated deficit................... (5,891,554) (7,115,588)
---------- -----------
Total stockholders' equity........ 14,399,169 13,125,072
------------ -----------
$ 17,358,635 $16,860,468
============ ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-42-
<PAGE>
READICARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28,
------------------------------------------
1996 1995 1994
----------- ------------ -------------
<S> <C> <C> <C>
Revenues..................... $36,200,537 $35,515,747 $36,633,838
Costs and expenses:
Center operating
expenses................. 28,730,177 29,283,368 30,857,114
Marketing, general and
administrative expenses.. 4,687,001 4,419,289 3,966,945
Depreciation and
amortization............. 1,381,700 1,368,590 1,835,951
Nonrecurring charges....... - (85,000) 8,443,165
Interest expense, net...... 10,626 92,158 154,669
----------- ----------- ------------
Income (loss) before taxes
and cumulative effect
of change in accounting
principle.................. 1,391,033 437,342 (8,624,006)
Provision for income
taxes...................... 167,000 52,000 681,323
----------- ----------- ------------
Income (loss) before
cumulative effect of
change in accounting
principle.................. 1,224,033 385,342 (9,305,329)
Cumulative effect of
change in accounting
principle.................. - - 176,471
----------- ----------- ------------
Net income (loss)............ $ 1,224,033 $ 385,342 $ (9,128,858)
=========== =========== ============
Per share:
Income (loss) before
cumulative effect of
change in accounting
principle................ $ 0.15 $ 0.05 $ (1.13)
Cumulative effect of
change in accounting
principle................ - - 0.02
----------- ---------- ------------
Net income (loss).......... $ 0.15 $ 0.05 $ (1.11)
=========== =========== ============
Weighted average common
shares and equivalents..... 8,319,000 8,178,000 8,195,000
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-43-
<PAGE>
READICARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(ACCUMULATED
ADDITIONAL DEFICIT)
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at February 28, 1993.... 8,294,574 $82,946 $20,444,319 $ 1,627,928 $ 22,155,193
Repurchase of stock........... (120,000) (1,200) (304,805) - (306,005)
Net loss...................... - - - (9,128,858) (9,128,858)
---------- ------- ----------- ----------- -----------
Balance at February 28, 1994.... 8,174,574 81,746 20,139,514 (7,500,930) 12,720,330
Exercise of stock options..... 10,000 100 19,300 - 19,400
Net income.................... - - - 385,342 385,342
---------- ------- ----------- ----------- -----------
Balance at February 28, 1995.... 8,184,574 81,846 20,158,814 (7,115,588) 13,125,072
Exercise of stock options .... 25,625 256 49,808 - 50,064
Net income.................... - - - 1,224,033 1,224,033
---------- ------- ----------- ----------- -----------
Balance at February 29, 1996.... 8,210,199 $82,102 $20,208,622 $(5,891,555) $14,399,169
========== ======= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
-44-
<PAGE>
READICARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28,
-----------------------------------------
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................... $1,224,033 $ 385,342 $(9,128,858)
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:
Depreciation and amortization .......... 1,381,700 1,368,590 1,835,951
Deferred income taxes .................. (32,000) 21,000 681,439
Loss (gain) on disposition of assets ... 4,626 4,210 (229)
Noncash portion of nonrecurring charges - (85,000) 7,640,769
Cumulative effect of change in
accounting principle ................. - - (176,471)
Changes in assets and liabilities net
of effects of nonrecurring charges:
Accounts receivable, net ............. 168,662 (750,758) 1,247,320
Supplies and other current assets..... (107,629) 172,696 145,662
Accounts payable ..................... 225,411 (36,096) (497,219)
Salaries and other accrued
employee benefits ................... 201,079 (315,011) 598,156
Other current liabilities ............ (196,620) (342,152) 995,304
---------- ---------- -----------
Net cash provided by
operating activities .............. 2,869,262 422,821 3,341,824
---------- ---------- -----------
Cash flows from investing activities:
Additions to equipment ................... (410,710) (359,138) (363,517)
Additions to property and improvements ... (29,683) (47,412) (277,705)
Proceeds from sale of assets ............. 11,453 - -
Other assets ............................. (5,506) 45,606 6,841
---------- ---------- -----------
Net cash used in investing
activities ............................ (434,446) (360,944) (634,381)
---------- ---------- -----------
Cash flows from financing activities:
Borrowings under line of credit............ - 1,500,000 150,000
Payments under line of credit ............. (700,000) (1,600,000) (1,250,000)
Payments under term note................... - (1,875,001) (624,999)
Issuance (repurchase) of common stock...... 50,063 19,400 (306,005)
---------- ---------- -----------
Net cash used in
financing activities .................. (649,937) (1,955,601) (2,031,004)
---------- ---------- -----------
Increase (decrease) in cash ................ 1,784,879 (1,893,724) 676,439
Cash at beginning of year................... 426,315 2,320,039 1,643,600
---------- ----------- -----------
Cash at end of year ........................ $2,211,194 $ 426,315 $ 2,320,039
========== =========== ===========
Supplemental cash flow information:
Cash paid during the year for interest..... $ 15,001 $ 94,242 $ 174,323
========== =========== ===========
Cash paid during the year for income taxes. $ 92,000 $ - $ 105,400
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-45-
<PAGE>
READICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General: ReadiCare, Inc. (the Company) is a developer and operator of
outpatient medical and rehabilitation centers and workers' compensation cost
containment medical programs and services in the states of Washington and
California. The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany transactions have
been eliminated. See Note 5 regarding agreements with Medical Groups.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reported
period. Actual results could differ materially from those estimates.
Cash and cash equivalents: Cash and cash equivalents include cash on-hand
and short-term investments with original maturities of 90 days or less.
Concentration of credit risk: Financial instruments which subject the
Company to concentration of credit risk consist primarily of accounts
receivable. Accounts receivable from the Washington State Department of Labor
and Industries, the insurer for the majority of workers' compensation insurance
in Washington State, represent approximately 13% of the Company's net accounts
receivable balance. The carrying value of all financial
-46-
<PAGE>
instruments approximate their respective fair values.
