<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM 10-Q/A
Amendment No. 1
-------------------------------
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
-----
Exchange Act of 1934
For the quarterly period ended September 30, 1994
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
-----
Exchange Act of 1934
Commission file number 0-15088
CONTINENTAL MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0287965
(State of incorporation) (I.R.S. Employer
Identification No.)
600 Wilson Lane
P.O. Box 715
Mechanicsburg, PA 17055
Telephone Number (717) 790-8300
-----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and, (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
----- -----
As of October 31, 1994, there were 38,526,936 shares of the Registrant's $.01
par value Common Stock outstanding.
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<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Index
Form 10-Q/A Amendment No. 1 - For the Quarter ended September 30, 1994
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
September 30, 1994 and June 30, 1994.......................... 1
Consolidated Statements of Income
Three months ended September 30, 1994 and 1993................ 2
Consolidated Statement of Stockholders' Equity
Three months ended September 30, 1994......................... 3
Consolidated Statements of Cash Flows
Three months ended September 30, 1994 and 1993................ 4-5
Notes to Consolidated Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 7-14
Signature............................................................... 15
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 1994 and June 30, 1994
<TABLE>
<CAPTION>
September 30, June 30,
Assets 1994 1994
- ------------------------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,258 $ 54,862
Accounts receivable, net of allowance for doubtful accounts
($18,356, September 30, 1994; $16,685, June 30, 1994) 226,826 232,198
Other receivables 12,142 10,778
Prepaid expenses 14,685 13,720
Prepaid income taxes 4,319
Deferred income taxes 5,410 5,610
------- -------
Total current assets 269,321 321,487
------- -------
Property and equipment, net 257,586 252,023
------- -------
Other:
Goodwill, net 84,544 72,613
Investments, principally affiliates 23,037 21,804
Notes receivable 29,720 31,454
Deferred income taxes 11,772 14,357
Deferred costs, new facilities, net 20,553 20,885
Other assets 33,438 32,119
------- -------
203,064 193,232
------- -------
$729,971 $766,742
======= =======
<CAPTION>
Liabilities and Stockholders' Equity
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 3,498 $ 4,013
Accounts payable 21,660 28,615
Accrued expenses 96,284 97,780
Due to third-party payors 17,247 24,676
Income taxes payable 4,047
------- -------
Total current liabilities 142,736 155,084
Long-term debt, net of current portion 321,508 353,752
Other liabilities 9,348 7,391
------- -------
Total liabilities 473,592 516,227
------- -------
Minority interests 14,899 14,963
------- -------
Commitments and contingencies (Note 3)
Stockholders' equity:
Preferred stock, $.01 par; authorized 10,000,000 shares; none issued
Common stock, $.01 par; authorized 80,000,000 shares; 38,382,984
shares issued and outstanding, September 30, 1994 (38,359,245
June 30, 1994) 384 384
Capital in excess of par 192,740 192,573
Retained earnings 48,356 42,595
------- -------
241,480 235,552
------- -------
$729,971 $766,742
======= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1994 1993
- --------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C>
Net operating revenues $ 243,393 $ 249,762
---------- ----------
Costs and expenses:
Cost of services 214,593 218,102
Interest expense 8,766 9,252
Depreciation and amortization 9,042 9,042
---------- ----------
232,401 236,396
---------- ----------
Income from operations 10,992 13,366
Other income, principally interest 743 872
---------- ----------
Income before minority interests and income taxes 11,735 14,238
Minority interests (1,539) (1,511)
---------- ----------
Income before income taxes 10,196 12,727
Income taxes 4,435 5,154
---------- ----------
Net income $ 5,761 $ 7,573
========== ==========
Net income per common share and common
equivalent share (Note 4) $ 0.15 $ 0.20
---------- ----------
Weighted average number of shares outstanding 39,494,283 38,186,995
========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Three Months Ended September 30, 1994
<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, July 1, 1994 38,359,245 $ 384 $ 192,573 $ 42,595 $ 235,552
Stock issued pursuant to:
Employee benefit plans 23,739 167 167
Net income for the three months 5,761 5,761
---------- ------ ---------- -------- ---------
