<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 27, 1996
REGISTRATION NO. 33-65397
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
HORIZON/CMS HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE
(State or other 8069
jurisdiction of (Primary Standard 91-1346899
incorporation or Industrial (I.R.S. Employer
organization) Classification Number) Identification No.)
</TABLE>
6001 INDIAN SCHOOL ROAD, N.E., SUITE 530
ALBUQUERQUE, NEW MEXICO 87110
(Address of principal executive offices, including zip code)
SCOT SAUDER
VICE PRESIDENT OF LEGAL AFFAIRS,
SECRETARY AND GENERAL COUNSEL
HORIZON/CMS HEALTHCARE CORPORATION
6001 INDIAN SCHOOL ROAD, N.E., SUITE 530
ALBUQUERQUE, NM 87110
(505) 881-4961
(Name, address and telephone number, including area code, of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
James H. Wilson Michael McArthur-Phillips
Vinson & Elkins L.L.P. Garvey, Schubert & Barer
2300 First City Tower, 1001 Fannin Eleventh Floor, 121 S.W. Morrison St.
Houston, Texas 77002-6760 Portland, Oregon 97204-3141
(713) 758-2222 (503) 228-3939
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
AS SOON AS PRACTICABLE FOLLOWING THE EFFECTIVENESS OF THIS REGISTRATION
STATEMENT.
--------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM OF FORM S-4 LOCATION IN PROSPECTUS
- ----------------------------------------------------------------------- -------------------------------------------------
<S> <C> <C> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus.................. Outside Front Cover Page of Proxy
Statement/Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus...................................... Inside Front Cover Page of Proxy
Statement/Prospectus; Available Information;
Incorporation of Certain Documents by Reference;
Table of Contents
3. Risk Factors and Other Information............... Outside Front Cover Page of Proxy
Statement/Prospectus; Summary; Risk Factors
4. Terms of the Transaction......................... Outside Front Cover Page of Proxy
Statement/Prospectus; Summary; The Special
Meeting; The Merger; Certain Terms of the Merger
Agreement; Stock Option Agreement; Voting
Agreement; Description of Horizon Capital Stock;
Comparative Rights of Horizon and Pacific Rehab
Stockholders
5. Pro Forma Financial Information.................. Unaudited Pro Forma Condensed Financial
Statements
6. Material Contracts with the Company Being
Acquired........................................ The Merger; Certain Terms of the Merger
Agreement; Stock Option Agreement; Voting
Agreement
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters... *
8. Interests of Named Experts and Counsel........... *
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities..................................... *
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants...... Outside Front Cover Page of Proxy
Statement/Prospectus; Summary; Horizon
11. Incorporation of Certain Information by
Reference....................................... Incorporation of Certain Documents by Reference;
Description of Horizon Capital Stock; Outside
Front Cover Page of Proxy Statement/Prospectus;
Summary; The Special Meeting; The Merger;
Certain Terms of the Merger Agreement
12. Incorporation with Respect to S-2 or S-3
Registrants..................................... *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM OF FORM S-4 LOCATION IN PROSPECTUS
- ----------------------------------------------------------------------- -------------------------------------------------
<S> <C> <C> <C>
13. Incorporation of Certain Information by
Reference....................................... *
14. Information with Respect to Registrants other
than S-3 or S-2 Registrants..................... *
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies........ *
16. Information with Respect to S-2 or S-3
Companies....................................... *
17. Information with Respect to Companies other than
S-3 or S-2 Companies............................ Outside Front Cover Page of Proxy
Statement/Prospectus; Summary; Pacific Rehab;
Pacific Rehab Management's Discussion and
Analysis of Financial Condition and Results of
Operations; The Special Meeting; The Merger;
Certain Terms of the Merger Agreement
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations are to be Solicited.............. Incorporation of Certain Documents by Reference;
Outside Front Cover Page of Proxy
Statement/Prospectus; Summary; The Special
Meeting; The Merger; Certain Terms of the Merger
Agreement; Beneficial Ownership by Certain
Stockholders and Management of Pacific Rehab;
Stockholder Proposals
19. Information if Proxies, Consents or
Authorizations are not to be Solicited In an
Exchange Offer.................................. *
</TABLE>
- ------------------------
* Not applicable or answer is negative.
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC.
8100 NE PARKWAY, SUITE 190
VANCOUVER, WASHINGTON 98662
MARCH 1, 1996
To Our Stockholders:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Special Meeting") of Pacific Rehabilitation & Sports Medicine, Inc. ("Pacific
Rehab") to be held at 9:00 a.m., local time, on Monday, April 1, 1996 at
, .
At the Special Meeting, you will be asked to consider and vote upon a
proposal to adopt the Agreement and Plan of Merger dated as of November 9, 1995
(the "Merger Agreement") and to approve the merger of a wholly owned subsidiary
of Horizon/CMS Healthcare Corporation into Pacific Rehab ("the Merger") as
contemplated by the Merger Agreement. Under the terms of the Merger Agreement,
each outstanding share of Pacific Rehab common stock would be converted into
.3483 of one share (the "Exchange Ratio") of common stock of Horizon/CMS
Healthcare Corporation ("Horizon") and Pacific Rehab would become a wholly owned
subsidiary of Horizon.
The Board of Directors of Pacific Rehab has carefully reviewed and
considered the terms and conditions of the proposed Merger. In addition, the
Board has received the written opinion dated November 9, 1995 of Smith Barney
Inc., Pacific Rehab's financial advisor, to the effect that, as of the date of
such opinion and based upon and subject to certain matters stated therein, the
Exchange Ratio was fair, from a financial point of view, to the holders of
Pacific Rehab common stock. The full text of Smith Barney's written opinion,
which is included as Appendix B to the Proxy Statement/Prospectus, should be
read carefully in its entirety.
For the reasons set forth in the attached Proxy Statement/Prospectus, the
Board of Directors of Pacific Rehab believes that the Merger is fair to and in
the best interests of Pacific Rehab and its stockholders, and recommends that
stockholders vote "FOR" adoption of the Merger Agreement and approval of the
Merger.
Details of the proposed Merger and other material information are included
in the attached Proxy Statement/Prospectus. Please review the Proxy
Statement/Prospectus carefully, particularly the information under the captions
"Risk Factors" and "The Merger -- Interests of Certain Persons in the Merger."
If you have any questions prior to the Special Meeting or need further
assistance, please call Georgeson & Company, Inc., who will be assisting in
connection with the Special Meeting, at (800) .
The affirmative vote of the holders of a majority of the outstanding shares
of Pacific Rehab common stock is required to adopt the Merger Agreement and
approve the Merger, so failure to vote will have the same effect as a vote
against the Merger Agreement and the Merger. Accordingly, we urge you to
complete, sign and date the enclosed proxy or voting instruction card and return
it in the enclosed return envelope, whether or not you plan to attend the
meeting. Your vote is important, regardless of the number of shares you own.
Sincerely,
[Sig Cut]
JOHN A. ELORRIAGA,
CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC.
8100 NE PARKWAY, SUITE 190
VANCOUVER, WASHINGTON 98662
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 1, 1996
------------------------
To the Stockholders of Pacific Rehabilitation & Sports Medicine, Inc.:
A Special Meeting of Stockholders (the "Special Meeting") of Pacific
Rehabilitation & Sports Medicine, Inc., a Delaware corporation ("Pacific
Rehab"), will be held on Monday, April 1, 1996 at 9:00 a.m., local time, at
, , , , for the following purposes:
1. To consider and vote upon a proposal to (a) adopt the Agreement and
Plan of Merger, dated as of November 9, 1995 (the "Merger Agreement"), among
Horizon/CMS Healthcare Corporation ("Horizon"), Horizon PRSM Corporation, a
wholly owned subsidiary of Horizon ("Merger Sub"), and Pacific Rehab and (b)
approve the merger of Merger Sub with and into Pacific Rehab (the "Merger")
as contemplated by the Merger Agreement. Pursuant to the Merger Agreement,
among other things, each outstanding share of common stock, par value $.01
per share, of Pacific Rehab ("Pacific Rehab Common Stock") would be
converted into .3483 of one share of common stock, par value $.001 per
share, of Horizon and Pacific Rehab would become a wholly owned subsidiary
of Horizon, all as more fully set forth in the attached Proxy Statement/
Prospectus and in the Merger Agreement, a copy of which is included as
Appendix A thereto; and
2. To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on March 1, 1996 as
the record date (the "Record Date") for the determination of stockholders
entitled to notice of, and to vote at, the Special Meeting or any adjournment
thereof. Only holders of record of shares of Pacific Rehab Common Stock at the
close of business on the Record Date are entitled to notice of, and to vote at,
the Special Meeting. Stockholders of Pacific Rehab are not entitled to any
appraisal or dissenter's rights under the Delaware General Corporation Law in
respect of the Merger.
Your vote is important. The affirmative vote of the holders of a majority of
the outstanding shares of Pacific Rehab Common Stock is required for adoption of
the Merger Agreement and approval of the Merger. Even if you plan to attend the
Special Meeting in person, we request that you sign and return the enclosed
proxy or voting instruction card and thus ensure that your shares will be
represented at the Special Meeting if you are unable to attend. If you do attend
the Special Meeting and wish to vote in person, you may withdraw your proxy and
vote in person.
By Order of the Board of Directors
[Sig Cut]
WILLIAM A. NORRIS
SECRETARY
Vancouver, Washington
March 1, 1996
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROXY STATEMENT/ PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 26, 1996
<TABLE>
<S> <C>
HORIZON/CMS PACIFIC REHABILITATION &
HEALTHCARE CORPORATION SPORTS MEDICINE, INC.
</TABLE>
------------------------
PROXY STATEMENT/PROSPECTUS
---------------------
This Proxy Statement/Prospectus relates to the proposed merger of Horizon
PRSM Corporation ("Merger Sub"), a Delaware corporation and wholly owned
subsidiary of Horizon/CMS Healthcare Corporation, a Delaware corporation
("Horizon"), with and into Pacific Rehabilitation & Sports Medicine, Inc., a
Delaware corporation ("Pacific Rehab"), pursuant to the Agreement and Plan of
Merger dated as of November 9, 1995 among Horizon, Merger Sub and Pacific Rehab
(the "Merger Agreement"). The merger contemplated by the Merger Agreement is
referred to herein as the "Merger."
As a result of the Merger, (i) each share of common stock, par value $.01
per share, of Pacific Rehab ("Pacific Rehab Common Stock") outstanding
immediately prior to the effective time of the Merger (other than Pacific Rehab
Common Stock held directly or indirectly by Horizon or directly by Pacific
Rehab) will be converted into .3483 of one share of common stock, par value
$.001 per share, of Horizon ("Horizon Common Stock") and (ii) Pacific Rehab will
become a wholly owned subsidiary of Horizon.
This Proxy Statement/Prospectus is being furnished to holders of Pacific
Rehab Common Stock in connection with the solicitation of proxies by the Board
of Directors of Pacific Rehab for use at a special meeting of stockholders of
Pacific Rehab (the "Special Meeting") to be held on April 1, 1996. This Proxy
Statement/Prospectus and the accompanying forms of proxy are first being mailed
to stockholders of Pacific Rehab on or about March 4, 1996.
At the Special Meeting, holders of Pacific Rehab Common Stock will be asked
to adopt the Merger Agreement and approve the Merger. See "Risk Factors"
beginning on page 21 for a discussion of certain factors that should be
considered by stockholders in connection with such proposal.
This Proxy Statement/Prospectus also constitutes a prospectus of Horizon
with respect to up to 3,371,742 shares of Horizon Common Stock to be issued
pursuant to the Merger Agreement in exchange for currently outstanding shares of
Pacific Rehab Common Stock and any additional shares of Pacific Rehab Common
Stock that may become outstanding prior to the Merger upon the exercise of
outstanding options or of an outstanding warrant to purchase shares of Pacific
Rehab Common Stock, upon conversion of convertible promissory notes of Pacific
Rehab, pursuant to certain installment sales arrangements entered into by
Pacific Rehab in connection with certain acquisitions and/or upon the occurrence
of certain conditions pursuant to an agreement entered into by Pacific Rehab in
connection with an acquisition (collectively, the "Pacific Rehab Acquisition
Rights"). See "Certain Terms of the Merger Agreement -- Assumption of
Obligations to issue Pacific Rehab Common Stock." The shares of Horizon Common
Stock issued pursuant to the Merger will be listed on the New York Stock
Exchange (the "NYSE").
On March , 1996, the closing price of Horizon Common Stock, as reported on
the NYSE Composite Tape, was $ and the closing price of Pacific Rehab Common
Stock, as reported on the Nasdaq Stock Market, was $ .
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY OTHER STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS MARCH , 1996
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY HORIZON OR PACIFIC REHAB. NEITHER THE
DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE
SECURITIES OFFERED HEREBY SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE AFFAIRS OF HORIZON OR PACIFIC REHAB
SINCE THE DATE HEREOF OR THAT THE INFORMATION SET FORTH OR INCORPORATED BY
REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO PURCHASE, ANY SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION OF AN OFFER OR PROXY SOLICITATION.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES CERTAIN DOCUMENTS BY REFERENCE
THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. HORIZON AND PACIFIC REHAB
EACH UNDERTAKES TO PROVIDE COPIES OF SUCH DOCUMENTS (OTHER THAN EXHIBITS TO SUCH
DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE),
WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS
PROXY STATEMENT/ PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST TO, IN
THE CASE OF DOCUMENTS RELATING TO HORIZON, MICHAEL H. SEELIGER, VICE PRESIDENT
OF INVESTOR AND CORPORATE RELATIONS, HORIZON/CMS HEALTHCARE CORPORATION, 6001
INDIAN SCHOOL ROAD, N.E., SUITE 530, ALBUQUERQUE, NEW MEXICO 87110 (TELEPHONE
(505) 881-4961), AND, IN THE CASE OF DOCUMENTS RELATING TO PACIFIC REHAB,
WILLIAM A. NORRIS, EXECUTIVE VICE PRESIDENT -- FINANCE AND ADMINISTRATION AND
SECRETARY, PACIFIC REHABILITATION & SPORTS MEDICINE, INC., 8100 NE PARKWAY
DRIVE, SUITE 190, VANCOUVER, WASHINGTON 98662 (TELEPHONE (360) 260-8130). IN
ORDER TO ENSURE DELIVERY OF DOCUMENTS PRIOR TO THE APPLICABLE STOCKHOLDERS
MEETING, REQUESTS SHOULD BE RECEIVED BY MARCH 22, 1996.
AVAILABLE INFORMATION
Horizon and Pacific Rehab are subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, file reports and other information with the Securities and
Exchange Commission (the "Commission"). Reports, proxy statements and other
information filed by Horizon and Pacific Rehab can be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
at Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material can be obtained by mail from the Public Reference
Section of the Commission at 450 West Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, reports, proxy statements and other
information concerning Horizon may be inspected at the offices of the NYSE, 20
Broad Street, New York, New York 10005.
Horizon has filed with the Commission a Registration Statement on Form S-4
(together with all amendments, supplements and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Horizon Common Stock to be issued
pursuant to the Merger Agreement, of which this Proxy Statement/Prospectus
constitutes a part. The information contained herein with respect to Horizon and
its affiliates, including Merger Sub, has been provided by Horizon, and the
information contained herein with respect to Pacific Rehab and its affiliates
has been provided by Pacific Rehab. This Proxy Statement/Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which were omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement. Any statements contained herein concerning the
provisions of any document filed as an exhibit to the Registration Statement or
otherwise filed with the Commission are not necessarily complete, and in each
instance reference is made to the copy of such document so filed. Each such
statement is qualified in its entirety by such reference.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed with the Commission pursuant
to the Exchange Act, are incorporated herein by reference:
1. For Horizon, (File No. 1-9369), its:
(a) Annual Report on Form 10-K for the fiscal year ended May 31, 1995
filed August 29, 1995, as amended by Amendment No. 1 on Form 10-K/A filed
October 4, 1995 and Amendment No. 2 on Form 10-K/A filed February 27, 1996
(the "Horizon 1995 Form 10-K");
(b) Quarterly Reports on Form 10-Q for the quarter ended August 31, 1995
filed October 16, 1995 as amended by Amendment No. 1 on Form 10-Q/A filed
February 26, 1996 and Form 10-Q for the quarter ended November 30, 1995
filed January 16, 1996 as amended by Amendment No. 1 on Form 10-Q/A filed
February 26, 1996;
(c) Current Reports on Form 8-K dated June 19, 1995 (filed on June 26,
1995) (as amended by Amendment No. 1 on Form 8-K/A filed August 9, 1995);
July 10, 1995 (filed July 25, 1995) (as amended by Amendment No. 1 on Form
8-K/A filed September 25, 1995 and Amendment No. 2 on Form 8-K/A filed
September 27, 1995); July 10, 1995 (filed July 25, 1995); July 10, 1995
(filed November 21, 1995); and November 9, 1995 (filed November 20, 1995);
(d) Registration Statement on Form 8-A filed March 17, 1987, as amended
by Amendment No. 1 on Form 8-A/A filed June 23, 1994 and Amendment No. 2 on
Form 8-A/A filed September 22, 1994; and
(e) Registration Statement on Form 8-A filed September 16, 1994.
2. For Pacific Rehab (File No. 0-23472), its:
(a) Annual Report on Form 10-K for the fiscal year ended December 31,
1994 filed March 30, 1995 (the "Pacific Rehab 1994 Form 10-K");
(b) Quarterly Reports on Form 10-Q for the quarter ended March 31, 1995
filed May 12, 1995; Form 10-Q for the quarter ended June 30, 1995 filed
August 14, 1995 and Form 10-Q for the quarter ended September 30, 1995 filed
November 14, 1995;
(c) Current report on Form 8-K dated January 31, 1995 (filed February
15, 1995) (as amended by Amendment No. 1 on Form 8-K/A filed April 17,
1995); March 6, 1995 (filed March 22, 1995) (as amended by Amendment No. 1
on Form 8-K/A filed May 19, 1995); April 28, 1995 (filed May 9, 1995) (as
amended by Amendment No. 1 on Form 8-K/A filed July 12, 1995); June 6, 1995
(filed June 21, 1995) (as amended by Amendment No. 1 on Form 8-K/A filed
August 21, 1995); June 13, 1995 (filed July 19, 1995) (as amended by
Amendment No. 1 on Form 8-K/A filed September 18, 1995); July 21, 1995
(filed August 7, 1995) (as amended by Amendment No. 1 on Form 8-K/A filed
October 6, 1995); October 1, 1995 (filed October 6, 1995); October 6, 1995
(filed October 23, 1995); November 9, 1995 (filed November 15, 1995); and
December 26, 1995 (filed December 29, 1995).
(d) Registration Statement on Form 8-A dated February 22, 1994, filed
February 24, 1994.
All documents filed by Horizon or Pacific Rehab pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Proxy
Statement/Prospectus and prior to the date of the Special Meeting shall be
deemed to be incorporated by reference herein and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Proxy Statement/Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document that also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement/Prospectus.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION............................. 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE... 3
SUMMARY........................................... 5
The Companies................................... 5
The Special Meeting............................. 5
Risk Factors.................................... 6
Interests of Certain Persons in the Merger...... 6
The Merger and the Merger Agreement............. 7
Stock Option.................................... 10
Voting Agreement................................ 10
Certain Federal Income Tax Consequences......... 10
Anticipated Accounting Treatment................ 11
No Appraisal Rights............................. 11
Exchange of Pacific Rehab Common Stock
Certificates................................... 11
Comparative Rights of Pacific Rehab and Horizon
Stockholders................................... 11
Market Price Data............................... 11
Dividend Policies............................... 12
Horizon Selected Historical and Unaudited Pro
Forma Financial Information.................... 13
Pacific Rehab Selected Historical Financial
Information.................................... 17
Selected Unaudited Pro Forma Financial
Information.................................... 19
Historical and Pro Forma Comparative Per Share
Data........................................... 20
RISK FACTORS...................................... 21
HORIZON........................................... 25
General......................................... 25
Recent Developments............................. 25
Strategy........................................ 26
Specialty Health Care Services.................. 27
Long-Term Care.................................. 29
Other Specialty Health Care..................... 29
PACIFIC REHAB..................................... 30
Introduction.................................... 30
Industry Background............................. 30
Services........................................ 31
Marketing....................................... 31
Seasonality and Quarterly Variability........... 32
Competition..................................... 32
Governmental Regulations........................ 32
Employees....................................... 33
Properties...................................... 34
Legal Proceedings............................... 34
PACIFIC REHAB SELECTED HISTORICAL FINANCIAL
INFORMATION...................................... 35
PACIFIC REHAB MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS....................................... 37
General......................................... 37
Results of Operations........................... 37
Liquidity and Capital Resources................. 41
THE SPECIAL MEETING............................... 45
Date, Time and Place............................ 45
Purposes of the Special Meeting................. 45
Record Date and Outstanding Shares.............. 45
Voting and Revocation of Proxies................ 45
Vote Required................................... 46
Solicitation of Proxies......................... 46
Other Matters................................... 46
THE MERGER........................................ 46
<CAPTION>
PAGE
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<S> <C>
General Description of the Merger............... 46
Background...................................... 47
Pacific Rehab's Reasons for the Merger;
Recommendation of Pacific Rehab Board of
Directors...................................... 49
Opinion of Financial Advisor to Pacific Rehab... 51
Interests of Certain Persons in the Merger...... 54
Certain Federal Income Tax Consequences......... 55
Accounting Treatment............................ 55
Governmental and Regulatory Approvals........... 56
Pacific Rehab Debt.............................. 56
Restrictions on Resales by Affiliates........... 56
No Appraisal Rights............................. 57
CERTAIN TERMS OF THE MERGER AGREEMENT............. 57
Effective Time of the Merger.................... 57
Manner and Basis of Converting Shares........... 57
Assumption of Obligations to Issue Pacific Rehab
Common Stock................................... 58
Conditions to the Merger........................ 58
Representations and Warranties.................. 59
Certain Covenants; Conduct of Business Prior to
the Merger..................................... 59
Employee Benefit Plans.......................... 60
No Solicitation................................. 60
Certain Post-Merger Matters..................... 61
Termination or Amendment of the Merger
Agreement...................................... 61
Expenses and Termination Fees................... 62
Indemnification................................. 62
STOCK OPTION AGREEMENT............................ 63
VOTING AGREEMENT.................................. 64
BENEFICIAL OWNERSHIP BY CERTAIN STOCKHOLDERS AND
MANAGEMENT OF PACIFIC REHAB...................... 66
DESCRIPTION OF HORIZON CAPITAL STOCK.............. 67
General......................................... 67
Horizon Common Stock............................ 67
Rights to Purchase Preferred Stock.............. 67
Horizon Preferred Stock......................... 69
Certain Provisions of Horizon Charter and
Bylaws......................................... 69
Stockholder Vote Required to Approve Certain
Business Combinations.......................... 70
Transfer Agent and Registrar.................... 71
COMPARATIVE RIGHTS OF HORIZON AND PACIFIC REHAB
STOCKHOLDERS..................................... 71
Number, Classification and Removal of
Directors...................................... 72
Voting Rights................................... 72
Power to Call Special Meetings.................. 72
Stockholder Vote Required for Certain
Transactions................................... 72
Action by Written Consent....................... 72
Amendments of Charter........................... 72
Amendments of Bylaws............................ 73
INDEPENDENT ACCOUNTANTS........................... 73
LEGAL MATTERS..................................... 73
EXPERTS........................................... 73
STOCKHOLDER PROPOSALS............................. 74
INDEX TO PACIFIC REHAB HISTORICAL FINANCIAL
STATEMENTS....................................... F-1
INDEX TO UNAUDITED PRO FORMA CONDENSED FINANCIAL
STATEMENTS....................................... P-1
APPENDICES:
A -- Merger Agreement
B -- Opinion of Smith Barney Inc.
</TABLE>
4
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT/ PROSPECTUS. REFERENCE IS MADE TO, AND THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS AND THE APPENDICES
HERETO. STOCKHOLDERS OF PACIFIC REHAB ARE URGED TO READ CAREFULLY THIS PROXY
STATEMENT/ PROSPECTUS AND THE APPENDICES HERETO IN THEIR ENTIRETY. AS USED IN
THIS PROXY STATEMENT/PROSPECTUS, UNLESS OTHERWISE REQUIRED BY THE CONTEXT, THE
TERM "HORIZON" MEANS HORIZON/CMS HEALTHCARE CORPORATION AND ITS CONSOLIDATED
SUBSIDIARIES, AND THE TERM "PACIFIC REHAB" MEANS PACIFIC REHABILITATION & SPORTS
MEDICINE, INC. AND ITS CONSOLIDATED SUBSIDIARIES. CAPITALIZED TERMS USED HEREIN
WITHOUT DEFINITION ARE, UNLESS OTHERWISE INDICATED, DEFINED IN THE MERGER
AGREEMENT AND USED HEREIN WITH SUCH MEANINGS.
THE COMPANIES
HORIZON AND MERGER SUB. Horizon is a leading provider of post-acute health
care services, including specialty health care services and long-term care
services, principally in the Midwest, Southwest and Northwest regions of the
United States. At January 1, 1996, Horizon provided specialty health care
services through 37 acute rehabilitation hospitals in 16 states (2,065 beds), 57
specialty hospitals and subacute care units in 17 states (1,875 beds), 145
outpatient rehabilitation clinics in 19 states and 2,686 rehabilitation therapy
contracts in 35 states. At that date, Horizon provided long-term care services
through 119 owned or leased facilities (14,793 beds) and 147 managed facilities
(16,448 beds) in a total of 19 states. Other medical services offered by Horizon
include pharmacy, laboratory, Alzheimer's care, physician management,
non-invasive medical diagnostic, home respiratory, home infusion therapy and
hospice care. For the six months ended November 30, 1995, Horizon derived 50% of
its revenues from private sources, 32% from Medicare and 18% from Medicaid.
Merger Sub is a Delaware corporation and a wholly owned subsidiary of Horizon
incorporated on November 9, 1995, for the purpose of consummating the Merger.
See "Horizon." The principal executive offices of Horizon, a Delaware
corporation, are located at 6001 Indian School Road, N.E., Suite 530,
Albuquerque, New Mexico 87110, and its telephone number at such offices is (505)
881-4961.
PACIFIC REHAB. Pacific Rehab provides comprehensive outpatient
rehabilitation services to patients suffering from work, sports and accident
related injuries at 72 outpatient rehabilitation clinics in ten states. See
"Pacific Rehab." The principal executive offices of Pacific Rehab, a Delaware
corporation, are located at 8100 NE Parkway Drive, Suite 190, Vancouver,
Washington 98662, and its telephone number at such offices is (360) 260-8130.
THE SPECIAL MEETING
DATE, TIME AND PLACE. The Special Meeting will be held on Monday, April 1,
1996, at , , , commencing at 9:00 a.m. local time.
PURPOSES OF THE SPECIAL MEETING. At the Special Meeting, Pacific Rehab
stockholders will consider and vote upon a proposal to adopt the Merger
Agreement and approve the Merger. The Pacific Rehab stockholders also will
consider and vote upon such other matters as may properly come before the
Special Meeting.
RECORD DATE; SHARES ENTITLED TO VOTE. Only holders of record of shares of
Pacific Rehab Common Stock at the close of business on March 1, 1996 (the
"Record Date") are entitled to notice of and to vote at the Special Meeting. On
such date, there were shares of Pacific Rehab Common Stock
outstanding, each of which will be entitled to one vote on each matter to be
acted upon at the Special Meeting.
QUORUM; VOTE REQUIRED. The presence, in person or by proxy, at the Special
Meeting of the holders of a majority of the shares of Pacific Rehab Common Stock
outstanding and entitled to vote at the
5
<PAGE>
Special Meeting is necessary to constitute a quorum at the meeting. The
affirmative vote of the holders of a majority of the shares of Pacific Rehab
Common Stock outstanding and entitled to vote thereon at the Special Meeting is
required under the General Corporation Law of the State of Delaware (the "DGCL")
to adopt the Merger Agreement and approve the Merger. Abstentions and broker
non-votes will have the same effect as a vote against the Merger Agreement.
SECURITY OWNERSHIP OF MANAGEMENT. As of the Record Date, the directors,
executive officers and a wholly owned subsidiary of Pacific Rehab owned 655,565
shares of Pacific Rehab Common Stock, or approximately 7.9% of the shares
entitled to vote at the Special Meeting. Brian Bussanich, the former Chairman,
President and Chief Executive Officer and a current director of Pacific Rehab,
Frank Jungers, a director of Pacific Rehab, and John Elorriaga, the current
Chairman, President and Chief Executive Officer of Pacific Rehab, have entered
into a Voting Agreement with Horizon dated November 9, 1995 (the "Voting
Agreement") whereby they have agreed, among other things, to vote all shares of
Pacific Rehab Common Stock owned by them for adoption of the Merger Agreement
and approval of the Merger. These persons also have agreed to vote their
beneficially owned shares against any combination proposal or other matters that
may interfere with the Merger. As of the Record Date, 613,815 shares of Pacific
Rehab Common Stock, or approximately 7.4% of the shares entitled to vote at the
Special Meeting, were subject to the Voting Agreement. See "Voting Agreement."
RISK FACTORS
The stockholders of Pacific Rehab should carefully consider the factors
discussed under "Risk Factors" in evaluating the Merger. Those factors include
the risks associated with (i) Horizon's expansion and development program,
including the risk that acquired operations could be subject to unanticipated
business uncertainties or legal liabilities, the risk that currently
unanticipated difficulties may arise in the integration of operations of
combining business entities, the risk that anticipated synergies from business
combinations may not be realized and the risk that restructuring programs may
result in a material charge to earnings; (ii) the uncertainties created by the
promulgation by the Health Care Financing Administration ("HCFA") of a
memorandum relating to nonbinding rates guidelines for speech and occupational
therapy costs reimbursement of inpatient providers; (iii) the reliance of
Horizon on Medicaid and Medicare programs as payor sources; (iv) the extensive
regulation of the businesses of Horizon and Pacific Rehab by federal, state and
local governments; (v) health care reform proposals intended to control health
care costs, to improve access to medical services and to assist in balancing the
federal budget; (vi) the significant amount of goodwill included in Horizon's
assets; (vii) Horizon's recent financial performance; (viii) medical
malpractice, personal injury and other liability claims and the insurance
coverage with respect thereto; (ix) the dependency of both Horizon and Pacific
Rehab on the availability of competent, trained and experience personnel in
marketing, nursing, therapy and certain other disciplines; (x) the dependency of
Horizon on a limited number of key officers; (xi) competition; and (xii) the
antitakeover implications of Horizon's stockholders rights plan and certain
provisions of its charter and bylaws. Pacific Rehab stockholders should consider
the fact that the Exchange Ratio is fixed and the market price of the Horizon
Common Stock is subject to fluctuation based on market influences, most of which
are beyond the control of Horizon. Pacific Rehab stockholders should also
consider that, if the Merger is not consummated, Pacific Rehab will require
additional capital for working capital purposes, which capital is not currently
readily available.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of Pacific Rehab's Board of Directors with
respect to the Merger, Pacific Rehab's stockholders should be aware that Pacific
Rehab's directors and officers have the following interests respecting the
Merger separate from their interests as holders of Pacific Rehab Common Stock.
Also see "The Merger -- Interests of Certain Persons in the Merger."
VESTING OF OPTIONS. Each of Pacific Rehab's officers and directors is a
party to previously existing stock option agreements that provide that all
unvested options covered by such agreements will vest
6
<PAGE>
immediately prior to a change in control such as the Merger. As of the date
hereof, unvested options to acquire 170,500 shares of Pacific Rehab Common Stock
at an average exercise price of $5.77 per share were held by the executive
officers and directors of Pacific Rehab. See "Certain Terms of the Merger
Agreement -- Assumption of Obligations to Issue Pacific Rehab Common Stock."
INDEMNIFICATION. The Merger Agreement provides that, for a minimum period
of six years after the consummation of the Merger, Pacific Rehab will indemnify
each present and former officer and director of Pacific Rehab and its
subsidiaries to the fullest extent permitted under applicable law with respect
to matters existing or occurring at or prior to the consummation of the Merger.
THE MERGER AND THE MERGER AGREEMENT
TERMS OF THE MERGER. At the Effective Time (as hereinafter defined), Merger
Sub will merge with and into Pacific Rehab, with Pacific Rehab being the
surviving corporation and becoming a wholly owned subsidiary of Horizon (the
"Surviving Corporation"). In the Merger, each share of Pacific Rehab Common
Stock outstanding at the Effective Time (other than shares held directly or
indirectly by Horizon or directly by Pacific Rehab) will be converted into .3483
of one share of Horizon Common Stock (the "Exchange Ratio"). Any resulting
fractional shares will be settled in cash.
BASED ON THE NUMBER OF SHARES OF PACIFIC REHAB COMMON STOCK OUTSTANDING AS
OF THE RECORD DATE, SHARES OF HORIZON COMMON STOCK WILL BE ISSUABLE
PURSUANT TO THE MERGER AGREEMENT (ASSUMING NO FURTHER ISSUANCES PRIOR TO THE
EFFECTIVE TIME OF PACIFIC REHAB COMMON STOCK PURSUANT TO THE PACIFIC REHAB
ACQUISITION RIGHTS), REPRESENTING APPROXIMATELY % OF THE TOTAL HORIZON COMMON
STOCK TO BE OUTSTANDING AFTER SUCH ISSUANCE.
HORIZON'S REASONS FOR THE MERGER. Horizon believes that the Merger will
significantly expand its presence in the outpatient rehabilitation clinic
marketplace and enhance the geographic diversity of the two companies. The
Merger will also enable Horizon to consolidate its existing outpatient
rehabilitation clinic business with Pacific Rehab's business into a single
network of outpatient rehabilitation clinics with a centralized management and
regional marketing structure. Horizon believes that this combined structure will
result in significant synergies.
