<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 December 31, 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 January 31, 1995, there were 38,539,746 shares of the Registrant's $.01
par value Common Stock outstanding.
================================================================================
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Index
Form 10-Q/A Amendment No. 1 - For the Quarter ended December 31, 1994
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
December 31, 1994 and June 30, 1994............................. 1
Consolidated Statements of Operations
Three months ended December 31, 1994 and 1993................... 2
Consolidated Statement of Stockholders' Equity
Three months ended December 31, 1994............................ 3
Consolidated Statements of Cash Flows
Three months ended December 31, 1994 and 1993................. 4-5
Notes to Consolidated Financial Statements...................... 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 8-16
Signature................................................................. 17
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1994 and June 30, 1994
<TABLE>
<CAPTION>
December 31, June 30,
Assets 1994 1994
- --------------------------------------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 21,799 $ 54,862
Accounts receivable, net of allowance for doubtful accounts
($19,089 December 31, 1994; $16,685, June 30, 1994) 227,105 232,198
Other receivables 13,266 10,778
Prepaid expenses 15,034 13,720
Prepaid income taxes 4,827 4,319
Deferred income taxes 10,360 5,610
--------- ---------
292,391 321,487
--------- ---------
Property and equipment, net 255,622 252,023
--------- ---------
Other:
Goodwill, net 89,196 72,613
Investments, principally affiliates 17,896 21,804
Notes receivable 28,526 31,454
Deferred income taxes 10,088 14,357
Deferred costs, new facilities, net 17,259 20,885
Other assets 37,829 32,119
--------- ---------
200,794 193,232
--------- ---------
$ 748,807 $ 766,742
========= =========
<CAPTION>
Liabilities and Stockholders' Equity
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 3,873 $ 4,013
Accounts payable 18,408 28,615
Accrued expenses 95,008 97,780
Due to third-party payors 28,290 24,676
--------- ---------
145,579 155,084
Long-term debt, net of current portion 343,078 353,752
Other liabilities 9,665 7,391
--------- ---------
498,322 516,227
--------- ---------
Minority interests 13,365 14,963
--------- ---------
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; 38,538,552 shares
issued and outstanding, December 31, 1994 (38,359,245, June 30, 1994) 385 384
Capital in excess of par 194,048 192,573
Retained earnings 42,687 42,595
--------- ---------
237,120 235,552
--------- ---------
$ 748,807 $ 766,742
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1994 1993 1994 1993
(In thousands, except per share data)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net operating revenues $ 245,639 $ 249,041 $ 489,032 $ 498,803
---------- --------- ---------- ---------
Costs and expenses:
Cost of services 220,525 223,217 435,118 441,319
Interest expense 8,928 9,751 17,694 19,003
Depreciation and amortization 9,392 9,734 18,434 18,776
Special charge (Note 4) 13,398 13,398
---------- --------- ---------- ---------
252,243 242,702 484,644 479,098
---------- --------- ---------- ---------
Income (loss) from operations (6,604) 6,339 4,388 19,705
Other income, principally interest 703 890 1,446 1,762
---------- --------- ---------- ---------
Income (loss) before minority interests and
income taxes (5,901) 7,229 5,834 21,467
Minority interests (1,532) (863) (3,071) (2,374)
---------- --------- ---------- ---------
Income (loss) before income taxes (7,433) 6,366 2,763 19,093
Income taxes (1,764) 2,578 2,671 7,732
---------- --------- ---------- ---------
Net income (loss) $ (5,669) $ 3,788 $ 92 $ 11,361
========== ========= ========== =========
Net income (loss) per common share and common
equivalent share (Note 5):
Primary $ (.15) $ .10 $ .00 $ .30
========== ========= ========== =========
Fully diluted $ (.15) $ .10 $ .00 $ .29
========== ========= ========== =========
Weighted average number of shares outstanding:
Primary 38,535,381 38,364,233 39,036,334 38,146,140
Fully diluted 38,535,381 38,598,379 39,546,285 38,410,534
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Six Months Ended December 31, 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 47,798 323 323
Acquisition agreements 131,509 1 1,152 1,153