Supplies: Supplies, consisting of medications and medical supplies, are
stated at the lower of cost (first-in, first-out) or market.
Acquired intangible assets: Acquired intangible assets consist primarily
of customer lists, patient records and the excess of cost over acquired net
assets (goodwill) in conjunction with various acquisitions. Such assets, other
than goodwill, are amortized over ten years using the straight-line method.
Goodwill is amortized using the straight-line method over forty years. The
Company determines and measures the impairment of acquired intangible assets in
accordance with the Statement of Financial Accounting Standards No. 121, (SFAS
121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of."
Other assets: Certain pre-opening costs incurred prior to the opening of a
new center, such as legal, training and recruiting costs, are deferred and
amortized on a straight-line basis over sixty months commencing with the opening
of the new center. Amortization of such costs for fiscal years 1996, 1995 and
1994 was $65,000, $67,000 and $67,000, respectively.
Revenues: Revenues are recorded when services are provided and at
estimated net amounts to be received from employers, patients, third-party
payors and others.
Depreciation and amortization: Depreciation and amortization of
equipment, property and improvements are provided principally on the straight-
line method over their estimated useful lives ranging from five to seven years
for equipment, ten years for leasehold
-47-
<PAGE>
improvements and twenty years for buildings.
Income taxes: The Company adopted Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes", in the first
quarter of fiscal 1994. SFAS 109 requires an asset and liability approach that
recognizes deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the financial statement carrying
amounts and the tax base of assets and liabilities.
Net income (loss) per common share: Net income (loss) per common share is
based on the weighted average number of shares outstanding for the respective
periods and common share equivalents, when dilutive, resulting from the assumed
exercise of stock options.
Recent accounting pronouncement: In October 1995, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
123 (SFAS 123), "Accounting for Stock-Based Compensation", which establishes a
fair value based method of accounting for compensation costs related to stock
option plans and other forms of stock based compensation plans as an alternative
to the intrinsic value based method of accounting defined under Accounting
Principles Board Opinion No. 25. Companies that do not elect the new method of
accounting beginning in 1996 will be required to provide pro forma disclosures
as if the fair value based method had been applied. The Company anticipates
that it will not elect the fair value based method of accounting and will
provide pro forma disclosure as required.
-48-
<PAGE>
NOTE 2. NONRECURRING CHARGES
In March of 1995, the FASB issued Statement of Financial Accounting
Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of", which establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of.
In the fourth quarter of fiscal 1996, the Company elected to adopt the new
accounting pronouncement. Prior to the fourth quarter of fiscal 1996, the
Company evaluated only intangible assets (not fixed assets) for potential
impairment based on discounted future cash flows. At the end of fiscal 1995,
the Company identified specific medical centers that did not meet desired
operating performance levels, and absent an increase in utilization, would not
meet acceptable profitability levels in fiscal 1996. In the fourth quarter of
fiscal 1996, after attempting various alternative strategies to increase
utilization levels, the Company determined the value of leasehold improvements
and equipment at five centers (two in Washington state, two in Southern
California, and one in Northern California) had been impaired as defined by SFAS
121. An impairment loss of $435,000 resulted from the write-down of the
carrying value of these assets to their fair value based on the present value of
expected future cash flows from these centers.
During fiscal 1996, the Company reviewed the adequacy of the reserve for
discontinued activities and restructuring established in fiscal 1994. Since the
actual costs incurred were less than
-49-
<PAGE>
previously estimated, the reserve was reduced by $435,000 and recognized as a
reduction of loss on discontinued activities and restructuring.
The fiscal 1996 nonrecurring charge is the net of a loss resulting from the
write-down of impaired assets and a reduction of the provision for loss on
discontinued activities and restructuring.
In fiscal 1995, because the actual costs associated with the closing of one
center and the termination of a business venture were less than previously
estimated, the accrual for discontinued activities established in fiscal 1994
was reduced by $85,000.
During the third quarter of fiscal 1994, the Company recorded a
restructuring charge of $8,443,000, of which $6,675,000 related to the noncash
write-down of intangible assets and $1,768,000 related to certain discontinued
activities. The write-down of intangible assets during fiscal year 1994
resulted from the realization that recent and proposed changes in the workers'
compensation and health care industries in California have adversely affected
the utilization patterns of many of the Company's outpatient medical centers,
particularly centers previously acquired by the Company located in Northern and
Southern California. These changes had a negative impact on projected revenues
and income levels as compared to expectations of performance at the time the
centers were acquired. Additionally, on March 1, 1994, a new official medical
fee schedule was implemented by the State of California which did not increase
reimbursement levels for certain services provided at the Company's California
centers. As a consequence, profit contributions from the California centers
were adversely impacted. After taking all
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<PAGE>
of the above factors into consideration, management concluded that the remaining
balance of intangible assets recorded for various acquisitions of California
outpatient medical centers, including the value of covenants not to compete,
customer lists, operating manuals, patient records, and goodwill, no longer
provided value to the ongoing business and, therefore, had been permanently
impaired.
The $1,768,000 charge related to discontinued activities resulted from the
termination of certain management service contracts, the cessation of services
provided at two locations, the planned relocation of one outpatient medical
center, and the consolidation of two administrative offices, all in California.
The write-down of the value of certain other assets, including computer software
and miscellaneous fixed assets no longer having economic value, was also
included in the charge. The total noncash expense related to asset write-downs
included in the discontinued activities charge is $966,000.
The following table sets forth the discontinued activities reserves for the
two years ended February 29, 1996.