RECOMMENDATION OF PACIFIC REHAB BOARD OF DIRECTORS. THE BOARD OF DIRECTORS
OF PACIFIC REHAB HAS UNANIMOUSLY DETERMINED THAT THE MERGER IS FAIR TO, AND IN
THE BEST INTERESTS OF, THE STOCKHOLDERS OF PACIFIC REHAB AND RECOMMENDS THAT THE
STOCKHOLDERS OF PACIFIC REHAB ADOPT THE MERGER AGREEMENT AND APPROVE THE MERGER.
The Board of Directors reached its conclusion after considering different
alternatives over the course of approximately nine months. Based on its business
judgment regarding trends in the health care industry, Pacific Rehab's
acquisition plans, Pacific Rehab's need for additional capital, Pacific Rehab's
disappointing operating results, and other factors, the Board of Directors
believed it was not in Pacific Rehab's best interest to attempt to raise
additional capital, that Pacific Rehab would ultimately be acquired as part of
the ongoing consolidation in the health care industry and that the Merger
represented the best opportunity to maximize stockholder value. See "The Merger
- -- Background" and "Pacific Rehab's Reasons for the Merger; Recommendation of
the Board of Directors of Pacific Rehab." In considering the recommendation of
the Pacific Rehab Board with respect to the Merger, Pacific Rehab stockholders
should be aware that certain officers and directors of Pacific Rehab have
certain interests respecting the Merger, apart from their interests as
stockholders of Pacific Rehab. See "The Merger -- Interests of Certain Persons
in the Merger."
OPINION OF FINANCIAL ADVISOR TO PACIFIC REHAB. Smith Barney Inc. ("Smith
Barney") has acted as financial advisor to Pacific Rehab in connection with the
Merger and delivered an oral opinion on November 9, 1995 (subsequently confirmed
by delivery of a written opinion dated such date) to the Board of Directors of
Pacific Rehab to the effect that, as of the date of such opinion and based upon
and subject to certain matters stated therein, the Exchange Ratio was fair, from
a financial point of view, to the holders of Pacific Rehab Common Stock. The
full text of the written opinion of Smith Barney, which sets forth the
assumptions made, matters considered and limitations on the review undertaken,
7
<PAGE>
is attached as Appendix B to this Proxy Statement/Prospectus and should be read
carefully in its entirety. Smith Barney's opinion is directed only to the
fairness of the Exchange Ratio from a financial point of view, does not address
any other aspect of the Merger or related transactions and does not constitute a
recommendation to any stockholder as to how such stockholder should vote at the
Special Meeting. See "The Merger -- Opinion of Financial Advisor to Pacific
Rehab."
EFFECTIVE TIME OF THE MERGER The Merger will become effective upon the
filing of a certificate of merger with the Secretary of State of the State of
Delaware (the "Effective Time"), unless the certificate of merger specifies a
later Effective Time. Assuming all conditions to the Merger contained in the
Merger Agreement are satisfied or, to the extent susceptible to waiver, waived
prior thereto, it is anticipated that the Effective Time of the Merger will
occur as soon as practicable following the Special Meeting.
CERTAIN CONDITIONS TO THE CONSUMMATION OF THE MERGER The obligations of
both Horizon and Pacific Rehab to consummate the Merger are subject to the
satisfaction of certain conditions, including the following: (i) adoption of the
Merger Agreement and approval of the Merger by the stockholders of Pacific
Rehab; (ii) the absence of any order making the Merger illegal or otherwise
prohibiting consummation of the Merger; and (iii) the absence of certain
regulatory conditions. None of the foregoing conditions will be waived by either
Horizon or Pacific Rehab. In addition, the obligations of each of Horizon and
Pacific Rehab are subject to the accuracy of the representations and warranties
of the other party and to compliance with all agreements and covenants on the
part of the other party contained in the Merger Agreement. Either Horizon or
Pacific Rehab may extend the time for performance of any of the obligations of
the other party or, except as aforesaid, waive compliance with those obligations
at its discretion. See "Certain Terms of the Merger Agreement -- Conditions to
the Merger."
Horizon and Pacific Rehab anticipate that all of the conditions to the
consummation of the Merger (other than receipt of the required approvals of the
stockholders of Pacific Rehab) will be satisfied prior to or at the time of the
Special Meeting.
GOVERNMENTAL APPROVALS. Neither Horizon nor Pacific Rehab is aware of any
governmental or regulatory approval required for consummation of the Merger that
has not been obtained, other than compliance with applicable securities laws.
See "The Merger -- Governmental and Regulatory Approvals and Matters."
NO SOLICITATION. The Merger Agreement provides that Pacific Rehab will not
initiate, solicit or encourage (including by way of furnishing information or
assistance) any inquiries or the making of any proposal relating to any
Competing Transaction (as defined below), or enter into discussions or
negotiations with any person in furtherance of a Competing Transaction, or agree
to, or endorse, a Competing Transaction; PROVIDED, HOWEVER, that Pacific Rehab
may furnish information or enter into discussions or negotiations with respect
to an unsolicited bona fide proposal in writing relating to a Competing
Transaction for which financing, to the extent required, is then committed or in
the good faith judgment of the Board of Directors could reasonably be expected
to be obtained (except that a financing commitment is not required for purposes
of furnishing information only), if, and only to the extent that, the Board of
Directors of Pacific Rehab, after consultation with and based upon the written
advice of outside legal counsel, determines in good faith that such action is
required for such Board to comply with its fiduciary duties to stockholders
imposed by the DGCL. Pacific Rehab is required to provide Horizon written notice
prior to taking any such actions, to notify Horizon of any inquiries or
proposals received by Pacific Rehab and to provide copies of any written inquiry
or proposal. Further, the Board of Directors of Pacific Rehab may determine not
to solicit proxies in favor of the approval and adoption of the Merger Agreement
if such Board determines in good faith after consultation with legal counsel and
its financial advisors that other action is necessary due to applicable
fiduciary duties of the directors of Pacific Rehab. A "Competing Transaction"
means any merger, consolidation, share exchange, business combination or similar
transaction involving Pacific Rehab or any of its Significant Subsidiaries (as
defined in the Merger Agreement) or the acquisition in any
8
<PAGE>
manner, directly or indirectly, of a material interest in any voting securities
of, or a material equity interest in a substantial portion of the assets of,
Pacific Rehab or any of its Significant Subsidiaries, other than the
transactions contemplated by the Merger Agreement. See "Certain Terms of the
Merger Agreement -- No Solicitation."
TERMINATION OF THE MERGER AGREEMENT. The Merger Agreement may be terminated
at any time prior to the Effective Time (i) by mutual consent of Horizon and
Pacific Rehab or (ii) by either party if (a) the Merger has not been consummated
on or before April 1, 1996, (b) any final court or governmental order shall have
prohibited consummation of the Merger or (c) if Pacific Rehab accepts a bona
fide written proposal made by a third party relating to a Competing Transaction
on terms that Pacific Rehab's Board of Directors determines it cannot reject in
favor of the Merger, based on applicable fiduciary duties and the advise of
counsel, and for which financing, to the extent required, is then committed (a
"Superior Proposal").
BY HORIZON. Horizon may terminate the Merger Agreement (i) upon a material
breach of any representation, warranty or material covenant or agreement on the
part of Pacific Rehab set forth in the Merger Agreement which breach is
incurable or which is not cured after 30-days written notice by Horizon to
Pacific Rehab, or (ii) if the Board of Directors of Pacific Rehab withdraws,
modifies or changes its recommendation of the Merger in a manner materially
adverse to Horizon or recommends to the stockholders of Pacific Rehab any
Competing Transaction or resolves to do so, or (iii) if a tender or exchange
offer for 20% or more of the outstanding Pacific Rehab Common Stock is
commenced, and the Board of Directors of Pacific Rehab does not recommend that
stockholders not tender their shares into such offer, or (iv) if any person
(other than Horizon or its affiliates) acquires or has the right to acquire
beneficial ownership of, or any group shall have been formed that beneficially
owns, or has the right to acquire beneficial ownership of, 20% or more of the
outstanding Pacific Rehab Common Stock.
BY PACIFIC REHAB. Pacific Rehab may terminate the Merger Agreement (i) if
the Merger Agreement is not adopted or the Merger is not approved by the holders
of a majority of the outstanding shares of Pacific Rehab Common Stock or (ii)
upon a material breach of any representation, warranty or material covenant or
agreement on the part of Horizon or Merger Sub set forth in the Merger
Agreement, which breach is incurable or which is not cured after 30-days'
written notice by Pacific Rehab to Horizon.
See "Certain Terms of the Merger Agreement -- Termination or Amendment of
the Merger Agreement."
TERMINATION FEES. If the Merger Agreement is terminated upon the occurrence
of certain of the events described above and no Competing Transaction is
consummated within six months following termination, Pacific Rehab will be
required to pay to Horizon an amount, subject to certain limitations, equal to
$500,000 plus Horizon's actual expenses, not to exceed $1 million, incurred in
connection with the transactions contemplated by the Merger Agreement. Such
termination fee is payable, at the election of Pacific Rehab, in cash or Pacific
Rehab Common Stock. Alternatively, if the Merger Agreement is terminated upon
the occurrence of certain of the events described above and a Competing
Transaction has either been consummated before the Six-Month Date or a
definitive agreement subsequently resulting in a Competing Transaction has been
executed before the Six-Month Date, Pacific Rehab will be required to pay to
Horizon an amount, subject to certain limitations, equal to $2.1 million plus
Horizon's actual expenses, not to exceed $1 million, incurred in connection with
the transactions contemplated by the Merger Agreement. In addition, under those
circumstances in which Pacific Rehab is required to pay Horizon the $2.1 million
fee, the Stock Option granted by Pacific Rehab to Horizon to acquire up to
1,131,490 shares of Pacific Rehab Common Stock would become exercisable. See
"Stock Option;" "Stock Option Agreement;" "Certain Terms of the Merger Agreement
- -- Expenses and Termination Fees."
ASSUMPTION OF PACIFIC REHAB OPTIONS AND OTHER OBLIGATIONS. Pursuant to
certain change of control provisions contained in certain option agreements, all
outstanding unvested options to acquire Pacific Rehab Common Stock will become
exercisable immediately prior to the Effective Time, and the
9
<PAGE>
holders of such options will have the right to elect to exercise such options
for shares of Pacific Rehab
Common Stock (in which case such shares of Pacific Rehab Common Stock will be
converted into shares of Horizon Common Stock as provided in the Merger
Agreement). If the holder of any outstanding option to purchase Pacific Rehab
Common Stock does not elect to exercise such option prior to the Effective Time,
Horizon will assume such option at the Effective Time, and such option will
remain outstanding as an option to purchase, in lieu of the shares of Pacific
Rehab Common Stock previously subject thereto, that number of shares of Horizon
Common Stock equal to the product of the number of shares of Pacific Rehab
Common Stock previously subject to the Pacific Rehab Option multiplied by the
Exchange Ratio. The exercise price per share of Horizon Common Stock will be
equal to the previous exercise price per share under the option to purchase
Pacific Rehab Common Stock divided by the Exchange Ratio. See "Certain Terms of
the Merger Agreement -- Assumption of Obligations to Issue Pacific Rehab Common
Stock."
In addition, Horizon has agreed in the Merger Agreement to assume, at the
Effective Time, the obligations of Pacific Rehab with respect to the issuance of
Pacific Rehab Common Stock under the other Pacific Rehab Acquisition Rights, by
agreeing to issue in lieu thereof Horizon Common Stock on the basis described
under "Certain Terms of the Merger Agreement -- Assumption of Obligations to
Issue Pacific Rehab Common Stock." Assuming that no shares of Pacific Rehab
Common Stock are issued prior to the Effective Time pursuant to the Pacific
Rehab Acquisition Rights, Horizon will be required to reserve for issuance an
aggregate of 477,011 shares of Horizon Common Stock for such purposes.
INDEMNIFICATION. The Merger Agreement provides that, for a minimum period
of six years after the Effective Time, Pacific Rehab will indemnify each present
and former officer and director of Pacific Rehab and its subsidiaries to the
fullest extent permitted under applicable law with respect to matters existing
or occurring at or prior to the Effective Time. Each of Pacific Rehab's
executive officers and directors is covered by an Indemnification Agreement with
Pacific Rehab. See "Certain Terms of the Merger Agreement -- Indemnification."
STOCK OPTION
Horizon and Pacific Rehab have entered into a Stock Option Agreement in
connection with, and as consideration for, Horizon's and Merger Sub's execution
of the Merger Agreement. Under the Stock Option Agreement, Pacific Rehab has
granted to Horizon an irrevocable option to purchase up to 1,131,490 shares,
subject to certain adjustments, of Pacific Rehab Common Stock for an exercise
price of $7.75 per share, subject to certain adjustments, which option is
exercisable in whole or in part and from time to time under the circumstances
described above under the caption "-- Termination Fees." See "Certain Terms of
the Merger Agreement -- Termination or Amendment of the Merger Agreement" and
"Stock Option Agreement."
VOTING AGREEMENT
Pursuant to the Voting Agreement, John Elorriaga, Chairman of the Board,
President and Chief Executive Officer of Pacific Rehab, Brian Bussanich,
formerly the Chairman, President and Chief Executive Officer and currently a
Director of Pacific Rehab, and Frank Jungers, a Director of Pacific Rehab have
agreed, among other things, to vote all shares of Pacific Rehab Common Stock
owned by them in favor of the Merger Agreement. As of the Record Date, 613,815
shares of Pacific Rehab Common Stock, or approximately 7.4% of the shares
entitled to vote at the Special Meeting, were subject to the Voting Agreement.
See "Voting Agreement."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Counsel to Pacific Rehab has delivered an opinion to Pacific Rehab and
Horizon that the Merger will qualify as a reorganization under Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code"), and should,
therefore, constitute a non-taxable transaction for Horizon,
10
<PAGE>
Pacific Rehab and the holders of Pacific Rehab Common Stock, except to the
extent of cash received, if any, in lieu of fractional shares of Horizon Common
Stock. For a discussion of these and other federal income tax considerations in
connection with the Merger, see "The Merger -- Certain Federal Income Tax
Consequences."
ANTICIPATED ACCOUNTING TREATMENT
The Merger is expected to be accounted for as a "pooling of interests" for
financial accounting purposes. See "The Merger -- Accounting Treatment."
NO APPRAISAL RIGHTS
Under Delaware law, neither Horizon's nor Pacific Rehab's stockholders will
be entitled to any appraisal or dissenter's rights in connection with the
Merger.
EXCHANGE OF PACIFIC REHAB COMMON STOCK CERTIFICATES
Promptly after consummation of the Merger, Horizon will mail a letter of
transmittal with instructions to each holder of record of Pacific Rehab Common
Stock outstanding immediately before the Effective Time for use in exchanging
certificates formerly representing shares of Pacific Rehab Common Stock for
certificates representing shares of Horizon Common Stock and cash in lieu of any
fractional shares. Certificates should not be surrendered by the holders of
Pacific Rehab Common Stock until they have received the letter of transmittal
from Horizon. See "Certain Terms of the Merger Agreement -- Manner and Basis of
Converting Shares."
COMPARATIVE RIGHTS OF PACIFIC REHAB AND HORIZON STOCKHOLDERS
Rights of stockholders of Pacific Rehab are currently governed by the DGCL,
the Restated Certificate of Incorporation, as amended, of Pacific Rehab (the
"Pacific Rehab Charter") and Pacific Rehab's Amended and Restated ByLaws, as
amended (the "Pacific Rehab ByLaws"). Upon consummation of the Merger, Pacific
Rehab stockholders will become stockholders of Horizon and their rights as
stockholders of Horizon will be governed by the DGCL, the Restated Certificate
of Incorporation, as amended, of Horizon (the "Horizon Charter") and Horizon's
Amended and Restated Bylaws, as amended (the "Horizon Bylaws"). There are
certain differences between the rights of Pacific Rehab stockholders and the
rights of Horizon stockholders. See "Comparative Rights of Horizon and Pacific
Rehab Stockholders" and "Description of Horizon Capital Stock."
MARKET PRICE DATA
Horizon Common Stock is traded on the NYSE under the symbol "HHC" and
Pacific Rehab Common Stock is traded on the Nasdaq Stock Market under the symbol
"PRHB." The following table sets forth, for the periods indicated, the range of
high and low per share sales prices for Horizon
11
<PAGE>
Common Stock as reported on the NYSE Composite Tape and for Pacific Rehab Common
Stock as reported by The Nasdaq Stock Market. No cash dividends were paid on
Horizon Common Stock or Pacific Rehab Common Stock during the periods presented.
<TABLE>
<CAPTION>
HORIZON PACIFIC REHAB**
----------------- -----------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
1994*
First Quarter................................... $261/2 $183/4 $ -- $ --
Second Quarter.................................. 253/4 203/4 63/4 53/8
Third Quarter................................... 281/4 211/2 71/4 51/4
Fourth Quarter.................................. 30 241/2 61/2 4
1995*
First Quarter................................... $281/4 $225/8 $ 9 $ 41/2
Second Quarter.................................. 25 165/8 11 81/8
Third Quarter................................... 24 171/2 101/8 57/8
Fourth Quarter.................................. 251/2 173/4 83/8 41/2
1996*
First Quarter (through February 14)............. $28 $241/4 $ 93/8 $ 75/8
</TABLE>
- ------------------------
* Calendar years. Horizon's fiscal year ends on May 31, and Pacific Rehab's
fiscal year ends on December 31.
** The Pacific Rehab Common Stock began trading on the Nasdaq Stock Market in
April 1994.
On November 9, 1995, the last trading day prior to the joint announcement by
Horizon and Pacific Rehab that they had executed the Merger Agreement, the
closing per share sales price of Horizon Common Stock, as reported on the NYSE
Composite Tape, was $20 5/8. On November 9, 1995, the closing price per share
sales price of Pacific Rehab Common Stock, as reported by the Nasdaq Stock
Market, was $6 3/16. See the cover page of this Proxy Statement/Prospectus for a
recent closing price of Horizon Common Stock and Pacific Rehab Common Stock.
DIVIDEND POLICIES
HORIZON. Horizon has not paid or declared any dividends on Horizon Common
Stock since its inception and anticipates that future earnings will be retained
to finance the continuing development of its business. The payment of any future
dividends will be at the discretion of Horizon's Board of Directors and will
depend upon, among other things, future earnings, the success of Horizon's
business activities, regulatory and capital requirements, the general financial
condition of Horizon and general business conditions. In addition, Horizon's
credit facility restricts the payment of dividends.
PACIFIC REHAB. Cash dividends have never been paid on the Pacific Rehab
Common Stock. Pacific Rehab's line of credit with Bank of America Oregon
contains restrictive covenants that limit Pacific Rehab's ability to pay cash
dividends or to repurchase any shares of Pacific Rehab Common Stock. Pacific
Rehab does not anticipate paying cash dividends in the foreseeable future.
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<PAGE>
HORIZON
SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following selected historical statement of operations and balance sheet
data for the periods ended May 31, 1991 through May 31, 1995 have been derived
from Horizon's Consolidated Financial Statements, as restated for the merger
with Continental Medical Systems, Inc. ("CMS") accounted for as a pooling of
interests. The Consolidated Financial Statements of Horizon have been audited by
Arthur Andersen LLP, independent accountants, with respect to 1995, 1994, 1993
and 1992 and by other accountants with respect to 1991. The Consolidated
Financial Statements of CMS have been audited by Ernst & Young LLP, independent
accountants, with respect to 1995 and 1994 and by Price Waterhouse LLP,
independent accountants, with respect to 1993, 1992 and 1991. The selected
consolidated financial data as of November 30, 1995 and for the six months ended
November 30, 1994 and 1995 have been derived from the unaudited consolidated
financial statements of Horizon, have been prepared on the same basis of
accounting as the other financial statements of Horizon and, in the opinion of
Horizon, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial position and
results of operations of Horizon for such periods. Results for the six month
period ended November 30, 1995 are not necessarily indicative of the results
which may be expected for any other interim period or for the year as a whole.
The information set forth below is qualified by reference to and should be read
in conjunction with the consolidated financial statements and related notes
included in Horizon's Current Report on Form 8-K dated November 21, 1995 and
Horizon's Quarterly Report on Form 10-Q for the quarter ended November 30, 1995,
incorporated by reference in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------------------------------------------
PRO FORMA
AFTER
ACQUISITIONS
(1) HISTORICAL
------------ -----------------------------------------------------
1995 1995 1994 1993 1992 1991
------------ --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA (4):
Total operating revenues..... $1,746,882 $1,625,326 $1,382,162 $1,136,358 $ 843,740 $ 543,697
------------ --------- --------- --------- --------- ---------
OPERATING EXPENSES:
Cost of services............. 1,425,522 1,342,590 1,167,994 957,363 723,227 459,677
Administrative and general... 110,064 82,533 60,108 42,284 32,470 24,866
Interest expense............. 58,053 53,045 44,396 26,999 8,423 13,360
Depreciation and
amortization................ 59,823 56,618 48,249 33,915 19,923 12,918
Special charge (2)........... 23,422 23,422 74,834 17,154 4,319 --
Settlement charge (2)........ 13,500 13,500 -- -- -- --
------------ --------- --------- --------- --------- ---------
Total operating
expenses................ 1,690,384 1,571,708 1,395,581 1,077,715 788,362 510,821
------------ --------- --------- --------- --------- ---------
Earnings (loss) before
minority interests, income
taxes, cumulative effect of
accounting change and
extraordinary item.......... 56,498 53,618 (13,419) 58,643 55,378 32,876
Minority interests........... (5,245) (5,245) (4,664) (6,787) (6,771) (3,320)
------------ --------- --------- --------- --------- ---------
Earnings (loss) before income
taxes, cumulative effect of
accounting change and
extraordinary item.......... 51,253 48,373 (18,083) 51,856 48,607 29,556
Income taxes................. 24,527 23,375 1,731 21,520 16,489 9,225
------------ --------- --------- --------- --------- ---------
Earnings (loss) before
cumulative effect of
accounting change and
extraordinary item.......... $ 26,726 24,998 (19,814) 30,336 32,118 20,331
------------
------------
Cumulative effect of
accounting change, net of
tax......................... -- -- (3,204) -- --
--------- --------- --------- --------- ---------
Earnings (loss) before
extraordinary item.......... 24,998 (19,814) 27,132 32,118 20,331
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------------------------------------------
PRO FORMA
AFTER
ACQUISITIONS
(1) HISTORICAL
------------ -----------------------------------------------------
1995 1995 1994 1993 1992 1991
------------ --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Extraordinary item, net of
tax (3)..................... 2,571 734 -- -- --
--------- --------- --------- --------- ---------
Net earnings (loss).......... $ 27,569 $ (19,080) $ 27,132 $ 32,118 $ 20,331
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
EARNINGS (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE:
Earnings (loss) before
cumulative effect of
accounting change and
extraordinary item.......... $ 0.54 $ 0.52 $ (0.54) $ 0.94 $ 1.02 $ 0.87
------------
------------
Cumulative effect of
accounting change, net of
tax......................... -- -- (0.10) -- --
--------- --------- --------- --------- ---------
Earnings (loss) before
extraordinary item.......... 0.52 (0.54) 0.84 1.02 0.87
Extraordinary item, net of
tax (3)..................... 0.06 0.02 -- -- --
--------- --------- --------- --------- ---------
Net earnings (loss) per
share................... $ 0.58 $ (0.52) $ 0.84 $ 1.02 $ 0.87
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
EARNINGS (LOSS) PER COMMON
SHARE -- ASSUMING FULL
DILUTION:
Earnings (loss) before
cumulative effect of
accounting change and
extraordinary item.......... $ 0.54 $ 0.52 $ (0.54) $ 0.89 $ 1.00 $ 0.86
------------
------------
Cumulative effect of
accounting change, net of
tax......................... -- -- (.09) -- --
--------- --------- --------- --------- ---------
Earnings (loss) before
extraordinary item.......... 0.52 (0.54) 0.80 1.00 0.86
Extraordinary item, net of
tax (3)..................... 0.06 0.02 -- -- --
--------- --------- --------- --------- ---------
Net earnings (loss) per
share................... $ 0.58 $ (0.52) $ 0.80 $ 1.00 $ 0.86
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Primary...................... 49,533 47,850 37,078 32,248 31,462 23,123
------------ --------- --------- --------- --------- ---------
------------ --------- --------- --------- --------- ---------
Fully diluted................ 49,533 47,857 40,051 36,941 32,964 24,692
------------ --------- --------- --------- --------- ---------
------------ --------- --------- --------- --------- ---------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED NOVEMBER 30,
--------------------------------------
PRO FORMA
AFTER HISTORICAL
ACQUISITIONS (1) ----------------------
1995 1995 1994
-------------- ---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA (4):
Total operating revenues............................................... $ 911,001 $ 872,159 $ 783,412
-------------- ---------- ----------
OPERATING EXPENSES:
Cost of services....................................................... 729,789 706,810 648,293
Administrative and general............................................. 54,759 41,892 39,678
Interest expense....................................................... 25,146 24,476 26,589
Depreciation and amortization.......................................... 30,569 29,758 27,631
Special charge (2)..................................................... 63,540 63,540 13,398
-------------- ---------- ----------
Total operating expenses 903,803 866,476 755,589
-------------- ---------- ----------
Earnings (loss) before minority interests, income taxes and
extraordinary item.................................................... 7,198 5,683 27,823
Minority interests..................................................... (3,402) (3,402) (3,031)
-------------- ---------- ----------
Earnings (loss) before income taxes and extraordinary item............. 3,796 2,281 24,792
Income taxes........................................................... 12,269 11,663 11,379
-------------- ---------- ----------
Net earnings (loss) before extraordinary item........................ $ (8,473) $ (9,382) $ 13,413
-------------- ---------- ----------
-------------- ---------- ----------
Extraordinary item, net of tax (3)..................................... 22,075 --
---------- ----------
Net earnings (loss).................................................. $ (31,457) $ 13,413
---------- ----------
---------- ----------
EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE:
Earnings (loss) before extraordinary item.............................. $ (0.16) $ (0.18) $ 0.30
--------------
--------------
Extraordinary item, net of tax (3)..................................... (0.43) --
---------- ----------
Net earnings (loss) per share........................................ $ (0.61) $ 0.30
---------- ----------
---------- ----------
EARNINGS (LOSS) PER COMMON SHARE -- ASSUMING FULL DILUTION:
Earnings (loss) before extraordinary item.............................. $ (0.16) $ (0.18) $ 0.29
--------------
--------------
Extraordinary item, net of tax (3)..................................... (0.43) --
---------- ----------
Net earnings (loss) per share........................................ $ (0.61) $ 0.29
---------- ----------
---------- ----------
Weighted average shares outstanding:
Primary................................................................ 52,798 51,696 45,182
-------------- ---------- ----------
-------------- ---------- ----------
Fully diluted.......................................................... 52,798 51,872 45,458
-------------- ---------- ----------
-------------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AT MAY 31,
AT NOVEMBER 30, 1995 --------------------------------------------------------------
----------------------------
PRO FORMA HISTORICAL
AFTER --------------------------------------------------------------
ACQUISITIONS (1) HISTORICAL 1995 1994 1993 1992 1991
-------------- ------------ ------------ ------------ ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Working capital......... $ 317,470 $ 329,790 $ 284,343 $ 232,639 $ 227,199 $ 151,090 $ 96,645
Total assets............ 1,483,509 1,451,974 1,398,123 1,148,032 925,398 578,849 383,536
Long-term debt,
excluding current
portion................ 604,277 601,319 532,688 461,331 458,062 183,322 81,737
Total stockholders'
equity................. 636,341 627,650 650,652 461,254 305,892 263,767 207,690
</TABLE>
- --------------------------
(1) The pro forma after acquisitions amounts for the year ended May 31, 1995
give effect to (i) the acquisition of the thirteen long-term care facilities
comprising peopleCARE Heritage Group ("peopleCARE") and (ii) the
consummation of other individually insignificant completed and pending
acquisitions as though all such transactions occurred on June 1, 1994. The
pro forma after acquisitions amounts for the six
15
<PAGE>
months ended November 30, 1995 give effect to the consummation of Horizon's
pending acquisitions as though these acquisitions occurred on June 1, 1994.
The pro forma after acquisitions amounts at November 30, 1995 give effect to
the consummation of Horizon's pending acquisitions as though these
acquisitions occurred on November 30, 1995. See the unaudited pro forma
financial statements and the notes thereto included elsewhere in this Proxy
Statement/Prospectus.
(2) Special and settlement charges represent the following items by period (for
historical fiscal year unless otherwise indicated): (i) 1995 historical and
pro forma -- reflects the effect of a revision in Horizon's estimate of
contract therapy receivables from third party payors of $18,377, costs of
$13,500 incurred in connection with the settlement of pending litigation and
related contract terminations and costs of $5,045 related to restructuring
actions taken at contract therapy companies; (ii) 1994 -- related to the
impairment of selected rehabilitation hospital division assets of $50,244,
the costs associated with the consolidation of contract therapy companies
and losses related to the termination of certain relationships in the
contract therapy business of approximately $22,842 and the costs related to
the reduction of corporate office work force and other restructuring costs
of $1,748; (iii) 1993 -- reflects the write-down of certain rehabilitation
facility development costs and merger expenses incurred in connection with
an acquisition accounted for as a pooling of interests and expenses of
subsequently integrating the acquired companies' operations; and (iv) 1992
-- reflects $1,000 of merger expenses incurred in connection with an
acquisition accounted for as a pooling of interests and $3,319 related to a
terminated merger agreement; (v) historical and pro forma six months ended
November 30, 1995 -- reflects the write-off of $6.7 million in transaction
costs incurred in completing the CMS merger, the $44.9 million of costs of
combining and restructuring the merged companies and the $11.9 million
write-down of assets expected to be divested during fiscal 1996; (vi) six
months ended November 30, 1994 -- reflects the effect of a revision in
Horizon's estimate of contract therapy receivables from third party payors.
(3) Extraordinary items represent the following items by period (for historical
fiscal year unless otherwise indicated): (i) 1995 -- reflects gains
recognized related to open market purchases of Horizon's subordinated debt
and convertible subordinated notes at a discount, (ii) 1994 -- reflects
gains recognized related to open market purchases of Horizon's convertible
subordinated notes at a discount and (iii) six months ended November 30,
1995 -- reflects a loss recognized related to the tender offer of Horizon's
senior subordinated notes.
(4) Horizon completed the following material business acquisitions using the
purchase method of accounting:
In July 1994, Horizon acquired peopleCARE. Consideration given for the
acquisition included the issuance of approximately 449,000 shares of Horizon
Common Stock, valued at approximately $10,000, assumption of capital lease
obligations of approximately $48,600 and cash payment of approximately
$56,000.
In March 1994, CMS acquired Medical Management Associates, Inc.
Consideration given for the acquisition included cash payments of
approximately $1,500 and the issuance of shares of approximately 349,456
shares of common stock (as converted into Horizon Common Stock pursuant to
the terms of the merger with CMS).
In February 1994, Horizon acquired Greenery Rehabilitation Group, Inc.
("Greenery") through a merger of Greenery into Horizon. Consideration given
for the acquisition included the issuance of approximately 2.0 million
shares of Horizon common stock, valued at approximately $48,000 and the
assumption of approximately $58,000 in debt.
In August 1990, Horizon, through CMS, acquired 80% of the outstanding common
stock of CommuniCare/ProRehab, Inc. Consideration given for the acquisition
included cash payments and the issuance of Horizon common stock in the
amount of approximately $5,700. In July 1992, Horizon acquired the remaining
20% of the outstanding common stock for cash payments and the issuance of
common stock valued at approximately $4,800.