Balance, September 30, 1994 38,382,984 $ 384 $ 192,740 $ 48,356 $ 241,480
========== ====== ========== ======== =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1994 1993
- --------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,761 $ 7,573
------- -------
Adjustments:
Depreciation and amortization 9,042 9,042
Other 1,366 (585)
Increase (decrease) in cash from changes in assets and liabilities,
excluding effects of acquisitions and dispositions:
Accounts receivable 6,319 (18,037)
Other assets (4,392) (3,058)
Accounts payable and accrued expenses (15,804) (4,580)
Other liabilities (6,752) (5,259)
Income taxes 11,172 4,429
------- -------
Total adjustments 951 (18,048)
------- -------
Net cash provided by (used in) operating activities 6,712 (10,475)
------- -------
Cash flows from investing activities:
Payments pursuant to acquisition agreements, net of cash acquired (13,728) (13,066)
Cash proceeds from sale of property and equipment 12,817
Deferred costs, new facilities (1,866) (1,803)
Acquisition of property and equipment (3,279) (9,264)
Notes receivable 1,734 473
Other investing activities (1,238) 312
------- -------
Net cash used in investing activities (18,377) (10,531)
------- -------
Cash flows from financing activities:
Long-term debt borrowing 7,131 31,133
Long-term debt repayment (38,449) (1,318)
Deferred financing costs (1,350) (264)
Issuance of common stock 167 383
Capital contributions by minority interests 320 708
Distributions to minority interests (758) (737)
------- -------
Net cash provided by (used in) financing activities (32,939) 29,905
------- -------
Net increase (decrease) in cash and cash equivalents (44,604) 8,899
Cash and cash equivalents, beginning of period 54,862 64,444
------- -------
Cash and cash equivalents, end of period $ 10,258 $ 73,343
======= =======
</TABLE>
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Cont'd)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1994 1993
- --------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Net cash paid (received) during the period for:
Interest, net of amounts capitalized ($867 in fiscal 1994) $11,366 $10,575
====== ======
Income taxes (net of refunds) $(6,688) $ 1,049
====== ======
Supplemental schedule of noncash investing and financing activities:
The company issued stock pursuant to various acquisition agreements $ 0 $ 1,283
====== ======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Basis of Presentation:
In the opinion of the Company, the accompanying interim consolidated financial
statements present fairly the Company's financial position at September 30,
1994, the results of its operations, and its cash flows for the three month
period then ended. All adjustments are of a normal and recurring nature. These
statements are presented in accordance with the rules and regulations of the
United States Securities and Exchange Commission ("SEC"). Accordingly, they are
unaudited, and certain information and footnote disclosures normally included in
the Company's annual consolidated financial statements have been condensed or
omitted, as permitted under the applicable rules and regulations. Readers of
these statements should refer to the Company's audited consolidated financial
statements and notes thereto which were included in the Company's Form 10-K for
the year ended June 30, 1994. The results of operations presented in the
accompanying financial statements are not necessarily representative of
operations for an entire year due to, among other things, new hospital
development, acquisitions, hospital divestitures, interest rate changes and
fluctuations in effective tax rates. Comparisons to the prior year might also
be affected for similar reasons. Certain items in the fiscal 1994 financial
statements have been reclassified to conform to the classifications in the
fiscal 1995 financial statements.
2. Long-Term Debt:
During the first quarter of fiscal 1995, the Company purchased approximately
$38,585,000 of its Senior Subordinated Notes in a series of open market
purchases.
3. Contingencies:
Outstanding letters of credit aggregated approximately $29,202,000 at September
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, including
without limitation malpractice claims covered under the Company's insurance
policies. 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.
4. Earnings Per Share:
Net income per common and common equivalent share is based upon the weighted
average number of common shares outstanding during the period plus the effect of
common shares contingently issuable, primarily from stock options and
acquisition agreements requiring the issuance of shares contingent on future
earnings.