Net income for the six months 92 92
---------- ------ ---------- -------- ---------
Balance, December 31, 1994 38,538,552 $ 385 $ 194,048 $ 42,687 $ 237,120
========== ====== ========== ======== =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1994 1993
- ---------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 92 $ 11,361
-------- --------
Adjustments:
Depreciation and amortization 18,434 18,776
Other 2,133 (1,049)
Special charge 13,398
Increase (decrease) in cash from changes in assets and liabilities,
excluding effects of acquisitions and dispositions:
Accounts receivable 6,040 (22,230)
Other assets (6,317) (4,965)
Accounts payable and accrued expenses (16,742) (540)
Other liabilities (8,789) (3,524)
Income taxes (968) 4,451
-------- --------
Total adjustments 7,189 (9,081)
-------- --------
Net cash provided by operating activities 7,281 2,280
-------- --------
Cash flows from investing activities:
Payments pursuant to acquisition agreements, net of cash acquired (16,607) (14,010)
Cash proceeds from sale of property and equipment 13,464
Deferred costs, new facilities (2,315) (2,654)
Acquisition of property and equipment (8,507) (17,660)
Notes receivable 2,928 514
Other investing activities (1,698) 726
-------- --------
Net cash used in investing activities (26,199) (19,620)
-------- --------
Cash flows from financing activities:
Long-term debt borrowing 65,022 88,274
Long-term debt repayment (74,092) (59,193)
Deferred financing costs (2,320) (866)
Issuance of common stock 323 723
Capital contributions by minority interests 334 1,408
Distributions to minority interests (3,412) (1,892)
-------- --------
Net cash provided by (used in) financing activities (14,145) 28,454
-------- --------
Increase (decrease) in cash and cash equivalents (33,063) 11,114
Cash and cash equivalents, beginning of period 54,862 64,444
-------- --------
Cash and cash equivalents, end of period $ 21,799 $ 75,558
======== ========
</TABLE>
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Cont'd)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1994 1993
- ---------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized ($1,227
in fiscal 1994) $ 19,778 $ 19,894
======== ========
Income taxes (net of refunds) $ 4,066 $ 3,838
======== ========
Supplemental schedule of noncash investing and financing activities:
The company issued stock pursuant to various acquisition agreements $ 1,153 $ 3,549
======== ========
</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 December 31, 1994,
the results of its operations, and its cash flows for the three and six month
periods 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 presented 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 and divestitures, acquisitions, 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 six months of fiscal 1995, the Company purchased approximately
$48,585,000 of its Senior Subordinated Notes in a series of open market
purchases.
3. Contingencies
Outstanding letters of credit aggregated approximately $29,202,000 at December
31, 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.
In the normal course of business, the Company has amounts due to or from the
Medicare program, the Medicaid program and other third party payors. The
Company has recorded amounts due to or from these third party payors which it
believes are reasonable estimates. However, additional changes to these
estimates in the future may be appropriate based on facts and circumstances
which come to light. Ultimately, the amounts due to or from third party payors
may be adjusted by these third party payors upon final settlement. The Company
is unable to estimate the likelihood or potential amounts of such adjustments.
4. Special charge:
During September through November of 1994, the Company received various
unfavorable adjustments upon the final settlement of its 1991 and 1992 CMS
Therapies Home Office Cost Reports and other CMS Therapies 1992 cost reports.
As a result of the unfavorable settlements, which was the Company's first
indication that adjustments to its estimates would be required, the Company
performed a detail analysis of its due to/from
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. Special charge (continued):
third party payors amounts for all open cost reports. Upon completion of its
analysis during the second quarter of fiscal 1995, the Company recorded a
special pre-tax charge of $13,398,000 to reflect the revision in the Company's
estimate of amounts due to/from third party payors.