16
<PAGE>
PACIFIC REHAB
SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL INFORMATION
The selected historical consolidated financial information of Pacific Rehab
and subsidiaries shown below for the three fiscal periods ended December 31,
1994 has been derived from Pacific Rehab's audited Consolidated Financial
Statements. The Consolidated Financial Statements of Pacific Rehab have been
audited by Price Waterhouse LLP, independent accountants, with respect to 1994
and by Grant Thornton LLP, independent accountants, with respect to 1993 and
1992. Pacific Rehab commenced operations on December 31, 1991. The financial
information for the nine-month periods ended September 30, 1995 and 1994 has
been derived from Pacific Rehab's unaudited consolidated financial statements
and includes, in the opinion of Pacific Rehab's management, all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the information for such periods. The information set forth below is qualified
by reference to and should be read in conjunction with Pacific Rehab's
consolidated financial statements and related notes included elsewhere in this
Proxy Statement/Prospectus. Results for the nine-month period ended September
30, 1995, are not necessarily indicative of the results which may be expected
for the fiscal year as a whole.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
PRO FORMA
AFTER HISTORICAL
ACQUISITIONS (1) -------------------------------
1994 1994 1993 1992
-------------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenues..................................................... $ 37,650 $ 20,504 $ 8,162 $ 4,396
Cost of revenues................................................. 19,739 10,290 4,028 1,426
-------------- --------- --------- ---------
Gross profit................................................... 17,911 10,214 4,134 2,970
-------------- --------- --------- ---------
Operating expenses:
Selling, general and administrative expenses..................... 10,336 5,618 1,878 872
Depreciation and amortization.................................... 1,743 979 505 375
-------------- --------- --------- ---------
12,079 6,597 2,383 1,247
-------------- --------- --------- ---------
Operating income............................................... 5,832 3,617 1,751 1,723
Nonoperating income (expense):
Interest expense................................................. (845) (170) (47) (229)
Interest income.................................................. 90 54 45 30
Other............................................................ -- -- (53) --
-------------- --------- --------- ---------
(755) (116) (55) (199)
-------------- --------- --------- ---------
Earnings before income taxes................................. 5,077 3,501 1,696 1,524
Income taxes..................................................... 2,005 1,375 649 563
-------------- --------- --------- ---------
Net earnings................................................... $ 3,072 $ 2,126 $ 1,047 $ 961
-------------- --------- --------- ---------
-------------- --------- --------- ---------
Net earnings per common and common equivalent share.............. $ 0.44 $ 0.35 $ 0.26 $ 0.26
-------------- --------- --------- ---------
-------------- --------- --------- ---------
Weighted average number of common and common equivalent shares
outstanding..................................................... 7,029 6,115 3,996 3,738
-------------- --------- --------- ---------
-------------- --------- --------- ---------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED)
--------------------------------------
PRO FORMA
AFTER
ACQUISITIONS
(1) HISTORICAL
-------------- ----------------------
1995 1995 1994
-------------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenues.......................................................... $ 32,506 $ 24,903 $ 14,159
Cost of revenues...................................................... 18,671 13,991 7,188
-------------- --------- -----------
Gross profit...................................................... 13,835 10,912 6,971
-------------- --------- -----------
Operating expenses:
Selling, general and administrative expenses........................ 7,520 6,488 3,732
Depreciation and amortization....................................... 1,673 1,327 669
-------------- --------- -----------
9,193 7,815 4,401
-------------- --------- -----------
Operating income.................................................. 4,642 3,097 2,570
-------------- --------- -----------
Nonoperating income (expense):
Interest expense.................................................... (952) (728) (131)
Interest income..................................................... 10 10 44
-------------- --------- -----------
(942) (718) (87)
-------------- --------- -----------
Earnings before income taxes...................................... 3,700 2,379 2,483
Income taxes.......................................................... 1,525 997 968
-------------- --------- -----------
Net earnings...................................................... $ 2,175 $ 1,382 $ 1,515
-------------- --------- -----------
-------------- --------- -----------
Net earnings per common and common equivalent share................... $ 0.25 $ 0.18 $ 0.26
-------------- --------- -----------
-------------- --------- -----------
Net earnings per common share assuming full dilution.................. $ 0.24 $ 0.18 $ 0.26
-------------- --------- -----------
-------------- --------- -----------
Weighted average shares outstanding:
Primary............................................................. 8,877 7,855 5,815
-------------- --------- -----------
-------------- --------- -----------
Fully diluted....................................................... 9,212 8,190 5,815
-------------- --------- -----------
-------------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, -------------------------------
1995
-------------------- HISTORICAL
HISTORICAL -------------------------------
(UNAUDITED) 1994 1993 1992
-------------------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................ $ (4,046) $ 8,247 $ 2,300 $ 3,748
Total assets........................................... 71,169 36,191 17,665 7,377
Long-term debt, excluding current portion.............. 6,065 2,029 1,074 --
Total stockholders' equity............................. 38,682 28,441 10,801 6,646
</TABLE>
- ------------------------
(1) To give effect to the consummation of acquisitions as though all such
acquisitions occurred on January 1, 1994. All of such acquisitions have been
accounted for using the purchase method of accounting. For additional
information with respect to these acquisitions, see Note 2 to each of
Pacific Rehab's annual and interim consolidated financial statements
included elsewhere in this Proxy Statement/Prospectus.
18
<PAGE>
SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following selected unaudited pro forma financial information has been
derived from and should be read in conjunction with the unaudited pro forma
financial information and notes thereto included elsewhere in this Proxy
Statement/Prospectus. The following selected unaudited pro forma combined
financial information is based on adjustments to the historical consolidated
balance sheets and related consolidated statements of operations of Horizon and
Pacific Rehab to give effect to the Merger using the pooling of interests method
of accounting for business combinations. The selected unaudited pro forma
combined after acquisitions financial information for the most recent full year
and interim period give effect to the Merger and other completed and pending
acquisitions of Horizon and Pacific Rehab. The following selected unaudited pro
forma financial information may not necessarily reflect the combined financial
condition or results of operations of Horizon and Pacific Rehab that would have
actually resulted had the transactions referred to above occurred as of the date
and for the periods indicated or reflect the combined future earnings of Horizon
and Pacific Rehab.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
--------------------------------------
SIX MONTHS ENDED
NOVEMBER 30, 1995 PRO FORMA
----------------- COMBINED AFTER PRO FORMA COMBINED (1)
PRO FORMA ACQUISITIONS (2)
COMBINED AFTER -------------- ----------------------
ACQUISITIONS (1) 1995 1994 1993
----------------- -------------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA:
Total operating revenues........................... $ 928,956 $1,786,223 $1,395,747 $1,141,867
----------------- -------------- ---------- ----------
Operating expenses:
Cost of services................................. 740,311 1,446,335 1,175,349 959,196
Administrative and general....................... 59,341 120,628 63,444 43,535
Interest expense................................. 25,795 59,028 44,519 27,072
Depreciation and amortization.................... 31,556 61,717 49,014 34,265
Special charge................................... 63,540 23,422 74,834 17,154
Settlement charge................................ -- 13,500 -- --
----------------- -------------- ---------- ----------
Total operating expenses....................... 920,543 1,724,630 1,407,160 1,081,222
----------------- -------------- ---------- ----------
Earnings (loss) before minority interests and income
taxes............................................... 8,413 61,593 (11,413) 60,645
Minority interests................................... (3,402) (5,245) (4,664) (6,787)
----------------- -------------- ---------- ----------
Earnings (loss) before income taxes.................. 5,011 56,348 (16,077) 53,858
Income taxes......................................... 12,806 26,543 2,510 22,270
----------------- -------------- ---------- ----------
Net earnings (loss) from continuing operations....... $ (7,795) $ 29,805 $ (18,587) $ 31,588
----------------- -------------- ---------- ----------
----------------- -------------- ---------- ----------
Earnings (loss) from continuing operations
per common and common equivalent share:............ $ (0.14) $ 0.57 $ (0.48) $ 0.94
----------------- -------------- ---------- ----------
----------------- -------------- ---------- ----------
Earnings (loss) from continuing operations
per common share - assuming full dilution:......... $ (0.14) $ 0.57 $ (0.48) $ 0.89
----------------- -------------- ---------- ----------
----------------- -------------- ---------- ----------
Weighted average shares outstanding:
Primary............................................ 55,594 52,261 38,767 33,521
----------------- -------------- ---------- ----------
----------------- -------------- ---------- ----------
Fully diluted...................................... 55,594 52,261 41,740 38,214
----------------- -------------- ---------- ----------
----------------- -------------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA COMBINED
AFTER ACQUISITIONS
AT NOVEMBER 30, 1995(1)
-----------------------
(IN THOUSANDS)
<S> <C>
SELECTED BALANCE SHEET DATA:
Working capital........................................................... $ 312,674
Total assets.............................................................. 1,554,678
Long-term debt, excluding current portion................................. 610,342
Total stockholders' equity................................................ 674,273
</TABLE>
- ----------------------------------
(1) To give effect to (i) the Merger and (ii) the consummation of Horizon's
individually insignificant pending acquisitions as though the Merger is
accounted for as a pooling of interests and the pending acquisitions
occurred on June 1, 1994. See the unaudited pro forma financial statements
and the notes thereto included elsewhere in this Proxy Statement/Prospectus.
(2) To give effect to (i) the Merger, (ii) the peopleCARE acquisition and (iii)
the consummation of other completed and pending acquisitions as though the
Merger is accounted for as a pooling of interests and the acquisitions
occurred on June 1, 1994. See the unaudited pro forma financial statements
and the notes thereto included elsewhere in this Proxy Statement/Prospectus.
19
<PAGE>
HISTORICAL AND PRO FORMA COMPARATIVE PER SHARE DATA
Set forth below are the comparative net income and book value per common
share data of (a) each of Horizon and Pacific Rehab on an historical basis, (b)
Horizon on a pro forma combined basis giving effect to the Merger and completed
and pending acquisitions and (c) Pacific Rehab on an equivalent pro forma
combined basis giving effect to the Merger and completed and pending
acquisitions, in each case giving effect to the Merger under the pooling of
interests method of accounting for business combinations, all on the bases
described in the unaudited pro forma financial information and notes thereto
included elsewhere in this Proxy Statement/Prospectus. The equivalent pro forma
data for Pacific Rehab was calculated by multiplying the Horizon pro forma per
common share data by the Exchange Ratio of .3483. Neither Horizon nor Pacific
Rehab paid any dividends to their stockholders during the periods presented.
The information set forth below should be read in conjunction with the
respective audited and unaudited consolidated financial statements and related
notes of Horizon and Pacific Rehab included or incorporated by reference in this
Proxy Statement/Prospectus and the unaudited pro forma financial information and
notes thereto included elsewhere in this Proxy Statement/Prospectus.
HORIZON
PER COMMON SHARE DATA
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED MAY 31
ENDED NOVEMBER 30, -------------------------------
1995 1995 1994 1993
------------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Historical: (1)
Net income (loss) -- primary................................ $ (0.61) $ 0.58 $ (0.52) $ 0.84
Net income (loss) -- fully diluted.......................... (0.61) 0.58 (0.52) 0.80
Book value.................................................. 12.23 12.97
Pro Forma Combined After Acquisitions and the Merger: (2)(4)
Net income (loss) -- primary................................ $ (0.14) $ 0.57 $ (0.48) $ 0.94
Net income (loss) -- fully diluted.......................... (0.14) 0.57 (0.48) 0.89
Book value.................................................. 12.23 12.82
</TABLE>
PACIFIC REHAB
PER COMMON SHARE DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED -------------------------------
SEPTEMBER 30, 1995 1994 1993 1992
------------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Historical:
Net income -- primary.......................................... $ 0.18 $ 0.35 $ 0.26 $ 0.26
Net income -- fully diluted.................................... 0.18 0.35 0.26 0.26
Book value..................................................... 4.83 4.06
Equivalent Pro Forma Combined After Acquisitions and the
Merger: (3)(4)
Net income (loss) -- primary................................... $ (0.05) $ 0.20 $ (0.17) $ 0.33
Net income (loss) -- fully diluted............................. (0.05) 0.20 (0.17) 0.31
Book value..................................................... 4.26 4.47
</TABLE>
- ------------------------
(1) Horizon net income (loss) per share (primary and fully diluted) on a pro
forma basis after completed and pending acquisitions, excluding the Merger,
was $(0.58) and $0.59 for the six months ended November 30, 1995 and the
year ended May 31, 1995, respectively.
(2) Represents Horizon and Pacific Rehab on a pro forma combined basis,
including Horizon and Pacific Rehab completed and pending acquisitions.
(3) Represents Horizon and Pacific Rehab on an equivalent pro forma combined
basis, including Horizon and Pacific Rehab historical acquisitions,
calculated by multiplying pro forma combined after acquisitions amounts by
the .3483 Exchange Ratio.
(4) Pro forma per share data is presented based upon earnings from continuing
operations. See unaudited pro forma financial statements.
20
<PAGE>
RISK FACTORS
The following are certain factors which should be considered by the
stockholders of Pacific Rehab in evaluating the Merger.
FLUCTUATIONS IN THE MARKET PRICE OF HORIZON COMMON STOCK. Because the
Exchange Ratio is fixed and because the market price of Horizon Common Stock is
subject to fluctuation, the market value of the shares of Horizon Common Stock
that holders of Pacific Rehab Common Stock will receive in the Merger may
increase or decrease prior to and following the Merger. There can be no
assurance that at or after the Effective Time of the Merger such shares of
Horizon Common Stock will maintain or equal the prices at which such shares have
traded in the past. The prices at which Horizon Common Stock trades after the
Merger may be influenced by many factors, including, among others, the liquidity
of the market for Horizon Common Stock, investor perceptions of Horizon and the
industry in which it operates, the operating results of Horizon and its
subsidiaries, Horizon's dividend policy and general economic and market
conditions. Similar factors affect the prices at which Pacific Rehab Common
Stock currently trades. See "Summary -- Market Price Data."
RAPID EXPANSION. Since its inception in 1986, Horizon has rapidly expanded
both the size and the diversity of its operations through (i) strategic mergers
and acquisitions such as the acquisition of CMS and the Merger, (ii) the
acquisition of or agreements to manage long-term care facilities including
Greenery, peopleCARE and the HEA Group, (iii) the development of specialty
hospitals and subacute care units and (iv) the acquisition and development of
other specialty health care businesses. The ability of Horizon to acquire
additional operations depends upon its ability to identify appropriate
acquisition candidates and to obtain appropriate financing and personnel.
Growth through acquisition entails certain risks in that acquired operations
could be subject to unanticipated business uncertainties or legal liabilities.
Horizon seeks to minimize these risks through investigation and evaluation of
the operations proposed to be acquired and through transaction structure and
indemnification. In addition, each such business combination presents the risk
that currently unanticipated difficulties may arise in integrating the
operations of the combined entities. Moreover, such business combinations
present the risk that the synergies expected from the combined operations may
not be realized. For a description of the synergies that management of Horizon
anticipates to be realized from the combination of Horizon and Pacific Rehab,
see "Horizon -- Specialty Health Care Services -- Outpatient Rehabilitation
Clinics." The various risks associated with the integration of recent and future
acquisitions and the subsequent performance of such acquired operations may
adversely affect Horizon's results of operations. Following each acquisition,
management will consider opportunities to eliminate excess or duplicative
operations, processes or personnel or other measures to maximize the potential
of the combined operations. As a result of these considerations, management may
commit to undertake restructuring measures which would result in a current
charge against earnings. Depending upon the relative significance of an
acquisition and the extent of the restructuring program undertaken, such charge
could be material to Horizon.
Horizon currently plans to sell the assets and leasehold improvements at
eight of the 17 rehabilitation and skilled nursing facilities acquired from
Greenery in February 1994. The eight facilities are all located in Massachusetts
and comprise Horizon's entire investment in nursing facilities in that state.
The decision to sell the facilities was based upon disappointing financial
performance, regulatory and operational considerations. The resulting $11.9
million charge recorded in fiscal 1996 to adjust the carrying value of the eight
facilities has adversely effected Horizon's financial results for the period.
REIMBURSEMENT RATES FOR CONTRACT THERAPY SERVICES. In April 1995, HCFA
issued a memorandum to its Medicare fiscal intermediaries as a guideline to
assess costs incurred by inpatient providers relating to payment of occupational
and speech language pathology services furnished under arrangements that include
contracts between therapy providers and inpatient providers. While not binding
on the fiscal intermediaries, the memorandum suggested certain rates to assist
the fiscal intermediaries in making annual "prudent buyer" assessments of speech
and occupational therapy rates paid by
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inpatient providers. In light of the fluid nature of the circumstances
surrounding the memorandum, Horizon cannot now determine whether HCFA will
continue to recommend the rates suggested in the memorandum or whether such
rates will be used by HCFA as a basis for developing a salary equivalency based
reimbursement system for speech and occupational therapy services. HCFA has
publicly advised providers that it may publish its determination of the rates to
be utilized in April 1996. There can be no assurance that actions ultimately
taken by HCFA with regard to reimbursement rates for such services will not
adversely affect Horizon's results of operations.
REIMBURSEMENT BY THIRD PARTY PAYORS. For fiscal years 1993, 1994, and 1995,
Horizon derived approximately 33%, 34% and 28%, respectively, of its revenues
from Medicare, and 14%, 14% and 17%, respectively, of its revenues from
Medicaid. Changes in the mix of patients among different types of private pay
sources and among private pay sources, Medicare and Medicaid can significantly
affect the revenues and profitability of Horizon's operations. Moreover, there
are increasing pressures from many payor sources to control health care costs
and to limit increases in reimbursement rates for medical services. There can be
no assurance that payments under governmental and third party payor programs
will remain at levels comparable to present levels or that Horizon will continue
to attract and retain private pay patients or maintain its current payor or
revenue mixes. In attempts to limit the federal budget deficit, there have been,
and Horizon expects that there will continue to be, a number of proposals to
limit Medicare and Medicaid reimbursement for certain services. Horizon cannot
now predict whether any of these pending proposals will be adopted or, if
adopted and implemented, what effect such proposals would have on Horizon.
REGULATION. The federal government and the governments of all states in
which Horizon or Pacific Rehab operates regulate various aspects of their
respective businesses. There can be no assurance that federal or state
governments will not impose additional restrictions on their activities that
might adversely affect their businesses. The operation of Horizon's long-term
care facilities and certain segments of its and Pacific Rehab's specialty health
care services and the provision of these services are subject to federal, state
and local licensure and certification laws. These facilities and segments are
subject to periodic inspection by governmental and other authorities to assure
compliance with the various standards established for continued licensure under
state law, certification under the Medicare and Medicaid programs and
participation in the Veteran's Administration program. To the extent that
Certificates of Need or other similar approvals are required for expansion of
Horizon's operations, Horizon could be adversely affected by the failure or
inability to obtain such approvals, by changes in the standards applicable to
approvals and by possible delays and expenses associated with obtaining
approvals. The failure by Horizon to obtain, retain or renew any required
regulatory approvals, licenses or certifications could prevent Horizon from
being reimbursed for or offering its services or could adversely affect its
operations, financial performance and its ability to expand.
A wide array of Medicare/Medicaid fraud and abuse provisions apply to
long-term care facilities, other specialty health care facilities, pharmacies
and clinical laboratories. Penalties for violations of these federal laws
include exclusion from participation in the Medicare/Medicaid programs, asset
forfeitures, civil penalties and criminal penalties. The Office of Inspector
General ("OIG") of the Department of Health and Human Services, the Department
of Justice and other federal agencies interpret these fraud and abuse provisions
liberally and enforce them aggressively. Members of both the House of
Representatives and the Senate have proposed various pieces of legislation to
expand significantly the federal government's involvement in curtailing fraud
and abuse and to increase the monetary penalties for violations of these
provisions.
HEALTH CARE REFORM. During 1995, various Congressional legislators
introduced reform proposals that are intended to control health care costs,
improve access to medical services for uninsured individuals and to balance the
federal budget by the year 2002. Certain of these budgetary proposals have been
passed by both Houses of Congress, including passage of the resultant committee
bills. These proposals included reduced rates of growth in the Medicare and
Medicaid programs and proposals to block grant funds to the states to administer
the Medicaid program. These proposals were
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included in the 1995 budget reconciliation act, which the President of the
United States has vetoed. Discussions regarding a balanced budget plan between
members of the House of Representatives, members of the Senate and the President
continued until the latter half of January, 1996. At that time, these
discussions were halted due to various disagreements between the parties. In
early February, the National Governor's Association presented its own proposals
to reform the Medicaid and welfare programs. While these proposals do not, at
this time, appear to affect Horizon in any material respect, significant changes
in reimbursement levels under Medicare or Medicaid and changes in applicable
governmental regulations could significantly affect the future results of
operations of Horizon. There can be no assurance that future legislation, health
care or budgetary, or other changes in the administration or interpretation of
governmental health care programs will not adversely effect the results of
operations of Horizon, Pacific Rehab or the combined enterprise.
SIGNIFICANCE OF GOODWILL AND OTHER INTANGIBLE ASSETS. The excess of total
acquisition cost over the fair value of net assets acquired (goodwill) and other
intangible assets represented approximately 14.6% of Horizon's total assets as
of November 30, 1995. Horizon amortizes goodwill over a period of 40 years and
amortizes other intangible assets over periods ranging from two to 20 years.
Horizon reviews the carrying value of goodwill and other intangible assets for
potential impairment on a quarterly basis. If, in connection with such a review,
Horizon determined that an adjustment to the carrying value of goodwill or other
intangible assets was appropriate, a material charge against earnings could
result.
RECENT FINANCIAL PERFORMANCE OF HORIZON. Horizon's financial results for
the three most recent fiscal years and interim period, when restated for the
merger with CMS, have been inconsistent. The inconsistent financial performance
has been caused largely by significant special or settlement charges and
extraordinary charges recorded during the periods. Horizon recorded a $63.5
million charge in the first quarter of fiscal 1996 and a $38.1 million
extraordinary charge related to extinguishment of debt in the second quarter of
fiscal 1996. The substantial majority of both of these charges was related to
combining the operations of Horizon and CMS following the merger and was
anticipated and considered by Horizon when negotiating the CMS acquisition. All
of the other significant charges recorded during the three most recent fiscal
years and interim period and included in Horizon's combined financial statements
were recorded by CMS prior to any involvement by Horizon management.
Nonetheless, charges were recorded during the periods to adjust the carrying
amount of settlements receivable, adjust the carrying amount of certain long
lived assets, settle pending litigation, provide for restructuring accruals and
expense merger costs. Horizon management does not currently anticipate any
charges of the nature or magnitude of those described above; however, future
events or circumstances could require that additional charges be recorded.
POTENTIAL LIABILITY; INSURANCE. Health care companies are subject to
medical malpractice, personal injury and other liability claims that are
customary risks in the operation of health care facilities and are generally
covered by insurance. Horizon maintains property, liability and professional
malpractice insurance in amounts and with such coverages and deductibles that
are deemed appropriate by management, based on historical claims, industry
standards and the nature of their respective businesses. There can be no
assurance that a future claim will not exceed available insurance coverages or
that such policies will continue to be available with the same scope of
coverages at reasonable premiums. Any substantial increase in the cost of such
insurance or the unavailability of any such coverages could have an adverse
effect on business and results of operations of Horizon, Pacific Rehab or the
combined enterprise.
DEMAND FOR PERSONNEL. The success and growth strategy of Horizon are
dependent in part on its ability to attract and retain competent individuals
with training and experience in marketing, nursing, therapy and other clinical
or operating disciplines. Such persons are in high demand and often are subject
to competing offers. In past years, the health care industry has experienced
nursing and therapy personnel shortages. There can be no assurance that Horizon,
Pacific Rehab or the combined enterprise will be able to attract and retain the
qualified clinical or operating personnel necessary for its business and planned
growth. A future lack of such personnel could adversely affect results of
operations of Horizon, Pacific Rehab or the combined enterprise.
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DEPENDENCY ON KEY PERSONNEL. Horizon is dependent on a limited number of
key officers, the loss of services of any one of whom could have an adverse
effect on it. Horizon maintains no key man life insurance policies. The future
success of Horizon and Pacific Rehab's businesses will depend in part on its
ability to attract and retain highly qualified individuals to fill key
management positions. Horizon competes for such individuals with similar health
care companies and there can be no assurance that it will be successful in
hiring or retaining qualified personnel. The loss of key personnel or the
inability to hire or retain qualified management personnel could adversely
affect Horizon's results of operations.
COMPETITION. Horizon operates in a highly competitive industry. Horizon's
facilities generally operate in communities that are also served by similar
facilities operated by others. Some competing facilities are located in
buildings that are newer than those operated by Horizon and provide services not
offered by Horizon. In addition, some facilities are operated by nonprofit
organizations or government agencies supported by endowments, charitable
contributions, tax revenues and other resources not available to Horizon. Some
acute care hospitals that provide long-term care, subacute care and
rehabilitative services are also a potential source of competition to Horizon.
In each area of services provided by Horizon, some of its competitors have
greater financial and other resources and longer operating histories than
Horizon. There can be no assurance that Horizon will not encounter increased
competition in the future that would adversely affect Horizon's results of
operations.
ANTI-TAKEOVER PROVISIONS. Horizon's stockholder rights plan, together with
certain provisions in its Certificate of Incorporation and Bylaws, may make it
more difficult to effect a change in control of Horizon and to replace incumbent
management. Such provisions could potentially deprive stockholders of
opportunities to sell shares at above market prices.
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HORIZON
GENERAL
Horizon is a leading provider of post-acute health care services, including
specialty health care services and long-term care services, principally in the
Midwest, Southwest and Northeast regions of the United States. At January 1,
1996, Horizon provided specialty health care services through 37 acute
rehabilitation hospitals in 16 states (2,065 beds), 57 specialty hospitals and
subacute care units in 17 states (1,875 beds), 145 outpatient rehabilitation
clinics in 19 states and 2,686 rehabilitation therapy contracts in 35 states. At
that date, Horizon provided long-term care services through 119 owned or leased
facilities (14,793 beds) and 147 managed facilities (16,448 beds) in a total of
19 states. Other medical services offered by Horizon include pharmacy,
laboratory, Alzheimer's care, physician management, non-invasive medical
diagnostic, home respiratory, home infusion therapy and hospice care. For the
six months ended November 30, 1995, Horizon derived 50% of its revenues from
private sources, 32% from Medicare and 18% from Medicaid.
Post-acute care is the provision of a continuum of care to patients for the
twelve month period following discharge from an acute care hospital. Post-acute
care services that Horizon provides include: (a) inpatient and outpatient
rehabilitative services; (b) subacute care; (c) long-term care; (d) contract
rehabilitation therapy services; (e) pharmacy and related services; (f) clinical
laboratory services; (g) non-invasive medical diagnostic services; (h) home
respiratory supplies and services; (i) home infusion supplies and services; and
(j) hospice care. Horizon's integrated post-acute health care system is intended
to provide continuity of care for its patients and enable payors to contract
with one provider to provide for virtually all of the patient's needs during the
period following discharge from an acute care facility.
RECENT DEVELOPMENTS
CMS. Horizon acquired CMS on July 10, 1995 by means of a merger pursuant to
which CMS became a wholly owned subsidiary of Horizon. The purchase price, paid
in shares of Horizon Common Stock, was approximately $393.9 million (based on
the market value of such shares on that date). The acquisition was accounted for
as a pooling of interests. CMS is one of the nation's largest providers of
comprehensive inpatient and outpatient medical rehabilitative services,
operating 37 free-standing rehabilitation hospitals, providing outpatient
rehabilitation at more than 140 locations, managing 13 inpatient rehabilitation
units for general acute care hospitals and providing contract rehabilitation
therapy services. As a result, Horizon now has an increased and significant
clinical and market presence in each of the medical rehabilitation industry's
three principal sectors: inpatient rehabilitation care, outpatient
rehabilitation care and contract rehabilitation therapies.
HEA GROUP. In December 1995, Horizon announced that it had finalized a
contract to manage the operation of 134 long-term care facilities (14,757 beds)
in Texas, Michigan and Oklahoma which are operated under long-term leases by the
HEA Group. Horizon began managing these facilities on January 1, 1996 under a
contract between a subsidiary of Horizon and the HEA Group, which has an initial
term of ten years. Horizon will receive a management fee equal to 6.5% of the
annual gross revenues generated from the operation of the HEA Group facilities,
which, in the aggregate, for the year ended December 31, 1995 had revenues of
approximately $220.0 million. Under certain circumstances, the management fee
can increase to 7.5% of the annual gross revenues. Horizon has made available a
$30.0 million credit line to provide for, among other things, the working
capital and capital improvement requirements of the managed facilities. The
credit line bears interest at 75 basis points over Horizon's effective cost of
borrowing under its credit facility, is secured by substantially all the assets
of the HEA Group and is repayable out of the cash flow of the operations of the
facilities, among other sources.
SENIOR SUBORDINATED NOTES OFFERING. On January 12, 1996, Horizon filed a
registration statement on Form S-3 with the Commission relating to the proposed
offering of $200 million of senior subordinated notes due 2006 (the "Notes").
The Notes will be general unsecured senior subordinated obligations of Horizon,
subordinated generally in right of payment to all existing and future senior
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debt of Horizon, including indebtedness pursuant to Horizon's existing credit
facility, and will be structurally subordinated to all indebtedness of Horizon's
subsidiaries. Horizon intends to use the net proceeds from the proposed sale of
the Notes to repay a portion of the indebtedness outstanding under Horizon's
existing credit facility.
MEDICAL INNOVATIONS. In February 1996, Horizon announced its agreement to
acquire Medical Innovations through the issuance of approximately 1,027,000
shares of Horizon Common Stock (which had a market value of approximately $27.0
million on the day preceding such announcement). In addition, Horizon will
convert Medical Innovations options and warrants into options and warrants to
acquire approximately 263,000 shares of Horizon common stock. The acquisition,
which will be accounted for as a pooling of interests, is expected to be
consummated in the second quarter of 1996.
Consummation of the acquisition is subject to certain conditions, and there can
be no assurance that these conditions will be satisfied. Medical Innovations
provides specialized and high-tech home health care services, home medical
equipment, homemaker services, and intravenous therapies, as well as,
comprehensive home healthcare management services under contractual arrangements
with hospitals and other providers.
SEC INVESTIGATION. Horizon has been advised that the staff of the Division
of Enforcement of the Commission has commenced a private investigation with
respect to trading in the securities of Horizon and CMS. In connection with that
investigation, Horizon has voluntarily produced certain documents and Neal M.
Elliott, Chairman of the Board, President and Chief Executive Officer of
Horizon, has voluntarily given testimony to the Commission. Mr. Elliott has also
produced certain documents in response to a subpeona from the Commission. The
investigation is ongoing, and neither Horizon nor Mr. Elliott possesses all the
facts with respect to the matters under investigation. Although neither Horizon
nor Mr. Elliott has been advised by the Commission that the Commission has
concluded that either Horizon or Mr. Elliott has been involved in any violation
of the federal securities laws, there can be no assurance as to what the outcome
of the investigation will be or when it will be concluded. Both Horizon and Mr.
Elliott intend to continue cooperating fully with the Commission in connection
with the investigation.
STRATEGY
In response to current health care reform and ongoing changes in the health
care marketplace, Horizon has implemented and continues to implement a strategy
of extending the continuum of services offered by Horizon beyond traditional
long-term and subacute care to create a post-acute health care delivery system
in each geographical region that it serves. Horizon's strategy is designed to
improve its profit margins, occupancy levels and payor mix. Continued
implementation of this strategy will require the following:
LEVERAGING EXISTING FACILITIES. Horizon intends to continue to use its
rehabilitation, long-term care and subacute care facilities as platforms to
provide a cost-effective continuum of post-acute care to managed care, private
and government payors. This allows Horizon to provide its services to the
increasing number of patients who continue to require rehabilitation, subacute
care or long-term care after being discharged from hospitals. These patients
often cannot receive proper care in the home because of the complex monitoring
and specialized medical treatment required. Horizon is able to offer these
complex medical services at a significantly lower cost than acute care hospitals
because its facilities have lower capital and operating costs than acute care
hospitals.
EXPANDING SPECIALTY HEALTH CARE SERVICES OFFERED. Horizon believes that by
providing a broad range of cost effective services it meets the needs of managed
care and other payors. As a result, Horizon has experienced and expects to
continue to experience increased patient volumes in, and revenues derived from,
its facilities. Horizon intends to diversify further the specialty services it
offers.
CROSS-SELLING BROAD SERVICE OFFERING. In response to payors' demands for a
broad range of services, Horizon intends to cross-sell the variety of services
provided by its business units. Horizon has begun to market aggressively its
pharmacy services, various therapies and other medical services to its
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existing and newly acquired operations. As a result of these efforts, Horizon
has achieved significant market positions in large markets, such as Texas and
Nevada, where it offers a full continuum of post-acute care through the
integration of rehabilitation, subacute, long-term and other medical services.
CONCENTRATING OPERATIONS IN TARGETED GEOGRAPHIC AREAS. To realize operating
efficiencies, economies of scale and growth opportunities, Horizon intends to
continue to concentrate its operations in clusters of operating units in
selected geographic areas. Horizon believes that concentration of its
rehabilitation hospitals and long-term care facilities within selected
geographic regions (a) provides Horizon with a platform from which it can expand
its specialty health care services, (b) enhances the development of stronger
local referral sources through concentrated marketing efforts and (c)
facilitates the establishment of effective working relationships with the
regulatory and legislative authorities in the states in which Horizon operates.
DEVELOPING REHABILITATION NETWORKS. Horizon intends to develop
rehabilitation networks by concentrating its outpatient rehabilitation clinics
in geographic locations where regional coverage, combined with the ability to
provide multiple services in concert with existing acute rehabilitation,
subacute and long-term care facilities, will strengthen its position with
managed care payors. Horizon believes that these networks better enable it to
provide a more complete continuum of care and also establish Horizon as a
provider of choice for the region or locality. By concentrating its
rehabilitation facilities, Horizon expects to be better able to negotiate
comprehensive rehabilitation contracts and leverage the clinical expertise in an
individual market.
EXPANDING THROUGH ACQUISITIONS. Horizon intends to continue to expand its
operations through the acquisition in select geographic areas of long-term care
facilities and providers of specialty health care services. Management believes
that such acquisitions provide opportunities to realize operating efficiencies,
particularly through (a) margin improvements from enhanced utilization of
rehabilitation therapies and other specialty medical services; (b) the expansion
of Horizon's institutional pharmacy services into new facilities and new
markets; (c) the consolidation of corporate overhead; (d) the potential to
increase business by providing a full range of care to managed care providers
who desire "one stop shopping;" (e) the ability to increase capacity and margins
by offering higher margin and higher acuity services to patients in Horizon
owned or operated subacute and long-term care facilities; (f) the potential to
increase patient volume by expanding the continuum of care of each acquired
entity on a stand-alone basis; and (g) the potential for improved buying power
with respect to suppliers.
SPECIALTY HEALTH CARE SERVICES
Horizon provides a variety of specialty health care services, including
acute rehabilitation, subacute care, rehabilitation therapies (occupational,
speech and physical therapies (in both inpatient and outpatient settings) and
treatment of traumatic head injury and other neurological impairments),
institutional pharmacy services, Alzheimer's care, non-invasive medical
diagnostic testing services, home respiratory care services and supplies, and
clinical laboratory services. Horizon believes that providing a broad range of
specialty health care services and programs enables Horizon to attract patients
with more complex health care needs. In addition, these services typically
generate higher profit margins than long-term care patient services.
ACUTE REHABILITATION. At January 1, 1996, Horizon operated 37 freestanding
comprehensive acute rehabilitation hospitals with a total of 2,065 licensed
acute rehabilitation beds located in 16 states. Generally, these hospitals are
located in the same geographic area as Horizon's long-term care or subacute care
facilities (including specialty hospitals) and therefore benefit from referrals
from such facilities. Many of Horizon's rehabilitation hospitals are operated
through joint ventures with local general acute care hospitals, physicians and
other investors. Horizon's rehabilitation unit management group operates
inpatient and outpatient rehabilitation programs within acute care hospitals. At
January 1, 1996, Horizon managed 12 rehabilitation units with more than 270 beds
in such acute care hospitals. In addition, Horizon's freestanding rehabilitation
hospitals typically provide on-site outpatient services.