-51-
<PAGE>
<TABLE>
<CAPTION>
BALANCE AMOUNT AMOUNT(C) BALANCE AMOUNT AMOUNT(C) BALANCE
2/28/94 UTILIZED REVERSED 2/28/95 UTILIZED REVERSED 2/29/96
------- -------- -------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Provision for
the closure
and relocation
of facilities
(a) $403,000 $(157,000) $(35,000) $211,000 $(142,000) $ (46,000) $23,000
Provision for
phase-down
of various
business
ventures
(b) 574,000 (97,000) (50,000) 427,000 (38,000) (389,000) -
------- -------- -------- ------- -------- --------- -------
Reserve for
discontinued
activities $977,000 $(254,000) $(85,000) $638,000 $(180,000) $(435,000) $23,000
======== ========= ========= ======== ========= ========= =======
</TABLE>
(a) Amounts utilized represent both cash and noncash items. The fiscal 1995
amount utilized of $157,000 represents $176,000 of cash disbursements
offset by a $19,000 noncash recovery. The fiscal 1996 amount of $142,000
represents $171,000 of cash disbursements offset by a $29,000 noncash
recovery.
(b) Amounts utilized represent cash payments.
(c) Amounts reversed represent noncash expense reversals.
-52-
<PAGE>
NOTE 3. ACQUIRED INTANGIBLE ASSETS
Acquired intangible assets comprise the following:
<TABLE>
<CAPTION>
FEBRUARY 29 OR 28,
1996 1995
-------------------------------
<S> <C> <C>
Patient records................................................... $ 421,837 $ 421,837
Goodwill.......................................................... 924,315 924,315
Other............................................................. 41,095 42,260
Customer Lists.................................................... 22,500 22,500
---------- ----------
1,409,747 1,410,912
Less: accumulated amortization ................................... (810,018) (748,034)
---------- ----------
$ 599,729 $ 662,878
========== ==========
</TABLE>
NOTE 4. EMPLOYEE BENEFIT PLANS AND STOCK OPTION PLANS
The Company has three stock option plans whereby incentive stock options and
nonqualified stock options to purchase a total of 1,400,000 shares of common
stock may be granted to certain employees. Physicians affiliated with ReadiCare
Medical Groups are also eligible to receive nonqualified stock options. Options
are granted at not less than fair market value at the date of grant and are
exercisable for periods not exceeding five years from the date of grant. Stock
option vesting periods are determined by the Executive Compensation and Stock
Option Committee of the Board of Directors.
-53-
<PAGE>
The following table sets forth the Plans' activities for the three years
ended February 29, 1996:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
OPTIONS RANGE PER SHARE
--------- ---------------
<S> <C> <C>
Issued and outstanding Feb. 28, 1993. 634,875 $1.94 - $6.00
Options granted . . . . . . . . . . 186,500 $2.50
Options exercised . . . . . . . . . - -
Options terminated or cancelled . . (163,500) $2.31 - $6.00
-------
Issued and outstanding Feb. 28, 1994. 657,875 $1.94 - $6.00
Options granted . . . . . . . . . . 120,000 $2.00 - $2.25
Options exercised . . . . . . . . . ( 10,000) $1.94
Options terminated or cancelled . . ( 78,375) $2.38 - $6.00
-------
Issued and outstanding Feb. 28, 1995. 689,500 $2.25 - $6.00
Options granted . . . . . . . . . . 230,500 $2.25 - $3.25
Options exercised . . . . . . . . . ( 13,125) $2.25 - $2.50
Options terminated or cancelled . . (271,375) $2.25 - $6.00
-------
Issued and outstanding Feb 29, 1996 . 635,500 $2.00 - $4.75
=======
Available for future grant at
February 29, 1996 . . . . . . . . . 151,375
=======
Options eligible for exercise at
February 29, 1996 . . . . . . . . . 426,750 $2.00 - $4.75
=======
</TABLE>
During fiscal year 1996, the Executive Compensation and Stock Option
Committee (the Committee) noted that a number of key employees of the Company
held options having exercise prices substantially in excess of the market price
of the Company's stock. The Committee believed that one purpose of the stock
option plan, to provide equity incentives, would not be achieved for employees
holding such options exercisable above the market price. As a result, upon the
surrender by those holders of 241,000 outstanding options in excess of an
exercise price of $3.50 per share, the Committee granted 120,500 new options
with an exercise price of $2.25 per share. The options that were surrendered
ranged in exercise price from $4.75 to $6.00 per share. The exchanged options
were contingent upon, among other terms, a six month
-54-
<PAGE>
holding period before such options could be exercised by the holder.
The Company also adopted a stock option plan during the year ended February
29, 1992, whereby nonqualified stock options to purchase a total of 200,000
shares of common stock may be granted to non-employee members of the Company's
Board of Directors. The plan was amended during the year ended February 28,
1994 and provides for an automatic grant of options to each non-employee
director to purchase 10,000 shares of common stock upon initial election to the
Board of Directors, options to purchase 7,500 shares of common stock annually
upon re-election to the Board of Directors, and options to purchase 5,000 shares
of common stock annually upon election as the chairman of a standing committee
of the Board of Directors. The options are for a term of five years and may be
exercised six months after the date of grant. During the year ended February
29, 1996, options for 47,500 shares were granted with exercise prices ranging
from $1.92 to $2.50 per share, options for 12,500 shares were exercised and
options for 27,500 shares were terminated. At February 29, 1996, 137,500
options were issued, outstanding and eligible for exercise, and 50,000 options
were available for future grant.
INVESTMENT PLAN
The Company offers employees the ReadiCare Savings and Investment Plan (the
Plan). Employees may contribute up to 15% of their salaries, with a
discretionary matching amount provided by the Company for those employees having
completed one year of service. For the three years ended February 29, 1996, the
Company did not contribute to the Plan.
-55-
<PAGE>
CHANGE IN CONTROL EXECUTIVE SEVERANCE PLAN
The Company adopted a change in control executive severance plan covering
the named executive officers and certain other key employees effective June 1,
1994 and subsequently amended on July 19, 1995. Under the plan, severance
payments would become payable in the event of specified terminations of
employment following a change in control of the Company. As of February 29,
1996, the maximum contingent liability of the Company subsequent to termination
of all key employees participating in the plan is approximately $600,000.