5. 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 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 No. 1 - For the Quarter ended December 31, 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 and six months ended December 31, 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 Six Months Ended
December 31, Increase December 31, Increase
1994 1993 (Decrease) 1994 1993 (Decrease)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net operating revenues:
- -----------------------
Rehabilitation group $134,972 $137,928 (2.1%) $267,328 $275,015 (2.8%)
Contract therapy services 86,263 85,172 1.3% 172,180 168,689 2.1%
Physician services 22,584 25,619 (11.8%) 47,275 54,698 (13.6%)
Other 1,820 322 N/M 2,249 401 N/M
-------- -------- ------- -------- -------- ------
$245,639 $249,041 (1.4%) $489,032 $498,803 (2.0%)
======== ======== ======= ======== ======== ======
</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. The 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 second 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 No. 1 - For the Quarter ended December 31, 1994
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net Operating Revenues and Income (Loss) from Operations
Net operating revenues decreased by 1.4% to $245,639,000 for the three months
ended December 31, 1994 from $249,041,000 in the comparative quarter of the
prior year. During the six months ended December 31, 1994, net operating
revenues decreased 2.0% to 489,032,000 from $498,803,000 for the same period in
the prior year. The decrease from the prior year's second quarter and six
months 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 (loss) from Operations declined to ($6,604,000) for the three months
ended December 31, 1994 from $6,339,000 in the comparative quarter of the prior
year. During the six months ended December 31, 1994, income from operations
decreased to $4,388,000 from $19,705,000 for the same period in the prior year.
The decrease in the Company's income (loss) from operations for the second
quarter and six months of fiscal 1995 resulted from the Company's fiscal 1995
second quarter special charge, offset, in part, by lower interest and
depreciation and amortization expenses.
Approximately 43% of the Company's consolidated net operating revenues during
the second quarter of fiscal 1995 and fiscal 1994, respectively, was provided
from patients covered by the federal government's Medicare program for the aged
and chronically disabled and state Medicaid programs for the indigent. 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, 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):
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q/A Amendment No. 1 - For the Quarter ended December 31, 1994
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net Operating Revenues and Income (Loss) from Operations (continued)
<TABLE>
<CAPTION>
Three Months Ended % Six Months Ended %
December 31, Increase December 31, Increase
1994 1993 (Decrease) 1994 1993 (Decrease)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net operating revenues:
Rehabilitation group
Hospitals (fiscal year of opening)
Pre-1994 (32 hospitals) $117,559 $116,829 0.6% $235,236 $234,942 0.1%
Fiscal 1994 (4 hospitals) 11,456 5,466 109.6% 22,040 8,710 153.0%
Fiscal 1995 (1 hospital) 2,337 100.0% 2,469 100.0%
Divested facilities (2 hospitals) 6,876 N/M 13,662 N/M
-------- -------- ------ -------- -------- ------
131,352 129,171 1.7% 259,745 257,314 0.9%
Other rehab related 3,620 8,757 (58.7%) 7,583 17,701 (57.2%)
-------- -------- ------- -------- -------- ------
Total rehabilitation group $134,972 $137,928 (2.1%) $267,328 $275,015 (2.8%)
======== ======== ======= ======== ======== ======
</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 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 operating 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
six months of fiscal 1995 (the "Pre-1994 Hospitals") increased slightly from the
prior comparable quarter.
As of December 31, 1994, the Company had transitional rehabilitation units, with
a total of 405 beds, in 23 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.
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q/A Amendment No. 1 - For the Quarter ended December 31, 1994
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net Operating Revenues and Income (Loss) from Operations (continued)
Rehabilitation Group (continued):
The percentage of net operating revenues generated by Medicare and Medicaid
patients within the rehabilitation group was 66% and 63% for the three months
ended December 31, 1994 and 1993, respectively, and 65% and 62% for the six
months ended December 31, 1994 and 1993, respectively.
With the pressures to control rising healthcare costs, more services are being
provided on an outpatient basis. Total outpatient treatments in the second
quarter of fiscal 1995 increased to 776,876 over the 756,734 outpatient
treatments in the comparative quarter of the prior year. For the six months
ended December 31, 1994 outpatient treatments were 1,562,023, a 4.6% increase
over the same period of the prior year. Outpatient services represented 16.8%
and 16.1% of the rehabilitation group's net operating revenues in the second
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.