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SUBACUTE CARE. Horizon provides subacute care to high acuity patients with
medically complex conditions who require ongoing, multi-disciplinary nursing and
medical supervision and access to specialized equipment and services but who do
not require many of the other services provided by an acute care hospital.
Horizon's subacute care services include dedicated programs for rehabilitative
ventilator care, wound management, general rehabilitation, head trauma/coma
stimulation and infusion therapy. Horizon's subacute care services are provided
through both its specialty hospitals and its subacute care units. Generally,
these specialty hospitals and subacute care units are located in separate areas
within the physical structures of Horizon's long-term care facilities and are
supervised by separate nursing staffs employed by Horizon. As of January 1,
1996, Horizon operated 57 specialty hospitals and subacute care units, including
one standalone specialty hospital, with 1,863 beds in 17 states. Horizon
believes that private insurance companies and other third party payors,
including certain state Medicaid programs, recognize that treating patients
requiring subacute care in specialty units such as those operated by Horizon is
a cost effective alternative to treatment in acute care hospitals. Horizon
believes that it can continue to offer subacute care at rates substantially
below those typically charged by acute care hospitals for comparable services.
Horizon's specialty hospitals are operated under specialty hospital licenses
that permit Horizon to provide higher acuity services and, as a consequence, to
receive higher reimbursement rates than subacute care units which are operated
under long-term care facility licenses. It is Horizon's belief that such
specialty hospital licenses enhance its marketing efforts to referral sources
such as physicians, managed care providers and hospital discharge planners. Once
a specialty hospital license has been obtained, the beds so licensed generally
can no longer be used for patients who require only basic patient care.
Horizon is a party to a number of contracts with commercial insurers and
managed care providers and out-of-state enhanced rate Medicaid provider
agreements. Horizon believes that these relationships will enable it to improve
its reimbursement rates and profit margins.
CONTRACT REHABILITATION THERAPIES. Horizon provides a comprehensive range
of rehabilitation therapies, including physical, occupational, respiratory
(including inpatient and outreach services) and speech therapy services to
skilled nursing facilities, general acute care hospitals, schools, home health
agencies, inpatient rehabilitation hospitals and outpatient clinics. As of
January 1, 1996, Horizon provided these services through approximately 2,686
contracts in 35 states, 184 of which are with Horizon-operated long-term care
facilities, specialty hospitals and subacute facilities, and 2,502 of which are
with third party long-term care facilities, home health agencies, hospitals,
outpatient clinics or school systems. The CMS merger has significantly expanded
Horizon's presence in the contract rehabilitation therapy marketplace, making
Horizon one of the nation's leading providers of these services.
OUTPATIENT REHABILITATION. Horizon provides rehabilitation therapies to
ambulatory patients recovering from industrial injuries, sports-related injuries
and other general orthopedic conditions. Horizon's outpatient clinics provide
rehabilitation programs dedicated to industrial reconditioning, sports medicine,
aquatic therapy, back stabilization, arthritis, osteoporosis, pain management,
total joint replacement and general rehabilitation. These services are provided
in freestanding outpatient facilities and ambulatory outpatient clinics within
institutional settings, as well as by a staff of fully-trained professionals who
rehabilitate patients in their own homes. As of January 1, 1996, Horizon
provided outpatient services through 145 outpatient rehabilitation clinics in 19
states. Horizon believes that the Merger will significantly expand its presence
in the outpatient rehabilitation clinic marketplace and enhance the geographic
diversity of the two companies. The Merger will also enable Horizon to
consolidate its existing outpatient rehabilitation clinic business with Pacific
Rehab's business into a single network of outpatient rehabilitation clinics with
a centralized management and regional marketing structure. Horizon believes that
this combined structure will result in significant synergies.
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INSTITUTIONAL PHARMACY. Horizon has established a network of 28 regionally
located pharmacies in 14 states through which it provides a full range of
prescription drugs and infusion therapy services, such as antibiotic therapy,
pain management and chemotherapy, to over 38,400 beds in facilities operated by
Horizon and by third parties. These pharmacy operations (certain of which are
managed by third parties) enable Horizon to generate revenues from services
previously provided to Horizon by third-party pharmacy vendors. Of the total
beds serviced by Horizon's institutional pharmacies, 20,500 are located in
facilities not owned or leased by Horizon.
ALZHEIMER'S CARE. Horizon offers a specialized program for persons with
Alzheimer's disease through its Alzheimer's centers. At January 1, 1996, this
program had been instituted at 25 of Horizon's long-term care facilities, with a
total of 816 beds. Each Alzheimer's center is located in a designated wing of a
long-term care facility and is designed to address the problems of
disorientation experienced by Alzheimer's patients and to help reduce stress and
agitation resulting from a short attention span and hyperactivity. Each
Alzheimer's center employs a specially trained nursing staff and an activities
director and engages a medical director with expertise in the treatment of
Alzheimer's disease. The program also provides education and support to the
patient's family.
LONG-TERM CARE
Horizon's long-term care facilities provide routine basic patient services
to geriatric and other patients with respect to daily living activities and
general medical needs. Such basic patient services include daily dietary
services, recreational activities, social services, housekeeping and laundry
services, pharmaceutical and medical supplies and 24 hours-a-day access to
registered nurses, licensed practical nurses and related services prescribed by
the patient's physician. At February 1, 1996 Horizon operated 267 long-term care
facilities (31,415 beds), of which 47 were owned (6,205 beds) and 73 were leased
(8,762 beds), and also managed 147 long-term care facilities (16,448 beds),
located in a total of 19 states.
OTHER SPECIALTY HEALTH CARE
PHYSICIAN "LOCUM TENENS." Horizon provides physician locum tenens services
to institutional providers and physician practice groups throughout the United
States. Horizon recruits, credentials and places health care providers in
appropriate short-term, long-term or permanent positions in most physician and
allied health care specialties. Horizon also provides credentialing assistance,
recruitment outsourcing, staff planning services and educational programs for
physicians and health care executives.
NON-INVASIVE MEDICAL DIAGNOSTICS. During fiscal 1994, Horizon began
providing non-invasive medical diagnostic testing services by way of mobile
units and fixed location operations (generally in acute care hospitals) through
a network of physicians and surgeons. These services include cardiovascular
(both cardiac imaging and vascular imaging), pelvic and abdominal testing
services and sleep diagnostic services. Horizon has recently expanded its
diagnostic expertise and the diagnostic markets it serves through acquisitions.
CLINICAL LABORATORY SERVICES. In fiscal 1993, Horizon established a
comprehensive clinical laboratory, located in Dallas Texas, to serve the
long-term care industry. The clinical laboratory provides bodily fluid testing
services to assist in detecting, diagnosing and monitoring diseases. This
laboratory has all necessary state regulatory approvals to conduct business in
the states in which Horizon currently operates and is certified to receive
reimbursement for charges to patients covered by Medicare and Medicaid. At
January 1, 1996, the laboratory provided services to approximately 10,000 beds.
HOME RESPIRATORY; HOME INFUSION. Horizon provides home respiratory care
services and supplies to home care patients in Texas, Oklahoma, Arkansas,
Louisiana, Tennessee and Kentucky through a physician referral base. Horizon
employs a fully-trained nursing staff to perform these services, which include
the provision of home infusion and intravenous therapies. Supplies provided by
Horizon include gas and liquid oxygen cylinders, oxygen concentrators and
aerosol nebulizers.
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HOSPICE CARE. Commencing in fiscal 1996, Horizon began providing hospice
care in Texas to home-bound and institutionalized, terminally ill patients.
Hospice care includes the provision of all durable medical equipment,
intravenous therapies and pharmaceuticals incident to such care.
PACIFIC REHAB
INTRODUCTION
Pacific Rehab provides physical therapy services to persons suffering from
work, sports and accident related injuries. In March 1994, Pacific Rehab merged
with Pacific Rehab, Inc., an Oregon corporation. By way of closings on April 21,
1994 and May 9, 1994, Pacific Rehab concluded an initial public offering of
2,760,000 shares of common stock (of which the Company sold 2,560,000 shares) at
$6.00 per share (the "Offering").
During the year ended December 31, 1994, Pacific Rehab, directly and through
subsidiaries, acquired 19 additional clinics in 12 transactions and opened two
new clinics. At December 31, 1994, Pacific Rehab owned and operated a total of
39 clinics located in eight states.
In the first quarter of 1995, Pacific Rehab acquired eight clinics in six
different transactions. One of the acquisitions occurred in Tacoma, Washington
and represented a new market for Pacific Rehab. The remaining five acquisitions
strengthened Pacific Rehab's presence in the Southern California, Miami,
Florida, and Baltimore, Maryland markets.
Pacific Rehab continued its acquisition activity in the second quarter of
1995. During this period, it acquired ten additional clinics in seven
transactions and opened two new clinics. In April, Pacific Rehab increased its
presence in the Las Vegas, Nevada area when it acquired a practice with two
clinics. In June, Pacific Rehab substantially increased its presence in Western
Washington when it acquired practices with clinics located in Silverdale,
Tumwater, Chehalis, Kirkland and Seattle, Washington. As of the end of the
second quarter, Pacific Rehab owned and operated 59 clinics.
In the third quarter of 1995, Pacific Rehab acquired fourteen additional
clinics, including thirteen in the new market area of Portland, Oregon. Pacific
Rehab opened a new clinic in the Baltimore, Maryland area during the same time
period. As of the end of the third quarter, Pacific Rehab owned and operated a
total of 74 clinics located in the states of Oregon, Washington, California,
Nevada, Hawaii, Arizona, Texas, Mississippi, Florida and Maryland. During the
fourth quarter, Pacific Rehab closed and consolidated two clinics in Hawaii.
Assuming Pacific Rehab remains a stand-alone entity and the proposed Merger
is not consummated, Pacific Rehab intends to continue to expand its operations
through internal growth, including opening new satellite clinics in existing
markets, where appropriate, to provide geographic coverage and to meet market
demand for services which cannot be reasonably satisfied at existing clinics,
and through a limited number of acquisitions.
INDUSTRY BACKGROUND
Rehabilitation is the process of restoring individuals disabled by injuries
or recovering from surgery to their optimum level of physical capabilities.
Rehabilitation services are provided on an inpatient and outpatient basis. On an
outpatient basis, rehabilitation services are provided by physicians and
licensed physical therapists in hospitals, managed care organizations and other
outpatient physical therapy clinics, including those owned by large national or
regional companies. Substantially all of Pacific Rehab's services are provided
on an outpatient basis.
Pacific Rehab believes the outpatient rehabilitation market will continue to
grow primarily as the result of (i) the recognition of the cost-effectiveness of
rehabilitation, (ii) the increased acceptance of rehabilitation by the
healthcare industry, (iii) increasing emphasis on physical fitness and the
treatment and prevention of sports injuries, (iv) the aging of the population
and (v) earlier discharge from acute care hospitals to alternate sites. Pacific
Rehab also believes the outpatient rehabilitation market will continue to
consolidate due to the highly fragmented nature of the market, growing
legislative
30
<PAGE>
and payor pressure to prohibit or limit referrals by physicians to entities in
which they have a financial interest, and the preference of managed care
organizations and other third party payors to contract with providers offering
comprehensive, cost-effective outpatient rehabilitation programs on a regional
or national basis.
SERVICES
The goals of physical therapy are to improve a patient's physical strength
and range of motion, reduce pain, help prevent reinjury and restore the ability
to perform basic activities. The primary services provided collectively at
Pacific Rehab's clinics are:
PHYSICAL THERAPY MODALITIES AND THERAPEUTIC EXERCISES. Each patient
receives an initial evaluation by a licensed physical therapist upon which is
based an individualized rehabilitation program tailored for that patient.
Treatment usually begins with acute pain relief through the use of therapy
modalties such as ice packs, massage, ultrasound, heat, traction and electrical
stimulation, and later includes such components as stretching, cardiovascular,
and neuro-muscular strengthening exercises.
WORK HARDENING. Work hardening is a rehabilitation program that simulates
the specific job activities of an injured worker in order to prepare the worker
to return to work while addressing the issues of productivity, safety, physical
tolerances and worker behavior. The goal is to prepare the patient to work a
complete workday safely and without reinjury.
FUNCTIONAL CAPACITY ASSESSMENT. Functional capacity assessments are used to
evaluate the physical condition and endurance of a current or prospective
employee to meet the requirements of employment. The assessment may be used by
employers, insurers and other payors to estimate the extent of rehabilitation
treatment needed or as an objective method of evaluating specific work capacity.
PREVENTIVE SERVICES. Pacific Rehab also provides services designed to
prevent or avoid injuries in the work place. These preventive services, which
may be performed at an employer's work site, include programs to teach employees
proper body mechanics and techniques and detailed analysis of specific job
activities, such as lifting, with the goal of changing how a job is performed to
prevent injuries to employees.
MARKETING
Pacific Rehab is continuing to implement a three-tier marketing program at
the local clinic, regional and corporate levels directed at physicians,
insurance companies, managed-care organizations, lawyers and employers.
At the local clinic level, the physical therapists are expected to maintain
relationships with existing referral sources and to establish relationships with
new referral sources, typically physicians, in the clinic's geographic area.
Pacific Rehab has at least one full time marketing position for each of six
of its nine regions, and expects that a marketing position will be added to two
regions soon and additional regions when necessary. Regional marketing personnel
provide support to clinical personnel in their marketing efforts and are
responsible for developing and expanding business relationships with all
referral sources such as insurance companies, managed care organizations,
lawyers and employers, as well as the physicians targeted by the clinical
personnel.
At the corporate level, the Regional Presidents concentrate on establishing
contracts with multi-regional managed care organizations, insurance companies
and employers. In addition, the Regional Presidents are expected to work with
and support the efforts of the regional marketing personnel.
Pacific Rehab is aware of the growing importance of managed care
organizations in controlling patient referrals and their demand for high
quality, cost-effective care from service providers with a regional presence.
Accordingly, both its corporate and regional marketing personnel devote
substantial efforts to building relationships with these organizations. Pacific
Rehab has been able to secure
31
<PAGE>
contracts and establish relationships with such organizations in the past and
believes that its sales and marketing efforts will allow it to acquire
additional contracts from and establish additional relationships with managed
care organizations in the future.
SEASONALITY AND QUARTERLY VARIABILITY
Pacific Rehab generally experiences a decrease in revenues in some markets
in the summer months of the third quarter and in certain markets in the fourth
quarter of each year as the number of patient visits tends to decline during the
holiday periods. In addition, Pacific Rehab has grown and expects to continue to
grow through a limited number of acquisitions. The timing, number and
integration of Pacific Rehab's acquisitions may cause financial results of
operations to vary on a quarterly basis.
COMPETITION
The physical therapy rehabilitation industry is highly competitive and
subject to changes in the manner in which services are delivered and in which
providers are selected. Pacific Rehab competes for patients with the outpatient
rehabilitation operations of acute care hospitals, managed care organizations
and with other outpatient physical therapy clinics, including those owned by
large national companies such as CareMark International, Inc., HEALTHSOUTH
Rehabilitation Corp., Horizon/CMS Healthcare Corporation, Living Centers of
America, Inc. (including the former operations of Rehability Corporation), and
NovaCare, Inc. (including the former operations of RehabClinics, Inc.).
Pacific Rehab also competes with other healthcare companies in acquiring
clinics. Several larger national companies with substantially greater financial
resources than Pacific Rehab, such as those named above, have been actively
acquiring outpatient rehabilitation clinics.
GOVERNMENTAL REGULATIONS
The Federal Medicare/Medicaid Anti-Fraud and Abuse Amendments of 1977 to the
Social Security Act (the "Anti-Kickback Law") make it a criminal felony offense
knowingly and willfully to 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, violations of the Anti-Kickback Law can
lead to civil monetary penalties and exclusion from the Medicare and Medicaid
programs. The scope of prohibited payments in the Anti-Kickback Law is broad and
includes economic arrangements involving hospitals, physicians and other health
care providers, including joint ventures, space and equipment rentals, purchases
of physician practices and management and personal services contracts. Federal
regulations describe certain arrangements that will not be deemed to constitute
violations of the Anti-Kickback Law. These "safe harbor" regulations define
certain practices that will be exempted from prosecution or other enforcement
action regarding inducements for referrals. Activities that fall outside of the
safe harbor rules include a wide range of activities frequently engaged in
between physicians, other providers and others. The application of the safe
harbor regulations could lead to a conclusion that certain arrangements outside
the safe harbors are subject to investigation and/or prosecution. Failure to
comply, however, does not mean that a health care provider will be prosecuted
for violation, or even that the activity is a violation of the law. Because the
regulations describe safe harbors and do not purport to describe comprehensively
all lawful or unlawful economic arrangements or other relationships between
health care providers and referral sources having these arrangements or
relationships may not be required to alter them in order to ensure compliance
with the Anti-Kickback Law.
In addition, under Section 1877 of the Social Security Act (known as "Stark
II"), effective January 1, 1995, physicians are prohibited from referring
Medicare or Medicaid patients for physical therapy and other "designated health
services" to an entity with which the physician has a "financial relationship."
Referrals are permitted only if the financial relationship falls within a
specific exception under the law. Certain provisions of Stark II are ambiguous
and the scope of the prohibition in the law is broad, in part because "financial
interest" is defined to include both "ownership or investment
32
<PAGE>
interests" of physicians in the entity providing services and "compensation
arrangements" between physicians and such providers. The statute provides that
an "ownership of investment interest" may be through "debt, equity or other
means." Penalties for violation of the statute include denial of Medicare or
Medicaid payment, as the case may be. In addition, civil monetary penalties
($15,000 for each service, $100,000 for a scheme in violation of the statute, or
$10,000 per day for false reporting) and program exclusion may be imposed under
certain circumstances.
Aside from federal law, certain states in which Pacific Rehab operates have
enacted laws and/or adopted regulations, generally similar to the federal
anti-referral laws, which restrict or prohibit health care practitioners
(including physicians) from referring patients to health care facilities in
which the practitioner has an ownership or other financial interest or with
which the practitioner has some other form of financial relationship, subject to
certain specific exceptions. Various state laws and regulations also prohibit
"fee-splitting," rebating and/or the giving and accepting of referral fees or
other consideration as compensation or inducement for patient referrals. These
laws may apply regardless of whether the source of payment for the services
involved is a public program, a private insurer, or some other payor.
Because these anti-fraud and abuse laws are quite broad in scope and have
been expansively interpreted, they limit the manner in which Pacific Rehab can
pursue acquisitions from, market its services to, and contract for services
with, physicians and other health care providers. For example, representatives
of OIG, the agency with civil enforcement responsibility, have indicated their
view that, under certain circumstances, a payment for goodwill in the context of
a practice sale is contrary to such anti-fraud and abuse laws.
A number of Pacific Rehab's clinics derive a portion of their revenue from
the Medicare or Medicaid programs. As to these clinics, any parties from whom
the clinics were acquired on terms which establish a "financial relationship",
or with whom Pacific Rehab otherwise maintains a financial relationship not
specifically permitted by Stark II, do not refer patients to the clinics and,
therefore, management of Pacific Rehab believes are not referral sources for
purposes of Stark II and the anti-fraud and abuse laws. Conversely, patients at
clinics acquired from referring physicians on terms which would otherwise
establish a "financial relationship" under Stark II are either: (1) not covered
by the Medicare or Medicaid programs or (2) treated without charge, i.e.,
neither the public health care programs nor the patient are billed for the
services. Less than 10% of Pacific Rehab's total net revenues are derived from
Medicare and Medicaid programs.
Pacific Rehab complies with state anti-referral laws by ensuring that its
financial arrangements with referring physicians fall within an exception to the
referral prohibition or by refraining from entering into financial relationships
with referring physicians. In particular, where state laws similar to Stark II
contain prohibitions generally similar to Stark II which are applicable
regardless of the payment source for the services which Pacific Rehab provides,
any parties from whom the clinics were acquired on terms which establish a
"financial relationship", or with whom Pacific Rehab otherwise maintains a
financial relationship not permitted under state law, such parties do not refer
patients to the clinics involved.
It is possible that the prohibitions under the federal anti-referral laws
may be extended to all payers at the national level and apply regardless of
whether the source of payment is the Medicare or Medicaid programs or some other
public or private source of payment. If such legislation were enacted, or
similar legislation were enacted in additional states, Pacific Rehab may be
required to restructure its relationships with certain of its referring
physicians, which may adversely affect Pacific Rehab's financial condition or
operations.
EMPLOYEES
At February 7, 1995, Pacific Rehab had 559 employees. None of Pacific
Rehab's employees are represented by a labor union. Management believes its
relations with its employees are good.
33
<PAGE>
PROPERTIES
Pacific Rehab leases all of the properties used for its rehabilitation
clinics and executive offices, with lease terms ranging from month to month to
seven years. Pacific Rehab believes that replacement premises will be available
on favorable terms in the event one or more of its leases are terminated.
Pacific Rehab intends to continue to lease the premises in which new centers are
located.
LEGAL PROCEEDINGS
In the ordinary course of its business, Pacific Rehab may be subject from
time to time to claims and legal actions. Pacific Rehab has no history of
material claims and no material actions are currently pending against Pacific
Rehab.
Pacific Rehab maintains professional malpractice liability coverage on its
physical therapy and technical employees in the amount of $2,000,000 per
occurrence and $4,000,000 in the aggregate as well as $1,000,000 of general
premises liability insurance inclusive of rehabilitation centers and its
executive offices. In addition, Pacific Rehab maintains a $10,000,000 umbrella
over the general liability insurance. Pacific Rehab believes its insurance
policies to be sufficient in amount and coverage for its current operations.
34
<PAGE>
PACIFIC REHAB
SELECTED HISTORICAL FINANCIAL INFORMATION
The selected historical consolidated financial information of Pacific Rehab
and subsidiaries shown below for the three fiscal periods ended December 31,
1994 has been derived from Pacific Rehab's audited Consolidated Financial
Statements. The Consolidated Financial Statements of Pacific Rehab have been
audited by Price Waterhouse LLP, independent accountants, with respect to 1994
and by Grant Thornton LLP, independent accountants, with respect to 1993 and
1992. Pacific Rehab commenced operations on December 31, 1991. The financial
information for the nine-month periods ended September 30, 1995 and 1994 has
been derived from Pacific Rehab's unaudited consolidated financial statements
and includes, in the opinion of Pacific Rehab's management, all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the information for such periods. The information set forth below is qualified
by reference to and should be read in conjunction with Pacific Rehab's
consolidated financial statements and related notes included elsewhere in this
Proxy Statement/Prospectus. Results for the nine-month period ended September
30, 1995, are not necessarily indicative of the results which may be expected
for the fiscal year as a whole.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
PRO FORMA
AFTER
ACQUISITIONS (1) HISTORICAL
-------------- -------------------------------
1994 1994 1993 1992
-------------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenues..................................................... $ 37,650 $ 20,504 $ 8,162 $ 4,396
Cost of revenues................................................. 19,739 10,290 4,028 1,426
-------------- --------- --------- ---------
Gross profit................................................... 17,911 10,214 4,134 2,970
-------------- --------- --------- ---------
Operating expenses:
Selling, general and administrative expenses..................... 10,336 5,618 1,878 872
Depreciation and amortization.................................... 1,743 979 505 375
-------------- --------- --------- ---------
12,079 6,597 2,383 1,247
-------------- --------- --------- ---------
Operating income............................................... 5,832 3,617 1,751 1,723
Nonoperating income (expense):
Interest expense................................................. (845) (170) (47) (229)
Interest income.................................................. 90 54 45 30
Other............................................................ -- -- (53) --
-------------- --------- --------- ---------
(755) (116) (55) (199)
-------------- --------- --------- ---------
Earnings before income taxes................................. 5,077 3,501 1,696 1,524
Income taxes..................................................... 2,005 1,375 649 563
-------------- --------- --------- ---------
Net earnings................................................... $ 3,072 $ 2,126 $ 1,047 $ 961
-------------- --------- --------- ---------
-------------- --------- --------- ---------
Net earnings per common and common equivalent share.............. $ 0.44 $ 0.35 $ 0.26 $ 0.26
-------------- --------- --------- ---------
-------------- --------- --------- ---------
Weighted average number of common and common equivalent shares
outstanding..................................................... 7,029 6,115 3,996 3,738
-------------- --------- --------- ---------
-------------- --------- --------- ---------
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
PRO FORMA
AFTER
ACQUISITIONS
(1) HISTORICAL
-------------- --------------------
1995 1995 1994
-------------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenues............................................................ $ 32,506 $ 24,903 $ 14,159
Cost of revenues........................................................ 18,671 13,991 7,188
-------------- --------- ---------
Gross profit........................................................ 13,835 10,912 6,971
-------------- --------- ---------
Operating expenses:
Selling, general and administrative expenses.......................... 7,520 6,488 3,732
Depreciation and amortization......................................... 1,673 1,327 669
-------------- --------- ---------
9,193 7,815 4,401
-------------- --------- ---------
Operating income.................................................... 4,642 3,097 2,570
-------------- --------- ---------
Nonoperating income (expense):
Interest expense...................................................... (952) (728) (131)
Interest income....................................................... 10 10 44
-------------- --------- ---------
(942) (718) (87)
-------------- --------- ---------
Earnings before income taxes........................................ 3,700 2,379 2,483
Income taxes............................................................ 1,525 997 968
-------------- --------- ---------
Net earnings........................................................ $ 2,175 $ 1,382 $ 1,515
-------------- --------- ---------
-------------- --------- ---------
Net earnings per common and common equivalent share..................... $ 0.25 $ 0.18 $ 0.26
-------------- --------- ---------
-------------- --------- ---------
Net earnings per common share assuming full dilution.................... $ 0.24 $ 0.18 $ 0.26
-------------- --------- ---------
-------------- --------- ---------
Weighted average shares outstanding:
Primary............................................................... 8,877 7,855 5,815
-------------- --------- ---------
-------------- --------- ---------
Fully diluted......................................................... 9,212 8,190 5,815
-------------- --------- ---------
-------------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------
AT SEPTEMBER 30,
1995 HISTORICAL
-------------------- -------------------------------
HISTORICAL 1994 1993 1992
-------------------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................ $ (4,046) $ 8,247 $ 2,300 $ 3,748
Total assets........................................... 71,169 36,191 17,665 7,377
Long-term debt, excluding current portion.............. 6,065 2,029 1,074 --
Total stockholders' equity............................. 38,682 28,441 10,801 6,646
</TABLE>
- ------------------------
(1) To give effect to the consummation of acquisitions as though all such
acquisitions occurred on January 1, 1994.
36
<PAGE>
PACIFIC REHAB
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read together with Pacific Rehab's
Historical Consolidated Financial Statements included elsewhere herein.
GENERAL
Pacific Rehab commenced operations in December 1991 by acquiring three
limited partnerships, each of which owned and operated an outpatient
rehabilitation clinic in Hawaii. As of September 30, 1995, Pacific Rehab
provided comprehensive outpatient rehabilitation and physical therapy services
at 74 outpatient rehabilitation clinics in Hawaii, Washington, Oregon,
California, Nevada, Arizona, Texas, Mississippi, Florida and Maryland.
By way of closings on April 21, 1994 and May 9, 1994, Pacific Rehab
concluded an initial public offering of 2,760,000 shares of common stock (of
which 2,560,000 were sold by Pacific Rehab) at $6.00 per share (the "Offering").
The net proceeds of the Offering to Pacific Rehab, after deducting estimated
issuance costs and expenses were $12,515,000.
The following table sets forth, as of September 30, 1995, the number of
clinic acquisitions completed and additional clinics opened by Pacific Rehab
since 1993:
<TABLE>
<CAPTION>
1995 1994
-------------------- ---------------------------
1ST QTR 2ND QTR 3RD QTR 1ST QTR 2ND QTR 3RD QTR 4TH QTR
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Clinics at beginning of period...... 39 47 59 18 18 37 37
Clinics acquired.................. 8 10 14 -- 17 -- 2
Clinics opened.................... -- 2 1 -- 2 -- --
-- -- -- -- -- -- --
Clinics at end of period............ 47 59 74 18 37 37 39
-- -- -- -- -- -- --
-- -- -- -- -- -- --
<CAPTION>
1993 1992
--------------------------- -------------------------------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR 2ND QTR 3RD QTR
----- ----- ----- ----- ----- ----- -----
<S> <C>
Clinics at beginning of period...... 5 7 7 18 3 4 4
Clinics acquired.................. 2 -- 11 -- -- -- 1
Clinics opened.................... -- -- -- -- 1 -- --
-- -- -- -- -- -- --
Clinics at end of period............ 7 7 18 18 4 4 5
-- -- -- -- -- -- --
-- -- -- -- -- -- --
<CAPTION>
4TH QTR
-----
Clinics at beginning of period...... 5
Clinics acquired.................. --
Clinics opened.................... --
--
Clinics at end of period............ 5
--
--
</TABLE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
consolidated financial information of Pacific Rehab expressed as a percentage of
net revenues:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------- ----------------------------------
1995 1994 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................................ 56.2 50.8 50.2 49.4 32.4
---------- ---------- ---------- ---------- ----------
Gross profit................................................ 43.8 49.2 49.8 50.6 67.6
Operating expenses:
Selling, general and administrative expenses.............. 26.1 26.4 27.4 23.0 19.9
Depreciation and amortization............................. 5.3 4.7 4.8 6.2 8.5
---------- ---------- ---------- ---------- ----------
31.4 31.1 32.2 29.2 28.4
---------- ---------- ---------- ---------- ----------
Operating income............................................ 12.4 18.1 17.7 21.4 39.2
---------- ---------- ---------- ---------- ----------
Non-operating income (expense):
Interest expense.......................................... (2.9) (0.9) (0.8) (0.6) (5.2)
Interest income........................................... -- 0.3 0.2 0.6 0.7
Other -- nonrecurring contract termination cost........... -- -- -- (0.6) --
---------- ---------- ---------- ---------- ----------
(2.9) (0.6) (0.6) (0.6) (4.5)
---------- ---------- ---------- ---------- ----------
Earnings before income taxes................................ 9.5 17.5 17.1 20.8 34.7
Income taxes................................................ 3.9 6.8 6.7 8.0 12.8
---------- ---------- ---------- ---------- ----------
Net earnings................................................ 5.6% 10.7% 10.4% 12.8% 21.9%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
37
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
NET REVENUES. Net revenues increased $10,744,000, from $14,159,000 for the
nine months ended September 30, 1994 to $24,903,000 for the nine months ended
September 30, 1995, an increase of 75.9%. An increase of $12,073,000,
attributable to the 51 clinics acquired and the five clinics opened by Pacific
Rehab since January 1994 was offset by a 14.7% "same store" decrease of
$1,329,000, attributable to the 18 clinics which operated for the first nine
months of both 1995 and 1994. The "same store" decrease was due to decreases in
net revenues in Hawaii, Texas and San Diego.
The decrease in Texas was a result of reduced referrals from two physicians.
Pacific Rehab believes this decrease in net revenues will be partially offset by
new referral sources generated by marketing programs, however, Pacific Rehab
does not anticipate that these actions alone will return net revenues in Texas
to levels experienced in the past.
The decreases in Hawaii, most of which occurred during the third quarter of
1995, was due primarily to passage of managed care legislation with reduced
reimbursement rates. These reduced reimbursement rates decreased Pacific Rehab's
revenue per patient. This has further resulted in reduced patient referrals as
some referral sources are treating patients themselves rather than referring
such patients to outpatient clinics. Pacific Rehab also believes revenues may
have decreased during the first and second quarters due to uncertainty in the
health care services provider community arising from the anticipated passage of
such legislation. Slow economic conditions have further contributed to a
reduction in the number of patients. This new legislation became effective in
Hawaii on July 1, 1995. The legislation resulted in reduced reimbursement rates
under workers' compensation programs as well as for physical therapy services
provided to patients suffering from injuries from automobile and other
accidents. Pacific Rehab also anticipates that regulations to be issued under
the legislation will reduce the number of approved patient visits, which may
further reduce Pacific Rehab's net revenues. Pacific Rehab believes that the
revenue decreases already experienced and those that result from this
legislation will be partially offset by the results of marketing programs aimed
at generating new referral sources, including the pursuit of contract business
with sources such as HMO's, PPO's and other managed care organizations. Pacific
Rehab has obtained managed care contracts in the past and will continue to
pursue this type of business in the future. Pacific Rehab also believes that as
the Hawaii government continues towards reducing health care costs through such
actions as lower reimbursement rates and encouraging greater participation in
managed care organizations, Pacific Rehab, because of its regional presence, may
capture a greater proportion of such business. The volume of patients from such
business could help offset the effects from decreases in patient volume and
reimbursement rates. Pacific Rehab cannot predict with certainty the time period
required to achieve revenue improvements, but believes it will be at least six
months or longer. Pacific Rehab has also taken and continues to take steps to
reduce operating expenses in its Hawaii clinics.
The decrease in San Diego was principally due to the loss of a significant
referral source. Pacific Rehab believes that the reduced referrals at the two
"same store" clinics in San Diego will be partially offset by the results of
marketing programs associated with Pacific Rehab's larger presence in the San
Diego market area, which is presently comprised of seven clinics as compared to
only two in 1994.
Net revenues for the nine months ended September 30, 1995 were also impacted
by greater than expected seasonal softness in Baltimore during the third quarter
of 1995. Pacific Rehab believes net revenues in Baltimore will increase in the
fourth quarter.
