<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended June 30, 1994 Commission file number: 0-15088
CONTINENTAL MEDICAL SYSTEMS, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 51-0287965
- - ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 Wilson Lane, Post Office Box 715, Mechanicsburg, Pennsylvania 17055
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(Address of principal executive offices)
Registrant's telephone number, including area code: (717) 790-8300
Securities registered Pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par value $.01 New York Stock Exchange
Securities registered Pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value (based on the last sale price quoted on the New
York Stock Exchange) of the voting stock held by non-affiliates of the
Registrant as of September 15, 1994 was approximately $334,394,011 (Reference is
made to the statement following Part I, Item 4 of this report for the
assumptions on which this calculation is based.)
The number of shares outstanding of the Registrant's common stock, $.01 par
value, as of September 15, 1994 was 38,380,734.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1994 definitive proxy statement (which is
expected to be filed with the Commission not later than 120 days after the
Registrant's 1994 fiscal year) are incorporated by reference into Part III of
this report.
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PART I
ITEM 1. BUSINESS.
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GENERAL
Continental Medical Systems, Inc. (together with its various direct and
indirect subsidiaries, the "Company") is one of the largest providers of
comprehensive medical rehabilitation programs and services in the country. The
Company has a significant presence in each of the rehabilitation industry's
three principal sectors -- inpatient rehabilitation care, outpatient
rehabilitation care and contract therapy. The Company has developed and provides
inpatient and outpatient rehabilitation programs and services for patients
suffering from stroke and other neurological and cardiac disorders, orthopedic
problems, head injuries, spinal cord injuries, work-related disabilities and
multiple trauma. The Company's inpatient and outpatient rehabilitation programs
and services are delivered to patients through a plan of treatment developed by
an interdisciplinary team that includes physician specialists, therapists and
other medical personnel as determined by the individual patient's needs.
The Company currently operates 36 freestanding comprehensive medical
rehabilitation hospitals with a total of 2,343 licensed beds located in 15
states. The Company also has one freestanding comprehensive medical
rehabilitation hospital currently under construction with a total of 68 beds.
Many of the Company's rehabilitation hospitals are operated through joint
ventures with local general acute care hospitals, physicians and other
investors. The Company's unit management group provides inpatient rehabilitation
services in acute care hospital settings and currently manages 10 rehabilitation
units with more than 200 beds in acute care hospitals.
The Company's comprehensive freestanding medical rehabilitation hospitals
typically provide on-site outpatient services. As of June 30, 1994, the Company
also provided outpatient services through 130 outpatient rehabilitation clinics,
91 of which are operated as satellite facilities to the Company's inpatient
rehabilitation hospitals. The remaining 39 outpatient clinics are operated
through the Company's contract therapy subsidiaries.
Through its contract therapy subsidiaries, the Company provides physical,
occupational, speech and respiratory therapy services on a contract basis to
skilled nursing facilities, general acute care hospitals, schools, home health
agencies, inpatient rehabilitation hospitals and outpatient clinics in 31
states.
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The Company provides physician locum tenens services to institutional
providers and physician practice groups throughout the United States. "Locum
tenens" is a term used in the healthcare field to describe one physician
covering for another. The Company also offers development, management and
managed care services to independent physician associations, physicians and
outpatient rehabilitation providers under various contractual arrangements.
During fiscal 1994, the Company opened four new freestanding rehabilitation
hospitals and sold one rehabilitation hospital under construction that was
expected to open in October 1993 and its interests in the operations of its
rehabilitation hospitals in Denver, Colorado and Chico, California. In April
1994, the Company acquired all of the outstanding stock of Medical Management
Associates, Inc. ("MMA"), a company specializing in the development and
management of independent physician associations ("IPA"). For additional
information about these and other developments since the beginning of fiscal
1994, see Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
The Company is incorporated in Delaware and commenced operations in March
1986. The address of its principal business office is 600 Wilson Lane, P.O. Box
715, Mechanicsburg, Pennsylvania 17055. Its telephone number is (717) 790-8300.
THE MEDICAL REHABILITATION INDUSTRY
The field of medical rehabilitation covers a broad spectrum of needs and
levels of care. Comprehensive medical rehabilitation is a treatment program in
an inpatient or an outpatient setting which is designed to restore levels of
physical, psychological, vocational, social and educational well-being for the
patient. The treatment programs, directed by a physician with expertise in
physical medicine and supported by a team of health care professionals,
encompasses physical, occupational, speech and respiratory therapies,
rehabilitation nursing and other specialties. For physical impairments which
require a lesser degree of care, outpatient facilities operated in conjunction
with inpatient facilities offer similar services.
The Company believes that medical rehabilitation has proven to be a
clinically appropriate and cost-effective way to improve the quality of life of
people who have physical impairments resulting from serious illness or trauma.
Growth in the demand for rehabilitation services has been driven primarily by
the rapid growth of the elderly population, which has a greater incidence of
major physical impairment, and improvements in medical care, which increasingly
enable patients to survive major trauma or illness resulting in severe physical
impairment. The Company believes that rehabilitation therapy generally reduces
the cost of treating and
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maintaining severely physically impaired patients by enabling many of those
patients to regain certain functional abilities and to return to some level of
self-sufficiency.
The Company believes that comprehensive medical rehabilitation hospitals
offer essential services to patients while providing medical treatment
comparable in quality to similar treatment provided in acute care hospitals but
at significant cost savings. The Company believes that rehabilitation hospitals
are lower cost providers, in part, because general acute care hospitals bear the
cost of many services that are not necessary for the treatment of rehabilitation
patients, such as emergency rooms, intensive care units and surgery facilities
and, in part, because the cost of delivery of rehabilitation services may be
less than the cost of on-going chronic care requirements of patients not
provided rehabilitation therapy.
Purchasers and providers of healthcare services, such as insurance
companies, health maintenance organizations and employers, are seeking economic
alternatives to traditional delivery systems that can provide quality care. The
Company believes that cost containment efforts by federal and state governments
and third party payors designed to encourage more efficient utilization of
hospital services has increased demand for specialized services that more
closely match patient needs. The Company believes that its broad spectrum of
rehabilitation services offered in a variety of settings will benefit from the
current focus on cost containment and more efficient utilization.
OPERATIONS
The Company provides rehabilitation services through the operation of
several different types of facilities and programs, including comprehensive
medical rehabilitation hospitals, outpatient clinics, managed units, specialty
centers and contract therapy.
Rehabilitation Hospitals
- - ------------------------
The Company's freestanding comprehensive rehabilitation hospitals provide
rehabilitation care in the form of physical, psychological, social and
vocational rehabilitation services to persons who have physical impairments
resulting from accident or illness. These services are provided by a number of
different types of healthcare professionals, predominately physicians
specializing in rehabilitation medicine, nurses and physical, speech,
occupational, recreation and respiratory therapists, aides and assistants. The
Company has developed numerous rehabilitation programs which include stroke,
head injury, spinal cord injury, industrial injury, pediatrics and ventilator.
While the mix of programs and services offered at the Company's rehabilitation
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hospitals varies with the medical needs of the local community, most hospitals
provide a continuum of services to enable patients to receive coordinated care
tailored to their needs from a single location.
The Company's hospitals are usually licensed as rehabilitation hospitals or
as general acute care hospitals with a rehabilitation designation. The Company
has changed some of the rehabilitation beds (typically 8 to 15 beds) at 20 of
its hospitals to create transitional rehabilitation units to offer a broader
spectrum of cost effective care to its patients. The Company's transitional
rehabilitation program is designed for patients who are unable to participate in
or benefit from a comprehensive inpatient program due to decreased endurance,
gravely impaired cognitive status or complex medical conditions, or who do not
otherwise qualify for a different level of inpatient rehabilitation care. The
goal of the program is to efficiently assist the reintegration of patients into
the community by maximizing impaired functions or enabling them to progress to
another appropriate and cost effective level of care.
The Company's hospitals are designed to meet the requirements of the Joint
Commission on Accreditation of Healthcare Organizations ("JCAHO") and the
Commission on the Accreditation of Rehabilitation Facilities ("CARF").
Generally, the Company applies for and obtains JCAHO and CARF accreditation for
each of its hospitals.
The Company's hospitals are typically operated through an operating
subsidiary. In many localities, local investors, including general acute care
hospitals and physicians, some of whom refer patients to the hospital, have
invested in the hospital's operations by acquiring a minority interest in the
real estate and buildings comprising the facility or in the operating entity.
The Company expects to develop new inpatient hospitals in selected markets where
it has obtained a Certificate of Need and a joint venture with a strong local
provider or made arrangements with a dominant acute-care hospital or strong
network of healthcare providers in the market. The Company intends to continue
to emphasize development of existing rehabilitation hospital markets through the
introduction of new programs, services and outpatient satellite centers. The
Company's business strategy is to be the preeminent provider of comprehensive
rehabilitation services in each market that it serves. In the area of inpatient
and outpatient rehabilitation services, the Company focuses on local market
areas with a view toward providing a continuum of rehabilitation care through
the development and operation of a freestanding medical rehabilitation hospital
and surrounding satellite outpatient clinics.
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Of its 36 currently operational rehabilitation hospitals, the Company
leases 19 of such hospitals from third parties. The following chart shows the
date opened or acquired, the number of licensed beds and the Company's
percentage ownership of operations at each of the Company's currently operating
rehabilitation hospitals:
<TABLE>
<CAPTION>
Date Percentage
Opened or Licensed Ownership
Facility Name and Location Acquired Beds Operations
(1)
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Braintree Hospital, Braintree, 12/86 166 100%
Massachusetts (3)
Western Neuro Care Center, Tustin, 2/87 57(2) 100%
California
Kentfield Hospital, Kentfield, 6/87 60 100%
California
Lakeview Rehabilitation Hospital, 11/87 40 100%
Elizabethtown, Kentucky
North Louisiana Rehab Hospital, Ruston, 11/88 90 90%
Louisiana
Northeast Arkansas Rehab Hospital, 12/88 54 100%
Jonesboro, Arkansas
Kansas Rehab Hospital, Topeka, Kansas 11/88 80 60%
Houston Rehab Institute, Houston, Texas 3/89 80 60%
Mid-America Rehab Hospital, Kansas City, 6/89 80 50%
Kansas
Rehab Hospital of Baton Rouge, Baton 6/89 80 100%
Rouge, Louisiana
Fort Worth Rehabilitation Hospital, Fort 7/90 60 100%
Worth, Texas
Central Arkansas Rehabilitation 10/90 60 80%
Hospital, Sherwood, Arkansas
Rehabilitation Hospital of Colorado 1/91 60 100%
Springs, Colorado Springs, Colorado
San Joaquin Valley Rehabilitation 1/91 60 70%
Hospital, Fresno, California
Southeast Texas Rehabilitation Hospital, 3/91 60 79%
Beaumont, Texas
Plano Rehabilitation Hospital, Plano, 3/91 62 83%
Texas (3)
Tustin Rehabilitation Hospital, Tustin, 6/91 60(2) 100%
California
Northwest Arkansas Rehabilitation 8/91 60 50%
Hospital, Fayetteville, Arkansas
</TABLE>
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<TABLE>
<CAPTION>
Date Percentage
Opened or Licensed Ownership
Facility Name and Location Acquired Beds Operations
(1)
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Northeast Tennessee Rehabilitation 8/91 60 50%
Hospital, Johnson City, Tennessee
Clear Lake Rehabilitation Hospital, 10/91 60 100%
Webster, Texas (3)
West Gables Hospital and Healthcare 12/91 60 100%
Center, Miami, Florida (3)
HCA Wesley Rehabilitation Hospital, 3/92 65 50%
Wichita, Kansas
Continental Rehabilitation Hospital of 4/92 110 51%
San Diego, San Diego, California (3)
Southern Arizona Rehabilitation 5/92 60 50%
Hospital, Tucson, Arizona
Eastern Neuro Rehabilitation Hospital, 5/92 20 100%
Silver Spring, Maryland (3)
Wichita Falls Rehabilitation Hospital, 7/92 60 100%
Wichita Falls, Texas (3)
Central Louisiana Rehabilitation 7/92 47 100%
Hospital, Alexandria, Louisiana (3)
The Rehabilitation Hospital of Nevada- 1/93 60 100%
Las Vegas, Las Vegas, Nevada (3)
Tyler Rehabilitation Hospital, Tyler, 1/93 60 80%
Texas (3)
Northeast Oklahoma Rehabilitation 4/93 60 100%
Hospital, Tulsa, Oklahoma (3)
The Rehabilitation Hospital of Nevada- 4/93 62 100%
Reno, Reno, Nevada (3)
Robert H. Ballard Hospital for 7/93 60 50%
Rehabilitation, San Bernardino,
California (3)
Terre Haute Rehabilitation Hospital, 7/93 60 50%
Terre Haute, Indiana (3)
Rehabilitation Hospital of Fort Wayne, 11/93 60 50%
Fort Wayne, Indiana (3)
The Rehabilitation Hospital of 5/94 50 79%
Lafayette, Lafayette, Louisiana (3)============================================
</TABLE>
________________________
(1) The percentages in this column relate to Company ownership of the
subsidiary that operates the hospital. For those facilities where the
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Company owns less than 100% of the operations, the Company also has a
contract to manage the facility.
(2) The Western Neuro Care Center and Tustin Rehabilitation Hospital facilities
are located on the same campus, and licensed as one facility and operated
under a single lease.
(3) The Company owns all or substantially all of the real property interests in
these facilities. The remaining facilities are leased from third parties.
For a discussion of the occupancy rates at the Company's inpatient hospitals,
see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
The Company currently has one hospital under construction in Memphis,
Tennessee with 68 beds. Construction is expected to be completed in the first
quarter of fiscal 1995. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operation", for a discussion of the Company's
historical and current methods of financing the construction and operation of
its hospitals.
Contract Therapy Services
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Through its Contract Therapy Services group, the Company provides physical,
occupational, speech, respiratory and ventilator services on a contract basis in
31 states. Rehabilitative programs and staffing are provided throughout the
entire healthcare continuum to entities such as schools, skilled nursing
facilities, acute care hospitals, rehabilitation hospitals, home health agencies
and outpatient clinics.
Many institutions offer diversified rehabilitation programs, such as
physical, speech, occupational and respiratory care, without having sufficient
patient demand to justify retaining full-time employees or establishing a
rehabilitation department to provide such services in house. Further, the
shortage of qualified healthcare personnel makes it difficult for many providers
to successfully recruit and retain staff for existing or proposed therapy
departments. The Company's Contract Therapy Services group can provide any of
these services on a full or part-time contractual basis to meet the staffing,
management and programmatic needs of such organizations.
In fiscal 1994, the Company consolidated several of its contract therapy
operations into CMS Therapies to eliminate duplicative administrative roles and
to improve the delivery of services by integrating the resources of the various
contract therapy subsidiaries. For additional discussion of the Company's
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consolidation efforts, see Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
CMS Therapies provides contract physical, occupational, speech and
respiratory therapy services to the growing skilled nursing facility-based
medical rehabilitation population. CMS Therapies currently serves more than
1000 facilities nationwide. The Company's RehabWorks, Pro Therapy and VTA
Management subsidiaries also provide contract therapy services.
Outpatient Services
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The Company believes outpatient facilities offer comprehensive
rehabilitation services in a convenient and cost-effective manner for a broad
range of cases, including post-inpatient hospital cases and other non-
hospitalized conditions such as hand, leg and neck injuries. The Company's
outpatient programs encompass sports medicine, industrial and occupational
medicine, women's centers and treatment for a broad range of orthopedic and
neurological conditions. The Company typically provides on-site outpatient
services at its rehabilitation hospitals and, as of June 30, 1994, at 130
outpatient facilities, 91 of which are operated in conjunction with the
Company's inpatient rehabilitation hospitals. The remaining 39 of the Company's
outpatient facilities are operated through its contract therapy group. The
Company intends to increase the volume of its outpatient services by
diversifying its programs, expanding services and making acquisitions of
additional outpatient centers.
Physician Services
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Through its Physician Services group, the Company provides temporary
physician (locum tenens services) and allied professional staffing services to
hospitals, physician practices and managed care payors throughout the United
States. Demand for these services results from shortages in the primary care
and allied healthcare professional field as well as from absences to meet
continuing medical education requirements, vacations and staff optimization in
hospital-based specialties. The Company believes that efficient operation of
healthcare facilities and practices will be a continuing driving force for the
utilization of locum tenens services of the Company to temporarily and
permanently fill staff vacancies.
Through its newly acquired MMA subsidiary, the Company provides
development, management and managed care contracting services to hospitals,
independent physicians practice associations ("IPA's") and other healthcare
providers through various subsidiaries. As of June 30, 1994, MMA managed 15
IPA's with managed care contracts covering 100,000 enrolled members and more
than 4000 physicians under contract. The Company's Kron Clinical
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Services subsidiary provides management services to certain hospital departments
and physician groups in the areas of anesthesiology and radiology.
Management Services
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The Company's SelectRehab subsidiary, formerly known as CMS Unit
Management, develops and manages acute and sub-acute rehabilitation units within
acute care hospitals and currently manages 10 units with more than 200 beds. The
Company's recently formed Innovative Health Alliances subsidiary provides
development, management and managed care contracting services to networks of
independent outpatient rehabilitation providers. IHA has developed a network in
Kansas City and is in the process of developing networks in other geographic
regions.
Sources of Revenue
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As of September 15, 1994, all of the Company's operating rehabilitation
hospitals were certified to receive Medicare reimbursement. The following table
sets forth the percentages of the Company's net patient revenues for the
Company's rehabilitation facilities, contract therapy companies and for the
entire Company on a consolidated basis, in each case accounted for by private
pay, Medicare and Medicaid revenues for each of the three fiscal years ended
June 30, 1992, 1993, and 1994:
<TABLE>
<CAPTION>
Rehabilitation Contract
Facilities Therapy Consolidated
-------------- -------- ---------------
Year ended June 30, Year ended June 30, Year ended June 30,
Payor 1992 1993 1994 1992 1993 1994 1992 1993 1994
- - ---------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Private Pay(1) 38% 38% 36% 87% 87% 80% 58% 59% 58%
Medicare 59% 59% 61% 13% 13% 20% 39% 38% 40%
Medicaid 3% 3% 3% - - - 3% 3% 2%
</TABLE>
_________________________
(1) Private pay revenues include direct pay patients, commercial insurers,
health maintenance and preferred provider organizations, Blue Cross,
worker's compensation plans, liability insurance and other similar payment
sources. Payments from these sources may be charge based, cost based or
based on contractually negotiated discounts or fee schedules.
Quality Improvement Program
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The Company has established a quality improvement program designed to
maintain and continuously improve the high quality of care rendered by the
Company to its patients. Each hospital employs an individual dedicated to the
daily operations of the quality management program. These operational
responsibilities include investigation of patient complaints, monitoring of high
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risk incidents and correction of any deficiencies issued by regulatory agencies.
These individuals receive support from regional Quality Management Support Staff
and the corporate office. The Company believes that its quality management
program will enable it to satisfy managed care payors regarding the quality of
service provided by the Company. The Company applies for and obtains JCAHO and
CARF accreditation for each of its hospitals.
In fiscal 1994, the Company introduced the Total Outcomes and Prediction
Program/SM/ (TOPP/SM/), a program designed to manage outcomes by establishing
performance benchmarks and critical treatment pathways. The Company believes
that the capability of TOPP/SM/ to describe and predict treatment outcomes and
expenses permits the Company to assure patients and payors of quality results
while its constant monitoring of therapy performance promotes continuous
improvements in treatment.
The Contract Therapy Services group maintains a quality assurance program
developed to ensure high quality patient care and monitor clinical staff care
practices. The quality assurance personnel are also charged with monitoring the
appropriateness of care and patient charges to ensure compliance with the
requirements of the various third party payors.
The Company's locum tenens providers also maintain a comprehensive quality
improvement program. Quality improvement personnel create procedures for and
participate in the monitoring of provider credentialling; client screening;
incident reporting and follow-up; specific monitoring of physician care; and
educational programs for employees. Medical consultants in the areas of OB/GYN,
anesthesia, family practice, orthopedic surgery, radiology, radiation oncology,
general surgery and pathology have assisted quality improvement personnel in
developing policies and forms. These consultants also provide inservice
seminars for Company staff and act as advisors to providers and clients on
patient care issues.
Competition
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The Company's competitors include inpatient and outpatient rehabilitation
hospitals as well as local acute care hospitals. The Company believes that
recent cost containment efforts of federal and state governments, health
maintenance and preferred provider organizations and other third party payors
are designed to encourage more efficient utilization of healthcare services and
have resulted in lower hospital occupancy, motivating some acute care hospitals
to convert to, or add, specialized post-acute care facilities to meet patient
care needs in a more cost effective manner. Hospitals and nursing homes are
developing "step-down" units, including subacute and acute rehabilitation units
that
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compete with the Company for cases such as uncomplicated orthopedic cases.
The primary competitive factors in the rehabilitation services business are
quality outcomes and cost efficiency. As managed care companies increase their
strength within each market that the Company serves, the Company's competitive
position in such markets depends, in large part, on its ability to negotiate
contracts with purchasers of health care services including health maintenance
and preferred provider organizations, medical groups and other third party
payors.
Traditionally, physicians exercised control over patient referral
decisions. More recently, managed care organizations and health care alliances
are participating in such decisions. These organizations are sensitive to issues
of cost control and functional outcome. Health care providers must continually
develop cost effective, high quality services closely tailored to match the
needs of the patient.
Contract therapy companies which the Company owns and operates, or may in
the future own or operate, will be in competition with other locally-based
contract therapy companies. At least one other company competes with the
Company on a national basis. Most of the Company's competition, however, comes
from small, locally-based firms, often owned by physicians. The Company
believes that it will be able to compete successfully in each locality by
maintaining its strong reputation in the local communities, establishing new
relationships in the future and continuing its business strategy of growth
through expansion of services and strategic acquisitions. The Company believes
the enactment of legislation banning physician referrals to providers owned by
the referring physician for services reimbursed by Medicare or Medicaid will
enhance the Company's competitive position in the market. See the discussion on
"Provider Relationships" below.
While the Company's locum tenens providers face competition from several
national firms, most competition comes from regional and local firms. Local
providers have the advantage of providing physicians who regularly work in the
same city as the client, and can therefore save money on travel and lodging
which can be passed on to the client. The Company believes that it can compete
with the local providers due to the economies of scale the Company is able to
achieve and the large pool of locum tenens physicians from which the Company is
able to draw.
In seeking to identify and acquire attractive rehabilitation or other
healthcare facilities or businesses and in obtaining the requisite regulatory
approvals to develop new facilities, the
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Company expects to face competition from other potential acquirors or providers,
some of which may have greater financial resources.
Employees
- - ---------
As of June 30, 1994, the Company employed approximately 14,000 full and
part-time employees. The Company believes that its employee relations are
satisfactory.
Insurance
- - ---------
The Company maintains professional liability insurance, comprehensive
general liability insurance, and other insurance coverage on all of its
healthcare facilities. The Company also maintains professional liability
insurance on its locum tenens physicians. Physicians practicing at the
Company's facilities as independent contractors are responsible for their own
professional liability insurance coverage. The Company believes that its
insurance is adequate in amount and coverage.
GOVERNMENT REGULATION
Healthcare Reforms
- - ------------------
President Clinton has identified reforming the payment for and delivery of
healthcare goods and services as a major goal of his administration. On
November 20, 1993, President Clinton introduced his healthcare reform proposal,
the Health Security Act (the "Act"), in the Congress. The primary objectives of
the proposal are to provide universal health insurance coverage and to reduce
the rate of increase in national healthcare expenditures. The Act, among other
things, would limit increases in Medicare spending primarily by reducing
reimbursement to medical providers. There are several other healthcare reform
proposals competing with the Act.
In addition, a number of legislative proposals have been introduced in
Congress and state legislatures in recent years that would effect major reforms
of the healthcare system. Within the last year, some states have enacted laws
that affect the public and private healthcare system within those states. The
Company believes that reform legislation will continue to be proposed at both
federal and state levels.
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It is uncertain what additional proposals the Administration may make or
what actions federal, state or private payors for healthcare goods and services
may take in response to such proposals. The Company cannot predict what reform
proposals will become law or the effect such reforms may have on its business,
and no assurance can be given that any such reforms will not have a material
adverse effect on the Company's revenues and earnings.
Licensure, Certification and Certificate of Need
- - ------------------------------------------------
Rehabilitation hospitals are subject to accrediting agency rules and a
substantial body of federal, state, and local government laws. These rules and
laws subject the Company's facilities to certain standards of performance and
to periodic compliance inspections. The Company believes that its facilities
are in substantial compliance with all applicable laws and rules governing their
operations, including the requirements of the accrediting agencies. Such
requirements are subject to change. There can be no assurance that the Company
will be able to maintain such compliance in the future for all of its facilities
or that the Company will not be required to expend significant sums in order to
do so.
Failure to comply with applicable requirements could result in, among other
things, the imposition of fines, temporary suspension of admission of new
patients to the facility, decertification from participation in the Medicare and
Medicaid programs and, in extreme circumstances, revocation of a facility's
license. In certain circumstances, conviction of abusive or fraudulent behavior
with respect to one facility may subject other facilities under common control
or ownership to disqualification for participation in Medicare and Medicaid
programs. In addition, some state regulations provide that all facilities under
common control or ownership within a state are subject to de-licensure if any
one or more of such facilities is de-licensed.
The Company's development, construction, and expansion of rehabilitation
hospitals are subject to extensive government regulation. Many states in which
the Company operates have Certificate of Need ("CON") laws. While these CON
laws vary, they generally require state approval for capital expenditures in
excess of certain threshold amounts, for the construction, expansion or
renovation of existing facilities, for the acquisition of certain medical
equipment, or for the institution of new services. CONs usually are issued for
a specified maximum dollar amount and require implementation of the proposed
project within a specified period of time. Some states also require a CON, or a
determination of non-reviewability under the CON law, prior to the acquisition
of existing healthcare facilities.
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Reimbursement
- - -------------
The Health Insurance for the Aged and Disabled Program, commonly known as
Medicare, is a federal program designed to provide payment for necessary medical
services to individuals who are (i) age 65 or over, (ii) entitled to social
security or railroad retirement disability benefits, or (iii) entitled to end-
stage renal disease benefits. As of September 15, 1994, all of the Company's
rehabilitation hospitals were certified to receive reimbursement under the
Medicare Program for services rendered to Medicare beneficiaries. Additionally,
as of September 15, 1994, 27 of the Company's 36 operational facilities were
certified to receive reimbursement under the Medicaid Program for services
rendered to Medicaid beneficiaries. The Medicaid Program is a cooperative
federal and state program designed to provide payment for necessary medical
services to economically disadvantaged individuals. Both initial and continuing
certification for the Medicare and Medicaid Programs require compliance with
standards in a variety of areas.
Most of the Company's contract therapy revenues are derived, directly or
indirectly, from Medicare. The Company contracts directly with a facility,
which in turn seeks reimbursement from third party payors such as Medicare.
Specific guidelines exist for determining Medicare reimbursement of physical,
occupational and speech therapy services. Medicare applies salary equivalency
guidelines to determine the appropriate reimbursement for physical therapy
services. Speech and occupational therapy services are reimbursed on a
reasonable cost basis. From time to time, certain proposals have been made to
impose limitations on Medicare reimbursement of speech and occupational therapy
services. In the event such limitations are adopted by Medicare, they may have
a material adverse effect on the Company's contract therapy revenues.
Funds received from the Medicare and Medicaid Programs are subject to
audit. These audits can result in retroactive adjustments of payments received
from the Medicare and Medicaid Programs. The amounts of adjustments from audits
completed as of September 1, 1994 have not been material. Differences between
estimated adjustments and final settlements are reflected as income or loss in
the year such audits are finalized.
Part A of the Medicare Program provides payment to the Company's
rehabilitation hospitals for certain inpatient services provided to Medicare
beneficiaries who have been certified for entitlement under Medicare. Patients
may be required to pay a deductible or make a co-payment for the inpatient
services they receive from the rehabilitation hospital. Coverage of inpatient
hospital services is limited to 90 days per episode of illness plus 60 lifetime
reserve days.