Fully diluted earnings per share are determined on the assumption that the
7 3/4% convertible subordinated debentures were converted July 1, 1993. Net
income was adjusted for the interest on the debentures, net of the related
income tax benefits.
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q/A Amendment 1 - For the Quarter ended September 30, 1994
- --------------------------------------------------------------------------------
OVERVIEW
The Company is a diversified provider of comprehensive medical rehabilitation
and physician services. The Company has a significant presence in each of the
rehabilitation industry's three principal sectors - inpatient rehabilitation
care, contract services and outpatient rehabilitation care. Additionally, the
Company is the largest provider of physician locum tenens services in the United
States. The following discussion of the Company's financial condition and
results of operations for the three months ended September 30, 1994 and 1993
should be read in connection with the Management's Discussion and Analysis of
Financial Condition and Results of Operations presented in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1994.
The following table sets forth, for the periods indicated, net operating
revenues for each of the Company's operating groups (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Increase
September 30, (Decrease)
----------------------- ------------
1994 1993 1993-1994
---- ---- ---------
<S> <C> <C> <C>
Net operating revenues:
- ----------------------
Rehabilitation group $132,357 $137,019 (3.4%)
Contract therapy services 85,917 83,517 2.9%
Physician services 24,691 29,080 (15.1%)
Other 428 146 N/M
-------- -------- -------
$243,393 $249,762 (2.6%)
======== ======== =======
</TABLE>
"Other" referred to in the above table consist principally of the Company's new
initiatives including SelectRehab, Innovative Health Alliances, Medical
Management Associates and Keystone Medical Systems. Certain percentage changes
in "Other" are not meaningful (N/M).
Certain reclassifications were made to the comparative quarter of the prior year
net operating revenues to conform to the first quarter of fiscal 1995
presentations.
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q/A Amendment 1 - For the Quarter ended September 30, 1994
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net Operating Revenues and Income from Operations
Net operating revenues decreased by 2.6% to $243,393,000 for the three months
ended September 30, 1994 from $249,762,000 in the comparative quarter of the
prior year. The decrease from the prior year's first quarter resulted from
operations sold or discontinued as part of the Company's previously announced
restructuring program which included the divestiture of two rehabilitation
hospitals during the fourth quarter of fiscal 1994. The decrease also resulted
from lower physician filled days in the Company's locum tenens business.
Income from operations, $10,992,000, declined 18% for the three months ended
September 30, 1994 from $13,366,000 in the comparative quarter of the prior
year. The decrease in income from operations for the first quarter of fiscal
1995 resulted primarily from lower revenues associated with lower therapist
productivity and higher than expected turnover, as well as lower contract
respiratory services pricing in the Contract Therapy Services Group offset, in
part, by lower interest expense.
Approximately 44% of the Company's consolidated net operating revenues during
the first quarter of fiscal 1995 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% for the first
quarter of fiscal 1994. The balance of the Company's net operating revenues was
provided by private pay sources, non-governmental payors, such as commercial
insurance companies, and non-patient related revenues.
The federal government 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.
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>
Three Months Ended Increase
September 30, (Decrease)
----------------------- --------------
1994 1993 1993-1994
---- ---- ---------
<S> <C> <C> <C>
Net operating revenues:
Rehabilitation group
Hospitals (fiscal year of opening)
Pre-1994 (32 hospitals) $117,677 $117,745 (0.1%)
Fiscal 1994 (4 hospitals) 10,718 3,244 230.4%
Divested facilities (2 hospitals) 6,786 N/M
-------- -------- --------
128,395 127,775 0.5%
Other rehab related 3,962 9,244 (57.1%)
-------- -------- --------
Total rehabilitation group $132,357 $137,019 (3.4%)
======== ======== ========
</TABLE>
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q/A Amendment 1 - For the Quarter ended September 30, 1994
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net Operating Revenues and Income from Operations (continued)
Rehabilitation Group (continued):
"Other rehab related" revenues referred to in the above table include revenues
from long-term care operations, Medicare reimbursement of certain home office
costs and certain outpatient operations.