COST OF REVENUES. Cost of revenues, which includes salaries, wages, fringe
benefits, payroll taxes, rent and other expenses directly associated with the
delivery of services to patients, increased $6,803,000, from $7,188,000 for the
nine months ended September 30, 1994 to $13,991,000 for the nine months ended
September 30, 1995, an increase of 94.6%. Of this increase, $6,609,000 was
attributable to the 51 clinics acquired and the five clinics opened by Pacific
Rehab since January 1995 and $193,000 was attributable to increased cost of
revenues at the 18 clinics which operated for the first nine months of both 1995
and 1994. Cost of revenues as a percentage of net revenues was 56.2% and 50.8%
for the nine months ended September 30, 1995 and 1994, respectively. This
increase is primarily a result of decreased net revenues in Hawaii, Texas, and
San Diego (while costs were not similarly decreased).
38
<PAGE>
GROSS PROFIT. Gross profit for Pacific Rehab increased $3,941,000, from
$6,971,000 for the nine months ended September 30, 1994 to $10,912,000 for the
nine months ended September 30, 1995, an increase of 56.5%. Gross profit
represented 43.8% and 49.2% of net revenues for the nine months ended September
30, 1995 and 1994, respectively. The decrease in the gross profit margin was due
primarily to the decreases in net revenues in Hawaii, Texas and San Diego. Gross
margin for clinics which operated for the first nine months of both 1995 and
1994 decreased from 45.5% for the nine months ended September 30, 1994 to 33.6%
for the nine months ended September 30, 1995, primarily as a result of the
decrease in net revenues for same store clinics in the same period, as discussed
above at "Net Revenues." Gross margins for clinics acquired since January 1994,
in the aggregate, was 48.4% for the nine month period ended September 30, 1995.
As a result of changes such as those in Hawaii discussed above, Pacific Rehab
does not anticipate that gross profit margins will return to historical levels.
SELLING; GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include expenses incurred in managing and operating the
clinics, as well as all corporate expenses. These expenses increased $2,756,000,
from $3,732,000 for the nine months ended September 30, 1994 to $6,488,000 for
the nine months ended September 30, 1995, an increase of 73.8%. Of this
increase, $1,917,000 was primarily due to the 51 clinics acquired and the five
clinics opened by Pacific Rehab since January 1994 and $839,000 resulted from
clinics which operated for the first nine months of both 1995 and 1994. Selling,
general and administrative expenses represented approximately 26% of net
revenues for the first nine months of both 1995 and 1994. Selling, general and
administrative expenses, as a percentage of net revenues remained relatively
constant due to percentage increases resulting from decreased net revenues in
Hawaii and Texas, offset by the acquisition of clinics with lower average costs
as a percentage of net revenues than the clinics owned as of September 30, 1994.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $658,000, from $669,000 for the nine months ended September 30, 1994
to $1,327,000 for the nine months ended September 30, 1995. The increase in
depreciation and amortization expense is the result of tangible and intangible
assets acquired in connection with acquisitions made by Pacific Rehab since
January 1994 as outlined under the caption "General" above.
NON-OPERATING INCOME (EXPENSE). Interest expense increased $597,000, from
$131,000 for the nine months ended September 30, 1994 to $728,000 for the nine
months ended September 30, 1995. The increase was due primarily to interest
expense associated with debt incurred in connection with practices acquired in
1994 and during the first nine months of 1995.
INCOME TAXES. Pacific Rehab's effective tax rate increased to 42% for the
first nine months of 1995 compared to 39% for the first nine months of 1994. The
increase in Pacific Rehab's effective tax rate is primarily a result of more
acquisitions being completed as acquisition-of-stock transactions, therefore
resulting in goodwill associated with such transactions that is non-deductible
for tax purposes, and a decrease in pre tax earnings. Pacific Rehab anticipates
that the effective tax rate for the year ending December 31, 1995 will be
approximately 42%. See Note 9 of Notes to Pacific Rehab's Historical
Consolidated Financial Statements.
YEARS ENDED DECEMBER 31, 1994 AND 1993
NET REVENUES. Net revenues increased $12,342,000, from $8,162,000 in 1993
to $20,504,000 in 1994, an increase of 151.2%. See Note 1 of Notes to Pacific
Rehab's Historical Consolidated Financial Statements. Of this increase,
$8,626,000 was attributable to the 19 clinics acquired and the two clinics
opened by Pacific Rehab in 1994, $3,272,000 was attributable to the 13 clinics
which operated for a full year in 1994 compared to a partial year in 1993 and
$444,000 was attributable to the five clinics which operated for a full year in
both 1994 and 1993, the latter representing a nine percent same store net
revenue increase.
COST OF REVENUES. Cost of revenues, which includes salaries and wages,
fringe benefits, payroll taxes, rent and other expenses directly associated with
the delivery of rehabilitation services to patients, increased $6,262,000, from
$4,028,000 in 1993 to $10,290,000 in 1994, an increase of 155.5%. Of this
increase, $3,788,000 was attributable to the 19 clinics acquired and the two
clinics opened by Pacific Rehab in 1994, $2,112,000 was attributable to the 13
clinics which operated for a full year in 1994
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compared to a partial year in 1993, and $362,000 resulted from the five clinics
which operated for a full year in both 1994 and 1993. Cost of revenues as a
percentage of net revenues was 50.2% and 49.4% for 1994 and 1993, respectively.
The increased percentage was due to the acquisition of clinics in 1994 with
higher average costs as a percentage of net revenues than the five clinics which
operated for a full year in 1994 and 1993.
GROSS PROFIT. Gross profit for Pacific Rehab increased $6,080,000, from
$4,134,000 in 1993 to $10,214,000 in 1994, an increase of 147.1%. Gross profit
represented 49.8% and 50.6% of net revenues in 1994 and 1993, respectively. The
decrease in gross profit margin was due to the acquisition of clinics with
higher average costs of revenues as a percentage of net revenues and, thus,
lower gross profit margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include expenses incurred in managing and administering
the clinics, as well as all corporate expenses. These expenses increased
$3,740,000, from $1,878,000 in 1993 to $5,618,000 in 1994, an increase of
199.2%. This increase was primarily comprised of $2,093,000 attributable to the
19 clinics acquired and the two clinics opened by Pacific Rehab in 1994,
$722,000 attributable to the clinics operating for a full year in 1994 compared
to a partial year in 1993, and $960,000 was attributable to increased corporate
staff and other corporate expenses related to the operation of a larger
organization, the result of additional acquisitions and anticipated future
acquisitions, and the additional expenses associated with being a publicly
traded company.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $474,000, from $505,000 in 1993 to $979,000 in 1994. The increase in
depreciation and amortization expense is the result of the tangible and
intangible assets acquired through the clinic acquisitions and openings by
Pacific Rehab in 1994 and 1993 as outlined under the caption "General" above.
See Notes 1, 2, 4 and 5 of Notes to Pacific Rehab's Historical Consolidated
Financial Statements.
NONOPERATING INCOME (EXPENSE). Interest expense increased $123,000, from
$47,000 in 1993 to $170,000 in 1994. The increase was due primarily to interest
expense associated with debt incurred in connection with clinics acquired in
1994 and 1993.
INCOME TAXES. Pacific Rehab's effective tax rate was approximately 39% in
1994, compared to 38% in 1993. The net increase in the effective rate is
principally the result of certain acquisitions in 1993 and 1994, which resulted
in non-deductible goodwill. See Note 10 of Notes to Pacific Rehab's Historical
Consolidated Financial Statements.
YEARS ENDED DECEMBER 31, 1993 AND 1992
NET REVENUES. Net revenues increased $3,766,000, from $4,396,000 in 1992 to
$8,162,000 in 1993. The increase was primarily due to $3,250,000 associated with
the 13 clinics acquired by Pacific Rehab during 1993.
COST OF REVENUES. Cost of revenues increased $2,602,000, from $1,426,000 in
1992 to $4,028,000 in 1993. Cost of revenues as a percentage of net revenues was
49.4% and 32.4% for 1993 and 1992, respectively. This increase was primarily due
to an increase of $2,301,000 in costs of revenues of the 13 clinics purchased in
1993. Clinics acquired in 1993 had higher average costs of revenues than the
five Hawaii clinics which operated in both 1993 and 1992.
GROSS PROFIT. Gross profit increased $1,164,000, from $2,970,000 in 1992 to
$4,134,000 in 1993. Gross profit represented 50.6% and 67.6% of net revenues for
1993 and 1992, respectively. The decrease in the gross profit margin was due to
the acquisition of clinics in 1993 with higher costs of revenues as a percentage
of net revenues, and as a result, lower gross profit margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1,006,000, from $872,000 in 1992 to
$1,878,000 in 1993. This increase was primarily due to costs associated with the
13 clinics acquired in 1993, an overall increase in the number of employees, and
other expenses related to the operation of a larger organization as a result of
completed and anticipated acquisitions.
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DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $130,000, from $375,000 in 1992 to $505,000 in 1993. The increase in
depreciation and amortization expense was the result of the increased number of
clinics acquired by Pacific Rehab in 1993 as outlined in the section titled
"General" above. See Notes 1, 2, 4 and 5 of Notes to Pacific Rehab's Historical
Consolidated Financial Statements.
NONOPERATING INCOME (EXPENSE). Nonoperating income (expense) decreased
$144,000, from $199,000 in 1992 to $55,000 in 1993. This decrease is primarily
due to a reduction in interest expense as a result of the payment during 1992 of
certain notes payable issued in connection with the acquisition of Pacific
Rehab's original three clinics, partially offset by an increase in interest
expense from debt associated with the 13 clinics acquired during 1993. A $53,000
nonrecurring expense incurred to terminate the services of an external
collection service further offset the reduction to nonoperating income
(expense).
EARNINGS PER SHARE. Earnings per share in 1993 and 1992 have been adjusted
by $.02 and $.03, respectively, from amounts previously reported on a pro forma
basis in Pacific Rehab's Registration Statement dated April 14, 1994, to reflect
the impact of the Securities and Exchange Commission Staff Accounting Bulletin
No. 83. See Note 1 of Notes to Pacific Rehab's Historical Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
AS OF SEPTEMBER 30, 1995
Pacific Rehab's operations and acquisitions of clinics have been financed
primarily by a private placement of common stock in 1992, Pacific Rehab's
initial public offering of common stock in 1994 (see "General" above), increased
bank borrowings and cash generated from operations.
As of September 30, 1995, current liabilities exceeded current assets,
resulting in negative working capital of $4,046,000, including $594,000 in cash
and cash equivalents. The principal reason for this negative working capital was
Pacific Rehab's acquisition activity in 1994 and the first nine months of 1995.
During this period, Pacific Rehab acquired a total of 51 clinics. A portion of
the purchase price was paid in the form of short-term debt which was payable in
1995 and 1996. The decrease in cash and cash equivalents from $1,085,000 at
December 31, 1994 to $594,000 at September 30, 1995 was primarily the net result
of $13,466,000 of cash used in acquisitions, $890,000 for payments on line of
credit, notes payable and long-term debt, $260,000 in additions to property and
equipment, offset by $3,292,000 of cash provided by operations and $10,833,000
of proceeds from short term borrowings.
Net patient accounts receivable increased $4,346,000 to $13,262,000 during
the nine months ended September 30, 1995, primarily as a result of receivables
acquired and generated in connection with acquisitions. The number of clinics
operated by Pacific Rehab increased from five at December 31, 1992 to 74 at
September 30, 1995. The number of days average net revenues in ending net
patient accounts receivable was 125 at December 31, 1994, 123 at March 31, 1995
and then 118 at both June 30 and September 30, 1995. The gradual decrease was
primarily the result of more focused cash collection policies, systems and
efforts and the acquisition of practices with lower average net revenues in
ending net patient accounts receivable than existing practices. The rate at
which Pacific Rehab collects accounts receivable is sufficient to satisfy
Pacific Rehab's operating cash needs. Additionally, $1,038,000 was reclassified
from other receivables to net patient accounts receivable as a result of a
change in the corporate structure of a subsidiary.
Current deferred income tax assets increased to $1,874,000 at September 30,
1995 from zero at December 31, 1994. Pacific Rehab reported on the cash basis
for tax purposes up to December 31, 1994. As of January 1, 1995, Pacific Rehab
was required to adopt the accrual basis for tax purposes. A deferred tax asset
was created due to reserves and allowances associated with patient accounts
receivable, which are not currently deductible for tax purposes. The long-term
deferred income tax liability increased to $4,848,000 at September 30, 1995 from
$2,167,000 at December 31, 1994, due primarily to increased goodwill related to
1995 asset acquisitions, which is being amortized over a shorter life for income
tax purposes than for book purposes.
Long-term obligations and notes payable increased $8,320,000 to $11,893,000
during the nine months ended September 30, 1995. This increase was primarily due
to notes and other obligations issued
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in connection with the acquisitions of clinics in the first nine months of 1995,
offset by payment (in cash or conversion into common stock) of the current
portion of obligations during the first nine months of 1995. At September 30,
1995, notes payable with aggregate principal amounts of $4,630,000 may be
converted into approximately 605,000 shares of common stock, including an
additional amount representing unpaid interest, at $7.00 to $8.75 per share. See
Note 6 of Notes to Pacific Rehab's Historical Consolidated Financial Statements.
During December 1995, Pacific Rehab restructured the repayment terms with the
holders of approximately $3,200,000 of its debt and obligations previously
incurred in connection with acquisitions (the "Acquisition Debt"). In exchange
for deferring payment of principal until 1997, Pacific Rehab agreed to pay such
holders interest of up to 9% per annum, except in one case where the applicable
interest rate will increase on March 31, 1996, if then unpaid, from 9% to 12%
per annum. Due dates for debt and obligations in the following amounts were
amended to become due in 1997 as compared to original due dates that occurred in
the following quarters: first quarter 1996, $1,900,000; second quarter 1996,
$500,000; and third quarter 1996, $800,000.
Pacific Rehab had, with Bank of America Oregon, a $5,000,000 credit facility
(the "Line of Credit") secured by the assets of Pacific Rehab. In April 1995,
the maximum amount that could then be borrowed under the Line of Credit was
increased to $12,000,000. On December 20, 1995, Pacific Rehab reached agreement
with the bank to modify its Line of Credit arrangement. Pursuant to that
agreement, the maximum amount that may be borrowed was increased to $12,500,000.
To the extent the Borrowing Base (as defined in the Line of Credit agreement as
85% of certain net accounts receivable or 85% of a calculated revenue amount) is
below the $12,500,000 maximum, the Line of Credit is limited to the Borrowing
Base. Applying this 85% figure, at December 31, 1995 the Borrowing Base was
approximately $11,400,000 as compared to borrowings under the line of credit
facility which were approximately $11,033,000. The Line of Credit revisions
include a one half of one percent increase in the effective per annum interest
rate and will subsequently include amendments to the corresponding covenant
conditions. The Line of Credit expires on July 1, 1996. Pacific Rehab believes
it can obtain a renewal or replacement of the Line of Credit; there can be no
assurance, however, that Pacific Rehab will be successful in obtaining such
renewal or replacement. See Note 7 of Notes to Pacific Rehab's Historical
Consolidated Financial Statements.
The Line of Credit contains three conditions, each of which must be
satisfied at all times. Failure to satisfy these conditions could result in
Pacific Rehab being declared in default by Bank of America Oregon under the Line
of Credit. As of September 30, 1995, Pacific Rehab was not in compliance with
the condition that Pacific Rehab's fixed charges maintain a certain ratio
relative to its earnings before interest, taxes, depreciation and amortization
("EBITDA"). Pacific Rehab's failure to meet this condition was the result of
lower earnings and increases in the current portion of long-term obligations. In
the agreement to modify the Line of Credit, the bank waived this condition and
an anticipated December 31, 1995 violation of this condition and a certain ratio
of funded debt to EBITDA. Pacific Rehab and the bank are currently negotiating a
revision of the covenants contained in the Line of Credit. Based on a December
20, 1995 letter from the bank and discussions with the bank and Pacific Rehab's
analysis of its cash flow needs and sources, existing liabilities, and
expectations regarding future operations, Pacific Rehab believes that it will be
able to comply with the amended covenants anticipated to be made a part of the
Line of Credit.
The Company acquired 19 clinics in 1994. A significant portion of the debt
incurred in connection with these acquisitions was scheduled to be paid in 1995
and 1996. During the first nine months of 1995, the Company acquired an
additional 32 clinics. A portion of the debt, and cash installment payments,
related to these 1995 acquisitions was scheduled to be paid in 1996. The
negotiation of revised terms for the Line of Credit, in addition to those
discussed above, and the restructuring of the repayment of acquisition debt was
principally a result of Pacific Rehab's decision not to pursue a private
placement of subordinated debt, the proceeds of which would have been used to
reduce the amounts outstanding under the Line of Credit and acquisition debt.
Pacific Rehab expects that its principal use of funds in the future will be
for debt repayments, working capital, payments pursuant to earn-out
arrangements, a limited number of additional acquisitions and purchases of
property and equipment. During the first nine months of 1995, Pacific Rehab
purchased 32 clinics for approximately $27,803,000, plus an additional
$2,645,000 if certain pre-tax profit
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levels are achieved by certain clinics. Of the $27,803,000, $11,371,000 was paid
in cash at closing, $100,000 will be paid in cash in January 1996, $337,500 will
be paid in cash in March 1996, $577,500 will be paid in cash in March 1997,
$3,982,000 was in the form of convertible promissory notes, and $4,364,000 was
in the form of non-convertible promissory notes, due on dates in 1996, 1997 and
1998, $160,000 was in the form of common stock warrants and $6,911,000 was in
the form of Pacific Rehab Common Stock. Up to an additional $2,270,000 in cash
will be paid on dates through the year 2000 if certain pre-tax profits are met
at certain of the acquired clinics. See Note 2 of Notes to Pacific Rehab's
Historical Consolidated Financial Statements.
Under the terms of the Merger Agreement, except with respect to the
termination fee described in Section 6.3(b) of the Merger Agreement, Pacific
Rehab is responsible for all fees and expenses of its counsel, accountants,
investment bankers, and consultants. Horizon, at its option, may pay any such
expenses of Pacific Rehab. Notwithstanding the foregoing, Pacific Rehab and
Horizon have agreed to share equally all expenses relating to printing, filing,
and mailing of the Registration Statement and this Prospectus/Proxy Statement
and all related Commission and other regulatory filing fees. Pacific Rehab
estimates its expenses, in the aggregate, will total approximately $2.2 million.
Such amounts are in addition to those which are payable to Horizon in the event
of the termination of the Merger Agreement. See "Certain Terms of the Merger
Agreement -- Expenses and Termination Fees."
As a result of the restructuring of the Acquisition Debt and the revisions
in the Line of Credit, Pacific Rehab's financial requirements, including both
short- and long-term cash needs are expected to be met for the next 12 months
from existing cash, cash flow from operations, amounts available under the Line
of Credit, and future equity and debt financings. Borrowings under the Line of
Credit or other debt source or equity financings may adversely affect Pacific
Rehab's earnings or result in dilution to holders of Pacific Rehab Common Stock.
Pacific Rehab's growth strategy will require expanded patient services and
support, increased personnel throughout Pacific Rehab, and expanded operational,
financial and information systems to better produce, collect, analyze and report
statistical data used to monitor and manage Pacific Rehab's patient care
delivery activities. These factors will affect future results of operations and
liquidity. Pacific Rehab's strategy is to continue to expand its operations
through internal growth and a limited number of acquisitions. While Pacific
Rehab continues to be engaged in discussions with prospective acquisition
candidates and is in the process of exchanging information with certain of these
candidates, there can be no assurance that suitable acquisition candidates will
be identified by Pacific Rehab in the future, that suitable financing for any
such acquisitions can be obtained by Pacific Rehab, or that any such
acquisitions will occur.
The health care industry is generally experiencing a trend toward cost
containment as private and governmental payors seek to respond to rapidly
escalating healthcare costs. One type of response has been to place limitations
on reimbursement rates by capping or lowering fees or restricting the number of
treatments which will be reimbursed for any given condition. All of the states
in which Pacific Rehab currently conducts business have fee schedules which
limit the reimbursement rates under workers' compensation programs and, in some
cases, reimbursement rates for physical injuries incurred in automobile and
other accidents. Pacific Rehab expects that legislation limiting the
reimbursement of fees for various outpatient services, including physical
therapy services, will become more prevalent.
Reimbursement for Pacific Rehab's services may also be limited by
third-party payors, such as insurers and managed care organizations. Such payors
often limit the amount of fees per visit, regardless of the number or type of
therapies applied to the patient, or otherwise limit by the terms of the managed
care contract the amount of fees which may be charged. Pacific Rehab expects the
trend toward third-party payor limiting of reimbursement levels for various
outpatient services, including outpatient rehabilitation services, will
continue.
As a consequence, there can be no assurance that reimbursement for Pacific
Rehab's rehabilitation services will remain at current levels. The reduction of,
or limits upon, reimbursement levels for Pacific Rehab's services may adversely
affect the profitability of or demand for Pacific Rehab's services and could
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have an adverse impact on Pacific Rehab's financial condition and liquidity. In
addition, such payors are expected to continue to develop programs designed to
control or reduce the cost of healthcare services, which may adversely affect
the profitability of or demand for Pacific Rehab's services.
Pacific Rehab reviews intangible assets acquired for impairment at the end
of each quarter or more frequently when events or changes in circumstances
indicate that the carrying amount of the intangible asset acquired may not be
recoverable. To perform that review, Pacific Rehab estimates the sum of future
expected undiscounted net cash flows from the intangible asset acquired. If the
estimated net cash flows are less than the carrying amount of the intangible
asset acquired, Pacific Rehab recognizes an impairment loss in the amount
necessary to write down the intangible asset acquired to a fair value as
determined from expected future cash flows. The effect of potential reductions
in the carrying value of intangible assets acquired could have a negative impact
on future earnings. Intangibles as a percentage of total assets have grown as a
result of Pacific Rehab's acquisition of more than 50 clinics from December 1993
through September 30, 1995. Pacific Rehab does not expect this trend to continue
as it does not anticipate acquiring clinics in the future at the rate it has in
the past.
In order to conserve capital resources, Pacific Rehab's policy is to lease
its facilities. As of September 30, 1995, Pacific Rehab had no material
commitments to purchase capital assets.
Pacific Rehab is unable to predict what impact the Merger, if it is
consummated, will have on Pacific Rehab's results of operations and capital
needs.
The consummation of the Merger is subject to a number of conditions, not all
of which are under the control of Pacific Rehab. The failure of the Merger to
occur will result in Pacific Rehab being solely responsible for all of its
expenses incurred in connection with the Merger and, under certain conditions,
additional payments to Horizon. See "Certain Terms of the Merger Agreement --
Expenses and Termination Fees." Such expenses and payments may adversely affect
Pacific Rehab's results of operations, liquidity and capital resources.
AS OF DECEMBER 31, 1994
As of December 31, 1994, Pacific Rehab had working capital of $8,247,000,
including $1,085,000 in cash and cash equivalents. Cash and cash equivalents
increased slightly in 1994, from $709,000 to $1,085,000, primarily as a result
of $14,207,000 of proceeds from the issuance of common stock, less issuance
costs incurred in 1994 of $824,000, ($868,000 of common stock issuance costs
were incurred in 1993), and the use of $11,950,000 of cash for the acquisitions
of clinics. Net accounts receivable increased $4,702,000 to $8,916,000 in 1994.
The increase was due primarily to receivables acquired in connection with
acquisitions as well as growth in Pacific Rehab's business. Included in the
increase in net accounts receivable is an increase in the allowance for doubtful
accounts which, in the case of some acquired clinics, had been historically high
as compared to Pacific Rehab's experience. However, in total, the number of days
average net revenues in ending net receivables decreased to 125 at December 31,
1994 from 134 at December 31, 1993. Other receivables increased by $1,018,000 to
$1,042,000 as a result of growth in non-patient services.
Current and long-term deferred income tax liabilities decreased $1,377,000
to $2,753,000 during 1994, a net result of both increases and decreases.
Deferred income taxes increased as a result of timing differences arising from
the difference between cash and accrual basis reporting and property and
equipment basis differences. Deferred income taxes decreased by $2,521,000 in
March 1994, with an equal amount of decrease to costs of acquisitions in excess
of fair value of net assets acquired. Deferred income taxes were recorded at the
time certain acquisitions were consummated during 1993 as an election was
available to Pacific Rehab to increase the asset basis for tax purposes. In May
1994, prior to the issuance of the March 31, 1994 financial statements,
management decided not to make such an election resulting in a $2,521,000
reduction in deferred income taxes. This adjustment had no effect on
shareholders' equity, net earnings, working capital or cash flows. See Note 10
of Notes to Pacific Rehab's Historical Consolidated Financial Statements.
Long-term obligations increased $2,205,000 to $3,573,000 during 1994. This
increase was primarily due to the notes and other obligations issued in
connection with acquisitions of clinics in 1994. Certain of
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these notes, with principal amounts of $1,310,000 may be converted into 163,750
shares, plus an additional amount representing unpaid interest, of Pacific
Rehab's common stock at $8.00 per share between May 1, 1995 and May 1, 1996. See
Note 2 of Notes to Pacific Rehab's Historical Consolidated Financial Statements.
In December 1994, Pacific Rehab obtained, from Bank of America Oregon, a
$5,000,000 line of credit facility and a $1,000,000 non-revolving credit
facility, the latter for equipment purchases. These borrowing facilities replace
a $2,000,000 line of credit facility with another bank. The line of credit
facility is secured by the assets of Pacific Rehab. To the extent the "borrowing
base" (as defined in the line of credit agreement as 55% of specified accounts
receivable) is below the $5,000,000 maximum line of credit amount, borrowings
are limited to the borrowing base. At December 31, 1994, the borrowing base was
approximately $4,000,000, and no borrowings were outstanding under the line of
credit or the non-revolving credit facility. In the first quarter of 1995
Pacific Rehab borrowed approximately $3,300,000 under the line of credit
facility to partially finance acquisitions made in that period. See Notes 7 and
15 of Notes to Pacific Rehab's Historical Consolidated Financial Statements.
Although inflation has abated during the last few years, the rate of
inflation in healthcare services has exceeded the rate experienced by the
economy as a whole. Generally speaking, increases in costs due to inflation have
either been offset by increases in patient charges or improvements in operating
efficiency. A substantial portion of net revenues are subject to reimbursement
rates which are regulated by governmental agencies or subject to third-party
payor contracts and do not automatically adjust for inflation. These
reimbursement rates may be adjusted periodically based on certain factors,
including legislation, contract negotiation, inflation and costs incurred in
providing services, but may have little relationship to the actual cost of doing
business.
Pacific Rehab can increase the amount billed only for those services that
are not subject to prescribed rate limits either through legislation or by
agreement. Increased operating costs that are subject to inflation, such as
labor and supply costs, without a compensating increase in reimbursement rates,
may adversely affect earnings in the future.
THE SPECIAL MEETING
DATE, TIME AND PLACE
The Special Meeting will be held on Monday, April 1, 1996, at ,
, , commencing at 9:00 a.m. local time.
PURPOSES OF THE SPECIAL MEETING
The purposes of the Special Meeting are to consider and vote upon (i) a
proposal to adopt the Merger Agreement and approve the Merger and (ii) such
other matters as may properly be brought before the Special Meeting.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of Pacific Rehab Common Stock at the close of
business on the Record Date (March 1, 1996) are entitled to notice of, and to
vote at, the Special Meeting.
On the Record Date, there were approximately holders of record of the
shares of Pacific Rehab Common Stock then issued and outstanding. Each
share of Pacific Rehab Common Stock entitles the holder thereof to one vote on
each matter submitted for stockholder approval. See "Beneficial Ownership of
Certain Stockholders and Management of Pacific Rehab" for information regarding
persons known to the management of Pacific Rehab to be the beneficial owners of
more than 5% of the outstanding Pacific Rehab Common Stock. A complete list of
stockholders entitled to notice of, and to vote at, the Special Meeting will be
available for examination at the offices of Pacific Rehab in Vancouver,
Washington during normal business hours by any Pacific Rehab stockholder, for
any purpose germane to the Special Meeting, for a period of 10 days prior to the
Special Meeting.
VOTING AND REVOCATION OF PROXIES
A form of proxy for use by stockholders of Pacific Rehab at the Special
Meeting accompanies this Proxy Statement/Prospectus. All properly executed
proxies that are received prior to or at the Special
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Meeting and not revoked will be voted at the Special Meeting in accordance with
the instructions contained therein. IF A HOLDER OF PACIFIC REHAB COMMON STOCK
EXECUTES AND RETURNS A PROXY AND DOES NOT SPECIFY OTHERWISE, THE SHARES
REPRESENTED BY SUCH PROXY WILL BE VOTED "FOR" ADOPTION OF THE MERGER AGREEMENT
AND APPROVAL OF THE MERGER IN ACCORDANCE WITH THE RECOMMENDATION OF THE BOARD OF
DIRECTORS OF PACIFIC REHAB. A stockholder of Pacific Rehab who has executed and
returned a proxy may revoke it at any time before it is voted at the Special
Meeting by (i) executing and returning a proxy bearing a later date, (ii) filing
written notice of such revocation with the Secretary of Pacific Rehab, as
appropriate, stating that the proxy is revoked or (iii) attending the Special
Meeting and voting in person.
VOTE REQUIRED
The presence at the Special Meeting, in person or by proxy, of the holders
of a majority of the outstanding shares of Pacific Rehab Common Stock entitled
to vote thereat will constitute a quorum for the transaction of business.
Adoption of the Merger Agreement and approval of the Merger requires the
affirmative vote of a majority of the issued and outstanding Pacific Rehab
Common Stock entitled to vote thereon. On the Record Date, there were
shares of Pacific Rehab Common Stock outstanding and entitled to vote at the
Special Meeting. In determining whether the Merger Agreement and the Merger have
received the requisite number of affirmative votes, abstentions and broker
non-votes will have the same effect as a vote against the Merger Agreement.
Brian Bussanich, the former Chairman, President and Chief Executive Officer
of Pacific Rehab and a current Director, John Elorriaga, the current Chairman,
President and Chief Executive Officer, and Frank Jungers, a Director of Pacific
Rehab have agreed pursuant to the Voting Agreement to vote all shares of Pacific
Rehab Common Stock owned by them in favor of the Merger Agreement and the
Merger. As of the Record Date, 613,815 shares of Pacific Rehab Common Stock, or
approximately 7.4% of the shares entitled to vote at the Special Meeting, were
subject to the Voting Agreement. The signatories to the Voting Agreement have
also agreed to vote such shares against any business combination proposal or
other matter that may interfere or be inconsistent with the Merger or the Merger
Agreement (including, without limitation, a Competing Transaction). The
obligations of the signatories to the Voting Agreement are not subject to the
continued support of the Board of Directors of Pacific Rehab in recommending
approval and adoption of the Merger Agreement (although the Voting Agreement
would terminate upon a termination of the Merger Agreement). See "Voting
Agreement."
SOLICITATION OF PROXIES
In addition to solicitation by mail, the directors, officers, employees and
agents of Pacific Rehab may solicit proxies from its stockholders by personal
interview, telephone, telegram or otherwise. Pacific Rehab will bear the costs
of the solicitation of proxies from its stockholders, except that Horizon and
Pacific Rehab will each pay one-half of the cost of printing this Proxy
Statement/Prospectus. Arrangements will also be made with brokerage firms and
other custodians, nominees and fiduciaries who hold of record voting securities
of Pacific Rehab for the forwarding of solicitation materials to the beneficial
owners thereof. Horizon and Pacific Rehab will reimburse such brokers,
custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses
incurred by them in connection therewith. Pacific Rehab has engaged the services
of Georgeson & Company Inc. to distribute proxy solicitation materials to
brokers, banks and other nominees and to assist in the solicitation of proxies
from Pacific Rehab stockholders for a fee of $5,000 plus reasonable
out-of-pocket expenses.
OTHER MATTERS
At the date of this Proxy Statement/Prospectus, the Board of Directors of
Pacific Rehab does not know of any business to be presented at the Special
Meeting other than as set forth in the notice attached to this Proxy
Statement/Prospectus. If any other matters should properly come before the
Special Meeting, it is intended that the shares represented by proxies will be
voted with respect to such matters in accordance with the judgment of the
persons voting such proxies.
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THE MERGER
GENERAL DESCRIPTION OF THE MERGER
The Merger Agreement provides that, at the Effective Time, Merger Sub will
merge with and into Pacific Rehab with Pacific Rehab becoming the Surviving
Corporation, and each outstanding share of Pacific Rehab Common Stock, other
than shares of Pacific Rehab Common Stock held in the treasury of Pacific Rehab
or owned by Horizon or any of Horizon's affiliates (other than natural persons)
will be converted into .3483 of one share of Horizon Common Stock. All shares of
Pacific Rehab Common Stock will be cancelled at the Effective Time other than
those shares owned of record by Horizon or any of Horizon's affiliates (other
than natural persons) immediately prior to the Effective Time. Any resulting
fractional shares will be settled in cash. As a consequence of the Merger,
Pacific Rehab will become a wholly owned subsidiary of Horizon.
Based on the number of shares of Pacific Rehab Common Stock outstanding as
of the Record Date, shares of Horizon Common Stock will be issuable
pursuant to the Merger Agreement (assuming no issuance prior to the Effective
Date of shares of Pacific Rehab Common Stock pursuant to the Pacific Rehab
Acquisition Rights) representing approximately % of the total Horizon Common
Stock to be outstanding after such issuance (based on the number of shares of
Horizon Common Stock outstanding as of the Record Date.
BACKGROUND
Beginning in April 1994, Brian Bussanich, Pacific Rehab's former President
and Chief Executive Officer, had occasional, informal conversations with senior
management of other health care companies in an effort to explore strategic
alternatives available to Pacific Rehab. At such time, Pacific Rehab determined
that it would be in its best interest to expand its operations and achieve
economies of scale through acquisitions. By the end of 1994, Pacific Rehab owned
39 rehabilitation clinics and anticipated acquiring a significant number of
additional clinics in 1995. During this time, Dr. Bussanich continued to have
discussions with other health care companies and, to a limited extent, with
investment bankers regarding acquisition and capital raising activities.