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Medicare currently pays an amount equal to the lesser of (i) the billed
charges or (ii) allowed reasonable direct and indirect costs, subject to
reduction, for the inpatient services provided to Medicare beneficiaries. In
addition, newly constructed rehabilitation hospitals may carry forward certain
pre-opening costs for five years and under certain conditions recover all or
part of such costs as are applicable to the Medicare program. Medicare payments
for inpatient services are subject to a limitation (a "ceiling") based on a
target amount which is tied to an inflation index called a "market basket"
index. With certain limited exceptions, the Omnibus Budget Reconciliation Act
of 1993 ("OBRA 1993") reduces the increases in the market basket percentage
increases by one percentage point for cost reporting years beginning in 1994
through 1997. Beginning in 1998, the updated target amounts will equal the
market basket index.
New rehabilitation hospital providers opened on or after October 1, 1992
are exempt from these ceilings during their first two full years of operation.
The ceilings for these hospitals are established based on their actual operating
costs for their second full year of operation and are applicable to their third
full year of operation and all years thereafter. Rehabilitation hospitals
opened prior to October 1, 1992 are exempt from the ceiling for the first three
full years of operation and, unless early implementation is elected, their
ceiling is established based on the third full year of operation and takes
effect in the fourth year. Based on its experiences in facilities that have
been operating three years or more, the Company does not believe such ceilings
will have a material impact on its hospitals' operating results.
Part B of the Medicare Program provides payment to the Company's
rehabilitation hospitals for certain outpatient services provided to Medicare
beneficiaries. Patients may be required to pay a deductible or copayment for
the outpatient services they receive from a rehabilitation hospital or from one
of the freestanding outpatient facilities.
Federal regulations provide that admission to and utilization of hospitals
by Medicare and Medicaid patients is subject to review by Peer Review
Organizations ("PRO"s) to ensure efficient utilization of services. A PRO may
conduct such reviews after the provision of services and may, as appropriate,
recommend denial of payments for services already provided. PRO review is
subject to administrative and judicial appeal. The Company's Quality
Improvement Program is designed to ensure proper and efficient utilization of
services and is intended to minimize retroactive PRO denials of payments.
The Company's operations are not currently subject to Medicare's
prospective payment system based on diagnosis-related
-16-
<PAGE>
groups ("PPS"). However, the amendments to the Medicare Program enacted under
Title VI of the Social Security Amendments of 1983 ("Title VI") provide for
implementation of a prospective payment reimbursement system for the payment of
all inpatient rehabilitation and extended care inpatient services in place of
the current reasonable cost with limits system of reimbursement. The Secretary
of the United States Department of Health and Human Services was directed to
develop a methodology for a prospective payment system for currently exempt
hospitals in the Omnibus Budget Reconciliation Act of 1990 by April 1, 1992. As
part of OBRA 1993, Congress requested the Secretary to submit a report on such
methodology promptly. In addition, informal proposals have been made for a
prospective payment system for Medicare outpatient care and for Medicare
reimbursement of interest expenses. The prospective payment system for
rehabilitation hospitals is still being developed by the federal government and,
therefore, the Company cannot predict at this time the effect that such a system
may have on its operations. Regulations relating to prospective payment or
other aspects of reimbursement may be developed in the future which could affect
reimbursement for services provided by the Company. The Company cannot predict
the effect such a change might have on its business, and no assurance can be
given that any such regulations will not have a material adverse effect on the
Company's revenues and earnings.
Other Reimbursement
- - -------------------
The Company's rehabilitation hospitals also receive reimbursement from a
variety of private payors, including managed care organizations and indemnity
plans such as Blue Cross and other private insurance carriers. Such indemnity
plans, including Blue Cross, pay for a variety of benefits for their insured
subscribers, frequently including rehabilitation and long-term care services.
Such plans generally make direct payments to rehabilitation hospitals or
reimburse their policyholders, often subject to policyholder copayments and
deductibles. Specific coverages in such plans vary substantially from state to
state and from plan to plan. In most cases, indemnity plans, including Blue
Cross, make payment on the basis of either (1) established charges or a
percentage thereof, or (2) daily rates negotiated by each facility with the
indemnity plan. In some cases, indemnity plans pay according to a formula based
on hospital costs and typically use the reimbursement principles and limitations
of the Medicare Program discussed above.
Managed care payors, such as health maintenance organizations and preferred
provider organizations, generally make direct payments to rehabilitation
hospitals on the basis of the hospital's direct charges or contractual per diem
rates negotiated directly with the hospital. Some payors operate under a
capitated payment system whereby providers are paid a fixed fee for each member
of
-17-
<PAGE>
the payor's plan regardless of the treatment rendered, if any. Under capitation,
providers bear the risk that the fixed fee may not be sufficient to treat all of
the plan members requiring treatment.
State Rate Setting Regulations
- - ------------------------------
Several states, including Massachusetts, Maryland and Florida, in which the
Company operates rehabilitation facilities have rate setting laws which limit
the charges which hospitals can establish and charge to their patients and
certain third party payors and the reimbursement rates which hospitals can
receive from Medicaid, workers compensation and other state reimbursement
programs.
Provider Relationships
- - ----------------------
Health care providers such as the Company and physicians are subject to
federal and some state laws and regulations regarding the referral of patients
for goods or services to entities in which they have a financial relationship.
For example, the federal Medicare/Medicaid Anti-Fraud and Abuse Amendments to
the Social Security Act (the "Anti-Kickback Law") make it a criminal felony
offense to knowingly and willfully offer, pay, solicit or receive remuneration
in order to induce business for which reimbursement is provided under the
Medicare or Medicaid programs. In addition to criminal penalties, including
fines up to $25,000 and five years imprisonment per offense, violations of the
Anti-Kickback Law or related federal laws can lead to civil monetary penalties
and exclusion from the Medicare and Medicaid programs from which the Company
receives substantial revenues. The Anti-Kickback Law has been broadly
interpreted to make remuneration of any kind, including many types of business
and financial arrangements among providers, such as joint ventures, space and
equipment rentals, management and personal services contracts, and certain
investment arrangements, illegal if any purpose of the remuneration or financial
arrangement is to induce a referral.
The United States Department of Health and Human Services ("HHS") has
promulgated regulations which describe certain arrangements that will be deemed
to not constitute violations of the Anti-Kickback Law (the "Safe Harbors"). The
Safe Harbors described in the regulations are narrow and do not cover a wide
range of economic relationships which many hospitals, physicians and other
health care providers consider to be legitimate business arrangements not
prohibited by the statute. Because the regulations do not purport to describe
comprehensively all lawful or unlawful economic arrangements or other
relationships between health care providers and referral sources, hospitals and
other health care providers having these arrangements or relationships may not
be required to alter them in order to ensure compliance with the Anti-Kickback
Law. However, failure to qualify for a Safe
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<PAGE>
Harbor may subject a particular arrangement or relationship to increased
regulatory scrutiny. On September 21, 1993, HHS published proposed regulations
for comment in the Federal Register establishing additional Safe Harbors. As of
September 1, 1994, such additional regulations have not been adopted. The
Company cannot predict the final form these regulations will take or their
effect, if any, on the Company's business.
In August 1993 President Clinton signed OBRA 1993 which included certain
amendments to Section 1877 of the Social Security Act dealing with "Physician
Ownership of, and Referral to, Healthcare Entities," commonly known as the
"Stark Bill." The amendments significantly broadened the scope of prohibited
physician self-referrals contained in the original Stark Bill to include, among
others, referrals by physicians to entities with which the physician has a
financial relationship and which provide physical and occupational therapy
services which are reimbursable by Medicare or Medicaid. The amended Stark Bill
contains exceptions to the self-referral prohibition, including an exception
where the physician has an ownership interest in the entire hospital. The
amendments become effective on December 31, 1994 and contemplate the
promulgation of regulations implementing the new provisions. The Company cannot
predict the final form that such regulations will take or the effect that the
Stark amendment or regulations to be promulgated thereunder will have on the
Company.
The Company has certain relationships with physicians and other referral
sources, some of whom have referred, or may refer, patients to the Company's
facilities, which do not qualify for Safe Harbor protection. Both the Anti-
Kickback Law and the Stark Bill are broadly drafted, and their application to
such arrangements is often uncertain. Since the inquiry under both laws is
highly factual, it is not possible to predict how they may be applied to certain
arrangements between the Company and other health care providers. Although the
Company believes that it and the health care facilities owned or controlled by
it are in compliance with the Anti-Kickback law, there can be no assurance that
enforcement authorities will not assert that the Company or one of its
facilities, or certain transactions into which they have entered, has violated
or is violating such Anti-Kickback Law, or that if any such assertion were made,
that the Company would prevail, or whether any sanction imposed would have a
material adverse effect on the operations of the Company. Additionally, the
Company intends to monitor regulations under, and interpretations of, the Stark
Bill to determine whether any modifications to such arrangements will be
necessary in order to comply with the Stark Bill by its effective date, December
31, 1994. Even the assertion of a violation of the Anti-Kickback Law or similar
laws could have a material adverse effect upon the Company.
-19-
<PAGE>
In addition, from time to time, legislation is introduced or regulations
are proposed at the federal and state levels that would further restrict
relationships and compensation arrangements among healthcare providers. Several
states have recently passed statutes which prohibit physicians from referring
patients to facilities in which they are a joint venture partner. The Company
cannot predict whether any of the proposed legislation or other legislation or
regulations applicable to the Company will be adopted, the final form that any
such legislation or regulations might take, or the effect that any such
legislation or regulations might have on the Company.
Government Investigations
- - -------------------------
From time to time, federal and state governments as well as insurers and
others have conducted and may conduct inquiries or investigations into
businesses in the healthcare industry, including rehabilitation businesses. The
Company cannot predict either the occurrence or the outcome of any such
investigation. The Company believes that it conducts its business in an ethical
manner and in compliance with applicable laws. However, any investigation could
lead to the imposition of additional regulations and have a material adverse
effect on the rehabilitation care industry in general and the Company in
particular.
ITEM 2. PROPERTIES.
----------
The Company presently leases its principal executive offices at 600 Wilson
Lane, Mechanicsburg, Pennsylvania. See the chart under Item 1, "Business-
Operations" for a description of the rehabilitation hospital facilities owned or
leased by the Company.
In addition, the Company currently owns or leases the various principal
executive offices of its contract therapy, physician services and management
services businesses and leases various facilities used for outpatient clinics
and other business purposes, none of which individually is materially important
to the Company's business as a whole. The Company believes its properties are
adequate and suitable for the Company's needs.
ITEM 3. LEGAL PROCEEDINGS.
-----------------
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the Company's business and matters in which the
amount involved does not exceed ten percent of the consolidated current assets
of the Company, to which the Company or any of its subsidiaries is a party or of
which any of their property is the subject. From time to time, the Company
-20-
<PAGE>
may also be involved in regulatory proceedings. See Item 1, "Business -
Government Regulation".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
-------------------------------------------
HOLDERS.
-------
No matters were submitted to a vote of the Company's security holders,
through the solicitation of proxies or otherwise, during the fourth quarter of
the fiscal year ended June 30, 1994.
ADDITIONAL INFORMATION
The following information is furnished in this Part 1 pursuant to
Instruction 3 to Item 401(b) of Regulation S-K:
Executive Officers of the Company
- - ---------------------------------
Name Age Position with the Company
---- --- -------------------------
Rocco A. Ortenzio 61 Chairman of the Board and
Chief Executive Officer
Robert A. Ortenzio 37 Director, President and Chief
Operating Officer
Frank Fritsch 42 Senior Vice President,
Human Resources
Dennis L. Lehman 38 Senior Vice President and
Chief Financial Officer
David G. Nation 41 Senior Vice President,
General Counsel and Secretary
Patricia A. Rice 47 Senior Vice President,
Clinical Operations
The executive officers of the Company customarily are elected annually by
the Board of Directors to serve at the pleasure of the Board until their
successors are elected.
Rocco A. Ortenzio. Mr. Ortenzio joined the Company in July 1986 as
-----------------
Chairman of the Board, President, and Chief Executive Officer. He served as
President until May 1989 and continues to serve in the other two capacities. Mr.
Ortenzio was founder, President, and a director of Rehab Hospital Services
Corporation ("RHSC") from 1979 until June 1986. RHSC is engaged principally in
the operation of a chain of rehabilitation hospitals. RHSC was a publicly held
company until it agreed to merge with National Medical Enterprises, Inc. in
January 1985. Mr. Ortenzio was
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<PAGE>
founder, President, Treasurer, and Chief Executive Officer of Pennsylvania
Health Corp. from 1976 to 1979 and was founder, President and Chief Executive
Officer of Rehab Corp. from 1969 until 1974. Rehab Corp. provided specialized
healthcare services, including a nationwide chain of outpatient cardiac
rehabilitation clinics. Rehab Corp. was acquired by American Sterilizer Company
in 1974. Mr. Ortenzio thereafter served as President of the Rehab Division of
American Sterilizer Company until December 1976. Mr. Ortenzio is a graduate of
the University of Pennsylvania School of Allied Health Services and has over
thirty years of experience in rehabilitation care. Mr. Ortenzio is also a
director of AMSCO International, Inc. and Quorum Health Services Group, Inc.
Mr. Ortenzio is the father of Robert A. Ortenzio.
Robert A. Ortenzio. Mr. Ortenzio has been President of the Company since
------------------
May 1989. He joined the Company as a Senior Vice President in February 1986,
was elected an Executive Vice President in January 1987, and was elected a
director and named Chief Operating Officer in April 1988. Prior thereto, he was
a Vice President of RHSC. Mr. Ortenzio is the son of Rocco A. Ortenzio.
Frank Fritsch. Mr. Fritsch joined the Company as a Senior Vice President
-------------
in August 1992. Since 1988 he was employed as Vice President, Human Resources
for Eastern Mercy Health System. Prior thereto, he held similar positions at
American Hospital Supply (since 1980), ARA Services and Rorer Pharmaceutical
Corporation.
Dennis L. Lehman. Since January 1991, Mr. Lehman has been a Senior Vice
----------------
President of the Company. Mr. Lehman joined the Company in June 1990 as a Vice
President and Chief Financial Officer. Prior thereto, he was employed by the
Houston office of Price Waterhouse (since 1978), directing the national
healthcare financial consulting practice.
David G. Nation. Mr. Nation joined the Company in September 1991 as Senior
---------------
Vice President and General Counsel. He was appointed Secretary in 1992. Prior
to September 1991, he was a member of the Philadelphia law firm of Drinker
Biddle & Reath and a partner in such firm since 1985.
Patricia A. Rice. Since May 1994, Ms. Rice has been a Senior Vice
----------------
President of the Company. Ms. Rice joined the Company in October 1987 as the
Administrator of the Company's Lakeview Rehabilitation Hospital. Ms. Rice became
an Assistant Vice President in July 1990 and a Vice President in January 1991.
-----------------------------------------------
For the purpose of calculating the aggregate market value of the voting
stock of the Company held by non-affiliates as shown on the cover page of this
report, the closing sales price of the
-22-
<PAGE>
Company's Common Stock on September 15, 1994 has been used, and it has been
assumed that all the outstanding shares were held by non-affiliates except for
the shares beneficially owned by directors of the Company and persons known by
the Company to beneficially own ten percent or more of the Company's outstanding
Common Stock. This should not be deemed to constitute an admission that all of
such persons are, in fact, affiliates of the Company or beneficial owners of
such stock or that there are not other persons who may be deemed to be
affiliates of the Company.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
--------------------------------------------------
MATTERS.
-------
Market Information
------------------
The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "CNM". The following table sets forth the range of high and low
closing sales prices of the Common Stock for the Company's fiscal periods
indicated.
<TABLE>
<CAPTION>
Reported Sales Price
--------------------
Fiscal Year ended June 30, 1994 HIGH LOW
------------------------------- ---- ---
<S> <C> <C>
First Quarter......................... 8 3/8 7 1/8
Second Quarter........................ 10 7 3/4
Third Quarter......................... 12 8
Fourth Quarter........................ 11 8
<CAPTION>
Fiscal Year ended June 30, 1993 HIGH LOW
------------------------------- ---- ---
<S> <C> <C>
First Quarter......................... 20 3/4 14 1/2
Second Quarter........................ 19 3/4 14 3/4
Third Quarter......................... 17 7/8 10 3/8
Fourth Quarter........................ 13 1/2 7 1/4
- - --------------------------
</TABLE>
Holders
-------
As of September 15, 1994 there were 1,206 stockholders of record of the
Company's Common Stock.
Dividends
---------
The Company has not paid any cash dividends on its Common Stock and does
not anticipate the payment of cash dividends in the
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<PAGE>
foreseeable future. The Company currently anticipates that any future earnings
will be retained to finance the Company's operations. Under its bank credit
agreement, the Company may not pay or declare cash dividends on its Common
Stock. The indentures covering the Company's 10 7/8% Senior Subordinated Notes
due 2002 and its 10 3/8% Senior Subordinated Notes due 2003 also contain certain
restrictions on the Company's ability to pay cash dividends.
ITEM 6. SELECTED FINANCIAL DATA.
-----------------------
Five Year Selected Financial Data
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
-----------------------------------------------------------------------
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
Income Statement Data:
Net Operating Revenues $1,004,839 $901,397 $681,825 $429,921 $291,712
Income (loss) from operations (40,905)/(1)/ 46,785/(2)/ 50,106 27,642 19,051
Net Income (loss) (34,545)/(1)/ 19,519/(2)(3)/ 27,091/(4)/ 18,501 12,701
Income (loss) per common share:
Primary (.92) .51 .73 .63 .48
Fully diluted (.92) .51 .72 .60 .46
Balance Sheet Data:
Total assets 766,742 772,228 475,230 327,796 219,676
Long-term debt, net of current
portion 353,752 382,602 134,835 57,947 92,292
</TABLE>
(1) Reflects a $74,834 pre-tax special charge related to the impairment of
selected assets of the Company's hospital division, the costs associated
with the consolidation of its contract therapy companies, the losses
related to the termination of certain relationships in the contract therapy
business and certain other costs of the restructuring program.
(2) Reflects $14,556 of pre-tax special charges related to the write-down of
certain rehabilitation facility development costs.
(3) Reflects $2,598 of pre-tax merger expenses in connection with the Kron
Medical Corporation acquisition and Kron's subsequent consolidation with
CompHealth and the cumulative effect of an accounting change totaling
$3,204, net of income tax benefit.
(4) Reflects $1,000 of pre-tax merger expenses in connection with the
CompHealth acquisition and a one-time pre-tax charge of $3,319 relating to
a terminated merger agreement.
The selected financial data has been restated to reflect the results of
CompHealth and Kron for the periods prior to their respective acquisitions.
CompHealth and Kron were acquired in business combinations accounted for as
poolings of interests.
-24-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
---------------------------------------------
OVERVIEW
The Company is a diversified provider of comprehensive medical
rehabilitation and physician services. The Company has a significant presence
in each of the rehabilitation industry's three principal sectors - inpatient
rehabilitation care, contract services and outpatient rehabilitation care.
Additionally, the Company is the largest provider of physician locum tenens
services in the United States.
The following table sets forth, for the periods indicated, net operating
revenues and EBITDA defined as income (loss) from operations plus interest,
depreciation, amortization, and special charge for each of the Company's
operating groups (in thousands):
<TABLE>
<CAPTION>
Year Ended June 30, Increase (Decrease)
------------------------------ -----------------------
1994 1993 1992 1993-1994 1992-1993
---- ---- ---- --------- ---------
Net operating revenues:
- - -----------------------
<S> <C> <C> <C> <C> <C>
Rehabilitation group $ 551,699 $514,224 $388,051 7% 33%
Contract therapy services 343,300 278,652 186,372 23% 50%
Physician services 107,108 108,396 94,905 (1%) 14%
Other 2,732 125 12,497 N/M N/M
---------- -------- -------- ------ ------
$1,004,839 $901,397 $681,825 11% 32%
========== ======== ======== ====== ======
<CAPTION>
EBITDA:
- - -------
<S> <C> <C> <C> <C> <C>
Rehabilitation group $ 70,410 $ 66,210 $ 41,922 6% 58%
Contract therapy services 33,684 36,275 23,849 (7%) 52%
Physician services 7,804 10,960 8,026 (29%) 37%
Other (1,547) 378 291 N/M N/M
----------- -------- -------- ------ ------
$ 110,351 $113,823 $ 74,088 (3%) 54%
=========== ======== ======== ====== ======
</TABLE>
"Other" revenues referred to in the above table consist principally of
revenues from the Company's new initiatives including SelectRehab, Innovative
Health Alliances and Medical Management Associates. Certain percentage changes
in "Other" are not meaningful (N/M).
Certain reclassifications were made to fiscal 1993 and 1992 net operating
revenues to conform to fiscal 1994 presentations.
The Company's recent growth in net operating revenues has been the result
of expansion of its contract therapy businesses as well as the development of
new rehabilitation hospitals, outpatient clinics and acquisitions of contract
therapy and physician services companies.
In April 1994, the Company sold its 50% interest in the operations of its
Rocky Mountain Rehabilitation Institute, located in Aurora, Colorado, and signed
a definitive agreement to sell by December 31, 1994 the real property comprising
that facility. On June 30, 1994, the Company sold selected assets of its
wholly-owned subsidiary which leased and operated its North Valley
Rehabilitation Hospital, located in Chico, California. In the
-25-
<PAGE>
fourth quarter of fiscal 1994, the Company also closed or divested twenty-nine
of its under performing outpatient centers.
RESULTS OF OPERATIONS
Net Operating Revenues and EBITDA
Net operating revenues increased by 11% to $1,004,839,000 for fiscal 1994
from $901,397,000 in fiscal 1993 and increased 32% in fiscal 1993 over fiscal
1992 net operating revenues of $681,825,000. The increase in both periods
resulted from the growth in the Company's existing operations and through the
addition of new rehabilitation hospitals. Additionally, the increase in fiscal
1993 resulted from the acquisition of a contract therapy company in the fourth
quarter of fiscal 1992.
EBITDA declined 3% to $110,351,000 for fiscal 1994 from $113,823,000 in
fiscal 1993 and increased 54% in fiscal 1993 from $74,088,000 in fiscal 1992.
The decrease in EBITDA for fiscal 1994 resulted from lower contract respiratory
services revenues in the contract therapy services group and a decline in higher
margin specialty care and allied professional days in the physician services
group and increases in certain other operating expenses. The increase in EBITDA
in fiscal 1993 over fiscal 1992 resulted from the growth in the Company's
existing operations and the addition of new rehabilitation hospitals.
Approximately 42% of the Company's consolidated net operating revenues
during fiscal 1994 was derived from patients covered by the federal government's
Medicare program for the aged and chronically disabled and state Medicaid
programs for the indigent as compared to 41% and 42% for fiscal 1993 and 1992,
respectively. The balance of the Company's net operating revenues was provided
by private pay sources, non-governmental payors, such as commercial insurance
companies, and non-patient related revenues.
Following is a discussion of the Company's operating groups. Certain
operating results related to new initiatives and management services companies
have been excluded from the discussion due to their immateriality in relation to
the consolidated results.
Rehabilitation Group:
The following table sets forth, for the periods indicated, net operating
revenues for the rehabilitation group (in thousands):
<TABLE>
<CAPTION>
Year Ended June 30, Increase (Decrease)
-------------------------------------------- -----------------------
1994 1993 1992 1993-1994 1992-1993
---- ---- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
Net operating revenues:
Rehabilitation group
Hospitals (fiscal year of opening)
Pre-1993 (26 hospitals) $403,785 $424,676 $337,520 (5%) 26%
Fiscal 1993 (6 hospitals) 69,164 29,845 132% N/A
Fiscal 1994 (4 hospitals) 25,327 N/A N/A
Divested facilities (2 hospitals) 24,637 31,150 27,102 (21%) 15%
-------- -------- -------- ---- ----
522,913 485,671 364,622 8% 33%
Other rehab related 28,786 28,553 23,429 1% 22%
-------- -------- -------- ---- ----
Total rehabilitation group $551,699 $514,224 $388,051 7% 33%
======== ======== ======== ==== ====
</TABLE>
"Other rehab related" revenues referred to in the above table include
revenues from long-term care operations, Medicare reimbursement of certain home
office costs and certain outpatient operations.
The increases in net operating revenues generated by the rehabilitation
hospital group resulted primarily from new hospital openings. Net operating
revenues generated by the Company's 26 rehabilitation hospitals in
-26-
<PAGE>
operation during all of fiscal 1994 and 1993 (the "Pre-1993 Hospitals") declined
5% in fiscal 1994 from the prior year. This decline is principally due to lower
costs which resulted in lower cost based Medicare reimbursement, shorter
inpatient length of stays, and competitive pricing pressures.
As of June 30, 1994, the Company had transitional rehabilitation units,
with a total of 308 beds, in 20 of its rehabilitation hospitals. Transitional
rehabilitation units provide a lower level of care and consequently generate
lower revenues per occupied bed than an acute rehabilitation bed. However,
there are less costs related to providing transitional rehabilitation services.
The Company believes that its transitional rehabilitation units will increase
its overall inpatient utilization at its hospitals and expand its continuum of
services at various levels of care and cost, an important factor in dealing with
managed care payors.
The percentage of net operating revenues generated by Medicare and Medicaid
patients at the rehabilitation hospitals was 64% in fiscal 1994, and 62% in each
of fiscal 1993 and 1992.
With the pressures to control rising healthcare costs, more services are
being provided on an outpatient basis. Total outpatient treatments in fiscal
1994 increased to 3,025,820 over the 2,448,866 outpatient treatments in fiscal
1993 and 1,635,606 outpatient treatments in fiscal 1992. Outpatient services
represented 16% of the rehabilitation group's net operating revenues in each of
fiscal 1994 and 1993 and 15% in fiscal 1992. While the volume of outpatient
treatments continues to increase, pricing of outpatient services has declined
over the prior year due to several factors including changes in the Company's
marketing strategy and changes in regulatory requirements affecting pricing in
selected states' workers compensation programs.
Overall EBITDA for the rehabilitation group increased 6% to $70,410,000
from $66,210,000 for the years ended June 30, 1994 and 1993, respectively, and
increased 58% in fiscal 1993 from $41,922,000 in fiscal 1992. The fiscal 1994
increase resulted from the rehabilitation hospitals opened during fiscal 1993
and 1994.
The Company is a provider to managed care payors in many of its markets.
Managed care programs are designed to encourage more efficient and less costly
utilization of medical services. Managed care payors are increasingly
negotiating discounted or per diem rates directly with the Company's
rehabilitation hospitals which have adversely affected the revenue growth and
operating margins of the rehabilitation group. The Company is responding to
managed care penetration by reducing costs through several measures including
the introduction of a new acuity based staffing model within the hospitals. The
new staffing model resulted in a reduction of staff and a change in the
hospitals' therapy delivery model. The Company has also established and
continues to refine cost accounting systems as well as outcomes documentation
and resource consumption information in order to demonstrate the cost
effectiveness of rehabilitation services. The Company believes this data will
be instrumental in its ability to negotiate with managed care payors.
Below are selected statistics for the Pre-1993 Hospitals:
<TABLE>
<CAPTION>
%
1994 1993 Change
---- ---- ------
<S> <C> <C> <C>
Occupancy percentage 65.9% 68.0% (3%)
Admissions 19,263 18,101 6%
Average length of stay (days) 22.1 23.7 (7%)
Patient days 423,106 428,044 (1%)
Outpatient treatments 2,325,779 2,074,856 12%
Outpatient % of net revenue 18.2% 17.3% 5%
</TABLE>
Occupancy percentage for the Pre-1993 Hospitals for fiscal 1994 was 65.9%
as compared to 68.0% during fiscal 1993. This decline in occupancy percentage
was due to an increase in licensed beds and a lower patient average length of
stay in fiscal 1994. Average length of stay declined, in part, due to cost
controls, case management review and increased efficiencies in treatments.
Average length of stay was also reduced by the increase in the number of
transitional rehabilitation beds which have shorter average lengths of stay.
Certain reimbursement methodologies, including those under the Tax Equity and
Fiscal Responsibility Act ("TEFRA") regulations, applicable to Medicare
reimbursement, make the number of admissions, in addition to occupancy
percentages and average length of stay, important in monitoring the results of
the hospitals as revenue growth becomes increasingly dependent upon patient
volume. As of June 30, 1994, the Company had 15 hospitals subject
-27-
<PAGE>
to TEFRA regulations. The lower patient average length of stay in fiscal 1994
versus fiscal 1993 was partially offset by a 6% increase in admissions in fiscal
1994.