The decreases in net operating revenues generated by the rehabilitation hospital
group resulted primarily from operations closed or divested as part of the
Company's previously announced restructuring program including the two hospitals
divested during the fourth quarter of fiscal 1994. The decline in other rehab
related net revenues is principally due to the Company's decision to discontinue
the provision of skilled nursing services at two of its rehabilitation
hospitals. Net operating revenues generated by the Company's 32 rehabilitation
hospitals in operation during all of fiscal 1994 and the first quarter of fiscal
1995 (the "Pre-1994 Hospitals") were unchanged from the prior comparable
quarter.
As of September 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 the first quarter of fiscal
1995, and 61% in the first quarter of fiscal 1994.
With the pressures to control rising healthcare costs, more services are being
provided on an outpatient basis. Total outpatient treatments in the first
quarter of fiscal 1995 increased to 785,147 over the 736,042 outpatient
treatments in the comparative quarter of the prior year. Outpatient services
represented 17.2% and 17.0% of the rehabilitation group's net operating revenues
in the first quarters of fiscal 1995 and 1994, respectively. While the volume
of outpatient treatments continues to increase, pricing of outpatient services
has declined over the prior year due to several factors including changes in the
Company's marketing strategy and changes in regulatory requirements affecting
pricing in selected states' workers compensation programs.
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q/A Amendment 1 - For the Quarter ended September 30, 1994
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net Operating Revenues and Income from Operations (continued)
Rehabilitation Group (continued):
Below are selected statistics for the Pre-1994 Hospitals:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------- %
1994 1993 Change
---- ---- ------
<S> <C> <C> <C>
Occupancy percentage 69.0% 63.7% 8%
Admissions 5,863 5,337 10%
Average length of stay (days) 22.4 22.9 (2%)
Patient days 132,768 121,544 9%
Outpatient treatments 714,774 640,022 12%
Outpatient % of net revenue 17.6% 16.8% 5%
</TABLE>
Occupancy percentage for the Pre-1994 Hospitals for the first quarter of fiscal
1995 was 69.0% as compared to 63.7% during the comparative quarter of the prior
year. This increase in occupancy percentage was primarily due to an increase in
admissions in the first quarter of fiscal 1995. Average length of stay
declined, in part, due to cost controls 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 September 30, 1994, the Company had 15 hospitals subject to TEFRA
regulations. The lower patient average length of stay in the first quarter of
fiscal 1995 versus the comparative quarter of the prior year was partially
offset by a 10% increase in Pre-1994 Hospital admissions in the first quarter of
fiscal 1995.
The timing of new hospital openings during fiscal 1994 makes a comparison of
occupancy percentages between the first quarter of fiscal 1995 and 1994 for
these hospitals not meaningful. The rehabilitation hospitals opened in fiscal
1994 (the "1994 Hospitals") increased their patient days in the first quarter of
fiscal 1995 to 10,862 from 3,104 in the comparative quarter of the prior year.
During the first quarter of fiscal 1995, the occupancy percentage for the 1994
Hospitals was 51.3%.
Contract Therapy Services:
The increases in net operating revenues generated by contract therapy services
resulted from same company growth through the addition of new contracts with
both existing and new providers. The net number of facilities served remained
relatively unchanged over the same period in the prior year. The Company
continues to add contracts with new facilities and terminate business with
certain facilities that do not meet the Company's business objectives. The
contract therapy companies serve over 2,400 facilities.
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q/A Amendment 1 - For the Quarter ended September 30, 1994
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net Operating Revenues and Income from Operations (continued)
Contract Therapy Services (continued):
Approximately 86% of the net operating revenues for the first quarter of fiscal
1995 and 79% of the net operating revenues for the comparative quarter of the
prior year 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 22% for the first quarter of fiscal 1995
representing an increase from 19% for the comparative quarter of the prior year.
The principal reason for the increase in the first quarter of fiscal 1995 is the
Company's decision to terminate its contractual arrangements with certain third-
party providers. Under these arrangements, the Company provided therapy
services to Medicare patients through an unrelated Medicare certified provider.