NOTE 5. MEDICAL GROUPS
The Company has entered into Facilities, Licensing and Management Services
Agreements (Management Agreements) with certain professional medical
corporations (Medical Groups). Under the Management Agreements with the Medical
Groups, the Company makes available fully equipped outpatient Medical Centers,
licenses business names and trademarks, and provides various management services
to the Medical Groups. In return, the Medical Groups provide medical services
at the Company's Centers. The Medical Groups were organized expressly for the
purpose of entering into the relationships embodied in the Management Agreements
and are not engaged in any other activities. The Medical Groups have nominal
capital and an insignificant amount of net assets. Pursuant to the Management
Agreements, the Medical Groups retain from net revenues amounts to pay those
physicians who are employed by or under contract to the Medical Groups and
certain additional amounts for compensation to the Medical Groups for providing
services. Amounts retained by the Medical Groups are reflected as a component
of center operating expenses in the Consolidated Statements of
-56-
<PAGE>
Operations. For the fiscal years ended February 29, 1996, February 28, 1995,
and February 28, 1994, the Medical Groups retained from net revenues aggregate
amounts of $9,583,142, $9,705,880 and $10,246,515, respectively.
NOTE 6. BORROWING AND LEASES
The Company has a $5.0 million bank line of credit facility expiring on
June 30, 1997, which is available for working capital and general corporate
purposes. Borrowings under the credit facility are secured by accounts
receivable and bear interest, at the option of the Company, at either the bank's
prime lending rate, or the bank's Eurodollar base rate, plus 2%. There was no
outstanding balance on the line of credit as of February 29, 1996. The
outstanding balance on the line of credit at February 28, 1995 was $700,000 at
an interest rate of 9%. The Company's maximum borrowing capacity at year-end
was $4.5 million.
Non-owned Company facilities are leased under operating lease agreements.
Generally, minimum annual rents are subject to increases based on changes in the
Consumer Price Index, taxes and operating costs. In addition, the Company rents
certain equipment under operating leases.
Operating lease expense under non-cancelable operating leases with
remaining terms greater than one year for the years ended February 29, 1996,
February 28, 1995 and February 28, 1994 was $2,896,513, $2,935,573 and
$3,056,765, respectively. As of February 29, 1996, minimum future obligations
for operating leases are as follows:
-57-
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDING
FEBRUARY 29 OR 28,: Buildings Equipment Total
----------------------- ----------- --------- -----------
<S> <C> <C> <C>
1997 $2,624,000 $233,000 $2,857,000
1998 1,578,000 228,000 1,806,000
1999 1,137,000 - 1,137,000
2000 804,000 - 804,000
2001 496,000 - 496,000
Thereafter 654,000 - 654,000
---------- -------- ----------
$7,293,000 $461,000 $7,754,000
========== ======== ==========
</TABLE>
NOTE 7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 29 OR 28,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal .............. $ 113,000 $ 31,000 $ 8,000
State................. 86,000 - 50,000
--------- ---------- ---------
199,000 31,000 58,000
--------- ---------- ---------
Deferred:
Federal .............. (12,000) (22,000) 688,000
State ................ (20,000) 43,000 (65,000)
--------- ---------- ---------
(32,000) 21,000 623,000
--------- ---------- ---------
$ 167,000 $ 52,000 $ 681,000
========= ========== =========
</TABLE>
Deferred tax assets (liabilities) comprise the following:
<TABLE>
<CAPTION>
FEBRUARY 29 OR 28,
1996 1995
----------- -----------
<S> <C> <C>
Net operating loss carryforwards........... $ 565,000 $ 942,000
Reserves for receivable disallowances...... 902,000 478,000
Restructuring costs........................ 347,000 1,088,000
Depreciation............................... 403,000 84,000
Other...................................... 14,000 27,000
---------- ----------
Gross deferred tax asset............... 2,231,000 2,619,000
---------- ----------
Pre-opening costs.......................... (26,000) (58,000)
Other...................................... (85,000) (88,000)
---------- ----------
Gross deferred tax liability........... (111,000) (146,000)
---------- ----------
Deferred tax asset valuation allowance .... (1,700,000) (2,086,000)
---------- ----------
Net deferred tax asset................. $ 420,000 $ 387,000
========== ==========
</TABLE>
Certain U.S. federal and state deferred tax assets may not be realized in
full by the Company and, consequently, a valuation allowance is required under
FAS 109. The valuation allowance is based on the Company's ability to generate
carryforward potential in future years. Carryforward potential for the next
year was based on a weighted average of pre-tax book income for fiscal years
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<PAGE>
1994 and 1995 and projected pre-tax book income for fiscal year 1997. The
Company's ability to project income beyond the next year is limited by
uncertainty in the industry, therefore, only a one year projection is used.
Based on future income, a valuation allowance of $1,700,00 has been provided,
and has been allocated pro-rata to federal and state current and non-current
deferred tax assets.
The provision for income taxes differed from the amount computed by
applying the statutory federal income tax rate to income (loss) before income
taxes and cumulative effect of change in accounting principle as a result of the
following:
<TABLE>
<CAPTION>
FEBRUARY 29 OR 28,
--------------------------------------
1996 1995 1994
--------- ---------- -----------
<S> <C> <C> <C>
Expected federal income tax
provision (benefit) at
statutory rate................ $ 473,000 $ 149,000 $(2,932,000)
State taxes, net of federal
tax benefit................... 85,000 28,000 29,000
Goodwill amortization and
write-off..................... 6,000 6,000 1,780,000
Non-deductible items............ 7,000 22,000 -
Change in valuation allowance (386,000) ( 259,000) 2,001,000
Other........................... (18,000) 106,000 ( 197,000)
--------- ---------- -----------
$ 167,000 $ 52,000 $ 681,000
========= ========== ===========
</TABLE>
The Company has net operating loss carryforwards for federal income tax
purposes totalling approximately $915,000 at February 29, 1996 which will expire
in fiscal years 2004 through 2010 unless previously utilized. The difference
between the net operating loss carryforwards for federal income tax purposes and
financial statement purposes is primarily attributable to the recognition of the
asset write-offs related to discontinued activities for financial statement
purposes but which have not yet been written off for income tax purposes.
