SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities and Exchange
Act of 1934
Date of Report: May 26, 1994
CONTINENTAL MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0287965 0-15088
(State of Incorporation) (IRS Employer (Commission
Identification No.) File Number)
600 Wilson Lane
P.O. Box 715
Mechanicsburg, PA 17055
Telephone Number (717) 790-8300
Item 5. Other Events
On May 24, 1994, the Registrant issued the following press
release:
Continental Medical Systems, Inc. (NYSE: CNM) announced
today plans to establish up to a $75 million pre-tax charge in
its fourth quarter, which will end June 30, 1994, for a
restructuring and reorganization program. The Company's Board of
Directors has approved several measures to streamline operations
and improve productivity by restructuring the Company into three
major operating divisions, flattening the management
organizational structure, writing down certain assets and, where
appropriate, divesting underproductive assets. The special
charge will comprise several items, including the write down of
selected assets in the Company's hospital division, the costs
associated with the consolidation of its contract therapy
companies, the write down of receivables related to the
termination of certain business relationships in the contract
therapy business and certain other costs of the program.
Approximately $53 million of the charge is associated with
the Company's plan to write down the assets to current values at
up to nine rehabilitation hospitals, write down the assets
related to an outpatient acquisition, an abandoned managed unit
and other miscellaneous charges. The majority of the charges are
for assets located in California. The recently announced
divestiture of the Company's interests in the Rocky Mountain
facility in Denver, Colorado and its agreement to sell its North
Valley facility in Chico, California will have a minimal effect
on the cost of this program.
Approximately $19 million of the charge is related to the
Company's plan to consolidate its five contract therapy companies
into its Premier Rehabilitation subsidiary, exit certain markets
and write down receivables related to the termination of certain
business relationships. This consolidation process will involve
the closure of offices, relocation and severance of personnel and
elimination of duplicative processes.
The remainder of the charge, up to $3 million, has been
provided to reduce and realign the work force at the Company's
corporate office and certain other locations and provide for
transaction costs to execute the plan.
The net cash effect of the program, including the proceeds
from the divestitures discussed above, is expected to be minimal.
The Company is implementing the consolidations and layoffs
as part of its plan to restructure its organization into three
major operating divisions - Hospital, Contract Therapy and
Physician Services/Locum Tenens. The Company has also realigned
reporting lines and operating responsibilities of its corporate
management, and reduced the number of corporate staff personnel,
consistent with its new organization structure to enhance
decision-making processes and reduce costs. Effective July 1, a
number of the support staff presently residing in the corporate
office will be reassigned to the operating subsidiary locations.
Clinical operations and selective support functions will continue
to be centralized.
The Company plans to commence reporting of its operating
results by its three operating Divisions in the fourth quarter.
It continues to be the Company's objective to maintain a
leadership role in each of the operating divisions. The
strategic outlook for each of these divisions and other
initiatives underway at the Company are as follows:
Hospital Division
The Company plans to pursue selected new development
opportunities and may add up to two hospitals per year as a
result of this strategy. There are presently several new
hospital development projects under consideration. The Company
will periodically evaluate its hospital portfolio and when it
believes that certain facilities will not provide adequate
returns on investment, the Company may seek to divest those
facilities. The Company also plans to continue to cultivate
alliances within existing markets and continue its expansion of
outpatient services surrounding its hospital operations as part
of its growth strategy. The Company has recently introduced to
insurance companies and managed care organizations its Total
Outcome and Prediction Program (TOPP) to respond to managed care
needs. TOPP establishes a new standard of excellence for outcome
management, cost control and resource allocation. The TOPP
program, combined with the Company's cost accounting application,
now enables the Company to predict costs of services and share
risks with payors.
Contract Therapy Division
The Contract Therapy Division continues to experience
revenue growth as demand for services continues to increase. It
is expected that therapist retention will improve to historical
levels as the effects of the reorganization subside. With the
consolidation of the businesses described above, the Company
expects that there will be substantial synergies in pursuing
existing and new product lines within the contract therapy group
including development of outcome based programs to meet the
demand for sub-acute rehabilitative and managed care services in
the long term care setting. Additionally, the cost savings that
the Company expects to achieve through the consolidation will
enable it to become more cost effective in the delivery of its
services.