As a result of terminating these arrangements, the Company, in many instances,
now provides the same services directly to Medicare patients.
Physician Services:
The decline in the Company's physician services net operating revenues was a
result of reduced demand and pricing pressures in the Company's physician/locum
tenens services. Net operating revenues for the first quarter of fiscal 1995
declined 15.1% as compared to the first quarter of the prior year.
During the first quarter of fiscal 1995 approximately 55% of net operating
revenues was generated through services to hospitals while 37% involved
contracts with physician groups. The remainder was with managed care programs,
clinics and other sources.
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q/A Amendment 1 - For the Quarter ended September 30, 1994
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Physician Services (continued):
The following table sets forth, for the periods indicated, filled days by
discipline:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, September 30,
1994 1993
------------------ ------------------ %
# of # of Increase
days % days % (Decrease)
------ ----- ------ ----- ----------
<S> <C> <C> <C> <C> <C>
Physicians:
Primary care 9,995 28.0 11,262 28.3 (11.3)
Specialty care 13,566 38.0 15,219 38.3 (10.9)
Allied professionals 12,137 34.0 13,251 33.4 (8.4)
------ ----- ------ ----- -----
35,698 100.0 39,732 100.0 (10.2)
====== ===== ====== ===== =====
</TABLE>
The decline in filled days is due to reduced demand for specialty physicians
locum tenens services and additional competition in local markets along with the
effect of the consolidation of the Company's primary care physician product
lines. Allied professionals represent approximately 21% of physician services
net operating revenues for the three months ended September 30, 1994. The
Company believes the primary care physician product line has greater growth
prospects than its specialist product line.
Cost of Services
Cost of services for the first quarter of fiscal 1995 totalled $214,593,000
compared to $218,102,000 for the comparative quarter of the prior year, a
decrease of $3,509,000. This decrease was primarily due to operations divested
during the fourth quarter of fiscal 1994 and lower lease and other operating
expenses associated with the Company's fiscal 1994 fourth quarter restructuring.
The Company's largest component of cost of services is salaries, wages and
benefits.
Interest Expense
Interest expense for the first quarter of fiscal 1995 totalled $8,766,000
compared to $9,252,000 for the comparative quarter of the prior year, a decrease
of $486,000. This decrease was primarily due to a lower average outstanding
debt balance as a result of the retirement of approximately $32,000,000 of the
Company's long-term debt during the first quarter of fiscal 1995.
Depreciation and Amortization
Depreciation and amortization were unchanged over the comparative quarter of the
prior year as an increase in depreciation expense resulting from the openings of
new hospitals was offset by the lower depreciation expense from facilities
impaired through the special charge recorded in the fourth quarter of fiscal
1994.
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q/A Amendment 1 - For the Quarter ended September 30, 1994
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Minority Interests
Minority interests in net income increased for the three months ended September
30, 1994 to $1,539,000 from $1,511,000 in the comparative quarter of the prior
year. This increase was primarily due to improved profitability during the
first quarter of fiscal 1995 at the Company's joint ventured rehabilitation
hospitals.
Income Taxes
Income taxes as a percentage of income before income taxes were 43.5% and 40.5%
for the first quarter of fiscal 1995 and 1994, respectively. The Company's
higher effective tax rate resulted primarily from a higher effective state tax
rate and a reduction in the tax exempt interest income.
CAPITAL RESOURCES AND LIQUIDITY
For the three months ended September 30, 1994, operating activities provided
$6,712,000 of cash as compared with uses of $10,475,000 in the three months
ended September 30, 1993. In the past, the Company has utilized cash from
operations to fund the working capital of new hospital openings as well as the
expansion of certain contract therapy and physician services companies. The
cash flow increase relates principally to the slowdown of capital intensive
hospital development projects. Investing activities, primarily acquisition
related, resulted in uses of cash of $18,377,000 during the first quarter of
fiscal 1995 as compared with $10,531,000 in the comparative quarter of the prior
year. Available cash was primarily used to fund the cash requirements for the
first quarter of fiscal 1995. See the Consolidated Statements of Cash Flows for
a detailed analysis of the components of cash flow.