The timing of new hospital openings during fiscal 1993 makes a comparison
of occupancy percentages between fiscal 1994 and 1993 for these hospitals not
meaningful. The rehabilitation hospitals opened in fiscal 1993 (the "1993
Hospitals") increased their patient days in fiscal 1994 to 87,857 from 35,644 in
fiscal 1993. During fiscal 1994, the occupancy percentage for the 1993
Hospitals was 69%. The occupancy percentage for rehabilitation hospitals opened
in fiscal 1994 (the "1994 Hospitals") was 42%. The 1994 Hospitals' patient days
were 25,112.
Contract Therapy Services:
The increases in net operating revenues generated by contract therapy
services resulted from same company growth through the addition of new contracts
with both existing and new providers. The net number of facilities served
remained relatively unchanged over the same period in the prior year. The
Company continues to add contracts with new facilities and terminate business
with certain facilities that do not meet the Company's profitability objectives.
The contract therapy companies serve over 2,400 facilities.
Approximately 81% of the net operating revenues for fiscal 1994, and 74%
and 66% of the net operating revenues for fiscal 1993 and 1992, respectively,
were generated through the provision of therapist services to skilled nursing
facilities, while the remainder was generated by therapy services to hospitals,
schools, clinics and other institutions.
The percentage of net operating revenues generated from direct services to
Medicare/Medicaid patients was 21% for fiscal 1994. This represents an increase
from 17% for fiscal 1993 and 20% for fiscal 1992. The principal reason for the
increases in fiscal 1994 is the Company's decision to terminate its contractual
arrangements with certain third-party providers. Under these arrangements, the
Company provided therapy services to Medicare patients through an unrelated
Medicare certified provider. As a result of terminating these arrangements, the
Company, in many instances, now provides the same services directly to Medicare
patients.
EBITDA decreased 7% to $33,684,000 in fiscal 1994 from $36,275,000 in
fiscal 1993, and increased 52% in fiscal 1993 from 23,849,000 in fiscal 1992.
During fiscal 1994, the earnings from contract therapy services declined
compared to the prior year primarily due to lower contract respiratory services
revenues as a result of changes in reimbursement in the state of Indiana in
December 1993, lower productivity per therapist partially as a result of
turnover and the consolidation of two of the Company's contract therapy
companies, and the exit from contractual arrangements with third-party
providers.
Physician Services:
The declines in the Company's physician services net operating revenues
were a result of reduced demand and pricing pressures in the specialist product
line of the Company's physician/locum tenens services. Net operating revenues
for the specialist product line for fiscal 1994 declined 20% as compared to the
prior year. This decline was partially offset by the 26% increase in revenues
for the primary care product line during fiscal 1994. The growth in net
operating revenues in fiscal 1993 as compared to fiscal 1992 was due to the
increase in the number of filled days. Filled days were 151,633 and 134,766 in
fiscal 1993 and 1992, respectively.
During fiscal 1994 approximately 51% of net operating revenues was
generated through services to hospitals while 33% involved contracts with
physician groups. The remainder was with managed care programs, clinics and
other sources. In fiscal 1993 and 1992, approximately 48% and 52%,
respectively, of net operating revenues were generated through services to
hospitals while 35% in both years involved contracts with physician groups.
EBITDA decreased 29% to $7,804,000 in fiscal 1994 from $10,960,000 in
fiscal 1993, and increased 37% in fiscal 1993 from $8,026,000 in fiscal 1992.
The decrease from fiscal 1993 to 1994 resulted primarily from a decline in
higher margin specialty care and allied professional days.
-28-
<PAGE>
The following table sets forth, for the periods indicated, filled days by
discipline:
<TABLE>
<CAPTION>
Fiscal 1994 Fiscal 1993
------------------ ----------------- %
# of # of Increase
days % days % (Decrease)
---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C>
Physicians:
Primary care 47,200 31.7 40,146 26.4 17.6
Specialty care 53,421 35.9 61,520 40.6 (13.2)
Allied professionals 48,302 32.4 49,967 33.0 (3.3)
------- ----- ------- ----- -----
148,923 100.0 151,633 100.0 (1.8)
======= ===== ======= ===== =====
</TABLE>
The decline in specialty care and allied professional days is due to
reduced demand for specialty physicians locum tenens services and additional
competition in local markets. Allied professionals represent approximately 22%
of physician services net operating revenues for the year ended June 30, 1994.
The increase in primary care filled days and its relative increase as a
percentage of total filled days reflects the increased demand for primary care
physicians and the Company's increased emphasis of this product line. The
Company believes the primary care physician product line has greater growth
prospects than its specialist product line.
The federal government as well as state governments, business and labor
continue to discuss, propose and implement various measures to control rising
healthcare costs, improve quality and provide funding for those who currently
lack health insurance. The Company is unable to predict what form these
measures will take and as a result cannot estimate how they might affect future
operating results.
Interest Expense
Interest expense for fiscal 1994 totalled $38,156,000 compared to
$22,747,000 for fiscal 1993, an increase of $15,409,000. Interest expense for
fiscal 1992 was $6,216,000. The increases in fiscal 1994 and fiscal 1993 over
the prior year were due to a higher average outstanding debt balance and a
higher average interest rate resulting from the issuance of $350,000,000 of
senior subordinated notes during fiscal 1993. In addition, interest expense was
impacted by a reduction in the amount of interest capitalized related to new
hospital construction, as the Company had fewer hospitals under construction in
fiscal 1994 than in fiscal 1993 and 1992.
Depreciation and Amortization
Depreciation and amortization as a percentage of net operating revenues
increased for fiscal 1994 to 3.8% from 3.3% and 2.6% in fiscal 1993 and 1992,
respectively. This increase resulted from the depreciation on the new
rehabilitation hospitals which are owned by the Company and an increase in
goodwill amortization resulting from acquisitions.
Special Charge
During the fourth quarter a special pre-tax charge of $74,834,000 was
recorded. The special charge resulted from the approval by the Company's Board
of Directors of several measures to streamline operations and improve
productivity by restructuring the Company into major operating businesses,
flattening the management organization structure, writing down certain assets
and, where appropriate, divesting unproductive assets. The Company began work
on the proposed plan during the fiscal 1994 third quarter as a result of market
changes the Company was experiencing. The special charge comprised several
items including the impairment of selected assets in the Company's
rehabilitation group, the costs associated with the consolidation of its
contract therapy companies, the losses related to the termination of certain
business relationships in the contract therapy business and certain other costs
of the restructuring program.
-29-
<PAGE>
Approximately $50,244,000 of the charge was associated with the impairment
of assets at eight rehabilitation hospitals, divestiture of two rehabilitation
hospitals, closure of a select group of outpatient locations and miscellaneous
other charges.
Approximately $22,842,000 of the charge was related to the consolidation of
certain contract therapy companies into CMS Therapies, the exit from certain
markets and businesses, and losses related to the termination of certain
business relationships. This consolidation process involved the closure of
offices, relocation and severance of personnel and the elimination of
duplicative processes.
The remainder of the charge, $1,748,000, was to reduce the work force at
the Company's corporate office and provide for transaction costs to execute the
plan.
The Company estimates that the reorganization plan, when fully implemented,
will reduce or eliminate approximately $5,500,000 of costs and expenses
annually, including depreciation, and eliminate unprofitable operations.
During the fourth quarter of fiscal 1993 the Company recorded a pre-tax
charge of $14,556,000 related principally to the write-off of deferred costs for
approximately 30 abandoned rehabilitation hospital development projects on which
construction had not started. The decision to abandon certain projects and
pursue less capital intensive growth than in the past was a result of changes in
the Company's rehabilitation hospital development strategy in response to
changes in various healthcare delivery markets. Prior to fiscal 1994, the
Company deferred certain costs incurred to obtain government approvals and other
expenses related to the development of rehabilitation hospitals. Based on a
historical high rate of completion, costs of developing a project were charged
to operations only when it was probable that the project would be abandoned. As
a result of its change in development strategy, the Company changed its
accounting for development costs. Ongoing hospital development costs are now
expensed until that time when it is probable that construction will commence.
Merger Expenses
On February 23, 1993, the Company acquired Kron Medical Corporation
("Kron") in a business combination accounted for as a pooling of interests. In
connection with this pooling, the Company incurred $2,598,000 of costs related
to the acquisition and combination of Kron with CompHealth. During fiscal 1992
the Company acquired CompHealth in a business combination accounted for as a
pooling of interests. In connection with this pooling, the Company incurred
$1,000,000 of costs. Additionally, during fiscal 1992, the Company recorded
costs of $3,319,000 related to the termination of a merger agreement.
Minority Interests
Minority interests in net income decreased for the year ended June 30, 1994
to $4,730,000 from $6,663,000 in fiscal 1993. This decline is primarily due to
lower earnings during fiscal 1994 at the Company's joint ventured rehabilitation
hospitals. In fiscal 1993, minority interests in income decreased $108,000 from
$6,771,000 in fiscal 1992. This decrease reflects the Company's July 1992
acquisition of the minority interests in its Communi-Care/Pro-Rehab subsidiary
and was offset by an increase in the number of joint venture companies operating
rehab hospitals.
Income Taxes
Income taxes as a percentage of income (loss) before income taxes were
(18)%, 44% and 35% respectively for fiscal 1994, 1993 and 1992. These
percentages reflect the restatements for the poolings of interests with Kron in
fiscal 1993 and CompHealth in fiscal 1992. Both of these entities were
S-Corporations prior to the merger and made no provision for income taxes. The
pro forma effective tax rate, including Kron and CompHealth taxed at statutory
rates prior to their acquisition dates, was (18)%, 45%, and 38% in fiscal 1994,
1993 and 1992. The significant increase in the pro forma effective tax rate
from fiscal 1992 to fiscal 1993 results from the loss of various
-30-
<PAGE>
state tax deductions due to one-time charges, the effect of certain transaction-
related pooling expenses which are not tax deductible, an increase in non-
deductible goodwill costs and a more unfavorable mix of state income. The tax
benefit in fiscal 1994 resulted from a pre-tax loss caused by the special charge
and was offset by certain non-deductible components of the special charge, prior
year tax assessments and a higher effective state tax rate.
Adoption of New Accounting Principles
Effective July 1, 1993 the Company adopted Financial Accounting Standards
Board Statement No. 109 "Accounting for Income Taxes" which changed the method
of accounting for income taxes for the Company in fiscal 1994. The statement
requires an asset and liability approach for accounting and reporting income
taxes. Under this approach, deferred taxes are based on future tax consequences
of events that have been recognized on the Company's financial statements or tax
return. Accordingly, deferred taxes are adjusted for changes in tax rates when
enacted. Under the prior rules, deferred taxes were provided based on their
relationship with pre-tax income at the tax rates in effect when the deferral
occurs and are not adjusted for changes in those rates. The cumulative effect
of this statement was not material.
In fiscal 1993 the Company adopted the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Company recognized an after tax cumulative effect of
$3,204,000 in adopting this statement. The cumulative effect resulted from the
write-down to fair value of a long-term care investment being held-to-maturity.
CAPITAL RESOURCES AND LIQUIDITY
For the year ended June 30, 1994, operating activities provided $50,708,000
of cash as compared with $6,789,000 in fiscal 1993, and $12,981,000 in fiscal
1992. In the past, the Company has utilized cash from operations to fund the
working capital of new hospital openings as well as the expansion of certain
contract therapy and physician services companies. The cash flow increase
relates principally to the slowdown of capital intensive hospital development
projects. Investing activities, primarily development, construction and
acquisition activities, resulted in uses of cash of $30,368,000 during fiscal
1994 as compared with $217,276,000 in fiscal 1993 and $96,407,000 in fiscal
1992. Available cash was primarily used to fund the cash requirements for
fiscal 1994. Cash inflows of $23,060,000 resulted from the sale of real estate
and equipment of one rehabilitation hospital under construction and the sale of
the operations of two rehabilitation hospitals and other miscellaneous assets.
The Company's current ratio was 2.07:1 at June 30, 1994 compared to 2.90:1 at
June 30, 1993. This decrease reflects the accrual of $18,794,000 related to the
special charge as well as an increase in the amounts due to third-party payors.
See the Consolidated Statements of Cash Flows for a detailed analysis of the
components of cash flow.
Long-term debt outstanding at June 30, 1994 totalled $357,765,000,
including $4,013,000 which represents the current portion of long-term debt.
The Company's percentage ratio of long-term debt to total capitalization both at
June 30, 1994 and 1993 was 60%. The Company's credit facility provides up to
$235,000,000 in a revolving line of credit, of which up to $45,000,000 is
available in the form of letters of credit. At June 30, 1994, there were no
borrowings and approximately $30,006,000 of letters of credit were outstanding
under the credit facility. The credit facility provides for a revolving loan
period through December 31, 1996 and the subsequent conversion of the revolving
loan into a four-year term loan. The Company has pledged its ownership
interests in certain of its operating subsidiaries as collateral under the
facility. The Company is also subject to certain financial and other covenants,
including, without limitation, restrictions on the amount of other indebtedness
it may incur and a prohibition on paying cash dividends.
On August 17, 1992, the Company issued $200,000,000 of 10 7/8% Senior
Subordinated Notes due 2002 ("10 7/8% Notes"). The 10 7/8% Notes were sold at
99.25% of their principal amount. On March 16, 1993 the Company issued
$150,000,000 of 10 3/8% Senior Subordinated Notes due 2003 ("10 3/8 Notes").
The 10 3/8% Notes were sold at 99.22% of their principal amount. The 10 7/8%
Notes are subject to redemption at any time on or after August 15, 1997, at the
option of the Company at specified redemption prices plus accrued interest. The
10 3/8% Notes are subject to redemption at any time on or after April 1, 1998,
at the option of the Company at specified redemption prices plus accrued
interest. The Company used the aggregate net proceeds of the 10 7/8%
-31-
<PAGE>
Notes and 10 3/8% Notes (collectively, the "Notes") to repay all indebtedness
outstanding under the credit facility at the time of each such sale
(approximately $277,000,000 in the aggregate for both issuances) and the
remainder for general corporate purposes including the construction and
acquisition of rehabilitation hospitals. Under the terms of the indentures for
the Notes, the Company's ability to incur additional indebtedness, provide
guarantees and pay cash dividends is limited under certain circumstances.
The Company's ongoing capital requirements relate principally to routine
capital expenditures, future development projects, potential acquisitions and
growth of its contract therapy and physician services companies. The Company
constructed fewer free-standing rehabilitation hospitals during fiscal 1994 than
in prior years. The Company currently estimates that its fiscal 1995 capital
requirements will consist of capital maintenance and improvements at existing
facilities in the normal course of business and will be funded through the
Company's operating cash flow or its credit facility. Pursuant to contingent
deferred payment provisions of certain acquisition agreements, the Company
estimates that approximately $17,000,000 in cash and the Company's common stock
may be required to be paid to the sellers of the acquired companies through
fiscal 1997, based upon the earnings of the acquired companies.
The Company has historically expanded its business, in part, through
selective acquisitions and intends to pursue additional acquisition
opportunities from time to time. It is anticipated that future acquisitions
will be funded through the issuance of capital stock and payment of cash and
other consideration. Management believes that current sources of capital are
sufficient to meet the needs of the Company's business for fiscal 1995 and for
the foreseeable future. Liquidity on a short-term basis will be provided
internally from the Company's operating cash flow and externally from its bank
credit facility. At June 30, 1994 the Company had $204,994,000 of unused
borrowing capacity (subject to applicable covenants which may limit borrowing
capacity) under its credit facility, of which $14,994,000 is available in the
form of letters of credit.
The Company recorded in fiscal 1994, a special pre-tax charge of
$74,834,000 which included a restructuring of certain elements of its business.
The Company expects that the net cash effect of this charge will be minimal.
In October 1992, the Company acquired 97% interests in the partnerships
which owned the real estate of its Aurora, Colorado, Plano, Texas and Webster,
Texas rehabilitation hospitals. The aggregate purchase price was $39,000,000.
These hospitals commenced operations in June 1989, March 1991 and October 1991,
respectively, and had been operated by the Company under long-term operating
leases with third parties prior to their acquisitions. In October 1992, the
Company acquired the condominium interest which comprises its San Diego
rehabilitation hospital. The purchase price for the condominium interest was
$25,200,000. The hospital commenced operations in April 1992 and had been
operated by the Company under an interim operating lease prior to its
acquisition. These acquisitions were financed with long-term debt borrowings.
The Company has agreed to lend up to $3,000,000 for working capital through
August 31, 2000 to the purchaser of certain of its long-term care facilities.
On August 31, 2000, the outstanding working capital loan balance will be
converted into a term loan payable in quarterly installments over a four-year
period. As of June 30, 1994, $900,000 has been provided pursuant to this
commitment.
In June 1994, the Company obtained consents from its bondholders and
amended its credit facility to permit purchases of its Senior Subordinated Notes
in the open market. During the first two months of fiscal 1995, the Company
purchased approximately $26,835,000 of its Senior Subordinated Notes utilizing
its operating cash flow. The Company anticipates that it will employ operating
cash flow in new growth opportunities within its core businesses and to
selectively retire long-term debt.
-32-
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- - --------------------------------------------
Continental Medical Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 1994 and 1993
<TABLE>
<CAPTION>
Assets 1994 1993
(In thousands, except share data)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 54,862 $ 64,444
Accounts receivable, net of allowance for doubtful accounts
($16,685 June 30, 1994; $17,426 June 30, 1993) 232,198 220,122
Other receivables 10,778 10,801
Prepaid expenses 13,720 14,243
Prepaid income taxes 4,319 3,412
Deferred income taxes 5,610 5,062
-------- --------
Total current assets 321,487 318,084
-------- --------
Property and equipment, net (Note 3) 252,023 289,822
-------- --------
Goodwill, net (Note 2) 72,613 58,461
Investments, principally affiliates 21,804 16,694
Notes receivable (Note 14) 31,454 29,461
Deferred income taxes 14,357 2,847
Deferred costs, new facilities, net (Notes 4 and 8) 20,885 28,634
Other assets 32,119 28,225
-------- --------
193,232 164,322
-------- --------
$766,742 $772,228
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt (Note 6) $ 4,013 $ 3,809
Accounts payable 28,615 27,515
Accrued expenses (Note 5) 97,780 64,602
Due to third-party payors 24,676 13,857
-------- --------
Total current liabilities 155,084 109,783
Long-term debt, net of current portion (Note 6) 353,752 382,602
Other liabilities 7,391 8,717
-------- --------
Total liabilities 516,227 501,102
-------- --------
Minority interests 14,963 13,430
-------- --------
Commitments and contingencies (Notes 2 and 7)
Stockholders' equity:
Preferred stock, $.01 par; authorized 10,000,000 shares;
none issued
Common stock, $.01 par; authorized 80,000,000 shares;
38,359,245
issued and outstanding, June 30, 1994 (36,934,546 June
30, 1993)
(Note 16) 384 369
Capital in excess of par 192,573 180,187
Retained earnings (Note 6) 42,595 77,140
-------- --------
235,552 257,696
-------- --------
$766,742 $772,228
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
Years ended June 30, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
(In thousands, except share data)
<S> <C> <C> <C>
Net operating revenues $ 1,004,839 $ 901,397 $ 681,825
----------- ----------- -----------
Costs and expenses:
Cost of services 894,488 787,574 607,737
Interest expense 38,156 22,747 6,216
Depreciation and amortization 38,266 29,735 17,766
Special charge (Note 8) 74,834 14,556
----------- ----------- -----------
1,045,744 854,612 631,719
----------- ----------- -----------
Income (loss) from operations (40,905) 46,785 50,106
Other income, principally interest 3,442 2,762 2,936
Merger expenses (Note 9) (2,598) (4,319)
----------- ----------- -----------
Income (loss) before minority interests, income taxes
and cumulative effect of accounting change (37,463) 46,949 48,723
Minority interests (4,730) (6,663) (6,771)
----------- ----------- -----------
Income (loss) before income taxes and cumulative effect
of accounting change (42,193) 40,286 41,952
Income taxes (Note 10) (7,648) 17,563 14,861
----------- ----------- -----------
Income (loss) before cumulative effect of accounting change (34,545) 22,723 27,091
Cumulative effect of accounting change (Note 11) (3,204)
----------- ----------- -----------
Net income (loss) $ (34,545) $ 19,519 $ 27,091
=========== =========== ===========
Income (loss) per common share and common
equivalent share (Note 17):
Primary:
Income (loss) before cumulative effect of accounting change $ (.92) $ .59 $ .73
Cumulative effect of accounting change (.08)
------ ------ ------
Net income (loss) $ (.92) $ .51 $ .73
====== ====== ======
Fully diluted:
Income (loss) before cumulative effect of accounting change $ (.92) $ .59 $ .72
Cumulative effect of accounting change (.08)
------ ------ ------
Net income (loss) $ (.92) $ .51 $ .72
====== ====== ======
Weighted average number of shares outstanding:
Primary: 37,662,519 38,050,513 37,169,328
Fully diluted: 37,662,519 38,289,537 37,402,973
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1994, 1993 and 1992
<TABLE>
<CAPTION>
Common Stock Capital
Shares in excess Retained
issued Amount of par earnings Total
(In thousands, except shares issued)
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1991 34,733,028 $348 $154,819 $ 32,524 $187,691
Stock issued pursuant to:
Employee benefit plans 632,684 6 7,223 7,229
Acquisition agreements 194,500 2 3,785 3,787
Distributions of pooled
companies (1,811) (1,811)
Net income for the year 27,091 27,091
---------- ---- -------- -------- --------
Balance, June 30, 1992 35,560,212 356 165,827 57,804 223,987
Stock issued pursuant to:
Employee benefit plans 1,196,859 11 11,260 11,271
Acquisition agreements 177,475 2 3,100 3,102
Distributions of pooled
companies (183) (183)
Net income for the year 19,519 19,519
---------- ---- -------- -------- --------
Balance, June 30, 1993 36,934,546 369 180,187 77,140 257,696
Stock issued pursuant to:
Employee benefit plans 285,192 3 1,842 1,845
Acquisition agreements 1,139,507 12 10,544 10,556
Net loss for the year (34,545) (34,545)
---------- ---- -------- -------- --------
Balance, June 30, 1994 38,359,245 $384 $192,573 $ 42,595 $235,552
========== ==== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended June 30, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
(In thousands)
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss) $ (34,545) $ 19,519 $ 27,091
--------- --------- --------
Adjustments:
Depreciation and amortization 38,266 29,735 17,766
Other 1,028 5,867 4,639
Special charge 74,834 14,556
Cumulative effect of accounting
change, net of taxes 3,204
Increase (decrease) in cash from
changes in assets and liabilities,
excluding effects of acquisitions
and dispositions:
Accounts receivable (27,174) (69,961) (53,751)
Other assets (9,497) (2,997) (9,260)
Accounts payable and
accrued expenses 13,853 19,855 23,294
Other liabilities 5,542 (1,670) 321
Income taxes (11,599) (11,319) 2,881
--------- --------- --------
Total adjustments 85,253 (12,730) (14,110)
--------- --------- --------
Net cash provided by operating activities 50,708 6,789 12,981
--------- --------- --------
Cash flows from investing activities:
Payments pursuant to acquisition
agreements, net of cash acquired (16,363) (57,303) (10,664)
Cash proceeds from sale of property
and equipment 23,060
Deferred costs, new facilities (3,527) (13,526) (17,699)
Acquisition of property and equipment (26,416) (131,185) (72,176)
Notes receivable (1,993) (6,938) 2,444
Other investing activities (5,129) (8,324) 1,688
--------- --------- --------
Net cash used in investing activities (30,368) (217,276) (96,407)
--------- --------- --------
Cash flows from financing activities:
Long-term debt borrowings 88,054 528,290 80,454
Long-term debt repayments (118,061) (280,772) (7,263)
Deferred financing costs (893) (12,306) (1,142)
Issuance of common stock 1,733 6,375 4,131
Capital contributions by minority
interests 2,388 555 1,136
Dividends of pooled companies (183) (1,811)
Distributions to minority interests (3,143) (2,454) (1,905)
--------- --------- --------
Net cash provided by (used in) financing
activities (29,922) 239,505 73,600
--------- --------- --------
Net increase (decrease) in cash and cash
equivalents (9,582) 29,018 (9,826)
Cash and cash equivalents, beginning of year 64,444 35,426 45,252
--------- --------- --------
Cash and cash equivalents, end of year $ 54,862 $ 64,444 $ 35,426
========= ========= ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
1. Summary of Significant Accounting Policies:
Principles of consolidation:
The consolidated financial statements include the Company and its 50% or
greater owned subsidiaries which the Company controls. All significant
intercompany accounts and transactions have been eliminated.
Investments in affiliates in which the Company owns 20% or more and limited
partnerships are carried, primarily, on the equity basis which approximates the
Company's equity in their underlying net book value. Other investments are
stated at cost.
Cash equivalents:
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents. Cash equivalents
are stated at cost.
Accounts receivable:
The Company receives payment for services rendered from the federal and
state governments under the Medicare and Medicaid programs and private pay
payors including third-party insurers, workers' compensation plans and
healthcare providers. The following table summarizes the percent of net
accounts receivable from all payors as of June 30, 1994 and 1993 respectively:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Government 39% 35%
Private 61% 65%
---- ----
100% 100%
==== ====
</TABLE>
Management does not believe that there are any credit risks associated with
receivables from governmental agencies. Private and other receivables consist
of receivables from a large number of payors, involved in diverse activities,
subject to differing economic conditions, and do not represent any concentrated
credit risks to the Company. Management continually monitors and adjusts its
reserves and allowances associated with these receivables.
Property and equipment and depreciation:
Property and equipment are stated at cost. Depreciation is being provided
on the straight-line method primarily over the estimated useful lives of the
assets as follows:
Buildings and improvements 30 to 40 years
Furniture and equipment 3 to 20 years
Accelerated methods and shorter lives are used for income tax purposes.
Goodwill:
Goodwill is being amortized using the straight-line method over 15 to 40
years. Accumulated amortization is $8,220,000 and $5,787,000 on June 30, 1994
and 1993, respectively.
Deferred costs, new facilities:
Hospital development costs are expensed until it is probable that
construction will commence. For completed facilities owned by third parties and
leased by the Company, deferred costs are amortized over the lease
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<PAGE>
term, principally 10 years. For internally developed and owned facilities,
these costs become part of the fixed asset and are amortized over its estimated
useful life.
Start-up expenses ("pre-opening costs") incurred prior to the opening of
new facilities are capitalized and amortized on a straight-line basis over
periods of 24 to 60 months upon the commencement of operations.
Due to third-party payors:
Due to third-party payors represents the difference between amounts
received under interim payment plans from third-party payors for services
rendered and amounts estimated to be reimbursed by those third-party payors upon
settlement of cost reports.
Net operating revenues:
Revenues consist of patient revenue and contract therapy and physician
services revenue. Revenues are recognized as services are rendered.
Patient revenue includes amounts estimated to be reimbursable by third-
party payors under the provisions of cost reimbursement formulas in effect.
Final determination of amounts earned is subject to review by third-party payors
and their agents. Any adjustments which may result at the time of settlement
are not expected to be material. Differences between estimated provisions and
final settlements are recorded in operations in the year finalized.
Contract therapy and physician services revenues represent revenues from
services provided by therapists and other healthcare professionals to healthcare
facilities and other institutions.
Income taxes:
The Company files a consolidated federal income tax return with all 80% or
more owned subsidiaries. Separate federal returns are filed for subsidiaries
owned less than 80%. Effective July 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". See Note
10.
Restatement and reclassification:
Certain items in the fiscal 1993 and 1992 consolidated financial statements
have been reclassified to conform to the classifications used in the fiscal 1994
consolidated financial statements.
2. Acquisitions:
On March 31, 1994, the Company acquired all of the outstanding stock of
Medical Management Associates, Inc. ("MMA"), for $1,500,000 in cash relating to
certain non-compete agreements and 647,500 shares of the Company's common stock.
The acquisition was accounted for by the purchase method of accounting. In
addition, certain costs of approximately $162,000 related to the transaction
were capitalized into the acquisition cost. Pursuant to the acquisition
agreement, additional shares of the Company's common stock may be issued over
the next three years, subject to the achievement of certain pre-tax earnings
levels.