In February 1995, after attending a health care conference, observing
presentations by other companies and analysts, and speaking with a number of
attendees, senior management of Pacific Rehab concluded that Pacific Rehab
should affirmatively pursue a possible transaction with a larger health care
company. The Board of Directors observed that the health care industry, in
general, and the physical therapy/rehabilitation segment of this industry, in
particular, was rapidly consolidating and concluded that Pacific Rehab either
had to continue to grow substantially through its aggressive acquisition
strategy or combine with a larger health care company. The Board of Directors
determined that the continuation of its aggressive acquisition strategy as an
independent company would have required substantial additional capital, in the
form of debt or equity, and a significant increase in personnel in order to
manage the growing operations. The Board was of the view that raising such
capital in the form of debt would have significantly added to Pacific Rehab's
interest expense and that raising such capital in the form of equity (or debt
with an equity component) would have diluted Pacific Rehab's earnings. After
deliberations regarding the option of raising additional capital, the Board of
Directors concluded that this option was not as attractive an alternative as
combining Pacific Rehab with another health care company. Shortly, thereafter,
Pacific Rehab retained Smith Barney as its exclusive financial advisor to assist
Pacific Rehab in this regard.
Between February and April 1995, confidential information pertaining to
Pacific Rehab was prepared and potential parties to a transaction were
identified. From late April 1995 through mid-July 1995, approximately 17 parties
were contacted. Approximately 10 parties executed confidentiality agreements
with Pacific Rehab and were furnished with confidential information relating to
Pacific Rehab. Three parties requested additional information and subsequently
met with Pacific Rehab and its advisors to conduct preliminary due diligence.
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Prior to the opening of trading on July 24, 1995, Pacific Rehab announced
that it expected its second quarter earnings to be lower than the prior year's
results. As a result of such announcement, discussions with interested parties
were delayed. The closing price per share of Pacific Rehab Common Stock on July
24, 1995, as reported by the Nasdaq Stock Market, was $7.250.
In August 1995, certain parties, including those that previously had
indicated an interest in a possible transaction with Pacific Rehab, were
contacted. Two parties expressed an interest in pursuing a possible transaction,
including Horizon, which actively pursued discussions with Pacific Rehab. On
August 17, 1995, Neal M. Elliott, President and Chief Executive Officer of
Horizon, met with Dr. Bussanich to discuss the possible acquisition of Pacific
Rehab by Horizon. On August 23, 1995, Pacific Rehab delivered to Horizon certain
financial, legal and operational information concerning Pacific Rehab. At a
meeting of the Board of Directors of Pacific Rehab held on August 30, 1995, the
Pacific Rehab Board met with senior management to discuss, among other things, a
possible transaction with Horizon.
On September 18, 1995, Neal Elliott and Charles H. Gonzales, Senior Vice
President of Subsidiary Operations, of Horizon and Edward Farina, Vice President
- -- Clinical Services of Rehab Works, Inc. (a Horizon subsidiary), met with Dr.
Bussanich, Randy Robertson, President -- Western Region, Al Howard, President --
Eastern Region, William Norris, Executive Vice President -- Finance and
Administration and Secretary, and Scott Osborne, Vice President, of Pacific
Rehab and a representative of Smith Barney to discuss, among other things, the
financial and operational aspects of the two companies.
During the week of October 2, 1995, senior management of Pacific Rehab had
numerous telephone conversions with, and provided additional due diligence
information concerning Pacific Rehab to, senior management of Horizon. After the
closing of trading on October 6, 1995, Pacific Rehab announced that it expected
its third quarter earnings to be significantly lower than the prior year's
results. The closing price per share of Pacific Rehab Common Stock on October 9,
1995 (the first trading day after the October 6, 1995 announcement regarding
Pacific Rehab's third quarter earnings), as reported by the Nasdaq Stock Market,
was $5.125. On or about October 11, 1995, a representative of Horizon contacted
a representative of Smith Barney and confirmed Horizon's strong interest in
acquiring Pacific Rehab. The other party that previously had indicated an
interest in a possible transaction with Pacific Rehab was again contacted,
although such party indicated that it was not interested in immediately pursuing
a transaction. In late October 1995, discussions between Horizon and Pacific
Rehab continued, and counsel for Pacific Rehab prepared a draft of a merger
agreement, a copy of which was delivered to counsel for Horizon on November 2,
1995.
Between November 6, 1995 and November 9, 1995, representatives of Horizon
and Pacific Rehab negotiated the pricing and structure of the transaction and
terms and conditions of the proposed merger agreement and related documents,
including the Exchange Ratio, the amount of the termination fee and
circumstances under which such fee would be payable to Horizon and the proposed
stock option arrangement. The Exchange Ratio was arrived at based on a number of
factors, none of which individually was determinative, including, the then
current prices at which each company's stock was trading in the marketplace, the
premium which the Board of Directors of Pacific Rehab believed should be paid
for acquisition of a controlling interest in Pacific Rehab, and an estimate of
the impact on the value of Horizon's Common Stock after taking into account the
consummation of the Merger. As of November 9, 1995 and March 1, 1996, based on
the per share Exchange Ratio and a closing price for Horizon Common Stock of
$20 5/8 and $ , respectively, the value of the consideration to Pacific
Rehab stockholders was approximately $7 3/16 and $ , respectively, per
share. On those dates, the last closing price of Pacific Rehab Common Stock on
The Nasdaq Stock Market was $6 3/16 and , respectively, per share.
On November 9, 1995, the Pacific Rehab Board held a special telephonic
meeting to consider in detail the proposed business combination with Horizon. At
such meeting, legal counsel reviewed with the Board the material terms and
conditions of the Merger Agreement and the Stock Option Agreement and the
Board's fiduciary obligations in connection with the proposed transaction. Smith
Barney then made a financial presentation to the Board and rendered an oral
opinion (subsequently confirmed by delivery of a written opinion dated November
9, 1995) to the effect that, as of such date and based upon and subject to
certain matters stated in such opinion, the Exchange Ratio was fair, from a
financial point of view, to the
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holders of Pacific Rehab Common Stock. After discussion, the Pacific Rehab Board
of Directors unanimously approved the Merger, the Merger Agreement and related
documents, including the Stock Option Agreement. The Board of Directors of
Horizon also met on November 9, 1995 to discuss the proposed transaction and,
after discussion with its legal counsel and senior management, approved the
final terms of the Merger Agreement and related agreements. The parties executed
the Merger Agreement and related agreements during the evening of November 9,
1995, and public announcement of such execution was made on the morning of
November 10, 1995.
PACIFIC REHAB'S REASONS FOR THE MERGER; RECOMMENDATION OF PACIFIC REHAB BOARD OF
DIRECTORS
At a meeting held on November 9, 1995 the Board of Directors of Pacific
Rehab concluded that the Merger was fair to and in the best interests of the
stockholders of Pacific Rehab, approved the Merger Agreement, the Stock Option
Agreement and the Merger and recommended that the stockholders of Pacific Rehab
adopt the Merger Agreement and approve the Merger. The Board of Directors
reached its conclusion after considering different alternatives over the course
of approximately nine months. Based on its business judgment regarding trends in
the healthcare industry, Pacific Rehab's acquisition plans, Pacific Rehab's need
for additional capital, Pacific Rehab's disappointing operating results, and
other factors, the Board of Directors believed it was not in Pacific Rehab's
best interest to attempt to raise additional capital, that Pacific Rehab would
ultimately be acquired as part of the ongoing consolidation in the health care
industry and that the proposed Merger represented the best opportunity to
maximize stockholder value.
As part of its review, the Pacific Rehab Board of Directors considered,
among other things, information presented by Pacific Rehab's legal and financial
advisors, including information relating to the relative resources and strengths
of each company, and their respective business lines, geographic dispersion and
long-term strategic focus. The Pacific Rehab Board of Directors considered
information concerning the current and prospective status of the rehabilitation
and long-term care industries and the relative capabilities and strengths of the
management of each company. The Pacific Rehab Board of Directors also considered
certain other financial information, including (among other things) historical
financial information for each of the companies, the results of the due
diligence review of the business and operations of Horizon conducted by Pacific
Rehab's advisors, the ability of the combined entity to raise additional debt
and equity capital on a favorable basis, the complementary nature of Horizon's
resources and the possibility of achieving specific savings by reducing
duplicative administrative costs. In addition, the Board considered the
prospects of Pacific Rehab on both a stand-alone and combined basis, and the
likelihood of obtaining by other means the strategic advantages offered by the
Merger. The Board also reviewed in detail the terms of the Merger Agreement and
the Stock Option Agreement, the related transactions, and the termination fee
payable to Horizon in certain circumstances if the transaction is not
consummated.
In reaching its determination, the Pacific Rehab Board of Directors
considered a number of factors, none of which individually was determinative
including, without limitation, the matters discussed above and the following.
(i) the immediate and potential long-term benefits to Pacific Rehab's
stockholders inherent in the terms of the Merger and the long-term prospects
for the combined entities. In this regard, in light of the consolidation of
the health care industry and the Board of Directors' perception that only by
growing substantially could Pacific Rehab be successful in the long term,
the Board of Directors concluded that the Merger represented the best
opportunity to maximize stockholder value;
(ii) the strategic benefits of combining Pacific Rehab's existing
expertise in outpatient rehabilitation therapy clinics with Horizon's
expertise in long-term care to enhance Pacific Rehab's competitive position
in an increasingly managed care environment and a conclusion that further
consolidations in the health care industry, including outpatient therapy
services, were likely, that Pacific Rehab could be at a competitive
disadvantage as a stand-alone entity in such an environment, and that market
conditions were favorable to a transaction in the current time frame. The
Board of Directors concluded that Pacific Rehab's outpatient physical
therapy clinics would compliment Horizon's expertise in subacute care,
nursing home, and other areas. In addition, the Board of Directors concluded
that Horizon had much of the corporate infrastructure and capital resources
necessary to further expand and manage the operations of a large and growing
health care corporation;
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(iii) the relative prospects for growth and growth in stockholder
values, as a stand-alone entity and as a part of a substantially larger
organization operating in economically diversified trading areas. The Board
of Directors concluded that the health care industry was consolidating
rapidly and that larger, more diversified companies were the most likely to
be successful;
(iv) Pacific Rehab's need for additional capital in the form of debt or
equity, for working capital and acquisitions and the relative prospects for
raising capital in current industry conditions as a stand-alone entity and
as part of a larger organization. The Board of Directors determined that
Pacific Rehab would need substantial amounts of additional capital in the
form of debt, equity, or some combination thereof. In light of the
disappointing earnings which Pacific Rehab was experiencing, the Board of
Directors concluded that the costs of debt capital would be too high and
would adversely affect earnings and additional equity capital would further
dilute earnings and adversely affect the price of Pacific Rehab Common Stock
in the marketplace;
(v) the compatibility of the respective businesses and management
philosophies of Pacific Rehab and Horizon with a common emphasis on
low-cost, efficient health care delivery systems;
(vi) the potential cost savings in management and general and
administrative expenses. The Board of Directors concluded that Pacific Rehab
would have to invest substantial amounts of money in additional capital
goods and personnel in order to properly manage the company as it expanded.
In contrast, the Board of Directors believed that Horizon had much of the
capital infrastructure and personnel needed to effectively manage such
growth;
(vii) the tax-free nature of the transaction to Pacific Rehab
stockholders and the advantageous effects on the combined enterprise of
treating the transaction as a pooling of interests for accounting purposes;
and
(viii) the oral opinion of Smith Barney rendered to the Pacific Rehab
Board on November 9, 1995 (subsequently confirmed by delivery of a written
opinion dated November 9, 1995) to the effect that, as of such date and
based upon and subject to certain matters, the Exchange Ratio was fair, from
a financial point of view, to the holders of Pacific Rehab Common Stock. The
Pacific Rehab Board of Directors did not specifically adopt the opinion of
Smith Barney, but rather considered such opinion in the total mix of
information regarding the proposed Merger that was available to, and
evaluated by, the Pacific Rehab Board.
The Pacific Rehab Board believes that all of the factors described above as
having been considered by the Pacific Rehab Board supported the Pacific Rehab
Board's conclusion that the Merger is in the best interests of Pacific Rehab and
its stockholders. Because the Board believes that the Merger is in the best
interests of all stockholders and that no material conflicts of interest exist
between the Board of Directors and nonaffiliated stockholders, an independent
representative to represent the interests of any stockholders was not retained.
The Board also evaluated the risks, inherent in any transaction such as the
Merger, that currently unanticipated difficulties could arise in integrating the
operations of two corporations; and that the synergies expected from combining
the operations of Pacific Rehab and Horizon may not be realized. The Pacific
Rehab Board also considered the risk that the Horizon Common Stock to be
received by Pacific Rehab's stockholders could decline in value between the
signing of the Merger Agreement and the closing of the Merger or thereafter. The
Pacific Rehab Board of Directors viewed the factors described in this paragraph
as perhaps militating against the Merger, but determined that they did not
outweigh the benefits of consummating the Merger. The Pacific Rehab Board also
recognized that the possibility of a higher offer was not precluded by the
Merger Agreement.
In analyzing the proposed Merger, the Pacific Rehab Board of Directors
evaluated the factors and considerations described above and consulted with its
financial and legal advisors and with Pacific Rehab management. The Pacific
Rehab Board of Directors did not view any one factor as determinative and did
not assign particular weight to any one factor. Based on the information
presented to the directors, the members of the Board of Pacific Rehab
unanimously adopted the Merger Agreement and recommended that the stockholders
of Pacific Rehab vote "FOR" the adoption of the Merger Agreement and approval of
the Merger.
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OPINION OF FINANCIAL ADVISOR TO PACIFIC REHAB
Smith Barney was retained by Pacific Rehab to act as its financial advisor
in connection with the Merger. In connection with such engagement, Pacific Rehab
requested that Smith Barney evaluate the fairness, from a financial point of
view, to the holders of Pacific Rehab Common Stock of the consideration to be
received by such holders in the Merger. On November 9, 1995, at a meeting of the
Board of Directors of Pacific Rehab held to evaluate the proposed Merger and
related transactions, Smith Barney delivered an oral opinion (subsequently
confirmed by delivery of a written opinion dated such date) to the Board of
Directors of Pacific Rehab to the effect that, as of the date of such opinion
and based upon and subject to certain matters stated in such opinion, the
Exchange Ratio was fair, from a financial point of view, to the holders of
Pacific Rehab Common Stock.
In arriving at its opinion, Smith Barney reviewed the Merger Agreement and
certain related documents, and held discussions with certain senior officers,
directors and other representatives and advisors of Pacific Rehab and certain
senior officers and other representatives of Horizon concerning the businesses,
operations and prospects of Pacific Rehab and Horizon. Smith Barney examined
certain publicly available business and financial information relating to
Pacific Rehab and Horizon as well as certain financial forecasts and other data
for Pacific Rehab and Horizon which were provided to Smith Barney by or
otherwise discussed with the respective managements of Pacific Rehab and
Horizon, including information relating to certain strategic implications and
operational benefits anticipated from the Merger. Smith Barney reviewed the
financial terms of the Merger as set forth in the Merger Agreement in relation
to, among other things: current and historical market prices and trading volumes
of Pacific Rehab Common Stock and Horizon Common Stock; the respective
companies' historical and projected earnings and operating data; and the
capitalization and financial condition of Pacific Rehab and Horizon. Smith
Barney also considered, to the extent publicly available, the financial terms of
certain other similar transactions recently effected which Smith Barney
considered relevant in evaluating the Merger and analyzed certain financial,
stock market and other publicly available information relating to the businesses
of other companies whose operations Smith Barney considered relevant in
evaluating those of Pacific Rehab and Horizon. Smith Barney also evaluated the
potential pro forma financial impact of the Merger on Horizon. In addition to
the foregoing, Smith Barney conducted such other analyses and examinations and
considered such other financial, economic and market criteria as Smith Barney
deemed appropriate in arriving at its opinion. Smith Barney noted that its
opinion was necessarily based upon information available, and financial, stock
market and other conditions and circumstances existing and disclosed, to Smith
Barney as of the date of its opinion.
In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information publicly available or furnished to or otherwise reviewed
by or discussed with Smith Barney. With respect to financial forecasts and other
information and data provided to or otherwise reviewed by or discussed with
Smith Barney, the respective managements of Pacific Rehab and Horizon advised
Smith Barney that such forecasts and other information and data were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the managements of Pacific Rehab and Horizon as to the future
financial performance of Pacific Rehab and Horizon and the strategic
implications and operational benefits anticipated from the Merger. Smith Barney
assumed, with the consent of the Board of Directors of Pacific Rehab, that the
Merger will be treated as a pooling of interests in accordance with generally
accepted accounting principles and as a tax-free reorganization for federal
income tax purposes. Smith Barney's opinion relates to the relative values of
Pacific Rehab and Horizon. Smith Barney did not express any opinion as to what
the value of Horizon Common Stock actually will be when issued to Pacific Rehab
stockholders pursuant to the Merger or the price at which the Horizon Common
Stock will trade subsequent to the Merger. Smith Barney did not make and was not
provided with an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of Pacific Rehab or Horizon nor did Smith
Barney make any physical inspection of the properties or assets of Pacific Rehab
or Horizon. In connection with its engagement, Smith Barney
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approached, and held discussions with, certain third parties to solicit
indications of interest in a possible acquisition of Pacific Rehab. Although
Smith Barney evaluated the Exchange Ratio from a financial point of view, Smith
Barney was not asked to and did not recommend the specific consideration payable
in the Merger. No other limitations were imposed by Pacific Rehab on Smith
Barney with respect to the investigations made or procedures followed by Smith
Barney in rendering its opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF SMITH BARNEY DATED NOVEMBER 9, 1995,
WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN, IS ATTACHED HERETO AS APPENDIX B AND IS INCORPORATED HEREIN
BY REFERENCE. HOLDERS OF PACIFIC REHAB COMMON STOCK ARE URGED TO READ THIS
OPINION CAREFULLY IN ITS ENTIRETY. SMITH BARNEY'S OPINION, WHICH IS ADDRESSED TO
AND FOR THE BENEFIT OF THE PACIFIC REHAB BOARD OF DIRECTORS, IS DIRECTED ONLY TO
THE FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW, DOES NOT
ADDRESS ANY OTHER ASPECT OF THE MERGER OR RELATED TRANSACTIONS AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD
VOTE AT THE SPECIAL MEETING. THE SUMMARY OF THE OPINION OF SMITH BARNEY SET
FORTH IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In preparing its opinion, Smith Barney performed a variety of financial and
comparative analyses, including those described below. The summary of such
analyses does not purport to be a complete description of the analyses
underlying Smith Barney's opinion. The preparation of a fairness opinion is a
complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to summary description. Accordingly, Smith Barney
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and factors, without considering all analyses and
factors, could create a misleading or incomplete view of the processes
underlying such analyses and its opinion. In its analyses, Smith Barney made
numerous assumptions with respect to Pacific Rehab, Horizon, industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Pacific Rehab and
Horizon. The estimates contained in such analyses and the valuation ranges
resulting from any particular analysis are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than those suggested by such analyses. In addition,
analyses relating to the value of businesses or securities do not purport to be
appraisals or to reflect the prices at which businesses or securities actually
may be sold. Accordingly, such analyses and estimates are inherently subject to
substantial uncertainty. Smith Barney's opinion was only one of many factors
considered by the Pacific Rehab Board of Directors in its evaluation of the
Merger and should not be viewed as determinative of the views of the Pacific
Rehab Board of Directors or management with respect to the Exchange Ratio or the
proposed Merger.
SELECTED COMPANY ANALYSIS. A selected company analysis examines a company's
operating performance relative to a group of publicly traded peers. Using
publicly available information, Smith Barney analyzed, among other things, the
market values and trading multiples of Pacific Rehab and the following selected
companies in the rehabilitation industry: Advantage Health Corporation;
HEALTHSOUTH Corporation; NovaCare, Inc.; and Rehabcare Corporation (the
"Rehabilitation Companies"). Smith Barney also analyzed the market values and
trading multiples of Horizon and the following selected companies in the
long-term care industry: Advocat, Inc.; Arbor Health Care Company; Beverly
Enterprises, Inc.; Genesis Health Ventures, Inc.; GranCare, Inc.; Health Care
and Retirement Corporation; Integrated Health Services, Inc.; Living Centers of
America, Inc.; Manor Care, Inc.; Mariner Health Group, Inc.; The Multicare
Companies, Inc.; National Healthcare, L.P.; Regency Health Services, Inc.;
Summit Care Corporation; Sun Healthcare Group, Inc.; and Vencor, Inc. (the
"Long-Term Care Companies" and, together with the Rehabilitation Companies, the
"Selected Companies"). Smith Barney compared market values as multiples of,
among other things, estimated calendar 1995 and 1996 net income, and adjusted
market values (equity market value, plus debt, less cash, plus operating leases
capitalized at 12.5%) as multiples of, among other things, latest 12 months
earnings before interest, taxes, depreciation and amortization ("EBITDA"). Net
income
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projections for Horizon and the Selected Companies were based on estimates of
selected investment banking firms, and net income projections for Pacific Rehab
were based on internal estimates of the
management of Pacific Rehab. All multiples were based on closing stock prices as
of November 7, 1995. This analysis resulted in an equity reference range for
Horizon of approximately $16.92 to $46.13 per share and an equity reference
range for Pacific Rehab of approximately $1.88 to $6.20 per share, as compared
to the per share equity value for Pacific Rehab implied by the Exchange Ratio,
based on a closing stock price of Horizon Common Stock on November 7, 1995, of
$7.62.
SELECTED MERGER AND ACQUISITION TRANSACTIONS ANALYSIS. Using publicly
available information, Smith Barney analyzed, among other things, the implied
purchase prices and transaction value multiples paid in the following selected
merger and acquisition transactions in the rehabilitation industry
(acquiror/target): Living Centers of America, Inc./Rehability Corporation
(6/95); Horizon/CMS (7/95); HEALTHSOUTH Corporation/NovaCare, Inc. (Rehab
Systems) (5/95); and HEALTHSOUTH Corporation/ReLife, Inc. (12/94) (the "Selected
Transactions"). Smith Barney compared equity purchase prices as a multiple of
latest 12 months net income and transaction values as a multiple of, among other
things, latest 12 months EBITDA and earnings before interest and taxes ("EBIT").
All multiples for the Selected Transactions were based on information available
at the time of announcement of such transaction. This analysis resulted in an
equity reference range for Pacific Rehab of approximately $2.24 to $7.00 per
share, as compared to the per share equity value for Pacific Rehab implied by
the Exchange Ratio, based on a closing stock price of Horizon Common Stock on
November 7, 1995, of $7.62.
No company, transaction or business used in the "Selected Company Analysis"
or the "Selected Merger and Acquisition Transactions Analysis" as a comparison
is identical to Pacific Rehab, Horizon or the Merger. Accordingly, an analysis
of the results of the foregoing is not entirely mathematical; rather, it
involves complex considerations and judgments concerning differences in
financial and operating characteristics and other factors that could affect the
acquisition, public trading or other values of the Selected Companies, Selected
Transactions or the business segment, company or transaction to which they are
being compared.
PRO FORMA MERGER ANALYSIS. Smith Barney analyzed certain pro forma effects
resulting from the Merger, including, among other things, the impact of the
Merger on the projected earnings per share ("EPS") of Horizon for the fiscal
years ended December 31, 1996 and 1997, based on estimates of selected
investment banking firms. The results of the pro forma merger analysis suggested
that the Merger would be neutral to Horizon's EPS in fiscal years 1996 and 1997,
assuming approximately $5.0 million of cost savings and other potential
synergies from the Merger were achieved. The actual results achieved by the
combined company may vary from projected results and the variations may be
material.
PREMIUM ANALYSIS. Smith Barney analyzed the implied premium payable in the
Merger and the premiums paid in 29 selected healthcare transactions based on
stock prices both one day and one month prior to the announcement date of such
transactions. The ranges of premiums for these selected health care transactions
were approximately (8.3%) to 132.2% (with a mean of 49.9% and a median of 41.0%)
as of one day prior to the announcement date of such transaction and
approximately 3.0% to 121.9% (with a mean of 58.8% and a median of 53.9%) as of
one month prior to the announcement date of such transaction. Smith Barney also
compared the premium payable in the Merger with the premiums payable in the four
Selected Transactions described above under "-- Selected Merger and Acquisition
Transactions Analysis." The ranges of premiums for the Selected Transactions
were approximately 12.2% to 35.2% (with a mean of 26.9%) as of one day prior to
the announcement date of the Selected Transactions and approximately 15.0% to
71.4% (with a mean of 47.5%) as of one month prior to the announcement date of
the Selected Transactions. The implied premium payable in the Merger as of one
day and one month prior to November 7, 1995 was approximately 24.0% and 51.2%,
respectively.
OTHER FACTORS AND COMPARATIVE ANALYSES. In rendering its opinion, Smith
Barney considered certain other factors and conducted certain other comparative
analyses, including, among other things: (i) the
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indications of interest received from third parties other than Horizon; (ii) a
review of historical and projected financial results of Pacific Rehab and
Horizon; (iii) the history of trading prices, volume and price to earnings
ratios for Pacific Rehab Common Stock and Horizon Common Stock and the
relationship between movements of such common stock, movements of the common
stock of the Selected Companies and movements in the S&P 500 Index; and (iv)
selected analysts' reports on Horizon, including analysts' estimates as to the
earnings growth potential of Horizon.
Pursuant to the terms of Smith Barney's engagement, Pacific Rehab has agreed
to pay Smith Barney for its services in connection with the Merger an aggregate
financial advisory fee equal to 1.5% of the total consideration (including
liabilities assumed) payable in connection with the Merger. It is currently
estimated that such financial advisory fee will be approximately $1.5 million.
Pacific Rehab also has agreed to reimburse Smith Barney for reasonable travel
and other out-of-pocket expenses incurred by Smith Barney in performing its
services, including the reasonable fees and expenses of its legal counsel, and
to indemnify Smith Barney and related persons against certain liabilities,
including liabilities under the federal securities laws, arising out of Smith
Barney's engagement.
Smith Barney has advised Pacific Rehab that, in the ordinary course of
business, Smith Barney and its affiliates may actively trade the securities of
Pacific Rehab and Horizon for their own account or for the account of its
customers and, accordingly, may at any time hold a long or short position in
such securities. In addition, Smith Barney and its affiliates (including
Travelers Group Inc. and its affiliates) may maintain relationships with Pacific
Rehab and Horizon.
Smith Barney is a nationally recognized investment banking firm and was
selected by Pacific Rehab based on Smith Barney's experience and expertise in
merger and acquisition transactions and specifically in the health care
industry. Smith Barney regularly engages in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of Pacific Rehab's Board of Directors with
respect to the Merger, Pacific Rehab's stockholders should be aware that certain
members of Pacific Rehab's Board and management have certain interests
respecting the Merger separate from their interests as holders of Pacific Rehab
Common Stock.
VESTING OF OPTIONS. Each of Pacific Rehab's officers, directors and key
employees is a party to previously existing stock option agreements that contain
change in control provisions. Under such agreements the unvested options held by
such an individual to purchase Pacific Rehab Common Stock (which by virtue of
the Merger will be converted into options to purchase shares of Horizon Common
Stock) will vest immediately prior to a change in control such as the Merger.
Immediately prior to the Effective Time, the following directors and senior
executive officers of Pacific Rehab will have unvested options to purchase the
number of shares of Pacific Rehab Common Stock indicated; William A. Norris,
Executive Vice President -- Finance & Administration, 42,500 shares; Alfred
Howard, President -- Eastern Region, 45,000 shares; Randy Robertson, President
- -- Western Region, 45,000 shares; John A. Elorriaga, Chairman of the Board,
President and Chief Executive Officer, 19,000 shares; and Frank Jungers,
Director, 19,000 shares. The average exercise price of these options is $5.77
per share. Absent the Merger, these options would vest over the next five years
according to prescribed schedules set forth in the respective option agreements.
INDEMNIFICATION. The Merger Agreement provides that, for a minimum period
of six years after the Effective Time, Pacific Rehab will indemnify each present
and former officer and director of Pacific Rehab and its subsidiaries to the
fullest extent permitted under applicable law with respect to matters existing
or occurring at or prior to the Effective Time. Each of Pacific Rehab's
executive officers and directors is covered by an Indemnification Agreement with
Pacific Rehab. See "Certain Terms of the Merger Agreement -- Indemnification."
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of all material federal income tax
consequences of the Merger to the holders of Pacific Rehab Common Stock and is
based upon current provisions of the Code, existing regulations thereunder and
current administrative rulings and court decisions, all of which are subject to
change. No attempt has been made to comment on all federal income tax
consequences of the Merger that may be relevant to particular holders, including
holders that are subject to special tax rules such as dealers in securities,
foreign persons, mutual funds, insurance companies, tax-exempt entities and
holders who do not hold their shares as capital assets. Holders of Pacific Rehab
Common Stock are advised and expected to consult their own tax advisers
regarding the federal income tax consequences of the Merger in light of their
personal circumstances and the consequences under state, local and foreign tax
laws.
No ruling from the Internal Revenue Service ("IRS") has been or will be
requested in connection with the Merger. Pacific Rehab has received from its
counsel, Garvey, Schubert & Barer, an opinion that the Merger will be treated
for federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code, that Horizon, Merger Sub and Pacific Rehab will each
be a party to the reorganization within the meaning of Section 368(b) of the
Code, and that stockholders of Pacific Rehab will not recognize any gain or loss
from the receipt of Horizon Common Stock for their Pacific Rehab Common Stock,
other than with respect to cash received in lieu of fractional shares of Horizon
Common Stock. Such opinion is based on certain representations of Horizon,
Merger Sub and Pacific Rehab. Stockholders of Pacific Rehab should be aware that
such opinion is not binding on the IRS and no assurance can be given that the
IRS will not adopt a contrary position or that a contrary IRS position would not
be sustained by a court.
Subject to the qualification in the preceding paragraph, the following
federal income tax consequences will occur:
(a) no gain or loss will be recognized by Horizon, Merger Sub or Pacific
Rehab solely as a result of the Merger;
(b) no gain or loss will be recognized by a holder of Pacific Rehab
Common Stock upon the exchange of all of such holder's shares of Pacific
Rehab Common Stock solely for shares of Horizon Common Stock in the Merger;
(c) the aggregate basis of the shares of Horizon Common Stock received
by a Pacific Rehab stockholder in the Merger (including any fractional share
deemed received) will be the same as the aggregate basis of the shares of
Pacific Rehab Common Stock surrendered in exchange therefor;
(d) the holding period of the shares of Horizon Common Stock received by
a Pacific Rehab stockholder in the Merger will include the holding period of
the shares of Pacific Rehab Common Stock surrendered in exchange therefor,
provided that such shares of Pacific Rehab Common Stock are held as capital
assets at the Effective Time; and
(e) a stockholder of Pacific Rehab who receives cash in lieu of a
fractional share will recognize gain or loss equal to the difference, if
any, between such stockholder's basis in the fractional share (as described
in paragraph (c) above) and the amount of cash received. Such gain or loss
will be a capital gain or loss if the Pacific Rehab Common Stock is held by
such stockholder as a capital asset at the Effective Time.
ACCOUNTING TREATMENT
Horizon anticipates that the Merger will be accounted for using the "pooling
of interests" method of accounting pursuant to Opinion No. 16 of the Accounting
Principles Board. The pooling of interests method of accounting assumes that the
combining companies have been merged from inception, and the historical
consolidated financial statements for periods prior to consummation of the
Merger are restated as though the companies had been combined from inception.
See the Unaudited Pro Forma
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Condensed Financial Information and notes thereto included elsewhere in this
Proxy Statement/ Prospectus. Such determination contemplates that each person
who may be deemed an affiliate of Pacific Rehab or Horizon will enter into an
agreement with Horizon not to sell or otherwise transfer any shares of Pacific
Rehab Common Stock or Horizon Common Stock, as the case may be, within 30 days
prior to the Effective Time or any Horizon Common Stock thereafter prior to the
publication of financial results that include at least 30 days of post-Merger
combined operations of Horizon and Pacific Rehab. Consummation of the Merger is
conditioned upon receipt by Horizon of an opinion of Price Waterhouse LLP that
Pacific Rehab is a "poolable" entity.
GOVERNMENTAL AND REGULATORY APPROVALS
ANTITRUST MATTERS. Transactions such as the Merger are reviewed by the
Department of Justice (the "DOJ") and the Federal Trade Commission (the "FTC")
to determine whether they comply with applicable antitrust laws. Under the
provisions of the HSR Act, the Merger could not be consummated until such time
as the specified waiting period requirements of the HSR Act have been satisfied.
On February 9, 1996, the DOJ and the FTC granted early termination of the
waiting period.
MEDICARE. Pacific Rehab has been advised by its counsel that the
transactions contemplated by the Merger Agreement will constitute a "change of
ownership" of certain of the Pacific Rehab "providers" for purposes of the
Medicare program. As a result, Pacific Rehab will be required to provide
post-Merger notification to its medicare fiscal intermediaries.
Except as described above, Horizon and Pacific Rehab are not aware of any
other governmental or regulatory approvals required for consummation of the
Merger, other than compliance with applicable securities laws.