Long-term debt outstanding at September 30, 1994 totalled $325,006,000,
including $3,498,000 representing the current portion of long-term debt. During
the first quarter of fiscal 1995, the Company purchased approximately
$38,585,000 of its Senior Subordinated Notes in a series of open market
purchases. The Company anticipates that it will employ operating cash flow in
new growth opportunities within its core businesses and to selectively retire
long-term debt. 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 September 30, 1994, there were approximately $7,000,000
of borrowings and approximately $29,202,000 of letters of credit outstanding
under the credit facility. The credit facility provides for a revolving loan
period through December 31, 1996 and the subsequent conversion of the revolving
loan into a four-year term loan. The Company has pledged its ownership
interests in certain of its operating subsidiaries as collateral under the
facility. The Company is also subject to certain financial and other covenants,
including, without limitation, restrictions on the amount of other indebtedness
it may incur and a prohibition on paying cash dividends.
The Company's ongoing working capital requirements relate principally to routine
capital expenditures, future development projects, potential acquisitions and
activities within its contract therapy and physician services companies. The
Company currently has no new hospital construction in progress. The Company
currently estimates that its fiscal 1995 capital requirements will consist of
capital maintenance and improvements at existing facilities in the normal course
of business and will be funded through the Company's operating cash flow or its
credit facility. Pursuant to contingent deferred payment provisions of certain
acquisition agreements, the Company expects that additional capital may be
required to pay the sellers of the acquired companies through fiscal 1997, based
upon the earnings of the acquired companies.
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q/A Amendment 1 - For the Quarter ended September 30, 1994
- --------------------------------------------------------------------------------
CAPITAL RESOURCES AND LIQUIDITY (continued)
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 September
30, 1994 the Company had $198,798,000 of unused borrowing capacity (subject to
applicable covenants which may limit borrowing capacity) under its credit
facility, of which $15,798,000 is available in the form of letters of credit.
In fiscal 1994 the Company recorded a special charge of $74,834,000, which
included a charge for restructuring certain elements of its business. At
September 30, 1994 an accrual of $16,746,000 remains to complete the plan
associated with certain components of the special charge. The Company believes
that the remaining accrual related to the special charge will be materially
liquidated by June 30, 1995. The components of the special charge are as
follows (in thousands):
<TABLE>
<CAPTION>
Original Fiscal 1994 Balance Fiscal 1995 Balance
Provision Activity 6/30/94 Activity 6/30/94
--------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Impairment of Assets $50,244 ($41,406) $ 8,838 $ 833 $ 9,671
Consolidation and
Reorganization 22,842 (13,807) 9,035 (2,471) 6,564
Employee and Other Costs 1,748 (827) 921 (410) 511
------- --------- ------- -------- -------
Total $74,834 ($56,040) $18,794 ($2,048) $16,746
======= ========= ======= ======== =======
</TABLE>
During October 1994, the Company announced that many of its operating facilities
and office locations were visited or contacted by representatives of the U.S.
Justice Department for the purpose of interviewing certain of its employees.
The Company has contacted representatives of the Justice Department to offer the
Company's cooperation to respond to its inquiries. At this time the Company
does not know the substance or timing of whatever follow-up is planned by the
Justice Department. The Company's management is not aware of any Company
practices of the type covered by the Justice Department inquiries, or otherwise,
that are not in compliance with the rules and regulations applicable to its
operations. The Company is unable to predict what effect, if any, these
inquiries will have on the Company's business.
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Signature
Form 10-Q/A - Amendment No. 1 - For the Quarter ended September 30, 1994
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this Amendment No. 1 to be signed on its behalf by
the undersigned thereunto duly authorized.
CONTINENTAL MEDICAL SYSTEMS, INC.
Date: June 1, 1995 By: /s/ Dennis L. Lehman
--------------------------
Dennis L. Lehman
Senior Vice-President - Finance
and Chief Financial Officer
Signing on the behalf of the registrant and
as principal financial officer.