On February 23, 1993, the Company acquired all of the outstanding stock of
Kron Medical Corporation ("Kron") in exchange for 1,268,331 shares of the
Company's common stock. The acquisition was accounted for as a pooling of
interests, and, accordingly, the Company's financial statements have been
restated to include the results of Kron for all periods presented. The effect
of the Kron acquisition on the consolidated results of operations of the Company
for the periods prior to the combination is immaterial.
On November 4, 1991, the Company acquired all of the outstanding stock of
CompHealth, Inc. ("CompHealth") in exchange for 3,007,890 shares of the
Company's common stock. CompHealth offers contract staffing services by
physicians and other allied health professionals. The acquisition was accounted
for as a pooling of interests and, accordingly, the Company's financial
statements have been restated to include the results of CompHealth for all
periods presented.
-35-
<PAGE>
Prior to their respective mergers, Kron and CompHealth (the "pooled
companies") were treated as S-Corporations for federal and, with some exceptions
in the case of CompHealth, for state tax purposes. Therefore, no provision for
income taxes was made except for those states where CompHealth did not qualify
for S-Corporation status. Prior to their respective mergers, the pooled
companies made regular cash dividend distributions to their shareholders, in
part, to offset tax liabilities which accrued directly to their shareholders.
Distributions for fiscal 1993 and 1992 were $183,000 and $1,811,000,
respectively.
During fiscal 1993 and 1992, the Company acquired the entities, described
below, which were accounted for by the purchase method of accounting. The pro
forma effects of the acquisitions on the consolidated results of operations of
the Company for the periods prior to the acquisition dates are not material.
Prior to fiscal 1992, the Company acquired 80% of the outstanding stock of
Communi-Care/ProRehab, Inc. ("Communi-Care") and on July 1, 1992 acquired the
remaining 20% of the outstanding stock. The initial purchase price was
approximately $5,654,000, paid in cash and the Company's common stock. The
purchase price for the remaining 20% of the outstanding stock was approximately
$4,831,000, paid in cash and the Company's common stock. As additional purchase
price under the purchase agreement, cash and common stock totalling $8,589,000,
$2,504,000 and $2,639,000 was paid during fiscal 1994, 1993 and 1992,
respectively. Additional cash and common stock may be paid over the next two
years as additional purchase price, subject to adjustment based upon future
earnings.
On May 28, 1992 the Company acquired all the outstanding stock of Advanced
Care Medicine, Inc. ("AcMed") which provides respiratory therapy in long-term
care settings. The initial purchase price was approximately $3,100,000 paid in
cash and the Company's common stock. As additional purchase price under the
purchase agreement, cash and common stock totalling $960,000 was paid in fiscal
1993 and additional contingent payments may be paid based on earnings levels
through December 1996. Additionally, the Company paid the former AcMed
stockholders $2,000,000 in cash and the Company's common stock in consideration
for certain non-compete agreements.
On October 19, 1992 the Company acquired a majority ownership in three
partnerships which owned the real estate of three of the Company's
rehabilitation hospitals for $39,000,000. The hospitals had been operated by
the Company under long-term operating leases prior to their acquisition. On
October 28, 1992, the Company acquired a condominium interest which comprises
another of its rehabilitation hospitals for $25,200,000. The hospital had been
operated under an interim operating lease prior to the acquisition.
During fiscal 1994 and 1993, the Company acquired various other outpatient
and contract rehabilitation services providers for $7,339,000 and $10,785,000,
respectively. The Company paid the former owners of these businesses $940,000
and $1,529,000, respectively, in consideration for certain non-compete
agreements.
Pursuant to other acquisitions consummated prior to 1992, cash and common
stock totaling $1,920,000, $2,162,000 and $2,937,000 was paid during fiscal
1994, 1993 and 1992, respectively.
Contingent payments estimated under all of the Company's acquisition
agreements approximate $17,000,000 and may be paid in cash and the Company's
common stock through fiscal 1997. These amounts are subject to adjustment based
upon the achievement of certain earnings levels.
3. Property and Equipment:
Property and equipment comprise the following (in thousands):
<TABLE>
<CAPTION>
June 30,
----------------
1994 1993
-------- --------
<S> <C> <C>
Land $ 24,448 $ 15,426
Buildings and improvements 189,349 185,999
Furniture and equipment 87,079 74,035
Construction in progress 2,487 47,650
-------- --------
303,363 323,110
Less: accumulated depreciation 51,340 33,288
-------- --------
</TABLE>
-36-
<PAGE>
<TABLE>
<S> <C>
$252,023 $289,822
======== ========
</TABLE>
4. Deferred Costs, New Facilities:
Deferred costs, new facilities comprise the following (in thousands):
<TABLE>
<CAPTION>
June 30,
----------------
1994 1993
------- -------
<S> <C> <C>
Deferred development costs $ 4,705 $ 7,028
Pre-opening costs 50,706 46,784
------- -------
55,411 53,812
Less: accumulated amortization 34,526 25,178
------- -------
$20,885 $28,634
======= =======
</TABLE>
5. Accrued Expenses:
Accrued expenses comprise the following (in thousands):
<TABLE>
<CAPTION>
June 30,
----------------
1994 1993
------- -------
<S> <C> <C>
Salaries, wages and benefits $44,269 $37,215
Interest 12,136 13,133
Accrual for special charge 18,794
Other 22,581 14,254
------- -------
$97,780 $64,602
======= =======
</TABLE>
6. Long-term Debt:
Long-term debt comprises the following (in thousands, except interest
rates):
<TABLE>
<CAPTION>
June 30, 1994
-------------------------------------------------------------
Current Long-term
Rate Portion Portion Maturity
---- ------- ---------- --------
<S> <C> <C> <C> <C>
10 7/8% Senior Subordinated Notes (b) 10 7/8% $200,000 2002
10 3/8% Senior Subordinated Notes (b) 10 3/8% 150,000 2003
Convertible subordinated debenture (c) 7 3/4% 2,000 2012
Notes, other (d) 5% to 14% $4,013 5,157 1994-2000
Unamortized discount (2,405)
------ ---------
4,013 354,752
Less: note receivable on convertible
debenture 1,000
------ --------
$4,013 $353,752
====== ========
<CAPTION>
June 30, 1993
-------------------------------------------------------------
Current Long-term
Rate Portion Portion Maturity
---- ------- ---------- --------
<S> <C> <C> <C> <C>
Revolving line of credit (a) (a) $ 27,000 1996-1999
10 7/8% Senior Subordinated Notes (b) 10 7/8% 200,000 2002
10 3/8% Senior Subordinated Notes (b) 10 3/8% 150,000 2003
Convertible subordinated debenture (c) 7 3/4% 2,000 2012
Prime + 1 1/2%
Notes, other (d) to 16.3% $3,809 7,175 1994-1999
</TABLE>
-37-
<PAGE>
<TABLE>
<S> <C> <C>
Unamortized discount (2,573)
------- -------
3,809 383,602
Less: note receivable on convertible
debenture 1,000
------- --------
$ 3,809 $382,602
======= ========
</TABLE>
Annual maturities for the next five years are as follows: 1995,
$4,013,000; 1996, $2,858,000; 1997, $1,220,000; 1998, $838,000; and 1999,
$13,000.
6. Long-term Debt (continued):
(a) The Company is party to a credit facility with Citibank, N.A., as
agent for a group of several banks (the "Facility"). The Facility provides up
to $235,000,000 in a revolving line of credit, of which up to $45,000,000 is
available in the form of letters of credit. The Facility provides for a
revolving loan period through December 31, 1996 and the subsequent conversion of
the revolving loan into a term loan. At June 30, 1994, $30,006,000 of letters
of credit were outstanding. The Company has pledged its ownership interests
in certain of its operating subsidiaries as collateral under the Facility.
At the Company's option, the interest rate on any loan under the
Facility will be based on the London Interbank Offered Rate (LIBOR) or a base
rate as specified in the agreement as adjusted for a margin. There were no
borrowings under the facility at June 30, 1994. At June 30, 1993, the weighted
average interest rate for all borrowings under the facility was 5.17%. Under
the terms of the Facility, the Company must, among other things, maintain
certain financial covenants. The Company is also limited in the amount of other
indebtedness it may incur and may not declare or pay cash dividends.
(b) On August 17, 1992, the Company issued its 10 7/8% Senior
Subordinated Notes due 2002 ("10 7/8% Notes") in the amount of $200,000,000 in a
public offering in which the Company received net proceeds of $192,500,000. The
10 7/8% Notes were priced at 99.25%, to yield 11% annually to maturity. On
March 16, 1993 the Company issued its 10 3/8% Senior Subordinated Notes due 2003
("10 3/8% Notes") in the amount of $150,000,000 in a private placement in which
the Company received net proceeds of $144,586,000. The 10 3/8% Notes were
priced at 99.22% to yield 10 1/2% annually to maturity. The 10 3/8% Notes were
subsequently registered in a registered exchange offer. The 10 7/8% Notes are
subject to redemption at any time on or after August 15, 1997 at the option of
the Company at specified redemption prices plus accrued interest. The 10 3/8%
Notes are subject to redemption at any time on or after April 1, 1998, at the
option of the Company at specified redemption prices plus accrued interest. The
indentures for the Notes contain certain covenants which include a limitation on
the Company's ability to incur additional indebtedness, provide guarantees and
pay cash dividends.
(c) In November 1987, a 7 3/4% convertible subordinated debenture was
sold to the Company's Chairman and Chief Executive Officer. This $2,000,000
debenture is convertible into shares of common stock at a conversion price of
$8.56 per share. Simultaneously, the Company loaned the Chairman and Chief
Executive Officer $2,000,000 to purchase the debenture. The loan is evidenced by
a promissory note bearing interest at 7 3/4%, payable on the maturity date of
the debenture or earlier to the extent that he converts or sells the debenture.
At June 30, 1994, $1,000,000 is outstanding on the note.
(d) These notes, primarily related to capitalized leases, require
periodic payments of principal and interest through maturity.
In order to reduce the impact of changes in interest rates on its
long-term debt, the Company, during fiscal 1994 and 1993, entered into various
interest rate swap agreements and interest rate cap agreements which are
recognized as adjustments to interest expense over the related terms of the
agreements. As of June 30, 1994, the Company had interest rate swap agreements
with notional amounts totalling $100,000,000 which mature in 1994 through 2000
and interest rate cap agreements with notional amounts totalling $100,000,000
which expire in fiscal 1997. The counterparty to the interest rate swap
agreements and interest rate cap agreements is a large international financial
institution. While the Company may be exposed to losses in the event of
nonperformance, it does not anticipate nonperformance under the agreements.
-38-
<PAGE>
7. Commitments and Contingencies:
Leases:
The Company leases 18 of its rehabilitation hospitals under non-
cancelable operating leases. These leases have terms of ten to fifteen years.
Future minimum lease payments under all non-cancelable operating leases
as of June 30, 1994, are as follows (in thousands):
<TABLE>
<S> <C>
1995 $ 47,600
1996 44,541
1997 40,465
1998 36,213
1999 28,867
Thereafter 67,775
--------
$265,461
========
</TABLE>
Substantially all of the above leases have optional renewal terms
based upon fair market rentals at the time of renewal. Certain facility
operating leases require contingent lease payments based upon net patient
revenues.
Total rental expense under operating leases for 1994, 1993 and 1992 was
$62,686,000, $64,648,000 and $56,014,000, respectively. The rental expense for
1994, 1993 and 1992 included contingent payments of $5,138,000, $6,982,000 and
$6,066,000, respectively.
Other:
The Company guarantees payment throughout the term of a bond issue to an
economic development authority, of amounts due and payable by the owner of a
long-term care facility previously managed by the Company. The outstanding bonds
total approximately $6,177,000 at June 30, 1994.
The Company is subject to legal proceedings and claims which have arisen in
the ordinary course of its business and have not been finally adjudicated, which
include malpractice claims covered under the Company's insurance policy. In the
opinion of management, the outcome of these actions will not have a material
effect on the financial position or results of operations of the Company.
8. Special Charge and Change in Accounting Principle:
During the fourth quarter a special pre-tax charge of $74,834,000 was
recorded. The special charge resulted from the approval by the Company's Board
of Directors of several measures to streamline operations and improve
productivity by restructuring the Company into major operating businesses,
flattening the management organization structure, writing down certain assets
and, where appropriate, divesting of unproductive assets. The Company began
working on the proposed plan during the fiscal 1994 third quarter as a result of
market changes the Company was experiencing. The special charge comprised
several items including the impairment of selected assets in the Company's
hospital division, the costs associated with the consolidation of its contract
therapy companies, the losses related to the termination of certain business
relationships in the contract therapy business and certain other costs of the
restructuring program.
Approximately $50,244,000 of the special charge was associated with the
impairment of assets at eight rehabilitation hospitals, divestiture of two
rehabilitation hospitals, closure of a select group of outpatient locations and
miscellaneous other charges.
The impaired assets were identified in accordance with the Company's
policy and based upon a review of the facts and circumstances related to the
assets and a determination that the assets would not be recoverable, as
-39-
<PAGE>
determined based upon the future undiscounted cash flows resulting from the
assets. The impairment loss was measured as the difference between the carrying
amount of the assets and their fair value as determined by independent
appraisals.
Approximately $22,842,000 of the charge is related to the consolidation of
certain contract therapy companies into CMS Therapies, the exit from certain
markets and businesses and losses related to the termination of certain business
relationships. This consolidation process involved the closure of offices,
relocation and severance of personnel and elimination of duplicative processes.
The remainder of the charge, $1,748,000, was to reduce the work force at the
Company's corporate office and provide for transaction costs to execute the
plan.
During the fourth quarter of fiscal 1993 the Company recorded a pre-tax
charge of $14,556,000 related principally to the write-off of deferred costs for
approximately 30 abandoned rehabilitation hospital development projects for
which construction had not started. The decision to write-down or abandon
certain projects and pursue less capital-intensive growth than in the past, was
a result of changes in the Company's rehabilitation hospital development
strategy in response to changes in various healthcare delivery markets.
Previously, the Company had deferred certain costs incurred to obtain government
approvals and other expenses related to the development of rehabilitation
hospitals. Based on a historical high rate of completion, costs of developing a
project were charged to operations only when it was determined that the project
would be abandoned. As a result of the change in development strategy, the
Company changed its accounting for development costs. Hospital development costs
are expensed until that time when it is probable that construction will
commence.
9. Merger Expenses:
Costs of $2,598,000 related to the merger with Kron and Kron's subsequent
consolidation with the Company's other physician services company, CompHealth,
were charged to expense in the third quarter of fiscal 1993.
Costs of $1,000,000 related to the merger with CompHealth were charged to
expense in the second quarter of fiscal 1992. In the fourth quarter of fiscal
1992, the Company incurred expenses of $3,319,000 related to the termination of
a merger agreement.
10. Income Taxes:
Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes." The
adoption of FAS 109 changes the Company's method of accounting for income taxes
from the deferred method (APB 11) to an asset and liability approach. Under the
deferred method, tax expense was based on items of income and expense that were
reported in different years in the financial statements and tax returns, and
were measured at the rate in effect in the year the difference originated. Under
FAS 109 the deferred tax assets and liabilities are measured using the tax rates
and laws that will be in effect when the differences are expected to be realized
or settled. As permitted, the Company has elected not to restate the financial
statements of prior years. The cumulative effect of adopting FAS 109 was not
material and has been included in the operating income tax provision. There was
no effect on pre-tax income for this prospective adoption.
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 increased
the top corporate tax rate from 34% to 35% effective retroactive to January 1,
1993 and made certain other tax law changes. The effects of these tax law
changes were not material and have been included in the operating income tax
provision.
At June 30, 1994, the Company has an estimated $2,800,000 capital loss
carryforward as a result of certain restructuring transactions. The loss is only
available to offset future capital gain income and will expire in fiscal 1999.
Deferred tax liabilities (assets) were comprised of the following at June
30, 1994 (in thousands):
<TABLE>
<S> <C>
Depreciation and amortization $ 10,441
Other 3,973
--------
</TABLE>
-40-
<PAGE>
<TABLE>
<S> <C>
Total deferred tax liabilities 14,414
--------
Special charges (20,511)
Bad debt reserves (2,888)
Other non-deductible accruals (7,673)
Tax carryforward items (1,889)
Other (3,220)
--------
Total deferred tax assets (36,181)
--------
Valuation allowance 1,800
--------
Excess of deferred tax assets over liabilities $(19,967)
========
Deferred Tax Balance Sheet Classification:
Current $ (5,610)
Noncurrent (14,357)
--------
Total $(19,967)
========
</TABLE>
The valuation allowance is the result of: (1) The uncertain state tax
benefits resulting from states requiring separate return filings or with no or
limited loss carryover provisions; and (2) limitations on the Company's ability
to absorb the estimated $2,800,000 capital loss in the five year carryforward
period. The valuation allowance increased by approximately $900,000 during
fiscal 1994 primarily as a result of the capital loss limitation.
Income taxes comprise the following (in thousands):
<TABLE>
<CAPTION>
Liability
Method Deferred Method
--------- ---------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 4,513 $19,180 $14,698
State and local 1,306 3,641 3,293
Deferred:
Federal (11,360) (3,681) (1,769)
State and local (1,103) (214) 78
Less:
Minority interest (1,004) (1,363) (1,439)
--------- ------- -------
$( 7,648) $17,563 $14,861
========= ======= =======
</TABLE>
A reconciliation of the statutory federal income tax rates with the
effective income tax rate is as follows:
<TABLE>
<CAPTION>
Liability
Method Deferred Method
--------- ---------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Federal income tax at statutory rates (35.0%) 34.0% 34.0%
State income taxes, net of federal tax
benefit (.1%) 6.9% 4.4%
Amortization of goodwill 1.4% 1.5% .8%
Merger costs 1.2% .2%
Assessments 6.9%
</TABLE>
-41-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Adjustment for inclusion of pooled
companies (Note 2) (.8%) (2.6%)
Special charge 4.1%
Capital loss valuation allowance 2.3%
Other 2.3% .8% (1.4%)
------ ----- -----
(18.1%) 43.6% 35.4%
====== ===== =====
</TABLE>
The components of the provision for deferred income taxes for fiscal
years 1993 and 1992 are as follows (in thousands):
<TABLE>
<CAPTION>
1993 1992
------- -------
<S> <C> <C>
Conversion from cash basis of accounting $ (267) $ (454)
Depreciation 1,094 790
Deferred costs (3,228) (53)
Bad debts (1,038) (119)
Accrued expenses and other (456) (1,855)
------- -------
$(3,895) $(1,691)
======= =======
</TABLE>
11. Adoption of New Accounting Principle:
In fiscal 1993 the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". In applying this statement, the Company recognized
a $5,000,000 write-down to fair value of a long-term care investment being held-
to-maturity. The cumulative effect of this change in accounting principle, on
an after-tax basis, was $3,204,000 or $.08 per share on a fully diluted basis.
12. Consolidated Statements of Cash Flow:
Supplementary information for the consolidated statements of cash flows is
set forth below (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Cash paid during the year for:
Interest, net of amounts
capitalized ($1,615, $5,918 and $1,226
in 1994, 1993 and 1992, respectively) $39,202 $10,356 $ 5,252
======= ======= =======
Income taxes $ 4,955 $27,819 $11,200
======= ======= =======
The sales of long-term care facilities
resulted in the following:
Assets disposed of $15,344
=======
Liabilities assumed by buyer $ 2,995
Notes received from buyers 12,349
-------
$15,344
=======
</TABLE>
-42-
<PAGE>
In fiscal 1992, the Company purchased 100% of the capital stock of AcMed
for $5,100,000 in cash and the Company's common stock. In fiscal 1994, the
Company purchased 100% of the capital stock of MMA for $8,668,000 in cash and
the Company's common stock.
(in thousands)
<TABLE>
<CAPTION>
MMA AcMed
------- -------
<S> <C> <C>
Fair value of assets acquired $ 9,525 $ 7,424
Less:
Cash payments (1,662) (3,200)
Fair value of stock issued (7,006) (1,900)
------- -------
Liabilities assumed $ 857 $ 2,324
======= =======
</TABLE>
In fiscal 1993, the Company purchased the 20% minority interest of
Communi-Care for $3,941,000 in cash and $890,000 in stock, plus future payments
based on earnings.
13. Fair Value of Financial Instruments:
The estimated fair values of the Company's financial instruments at June
30, 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
-------- --------
<S> <C> <C>
Cash and cash equivalents $ 54,862 $ 54,862
Notes Receivable $ 31,165 $ 30,643
Investments $ 11,367
Long-term debt $354,272 $339,927
Interest rate swap agreements/interest rate
collar agreements $ 644 $ (6,300)
</TABLE>
Cash and cash equivalents' carrying amount approximates fair value because
of the short maturity of these instruments. The fair value of notes receivable
was estimated by discounting the future cash flows using current rates available
to similar borrowers under similar circumstances. It is not practicable to
estimate the fair value of the Company's investments, which comprise certain
short-term and equity investments because of the lack of a quoted market price,
and the inability to estimate fair value without incurring excessive costs. The
$11,367,000 carrying amount at June 30, 1994 represents the original cost of the
investments, which management believes is not impaired. The fair value of the
Company's long-term debt, excluding capital leases, was estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. The fair
values of interest rate swaps and interest rate collars are the estimated
amounts that the Company would receive or pay to terminate the swap agreements,
taking into account current interest rates.
14. Disposition of Long-term Care Facilities:
On March 31, 1992, the Company sold substantially all of the property and
equipment of two of its long-term care facilities to Renaissance Healthcare
Corporation ("RHC"), a long-term care company owned and operated by former
management employees of the Company. The aggregate sales price was approximately
$9,700,000 and was financed through installment sales agreements. In addition,
the Company sold all of the outstanding stock of another facility to RHC for
approximately $2,600,000 financed through a promissory note. There were no gains
or losses on the sales. As part of the transactions, the Company increased a
previously agreed upon working capital loan commitment to $3,000,000 and
extended its payment terms.
-43-
<PAGE>
The Company has notes receivable and other investments, related to its
divestiture of its free-standing long-term care facilities totaling $22,078,000
including notes receivable of $16,765,000 from RHC. Repayment of those amounts
are dependent upon the cash flows of the individual companies. Collateral on
certain notes receivable and investments aggregating $4,129,000 consists of
first or second mortgages, personal guarantees and pledges of certain other
assets. Certain notes receivable from RHC aggregating $13,265,000 reflect future
installment sales obligations under which the Company holds title to the sold
assets until all payments are made.
All notes receivable bear interest at 5% to 12% and require future
principal payments of approximately $547,000 in 1995, $3,742,000 in 1996,
$1,015,000 in 1997, $683,000 in 1998, $661,000 in 1999, and $25,353,000
thereafter. The current portion of these long-term notes are included in other
receivables in the consolidated balance sheets.
15. Related Party Transactions:
The Company has been party to various contracts with Commercial
Construction Company, Inc. ("CCI") for the construction of new rehabilitation
hospitals to be owned and operated by the Company. CCI is wholly owned by the
son of the Company's Chairman and Chief Executive Officer and brother of the
President of the Company. In addition, the Company purchases other development
and maintenance services, equipment, furniture and supplies for its
rehabilitation hospitals through CCI and its affiliates. In fiscal 1994, 1993
and 1992, the Company made payments aggregating approximately $16,950,000,
$75,220,000 and $14,994,000, respectively, to CCI and its affiliates. As of June
30, 1994, commitments under outstanding contracts with CCI and its affiliates
were $7,273,000 plus reimbursement of certain personnel costs.
16. Stock Options:
Under various Company stock option plans, shares of common stock have been
reserved for issuance to officers, key employees and directors. The following
summary covers options under these plans as adjusted for the three-for-two stock
split paid November 15, 1991:
<TABLE>
<CAPTION>
Fiscal Year
-------------------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Shares under options at beginning of
period 5,441,563 6,469,567 2,843,190
Options granted during the period 1,135,003 3,633,932 4,252,031
Options canceled or terminated (364,571) (3,465,812) (25,099)
Options exercised:
1994 ($5.25 to $7.33) (206,125)
1993 ($.18 to $13.00) (1,196,124)
1992 ($5.25 to $13.00) (600,555)
--------- ---------- ----------
Shares under option, end of period 6,005,870 5,441,563 6,469,567
Shares available for future grants 2,733,698 2,004,877 180,866
--------- ---------- ----------
Shares reserved 8,739,568 7,446,440 6,650,433
========= ========== ==========
Options exercisable 2,054,179 1,502,507 1,745,552
========= ========== =========
</TABLE>
The Company has the following stock compensation plans at June 30, 1994:
The 1986 Stock Option Plan (1986 Plan), the 1989 Non-Qualified Stock Option
Agreement, the 1989 Non-Employee Directors' Stock Option Plan, the 1992 CEO
Stock Option Plan (1992 Plan), the 1993 Non-Qualified Stock Option Plan (1993
Plan), and the 1994 Stock Option Plan (1994 Plan). Options outstanding at June
30, 1994 are at prices ranging from $5.25 to $21.84 per share, the fair market
value of the stock at the date of grant. Accordingly, no compensation expense
has been recorded for these awards. Options become exercisable in four to seven
annual installments commencing on the first anniversary of the date of grant,
and expire between November 1994 and August 2003, five to ten years from the
date of grant.
-44-
<PAGE>
In August 1993, the Board of Directors approved adoption of the 1994 Plan
which authorized options of 1,500,000 shares. No options were granted under the
Plan as of June 30, 1994.
In May 1993, the Board of Directors approved adoption of the 1993 Plan
which authorized options of 1,000,000 shares. Officers and directors of the
Company are not eligible to receive options under the 1993 Stock Option Plan.
In May 1993, the Company's Board of Directors granted options, exercisable
at the market price on the date of grant ($11 per share), to substantially all
employees holding outstanding options with exercise prices higher than such
current market price. The number of shares subject to the options granted to
each employee was equal in number to the shares covered by options previously
granted to such employee at higher exercise prices. The new options were granted
to each employee conditioned on such employee's agreement to cancel their
previously granted options for an equal number of shares at the higher exercise
prices. The term, vesting rate and other provisions of the new options were
otherwise identical to the options canceled. As a result, options on 3,339,187
shares with exercise prices per share ranging from $13 to $22.88 per share were
canceled and the same number of new options were granted at an exercise price of
$11 per share.
During fiscal 1993, the Company loaned its Chairman and Chief Executive
Officer $4,548,000 for the exercise of stock options and the payment of the
resulting income taxes, and loaned its President $530,000 for the payment of
income taxes resulting from the exercise of stock options. The tax loans were
authorized under the 1986 Plan, and the remaining loan was authorized by the
Company's Board of Directors. The loans are repayable upon demand with interest
payable monthly at the IRS' Applicable Federal Rate, adjusted semi-annually on
January 1, and July 1.
17. Net Income (Loss) Per Share:
Net income (loss) per common share and common equivalent share is based
upon the weighted average number of common shares outstanding during the period
plus the dilutive effect of common shares contingently issuable, primarily from
stock options and acquisition agreements requiring the issuance of shares
contingent on future earnings.
Fully diluted earnings per share are determined on the assumption that the
7 3/4% convertible subordinated debentures were converted on July 1, 1991. Net
income was adjusted for the interest on the debentures, net of the related
income tax benefits.
18. Shareholders' Rights Plan:
On March 11, 1991, the Company declared a distribution of Preferred Stock
Purchase Rights ("Rights") to holders of the Company's common stock and
authorized the issuance of additional Rights for common stock issued after that
date. The Company may redeem the Rights at $.001 per right at any time until
they become exercisable.
The rights become exercisable only if (with certain exceptions and
limitations) a person or group attempts to obtain beneficial ownership of 20% or
more of the Company's common stock or is determined to be an "adverse person" by
the Board of Directors. Each Right, if and when it becomes exercisable, may be
exchanged for 1/1000th of a share of Series A Junior Participating Preferred
Stock, at an exercise price of $85, subject to adjustment.
In certain actual or potential takeover situations if the Rights have not
been redeemed, Rights holders will be entitled to purchase common stock or other
securities or property of the Company or an acquiring company.
19. Subsequent Event
In June 1994, the Company obtained consents from its bondholders and
amended its credit facility to permit purchases of its Senior Subordinated Notes
in the open market. During the first two months of fiscal 1995, the
-45-
<PAGE>
Company purchased approximately $26,835,000 of its Senior Subordinated Notes in
a series of open market purchases utilizing its operating cash flow.