In addition, at February 29, 1996, one of the Company's subsidiaries has
acquired operating loss carryforwards of $748,000
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<PAGE>
for tax reporting purposes which will expire in fiscal years 2000 through 2001.
For tax reporting purposes, these net operating losses may only be utilized
against taxable income produced by such subsidiary.
Use of the Company's net operating loss carryforwards may be limited if a
cumulative change in ownership of more than 50% occurs within any three year
period.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Certain claims and litigation against the Company have arisen in the normal
course of business. The Company believes that it is unlikely that the outcome
of these claims and lawsuits will have an adverse material effect on the
Company's financial position or results of operations.
NOTE 9. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
-----------------------------------------------
FIRST SECOND THIRD FOURTH
------- ---------- ---------- --------
<S> <C> <C> <C> <C>
FISCAL 1995
Net revenue ... $9,021,411 $9,121,688 $8,962,416 $8,410,232
========== ========== ========== ==========
Net income
(loss) ....... $ 212,655 $ 167,576 $ 82,173 $ (77,062)
========== ========== ========== ==========
Net income
(loss) per
share ........ $ .03 $ .02 $ .01 $ (.01)
========== ========== ========== ==========
FISCAL 1996
Net revenue ... $9,191,534 $9,136,969 $9,012,316 $8,859,718
========== ========== ========== ==========
Net income .... $ 307,562 $ 517,106 $ 311,567 $ 87,798
========== ========== ========== ==========
Net income
per share .... $ .04 $ .06 $ .04 $ .01
========== ========== ========== ==========
</TABLE>
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<PAGE>
During the second quarter of fiscal year 1996, the Company recognized
$101,000 in management fee income relating to previously terminated management
services contracts.
During the fourth quarter of fiscal year 1995, the Company recorded an
$85,000 reduction of the loss on discontinued activities and restructuring.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED FEBRUARY 29 OR 28, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
ALLOWANCE FOR BALANCE BALANCE
DOUBTFUL AT ADDITIONS AT END
RECEIVABLES BEGINNING CHARGED DEDUCTIONS OF YEAR
<S> <C> <C> <C> <C>
--------------------------------------------------------------------
1994 $1,411,807 $5,525,560 $4,972,482 $1,964,885
1995 $1,964,885 $4,537,821 $4,890,334 $1,612,372
1996 $1,612,372 $5,612,505 $4,977,583 $2,247,294
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors is incorporated herein by reference from
the registrant's definitive proxy statement under the caption of "Election of
Directors". Information concerning executive officers is included in Part I of
this report under the caption "Employees".
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on July 25, 1996
under the caption "Compensation of Executive Officers".
-61-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on July 25, 1996
under the caption "Beneficial Share Ownership".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy
statement for the annual meeting of stockholders to be held on July 25, 1996
under the caption "Certain Transactions".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) The following documents are filed as a part of
this report.
1. Consolidated Financial Statements PAGE
----
(i) Consolidated Balance Sheets at February
28 and 29, 1995 and 1996 42
(ii) Consolidated Statements of Operations
for the years ended February 28 or 29, 1996,
1995 and 1994 43
(iii) Consolidated Statements of Stockholders'
Equity for the years ended February
28 or 29, 1996, 1995 and 1994 44
(iv) Consolidated Statements of Cash Flows
for the years ended February 28 or 29, 1996
1995 and 1994 45
(v) Notes to Consolidated Financial
Statements 46
2. Consolidated Financial Statement Schedules
II-Valuation and qualifying accounts 61
All schedules, other than those listed above, have been omitted as
inapplicable or because the information required to be included therein is shown
in the financial statements or notes thereto.
3. Exhibits
The exhibits listed on the accompanying index to exhibits are filed
as part of this report.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
(i) 1982 Incentive Stock Option Plan filed as Exhibit 10.2 to the Company's
Registration Statement on Form S-18, Registration No. 2-80532-LA
originally filed on November 22, 1982.
(ii) Amendment of 1982 Incentive Stock Option Plan filed as Exhibit 10.2.1 to
the Company's Form 10-K for the fiscal year ended February 28, 1986.
(iii) Second Amendment of 1982 Incentive Stock Option Plan filed as Exhibit
10.2.2 to the Company's Form 10-K for the fiscal year ended February 29,
1988.
(iv) Third Amendment of 1982 Incentive Stock Option Plan filed as Exhibit
10.2.3 to the Company's Form 10-K for the fiscal year ended February 28,
1990.
(v) 1983 Incentive Stock Option Plan filed as Exhibit 10.3 to the Company's
Registration Statement on Form S-14, Registration No. 2-94469, originally
filed on October 18, 1984.
(vi) Amendment of 1983 Incentive Stock Option Plan filed as Exhibit 10.3.1 to
the Company's Form 10-K for the fiscal year ended February 29, 1988.
(vii) Second Amendment of 1983 Incentive Stock Option Plan filed as Exhibit
10.3.2 to the Company's Form 10-K for the fiscal year ended February 28,
1990.
(viii) 1991 Stock Option Plan filed as Exhibit 10.4 to the Company's Form 10-K
for the fiscal year ended February 29, 1992.
(ix) Stock Option Plan for Non-Employee Directors filed as Exhibit 10.5 to the
Company's Form 10-K for the fiscal year ended February 29, 1992.
(x) Amendment of Stock Option Plan for Non-Employee Directors filed as
Exhibit 10.5.1 to the Company's Form 10-K for the fiscal year ended
February 28, 1994.
-62-
<PAGE>
(xi) Change in Control Executive Severance Benefit Plan filed as exhibit 10.10
to the Company's Form 10-K for the fiscal year ended February 28, 1995.