PACIFIC REHAB DEBT
As of the date hereof, Pacific Rehab's total outstanding debt was
approximately $21.5 million, of which approximately $11 million is outstanding
under its Line of Credit with the Bank of America Oregon (the "Bank Debt") and
approximately $10.5 million is due under convertible and non-convertible
promissory notes issued or assumed by Pacific Rehab in connection with certain
acquisitions (the "Acquisition Debt"). The convertible notes are convertible at
prices ranging from $7.00 to $8.75 per share and generally do not provide for
automatic conversion of the securities into which such notes are convertible
upon consummation of the Merger. Therefore, if such notes remain outstanding
after the Merger, they would continue to be convertible into shares of Pacific
Rehab Common Stock. Pursuant to the Merger Agreement, Horizon has agreed to
issue shares of Horizon Common Stock in lieu of shares of Pacific Rehab Common
Stock upon conversion of such notes. The maturity of the Bank Debt is not
affected by the Merger. The maturities of certain portions of the Acquisition
Debt and the conversion date of a limited number of the convertible notes will
be accelerated as a result of the Merger. Horizon intends to repay the Bank Debt
at the Effective Time and is in the process of analyzing the Acquisition Debt to
determine what, if any, actions it will take with respect thereto.
RESTRICTIONS ON RESALES BY AFFILIATES
The shares of Horizon Common Stock to be received by Pacific Rehab
stockholders in connection with the Merger have been registered under the
Securities Act and, except as set forth in this paragraph, may be traded without
restriction. The shares of Horizon Common Stock to be issued in connection with
the Merger and received by persons who are deemed to be "affiliates" (as that
term is defined in Rule 144 under the Securities Act) of Pacific Rehab prior to
the Merger may be resold by them only in transactions permitted by the resale
provisions of Rule 145 under the Securities Act (or, in the case of such persons
who become affiliates of Horizon, Rule 144 under the Securities Act) or as
otherwise permitted under the Securities Act. Under guidelines published by the
Commission, the sale or other disposition of Horizon Common Stock or Pacific
Rehab Common Stock by an affiliate of either Horizon or Pacific Rehab, as the
case may be, within 30 days prior to the Effective Time or the sale or other
disposition of Horizon Common Stock thereafter prior to the publication of
financial results that include at least 30 days of post-Merger combined
operations of Horizon and Pacific Rehab
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(the "Pooling Period") could preclude pooling of interests accounting treatment
of the Merger. Accordingly, the Merger Agreement provides that each of Pacific
Rehab and Horizon will use all reasonable efforts to cause its affiliates to
execute a written agreement to the effect that such persons will not sell,
transfer or otherwise dispose of any shares of Pacific Rehab Common Stock or
Horizon Common Stock, as the case may be, during the Pooling Period and, with
respect to affiliates of Pacific Rehab, that such persons will not sell,
transfer or otherwise dispose of Horizon Common Stock at any time in violation
of the Securities Act or the rules and regulations promulgated thereunder,
including Rule 145.
NO APPRAISAL RIGHTS
Under Delaware law, Pacific Rehab's stockholders will not be entitled to any
appraisal or dissenter's rights in connection with the Merger.
CERTAIN TERMS OF THE MERGER AGREEMENT
The following description does not purport to be complete and is qualified
in its entirety by reference to the Merger Agreement, a copy of which is
attached as Appendix A to this Proxy Statement/Prospectus and is incorporated
herein by reference.
EFFECTIVE TIME OF THE MERGER
The Merger Agreement provides that, as promptly as practicable after the
satisfaction or waiver of the conditions to effecting the Merger, the parties
shall cause the Merger to be consummated by filing a Certificate of Merger with
the Secretary of State of the State of Delaware, in such form as required by,
and executed in accordance with, the relevant provisions of the DGCL. It is
anticipated that, if the Merger Agreement is adopted and the Merger is approved
at the Special Meeting and all other conditions to the Merger have been
satisfied or waived, the Effective Time will occur on the date of the Special
Meeting or as soon thereafter as practicable.
MANNER AND BASIS OF CONVERTING SHARES
At the Effective Time, each outstanding share of Pacific Rehab Common Stock,
other than shares of Pacific Rehab Common Stock held in the treasury of Pacific
Rehab or owned by Horizon or any of Horizon's affiliates (other than natural
persons) will be converted into .3483 of one share of Horizon Common Stock. All
shares of Pacific Rehab Common Stock will be cancelled at the Effective Time
other than those shares owned of record by Horizon or any of Horizon's
affiliates (other than natural persons) immediately prior to the Effective Time.
Notwithstanding the foregoing, if between the date of the Merger Agreement and
the Effective Time the outstanding shares of Horizon Common Stock shall have
been changed into a different number of shares or a different class, by reason
of any stock dividend, subdivision, reclassification, recapitalization, split,
combination or exchange of shares, the Exchange Ratio will be correspondingly
adjusted to reflect such stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares.
As soon as practicable following the Effective Time, Horizon will mail to
each record holder of Pacific Rehab Common Stock immediately prior to the
Effective Time, a letter of transmittal and other information advising such
holder of the consummation of the Merger and for use in exchanging Pacific Rehab
Common Stock certificates for Horizon Common Stock certificates and cash in lieu
of fractional shares. Letters of transmittal will also be available following
the Effective Time at the offices of Horizon in Albuquerque, New Mexico. After
the Effective Time, there will be no further registration of transfers on the
stock transfer books of Pacific Rehab of shares of Pacific Rehab Common Stock
that were outstanding immediately prior to the Effective Time. Share
certificates should not be surrendered for exchange by stockholders of Pacific
Rehab prior to the Effective Time and the receipt of a letter of transmittal.
No fractional shares of Horizon Common Stock will be issued in the Merger.
Each stockholder of Pacific Rehab entitled to a fractional share will receive an
amount in cash equal to the value of such fractional share based upon the
closing price of Horizon Common Stock on the NYSE Composite Tape
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two days prior to the date of the Effective Time. No interest will be paid on
such amount, and all shares of Pacific Rehab Common Stock held by a record
holder shall be aggregated for purposes of computing the amount of such payment.
Until surrendered and exchanged, each certificate previously evidencing
Pacific Rehab Common Stock shall represent solely Horizon Common Stock and the
right to receive cash in lieu of fractional shares. Unless and until any such
certificates shall be so surrendered and exchanged, no dividends or other
distributions payable to the holders of record of Horizon Common Stock as of any
time after the Effective Time shall be paid to the holders of such certificates
previously evidencing Pacific Rehab Common Stock; PROVIDED, HOWEVER, that, upon
any such surrender and exchange of such certificates, there shall be paid to the
record holders of the certificates issued and exchanged therefor (i) the amount,
without interest thereon, of dividends and other distributions, if any, with a
record date after the Effective Time theretofore paid with respect to such whole
shares of Horizon Common Stock, and (ii) at the appropriate payment date, the
amount of dividends or other distributions, if any, with a record date after the
Effective Time but prior to surrender and a payment date occurring after
surrender, payable with respect to such whole shares of Horizon Common Stock.
ASSUMPTION OF OBLIGATIONS TO ISSUE PACIFIC REHAB COMMON STOCK
The Merger Agreement provides that at the Effective Time, each holder of
options to purchase Pacific Rehab Common Stock ("Pacific Rehab Options") shall
have the right to elect to (a) exercise such options for shares of Pacific Rehab
Common Stock (in which case such shares of Pacific Rehab Common Stock will be
converted into shares of Horizon Common Stock at the Exchange Ratio) or (b) have
each Pacific Rehab Option assumed by Horizon. An assumed Pacific Rehab Option
will not give the optionee additional benefits that such optionee did not have
previously under the Pacific Rehab Option, and shall be assumed on the same
terms and conditions as the Pacific Rehab Option being assumed, subject to the
matters described in the following paragraph.
The number of shares of Horizon Common Stock purchasable under any Pacific
Rehab Option assumed by Horizon will be equal to the number of shares of Horizon
Common Stock that the holder of the Pacific Rehab Option would have received
(without regard to any vesting schedule) upon consummation of the Merger had
such Pacific Rehab Option been exercised in full immediately prior to the
Effective Time, and the per share exercise price will be equal to the per share
exercise price of the Pacific Rehab Option divided by the Exchange Ratio.
Horizon has agreed in the Merger Agreement to assume, at the Effective Time,
the obligations of Pacific Rehab with respect to the issuance of Pacific Rehab
Common Stock under the other Pacific Rehab Acquisition Rights by agreeing to
issue in lieu thereof Horizon Common Stock. Assuming that no shares of Pacific
Rehab Common Stock are issued prior to the Effective Time pursuant to the
Pacific Rehab Acquisition Rights, Horizon will be required to reserve for
issuance an aggregate of 477,011 shares of Horizon Common Stock for such
purposes, consisting of 309,168 shares issuable upon the exercise of Pacific
Rehab Options, 129,964 shares upon the conversion of outstanding promissory
notes, 26,123 shares upon the exercise of a warrant issued in connection with an
acquisition and 11,756 shares that may be issued upon satisfaction of certain
conditions pursuant to agreements entered into in connection with an acquisition
by Pacific Rehab.
CONDITIONS TO THE MERGER
The respective obligations of Horizon and Pacific Rehab to consummate the
Merger are subject to the satisfaction of the following conditions, any or all
of which may be waived in writing by Pacific Rehab and Horizon, in whole or in
part, to the extent permitted by applicable law: (a) the Merger Agreement shall
have been adopted and the Merger shall have been approved by a vote of the
holders of a majority of the outstanding shares of Pacific Rehab Common Stock;
(b) no federal or state or regulatory body or court of competent jurisdiction
shall have enacted, issued, promulgated or enforced any statute, rule,
regulation, executive order, decree, judgment, preliminary or permanent
injunction or other order which is in effect and which prohibits, enjoins or
otherwise restrains the consummation of the Merger; (c) all material filings
required to be made prior to the Effective Time with, and all
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material consents, approvals, permits and authorizations required to be obtained
prior to the Effective Time from, governmental and regulatory authorities in
connection with the Merger and all other transactions contemplated in the Merger
Agreement shall have been consummated; (d) the Registration Statement shall have
become effective in accordance with the provisions of the Securities Act and no
stop order suspending such effectiveness shall have been issued and remain in
effect; and (e) the shares of Horizon Common Stock issuable in the Merger
(including those issued in connection with the Pacific Rehab Acquisition Rights)
shall have been approved for listing on the NYSE upon official notice of
issuance.
The obligation of Pacific Rehab to effect the Merger is also subject to the
satisfaction at or prior to the Effective Time of the following conditions, any
or all of which may be waived in writing by Pacific Rehab, in whole or in part:
(a) each of the representations and warranties of Horizon and Merger Sub
contained in the Merger Agreement shall be true and correct in all material
respects as of the Effective Time as though made as of the Effective Time; (b)
Horizon and Merger Sub shall have performed or complied in all material respects
with all agreements and covenants required by the Merger Agreement to be
performed or complied with by them on or prior to the Effective Time; and (c)
Pacific Rehab shall have received an opinion from Garvey, Schuber & Barer to the
effect that the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code.
The obligations of Horizon and Merger Sub to effect the Merger are also
subject at or prior to the Effective Time to the following conditions, any or
all of which may be waived in writing by either Horizon or Merger Sub: (a) each
of the representations and warranties of Pacific Rehab contained in the Merger
Agreement shall be true and correct in all material respects as of the Effective
Time as though made as of the Effective Time; (b) Pacific Rehab shall have
performed or complied in all material respects with all agreements and covenants
required by the Merger Agreement to be performed or complied with by Pacific
Rehab on or prior to the Effective Time; and (c) Horizon shall have received an
opinion from Price Waterhouse LLP, dated the date hereof and the Closing Date,
in form and substance reasonably satisfactory to Horizon, stating that Pacific
Rehab is a "poolable" entity under generally acceptable accounting principles
and applicable Commission regulations.
There can be no assurance that all of the conditions to the Merger will be
satisfied.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
Pacific Rehab, Merger Sub and Horizon relating to, among other things, (i) the
organization and similar corporate matters of each, (ii) the capitalization of
each, (iii) the authorization, execution, delivery, performance and
enforceability of the Merger Agreement and related matters, and the absence of
conflicts, violations and defaults under their respective charters and bylaws
and certain other agreements and documents, (iv) compliance with law, (v) the
documents and reports filed by them with the Commission and the accuracy of the
information contained therein, (vi) the absence of certain changes and events,
(vii) litigation, (viii) employee benefit and labor matters, (ix) taxes and
matters relating to a tax-free reorganization, (x) certain matters relating to
pooling of interests accounting, (xi) certain business practices, (xii) the vote
required to approve the Merger Agreement, (xiii) brokers, (xiv) Pacific Rehab's
stockholder rights plan, (xv) insurance, (xvi) properties and (xviii) the
accuracy of certain information provided. The representations and warranties
expire at the Effective Time.
CERTAIN COVENANTS; CONDUCT OF BUSINESS PRIOR TO THE MERGER
Each of Pacific Rehab and Horizon has agreed that, prior to the Effective
Time, unless expressly contemplated by the Merger Agreement or otherwise
consented to in writing by the other, it will and will cause its subsidiaries to
(a) use all commercially reasonable efforts to conduct its business and the
business of its subsidiaries in all material respects only in the ordinary
course of business and consistent with past practices; and (b) use all
commercially reasonable efforts to preserve intact its business organizations
and the business organizations of its subsidiaries, and to keep available the
services of its present key officers and employees; PROVIDED, HOWEVER, that to
satisfy these obligations,
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neither Pacific Rehab or Horizon is required to make any payments or enter into
or amend any contractual arrangements or understandings, except in the ordinary
course of business and consistent with past practice.
Each of Pacific Rehab and Horizon has agreed that, prior to the Effective
Time, unless expressly contemplated by the Merger Agreement or otherwise
consented to in writing by the other, it will not do, and will not permit any of
its subsidiaries to do, any of the following: (a)(i) increase the compensation
payable or to become payable to its executive officers or employees subject to
certain exceptions; or (ii) grant any severance or termination pay to, or enter
into any employment agreement with, any of its executive officers or directors
subject to certain exceptions; (b) amend its charter or bylaws; (c) declare, set
aside or pay any dividend or other distribution in respect of its capital stock
(other than regular quarterly dividends); (d) reclassify, combine, split,
subdivide or redeem, purchase or otherwise acquire, directly or indirectly, any
of its capital stock; (e) issue, grant, sell or pledge any shares of, or rights
of any kind to acquire any shares of, its capital stock with certain exceptions;
(f) acquire, sell, transfer, lease or encumber any material assets except in the
ordinary course of business consistent with past practice; (g) adopt a plan of
complete or partial liquidation or adopt resolutions providing for the complete
or partial liquidation, dissolution, consolidation, merger, restructuring or
recapitalization of Pacific Rehab or Horizon or any of their subsidiaries; (h)
settle or compromise any material claims or litigation or amend or terminate any
of its material contracts or waive, release or assign any material rights or
claims, or make any payment, direct or indirect, of any material liability
before the same becomes due and payable with certain exceptions; (i) change any
of its significant accounting policies or take certain actions with respect to
taxes; (j) permit any material insurance policy naming it as beneficiary or a
loss payable to be cancelled or terminated without notice to Pacific Rehab or
Horizon, as the case may be, except in the ordinary course of business; or (k)
authorize or enter into an agreement to do any of the following.
EMPLOYEE BENEFIT PLANS
Horizon has agreed to cause, following the Effective Time, the Surviving
Corporation to provide to persons who were employees of Pacific Rehab or any of
its subsidiaries prior to the Effective Time (the "Pacific Rehab Personnel")
employee benefit plans, programs and arrangements which in the aggregate are
substantially comparable to those employee benefit plans, programs and
arrangements generally provided to the employees of Horizon as of the Effective
Time. Furthermore, certain employment agreements and employment security
agreements for the benefit of Pacific Rehab Personnel will be assumed by
Surviving Corporation and guaranteed by Horizon at the Effective Time on the
same terms and subject to the same conditions as in effect under such agreements
immediately prior to the Effective Time.
NO SOLICITATION
Pacific Rehab has agreed not to initiate, solicit or encourage (including by
way of furnishing information or assistance), or take any other action to
facilitate, any inquiries or the making of any proposal relating to, or that may
reasonably be expected to lead to, any Competing Transaction, or enter into
discussions or negotiate with any person or entity in furtherance of such
inquiries or to obtain a Competing Transaction, or agree to or endorse any
Competing Transaction, or authorize or knowingly permit any of the officers,
directors, employees or agents of Pacific Rehab or any of its subsidiaries or
any investment banker, financial advisor, attorney, accountant or other
representative retained by Pacific Rehab or any of Pacific Rehab's subsidiaries
to take any such action. Pacific Rehab also has agreed to promptly as
practicable notify Horizon of all relevant terms of any such inquiries or
proposals received by Pacific Rehab or any of its subsidiaries and if such
inquiry or proposal is in writing, Pacific Rehab has agreed to promptly as
practicable deliver or cause to be delivered to Horizon a copy of such inquiry
or proposal; PROVIDED, HOWEVER, that the Board of Directors of Pacific Rehab may
(i) furnish information to, or enter into discussions or negotiations with, any
person or entity in connection with an unsolicited bona fide proposal in
connection with a Competing Transaction if, and only to the extent that (a) such
unsolicited proposal is on terms that Pacific Rehab's Board of Directors
determines it cannot reject, based on applicable fiduciary duties and the advice
of counsel and (except
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with respect to furnishing information) for which financing, to the extent
required, is then committed, or in the good faith judgment of the Board of
Directors could reasonably be expected to be obtained, and (b) prior to
furnishing such information to, entering into discussions or negotiations with,
such person or entity Pacific Rehab provides written notice to Horizon to the
effect that it is furnishing information to, or entering into discussions with,
such person or entity; or (ii) complying with Rule 14d-9 or Rule 14e-2
promulgated under the Securities Exchange Act of 1934, as amended, with regard
to a Competing Transaction.
CERTAIN POST-MERGER MATTERS
Once the Merger is consummated, Merger Sub will cease to exist as a
corporation, and Pacific Rehab, as the Surviving Corporation, will succeed to
all of the assets, rights and obligations of Merger Sub.
Pursuant to the Merger Agreement, the Pacific Rehab Charter and the Pacific
Rehab Bylaws, as in effect immediately prior to the Effective Time, will be the
certificate of incorporation and bylaws of the Surviving Corporation until
amended as provided therein and pursuant to the DGCL.
TERMINATION OR AMENDMENT OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after adoption of the Merger Agreement and approval of
the Merger by the stockholders of Pacific Rehab: (a) by mutual consent of
Horizon and Pacific Rehab; (b) by Horizon, upon a material breach of any
representation, warranty, material covenant or agreement on the part of Pacific
Rehab set forth in the Merger Agreement which breach is incurable or which is
not cured after thirty days written notice by Horizon to Pacific Rehab (a
"Terminating Pacific Rehab Breach"); (c) by Pacific Rehab, upon a material
breach of any representation, warranty, material covenant or agreement on the
part of Horizon or Merger Sub set forth in the Merger Agreement which breach is
incurable or which is not cured after thirty days written notice by Pacific
Rehab to Horizon (a "Terminating Horizon Breach"); (d) by either Horizon or
Pacific Rehab, if there shall be any judgment, injunction, order or decree
issued by any court or governmental regulatory body which is final and
nonappealable preventing the consummation of the Merger, subject to a limited
exception or if any statute, rule, regulation or executive order promulgated or
enacted by any federal or state governmental authority after the date of the
Merger Agreement which prohibits the consummation of the Merger shall be in
effect; (e) by either Horizon or Pacific Rehab, if the Merger shall not have
been consummated on or before April 1, 1996; (f) by Pacific Rehab, if the Merger
Agreement and the Merger shall fail to receive the requisite vote for approval
and adoption by the stockholders of Pacific Rehab at the Special Meeting; (g) by
Horizon, if (1) the Board of Directors of Pacific Rehab withdraws, modifies or
changes its recommendation of the Merger Agreement or the Merger in a manner
materially adverse to Horizon or shall have resolved to do any of the foregoing;
(2) the Board of Directors of Pacific Rehab shall have recommended to the
stockholders of Pacific Rehab any Competing Transaction or shall have resolved
to do so; (3) a tender offer or exchange offer for 20% or more of the
outstanding shares of capital stock of Pacific Rehab is commenced, and the Board
of Directors of Pacific Rehab does not recommend that stockholders not tender
their shares into such tender or exchange offer, or (4) any person (other than
Horizon or an affiliate thereof) shall have acquired beneficial ownership or the
right to acquire beneficial ownership of, or any "group" (as such term is
defined under Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder) shall have been formed that beneficially owns, or has
the right to acquire beneficial ownership of, 20% or more of the then
outstanding shares of capital stock of Pacific Rehab; or (h) by Pacific Rehab or
Horizon, if Pacific Rehab accepts a Superior Proposal.
Subject to limited exceptions, including the survival of Pacific Rehab's
agreement to pay a termination fee to Horizon under certain circumstances, in
the event of the termination of the Merger Agreement, the Merger Agreement shall
become void, there shall be no liability on the part of
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Horizon, Merger Sub or Pacific Rehab to any other party and all rights and
obligations of the parties thereto shall cease, except that no party will be
relieved from its obligations with respect to any breach of the Merger
Agreement.
The Merger Agreement may be amended by the parties thereto by action taken
by or on behalf of their respective Boards of Directors at any time prior to the
Effective Time; PROVIDED, HOWEVER, that, after approval of the Merger by the
stockholders of Pacific Rehab, no amendment may be made which by law requires
further approval by the stockholders of Pacific Rehab, without such approval. At
any time prior to the Effective Time, any party to the Merger Agreement may (a)
extend the time for the performance of any of the obligations or other acts of
the other party thereto, (b) waive any inaccuracies in the representations and
warranties of the other party contained therein or in any document delivered
pursuant thereto or (c) waive compliance by the other party with any of the
agreements or conditions contained therein.
EXPENSES AND TERMINATION FEES
All expenses incurred by Horizon and Pacific Rehab will be borne by the
party incurring such expenses; PROVIDED, HOWEVER, that all expenses related to
printing, filing and mailing this Proxy Statement/Prospectus and all Commission
and other regulatory filing fees incurred in connection with the Registration
Statement or this Proxy Statement/Prospectus will be divided equally between
Pacific Rehab and Horizon.
The Merger Agreement provides that Pacific Rehab will pay to Horizon its
actual expenses up to $1 million, plus a fee equal to $2.1 million (the
"Termination Fee") if a Competing Transaction has been consummated or a
definitive agreement subsequently resulting in a Competing Transaction has been
executed within six months following the termination of the Merger Agreement in
accordance with its terms: (a) by Horizon if prior to the Special Meeting,
Pacific Rehab shall have furnished information to or entered into discussions
with, any person or entity with respect to a Competing Transaction and Pacific
Rehab's Board of Directors shall have not reaffirmed its recommendations to the
stockholders of Pacific Rehab with respect to transactions contemplated by the
Merger Agreement by the time of the Special Meeting and (i) Pacific Rehab's
Board of Directors withdraws, modifies or changes its recommendation of the
Merger Agreement or the Merger in a manner materially adverse to Horizon (or
resolves to do so); (ii) the Board of Directors of Pacific Rehab shall recommend
any Competing Transaction to Pacific Rehab's stockholders (or resolves to do
so); (iii) a tender or exchange offer for 20% or more of the capital stock of
Pacific Rehab is commenced, and Pacific Rehab's Board of Directors does not
recommend that stockholders not tender their shares into such tender offer or
exchange offer; or (iv) any person acquires beneficial ownership or the right to
acquire beneficial ownership of, or any "group" is formed that beneficially
owns, or has the right to acquire beneficial ownership of 20% or more of the
then outstanding shares of capital stock of Pacific Rehab; (b) by Horizon or
Pacific Rehab, if Pacific Rehab accepts a Superior Proposal; or (c) by Horizon
or Pacific Rehab due to a material breach of any representation, warranty or
material covenant or agreement by Pacific Rehab that is not cured unless the
representation was correct as of the date of the Merger Agreement. In the case
of a termination of the Merger Agreement pursuant to (b) of the preceding
sentence, if within six months following such termination, a Competing
Transaction is not consummated, Pacific Rehab must pay to Horizon its actual
expenses up to $1 million, plus a fee equal to $500,000, payable, at the
election of Pacific Rehab, in cash or Pacific Rehab Common Stock.
If the Merger Agreement becomes terminable by Horizon under circumstances
that would entitle Horizon to the Termination Fee, the Stock Option granted by
Pacific Rehab to Horizon to acquire up to 1,131,490 shares of Pacific Rehab
common stock would become exercisable. See "Stock Option Agreement." To the
extent that the Profit (as defined in the Stock Option Agreement) realized upon
exercise of the option granted under the Stock Option Agreement thereunder
exceeds $1 million (the "Excess Profit"), then the amount of such Excess Profit
shall be set off against any other payments to be made by Pacific Rehab pursuant
to the preceding paragraph, or, if such payments have already been
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paid to Horizon, Horizon shall promptly return, to the extent not applied to
such set-off, such Excess Profit to Pacific Rehab up to the amount of the
payments previously paid pursuant to the preceding paragraph.
INDEMNIFICATION
The Merger Agreement provides that through the later of (i) the sixth
anniversary of the Effective Time and (ii) the expiration of any statute of
limitations applicable to a claim, action, suit, proceeding or investigation
referred to in the Merger Agreement (collectively, a "Proceeding"), Pacific
Rehab will indemnify and hold harmless each present and former officer and
director of Pacific Rehab and its subsidiaries against any claims, losses,
liabilities, damages, judgments, fines, fees, costs or expenses, including
without limitation attorneys' fees and disbursements (collectively, the
"Costs"), incurred in connection with a Proceeding arising out of or pertaining
to matters existing or occurring at or prior to the Effective Time, whether
asserted or claimed prior to at or after the Effective Time, to the fullest
extent that Pacific Rehab or such subsidiary would have been permitted, under
applicable law, indemnification agreements existing on the date of the Merger
Agreement, the Charter or Bylaws of Pacific Rehab or such subsidiary in effect
on the date of the Merger Agreement. Each of Pacific Rehab's executive officers
and directors is covered by an Indemnification Agreement with Pacific Rehab.
STOCK OPTION AGREEMENT
Pursuant to the Stock Option Agreement, Horizon has an option ("the Option")
to acquire from Pacific Rehab up to 1,131,490 shares, subject to certain
adjustments (the "Option Shares"), of Pacific Rehab Common Stock at an exercise
price of $7.75, subject to certain adjustments (the "Exercise Price") payable at
Horizon's option (a) in cash or (b) subject to certain conditions, in Horizon
Common Stock. The number of Option Shares represents 15% of the outstanding
shares of Pacific Rehab Common Stock on November 9, 1995, the date of the Stock
Option Agreement. The Option was granted by Pacific Rehab as a condition of and
in consideration for Horizon's entering into the Merger Agreement.
The Option may be exercised by Horizon, in whole or in part, at any time or
from time to time after the Merger Agreement becomes terminable by Horizon under
circumstances that would, if the Merger Agreement were terminated as a result
thereof, entitle Horizon to the Termination Fee described under "Certain Terms
of the Merger Agreement -- Expenses and Termination Fees." The circumstances
giving rise to the exercisability of the Option are referred to in the Stock
Option Agreement as "Trigger Events."
The Option will terminate upon the earlier of: (i) the Effective Time; (ii)
the termination of the Merger Agreement in accordance with its terms (other than
upon or during the continuance of a Trigger Event); or (iii) 180 days following
any termination of the Merger Agreement upon or during the continuance of a
Trigger Event (or if, at the expiration of such 180 day period the Option cannot
be exercised by reason of any applicable judgment, decree, order, law or
regulation, ten business days after such impediment to exercise shall have been
removed or shall have become final and not subject to appeal, but in no event
under this circumstance later than September 1, 1996). The Option may not,
however, be exercised if Horizon is in material breach of any of its material
representations or warranties, or in material breach of any of its covenants or
agreements, contained in the Stock Option Agreement or in the Merger Agreement.
The obligation of Pacific Rehab to issue Option Shares to Horizon pursuant
to the Stock Option Agreement is subject to certain conditions, including, among
others, that (i) all waiting periods, if any, under the HSR Act, applicable to
the issuance of Option Shares shall have expired or have been terminated; and
(ii) all consents, approvals, orders or authorizations of, or registrations,
declarations or filings with, any Governmental Entity, if any, required in
connection with the issuance of Option
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Shares shall have been obtained or made, as the case may be and (iii) the Option
Shares and Horizon Common Stock which are issued in payment of the Exercise
Price have been approved for listing on either the NYSE or Nasdaq Stock Market.
Horizon and Pacific Rehab have agreed that for the five year period ending
November 9, 2000 (the "Expiration Date"), each will vote any shares of capital
stock of the other party acquired by such party pursuant to the Stock Option
Agreement ("Restricted Shares") or otherwise beneficially owned (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) by such party on each
matter submitted to a vote of stockholders of such other party for and against
such matter in the same proportion as the vote of all other stockholders of such
other party are voted (whether by proxy or otherwise) for and against such
matter. Horizon and Pacific Rehab have also agreed that prior to the Expiration
Date, neither party will, directly or indirectly, by operation of law or
otherwise, sell, assign, pledge, or otherwise dispose of or transfer any
Restricted Shares beneficially owned by such party, other than (i) in connection
with a tender or exchange offer that has been approved or recommended, or
otherwise determined to be fair to and in the best interests of the stockholders
of the other party, by a majority of the members of the Board of Directors of
such other party, which majority shall include a majority of directors who were
directors prior to the announcement of such tender or exchange offer or (ii) in
connection with the exercise of certain registration rights granted in the Stock
Option Agreement.
The Stock Option Agreement has been filed as an exhibit to the Registration
Statement of which this Proxy Statement/Prospectus is a part, and is
incorporated herein by reference.
VOTING AGREEMENT
In order to induce Horizon to enter into the Merger Agreement, Brian
Bussanich, former Chairman of the Board, President and Chief Executive Officer
of Pacific Rehab and a current Director, John Elorriaga, currently Chairman of
the Board, President and Chief Executive Officer of Pacific Rehab, and Frank
Jungers, a Director of Pacific Rehab (collectively, the "Stockholders") entered
into the Voting Agreement with Horizon on November 9, 1995. The Voting Agreement
was entered into after negotiations between Horizon and Pacific Rehab, which
occurred on November 6, 1995. Horizon requested the Stockholders to enter into
the Voting Agreement in order to ensure that the Stockholders not only supported
the Merger as directors of Pacific Rehab, but also that the Stockholders, in
their individual capacities as stockholders, would vote their shares in favor of
the Merger and in opposition to any competing transaction. Horizon's request was
presented as an integral part of the overall transaction, and the Stockholders
agreed to do so in order to facilitate the Merger.
As of the Record Date, the Stockholders held 613,815 shares of Pacific Rehab
Common Stock, representing in the aggregate approximately 7.4% of the shares
entitled to vote at the Special Meeting. Pursuant to the Voting Agreement, the
Stockholders have, among other things, agreed to vote all shares of Pacific
Rehab Common Stock beneficially owned by them in favor of the Merger and against
any combination proposal or other matter that may interfere or be inconsistent
with the Merger. Notwithstanding the preceding sentence, the Stockholders have
agreed, if requested by Horizon, not (i) to attend, or vote any Pacific Rehab
Common Stock beneficially owned by them at, any annual or special meeting of
stockholders or (ii) to execute any written consent of stockholders.
The Stockholders have also agreed that no Stockholder or any corporation or
other person controlled by any Stockholder or any affiliate or associate
thereof, other than Pacific Rehab and its subsidiaries (collectively, the
"Stockholder Group"), will, directly or indirectly, sell, transfer, pledge or
otherwise dispose of, or grant a proxy with respect to, any shares of Pacific
Rehab Common Stock beneficially owned by any member of the Stockholder Group to
any person other than Horizon or its designee, or grant an option with respect
to any of the foregoing, or enter into any other agreement or arrangement with
respect to any of the foregoing.
The Voting Agreement also provides that no Stockholder or any other member
of the Stockholder Group will initiate, solicit or encourage (including by way
of furnishing information or assistance), or
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take any other action to facilitate, any inquiries or the making of any proposal
relating to, or that may reasonably be expected to lead to, any Competing
Transaction, or enter into discussions or negotiate with any person or entity in
furtherance of such inquiries or to obtain a Competing Transaction, or agree to,
or endorse, any Competing Transaction, or authorize or permit any of the
officers, directors or employees of any Stockholder or any member of the
Stockholder Group or any investment banker, financial advisor, attorney,
accountant or other representative retained by any Stockholder or any other
member of the Stockholder Group to take any such action.
The parties to the Voting Agreement have agreed that nothing in the Voting
Agreement will be deemed to prohibit any Stockholder from acting in accordance
with such Stockholder's fiduciary duties solely to the extent that such
Stockholder is acting in the capacity of officer or director of Pacific Rehab.
The Voting Agreement terminates upon the termination of the Merger Agreement.
The Voting Agreement has been filed as an exhibit to the Registration
Statement of which this Proxy Statement/Prospectus is a part, and is
incorporated herein by reference.
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BENEFICIAL OWNERSHIP
BY CERTAIN STOCKHOLDERS AND
MANAGEMENT OF PACIFIC REHAB
The following table sets forth information as of the Record Date regarding
the beneficial ownership of Pacific Rehab Common Stock and stock options
exercisable within 60 days of such date held by (i) each person or group of
persons known by Pacific Rehab to own beneficially more than 5% of the
outstanding Pacific Rehab Common Stock; (ii) each director of Pacific Rehab;
(iii) certain executive officers; and (iv) all executive officers and directors
of Pacific Rehab as a group. The table gives effect to the adjusted ownership
upon consummation of the Merger.