20. Quarterly Results of Operations (unaudited):
The following is a summary of the unaudited quarterly results of operations
for (in thousands, except per share data):
<TABLE>
<CAPTION>
Fiscal Year 1994
-----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net operating revenues $249,762 $249,041 $252,986 $253,050
Income (loss) before income taxes 12,727 6,366 7,010 (68,296) (a)
Net income (loss) 7,573 3,788 4,170 (50,076) (a)
Income (loss) per share $.20 $.10 $.11 $(1.31)
<CAPTION>
Fiscal Year 1993
-----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net operating revenues $209,889 $218,536 $232,305 $240,667
Income before income taxes and
cumulative effect of accounting
change 14,676 16,122 13,002(b) (3,514)(c)
Income before cumulative effect
of accounting change 9,095 9,996 7,764(b) (4,132)(c)
Net income 9,095 9,996 7,764(b) (7,336)(c)
Income per share:
Income before cumulative
effect of accounting change $.24 $.26 $.20 $(.11)
Cumulative effect of
accounting change (.08)
---- ---- ---- -----
Net income $.24 $.26 $.20 $(.19)
==== ==== ==== =====
</TABLE>
(a) Includes $74,834 pre-tax special charge related to the impairment of
selected assets of the Company's hospital division, the costs associated
with the consolidation of its contract therapy companies, the losses related
to the termination of certain relationships in the contract therapy business
and certain other costs of the restructuring program.
(b) Includes $2,598 of pre-tax merger expense related to the Kron acquisition
and its subsequent consolidation with CompHealth.
(c) Includes $14,556 pre-tax special charge related to the write-down of certain
rehabilitation facility development costs.
-46-
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders of
Continental Medical Systems, Inc.
We have audited the consolidated balance sheet of Continental Medical Systems,
Inc. and subsidiaries as of June 30, 1994, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. Our audit also included the financial statement schedules listed in the
Index at Item 14(a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audit. The
consolidated financial statements of Continental Medical Systems, Inc. and
subsidiaries for each of the two years in the period ended June 30, 1993 were
audited by other auditors whose report dated August 10, 1993 on those statements
included an explanatory paragraph that described the change in the Company's
method of accounting for development costs and the adoption of the provisions of
Statement of Financial Accounting Standards No. 115 discussed in Notes 8 and 11
to the consolidated financial statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements and schedules. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement and
schedule presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the 1994 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Continental
Medical Systems, Inc. and subsidiaries at June 30, 1994, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
As discussed in Note 10 to the consolidated financial statements, in fiscal 1994
the Company changed its method of accounting for income taxes.
Ernst & Young LLP
Harrisburg, Pennsylvania
August 9, 1994
<PAGE>
Report of Independent Accountants
To the Board of Directors
of Continental Medical Systems, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index, present fairly, in all material respects, the financial position, results
of operations and cash flows of Continental Medical Systems, Inc. and its
subsidiaries as of and for each of the two years in the period ended June 30,
1993, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Continental
Medical Systems, Inc. for any period subsequent to June 30, 1993.
As discussed in Notes 8 and 11 to the consolidated financial statements, in
fiscal 1993 the Company changed its method of accounting for development costs
and adopted the provisions of Statement of Financial Accounting Standards
No. 115.
Our audits of the consolidated financial statements referred to above also
included an audit of the related financial statement schedules. In our opinion,
these financial statement schedules present fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements.
Price Waterhouse
Philadelphia, PA
August 10, 1993
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE.
-----------------------------------
The information required by this Item was previously reported by the
Company on a Current Report on Form 8-K filed with the Commission on January 25,
1994.
-47-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------
OF THE REGISTRANT.
-----------------
Information regarding directors and nominees for directors of the Company
will be included under the caption entitled "Election of Directors" in the Proxy
Statement and is incorporated herein by reference. Information regarding
executive officers is contained following Item 4 of this report.
Based solely on its review of copies of Forms 3, 4 and 5 (and amendments
thereto) received by the Company and written representations from certain
persons required to file reports under Section 16(a) of the Securities Exchange
Act of 1934 that no Form 5s were required for those persons, the Company
believes that, during fiscal 1993, all filing requirements applicable to
reporting persons were met.
ITEM 11. EXECUTIVE COMPENSATION.
----------------------
Information regarding compensation of the Company's executive officers will
be included in the Proxy Statement under the caption entitled "Executive
Compensation", and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
----------------------------------------
OWNERS AND MANAGEMENT.
---------------------
Information regarding beneficial ownership of the Company's Common Stock by
certain beneficial owners and by management of the Company will be included
under the captions entitled "Beneficial Ownership of Shares" in the Proxy
Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
Information regarding certain relationships and related transactions with
management will be included under the caption entitled "Certain Relationships
and Related Transactions" in the Proxy Statement and is incorporated herein by
reference.
-48-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
--------------------------------------------
REPORTS ON FORM 8-K.
-------------------
(a)(1) and (2) Financial Statements and Financial Statement Schedules
The Financial Statements and Supplemental Financial Statement Schedules are
listed in the accompanying "Index to the Consolidated Financial Statements
and Financial Statement Schedules" (which appears immediately after the
signature pages) (the "Financial Statement Index") are filed as part of
this Annual Report on Form 10-K.
(a)(3) Exhibits
The Exhibits are listed in the "Exhibit Index" (which appears immediately
after the Supplemental Financial Statement Schedules which follow the
Financial Statement Index) required by Item 601 of Regulation S-K at Item
(c) below. The Exhibit Index is incorporated herein by reference.
(b) Reports on Form 8-K
On May 26, 1994, the Company filed a Current Report on Form 8-K with the
Commission announcing the Company's plan to establish up to a $75,000,000
pre-tax charge in its fourth quarter for a restructuring and reorganization
program.
(c) The Exhibits required by Item 601 of Regulation S-K (the "Required
Exhibits") appear immediately following the Exhibit Index. The
Required Exhibits are incorporated herein by reference.
(d) The Supplemental Financial Statement Schedules, which appear
immediately after the Financial Statement Index, are incorporated
herein by reference.
With the exception of the information from the Proxy Statement expressly
incorporated by reference in Items 10, 11, 12 and 13 of this Form 10-K Annual
Report, the Proxy Statement, including, without limitation, the "Report of
the Compensation Committee on Executive Compensation" and the "Stock
Performance Graph" is not deemed filed as part of this Form 10-K Annual
Report.
-49-
<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.
CONTINENTAL MEDICAL SYSTEMS, INC.
September 12, 1994 By:/s/ Dennis L. Lehman
--------------------------------------
Dennis L. Lehman, Senior Vice
President-Finance and Chief Financial
Officer (Principal financial and
accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
September 12, 1994 /s/ R. A. Ortenzio
----------------------------------------
R.A. Ortenzio, Director, Chairman, and
Chief Executive Officer
September 12, 1994 /s/ Robert A. Ortenzio
----------------------------------------
Robert A. Ortenzio, Director, President,
and Chief Operating Officer
September 12, 1994 /s/ Dennis L. Lehman
----------------------------------------
Dennis L. Lehman, Senior Vice President
and Chief Financial Officer (Principal
financial and accounting officer)
<PAGE>
SIGNATURES
----------
September 12, 1994 /s/ Russell L. Carson
----------------------------------------
Russell L. Carson, Director
September 12, 1994 /s/ Bryan C. Cressey
----------------------------------------
Bryan C. Cressey, Director
September 12, 1994 /s/ Frank DeFazio
----------------------------------------
Frank DeFazio, Director
September 12, 1994 /s/ William M. Goldstein
----------------------------------------
William M. Goldstein, Director
September 12, 1994 /s/ LeRoy S. Zimmerman
---------------------------------------
LeRoy S. Zimmerman, Director
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(Item 14 (a)(1) and (2))
<TABLE>
<CAPTION>
Page Reference
<S> <C>
Consolidated Financial Statements:
Report of independent auditors (Ernst & Young)........
Report of independent accountants (Price Waterhouse)..
Consolidated balance sheets at June 30, 1994 & 1993...
For the years ended June 30, 1994, 1993 and 1992,
Consolidated statements of income................
Consolidated statements of stockholders' equity..
Consolidated statements of cash flows............
Notes to consolidated financial statements.......
Supplemental Financial Statement Schedules:
The following Financial Statement Schedules together
with the report thereon of Ernst and Young dated
August 9, 1994 and the report thereon of Price
Waterhouse dated August 10, 1993, both of which
immediately follow the Notes to consolidated
financial statements, should be read in conjunction
with the consolidated financial statements included
in Item 8 of this report. Financial Statement
Schedules not included in this report have been
omitted because they are not applicable or the
required information is shown in the Consolidated
Financial Statements or notes thereto.
Report of independent auditors (Ernst & Young)........
Report of independent accountants (Price Waterhouse)..
Schedule II:
Amounts Receivable From Related Parties and
Underwriters, Promoters and Employees and
Other Related parties...........................
Schedule V:
Property, Plant and Equipment....................
Schedule VI:
Accumulated Depreciation, Depletion and
Amortization of Property, Plant and Equipment...
Schedule VII:
Guarantees of Securities of Other Issuers........
Schedule VIII:
Valuation and Qualifying Accounts and Reserves...
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page Reference
<S> <C>
Schedule X:
Supplementary Income Statement Information.......
</TABLE>
<PAGE>
CONTINENTAL MEDICAL SYSTEMS, INC. & SUBSIDIARIES
SCHEDULE II
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS
AND EMPLOYEES OTHER THAN RELATED PARTIES
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- - ------------------------------------------------------------------------------------------------------------------------------------
DEDUCTIONS BALANCES AT CLOSE OF PERIOD
------------------------------------------------------------------
BAL. AT (1) (2) (1) (2)
NAME OF DEBTOR BEG. OF PERIOD ADDITIONS AMTS COLLECTED AMTS WRITTEN OFF CURRENT NOT CURRENT
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR FISCAL YEAR ENDED JUNE 30, 1992
UNITED MEDICAL ASSOCIATES
LIMITED PARTNERSHIP
INTEREST RATE 12.25% $159,000 $159,000
------------------------------------------------------------------------------------------------
$159,000 $0 $0 $0 $0 $159,000
- - ------------------------------------================================================================================================
FOR FISCAL YEAR ENDED JUNE 30, 1993
UNITED MEDICAL ASSOCIATES
LIMITED PARTNERSHIP
INTEREST RATE 12.25% $159,000 $ 159,000
ROCCO A. ORTENZIO
INTEREST RATE 4.32% $4,549,000 4,549,000
ROBERT A. ORTENZIO
INTEREST RATE 4.32% 530,000 530,000
KENNETH HUBBARD
INTEREST RATE 7.00% 931,000 931,000
SAMUEL DENTON
INTEREST RATE 7.50% 499,000 $45,000 454,000
------------------------------------------------------------------------------------------------
$159,000 $6,509,000 $45,000 $0 $0 $6,623,000
- - ------------------------------------================================================================================================
FOR FISCAL YEAR ENDED JUNE
30, 1994
UNITED MEDICAL ASSOCIATES
LIMITED PARTNERSHIP
INTEREST RATE 12.25% $159,000 $159,000
ROCCO A. ORTENZIO
INTEREST RATE 3.94% 4,549,000 4,549,000
ROBERT A. ORTENZIO
INTEREST RATE 3.94% 530,000 530,000
KENNETH HUBBARD
INTEREST RATE 7.00% 931,000 $9,000 $940,000 0
SAMUEL DENTON
INTEREST RATE 7.50% 454,000 49,000 $40,000 365,000
ALAN KRONHAUS
INTEREST RATE 6.00% 0 200,000 200,000
------------------------------------------------------------------------------------------------
$6,623,000 $209,000 $989,000 $0 $40,000 $5,803,000
- - ------------------------------------================================================================================================
</TABLE>
<PAGE>
CONTINENTAL MEDICAL SYSTEMS, INC. & SUBSIDIARIES
SCHEDULE V
PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- - ------------------------------------------------------------------------------------------------------------------
BAL. AT BEG. ADDITIONS OTHER CHANGES- BAL. AT END
CLASSIFICATION OF PERIOD AT COST RETIREMENTS ADD(DEDUCT)-DESCRIBE OF PERIOD
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1992
LAND AND LAND IMPROVEMENTS $4,939,000 $984,000 $1,755,000 (A) $1,600,000 (B)
---------------------------------------------------------------------------------
$4,939,000 $984,000 $1,755,000 $1,600,000 $5,768,000
---------------------------------------------------------------------------------
BUILDINGS AND IMPROVEMENTS $44,445,000 $14,455,000 $11,634,000 (A) $10,312,000 (B)
243,000 1,217,000 (C)
---------------------------------------------------------------------------------
$44,445,000 $14,455,000 $11,877,000 $11,529,000 $58,552,000
---------------------------------------------------------------------------------
FURNITURE AND EQUIPMENT $26,997,000 $17,358,000 $2,002,000 (A) $3,160,000 (B)
334,000
---------------------------------------------------------------------------------
$26,997,000 $17,358,000 $2,336,000 $3,160,000 $45,179,000
---------------------------------------------------------------------------------
CONSTRUCTION IN PROGRESS $0 $39,379,000 $0 $1,561,000 (C)
---------------------------------------------------------------------------------
$0 $39,379,000 $0 $1,561,000 $40,940,000
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
TOTAL FIXED ASSETS $76,381,000 $72,176,000 $15,968,000 $17,850,000 $150,439,000
- - ---------------------------------=================================================================================
</TABLE>
(A) SALE OF DREW VILLAGE, PALMETTO, AND ILIFF NURSING FACILITIES
(B) ACQUISITION OF WEST GABLES AND ACMED
(C) RECLASSIFICATION
METHOD OF DEPRECIATION: STRAIGHT LINE
LIVES: BUILDINGS AND IMPROVEMENTS, LAND AND LAND IMPROVEMENTS - 30 TO 35 YEARS
FURNITURE AND EQUIPMENT, INCLUDING CAPITAL LEASES - 3 TO 15 YEARS
<PAGE>
CONTINENTAL MEDICAL SYSTEMS, INC. & SUBSIDIARIES
SCHEDULE V
PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- - ------------------------------------------------------------------------------------------------------------------
BAL. AT BEG. ADDITIONS OTHER CHANGES- BAL. AT END
CLASSIFICATION OF PERIOD AT COST RETIREMENTS ADD(DEDUCT)-DESCRIBE OF PERIOD
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1993
LAND AND LAND IMPROVEMENTS $5,768,000 $466,000 $0 $4,844,000 (A)
$4,348,000 (C)
---------------------------------------------------------------------------------
$5,768,000 $466,000 $0 $9,192,000 $15,426,000
---------------------------------------------------------------------------------
BUILDINGS AND IMPROVEMENTS $58,552,000 $27,420,000 $400,000 $35,890,000 (A)
317,000 (B)
64,220,000 (C)
---------------------------------------------------------------------------------
$58,552,000 $27,420,000 $400,000 $100,427,000 $185,999,000
---------------------------------------------------------------------------------
FURNITURE AND EQUIPMENT $45,179,000 $30,284,000 $2,767,000 $1,339,000 (B)
---------------------------------------------------------------------------------
$45,179,000 $30,284,000 $2,767,000 $1,339,000 $74,035,000
---------------------------------------------------------------------------------
CONSTRUCTION IN PROGRESS $40,940,000 $73,015,000 $0 ($66,305,000)(C)
---------------------------------------------------------------------------------
$40,940,000 $73,015,000 $0 ($66,305,000) $47,650,000
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
TOTAL FIXED ASSETS $150,439,000 $131,185,000 $3,167,000 $44,653,000 $323,110,000
- - ---------------------------------=================================================================================
</TABLE>
(A) ACQUISITION OF REAL ESTATE PARTNERSHIPS
(B) MISCELLANEOUS ACQUISITIONS
(C) RECLASSIFICATION
METHOD OF DEPRECIATION: STRAIGHT LINE
LIVES: BUILDINGS AND IMPROVEMENTS, LAND AND LAND IMPROVEMENTS - 30 TO 35 YEARS
FURNITURE AND EQUIPMENT, INCLUDING CAPITAL LEASES - 3 TO 15 YEARS
<PAGE>
CONTINENTAL MEDICAL SYSTEMS, INC. & SUBSIDIARIES
SCHEDULE V
PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- - ------------------------------------------------------------------------------------------------------------------
BAL. AT BEG. ADDITIONS OTHER CHANGES- BAL. AT END
CLASSIFICATION OF PERIOD AT COST RETIREMENTS ADD(DEDUCT)-DESCRIBE OF PERIOD
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1994
LAND AND LAND IMPROVEMENTS $15,426,000 $100,000 $696,000 $9,618,000 (C)
---------------------------------------------------------------------------------
$15,426,000 $100,000 $696,000 $9,618,000 $24,448,000
---------------------------------------------------------------------------------
BUILDINGS AND IMPROVEMENTS $185,999,000 $3,918,000 $753,000 $31,899,000 (C)
($31,714,000)(B)
---------------------------------------------------------------------------------
$185,999,000 $3,918,000 $753,000 $185,000 $189,349,000
---------------------------------------------------------------------------------
FURNITURE AND EQUIPMENT $74,035,000 $18,216,000 $4,338,000 $1,364,000 (A)
($716,000)(C)
($1,482,000)(B)
---------------------------------------------------------------------------------
$74,035,000 $18,216,000 $4,338,000 ($834,000) $87,079,000
---------------------------------------------------------------------------------
CONSTRUCTION IN PROGRESS $47,650,000 $4,182,000 $7,957,000 ($41,388,000)(C)
---------------------------------------------------------------------------------
$47,650,000 $4,182,000 $7,957,000 ($41,388,000) $2,487,000
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
TOTAL FIXED ASSETS $323,110,000 $26,416,000 $13,744,000 ($32,419,000) $303,363,000
- - ---------------------------------=================================================================================
</TABLE>
(A) MISCELLANEOUS ACQUISITIONS
(B) WRITE-DOWN OF ASSETS AS PART OF SPECIAL CHARGE
(C) RECLASSIFICATION
METHOD OF DEPRECIATION: STRAIGHT LINE
LIVES: BUILDINGS AND IMPROVEMENTS, LAND AND LAND IMPROVEMENTS - 30 TO 40 YEARS
FURNITURE AND EQUIPMENT, INCLUDING CAPITAL LEASES - 3 TO 20 YEARS
<PAGE>
CONTINENTAL MEDICAL SYSTEMS, INC. & SUBSIDIARIES
SCHEDULE VI
ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- - --------------------------------------------------------------------------------------------------------------
ADDITIONS
BAL. AT BEG. CHARGED TO OTHER CHANGES- BAL. AT END
CLASSIFICATION OF PERIOD COSTS AND EXP RETIREMENTS ADD(DEDUCT)-DESCRIBE OF PERIOD
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1992
LAND IMPROVEMENTS $63,000 $15,000 $69,000 (A)
----------------------------------------------------------------------------
$63,000 $15,000 $69,000 $0 $9,000
----------------------------------------------------------------------------
BUILDINGS AND IMPROVEMENTS $5,664,000 $1,998,000 $1,478,000 (A) $591,000 (B)
174,000
----------------------------------------------------------------------------
$5,664,000 $1,998,000 $1,652,000 $591,000 $6,601,000
----------------------------------------------------------------------------
FURNITURE AND EQUIPMENT $9,566,000 $4,801,000 $725,000 (A) $826,000 (B)
349,000
----------------------------------------------------------------------------
$9,566,000 $4,801,000 $1,074,000 $826,000 $14,119,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
TOTAL DEPRECIATION $15,293,000 $6,814,000 $2,795,000 $1,417,000 $20,729,000
============================================================================
</TABLE>
(A) SALE OF DREW VILLAGE, PALMETTO, AND ILIFF NURSING FACILITIES
(B) ACQUISITION OF WEST GABLES
<PAGE>
CONTINENTAL MEDICAL SYSTEMS, INC. & SUBSIDIARIES
SCHEDULE VI
ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- - ----------------------------------------------------------------------------------------------------------------
ADDITIONS
BAL. AT BEG. CHARGED TO OTHER CHANGES- BAL. AT END
CLASSIFICATION OF PERIOD COSTS AND EXP RETIREMENTS ADD(DEDUCT)-DESCRIBE OF PERIOD
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1993
LAND IMPROVEMENTS $9,000 $0 $0 ($9,000)(A)
------------------------------------------------------------------------------
$9,000 $0 $0 ($9,000) $0
------------------------------------------------------------------------------
BUILDINGS AND IMPROVEMENTS $6,601,000 $4,844,000 $0 $2,000 (A)
138,000 (B)
------------------------------------------------------------------------------
$6,601,000 $4,844,000 $0 $140,000 $11,585,000
------------------------------------------------------------------------------
FURNITURE AND EQUIPMENT $14,119,000 $8,535,000 $1,508,000 $7,000 (A)
550,000 (B)
------------------------------------------------------------------------------
$14,119,000 $8,535,000 $1,508,000 $557,000 $21,703,000
------------------------------------------------------------------------------
TOTAL DEPRECIATION $20,729,000 $13,379,000 $1,508,000 $688,000 $33,288,000
==============================================================================
</TABLE>
(A) RECLASSIFICATION
(B) MISCELLANEOUS ACQUISITIONS
<PAGE>
CONTINENTAL MEDICAL SYSTEMS, INC. & SUBSIDIARIES
SCHEDULE VI
ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- - ----------------------------------------------------------------------------------------------------------------
ADDITIONS
BAL. AT BEG. CHARGED TO OTHER CHANGES- BAL. AT END
CLASSIFICATION OF PERIOD COSTS AND EXP RETIREMENTS ADD(DEDUCT)-DESCRIBE OF PERIOD
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1994
LAND IMPROVEMENTS $0
-------------------------------------------------------------------------------
$0 $0 $0 $0 $0
-------------------------------------------------------------------------------
BUILDINGS AND IMPROVEMENTS $11,585,000 $7,552,000 $359,000 ($56,000)(A) $18,722,000
-------------------------------------------------------------------------------
$11,585,000 $7,552,000 $359,000 ($56,000) $18,722,000
-------------------------------------------------------------------------------
FURNITURE AND EQUIPMENT $21,703,000 $11,814,000 $1,639,000 $476,000 (B) $32,618,000
$264,000 (A)
-------------------------------------------------------------------------------
$21,703,000 $11,814,000 $1,639,000 $740,000 $32,618,000
-------------------------------------------------------------------------------
TOTAL DEPRECIATION $33,288,000 $19,366,000 $1,998,000 $684,000 $51,340,000
===============================================================================
</TABLE>
(A) RECLASSIFICATION
(B) MISCELLANEOUS ACQUISITIONS
<PAGE>
CONTINENTAL MEDICAL SYSTEMS, INC. & SUBSIDIARIES
SCHEDULE VII
GUARANTEES OF SECURITIES OF OTHER ISSUERS
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- - ---------------------------------------------------------------------------------------------------------------------------
TOTAL AMOUNT OWNED AMOUNT IN TREASURY
NAME OF ISSUER OF SECURITIES TITLES OF ISSUE OF AMOUNT BY PERSON OR PERSONS OF ISSUER OF
GUARANTEED BY PERSON OR PERSONS EACH CLASS OF GUARANTEED FOR WHICH STATEMENT SECURITIES
FOR WHICH STATEMENT IS FILED SECURITIES GUARANTEED & OUTSTANDING IS FILED GUARANTEED
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1994
CONTINENTAL CARE CENTERS OF NEW JERSEY ECONOMIC TOTAL AMOUNT NONE NONE
NEW JERSEY ISSUED THROUGH DEVELOPMENT AUTHORITY GUARANTEED
THE NEW JERSEY ECONOMIC FIRST MORTGAGE GROSS $7,500,000
DEVELOPMENT AUTHORITY REVENUE REFUNDING BONDS
(OAKRIDGE MANOR PROJECT) OUTSTANDING
SERIES 1986 $6,177,000
- - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- - ---------------------------------------------------
COLUMN F COLUMN G
- - ---------------------------------------------------
NATURE OF ANY DEFAULTS BY ISSUER
OF SECURITIES GUARANTEED IN
NATURE OF PRINCIPLE INTEREST, SINKING FUND
GUARANTEE OR REDEMPTION PROVISIONS, OR
PAYMENT OF DIVIDEND
- - ---------------------------------------------------
<S> <C>
THE GUARANTEE OF NONE
PAYMENTS BY
CONTINENTAL CARE
CENTERS OF NEW
JERSEY
- - ---------------------------------------------------
</TABLE>
<PAGE>
CONTINENTAL MEDICAL SYSTEMS, INC. & SUBSIDIARIES
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- - ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
--------------------------------------
BALANCE AT (1) (2)
BEGINNING OF CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS - BALANCE AT END
DESCRIPTION PERIOD AND EXPENSES ACCTS - DESCRIBE DESCRIBE OF PERIOD
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1992
ALLOWANCE FOR DOUBTFUL ACCOUNTS $9,277,000 $15,576,000 $688,000 (C) ($8,464,000)(A) $17,077,000
----------------------------------------------------------------------------------------------
$9,277,000 $15,576,000 $688,000 ($8,464,000) $17,077,000
==============================================================================================
ALLOWANCE FOR CONTRACTUAL ADJUSTMENT $22,349,000 $196,059,000 $812,000 (C) ($185,260,000)(B) $33,960,000
----------------------------------------------------------------------------------------------
$22,349,000 $196,059,000 $812,000 ($185,260,000) $33,960,000
- - --------------------------------------==============================================================================================
- - ------------------------------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30, 1993
ALLOWANCE FOR DOUBTFUL ACCOUNTS $17,077,000 $19,693,000 ($19,344,000)(A) $17,426,000
----------------------------------------------------------------------------------------------
$17,077,000 $19,693,000 $0 ($19,344,000) $17,426,000
==============================================================================================
ALLOWANCE FOR CONTRACTUAL ADJUSTMENT $33,960,000 $259,257,000 ($253,405,000)(B) $39,812,000
----------------------------------------------------------------------------------------------
$33,960,000 $259,257,000 $0 ($253,405,000) $39,812,000
- - --------------------------------------==============================================================================================
- - ------------------------------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30, 1994
ALLOWANCE FOR DOUBTFUL ACCOUNTS $17,426,000 $19,365,000 ($20,106,000)(A) $16,685,000
----------------------------------------------------------------------------------------------
$17,426,000 $19,365,000 $0 ($20,106,000) $16,685,000
----------------------------------------------------------------------------------------------
ALLOWANCE FOR CONTRACTUAL ADJUSTMENT $39,812,000 $295,659,000 ($290,608,000)(B) $44,863,000
----------------------------------------------------------------------------------------------
$39,812,000 $295,659,000 $0 ($290,608,000) $44,863,000
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) WRITE-OFFS AGAINST RESERVE
(B) APPLICATION OF ALLOWANCE AGAINST THIRD PARTY ACCOUNTS RECEIVABLE
(C) BEGINNING RESERVE AS A RESULT OF THE ACQUISITION OF WEST GABLES AND ACMED
<PAGE>
CONTINENTAL MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE X
SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B
ITEM CHARGED TO COSTS AND EXPENSES
- - --------------------------------------------------------------------------------------------------------
1992 1993 1994
-------------------------------------------------
<S> <C> <C> <C>
MAINTENANCE AND REPAIRS N/A N/A N/A
DEPRECIATION AND AMORTIZATION OF INTANGIBLE ASSETS,
PREOPERATING COSTS AND SIMILAR DEFERRALS
AMORTIZATION OF GOODWILL $1,187,000 $1,818,000 $2,615,000
AMORTIZATION OF FINANCING COSTS 1,167,000 2,035,000 2,403,000
AMORTIZATION OF DEFERRED COSTS, NEW FACILITIES 7,317,000 10,258,000 10,287,000
AMORTIZATION - OTHER 1,281,000 2,245,000 3,595,000
TAXES OTHER THAN PAYROLL AND INCOME TAXES
PROPERTY TAXES N/A N/A N/A
ROYALTIES N/A N/A N/A
ADVERTISING COSTS N/A N/A N/A
- - --------------------------------------------------------------------------------------------------------
</TABLE>
N/A - AMOUNTS NOT PRESENTED AS SUCH AMOUNTS ARE LESS THAN ONE PERCENT OF NET
OPERATING REVENUES
<PAGE>
EXHIBIT INDEX
-------------
Exhibits marked with an asterisk are filed herewith. The remainder of the
exhibits have heretofore been filed with the Commission and are incorporated
herein by reference.