(xii) Amendment of Change in Control Executive Severance Benefit Plan filed as
exhibit 10.10.1 to the Company's Form 10-K for fiscal year February 29,
1996.
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the
last quarter of the fiscal year ended February 29, 1996.
INDEX TO EXHIBITS
3.1 Certificate of Incorporation (E)
3.2 Bylaws (E)
10.1 Facilities, Licensing and Management Services Agreement for
Urgent Care Centers (B)
10.1.9 Revised Facilities, Licensing and Services Agreement (I)
10.2 1982 Incentive Stock Option Plan (A)
10.2.1 Amendment of 1982 Incentive Stock Option Plan (D)
10.2.2 Second Amendment of 1982 Incentive Stock Option Plan (E)
10.2.3 Third Amendment of 1982 Incentive Stock Option Plan (F)
10.3 1983 Incentive Stock Option Plan (C)
10.3.1 Amendment of 1983 Incentive Stock Option Plan (E)
10.3.2 Second Amendment of 1983 Incentive Stock Option Plan (F)
10.4 1991 Stock Option Plan (G)
10.5 Stock Option Plan for Non-Employee Directors (G)
10.5.1 Amendment of Stock Option Plan for Non-Employee Directors (I)
10.6 Facilities, Licensing and Management Services Agreement for Minor
Medical Outpatient Treatment Centers (E)
10.6.6 Revised Facilities, Licensing and Services Agreement (I)
-63-
<PAGE>
10.7 Amended and Restated Credit Agreement dated April 10, 1992,
between ReadiCare, Inc. and Security Pacific National Bank (G)
10.7.1 Amendment of Credit Agreement dated April 10, 1992, between
ReadiCare, Inc. and Security Pacific National Bank (H)
10.7.2 Second Amendment of Credit Agreement dated April 10 1992,
between ReadiCare, Inc. and Security Pacific National Bank (I)
10.7.3 Third Amendment of Credit Agreement dated April 10,1993, between
ReadiCare, Inc. and Security Pacific National Bank (I)
10.7.4 Fourth Amendment of Credit Agreement dated April 10, 1994,
between ReadiCare, Inc. and Security Pacific National Bank (I)
10.7.5 Credit agreement between ReadiCare, Inc. and First Interstate
Bank of California executed on August 15, 1994 (J)
10.7.6 Amendment to Credit Agreement between ReadiCare, Inc. and First
Interstate Bank of California dated August 16, 1995 (K)
10.8 Master Equipment Lease dated February 6, 1992, between ReadiCare,
Inc. and Metlife Capital Corporation (G)
10.9 Master Equipment Lease dated February 6, 1992, between CHEC
Medical Centers, Inc. and Metlife Capital Corporation (G)
10.10 Change in Control Executive Severance Benefit Plan dated June 1,
1994 (J)
10.10.1 Amendment to Change in Control Executive Severance Benefit Plan
dated July 19, 1995.(K)
21 Subsidiaries of Registrant (K)
23 Consent of Price Waterhouse LLP (K)
27 Financial Data Schedule (K)
Footnotes
---------
(A) Filed as an exhibit to the Company's Registration Statement on
Form S-18, Registration No. 2-80532-LA originally filed on
November 22, 1982, and hereby incorporated by reference.
(B) Incorporated by reference from the Company's definitive proxy
statement dated June 13, 1983, filed with the Commission on June
16, 1983.
(C) Incorporated by reference from the Company's
-64-
<PAGE>
Registration Statement on Form S-14, Registration
No. 2-94469, originally filed on October 18, 1984.
(D) Incorporated by reference from the Company's Form 10-K for the
fiscal year ended February 28, 1986.
(E) Incorporated by reference from the Company's Form 10-K for the
fiscal year ended February 29, 1988.
(F) Incorporated by reference from the Company's Form 10-K for the
fiscal year ended February 28, 1990.
(G) Incorporated by reference from the Company's Form 10-K for the
fiscal year ended February 29, 1992.
(H) Incorporated by reference from the Company's Form 10-K for the
fiscal year ended February 28, 1993.
(I) Incorporated by reference from the Company's Form 10K for the
fiscal year ended February 28, 1994.
(J) Incorporated by reference from the Company's Form 10K for the
fiscal year ended February 28, 1995 .
(K) Filed herewith
-65-
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
ReadiCare, Inc.
By: /s/ Dennis G. Danko
------------------------------------
Dennis G. Danko
President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT IN
THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Dennis G. Danko President and Chief Executive
------------------------- Officer (Principal Executive
Dennis G. Danko Officer) and Director May 17, 1996
/s/ Steve E. Busby Senior Vice President, Finance
------------------------- and Secretary
Steve E. Busby (Principal Accounting
Officer) May 17, 1996
/s/ James M. Hall Director May 17, 1996
-------------------------
James M. Hall
/s/ Alfred E. Osborne Director May 17, 1996
-------------------------
Alfred E. Osborne
/s/ Harry L. Casari Director May 17, 1996
-------------------------
Harry L. Casari
-66-
<PAGE>
EXHIBIT 10.7.6
[LETTERHEAD OF FIRST INTERSTATE BANK]
August 16, 1995
Steve E. Busby
Senior Vice President, Finance & Secretary
ReadiCare, Inc.
446 Oakmead Parkway
Sunnyvale, CA 94086
Dear Steve,
At your request and based upon the information you have provided to First
Interstate Bank of California ("FICAL"), I am pleased to confirm FICAL's
commitment to provide the following amendment ("Amendment") to the existing
$5,000,000 credit facility ("Credit Facility") to ReadiCare,Inc., Chec Medical
Centers, Inc. and American Orthopedics & Rehabilitation Centers, Inc., jointly
and severally, "Borrower") as outlined in the Letter Loan Agreement dated July
28, 1994. Except as otherwise contained herein, all existing covenants, terms
and conditions contained in the Credit Agreement shall remain in fully force and
effect.