Physician Service/Locum Tenens Division
The Company recently recruited a new Chief Executive Officer
to its locum tenens business, CompHealth/Kron. Primary care and
allied professional days continue to grow while demand for
specialty physician services remains soft. The Company expects
to continue to pursue more relationships with primary care
providers and clients while adding additional services in the
marketplace. As part of the restructuring program, the locum
tenens business has closed one of its office locations to create
greater efficiency and additional cost savings in the pursuit of
its primary care services initiatives.
Corporate
With the flattening of the organization and streamlining the
operating divisions, the Corporate office has been reduced by
approximately 10% of its personnel. The Company continues to
make investments in its Vision information technology project
which will give the Company a competitive advantage in its
various initiatives.
New Initiatives
Recently, the Company has embarked upon new initiatives
which it believes afford substantial opportunity for the future.
The Company recently created an initiative called Innovative
Health Alliances (IHA) whereby the Company plans to facilitate
development and provide certain management services to networks
of independent outpatient rehabilitation clinics within
geographic regions. The IHA program has been initiated in Kansas
City and has a number of other development opportunities
throughout the country. The Company believes that the IHA
networks will provide the necessary leverage for independent
clinics to enable them to contract with managed care programs.
In certain instances the Company will own the clinics in the
network and in all instances IHA will provide certain management
and contracting services for the network.
The Company plans to continue to broaden its range of
services and programs to physicians as evidenced by its recent
acquisition of Medical Management Associates, Inc. (MMA). MMA
is engaged in the development and management of independent
physician practice associations (IPAs) and currently has 15 IPAs
under management. The IPAs currently managed by MMA have managed
care contracts covering 110,000 enrolled members and have 4,000
physicians under contract. The Company believes that MMA
provides opportunities for substantial growth going forward.
The Company plans to continue to invest in the development
and management of rehabilitation units in acute hospital settings
through the Select Rehab subsidiary. The Company currently
manages 12 such units with a number of development projects
underway.
Commenting on the announcement, CMS Chairman and Chief
Executive Officer R.A. Ortenzio stated, "We have made
organization changes to enable senior executives of each Division
and the Corporation to be more responsive to marketplace changes
while reducing our overhead costs. It has been a very difficult
decision for us to write down selected hospital division assets.
Although there is a need for the rehabilitation services we
provide in these markets, we have found that certain of our
hospitals are not adequately aligned and are having difficulty
developing a market capable of supporting our investment in that
location." Regarding the consolidation of the contract therapy
companies, he stated, "In February we internally announced the
combination of the long-term care services of Communi-Care/Pro-
Rehab and RehabWorks into Premier. We have now expanded that
program to encompass the other contract therapy companies to
consolidate these entities along product lines. We expect the
synergies and cost savings that will result from this
consolidation will enhance the Company's capability to deliver
higher quality and cost effective care. We believe our locum
tenens business is progressing well and expect to see growth in
the Division during fiscal 1995. Our continuing investment in
the Vision project and the new initiatives, which we expect to be
profitable by fiscal 1996, are all part of our plan to enhance
shareholder value."
Commenting on the restructuring program President and Chief
Operating Officer Robert A. Ortenzio stated, "We believe that the
synergies and cost savings obtained through flattening the
organization and re-aligning our businesses into three separate
major divisions will position the Company to grow its businesses
efficiently. It is our expectation that the various initiatives
under way, together with the improvement generally in our
business fundamentals, will enable the Company to accomplish
continued growth in our operating earnings for the foreseeable
future."
Dennis Lehman, Senior Vice President - Finance and Chief
Financial Officer stated, "Although our operating earnings for
fiscal 1994 have been a disappointment, we have enjoyed
substantial cash flow which has been used in part to make
investments in opportunities which we believe will provide
favorable returns to our shareholders. We have also utilized our
cash flow to reduce our indebtedness as evidenced by the
repayment of $37 million this past quarter."
CMS is one of the nation's largest providers of
comprehensive medical rehabilitation services with annualized net
operating revenues of approximately $1 billion. CMS operates 38
freestanding rehabilitation hospitals, provides outpatient
rehabilitation services at more than 140 locations and manages 12
inpatient rehabilitation units for general acute care hospitals.
These services are provided in 22 states. CMS' Contract Therapy
Group provides physical, occupational, respiratory and speech
therapy. The physician locum tenens businesses provide services
in all 50 states.
Pursuant to the requirements of the Securities and 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.
Date: May 26, 1994 By: /s/ David G. Nation
David G. Nation, Senior Vice-President,
General Counsel and Secretary