<TABLE>
<CAPTION>
Exhibit
Number Document Page
- - --------- ---------------------------------------------------- ----
<S> <C> <C>
3.1 Restated Certificate of Incorporation, as amended.
(9)
3.2 Certificate of Amendment of Restated Certificate of
Incorporation. (8)
3.3 By-Laws, as amended. (8)
4.1.1 Amended and Restated Credit Agreement Among
Continental Medical Systems, Inc., Certain Lenders,
and Citibank, N.A., as Agent, dated August 28, 1991
as amended by a First Amendment and a Second
Amendment. (5)
4.1.2 Third Amendment to Amended and Restated Credit
Agreement dated July 8, 1992. (5)
4.1.3 Fourth Amendment to Amended and Restated Credit
Agreement dated September 23, 1992. (8)
4.1.4 Fifth Amendment to Amended and Restated Credit
Agreement dated February 26, 1993. (9)
4.1.5 Sixth Amendment to Amended and Restated Credit
Agreement dated March 26, 1993. (6)
4.1.6 Seventh Amendment to Amended and Restated Credit
Agreement dated December 31, 1993. (10)
4.1.7* Eight Amendment to Amended and Restated Credit
Agreement dated June 17, 1994.
4.2.1 Indenture, including form of note contained
therein, dated as of August 17, 1992. (8)
4.2.2* First Supplemental Indenture dated June 22, 1994
(supplementing Indenture dated August 17, 1992).
4.3.1 Indenture, including form of note contained
therein, dated as of March 15, 1993. (9)
4.3.2* First Supplemental Indenture dated June 22, 1994
(supplementing Indenture dated March 15, 1993).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document Page
- - --------- ---------------------------------------------------- ----
<S> <C> <C>
10.1 Facility Lease between Fort Worth Rehab Associates
Limited Partnership and Tarrant County
Rehabilitation Hospital, Inc., dated as of December
19, 1988. (3)
10.1.1 Schedule identifying the documents substantially
identical to the Exhibit Number 10.1 setting forth
the material details in which the Scheduled
documents differ from the filed document. (8)
10.2 Agreement among Rocco A. Ortenzio, National Medical
Enterprises, Inc. and Rehab Hospital Services
Corporation. (11)
10.3 1986 Stock Option Plan, as amended. (11)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document Page
- - --------- ---------------------------------------------------- ----
<S> <C> <C>
10.4 Provisions of Deferred Compensation Program of Continental Medical
Systems, Inc. (7)
10.5 Indenture of Lease between Continental Medical
Systems, Inc. and Liberty Plaza Associates II. (11)
10.5.1* Schedule identifying the leases substantially
identical to Exhibit Number 10.5 setting forth the
material details in which the scheduled documents
differ from the filed document.
10.6 Employment Agreement between Rocco A. Ortenzio and
the Company, dated May 26, 1992. (5)
10.7 Employment Agreement between Robert A. Ortenzio and
the Company, dated May 26, 1992. (5)
10.8 1989 Non-Employee Directors' Stock Option Plan as
Amended through September 16, 1991. (3)
10.8.1 Amendment to 1989 Non-Employee Directors' Stock
Option Plan. (11)
10.9 1990 Restricted Stock Plan. (4)
10.10 Stock Purchase Agreement among the Company, Kenneth
Hubbard, Lynn Hubbard and Steven Baldwin, dated as
of July 1, 1990. (1)
10.11 Stock Purchase Agreement among the Company, Kenneth
Hubbard, Lynn Hubbard and Steven Baldwin, dated as
of July 1, 1992. (8)
10.12 Rights Agreement dated as of March 11, 1991 between
the Company and Security Trust Company, N.A. (2)
10.13 Adoption Agreement #007 Nonstandardized Code (S)
401(k) Profit Sharing Plan. (3)
10.14 Continental Medical Systems, Inc. Restricted Stock
Bonus Plan (effective July 1, 1991). (3)
10.15 1992 CEO Stock Option Plan, as amended (subject to
stockholder approval). (11)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document Page
- - --------- ---------------------------------------------------- ----
<S> <C> <C>
10.16 1993-94 Employee Stock Purchase Plan. (8)
10.17 1993 Nonqualified Stock Option Plan, as amended.
(11)
10.18 1994 Stock Option Plan. (11)
10.19 Letter Agreement between the Company and David G.
Nation. (11)
11* Continental Medical Systems, Inc. and Subsidiaries -
Computation of net income per common share and
common equivalent share - Years ended June 30,
1994, 1993 and 1992.
18 Letter from Price Waterhouse re change in
accounting principles. (11)
22* Subsidiaries of the Registrant.
24.1* Consent of Ernst and Young.
24.2* Consent of Price Waterhouse.
27* Financial Data Schedule.
</TABLE>
____________________________
(1) Incorporated by reference from the Company's Report on Form 8-K (File No.
0-15088), filed with the Commission on September 14, 1990.
(2) Incorporated by reference from the Company's Report on Form 8-K (File No.
0-15088) as amended on Form 8 dated April 16, 1991), filed with the
Commission on March 14, 1991.
(3) Incorporated by reference from the Company's Annual Report on Form 10-K
(File No. 0-15088), filed with the Commission on September 28, 1991.
(4) Incorporated by reference from the Company's Report on Form 10-K (File No.
0-15088), filed with the Commission on September 27, 1990.
(5) Incorporated by reference from the Company's Registration Statement on
Form S-3 (File No. 33-48848), filed with the Commission on June 26, 1992.
(6) Incorporated by reference from the Company's Report on Form 10-Q (File No.
0-15088), filed with the Commission on May 17, 1993.
(7) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-8894), filed with the Commission on September 19, 1986,
and as amended on October 2, October 27 and November 6, 1986.
(8) Incorporated by reference from the Company's Report on Form 10-K (File No.
0-15088), filed with the Commission on September 25, 1992.
(9) Incorporated by reference from the Company's Registration Statement on Form
S-4 (File No. 33-60004/22-23996, filed with the Commission on March 24,
1993.
(10) Incorporated by reference from the Company's Report on Form 10-Q (File No.
0-15088), filed with the Commission on February 14, 1994.
(11) Incorporated by reference from the Company's Annual Report on Form 10-K
(File No. 0-15088), filed with the Commission on September 27, 1993.
<PAGE>
EXHIBIT 4.1.7
EIGHTH AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
-------------------------------------
THIS EIGHTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT is dated as
of the 17th day of June, 1994, among CONTINENTAL MEDICAL SYSTEMS, INC., a
Delaware corporation ("Borrower"), the Lenders party to the Credit Agreement
described below, NATIONSBANK OF TENNESSEE, N.A., a national banking association,
successor by assignment to Maryland National Bank, as Co-Agent, and CITIBANK,
N.A., a national banking association, as Agent (the "Agent").
WITNESSETH:
-----------
WHEREAS, the Borrower, Lenders, and Agent entered into an Amended and
Restated Credit Agreement dated as of August 28, 1991, as amended as of December
31, 1991, March 31, 1992, July 8, 1992, September 23, 1992, February 26, 1993,
March 26, 1993 and December 10, 1993 (the "Credit Agreement");
WHEREAS, the Borrower has requested an increase in the Letter of Credit
Commitment to $45,000,000 and other amendments to the Credit Agreement; and
WHEREAS, the Agent and the Lenders executing this Eighth Amendment have
agreed to make such amendments upon the terms and conditions set forth below;
NOW, THEREFORE, for valuable consideration hereby acknowledged, the
Borrower, the Lenders executing this Eighth Amendment and the Agent agree as
follows:
Section 1. Definitions. Unless otherwise defined herein, terms are used
-----------
herein as defined in the Credit Agreement.
Section 2. Amendment of Section 1.01. Section 1.01 of the Credit
-------------------------
Agreement is hereby amended by (a) deleting the definition of "Letter of Credit
Commitment" and inserting in place thereof the following: "Letter of Credit
----------------
Commitment" means $45,000,000." and (b) adding the following new definitions of
- - ----------
"Asset Sale," "EBDIT," "Fair Market Value" and "Net Cash Proceeds" (in
appropriate alphabetical order):
"Asset Sale" means any sale or other disposition (including, without
----------
limitation, by way of merger, consolidation or sale of stock), directly or
indirectly, in one or a series of related transactions, of (a) any
hospital, facility, business, division or entity; or (b) any other
properties or assets sold or disposed of other than in the ordinary course
of business; provided that the term "Asset Sale" shall not include (i) any
transfer
1
<PAGE>
of properties or assets of the Borrower to any Subsidiary of the Borrower,
or of any Subsidiary to the Borrower or any other Subsidiary of the
Borrower, in accordance with the terms of this Agreement or (ii) any sale
or other disposition of an equity interest in any Subsidiary of the
Borrower (whether in one or a series of related transactions) that
immediately thereafter continues to be a Subsidiary of the Borrower.
"EBDIT" means, for any Person and its Subsidiaries determined on a
-----
consolidated basis, the sum of pre-Tax income (before deduction of minority
interests in businesses or entities that are included on the consolidated
financial statements of such Person and its Subsidiaries), plus
----
depreciation, amortization, and interest expense, all determined in
accordance with GAAP, minus income attributable to minority interests in
-----
businesses or entities that are not included on the consolidated financial
statements of such Person and its Subsidiaries (except to the extent of
distributions in cash in respect thereof actually received), minus
-----
Dividends paid in cash pursuant to Section 6.08 hereof to the extent not
otherwise deducted in the calculation of income, and adjusted (a) to
exclude:
(i) any extraordinary or non-recurring non-cash items deducted
from or included in the calculation of pre-Tax income;
(ii) any gains or losses on the sale or other disposition of
assets or equity interests other than the sale or disposition of
assets in the ordinary course of business;
(iii) (A) the income for the period prior to and including the
date of sale or disposition that is attributable to a business or
entity that is included on the consolidated financial statements of
such Person and its Subsidiaries in which equity interests have been
sold or disposed of if after such sale or disposition the business or
entity ceases to be included on the consolidated financial statements
of such Person and its Subsidiaries (provided that, in any case in
which such Person or any of its Subsidiaries retains equity interests
in such business or entity, there shall be no exclusion of the income
which was paid in cash Dividends with respect to the equity interests
so retained), and (B) the income for the period prior to and including
the date of sale or disposition that
2
<PAGE>
was paid in cash Dividends with respect to minority interests which
have been sold or disposed of by such Person and any of its
Subsidiaries; and
(iv) the income statement effect attributable to any consolidated
Person (or any business or entity included therein) or other Person of
which substantially all assets have been sold;
and (b) to include:
(i) in the case of any acquisition of any business or entity that
becomes or is included on the consolidated financial statements of
such Person and its Subsidiaries in accordance with Section 6.06(b) or
(c) hereof, the sum of pre-Tax income (before deduction of minority
interests), plus depreciation, amortization and interest expense of
----
such business or entity, during the period, if any, that such business
or entity was not included in the consolidated financial statements of
such Person and its Subsidiaries, all determined in accordance with
GAAP and adjusted to exclude any extraordinary or non-recurring non-
cash items deducted from or included in the calculation of pre-Tax
income during such period; and
(ii) in the case of any acquisition by such Person or any of its
Subsidiaries of a minority interest, the amount of Dividends paid in
cash with respect to such interest during the applicable period prior
to such acquisition.
"Fair Market Value" means, with respect to any asset or equity
-----------------
interest, the sale or lease value, as the case may be, that would be
obtained in an arm's-length transaction between an informed and willing
seller or lessor under no compulsion to sell or lease and an informed and
willing buyer or lessee.
"Net Cash Proceeds" means, with respect to any Asset Sale, the
-----------------
proceeds thereof in the form of cash or cash equivalents (within the
meaning of GAAP), including payments in respect of deferred payment
obligations when received in the form of, or stock or other assets when
disposed for, cash or cash equivalents (except to the extent that such
obligations are financed or sold with
3
<PAGE>
recourse to the Borrower or any of its Subsidiaries), net of (a) brokerage
commissions and other reasonable fees and expenses (including fees and
expenses of counsel and investment bankers) related to such Asset Sale, (b)
provisions for all taxes payable as a result of such Asset Sale, (c)
payments made to retire (i) Debt that is secured by the assets or
properties the subject of such Asset Sale or (ii) Debt of the Subsidiary
holding such assets or properties relating exclusively to such assets or
properties (but only to the extent that the amount of such Debt exceeds the
amount of receivables and other current assets retained by such Subsidiary
after such Asset Sale), (d) amounts required to be paid to any Person
(other than the Borrower or any of its Subsidiaries) owning a beneficial
interest in the assets subject to the Asset Sale or in the Subsidiary
holding such assets and (e) appropriate amounts to be provided by the
Borrower or any of its Subsidiaries, as the case may be, as a reserve, in
accordance with GAAP, against any liabilities associated with such Asset
Sale and retained by the Borrower or any of its Subsidiaries, as the case
may be, after such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale, all as reflected in a certificate of an
officer of the Borrower delivered to the Agent.
Section 3. Amendment of Section 2.03. Section 2.03 of the Credit
-------------------------
Agreement is hereby amended by adding a new subsection (h) to read as follows:
(h) The Borrower agrees to pay to the Agent, for the account of each
Lender who executes the Eighth Amendment to this Agreement, an amendment
fee, payable on the effective date of the Eighth Amendment to this
Agreement (or, if later, the date of such Lender's execution thereof),
equal to 0.0833% times the amount of such Lender's Specified Percentage of
the Commitment.
Section 4. Amendment of Section 2.06. Section 2.06 of the Credit
-------------------------
Agreement is hereby amended by redesignating subsection (c) thereof as
subsection (d) and inserting a new subsection (c) to read as follows:
(c) In the event of an Asset Sale by the Borrower or any of its
Subsidiaries on or after the Conversion Date, the Borrower shall prepay the
principal amount of the Advances then outstanding in an amount equal to 75%
of the Net Cash Proceeds from such Asset Sale not later than ten days after
the receipt of such consideration by
4
<PAGE>
the Borrower or such Subsidiary. If no Advances are then outstanding, the
Borrower shall deposit with the Agent, as security for its reimbursement
obligations with respect to the Letters of Credit then outstanding, cash or
Cash Equivalents in an amount equal to the lesser of 75% of such Net Cash
Proceeds or the aggregate Stated Amount of such Letters of Credit.
Section 5. Amendment of Section 6.05. Section 6.05 of the Credit
-------------------------
Agreement is hereby amended by (a) redesignating clause (iv) of subsection (a)
thereof as clause (v) and inserting a new clause (iv) after clause (iii) to
read: "(iv) any lease or sublease of a portion of any facility, at no less than
the Fair Market Value thereof, intended to reduce excess capacity or improve
operating results at such facility"; and (b) deleting subsection (c) thereof in
its entirety and inserting in place thereof the following new subsection (c):
(c) The Borrower may dispose of all or substantially all assets of, or
all or substantially all or a portion of the equity interests (directly or
by dilution of equity interests through the issuance of additional equity
by the applicable Subsidiary) in, any of its Subsidiaries or any other
Person (other than The Kelton Corporation); provided, however, that:
(i) no Default or Event of Default shall exist immediately prior
thereto or would result therefrom (after giving pro forma effect
thereto as if such disposition had occurred at the end of the fiscal
quarter then most recently ended for the purposes of Section 6.01
hereof);
(ii) in the case of a disposition of an equity interest in any
Person that immediately thereafter ceases to be a Subsidiary of the
Borrower, at the time of the disposition: (A) the amount of the
equity interest retained by the Borrower could be acquired in
compliance with Section 6.06(b)(i) and (vii) hereof (and for the
purposes of such Section such interest shall be deemed to be then
acquired at the then book value thereof); (B) any loan to or guarantee
for such Person made by the Borrower or any of its Subsidiaries is
repaid (or, in the case of a guarantee, satisfied) or, if such loan or
guarantee will continue to be outstanding immediately after such
disposition, it could be incurred in compliance with Section 6.10(iv)
hereof (and for the purposes of such Section such loan or
5
<PAGE>
guarantee shall be deemed to be then made); and (C) any Debt of any
other Subsidiary of the Borrower to such Person that will continue to
be outstanding immediately after such disposition could be incurred in
compliance with Section 6.02(j) hereof (and for the purposes of such
Section such Debt shall be deemed to be then incurred); and
(iii) in case of a disposition pursuant to clause (a)(iv) above or
this clause (c) made on or after the date that the aggregate net book
value of all of the assets and equity interests disposed of pursuant
to such clauses after August 17, 1992 exceeds (or after giving effect
thereto would exceed) 5% of the consolidated total assets (as
determined in accordance with GAAP) of the Borrower and its
Subsidiaries as of the Quarterly Date immediately prior to such
disposition, (A) the Borrower or the Subsidiary making such
disposition shall receive consideration at the time of such
disposition at least equal to the Fair Market Value of the assets or
equity interests disposed of and (B) if such disposition is on or
after the Conversion Date, at least 75% of the proceeds of such
disposition when received shall consist of cash or cash equivalents
(within the meaning of GAAP).
Section 6. Amendment of Section 6.20. Section 6.20 of the Credit
-------------------------
Agreement is hereby amended by adding a new subsection (c) to read as follows:
(c) Without the prior written consent of the Majority Lenders, neither
the Borrower nor any of its Subsidiaries shall purchase or acquire any
Subordinate Debt prior to its maturity or make an offer to any holder of
Subordinate Debt to purchase or acquire any Subordinate Debt prior to its
maturity, except that from time to time the Borrower may purchase (and make
offers to purchase) the Debt outstanding under the Subordinate Debt
Indentures upon the following conditions:
(i) the amount of cash spent by the Borrower to purchase such
Debt (excluding any accrued interest thereon) shall not exceed the
following: (A) during the period from the effective date of the
Eighth Amendment to this Agreement through September 30, 1994, the sum
of(1) $50,000,000, plus (2) the Net Cash
----
6
<PAGE>
Proceeds from Asset Sales received by the Borrower during such period,
and (B) during any subsequent fiscal quarter, the sum of (1)
$25,000,000, plus (2) the Net Cash Proceeds from Asset Sales received
----
by the Borrower during such fiscal quarter;
(ii) the aggregate amount of cash spent by the Borrower to make all
purchases of such Debt (excluding accrued interest thereon) shall in
no event exceed $100,000,000;
(iii) no purchases of such Debt may be made during any fiscal
quarter unless:
(A) the ratio of (1) the sum of (x) Total Senior Debt
outstanding at the date of such purchase and immediately after
giving effect thereto, plus (y) the aggregate Stated Amount of
----
all letters of credit then outstanding issued for the account of
the Borrower or any of its Subsidiaries (including, without
limitation, the Letters of Credit) to (2) the difference of (x)
EBDIT of the Borrower and its Subsidiaries, minus (y) Dividends
-----
paid in cash to minority interests, for the four fiscal quarters
most recently ended prior to the date of such purchase shall be
less than 0.75 to 1.00; and
(B) (1) the product of EBDIT of the Borrower and its
Subsidiaries for the two fiscal quarters most recently ended
prior to such purchase times 2.00 shall be not less than (2)
-----
$100,000,000 minus an amount equal to 75% of such EBDIT
-----
attributable to any hospital, facility, business, division or
entity that has been sold or otherwise disposed of (including,
without limitation, by way of merger, consolidation or sale of
stock) during such two fiscal quarters;
(iv) no Default or Event of Default shall then exist or would
result from such purchase
7
<PAGE>
(after giving pro forma effect thereto as if such purchase had
occurred at the end of the fiscal quarter then most recently ended for
the purposes of Section 6.01 hereof); and
(v) such purchase is effected prior to the Conversion Date or, if
effected on or after the Conversion Date, all of the Advances shall
have been repaid in full and the Borrower shall have deposited with
the Agent, as security for its reimbursement obligations with respect
to Letters of Credit then outstanding, cash or Cash Equivalents in an
amount equal to the aggregate Stated Amount thereof.
Section 7. Amendment of Section 7.01. Section 7.01 of the Credit
-------------------------
Agreement is hereby amended by (a) deleting the word "or" before the number
"6.11" appearing in subsection (c) thereof and adding after such number the
phrase ", or 6.20(c)"; and (b) by eliminating the phrase "purchase, acquire" in
clauses (iii) and (iv) of subsection (p) thereof and inserting in place thereof
the phrase "purchase or acquire (except as permitted by Section 6.20(c)
hereof)."
Section 8. Effectiveness of Eighth Amendment; Conditions to Amendments.
-----------------------------------------------------------
(a) This Eighth Amendment shall be effective pursuant to Section 9.01
of the Credit Agreement upon the execution of this Eighth Amendment by the
Agent and the Majority Lenders.
(b) The amendments effected by Sections 2 through 7 of this Eighth
Amendment shall not become effective until the following shall be
satisfied, in a manner acceptable to the Agent:
(i) All of the Subsidiary Guarantors and Borrowing Subsidiaries
shall have executed and delivered the Consent and Agreement attached
to this Eighth Amendment.
(ii) The Agent shall have received an opinion of counsel to the
Borrower, in form and substance satisfactory to the Agent, (A) that
this Eighth Amendment has been duly authorized, executed and delivered
by the Borrower and constitutes the legal, valid, and binding
obligation of the Borrower, enforceable in accordance with its terms
(subject as to enforcement of remedies to any
8
<PAGE>
applicable bankruptcy, reorganization, moratorium, or similar Laws or
principles of equity affecting enforcement of creditors' rights
generally), and (B) as to such other matters as the Agent deems
appropriate.
(iii) The Agent shall have received certificates from the
Secretaries of State and other appropriate officials of the States of
Delaware and Pennsylvania, to the effect that the Borrower is in good
standing and duly organized.
(iv) The Borrower shall have paid the fees required by Section
2.03(h) of the Credit Agreement, as amended hereby, to be paid upon
the effectiveness of this Eighth Amendment.
(v) The Agent shall have received such other documents,
instruments, and certificates as it shall deem necessary or
appropriate in connection with this Eighth Amendment and the
transactions contemplated hereby.
(c) In addition to the conditions set forth in subsection (b) above,
the amendment effected by Sections 2(a) and 5 of this Eighth Amendment
shall not be effective until this Eighth Amendment shall have been executed
by all of the Lenders.
Section 9. Representations and Warranties. The Borrower represents and
------------------------------
warrants that this Eighth Amendment has been duly authorized, executed and
delivered by the Borrower and constitutes the Borrower's legal, valid, and
binding obligation, enforceable in accordance with its terms (subject as to
enforcement of remedies to any applicable bankruptcy, reorganization,
moratorium, or similar laws or principles of equity affecting the enforcement of
creditors' rights generally). The Borrower further represents and warrants that
(a) there exists no Default or Event of Default under the Credit Agreement on
the date hereof (before and after giving effect to the transactions contemplated
hereby), (b) the representations and warranties set forth in Article V of the
Credit Agreement are true and correct on the date hereof (before and after
giving effect to the transactions contemplated hereby), and (c) it has complied
with all agreements and conditions to be complied with by it under the Credit
Agreement and other Loan Papers by the date hereof.
Section 10. Entire Agreement; Ratification. This Eighth Amendment
------------------------------
embodies the entire agreement of the parties, and may not be contradicted by
evidence of prior, contemporaneous, or subsequent oral agreements of any
parties. This Eighth Amendment
9
<PAGE>
supersedes any prior agreements or understandings with respect to the subject
matter hereof. Except as modified or supplemented in connection herewith, the
Credit Agreement and all other Loan Papers shall continue in full force and
effect.
SECTION 11. GOVERNING LAW. THIS EIGHTH AMENDMENT SHALL BE GOVERNED BY
-------------
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND THE
UNITED STATES OF AMERICA.
Section 12. Counterparts. This Eighth Amendment may be executed in any
------------
number of counterparts, all of which taken together shall constitute one and the
same instrument. In making proof hereof, it shall not be necessary to produce
or account for any counterpart other than one signed by the party against which
enforcement is sought.
IN WITNESS WHEREOF, this Eighth Amendment to Amended and Restated Credit
Agreement is executed as of the date first set forth above.
BORROWER: CONTINENTAL MEDICAL SYSTEMS, INC.
By: /s/ Dennis L. Lehman
-------------------------------
Dennis L. Lehman,
Senior Vice President
AGENT: CITIBANK, N.A., as Agent
By: /s/ Barbara A. Cohen
-------------------------------
Title Vice President
LENDERS: CITIBANK, N.A., individually
By: /s/ Barbara A. Cohen
---------------------------------
Title Vice President
10
<PAGE>
NATIONSBANK OF TENNESSEE, N.A.
(formerly known as Sovran Bank/Tennessee)
By: /s/ Patrick J. Neal
------------------------------------
Title Assistant Vice President
MELLON BANK
By: /s/ Amy L. Evans
-------------------------------------
Title Assistant Vice President
PNC BANK, NATIONAL ASSOCIATION
(formerly known as Pittsburgh National
Bank)
By: /s/ Frank A. Taucher
-------------------------------------
Title Vice President
THE BANK OF CALIFORNIA, N.A.
By: /s/ Lynn Vine
------------------------------------
Title Vice President
THE CHASE MANHATTAN BANK, N.A.
By: /s/ Dawn Lee Lum
------------------------------------
Title Vice President
CORESTATES BANK, N.A.
By: /s/ Paul Hogan
------------------------------------
Title Assistant Vice President
11
<PAGE>
CONSENT AND AGREEMENT
The undersigned, being all of the Subsidiary Guarantors and Borrowing
Subsidiaries (each as defined in the Credit Agreement), hereby consent and agree
to the foregoing Eighth Amendment to the Credit Agreement and hereby confirm
their respective guarantees and grants of security interests and other
obligations under the Loan Papers (as defined in the Credit Agreement), which
shall remain in full force and effect and be applicable to the Credit Agreement
and the Loan Papers, as amended by the foregoing Eighth Amendment, including
without limitation the increase in the amount of the Letter of Credit Commitment
(as defined in the Credit Agreement) effected by the foregoing Eighth Amendment.
ADVANCED CARE MEDICINE, INC.
APCO MEDICAL LABORATORIES, INC.
BATON ROUGE REHAB, INC.
BRAINTREE REHABILITATION VENTURES, INC.
CAPITAL REHABILITATION HOSPITAL, INC.
(formerly New London Rehabilitation Hospital, Inc.)
CENTRAL ARIZONA REHABILITATION HOSPITAL, INC.
CENTRAL ARKANSAS OUTPATIENT CENTERS, INC.
CHICO REHABILITATION HOSPITAL, INC.
CLEAR LAKE REHABILITATION HOSPITAL, INC.
CMS ALEXANDRIA REHABILITATION, INC.
CMS BATON ROUGE REHABILITATION, INC.
CMS BEAUMONT REHABILITATION, INC.
CMS CONTRA COSTA CLINIC, INC.
(formerly Unit Management Group, Inc.,
formerly Northeast Wisconsin Rehabilitation
Hospital, Inc.)
CMS DENVER REHABILITATION, INC.
CMS DEVELOPMENT AND MANAGEMENT COMPANY, INC.
CMS ELIZABETHTOWN, INC.
CMS FAYETTEVILLE REHABILITATION, INC.
CMS FORT WORTH REHABILITATION, INC.
CMS FRESNO REHABILITATION, INC.
CMS HOUSTON REHABILITATION, INC.
CMS KANSAS CITY REHABILITATION, INC.
CMS OF OHIO, INC.
CMS OUTPATIENT CENTERS OF NORTH TEXAS, INC.
CMS OUTPATIENT CENTERS OF SOUTH TEXAS, INC.
CMS PENNSYLVANIA, INC.
(formerly CMS Pennsylvania Rehabilitation, Inc.)
CMS REHABILITATION CENTER OF HIALEAH, INC.
CMS RUSTON REHABILITATION, INC.
CMS SAN DIEGO REHAB, INC.
CMS SHERWOOD REHABILITATION, INC.
CMS SOUTH MIAMI REHAB, INC.
12
<PAGE>
CMS SPORTSMED CLINIC, INC.
(formerly CMS Los Gatos, Inc.)
CMS TOPEKA REHABILITATION, INC.
CMS TRI-CITIES REHABILITATION HOSPITAL, INC.
CMS TUSTIN REHABILITATION, INC.
CMS WICHITA REHABILITATION, INC.
CMS WORK-ABLE, INC.
CMS WORK-ABLE OF PARAGOULD, INC.