The Expiration Date of the Credit Facility has been amended from June 30, 1996
to June 30, 1997.
FICAL reserves the right, in its sole discretion, to cancel its commitment to
make this Amendment and to terminate its obligations thereunder (a) upon the
occurrence of a material adverse change in the financial condition of borrower;
or (b) in the event that all closing conditions under such Amendment have not
been complied with to FICAL's satisfaction by September 15, 1995.
Kindly indicate your agreement to this Amendment by signing the enclosed copy of
this letter and returning it to me. This offer shall expire at 3:00 p.m. on
Friday, August 25, 1995 unless prior to such time, FICAL receives such copy
executed by you. If you have any questions concerning FICAL or the contents of
this letter, please do not hesitate to call me at (408) 971-5858.
Sincerely yours,
/s/ LAURA HEWITT
-------------------------
Laura Hewitt
Corporate Banking Officer
<PAGE>
Page 2
Steve E. Busby
August 16, 1995
On behalf of ReadiCare, Inc., Chec Medical Centers, Inc. and American
Orthopedic & Rehabilitation Centers, Inc., the below signed agree to the terms
and conditions contained in this Amendment.
AMERICAN ORTHOPEDIC & REHABILITATION
READICARE, INC. CENTERS, INC.
By: /s/ XXXXXXXXXXXXXXXX By: /s/ XXXXXXXXXXXXXXXXXXXXXXXX
--------------------------------- ------------------------------------
Title: Senior VP Finance, Secretary Title: VP Finance, Secretary
------------------------------ ---------------------------------
Date: 8/18/95 Date: 8/18/95
------------------------------- ----------------------------------
CHEC MEDICAL CENTERS, INC.
By: /s/ XXXXXXXXXXXXXXXXXXXXXXXXXXXXX
---------------------------------
Title: VP Finance, Secretary
------------------------------
Date: 8/18/95
-------------------------------
<PAGE>
Exhibit 10.10.1
AMENDED CHANGE IN CONTROL
-------------------------
EXECUTIVE SEVERANCE BENEFIT PLAN
--------------------------------
The Change in Control Executive Severance Benefit Plan (the "Plan")
adopted on June 1, 1994 is hereby amended on July 19, 1995 to read as follows:
SECTION I - PURPOSES:
--------------------
The purposes of this Plan are to:
(a) Assure the Company and its stockholders of continuity of management in the
event of any actual or threatened Change in Control;
(b) Assure the Company and its stockholders that key executive employees of the
Company will evaluate objectively whether a potential Change in Control is
in the best interests of the stockholders; and
(c) Advance the interests of the Company and its stockholders by providing
financial protection to selected key executive employees of the Company.
SECTION II - ELIGIBILITY:
------------------------
Persons eligible to participate in this Plan are those Executive officers,
divisional officers, or key employees of the Company in good standing who shall
be selected from time to time by the Executive Compensation and Stock Option
Committee of the Board of Directors of the Company (the "Committee"), whose
names are set forth in Schedule "A" attached hereto. In selecting the eligible
Plan Participants,the Committee shall take into consideration such factors as it
deems relevant in connection with accomplishing the
<PAGE>
purposes of the Plan. At the Company's request, each participant (the
"Participant") selected by the Committee shall execute a separate agreement with
the Company ("Agreement") which will provide for the payment of benefits in
accordance with the provisions of the Plan, as amended.
SECTION III - PLAN ADMINISTRATION:
---------------------------------
The Committee shall, from time to time, establish and modify rules for the
administration of the Plan and the transaction of its business. Except as
herein otherwise expressly provided, the Committee shall have the exclusive
right to interpret the Plan and to decide any matters arising thereunder in
connection with the administration of the Plan. The decisions and the records
of the Committee shall be conclusive and binding upon the Company, its officers,
employees and stockholders, Participants, and all other persons having any
interest under the Plan.
<PAGE>
SECTION IV - REQUIREMENTS FOR BENEFITS:
--------------------------------------
The benefits shall be payable under the Plan or any Agreement only when there
has been a Change in Control as set forth in Section V and, within one (1) year
following the date of the Change in Control, the Participant has a Termination
of Employment as described in Section VI. Participation in this Plan absent
these events does not guarantee employment with the Company other than on an at-
will basis.
SECTION V - CHANGE IN CONTROL:
-----------------------------
"Change in Control" shall:
(a) Mean a change in control of the Company of a nature that would be required
to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934 as amended, in effect
on the date of this Plan or if Item 5(f) is no longer in effect, any
regulations issued by the Securities and Exchange Commission which serve
similar purposes; or
(b) Be deemed to have occurred if any person, or group of persons acting
together, becomes a beneficial owner, directly or indirectly, of securities
of the Company representing more than fifty percent (50%) of the combined
voting power of the Company's then outstanding securities. "Person", for
the purposes of this paragraph, shall mean an individual, a partnership, a
corporation, an association, an unincorporated organization, a trust, or
any other entity.
SECTION VI - TERMINATION OF EMPLOYMENT:
--------------------------------------
(a) For purposes of this Plan, "Termination of Employment" shall mean:
(i) Termination by the Company of Participant's employment within one (1)
year following the date of Change in Control for any reason other than
death, disability, retirement, or Cause; or
<PAGE>
(ii) Resignation by Participant within one (1) year following the
date of Change in Control because of certain adverse
events as defined in the Plan. Such adverse events may include:
(A) A material reduction in Participant's compensation, benefits, or
perquisites;
(B) A significant change in the nature or scope of the Participant's
authorities and duties from those the Participant had with the
Company immediately prior to the Change in Control;
(C) The unreasonable relocation to a facility or office location from
the location at which Participant was employed prior to such
relocation, except in the event the Participant consents to such
relocation; or
(D) The breach by the Company of any provision of this Plan.
(b) "Cause" shall mean (i) gross misconduct, (ii) willful and material breach
of duties by the Participant, (iii) conviction of a felony, (iv) fraud or
(v) repeated unexplained or unjustified absence.