Below are selected statistics for the Pre-1994 Hospitals:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1994 1993 % Change 1994 1993 % Change
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Occupancy percentage 69.4% 64.3% 7.9% 69.2% 64.3% 7.6%
Admissions 5,839 5,561 5.0% 11,702 10,898 7.4%
Average length of stay (days) 22.6 22.4 0.9% 22.5 22.6 (0.4%)
Patient days 133,586 123,605 8.1% 266,354 245,149 8.6%
Outpatient treatments 702,968 636,929 10.4% 1,417,742 1,276,950 11.0%
Outpatient % of net operating revenue 17.5% 16.6% 5.4% 17.6% 17.1% 2.9%
</TABLE>
Occupancy percentage for the Pre-1994 Hospitals for the second quarter of fiscal
1995 was 69.4% as compared to 64.3% during the comparative quarter of the prior
year. Those same facilities' occupancy percentage for the six months ended
December 31, 1994 was 69.2% compared to 64.3% during the same period in the
prior year. This increase in occupancy percentage was primarily due to an
increase in admissions during the first six months of fiscal
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q/A Amendment No. 1 - For the Quarter ended December 31, 1994
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net Operating Revenues and Income (Loss) from Operations (continued)
Rehabilitation Group (continued):
1995. Average length of stay remained relatively consistent for the comparative
three and six months ended December 31, 1994 and 1993. 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 December 31, 1994, the
Company had 18 hospitals subject to TEFRA regulations.
The timing of new hospital openings during fiscal 1994 makes a comparison of
occupancy percentages between the second 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 second quarter
of fiscal 1995 to 12,406 from 4,893 in the comparative quarter of the prior
year. Year to date, their patient days increased to 23,268 from 7,997 in the
prior year. During the second quarter of fiscal 1995, the occupancy percentage
for the 1994 Hospitals was 58.6% and 55.0% for the six months ended December 31,
1994.
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 2,300 facilities.
Approximately 84% and 85% of the net operating revenues for both the three and
six months ended December 31, 1994, 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 remained relatively constant at 20% for the three and
six months ended December 31, 1994 and 1993.
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q/A Amendment No. 1 - For the Quarter ended December 31, 1994
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Physician Services:
The decline in the Company's physician services net operating revenues was a
result of reduced demand, additional competition in local markets and pricing
pressures in the Company's physician/locum tenens services. Net operating
revenues for the three and six months ended December 31, 1994 declined 11.8% and
13.6% as compared to the same periods of the prior year.
During the three and six months ended December 31, 1994 approximately 59% and
57%, respectively, of net operating revenues was generated through services to
hospitals, while 28% and 32%, respectively, involved contracts with physician
groups. The remainder was with managed care programs, clinics and other
sources.
The following tables set forth, for the periods indicated, filled days by
discipline:
<TABLE>
<CAPTION>
Three Months Ended
December 31,
________________________________________________________________________________
1994 1993 %
# of # of Increase
days % days % (Decrease)
------ ----- ------ ----- ----------
<S> <C> <C> <C> <C> <C>
Physicians:
Primary care 9,431 28.1 11,963 33.0 (21.2%)
Specialty care 11,752 35.0 12,586 34.8 ( 6.6%)
Allied professionals 12,360 36.9 11,638 32.2 6.2%
------ ----- ------ ----- -------
33,543 100.0 36,187 100.0 ( 7.3%)
====== ===== ====== ===== =======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
December 31,
________________________________________________________________________________
1994 1993 %
# of # of Increase
days % days % (Decrease)
------ ----- ------ ----- ----------
<S> <C> <C> <C> <C> <C>
Physicians:
Primary care 19,426 28.1 23,225 30.6 (16.4%)
Specialty care 25,318 36.6 27,805 36.6 ( 8.9%)
Allied professionals 24,497 35.3 24,889 32.8 ( 1.6%)
------ ----- ------ ----- -------
69,241 100.0 75,919 100.0 ( 8.8%)
====== ===== ====== ===== =======
</TABLE>
The decline in total 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
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q/A Amendment No. 1 - For the Quarter ended December 31, 1994
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
physician product lines. Allied professionals represent approximately 22% of
physician services net operating revenues for the three and six months ended
December 31, 1994. The Company believes the primary care physician product line
has greater long-term growth prospects than its specialist product line.
Cost of Services
Cost of services for the second quarter of fiscal 1995 totalled $220,525,000
compared to $223,217,000 for the comparative quarter of the prior year. Cost of
services year to date in fiscal 1995 totalled $435,118,000 compared to
$441,319,000 for the comparative prior year. Decreases in cost of services over
both the comparative second quarter and year to date time periods were due
primarily to operations divested during the prior fiscal year and lower lease
and other operating expenses as a result of the Company's fourth quarter fiscal
1994 restructuring. The Company's largest component of cost of services are
salaries, wages and benefits.