CMS WORKNET OF BATON ROUGE, INC.
CMSI SYSTEMS OF TEXAS, INC.
COLORADO OUTPATIENT CENTERS, INC.
(formerly CMS Kokomo Rehabilitation, Inc.)
COMPHEALTH, INC.
COMPHEALTH MEDICAL STAFFING, INC.
CONTINENTAL MEDICAL OF ARIZONA, INC.
CONTINENTAL MEDICAL OF COLORADO, INC.
CONTINENTAL MEDICAL OF KENTUCKY, INC.
CONTINENTAL MEDICAL OF PALM BEACH, INC.
CONTINENTAL MEDICAL SYSTEMS OF FLORIDA, INC.
CONTINENTAL REHAB OF W.F., INC.
CONTINENTAL REHABILITATION HOSPITAL OF ARIZONA, INC.
ELIZABETHTOWN MANAGEMENT COMPANY, INC.
FAIRFIELD REHABILITATION HOSPITAL, INC.
FAIRLAND NURSING AND RETIREMENT HOME, INC.
GREAT PLAINS REHABILITATION HOSPITAL, INC.
HARTFORD REHABILITATION HOSPITAL, INC.
HCA WESLEY REHABILITATION CLINIC OF LIBERAL, INC.
(formerly CMS Chico Rehabilitation, Inc.)
HCA WESLEY REHABILITATION HOSPITAL, INC. (SPECIFIED DEBT)
HIALEAH CONVALESCENT CENTERS, INC.
INDIANA OUTPATIENT CENTERS, INC.
INNOVATIVE HEALTH ALLIANCES, INC.
(formerly Memphis Rehabilitation Hospital, Inc.)
K.C. REHABILITATION HOSPITAL, INC. (SPECIFIED DEBT)
KANSAS OUTPATIENT CENTERS, INC.
KENTFIELD HOSPITAL CORPORATION
KOKOMO REHABILITATION HOSPITAL, INC.
LOUISIANA OUTPATIENT CENTERS, INC.
MANAGEMENT CARE THERAPY SERVICES, INC.
MARYLAND REHABILITATION HOSPITAL, INC.
MID-AMERICA OUTPATIENT CENTERS, INC.
(formerly Pikeville Rehabilitation Hospital, Inc.)
NEVADA REHABILITATION HOSPITAL, INC.
NEW ALBANY REHABILITATION HOSPITAL, INC.
NORTHEAST OKLAHOMA REHABILITATION HOSPITAL, INC.
NORTH LOUISIANA REHABILITATION CENTER, INC.
(SPECIFIED DEBT)
NORTHEAST ARKANSAS REHABILITATION UNIT, INC.
NORTHERN VIRGINIA REHABILITATION HOSPITAL, INC.
(formerly Iliff Nursing Home, Inc.)
ORANGE REHABILITATION HOSPITAL, INC.
13
<PAGE>
P.G. REHABILITATION HOSPITAL, INC.
PALM SPRINGS REHABILITATION HOSPITAL, INC.
PARK MANOR NURSING HOME, INC.
PINELLAS-RODRIGUEZ REHABILITATIVE ASSOCIATES LIMITED, INC.
PREMIER ANCILLARY SERVICES, INC.
(formerly RMS Clinics, Inc.)
PREMIER REHAB, INC.
(formerly Pro-Rehab, Inc.) (SPECIFIED DEBT)
PREMIER REHABILITATION MANAGEMENT, INC.
(formerly Communi-Care/Pro Rehab Management, Inc.)
(SPECIFIED DEBT)
PREMIER REHABILITATION SERVICES, INC.
(formerly Communi-Care of America, Inc.)
(SPECIFIED DEBT)
PRO THERAPY OF AMERICA, INC.
PROFESSIONAL MANAGEMENT RESOURCES, INC.
PROFESSIONAL THERAPY INTERNATIONAL, INC.
PROFESSIONAL THERAPY STAFFING, INC.
RCM MANAGEMENT COMPANY, INC.
REHAB JOINT VENTURES, INC.
REHAB RESOURCES, INC.
(formerly Rehab America Management Services, Inc.)
REHABILITATIVE ASSOCIATES, INC.
REHABILITATION HOSPITAL OF COLORADO SPRINGS, INC.
REHABILITATION HOSPITAL OF FORT WAYNE, INC.
REHABILITATION HOSPITAL OF NEVADA-LAS VEGAS, INC.
(formerly SR Sub, Inc.)
REHABILITATION HOSPITAL OF PLANO, INC.
REHABWORKS, INC.
REHABWORKS OF CALIFORNIA, INC.
(formerly California Therapy, Inc.)
ROMANO REHABILITATION HOSPITAL, INC.
SD ACQUISITION CORPORATION
SD PARTNERS, INC.
SAN BERNARDINO REHABILITATION HOSPITAL, INC.
SELECTIVE REHABILITATIVE SERVICES, INC.
SELECTREHAB, INC.
(formerly CMS Unit Management, Inc.)
SHERWOOD REHABILITATION HOSPITAL, INC.
SIERRA PAIN AND OCCUPATIONAL REHABILITATION CENTER, INC.
(formerly Coastal Empire Rehabilitation Hospital, Inc.)
SOUTHEAST TEXAS REHABILITATION HOSPITAL, INC.
TARRANT COUNTY REHABILITATION HOSPITAL, INC.
TERRE HAUTE REHABILITATION HOSPITAL, INC.
THE KELTON CORPORATION
THE NURSING HOME AT CHEVY CHASE, INC.
THE REHAB SOURCE, INC.
TULSA REHABILITATION HOSPITAL, INC.
TYLER REHABILITATION HOSPITAL, INC.
14
<PAGE>
WESTERN NEURO CARE, INC.
WESTERN NEUROLOGIC RESIDENTIAL CENTERS, INC.
WESTERN NEURO RESIDENTIAL, INC.
WICHITA FALLS REHABILITATION HOSPITAL, INC.
BEAUMONT REHAB ASSOCIATES LIMITED PARTNERSHIP
(SPECIFIED DEBT)
By: Southeast Texas Rehabilitation Hospital, Inc.,
General Partner
CENTRAL ARIZONA REHAB ASSOCIATES, L.P.
By: Central Arizona Rehabilitation Hospital, Inc.,
General Partner
CENTRAL ARKANSAS REHABILITATION ASSOCIATES, L.P.
(SPECIFIED DEBT)
By: Sherwood Rehabilitation Hospital, Inc.,
General Partner
CENTRAL LOUISIANA REHAB ASSOCIATES, L.P.
(SPECIFIED DEBT)
By: CMS Alexandria Rehabilitation, Inc.,
General Partner
CMS REHAB OF W.F., L.P. (SPECIFIED DEBT)
By: Continental Rehab of W.F., Inc.,
General Partner
CMS REHABILITATION CENTER OF SOUTH MIAMI
(SPECIFIED DEBT)
By: CMS South Miami Rehab, Inc.,
General Partner
COLLIN COUNTY REHAB ASSOCIATES LIMITED PARTNERSHIP
(SPECIFIED DEBT)
By: Rehabilitation Hospital of Plano, Inc.,
General Partner
HELMWOOD ASSOCIATES LIMITED PARTNERSHIP
(SPECIFIED DEBT)
By: CMS Elizabethtown, Inc.,
General Partner
HOUSTON REHABILITATION ASSOCIATES
(SPECIFIED DEBT)
By: Romano Rehabilitation Hospital, Inc.,
General Partner
KOKOMO REHABILITATION HOSPITAL, L.P.
By: Kokomo Rehabilitation Hospital, Inc.,
General Partner
15
<PAGE>
LAKEVIEW REHABILITATION GROUP PARTNERS
(SPECIFIED DEBT)
By: Continental Medical of Kentucky, Inc.,
General Partner
LIFELINES REHABILITATION SERVICES
(SPECIFIED DEBT)
By: Rehab Joint Ventures, Inc.,
General Partner
MARYLAND REHAB ASSOCIATES, L.P.
By: Maryland Rehabilitation Hospital, Inc.,
General Partner
NORTHEAST OKLAHOMA REHAB ASSOCIATES, L.P.
By: Northeast Oklahoma Rehabilitation Hospital,
Inc., General Partner
NORTHWEST ARKANSAS REHABILITATION ASSOCIATES
(SPECIFIED DEBT)
By: CMS Fayetteville Rehabilitation, Inc.,
General Partner
PHYSICAL THERAPY AND SPORTS MEDICINE CENTER PARTNERSHIP
(SPECIFIED DEBT)
By: Pro Therapy of America, Inc.,
General Partner
PRIDE/BRAINTREE JOINT VENTURE
By: Braintree Rehabilitation Ventures, Inc.,
General Partner
REHAB HOSPITAL OF FORT WAYNE GENERAL PARTNERSHIP
(SPECIFIED DEBT)
By: Rehabilitation Hospital of Fort Wayne, Inc.
REHABILITATION HOSPITAL OF NEVADA-LAS VEGAS, L.P.
By: Rehabilitation Hospital of Nevada-Las Vegas, Inc.,
General Partner
RENO REHAB ASSOCIATES, LIMITED PARTNERSHIP
By: Nevada Rehabilitation Hospital, Inc.,
General Partner
SAN BERNARDINO REHABILITATION HOSPITAL
(SPECIFIED DEBT)
By: San Bernardino Rehabilitation Hospital, Inc.,
General Partner
16
<PAGE>
SAN DIEGO HEALTH ASSOCIATES LIMITED PARTNERSHIP
By: SD Acquisition Corporation,
General Partner
SAN DIEGO REHAB LIMITED PARTNERSHIP
(SPECIFIED DEBT)
By: San Diego Rehabilitation Associates,
General Partner
By: CMS San Diego Rehab, Inc.,
General Partner
SAN DIEGO REHABILITATION ASSOCIATES
(SPECIFIED DEBT)
By: CMS San Diego Rehab, Inc.,
General Partner
SAN JOAQUIN VALLEY REHABILITATION HOSPITAL,
A DELAWARE LIMITED PARTNERSHIP
(SPECIFIED DEBT)
By: Orange Rehabilitation Hospital, Inc.,
General Partner
SOUTH DADE NURSING HOME, LTD.,
(SPECIFIED DEBT)
By: Continental Medical Systems of Florida, Inc.,
General Partner
SOUTHERN ARIZONA REGIONAL REHABILITATION HOSPITAL, L.P.
(SPECIFIED DEBT)
By: Continental Rehabilitation Hospital of Arizona, Inc.,
General Partner
SPORTSMED ASSOCIATES (SPECIFIED DEBT)
By: CMS Sportsmed Clinic, Inc.,
General Partner
TERRE HAUTE REGIONAL REHABILITATION HOSPITAL, L.P.
(SPECIFIED DEBT)
By: Terre Haute Rehabilitation Hospital, Inc.,
General Partner
TRI-CITIES REHABILITATION HOSPITAL, L.P.
(SPECIFIED DEBT)
By: CMS Tri-Cities Rehabilitation Hospital, Inc.,
General Partner
TULSA REHAB HOSPITAL, L.P.
By: Tulsa Rehabilitation Hospital, Inc.,
General Partner
17
<PAGE>
TYLER REHAB ASSOCIATES, L.P.
(SPECIFIED DEBT)
By: Tyler Rehabilitation Hospital, Inc.,
General Partner
By: /s/ Dennis L. Lehman
------------------------------------------
Dennis L. Lehman, Vice President
ACMED THERAPY TECHNOLOGIES CORP.
CHS THERAPY TECHNOLOGIES CORP.
CMS CAPITAL VENTURES, INC.
CMS REHAB TECHNOLOGIES CORP.
COA THERAPY TECHNOLOGIES CORP.
REHAB CONCEPTS CORP.
RWI THERAPY TECHNOLOGIES CORP.
VTA THERAPY TECHNOLOGIES CORP.
(formerly CMS Appleton Rehabilitation, Inc.)
By: /s/ William L. Pegler
---------------------------------------------
William L. Pegler, Vice President
KANSAS REHABILITATION HOSPITAL, INC.
(SPECIFIED DEBT)
By: /s/ Anthony F. Misitano
----------------------------------------------
Anthony F. Misitano, Vice President
CMS SAN DIEGO SURGICAL, INC.
By: /s/ David G. Nation
----------------------------------------------
David G. Nation, Vice President
18
<PAGE>
CMS PHYSICIAN SERVICES, INC.
(formerly CMS Washington Rehabilitation, Inc.)
ENCOMPUS, INC.
KRON CLINICAL SERVICES, L.P.
(SPECIFIED DEBT)
By: CMS Physician Services, Inc.,
General Partner
VTA MANAGEMENT SERVICES, INC.
By: /s/ Dennis L. Lehman
----------------------------------------------------
Dennis L. Lehman, Treasurer
LAFAYETTE REHABILITATION HOSPITAL, INC.,
(formerly New Bern Rehabilitation Hospital, Inc.)
By: /s/ Edward T. Stinson
-----------------------------------------------------
Edward T. Stinson, President
19
<PAGE>
EXHIBIT 4.2.2
FIRST SUPPLEMENTAL INDENTURE
Dated as of June 22, 1994
----------
FIRST SUPPLEMENTAL INDENTURE, dated as of June 22, 1994 (the "First
Supplemental Indenture"), between CONTINENTAL MEDICAL SYSTEMS, INC., a Delaware
corporation (hereinafter called the "Company"), and NATIONSBANK OF VIRGINIA,
N.A., a national banking corporation, as trustee under the Indenture referred to
below (hereinafter called the "Trustee").
WHEREAS, the Company and the Trustee are parties to an Indenture, dated as
of August 17, 1992 (hereinafter called the "Existing Indenture", all capitalized
terms used in this First Supplemental Indenture and not otherwise defined being
used as defined in the Existing Indenture), pursuant to which the Company issued
its 10-7/8% Senior Subordinated Notes due 2002 (hereinafter called the
"Securities");
WHEREAS, on June 7, 1994, the Company solicited (the "Solicitation")
consents to amend certain provisions of the Existing Indenture;
WHEREAS, the Existing Indenture provides that, when authorized by a Board
Resolution, indentures supplemental thereto may be executed and delivered by the
Company and the Trustee with the consent of the Holders of not less than a
majority in principal amount of the Outstanding Securities (or in certain cases
the consent of the Holder of each Outstanding Security affected thereby), such
consent to be by Act of said Holders delivered to the Company and the Trustee;
WHEREAS, pursuant to the Solicitation, the Holders of at least a majority
in principal amount of the Outstanding Securities have so consented to the
execution and delivery of this First Supplemental Indenture; and
WHEREAS, all things necessary have been done to make this First
Supplemental Indenture, when executed and delivered by the Company, the legal,
valid and binding agreement of the Company, in accordance with its terms.
<PAGE>
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
The parties hereto mutually covenant and agree as follows:
PART ONE
Section 1009 of the Existing Indenture is hereby supplemented, modified and
restated to read as set forth in Exhibit A to this First Supplemental Indenture.
PART TWO
(S) 1. This First Supplemental Indenture shall be construed as supplemental
to the Indenture and shall form a part thereof, and the Existing Indenture is
hereby incorporated by reference herein and, as supplemented, modified and
restated hereby, is hereby ratified, approved and confirmed.
(S) 2. This First Supplemental Indenture shall be governed by and construed
in accordance with the laws of the State of New York.
(S) 3. This First Supplemental Indenture may be signed in any number of
counterparts with the same effect as if the signatures to each counterpart were
upon a single instrument, and all such counterparts together shall be deemed an
original of this First Supplemental Indenture.
(S) 4. The First Supplemental Indenture shall be effective and operative on
the date and time hereof.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental
Indenture to be duly executed, and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.
CONTINENTAL MEDICAL SYSTEMS, INC.
By: /s/ Dennis Lehman
--------------------
Name: Dennis Lehman
Title: Senior V.P.
Attest: /s/ David Nation
---------------------
Name: David Nation
Title: Secretary
NATIONSBANK OF VIRGINIA, N.A.,
as Trustee
By: /s/ Franklin S. Wood
---------------------
Name: Franklin S. Wood
Title: Assistant Vice President
Attest: /s/ Bob Richardson
--------------------
Name: Bob Richardson
Title: Vice President
3
<PAGE>
STATE OF Virginia )
) SS.:
CITY OF Richmond )
On the 10 day of June, 1994, before me personally came Franklin S. Wood and
Bob Richardson respectively, to me known, who, being by me duly sworn, did
acknowledge before me that they reside at Richmond, VA and Midlothian, VA,
respectively; that they are Assistant VP and VP, respectively, of NationsBank of
Virginia, N.A., one of the corporations described in and which executed the
above instrument; that they know the corporate seal of such corporation; that
the seal affixed to said instrument is such corporate seal; that it was so
affixed pursuant to authority of the Board of Directors of such corporation; and
that they signed their names thereto pursuant to like authority.
(NOTARIAL SEAL)
/s/ Sheliah B. Berryman
--------------------------------
My Commission Expires 8/31, 1996
--------------------------------
4
<PAGE>
STATE OF Pennsylvania )
---------------
) ss.:
COUNTY OF Cumberland )
---------------
On the 1st day of July, 1994, before me personally came Dennis L. Lehman
and David G. Nation, respectively, to me known, who, being by me duly sworn, did
acknowledge before me that they reside at Mechanicsburg, PA and Mechanicsburg,
PA, respectively; that they are Chief Financial Officer and Secretary,
respectively, of Continental Medical Systems, Inc., one of the corporations
described in and which executed the above instrument; that they know the
corporate seal of such corporation; that the seal affixed to said instrument is
such corporate seal, that it was so affixed pursuant to authority of the Board
of Directors of such corporation; and that they signed their names thereto
pursuant to like authority.
(NOTARIAL SEAL)
/s/ Susan J. Crabb
-----------------------------
-----------------------------------
Notarial Seal
Susan J. Crabb, Notary Public
Upper Allen Twp., Cumberland County
My Commission Expires Nov. 13, 1995
-----------------------------------
5
<PAGE>
Exhibit A
---------
SECTION 1009. Limitation on Restricted Payments. The Company will not, and will
not permit any Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to holders of,
any Capital Stock of the Company (other than dividends or distributions payable
solely in shares of Qualified Capital Stock of the Company or in options,
warrants or other rights to acquire Qualified Capital Stock of the Company);
(ii) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any Affiliate thereof (other than Wholly Owned
Subsidiary of the Company) or any option, warrant or other right to acquire such
Capital Stock of the Company or any Affiliate thereof;
(iii) make any principal payment on, or redeem, repurchase, defease or
otherwise acquire or retire for value, prior to any scheduled repayment, or
maturity, any Subordinated Indebtedness;
(iv) incur, create or assume any guarantee of Indebtedness of any Affiliate
(other than with respect to (a) guarantees of Indebtedness of any Wholly Owned
Subsidiary by the Company or by any Subsidiary or (b) guarantees of Indebtedness
of the Company by any Subsidiary of the Company, in each case in accordance with
the terms of this Indenture); or
(v) make any Investment in any Person (other than any Permitted Investment)
(such payments described in (i) through (v) collectively, "Restricted Payments")
unless at the time of and after giving effect to the proposed Restricted Payment
(the amount of any such Restricted Payment, if other than cash, as determined by
the Board of Directors, whose determined shall be conclusive and evidenced by a
Board Resolution), (1) no Default or Event of Default shall have occurred and be
continuing; (2) immediately before and immediately after giving effect to such
transaction on a pro forma basis, the Company could incur $1.00 of additional
--- -----
Indebtedness under the provisions of Section 1008 (other than Permitted
Indebtedness); and (3) the aggregate amount of all Restricted Payments (plus,
without duplication, dividends and distributions paid to any Person other than
the Company, a Wholly Owned Subsidiary or a Permitted Joint Venture as permitted
by paragraph (b) of Section 1010) and any Restricted Payments made pursuant to
clauses (i),(iv),(vii) and (viii) of the succeeding paragraph) declared or made
after the date of this Indenture shall not exceed the sum of
A-1
<PAGE>
(A) 50% of the Consolidated Net Income of the Company accrued on a
cumulative basis during the period beginning on the date of this Indenture and
ending on the last day of the Company's last fiscal quarter ending prior to the
date of such proposed Restricted Payment (or, if such aggregate cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss);
(B) the aggregate Net Cash Proceeds, received after the date of this
Indenture by the Company as capital contributions to the Company;
(C) the aggregate Net Cash Proceeds received after the date of this
Indenture by the Company from the issuance or sale (other than to any of its
Subsidiaries) of shares of Capital Stock (other than Redeemable Capital Stock)
of the Company or any options or warrants to purchase such shares (other than
issuances in respect of clause (ii) of the subsequent paragraph) of Capital
Stock (other than Redeemable Capital Stock) of the Company;
(D) the aggregate Net Cash Proceeds received after the date of this
Indenture by the Company (other than from any of its Subsidiaries) upon the
exercise of any options or warrants to purchase shares of Capital Stock of the
Company; and
(E) the aggregate Net Cash Proceeds received after the date of this
Indenture by the Company for debt securities that have been converted into or
exchanged for Qualified Capital Stock of the Company to the extent such debt
securities are originally sold for cash plus the aggregate cash received by the
Company at the time of such conversion or exchange.
None of the foregoing provisions shall be deemed to prohibit the
following Restricted Payments so long as in the case of clauses (ii), (iii),
(v), (vi) and (vii) there is no Default or Event of Default continuing:
(i) dividends paid within 60 days after the date of declaration if
at the date of declaration, such payment would be permitted by the provisions of
the preceding paragraph and such payment shall be deemed to have been paid on
such date of declaration for purposes of the calculation required by the
provisions of the foregoing paragraph;
(ii) the redemption, repurchase or other acquisition or retirement
of any shares of any class of Capital Stock of the Company or Subordinated
Indebtedness in exchange for, or out of the net proceeds of, a substantially
concurrent issue and sale (other than to a Subsidiary) of shares of Qualified
Capital Stock of the Company; provided that any net proceeds from the issue and
--------
sale of such Qualified Capital Stock are excluded from clause 3(C) of the
foregoing paragraph;
A-2
<PAGE>
(iii) the redemption, repurchase, or other acquisition or retirement of
Subordinated Indebtedness of the Company (other than Redeemable Capital Stock)
made by exchange for, or out of the proceeds of the substantially concurrent
sale of, new Indebtedness of the Company so long as (A) the principal amount of
such new Indebtedness does not exceed the principal amount of the Indebtedness
being so redeemed, repurchased, acquired or retired for value (plus the amount
of any premium required to be paid under the terms of the instrument governing
the Indebtedness being so redeemed, repurchased, acquired or retired), (B) such
Indebtedness is subordinated to Senior Indebtedness and the Securities at least
to the same extent as such Subordinated Indebtedness so purchased, exchanged,
redeemed, repurchased, acquired or retired for value, (C) such Indebtedness has
a Stated Maturity for its final scheduled principal payment later than the
Stated Maturity for the final scheduled principal payment of the Securities and
(D) such Indebtedness has an Average Life to Stated Maturity equal to or greater
than the remaining Average Life to Stated Maturity of the Securities;
(iv) any purchase, redemption or other acquisition of Capital Stock of a
Permitted Joint Venture from a physician or other healthcare provider which is
required to be purchased, redeemed or otherwise acquired by applicable law;
(v) in addition to the transactions covered by clause (iv) of this
paragraph, any purchase, redemption or other acquisition of Capital Stock of a
Permitted Joint Venture;
(vi) the incurrence, creation or assumption of any guarantee of
Indebtedness of a Permitted Joint Venture;
(vii) the making of any payment pursuant to any guarantee of Indebtedness
of a Permitted Joint Venture; or
(viii) the incurrence, creation or assumption of any Physician Support
Obligations and any payments made in respect thereof in an amount not to exceed
$5,000,000 in any given Fiscal Year.
A-3
<PAGE>
EXHIBIT 4.3.2
FIRST SUPPLEMENTAL INDENTURE
Dated as of June 22, 1994
--------------------
FIRST SUPPLEMENTAL INDENTURE, dated as of June 22, 1994 (the "First
Supplemental Indenture"), between CONTINENTAL MEDICAL SYSTEMS, INC., a Delaware
corporation (hereinafter called the "Company"), and NATIONSBANK OF VIRGINIA,
N.A., a national banking corporation, as trustee under the Indenture referred to
below (hereinafter called the "Trustee").
WHEREAS, the Company and the Trustee are parties to an Indenture, dated as
of March 15, 1993 (hereinafter called the "Existing Indenture", all capitalized
terms used in this First Supplemental Indenture and not otherwise defined being
used as defined in the Existing Indenture), pursuant to which the Company issued
its 10-3/8% Senior Subordinated Notes due 2003, Series B (hereinafter called the
"Securities");
WHEREAS, on June 7, 1994, the Company solicited (the "Solicitation")
consents to amend certain provisions of the Existing Indenture;
WHEREAS, the Existing Indenture provides that, when authorized by a Board
Resolution, indentures supplemental thereto may be executed and delivered by the
Company and the Trustee with the consent of the Holders of not less than a
majority in principal amount of the Outstanding Securities (or in certain cases
the consent of the Holder of each Outstanding Security affected thereby), such
consent to be by Act of said Holders delivered to the Company and the Trustee;
WHEREAS, pursuant to the Solicitation, the Holders of at least a majority
in principal amount of the Outstanding Securities have so consented to the
execution and delivery of this First Supplemental Indenture; and
WHEREAS, all things necessary have been done to make this First
Supplemental Indenture, when executed and delivered by the Company, the legal,
valid and binding agreement of the Company, in accordance with its terms.
<PAGE>
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
The parties hereto mutually covenant and agree as follows:
PART ONE
Section 1009 of the Existing Indenture is hereby supplemented, modified and
restated to read as set forth in Exhibit A to this First Supplemental Indenture.
PART TWO
(S) 1. This First Supplemental Indenture shall be construed as supplemental
to the Indenture and shall form a part thereof, and the Existing Indenture is
hereby incorporated by reference herein and, as supplemented, modified and
restated hereby, is hereby ratified, approved and confirmed.
(S) 2. This First Supplemental Indenture shall be governed by and construed
in accordance with the laws of the State of New York.
(S) 3. This First Supplemental Indenture may be signed in any number of
counterparts with the same effect as if the signatures to each counterpart were
upon a single instrument, and all such counterparts together shall be deemed an
original of this First Supplemental Indenture.
(S) 4. This First Supplemental Indenture shall be effective and operative
on the date and time hereof.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental
Indenture to be duly executed, and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.
CONTINENTAL MEDICAL SYSTEMS, INC.
By: /s/ Dennis Lehman
----------------------------
Name: Dennis Lehman
Title: Senior V.P.
Attest: /s/ David Nation
----------------------------
Name : David Nation
Title: Secretary
NATIONSBANK OF VIRGINIA, N.A.,
as Trustee
By: /s/ Franklin S. Wood
----------------------------
Name: Franklin S. Wood
Title: Assistant Vice President
Attest: /s/ Bob Richardson
----------------------------
Name: Bob Richardson
Title: Vice President
<PAGE>
STATE OF Virginia )
) SS.:
CITY OF Richmond )
On the 10 day of June, 1994, before me personally came Franklin S. Wood and
Bob Richardson respectively, to me known, who, being by me duly sworn, did
acknowledge before me that they reside at Richmond, VA and Midlothian, VA,
respectively; that they are Assistant VP and VP, respectively, of NationsBank of
Virginia, N.A., one of the corporations described in and which executed the
above instrument; that they know the corporate seal of such corporation; that
the seal affixed to said instrument is such corporate seal; that it was affixed
pursuant to authority of the Board of Directors of such corporation; and that
they signed their names thereto pursuant to like authority.
(NOTARIAL SEAL)
/s/ Sheliah B. Berryman
--------------------------------
My Commission Expires 8/31, 1996
--------------------------------
4
<PAGE>
STATE OF Pennsylvania )
) SS.:
COUNTY OF Cumberland )
On the 1st day of July, 1994, before me personally came Dennis L. Lehman
and David G. Nation, respectively, to me known, who, being by me duly sworn, did
acknowledge before me that they reside at Mechanicsburg, PA and Mechanicsburg,
PA, respectively; that they are Chief Financial Officer and Secretary,
respectively, of Continental Medical Systems, Inc., one of the corporations
described in and which executed the above instrument; that they know the
corporate seal of such corporation; that the seal affixed to said instrument is
such corporate seal; that it was so affixed pursuant to authority of the Board
of Directors of such corporation; and that they signed their names thereto
pursuant to like authority.