(c) "Current Compensation" shall mean an amount equal to the greater of (i)
Participant's highest annual compensation preceding the year in which the
Termination of Employment occurs, (ii) Participant's annual compensation at
any time during the year in which the Termination of Employment occurs or
(iii) Participant's annual compensation on the date of Termination of
Employment. Compensation computations shall include any prior year bonus
payments, auto allowance payments, or other income as reported on
Participant's form W-2.
<PAGE>
SECTION VII - BENEFIT:
---------------------
In the event of a Termination of Employment, as set forth in Section VI above,
the Company shall pay to the Participant an amount equal to the following:
(a) For Named Executive Officers:
----------------------------
one twelfth (1/12th) of
current compensation for
each full year (pro-rata for
partial years) employee was
employed by Company, payable
within 10 days of termination;
(b) For Other Key Employees:
-----------------------
the greater of six (6) month's
pay, or one twenty-fourth (1/24)
of current compensation for
each full year (pro-rata for
partial years) employee was
employed by Company, payable
within 10 days of termination.
The Company shall not be obligated to provide Participant with any other
compensation, (except the Company will at its expense be obligated to provide
for health, dental, life and disability insurance benefits, at levels no less
than those made available to participant before a change in control) unless
otherwise agreed upon by the Company and Participant as may be set forth
pursuant to the terms of an employment or severance agreement.
SECTION VIII - METHOD OF PAYMENT:
--------------------------------
The benefit determined to be payable to the Participant under Section VII of
this Plan shall be paid in a lump sum cash payment (in U.S. Dollars) within ten
(10) business days after the Participant's Termination of Employment.
<PAGE>
SECTION IX - NO DUTY TO SEEK EMPLOYMENT:
---------------------------------------
The Participant shall not be under any duty or obligation to seek or accept
other employment after Termination of Employment. No benefit due the
Participant hereunder shall be reduced or suspended if the Participant accepts
subsequent employment.
SECTION X - WITHHOLDING OF TAXES:
--------------------------------
The Company may withhold from any amounts payable under this Plan all Federal,
State, City, or other taxes as legally shall be required.
SECTION XI - SUCCESSORS OF THE COMPANY:
--------------------------------------
This Plan shall be binding upon the Company and any successor of the Company,
including, without limitation, any corporation or other entity acquiring
directly or indirectly all or substantially all of the assets of the Company
whether by merger, consolidation, sale, or otherwise. Such successor shall
thereafter be deemed the "Company" for the purposes of this Plan.
SECTION XII - VALIDITY:
----------------------
The invalidity or unenforceability of any provision of this Plan shall not
affect the validity or enforceability of any other provision of this Plan, which
shall continue in full force and effect.
<PAGE>
SECTION XIII - ARBITRATION:
--------------------------
Any dispute or controversy arising under or in connection with this Plan shall
be settled exclusively by arbitration in accordance with the Voluntary Labor
Arbitration Rules of the American Arbitration Association then in effect. The
arbitrator's sole authority shall be to interpret or apply the provisions of
this Plan; he shall not change, add to, or subtract from, any of its provisions.
The arbitrator shall have the power to compel attendance of witnesses at the
hearing. The arbitration award shall be final and binding and shall be the sole
remedy for any claimed breach of this Plan. Judgement may be entered on the
arbitrator's award in any court having jurisdiction, but neither party may
otherwise resort to any court or administrative agency with respect to any
dispute that is arbitrable under this section except for claims that the
arbitrator has exceeded his jurisdiction. The expense of any arbitration shall
be paid by the Company.
SECTION XIV - EFFECTIVE DATE AND GOVERNING LAW:
----------------------------------------------
This Plan shall be effective as of June 1, 1994 and shall be governed and
construed in accordance with the laws of the State of Delaware. Any amendments
to the Plan shall take effect on the day so approved by the Stock Option &
Executive Compensation Committee of the Board of Directors.
<PAGE>
CHANGE IN CONTROL
-----------------
EXECUTIVE SEVERANCE BENEFIT PLAN PARTICIPANTS(7/95)
---------------------------------------------------
Participant(s) Name Position
-------------- ---- --------
1. Named Executive Officers: D. Danko President, CEO
T. Carey Sr. V.P.
S. Busby Sr. V.P.
2. Other Key Employees: K. Quigley V.P.
D. Penn V.P.
<PAGE>
Exhibit 21
READICARE, INC.
Subsidiaries of Registrant
--------------------------
State of Doing
Name Incorporation Business As
---- ------------- -----------
American Orthopedics & American Orthopedics &
Rehabilitation Centers, Rehabilitation Centers,
Inc. Delaware Inc.
Chec Medical Centers, Chec Medical Centers,
Inc. Washington Inc.
Dennis G. Danko - President & C.E.O. of both of the above
subsidiaries.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 2-88902 and 33-42343) of ReadiCare, Inc. of our
report dated April 10, 1996 appearing on page 41 of this form 10-K.
PRICE WATERHOUSE LLP
San Jose, California
May 17, 1996
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> FEB-29-1996
<CASH> 2,211,194
<SECURITIES> 0
<RECEIVABLES> 6,363,136
<ALLOWANCES> 0
<INVENTORY> 703,135
<CURRENT-ASSETS> 9,847,704
<PP&E> 14,394,127
<DEPRECIATION> 7,848,348
<TOTAL-ASSETS> 17,358,635
<CURRENT-LIABILITIES> 2,959,466
<BONDS> 0
0
0
<COMMON> 82,102
<OTHER-SE> 14,317,067
<TOTAL-LIABILITY-AND-EQUITY> 17,358,635
<SALES> 0
<TOTAL-REVENUES> 36,200,537
<CGS> 0
<TOTAL-COSTS> 28,730,177
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,612,505
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,391,033
<INCOME-TAX> 167,000
<INCOME-CONTINUING> 1,224,033
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,224,033
<EPS-PRIMARY> 0.15
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