Interest Expense
Interest expense year to date in fiscal 1995 totalled $17,694,000 compared to
$19,003,000 for the comparative time period of the prior year, a decrease of
$1,309,000. This decrease was primarily due to a lower average outstanding debt
balance as a result of the retirement of approximately $48,585,000 of the
Company's Senior Subordinated Notes during the first six months of fiscal 1995.
The decrease was offset, in part, by bank credit facility borrowings.
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.
Special Charge
The Company has taken a special pre-tax charge of $13,398,000 in the second
quarter and expects to record an increase in this special charge in its third
quarter. Based on current information, the third quarter charge is estimated to
be $5,000,000 before taxes and will reflect the elimination of staff positions,
office lease terminations and certain other costs of the changes being
implemented during the third quarter.
During September through November of 1994, the Company received various
unfavorable adjustments upon the final settlement of its 1991 and 1992 CMS
Therapies Home Office Cost Reports and other CMS Therapies 1992 cost reports. As
a result of the unfavorable settlement, which was the Company's first indication
that adjustments to its estimates would be required, the Company performed a
detail analysis of its due to/from third party payor amounts for all open cost
reports. Upon completion of its analysis during the second quarter of fiscal
1995, the Company recorded a $13,398,000 special pre-tax charge to reflect the
revision in the Company's estimate of amounts due to/from third party payors.
The final settlement of the various cost reports will take place over a period
of several years. Management expects cash flow from operations will be
sufficient to meet additional estimated amounts due to third party payors when
the respective cost reports are final settled and believes the effect of the
estimated $5,000,000 third quarter charge on liquidity to be minimal.
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q/A Amendment No. 1 - For the Quarter ended December 31, 1994
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Minority Interests
Minority interests in net income increased for both the three and six months
ended December 31, 1994. This increase was primarily due to improved
profitability in fiscal 1995 at the Company's joint ventured rehabilitation
hospitals.
Income Taxes
Income taxes as a percentage of income (loss) before income taxes was (23.7%)
and 96.7% for the three and six months ended December 31, 1994, respectively.
These percentages reflect the effect of the special charge taken in the second
quarter. Without the effect of the special charge, pro forma income taxes as a
percentage of income before income taxes was 50.3% and 46.0% for the three and
six months ended December 31, 1994, respectively. The percentage for each of
the comparable periods in the prior year was 40.5%. The Company's higher pro
forma effective tax rate resulted primarily from a higher effective state tax
rate, a reduction in the tax exempt interest income, a higher proportion of
income from subsidiaries not consolidated for tax purposes and a relative
increase in non-deductible costs such as goodwill amortization.
CAPITAL RESOURCES AND LIQUIDITY
For the six months ended December 31, 1994, operating activities provided
$7,281,000 of cash as compared with $2,280,000 in the six months ended December
31, 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 operations. The cash flow increase
relates principally to the slowdown of capital intensive hospital development
projects. Available cash was primarily used to fund the cash requirements for
the six months 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 December 31, 1994 totalled $346,951,000, including
$3,873,000 representing the current portion of long-term debt. During the first
six months of fiscal 1995, the Company purchased approximately $48,585,000 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, where market opportunities are available on
favorable terms, to selectively retire long-term debt. During the third quarter
of fiscal 1995, the Company made additional purchases of its Senior Subordinated
Notes in the open market. 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 December 31, 1994, there were
approximately $38,000,000 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 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
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q/A Amendment No. 1 - For the Quarter ended December 31, 1994
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY (continued)
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.
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 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 December 31, 1994
the Company had $167,798,000 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
December 31, 1994 an accrual of $14,143,000 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 12/31/94
--------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Impairment of Assets $50,244 ($41,406) $ 8,838 $ 337 $ 9,175
Consolidation and
Reorganization 22,842 ( 13,807) 9,035 ( 4,490) 4,545
Employee and Other Costs 1,748 ( 827) 921 ( 498) 423
------- --------- ------- -------- -------
Total
$74,834 ($56,040) $18,794 ($4,651) $14,143
======= ========= ======= ======== =======
</TABLE>
In 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. 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.
In the normal course of its business, certain contingencies have the potential
to affect the Company's operating results and financial position. These
contingencies are discussed in Note 3 of the Company's financial statements
included in this report.
<PAGE>
Continental Medical Systems, Inc. and Subsidiaries
Signature
Form 10-Q/A - Amendment No. 1 - For the Quarter ended December 31, 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.