(NOTARIAL SEAL)
/s/ Susan J. Crabb
--------------------------
Notarial Seal
Susan J. Crabb, Notary Public
Upper Allen Twp., Cumberland County
My Commission Expires Nov. 13, 1995
5
<PAGE>
Exhibit A
---------
SECTION 1009. Limitation on Restricted Payments. The Company will not, and will
not permit any Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to holders
of, any Capital Stock of the Company (other than dividends or distributions
payable solely in shares of Qualified Capital Stock of the Company or in
options, warrants or other rights to acquire Qualified Capital Stock of the
Company);
(ii) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any Affiliate thereof (other than any Wholly Owned
Subsidiary of the Company) or any option, warrant or other right to acquire such
Capital Stock of the Company or any Affiliate thereof;
(iii) make any principal payment on, or redeem, repurchase, defease or
otherwise acquire or retire for value, prior to any scheduled repayment, or
maturity, any Subordinated Indebtedness;
(iv) incur, create or assume any guarantee of Indebtedness of any Affiliate
(other than with respect to (a) guarantees of Indebtedness of any Wholly Owned
Subsidiary by the Company or by any Subsidiary or (b) guarantees of Indebtedness
of the Company by any Subsidiary of the Company, in each case in accordance with
the terms of this Indenture); or
(v) make any investment in any Person (other than any Permitted Investment)
(such payments described in (i) through (v) collectively, "Restricted Payments")
unless at the time of and after giving effect to the proposed Restricted Payment
(the amount of any such Restricted Payment, if other than cash, as determined by
the Board of Directors, whose determination shall be conclusive and evidenced by
a Board Resolution), (1) no Default or Event of Default shall have occurred and
be continuing; (2) immediately before and immediately after giving effect to
such transaction on a pro forma basis, the Company could incur $1.00 of
--- -----
additional Indebtedness under the provisions of Section 1008 (other than
Permitted Indebtedness); and (3) the aggregate amount of all Restricted
Payments (plus, without duplication, dividends and distributions paid to any
Person other than the Company, a Wholly Owned Subsidiary or a Permitted Joint
Venture as permitted by paragraph (b) of Section 1010) and any Restricted
Payments made pursuant to clauses (i), (iv), (v), (vii) and (viii) of the
succeeding paragraph) declared or made after the date of this Indenture shall
not exceed the sum of
A-1
<PAGE>
(A) 50% of the Consolidated Net Income of the Company accrued on a
cumulative basis during the period beginning on the date of this Indenture and
ending on the last day of the Company's last fiscal quarter ending prior to the
date of such proposed Restricted Payment (or, if such aggregate cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss);
(B) the aggregate Net Cash Proceeds, received after the date of this
Indenture by the Company as capital contributions to the Company;
(C) the aggregate Net Cash Proceeds, received after the date of this
Indenture by the Company from the issuance or sale (other than to any of its
Subsidiaries) of shares of Capital Stock (other than Redeemable Capital Stock)
of the Company or any options or warrants to purchase such shares (other than
issuances in respect of clause (ii) of the subsequent paragraph) of Capital
Stock (other than Redeemable Capital Stock) of the Company;
(D) the aggregate Net Cash Proceeds received after the date of this
Indenture by the Company (other than from any of its Subsidiaries) upon the
exercise of any options or warrants to purchase shares of Capital Stock of the
Company; and
(E) the aggregate Net Cash Proceeds received after the date of this
Indenture by the Company for debt securities that have been converted into or
exchanged for Qualified Capital Stock of the Company to the extent such debt
securities are originally sold for cash plus the aggregate cash received by the
Company at the time of such conversion or exchange.
None of the foregoing provisions shall be deemed to prohibit the
following Restricted Payments so long as in the case of clauses (ii), (iii),
(v), (vi) and (viii) there is no Default or Event of Default continuing;
(i) dividends paid within 60 days after the date of declaration if
at the date of declaration, such payment would be permitted by the provisions of
the preceding paragraph and such payment shall be deemed to have been paid on
such date of declaration for purposes of the calculation required by the
provisions of the foregoing paragraph;
(ii) the redemption, repurchase or other acquisition or retirement
of any shares of any class of Capital Stock of the Company or Subordinated
Indebtedness in exchange for, or out of the net proceeds of, a substantially
concurrent issue and sale (other than to a Subsidiary) of shares of Qualified
Capital Stock of the Company; provided that any net proceeds from the issue and
sale of such Qualified Capital Stock are excluded from clause 3(C) of the
foregoing paragraph;
A-2
<PAGE>
(iii) the redemption, repurchase, or other acquisition or retirement of
Subordinated Indebtedness of the Company (other than Redeemable Capital Stock)
made by exchange for, or out of the proceeds of the substantially concurrent
sale of, new Indebtedness of the Company so long as (A) the principal amount of
such new Indebtedness does not exceed the principal amount of the Indebtedness
being so redeemed, repurchased, acquired or retired for value (plus the amount
of any premium required to be paid under the terms of the instrument governing
the Indebtedness being so redeemed, repurchased, acquired or retired), (B) such
Indebtedness is subordinated to Senior Indebtedness and the Securities at least
to the same extent as such Subordinated Indebtedness so purchased, exchanged,
redeemed, repurchased, acquired or retired for value, (C) such Indebtedness has
a Stated Maturity for its final scheduled principal payment later than the
Stated Maturity for the final scheduled principal payment of the Securities and
(D) such Indebtedness has an Average Life to Stated Maturity equal to or greater
than the remaining Average Life to Stated Maturity of the Securities;
(iv) any purchase, redemption or other acquisition of Capital Stock of a
Permitted Joint Venture from a physician or other healthcare provider which is
required to be purchased, redeemed or otherwise acquired by applicable law;
(v) in addition to the transactions covered by clause (iv) of this
paragraph, any purchase, redemption or other acquisition of Capital Stock of a
Permitted Joint Venture;
(vi) the incurrence, creation or assumption of any guarantee of
Indebtedness of a Permitted Joint Venture;
(vii) the making of any payment pursuant to any guarantee of Indebtedness
of a Permitted Joint Venture; or
(viii) the incurrence, creation or assumption of any Physician Support
Obligations and any payments made in respect thereof in an amount not to exceed
$5,000,000 in any given Fiscal Year.
A-3
<PAGE>
EXHIBIT 10.5.1
This Schedule 10.5.1 describes lists modifications to the lease filed as
Exhibit 10.5 to the Company's Annual Report on Form 10-K (File Number 0-15088),
filed with the Commission on September 25, 1992. This Schedule also describes
modification to certain terms in each of two other leases identified in Schedule
10.5.1 in the Company's Annual Report on Form 10-K (File Number 0-15088), filed
with the Commission on September 27, 1993. Each of the leases described above
was amended and restated on July 19, 1994 on substantially the same terms and
conditions except as set forth below.
1. Lease Agreement dated July 19, 1994 between Liberty Plaza Associates
and the Company.
A. Rent: $16.00 per rentable square foot.
-----
B. Term: June 1, 1994 through May 31, 1997.
-----
2. Lease Agreement dated July 19, 1994 between Liberty Plaza Associates
II and the Company.
A. Rent: $18.00 per rentable square foot.
-----
B. Term: June 1, 1994 through May 31, 1997.
-----
3. Lease Agreement dated July 19, 1994 between Liberty Plaza Associates
III and the Company.
A. Rent: $16.00 per rentable square foot.
-----
B. Term: June 1, 1994 through May 31, 1997.
-----
<PAGE>
EXHIBIT 11
Continental Medical Systems, Inc. and Subsidiaries
Computation of Earnings per Share
<TABLE>
<CAPTION>
1994 1993 1992
-----------------------------
(In thousands, except per share data)
Primary:
<S> <C> <C> <C>
Shares outstanding at beginning of period 36,935 35,560 34,733
Weighted average shares issued pursuant to:
Employee benefit plans 188 671 473
Acquisition agreements 540 138 72
Dilutive effect of outstanding stock options 963 1,611
Contingent shares issuable pursuant to
acquisition agreements 719 280
------- ------- ------
Weighted average number of shares and
equivalent shares outstanding 37,663 38,051 37,169
======= ======= =======
Income (loss) before cumulative effect of
accounting change ($34,545) $22,723 $27,091
Additional goodwill amortization from
contingent shares issuable pursuant to
acquisition agreements (176) (109)
------- ------ ------
Adjusted income (loss) before cumulative
effect of accounting change
used in primary calculation ($34,545) $22,547 $26,982
Cumulative effect of accounting change (3,204)
------- ------- -------
Adjusted net income (loss) used in primary
calculation ($34,545) $19,343 $26,982
======= ======= =======
Income (loss) per share and equivalent
share:
Income (loss) before cumulative effect of
accounting change ($0.92) $ 0.59 $ 0.73
Cumulative effect of accounting change (0.08)
------- ------- -------
Net income (loss) ($0.92) $ 0.51 $ 0.73
======= ======= =======
</TABLE>
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Computation of Earnings per Share
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------
Fully Diluted: (In thousands, except per share data)
<S> <C> <C> <C>
Weighted average number of shares and equivalent
shares used in primary calculation 37,663 38,051 37,169
Additional dilutive effect of stock options 5
Assumed conversion of dilutive convertible
debentures 234 234
------- ------- -------
Fully diluted weighted average number of shares
and equivalent shares outstanding 37,663 38,290 37,403
======= ======= =======
Adjusted income (loss) before cumulative effect
of accounting change
used in primary calculation ($34,545) $22,547 $26,982
Adjustment for interest expense, net of related
income tax benefits 86 97
------- ------- -------
Adjusted income (loss) before cumulative effect
of accounting change
used in fully diluted calculation ($34,545) $22,633 $27,079
Cumulative effect of accounting change (3,204)
------- ------- -------
Adjusted net income (loss) used in fully diluted
calculation ($34,545) $19,429 $27,079
======= ======= =======
Income (loss) per share and equivalent share:
Income (loss) before cumulative effect of
accounting change ($0.92) $ 0.59 $ 0.72
Cumulative effect of accounting change (0.08)
------- ------- -------
Net income (loss) ($0.92) $ 0.51 $ 0.72
======= ======= =======
</TABLE>
<PAGE>
EXHIBIT 22
SUBSIDIARIES OF THE COMPANY (as of September 15, 1994)
Name State of
Incorporation
ACMED Therapy Technologies Corp. .................................. DE
Advanced Care Medicine, Inc. ...................................... DE
Baton Rouge Rehab, Inc. ........................................... DE
d/b/a The Rehabilitation Hospital of Baton Rouge
Braintree Rehabilitation Ventures, Inc. ........................... MA
Capital Rehabilitation Hospital, Inc. ............................. DE
Central Arizona Rehabilitation Hospital, Inc. ..................... DE
Central Arkansas Outpatient Centers, Inc. ......................... DE
d/b/a Little Rock Rehabilitation Center
d/b/a Southeast Arkansas Rehabilitation Center
d/b/a Searcy WorkAble Center
d/b/a WorkAble
Chandler Rehabilitation Hospital, Inc. ............................ DE
Chico Rehabilitation Hospital, Inc. ............................... DE
Clear Lake Rehabilitation Hospital, Inc. .......................... TX
d/b/a CMS WorkAble of Clear Lake
CHS Therapy Technologies Corp. .................................... DE
CMS Alexandria Rehabilitation, Inc. ............................... DE
CMS Baton Rouge Rehabilitation, Inc. .............................. DE
CMS Beaumont Rehabilitation, Inc. ................................. TX
CMS Capital Ventures, Inc. ........................................ DE
CMS Contra Costa Clinic, Inc. ..................................... DE
CMS Denver Rehabilitation, Inc. ................................... DE
CMS Development and Management Company, Inc. ...................... DE
CMS Elizabethtown, Inc. ........................................... DE
CMS Fayetteville Rehabilitation, Inc. ............................. DE
CMS Fort Worth Rehabilitation, Inc. ............................... TX
CMS Fresno Rehabilitation, Inc. ................................... DE
CMS Houston Rehabilitation, Inc. .................................. TX
CMS Jonesboro Rehabilitation, Inc. ................................ DE
d/b/a Northeast Arkansas Rehabilitation Hospital
d/b/a Physical Medicine and Sports Rehabilitation Center
CMS Kansas City Rehabilitation, Inc. .............................. DE
CMS Outpatient Centers of North Texas, Inc. ....................... DE
d/b/a CMS WorkAble
d/b/a Continental Rehabilitation Center for Women
CMS Outpatient Centers of South Texas, Inc. ....................... DE
d/b/a CMS WorkAble of Houston
d/b/a CMS WorkAble of Clear Lake
CMS Pennsylvania, Inc. ............................................ DE
<PAGE>
CMS Physician Services, Inc. ...................................... DE
CMS of Ohio, Inc. ................................................. DE
CMS Rehab Technologies Corp. ...................................... DE
CMS Rehabilitation Center of Hialeah, Inc. ........................ DE
CMS Ruston Rehabilitation, Inc. ................................... DE
CMS San Diego Rehab, Inc. ......................................... DE
d/b/a Rehabilitation Hospital of San Diego
CMS San Diego Surgical, Inc. ...................................... DE
CMS Sherwood Rehabilitation, Inc. ................................. DE
CMS South Miami Rehab, Inc. ....................................... DE
d/b/a CMS WorkAble of Aventura
d/b/a Club Rehab
CMS Sportsmed Clinic, Inc. ........................................ DE
CMS Therapies, Inc. ............................................... NC
Subsidiaries:
North Shore Rehab Association, Inc. .......................... WI
CMS Therapies Management, Inc. .................................... NC
CMS Therapies Provider, Inc. ...................................... NC
CMS Topeka Rehabilitation, Inc. ................................... DE
CMS Tri-Cities Rehabilitation, Inc. ............................... DE
d/b/a Northeast Tennessee Rehabilitation Hospital
CMS Tustin Rehabilitation, Inc. ................................... DE
CMS Wichita Rehabilitation, Inc. .................................. DE
CMS WorkAble, Inc. ................................................ DE
d/b/a CMS Rehab and Performance Center
d/b/a CMS WorkAble of Tucson
CMS WorkAble of Paragould, Inc. ................................... DE
d/b/a North Arkansas Regional Industrial Rehabilitation
Center
CMS Worknet of Baton Rouge, Inc. .................................. DE
CMSI Systems of Texas, Inc. ....................................... TX
COA Therapy Technologies Corp. .................................... DE
Colorado Outpatient Centers, Inc. ................................. DE
CompHealth, Inc. .................................................. DE
CompHealth Medical Staffing, Inc. ................................. DE
Continental Medical of Arizona, Inc. .............................. DE
Continental Medical of Colorado, Inc. ............................. DE
Continental Medical Systems of Florida, Inc. ...................... FL
Continental Medical of Kentucky, Inc. ............................. DE
Continental Medical of Palm Beach, Inc. ........................... DE
d/b/a Helen Wilkes Residence
Continental Rehab of W.F., Inc. ................................... TX
Continental Rehabilitation Hospital of Arizona, Inc. .............. DE
Elizabethtown Management Company, Inc. ............................ DE
-2-
<PAGE>
Encompus, Inc. .................................................... DE
Fairfield Rehabilitation Hospital, Inc. ........................... DE
Fairland Nursing and Retirement Home, Inc. ........................ DE
d/b/a Fairland Nursing and Retirement Home
d/b/a Eastern Neuro Rehabilitation Hospital
Great Plains Rehabilitation Hospital, Inc. ........................ DE
Hartford Rehabilitation Hospital, Inc. ............................ DE
HCA Wesley Rehabilitation Clinic of Liberal, Inc. ................. DE
HCA Wesley Rehabilitation Hospital, Inc. .......................... DE
Hialeah Convalescent Centers, Inc. ................................ FL
d/b/a Palmetto Rehabilitation Center
Indiana Outpatient Centers, Inc. .................................. DE
d/b/a WorkAble of Central Indiana
Innovative Health Alliances, Inc. ................................. DE
KBT Corporation.................................................... MA
K.C. Rehabilitation Hospital, Inc. ................................ DE
d/b/a Mid-America Rehabilitation Hospital
Kansas Outpatient Centers, Inc. ................................... DE
Kansas Rehabilitation Hospital, Inc. .............................. DE
Kentfield Hospital Corporation..................................... CA
d/b/a Kentfield Rehabilitation Hospital
Keystone Medical Systems, Inc. .................................... PA
Kokomo Rehabilitation Hospital, Inc. .............................. DE
d/b/a Kokomo Rehabilitation, Inc.
Lafayette Rehabilitation Hospital, Inc. ........................... DE
Louisiana Outpatient Centers, Inc. ................................ DE
Maryland Rehabilitation Hospital, Inc. ............................ DE
Medical Management Associates, Inc. ............................... CA
Subsidiaries:
Mancor Medical Management Company, Inc. ...................... CA
Mid-America Outpatient Centers, Inc. .............................. DE
Nevada Rehabilitation Hospital, Inc. .............................. DE
North Louisiana Rehabilitation Center, Inc. ....................... LA
Northeast Arkansas Rehabilitation Unit, Inc. ...................... AR
Northeast Oklahoma Rehabilitation Hospital, Inc. .................. DE
Northern Virginia Rehabilitation Hospital, Inc. ................... DE
Orange Rehabilitation Hospital, Inc. .............................. DE
d/b/a San Joaquin Valley Rehabilitation Hospital
d/b/a CMS WorkAble of Fresno
P.G. Rehabilitation Hospital, Inc. ................................ DE
Palm Springs Rehabilitation Hospital, Inc. ........................ DE
Park Manor Nursing Home, Inc. ..................................... DE
Premier Ancillary Services, Inc. .................................. DE
-3-
<PAGE>
Pro Therapy of America, Inc. ...................................... DE
Subsidiaries:
Apco Medical Laboratories, Inc. .............................. MI
Professional Therapy International, Inc. ..................... FL
Professional Therapy Staffing, Inc. .......................... MI
Professional Management Resources, Inc. ........................... NY
RCM Management Company, Inc. ...................................... DE
RWI Therapy Technologies Corp. .................................... DE
Rehab Concepts Corp. .............................................. DE
Rehab Connection, Inc. ............................................ DE
Rehab Resources, Inc. ............................................. DE
Rehabilitation Hospital of Colorado Springs, Inc. ................. DE
d/b/a The Womens Center for Rehabilitation
d/b/a The Language Learning Center
Rehabilitation Hospital of Fort Wayne, Inc. ....................... DE
Rehabilitation Hospital of Nevada-Las Vegas, Inc. ................. DE
Rehabilitation Hospital of Plano, Inc. ............................ TX
d/b/a Plano Rehabilitation Hospital
RehabWorks of California, Inc. .................................... CA
d/b/a Orthopedic and Sport Therapy Clinic of Marin
RehabWorks, Inc. .................................................. FL
Subsidiaries of RehabWorks, Inc.
Rehab Joint Ventures, Inc. ................................... FL
Rehabilitative Associates, Inc. .............................. FL
Pinellas-Rodriguez Rehabilitative
Associates Ltd., Inc. ....................................... FL
Management Care Therapy Services, Inc. ....................... FL
Selective Rehabilitative Services, Inc. ...................... FL
Rehab Plus of Orlando, Inc. .................................. FL
Rehab Plus of Raleigh, Inc. .................................. NC
Romano Rehabilitation Hospital, Inc. .............................. TX
d/b/a Houston Rehabilitative Institute
SD Acquisition Corporation......................................... DE
SD Partners, Inc. ................................................. DE
San Bernardino Rehabilitation Hospital, Inc. ...................... DE
SelectRehab, Inc. ................................................. DE
Sherwood Rehabilitation Hospital, Inc. ............................ DE
d/b/a Central Arkansas Rehabilitation Hospital
Sierra Pain and Occupational Rehabilitation Center, Inc. .......... DE
Southeast Texas Rehabilitation Hospital, Inc. ..................... TX
Tarrant County Rehabilitation Hospital, Inc. ...................... TX
d/b/a Fort Worth Rehabilitation Hospital
d/b/a Rehabilitation Associates
-4-
<PAGE>
Terre Haute Rehabilitation Hospital, Inc. ......................... DE
The Kelton Corporation............................................. MA
d/b/a Braintree Hospital
The Nursing Home at Chevy Chase, Inc. ............................. DE
The Rehab Source, Inc. ............................................ DE
Therapy Source, Inc. .............................................. DE
Tulsa Rehabilitation Hospital, Inc. ............................... DE
Tyler Rehabilitation Hospital, Inc. ............................... TX
VTA Management Services, Inc. ..................................... NY
VTA Therapy Technologies Corp. .................................... DE
Western Neuro Care, Inc. .......................................... DE
d/b/a Western Neuro Care Center
d/b/a Tustin Rehabilitation Hospital
Western Neurologic Residential Centers, Inc. ...................... CA
d/b/a Meridian Neuro Care
d/b/a Meridian Home Health Care
Western Neuro Residential, Inc. ................................... DE
d/b/a Meridian Neuro Care
Wichita Falls Rehabilitation Hospital, Inc. ....................... TX
d/b/a Wichita Falls Rehabilitation Hospital
PARTNERSHIPS
Name State of
Formation
Back Center Associates, Limited Partnership........................ DE
Beaumont Rehab Associates Limited Partnership...................... DE
d/b/a Southeast Texas Rehabilitation Hospital
Central Arkansas Rehabilitation Associates L.P. ................... DE
Central Louisiana Rehab Associates, L.P. .......................... DE
d/b/a Central Louisiana Rehabilitation Hospital
Collin County Rehab Associates Limited Partnership................. DE
Contra Costa Associates, General Partnership....................... DE
d/b/a Contra Costa Physical Therapy and Sports Medicine Center
CMS Rehab of W.F., L.P. ........................................... DE
CMS Rehabilitation Center of South Miami........................... DE
d/b/a CMS WorkAble of South Miami
Helmwood Associates Limited Partnership............................ DE
d/b/a Pathways Post-Acute Brain Injury Program
Houston Rehabilitation Associates.................................. DE
-5-
<PAGE>
Kokomo Rehabilitation Hospital L.P. ............................... DE
d/b/a WorkAble of Central Indiana
Kron Clinical Services, L.P. ...................................... DE
Lakeview Rehabilitation Group Partners............................. KY
Lafayette Rehab Associates, Limited Partnership.................... DE
d/b/a Rehabilitation Hospital of Lafayette
Maryland Rehab Associates, L.P. ................................... DE
Memphis Rehab Associates, Limited Partnership...................... DE
Mid-America Associates, Limited Partnership........................ DE
Northeast Oklahoma Rehab Associates, L.P. ......................... DE
d/b/a Northeast Oklahoma Rehabilitation Hospital
Northern Rhode Island Rehab Management Associates, L.P. ........... DE
d/b/a Northern Rhode Island Rehabilitation Hospital
Northwest Arkansas Rehabilitation Associates....................... AR
Physical Therapy and Sports Medicine Center Partnership............ MI
Pride/Braintree Joint Venture...................................... MA
Prince George's Rehab Associates, L.P. ............................ DE
Rehab Hospital of Fort Wayne General Partnership................... DE
d/b/a Rehabilitation Hospital of Fort Wayne
Rehabilitation Hospital of Nevada-Las Vegas, L.P. ...................DE
d/b/a Rehabilitation Hospital of Nevada-Las Vegas
Reno Rehab Associates, Limited Partnership......................... DE
d/b/a Rehabilitation Hospital of Nevada-Reno
San Bernardino Rehabilitation Hospital............................. CA
San Diego Rehab Limited Partnership................................ DE
d/b/a Continental Rehabilitation Hospital of San Diego
San Diego Rehabilitation Associates................................ DE
San Diego Surgical Hospital Limited Partnership.................... DE
d/b/a San Diego Hospital for Special Surgery
San Joaquin Valley Rehabilitation Hospital L.P. ................... DE
Southern Arizona Regional Rehabilitation Hospital, L.P. ........... DE
d/b/a Southern Arizona Rehabilitation Hospital
d/b/a Northwest Center for Physical Therapy
Southern Rhode Island Rehab Management Associates, L.P. ........... DE
d/b/a Southern Rhode Island Rehabilitation Hospital
Sportsmed Associates............................................... DE
d/b/a Continental Therapy Center
Terre Haute Regional Rehabilitation Hospital, L.P. ................ DE
d/b/a Continental Rehabilitation Hospital of Terre Haute
Tri-Cities Rehabilitation Hospital, L.P. .......................... DE
West Gables Rehabilitation Hospital, Ltd. ......................... FL
d/b/a CMS WorkAble of Miami
-6-
<PAGE>
Tyler Rehab Associates, L.P. ...................................... DE
d/b/a Tyler Rehabilitation Hospital
Central Louisiana Rehab Associates, L.P. .......................... DE
d/b/a Central Louisiana Rehabilitation Hospital
Clear Lake Health Associates, L.P. ................................ DE
Plano Health Associates, Limited Partnership....................... DE
Rocky Mountain Health Associates Limited Partnership............... DE
San Diego Health Associates Limited Partnership.................... DE
Tulsa Rehab Hospital, L.P. ........................................ DE
Ruston Louisiana Associates Limited Partnership.................... DE
Jay Hawk Associates of Delaware Limited Partnership................ DE
Johnson Rehab Associates Limited Partnership....................... DE
Arapahoe Rehab Associates Limited Partnership...................... DE
United Medical Associates Limited Partnership...................... DE
Rehabmed Associates Limited Partnership............................ DE
Fresno Rehab Associates Limited Partnership........................ DE
Jonesboro Health Associates Limited Partnership.................... DE
Wichita Rehab, L.P. ............................................... DE
Tarrant County Rehab Associates Limited Partnership................ DE
Central Arkansas Associates Limited Partnership.................... DE
Colorado Springs Associates Limited Partnership.................... DE
Plano Rehab Associates Limited Partnership......................... DE
Washington Rehab Associates Limited Partnership.................... DE
Clear Lake Rehab Associates, L.P. ................................. DE
-7-
<PAGE>
EXHIBIT 24.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-3 (Nos. 33-46482, 33-50196, 33-63764, 33-62752, 33-52369, 33-54033,
33,51313) and Form S-8 (Nos. 33-33346, 33-44652, 33-52884, 33-56578, 33-52895,
33-52899) of Continental Medical Systems, Inc. of our report dated August 9,
1994, with respect to the consolidated financial statements and schedules of
Continental Medical Systems, Inc. included in this Annual Report (Form 10-K) for
the year ended June 30, 1994.
Ernst & Young LLP
Harrisburg, Pennsylvania
September 19, 1994
<PAGE>
EXHIBIT 24.2
Consent of Independent Accountants
We hereby consent to the Incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 33-46482,
33-50196, 33-63764, 33-62752, 33-52369, 33-54033 and 33-51313) and Form S-8
(Nos. 33-33346, 33-44652, 33-52884, 33-56578, 33-52895 and 33-52899) of
Continental Medical Systems, Inc. of our report dated August 10, 1993 which is
included in the Annual Report on Form 10-K. We also consent to the reference to
us under the heading "Experts".
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
September 16, 1994
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This Schedule contains summary information extracted from the
June 30, 1994 audited financial statements qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1994
<PERIOD-START> JUL-01-1993
<PERIOD-END> JUN-30-1994
<EXCHANGE-RATE> 1
<CASH> 54,862
<SECURITIES> 0
<RECEIVABLES> 248,883
<ALLOWANCES> 16,685
<INVENTORY> 0
<CURRENT-ASSETS> 321,487
<PP&E> 303,363
<DEPRECIATION> 51,340
<TOTAL-ASSETS> 766,742
<CURRENT-LIABILITIES> 155,084
<BONDS> 353,752
<COMMON> 384
0
0
<OTHER-SE> 235,168
<TOTAL-LIABILITY-AND-EQUITY> 766,742
<SALES> 1,004,839
<TOTAL-REVENUES> 1,004,839
<CGS> 894,488
<TOTAL-COSTS> 894,488
<OTHER-EXPENSES> 113,100
<LOSS-PROVISION> 19,365
<INTEREST-EXPENSE> 38,156
<INCOME-PRETAX> (37,463)
<INCOME-TAX> 7,648
<INCOME-CONTINUING> (34,545)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,545)
<EPS-PRIMARY> (.92)
<EPS-DILUTED> (.92)
</TABLE>