<TABLE>
<CAPTION>
PACIFIC REHAB PERCENT OF
COMMON STOCK (1) OUTSTANDING
-------------------------------------- HORIZON COMMON
NUMBER OF PERCENT OF STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES SHARES OUTSTANDING AFTER MERGER
- ------------------------------------------------------------- --------------- --------------------- -----------------
<S> <C> <C> <C>
Kalmar Investments, Inc...................................... 432,700(2) 5.2% *
1300 Market Street, Suite 500
Wilmington, DE 19801
Brian M. Bussanich........................................... 766,700(3) 9.9% *
8100 N.E. Parkway Drive, Suite 190
Vancouver, WA 98662
William A. Norris............................................ 105,000(4) 1.2% *
8100 N.E. Parkway Drive, Suite 190
Vancouver, WA 98662
Al Howard.................................................... 103,000(5) 1.2% *
8100 N.E. Parkway Drive, Suite 190
Vancouver, WA 98662
Randy Robertson.............................................. 100,000(6) 1.2% *
8100 N.E. Parkway Drive, Suite 190
Vancouver, WA 98662
John A. Elorriaga............................................ 58,540(7) * *
111 SW Fifth Avenue, Suite 3100
Portland OR 97204
Frank Jungers................................................ 69,325(8) * *
5584 SE Hillwood Circle
Milwaukie, OR 97267
All Directors and Executive Officers as a Group
(6 persons)................................................. 1,202,565(9) 13.6% *
</TABLE>
- ------------------------
* less than 1%
(1) Unless otherwise indicated, each of the shareholders named above has sole
voting and investment power with respect to all shares shown as being
beneficially owned by them.
(2) Kalmar Investments, Inc. is a registered investment advisor under the
Investment Advisors Act of 1940, as amended. Except for its beneficial
ownership of 460,800 shares of Pacific Rehab Common Stock. Pacific Rehab is
not aware of any other affiliation between it and Kalmar Investments, Inc.
(3) Includes 218,750 shares subject to options granted pursuant to Pacific
Rehab's 1993 Combination Stock Option Plan, as amended, and exercisable
immediately prior to the Effective Time.
(4) Includes 100,000 shares subject to options granted pursuant to Pacific
Rehab's 1993 Combination Stock Option Plan, as amended, and exercisable
immediately prior to the Effective Time.
(5) Includes 100,000 shares subject to options granted pursuant to Pacific
Rehab's 1993 Combination Stock Option Plan, as amended, and exercisable
immediately prior to the Effective Time.
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(6) Includes 100,000 shares subject to options granted pursuant to Pacific
Rehab's 1993 Combination Stock Option Plan, as amended, and exercisable
immediately prior to the Effective Time.
(7) Includes 31,000 shares subject to options granted pursuant to Pacific
Rehab's 1993 Combination Stock Option Plan, as amended, and the Directors'
Stock Option Plan, as amended, and exercisable immediately prior to the
Effective Time.
(8) Includes 31,000 shares subject to options granted pursuant to Pacific
Rehab's 1993 Combination Stock Option Plan, as amended, and the Directors'
Stock Option Plan, as amended, and exercisable immediately prior to the
Effective Time.
(9) Includes 580,750 shares subject to options granted pursuant to Pacific
Rehab's 1993 Combination Stock Option Plan, as amended, and Pacific Rehab's
Directors' Stock Option Plan, as amended, and exercisable immediately prior
to the Effective Time.
DESCRIPTION OF HORIZON CAPITAL STOCK
GENERAL
The following descriptions of certain of the provisions of the Horizon
Charter and the Horizon Bylaws are necessarily general and do not purport to be
complete and are qualified in their entirety by reference to the Horizon Charter
and the Horizon Bylaws, which are included as exhibits to the Registration
Statement of which this Proxy Statement/Prospectus is a part.
HORIZON COMMON STOCK
Horizon is authorized to issue 150,000,000 shares of Horizon Common Stock,
par value $.001. As of March 1, 1996, there were shares of Horizon
Common Stock issued and outstanding and approximately holders of record of
Horizon Common Stock. The holders of Horizon Common Stock are entitled to one
vote for each share on all matters submitted to a vote of stockholders. The
holders of Horizon Common Stock do not have cumulative voting rights in the
election of directors of Horizon unless and until a person or group of
affiliated or associated persons has acquired beneficial ownership in one
transaction or a series of related transactions of 40% or more of the stock of
any class or series thereof entitled to vote in the election of directors, in
which case cumulative voting will be in effect commencing with the first annual
election of directors subsequent to such acquisition. The holders of Horizon
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared by the Horizon Board of Directors out of legally available funds. In
the event of liquidation, dissolution or winding up of Horizon, the holders of
Horizon Common Stock are entitled to share ratably in all assets of Horizon
remaining after provision for payment of liabilities and satisfaction of the
liquidation preference of any shares of Horizon Preferred Stock (as defined
below) that may be outstanding. The holders of Horizon Common Stock have no
preemptive, subscription, redemptive or conversion rights. The outstanding
shares are fully paid and nonassessable. The rights, preferences and privileges
of holders of Horizon Common Stock may become subject to those of holders of
Horizon Preferred Stock, if Horizon should issue Horizon Preferred Stock in the
future. See "Horizon Preferred Stock."
RIGHTS TO PURCHASE PREFERRED STOCK
On September 12, 1994, the Board of Directors of Horizon declared a dividend
of one preferred share purchase right (a "Right") for each outstanding share of
Horizon Common Stock held of record on September 22, 1994 and approved the
further issuance of Rights with respect to all shares of Horizon Common Stock
that are subsequently issued. Each Right entitles the registered holder to
purchase from Horizon one-thousandth of a share of Series A Junior Participating
Preferred Stock, par value $.001 per share ("Series A Preferred"), of Horizon,
at a price of $110 per one-thousandth of a share (the "Purchase Price"), subject
to adjustment. See "Horizon Preferred Stock -- Series A Preferred." Until the
occurrence of certain events described below, the Rights are not exercisable,
will be evidenced by the certificates for Horizon Common Stock and will not be
transferable apart from the Horizon Common Stock.
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DETACHMENT OF RIGHTS; EXERCISE. Initially, the Rights will attach to all
certificates representing outstanding shares of Horizon Common Stock and no
separate Right Certificates will be distributed. The Rights will separate from
the Horizon Common Stock and a Distribution Date will occur upon the earlier of
(i) 10 business days following a public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired beneficial
ownership of 20% or more of the outstanding Voting Shares (as defined in the
Rights Agreement) of Horizon, or (ii) 10 business days following the
commencement or announcement of an intention to commence a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 20% or more of such outstanding Voting Shares.
The Rights are not exercisable until the Distribution Date. As soon as
practicable following the Distribution Date, separate certificates evidencing
the Rights (the "Right Certificates") will be mailed to holders of record of
Horizon Common Stock as of the close of business on the Distribution Date and
such separate Right Certificates alone will thereafter evidence the Rights.
If a person or group were to acquire 20% or more of the Voting Shares of
Horizon, each Right then outstanding (other than Rights beneficially owned by
the Acquiring Person which would become null and void) would become a right to
buy that number of shares of Horizon Common Stock (or under certain
circumstances, the equivalent number of one-thousandths of a share of Series A
Preferred) that at the time of such acquisition would have a market value of two
times the Purchase Price of the Right.
If Horizon were acquired in a merger or other business combination
transaction or more than 50% of its consolidated assets or earning power were
sold, proper provision will be made so that each holder of a Right will
thereafter have the right to receive, upon the exercise thereof at the then
current Purchase Price of the Right, that number of shares of common stock of
the acquiring company which at the time of such transaction would have a market
value of two times the Purchase Price of the Right.
ANTIDILUTION AND OTHER ADJUSTMENTS. The number of shares (or fractions
thereof) of Series A Preferred or other securities or property issuable upon
exercise of the Rights, and the Purchase Price payable, are subject to customary
adjustments from time to time to prevent dilution. The number of outstanding
Rights and the number of shares (or fractions thereof) of Series A Preferred
issuable upon exercise of each Right are also subject to adjustment in the event
of a stock split of the Horizon Common Stock or a stock dividend on the Horizon
Common Stock payable in Horizon Common Stock or subdivisions, consolidations or
combinations of the Horizon Common Stock occurring, in any such case, prior to
the Distribution Date.
EXCHANGE OPTION. At any time after the acquisition by a person or group of
affiliated or associated persons of beneficial ownership of 20% or more of the
outstanding Voting Shares of Horizon and before the acquisition by a person or
group of 50% or more of the outstanding Voting Shares of Horizon, the Horizon
Board of Directors may, at its option, issue Horizon Common Stock in mandatory
redemption of, and in exchange for, all or part of the then outstanding and
exercisable Rights (other than Rights owned by such person or group which would
become null and void) at an exchange ratio of one share of Horizon Common Stock
(or one-thousandth of a share of Series A Preferred) for each two shares of
Horizon Common Stock for which each Right is then exercisable, subject to
adjustment.
REDEMPTION OF RIGHTS. At any time prior to the first public announcement
that a person or group has become the beneficial owner of 20% or more of the
outstanding Voting Shares, the Horizon Board of Directors may redeem all but not
less than all the then outstanding Rights at a price of $.01 per Right (the
"Redemption Price"). The redemption of the Rights may be made effective at such
time, on such basis and with such conditions as the Horizon Board of Directors
in its sole discretion may establish. Immediately upon the action of the Horizon
Board of Directors ordering redemption of the Rights, the right to exercise the
Rights will terminate and the only right of the holders of Rights will be to
receive the Redemption Price.
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EXPIRATION; AMENDMENT OF RIGHTS. The Rights will expire on September 22,
2004, unless earlier redeemed or exchanged. The terms of the Rights may be
amended by the Horizon Board of Directors without the consent of the holders of
the Rights, including an amendment to extend the expiration date of the Rights,
and, provided a Distribution Date has not occurred, to extend the period during
which the Rights may be redeemed, except that after the first public
announcement that a person or group has become the beneficial owner of 20% or
more of the outstanding Voting Shares, no such amendment may materially and
adversely affect the interests of the holders of the Rights.
The Rights have certain anti-takeover effects. The rights will cause
substantial dilution to a person or group that attempts to acquire Horizon
without the approval of the Horizon Board of Directors. The Rights should not,
however, interfere with any merger or other business combination that is
approved by the Horizon Board of Directors.
The description and terms of the Rights are set forth in a Rights Agreement
(the "Horizon Rights Agreement") dated as of September 15, 1994 between Horizon
and Chemical Trust Company of California, as Rights Agent. The foregoing
description of the Rights does not purport to be complete and is qualified in
its entirety by reference to the Rights Agreement, a copy of which is available
free of charge from Horizon.
HORIZON PREFERRED STOCK
GENERAL. Horizon is authorized to issue 500,000 shares of Preferred Stock,
par value $.001 per share ("Horizon Preferred Stock"), of which 150,000 shares
had been designated as Series A Preferred as of September 12, 1994. No shares of
Horizon Preferred Stock were outstanding at September 12, 1994. The Horizon
Board of Directors has authority, without stockholder approval, to issue shares
of Horizon Preferred Stock in one or more series and to determine the number of
shares, designations, dividend rights, conversion rights, voting power,
redemption rights, liquidation preferences and other terms of any such series.
The issuance of Preferred Stock, while providing desired flexibility in
connection with possible acquisitions and other corporate purposes, could
adversely affect the voting power of holders of Horizon Common Stock and the
likelihood that such holders will receive dividend payments and payments upon
liquidation and could have the effect of delaying, deferring or preventing a
change in control of Horizon. Horizon has no present plans for any issuance of
Horizon Preferred Stock, other than the reserved shares of Series A Preferred
Stock issuable pursuant to the Rights.
SERIES A PREFERRED. The terms of the Series A Preferred are designed so
that the value of each one-thousandth of a share purchasable upon exercise of a
Right will approximate the value of one share of Horizon Common Stock. The
Series A Preferred is non-redeemable and will rank junior to all other series of
Horizon's Preferred Stock. Each whole share of Series A Preferred is entitled to
receive a quarterly preferential dividend in an amount per share equal to the
greater of (i) $1.00 in cash, or (ii) in the aggregate, 1,000 times the dividend
declared on the Horizon Common Stock. In the event of liquidation, the holders
of the Series A Preferred are entitled to receive a preferential liquidation
payment equal to the greater of (i) $1,000 per share, or (ii) in the aggregate,
1,000 times the payment made on the Horizon Common Stock. In the event of any
merger, consolidation or other transaction in which the Horizon Common Stock is
exchanged for or changed into other stock or securities, cash or other property,
each whole share of Series A Preferred is entitled to receive 1,000 times the
amount received per share of Horizon Common Stock. Each whole share of Series A
Preferred is entitled to 1,000 votes on all matters submitted to a vote of the
stockholders of Horizon, and Series A Preferred will generally vote together as
one class with the Horizon Common Stock and any other capital stock on all
matters submitted to a vote of stockholders of Horizon.
CERTAIN PROVISIONS OF HORIZON CHARTER AND BYLAWS
Horizon's Charter provides for a classified Board of Directors with three
classes, each class to consist as nearly as possible of one-third of the
directors. Currently, the authorized number of directors on the Horizon Board of
Directors is 12. Each director serves for a term of three years and until his or
her successor is elected and qualified. A classified Board of Directors could
make it more
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difficult for stockholders, including those holding a majority of the
outstanding shares, to force an immediate change in the composition of a
majority of the Horizon Board of Directors. Staggered terms moderate the pace of
changes in the Horizon Board of Directors by extending the minimum time required
to elect a majority of directors from one to two years.
Directors may be removed only for cause by the affirmative vote of the
holders of two-thirds of outstanding shares entitled to vote, provided that any
director elected by holders of any series of Horizon Preferred Stock, voting
separately as a class, may be removed only for cause by the affirmative vote of
the holders of two-thirds of the outstanding shares of such series. For this
purpose "cause for removal" means an adjudication by a court of competent
jurisdiction that the director to be removed (i) is liable for negligence or
misconduct in the performance of his duty, (ii) has been convicted of a felony
or (iii) has acted or failed to act in a manner which is in derogation of the
director's duties.
The Horizon Charter provides that, except in the case of nominations by the
Horizon Board of Directors, written notice must be given of any nomination of a
director, (i) with respect to an election to be held at an annual meeting of
stockholders, not later than ten days prior to the date which is one year
following the date of the notice of the prior year's annual meeting, and (ii)
with respect to an election to be held at a special meeting of stockholders, not
later than the close of business on the seventh day following the day of notice
of such meeting.
Certain actions taken by the Horizon Board of Directors, including the
appointment and removal of officers of Horizon, designation of committees of the
Horizon Board of Directors and appointment of members of any committee
established by the Horizon Board of Directors, require the affirmative vote of
80% of the then authorized number of directors. The Horizon Charter also
provides that the number of directors on the Horizon Board of Directors cannot
be increased or decreased without the approval of 80% of the then authorized
number of directors. Newly created directorships resulting from any increase in
the authorized number of directors and any vacant directorships may be filled by
the affirmative vote of at least 80% of the directors then in office.
The Horizon Charter provides that special meetings of stockholders may be
called by the Horizon Board of Directors or by the holders of not less than 25%
of the outstanding shares of any class or any series thereof entitled to vote on
the election of directors. Holders of any series of Horizon Preferred Stock
entitled to elect or remove one or more directors separately as a class may do
so at special meetings, which may be called only for such purposes by the
holders of 25% of the outstanding shares of such series. The Horizon Bylaws
provide that at special meetings of stockholders only such business may be
conducted as is (i) specified in the written notice of meeting, (ii) brought
before the meeting at the direction of the Horizon Board of Directors or (iii)
specified in a written notice given by or on behalf of the stockholders not more
than ten days after the date of the official notice of the meeting. The Horizon
Charter also provides that all stockholder actions must be taken at stockholder
meetings and not by written consent in lieu of a meeting.
The provisions of the Horizon Charter described above may be amended or
repealed only by the vote of holders of two-thirds of Horizon's outstanding
shares of all classes or series thereof entitled to vote on the election of
directors. The Horizon Bylaws may be adopted, amended or rescinded by the
Horizon Board of Directors or by the vote of holders of two-thirds of the
outstanding shares of all classes or series of capital stock entitled to vote on
the election of directors.
STOCKHOLDER VOTE REQUIRED TO APPROVE CERTAIN BUSINESS COMBINATIONS
The Horizon Charter requires the approval by holders of at least two-thirds
of the outstanding shares of all classes or series of capital stock entitled to
vote on the election of directors for (i)(a) any merger or consolidation of
Horizon or any subsidiary of Horizon with or into, (b) any sale, lease,
exchange, mortgage, pledge, transfer or other disposition of any substantial
part (defined generally as 30% or more of the total assets of the relevant
entity or leasehold interests in more than ten facilities) of the assets of
Horizon or any subsidiary of Horizon to or with, or (c) the issuance or transfer
of
70
<PAGE>
securities of Horizon or any subsidiary in exchange for cash, securities (other
than securities of Horizon which by their terms are convertible into other
securities of Horizon) or other property to, a Related Person (as defined
below), (ii) any reclassification of securities or recapitalization of Horizon,
merger or consolidation of Horizon with any subsidiary or any similar
transaction which has the effect of increasing the proportionate interest of a
Related Person or any person associated or affiliated with a Related Person, or
(iii) the adoption of a plan of liquidation or dissolution of Horizon.
"Related Person" is defined as any person (other than a subsidiary of
Horizon, certain employee benefit plans and Continuing Directors (as defined
below)) that, together with such person's affiliates and associates, (i)
directly or indirectly, beneficially own or have the right to acquire or to vote
more than 5% of the Voting Shares (as defined in the Horizon Charter); or (ii)
within the preceding two years beneficially owned or had the right to acquire or
to vote not less than 5% of the Voting Shares; or (iii) is an assignee of or has
otherwise succeeded, within the preceding two years, to any shares of capital
stock of Horizon beneficially owned by any Related Person, in a transaction
other than a public offering within the meaning of the Securities Act.
Notwithstanding the foregoing, such stockholder approval is not required if
the transaction is approved by at least 80% of all Continuing Directors.
"Continuing Directors" are directors of Horizon who either (i) were first
elected prior to the date as of which any Related Person that proposes to enter
into or become a party to a business combination or other transaction described
above became a beneficial owner of more than 5% of the Voting Shares or (ii)
were designated as Continuing Directors (prior to being elected as a director)
by a majority of the then Continuing Directors; provided that all members of the
Horizon Board of Directors on July 27, 1994, and all persons nominated by the
Horizon Board of Directors as directors of Horizon and elected by the
stockholders at the 1994 Annual Meeting of Stockholders are Continuing
Directors.
The Horizon Charter allows the Continuing Directors, in evaluating any
business combination or other transaction listed above, to consider, in addition
to the adequacy of the amount to be paid in connection with any such
transaction, certain specified factors and any other factors the Continuing
Directors deem relevant. Among the factors the Continuing Directors may consider
are: (i) the social and economic effects of the transaction on Horizon, its
employees, patients and other elements of the communities in which Horizon's
facilities are located; (ii) the business and financial condition and earnings
prospects of the other party or parties to such transaction; and (iii) the
competence, experience and integrity of the other party or parties to such
transaction and its or their management.
The provisions described above may tend to deter any potential unfriendly
offers or other efforts to obtain control of Horizon that are not approved by
the Horizon Board of Directors and thereby deprive the stockholders of
opportunities to sell shares at above-market prices. Such provisions may also
have the effect of preventing changes in the management of Horizon. It is
possible that such provisions could make it more difficult to accomplish
transactions that stockholders may otherwise deem to be in their best interests.
The foregoing provisions of the Horizon Charter regarding business
combinations and other similar transactions may be amended or repealed only by
the vote of holders of two-thirds of Horizon's outstanding shares of all classes
or series of capital stock entitled to vote on the election of Directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Horizon Common Stock is Chemical
Mellon Shareholder Services.
COMPARATIVE RIGHTS OF HORIZON AND PACIFIC REHAB STOCKHOLDERS
If the Merger is consummated, the stockholders of Pacific Rehab will become
stockholders of Horizon. The rights of the stockholders of both Horizon and
Pacific Rehab are governed by and subject to the provisions of the DGCL. The
rights of current Pacific Rehab stockholders following the Merger will be
governed by the Horizon Charter and Horizon's Bylaws rather than the provisions
of the
71
<PAGE>
Pacific Rehab Charter and Bylaws. The following is a brief summary of certain
differences between the rights of Horizon stockholders and the rights of Pacific
Rehab stockholders, and is qualified in its entirety by reference to the
relevant provisions of the DGCL, the Horizon Charter and Bylaws and the Pacific
Rehab Charter and Bylaws.
NUMBER, CLASSIFICATION AND REMOVAL OF DIRECTORS
The Horizon Charter and Bylaws provide for the classification of the Board
of Directors of Horizon into three classes, with directors serving staggered
three-year terms. The Horizon Charter also provides that the number of directors
shall be five unless otherwise determined by 80% of the then authorized number
of directors. The foregoing provisions cannot be altered, amended or repealed
without the affirmative vote of the holders of not less than 66 2/3% of the
Voting Shares (as defined in the Horizon Charter). Currently the number of
Horizon directors is 12.
The Pacific Rehab Bylaws provide that the number of directors shall be not
less than three nor more than seven. Currently, Pacific Rehab has three
directors.
The Horizon Charter allows directors to be removed only for cause and such
removal must be approved by 66 2/3% of the outstanding shares of Horizon Common
Stock entitled to vote for the election of directors. Pacific Rehab's directors
may be removed with or without cause by a majority of the outstanding shares of
Pacific Rehab Common Stock entitled to vote for the election of directors.
VOTING RIGHTS
Neither Horizon's nor Pacific Rehab's Charter provides for cumulative voting
rights under current circumstances, although Horizon's Charter does provide for
cumulative voting rights if any stockholder attains ownership of 40% or more of
the shares of stock of any class or series entitled to vote for the election of
directors.
POWER TO CALL SPECIAL MEETINGS
Horizon's Charter provides that a special meeting of stockholders may be
called by a majority of directors then in office or by the holders of not less
than 25% of the issued and outstanding shares of stock of any class or series
entitled to vote for the election of directors. In addition, if the holders of
any preferred stock of Horizon are entitled to elect one or more directors
separately as a class, the holders of 25% of such preferred stock then
outstanding may call a special meeting for limited purposes. Pacific Rehab's
Bylaws provide that a special meeting of stockholders may be called by the
Chairman of the Board, the President, by a majority of Pacific Rehab's Directors
or by the holders of not less than three-tenths of all of the outstanding shares
of Pacific Rehab Common Stock entitled to vote at the meeting.
STOCKHOLDER VOTE REQUIRED FOR CERTAIN TRANSACTIONS
The Horizon Charter contains certain provisions that require that a higher
percentage of stockholders approve mergers, consolidations, sales of a
substantial amount of assets and other similar transactions involving a Related
Person (or an Affiliate or Associate thereof) than would otherwise be required
under the DGCL, subject to certain exceptions. See "Description of Horizon
Capital Stock." The Pacific Rehab Charter does not contain any similar
provisions.
ACTION BY WRITTEN CONSENT
Horizon's Charter does not permit action to be taken by stockholders without
a meeting. Because the Pacific Rehab Charter does not contain a similar
provision, the DGCL permits the taking of stockholder action by written consent.
AMENDMENTS OF CHARTER
Horizon's Charter contains a provision that requires a higher percentage of
stockholders to amend certain provisions of the Horizon Charter than would
otherwise be required under the DGCL. The Pacific Rehab Charter does not contain
a similar provision.
72
<PAGE>
AMENDMENTS OF BYLAWS
Horizon's Bylaws may be amended by the Board of Directors of Horizon or by
the holders of not less than 66 2/3% of the Voting Shares outstanding. Pacific
Rehab's Bylaws may be amended by the Board of Directors of Pacific Rehab and by
the holders of a majority of the outstanding shares of stock entitled to vote
thereon.
Also see "Description of Horizon Capital Stock."
INDEPENDENT ACCOUNTANTS
It is expected that representatives of Price Waterhouse LLP will be present
at the Special Meeting to respond to appropriate questions of stockholders and
to make a statement if they so desire.
LEGAL MATTERS
The validity of the Horizon Common Stock to be issued in the Merger has been
passed upon for Horizon by Scot Sauder, Horizon's Vice President of Legal
Affairs, Secretary and General Counsel, Albuquerque, New Mexico. Certain tax
consequences of the Merger have been passed upon for Pacific Rehab by Garvey,
Schubert & Barer, Portland, Oregon.
EXPERTS
The consolidated financial statements and financial statement schedules of
Horizon/CMS Healthcare Corporation at May 31, 1995 and 1994 and for each of the
three years in the period ended May 31, 1995, incorporated by reference into
this Proxy Statement/Prospectus and Registration Statement have been audited by
Arthur Andersen LLP, independent accountants, as set forth in their reports
thereon incorporated by reference elsewhere herein which, as to the years 1995,
1994, and 1993, are based in part on the reports of Ernst & Young LLP and Price
Waterhouse LLP, independent accountants. The financial statements and financial
statement schedules referred to above have been incorporated by reference herein
in reliance upon said reports given upon the authority of said firms as experts
in accounting and auditing.
The consolidated financial statements of Pacific Rehabilitation & Sports
Medicine, Inc. as of December 31, 1994 and for the year ended December 31, 1994
included in this Proxy Statement/ Prospectus and Registration Statement have
been so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The combined financial statements of Physical Therapy Clinic of Tualatin,
Inc.; Roger J. Miller Enterprises, Inc. dba Lake Oswego Physical Therapy; John
Phillipe and Wayne Crinklaw dba Hillsboro Physical Therapy Clinic; Northwest
Physical Therapy Clinic, Inc.; Eischen Physical Therapy Inc.; and Longview
Physicians' Physical Therapy Services, P.S. as of December 31, 1994 and for the
year ended December 31, 1994 and Oregon City Physical Therapy, Inc. as of
October 31, 1994 and for the year ended October 31, 1994 included in this Proxy
Statement/Prospectus and Registration Statement have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The financial statements of Samuel H. Esterson, P.T. as of December 31, 1994
and for the year ended December 31, 1994 included in this Proxy
Statement/Prospectus and Registration Statement have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The financial statements of Michael C. Gibbons, P.T. dba Tigard Physical
Therapy as of December 31, 1994 and for the year ended December 31, 1994
included in this Proxy Statement/Prospectus
73
<PAGE>
and Registration Statement have been so included in reliance on the the report
of Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements of Northwest Evaluation for the Injured, Inc. as of
December 31, 1994 and for the year ended December 31, 1994 included in this
Proxy Statement/Prospectus and Registration Statement have been so included in
reliance on the Report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The financial statements of Arthritis, Trauma & Sports Physical Therapy,
Inc. as of December 31, 1994 and for the year ended December 31, 1994 included
in this Proxy Statement/Prospectus and Registration Statement have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of Center for Industrial Medicine, Inc. as of
December 31, 1994 and for the year ended December 31, 1994 included in this
Proxy Statement/Prospectus and Registration Statement have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The financial statements of NW Center for Sports Medicine and Physical
Therapy, Inc. as of December 31, 1994 and for the year ended December 31, 1994
included in this Proxy Statement/ Prospectus and Registration Statement have
been so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of Advanced Rehabilitation Technologies, Inc. as of
December 31, 1993 and for the year ended December 31, 1993 included in this
Proxy Statement/Prospectus and Registration Statement have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The financial statements of Michael D. Mericle, P.T. as of December 31, 1993
and for the year ended December 31, 1993 included in this Proxy
Statement/Prospectus and Registration Statement have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The financial statements of Care Concepts, Inc. as of December 31, 1993 and
for the year ended December 31, 1993 included in this Proxy Statement/Prospectus
and Registration Statement have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements of Professional Athletic Rehabilitation, Inc. as of
December 31, 1993 and for the year ended December 31, 1993 included in this
Proxy Statement/Prospectus and Registration Statement have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The consolidated financial statements and schedule of Pacific Rehab at
December 31, 1993, and for the two years then ended and of Dr. Judman and Dr.
Gober St. Paul and Biddle Medical Associates, P.A. for the respective periods as
indicated in their reports, set forth herein or in the Registration Statement
have been audited by Grant Thornton LLP, independent accountants, as set forth
in their reports thereon set forth herein, and are included herein in reliance
upon such reports given upon the authority of such firm as experts in accounting
and auditing.
STOCKHOLDER PROPOSALS
If the Merger is not consummated, any proposals of stockholders of Pacific
Rehab intended to be presented at the Annual Meeting of Stockholders of Pacific
Rehab to be held in 1996 must have been received by Pacific Rehab, addressed to
the Secretary of Pacific Rehab at 8100 NE Parkway Drive, Suite 190, Vancouver,
Washington 98662 by no later than January 5, 1996, to be considered for
inclusion in the proxy statement and form of proxy relating to that meeting.
74
<PAGE>
INDEX TO PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
HISTORICAL FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES ("THE COMPANY") CONSOLIDATED FINANCIAL
INFORMATION:
Interim Financial Statements:
Consolidated Balance Sheets as of September 30, 1995 and December 31, 1994........................... F-4
Consolidated Statements of Earnings for the Nine Months Ended September 30, 1995 and 1994............ F-5
Consolidated Statements of Shareholders' Equity for the Nine Months Ended September 30, 1995 and the
Year Ended December 31, 1994........................................................................ F-6
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1995 and 1994.......... F-7
Notes to Consolidated Financial Statements........................................................... F-8
Annual Financial Statements:
Report of Independent Accountants -- Price Waterhouse LLP............................................ F-20
Report of Independent Accountants -- Grant Thornton LLP.............................................. F-21
Consolidated Balance Sheets as of December 31, 1994 and 1993......................................... F-22
Consolidated Statements of Earnings for the Years Ended December 31, 1994, 1993 and 1992............. F-23
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1994, 1993 and
1992................................................................................................ F-24
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992........... F-25
Notes to Consolidated Financial Statements........................................................... F-26
PACIFIC REHAB ACQUISITIONS:
Dr. Judman and Dr. Gober St. Paul and Biddle Medical Associates, P.A.:
Report of Independent Certified Public Accountants -- Grant Thornton LLP............................. F-39
Balance Sheets as of December 31, 1993 and 1992...................................................... F-40
Statements of Earnings for the Years Ended December 31, 1993, 1992 and 1991.......................... F-41
Statements of Retained Earnings for the Years Ended December 31, 1993, 1992 and 1991................. F-42
Statements of Cash Flows for the Years Ended December 31, 1993, 1992 and 1991........................ F-43
Notes to Financial Statements........................................................................ F-44
Arthritis, Trauma & Sports Physical Therapy, Inc.:
Report of Independent Accountants -- Price Waterhouse LLP............................................ F-46
Balance Sheet as of December 31, 1994................................................................ F-47
Statement of Operations and Retained Earnings for the Year Ended December 31, 1994................... F-48
Statement of Cash Flows for the Year Ended December 31, 1994......................................... F-49
Notes to Financial Statements........................................................................ F-50
Care Concepts, Inc. dba Pacific Physical Therapy:
Report of Independent Accountants -- Price Waterhouse LLP............................................ F-52
Consolidated Balance Sheet as of March 31, 1994 and December 31, 1993................................ F-53
Consolidated Statement of Operations and Retained Earnings for the Three Months Ended March 31, 1994
and the Year Ended December 31, 1993................................................................ F-54
Consolidated Statement of Cash Flows for the Three Months Ended March 31, 1994 and the Year Ended
December 31, 1993................................................................................... F-55
Notes to the March 31, 1994 and December 31, 1993 Consolidated Financial Statements.................. F-56
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
Center For Industrial Medicine, Inc.:
<S> <C>
Report of Independent Accountants -- Price Waterhouse LLP............................................ F-61
Balance Sheet as of December 31, 1994................................................................ F-62
Statement of Operations and Accumulated Deficit for the Year Ended December 31, 1994................. F-63
Statement of Cash Flows for the Year Ended December 31, 1994......................................... F-64
Notes to Financial Statements........................................................................ F-65
Michael C. Gibbons, P.T. dba Tigard Physical Therapy:
Report of Independent Accountants -- Price Waterhouse LLP............................................ F-68
Balance Sheet as of March 31, 1995 and December 31, 1994............................................. F-69
Statement of Operations and Owner's Equity for the Three Months Ended March 31, 1995 and the Year
Ended December 31, 1994............................................................................. F-70
Statement of Cash Flows for the Three Months Ended March 31, 1995 and the Year Ended December 31,
1994................................................................................................ F-71
Notes to Financial Statements........................................................................ F-72
Michael D. Mericle, P.T.:
Report of Independent Accountants -- Price Waterhouse LLP............................................ F-74
Balance Sheet as of March 31, 1994 and December 31, 1993............................................. F-75
Statement of Operations and Retained Earnings for the Three Months Ended March 31, 1994 and the Year
Ended December 31, 1993............................................................................. F-76
Statement of Cash Flows for the Three Months Ended March 31, 1994 and Year Ended December 31, 1993... F-77
Notes to the March 31, 1994 and December 31, 1993 Financial Statements............................... F-78
NW Center For Sports Medicine and Physical Therapy, Inc.:
Report of Independent Accountants -- Price Waterhouse LLP............................................ F-80
Balance Sheet as of December 31, 1994................................................................ F-81
Statement of Operations and Retained Earnings for the Year Ended December 31, 1994................... F-82
Statement of Cash Flows for the Year Ended December 31, 1994......................................... F-83
Notes to Financial Statements........................................................................ F-84
Northwest Evaluation For The Injured, Inc.:
Report of Independent Accountants -- Price Waterhouse LLP............................................ F-87
Balance Sheet as of March 31, 1995 and December 31, 1994............................................. F-88
Statement of Operations and Retained Earnings for the Three Months Ended March 31, 1995 and the Year
Ended December 31, 1994............................................................................. F-89
Statement of Cash Flows for the Three Months Ended March 31, 1995 and the Year Ended December 31,
1994................................................................................................ F-90
Notes to Financial Statements........................................................................ F-91
Advanced Rehabilitation Technologies, Inc.:
Report of Independent Accountants -- Price Waterhouse LLP............................................ F-95
Balance Sheet as of March 31, 1994 and December 31, 1993............................................. F-96
Statement of Operations and Retained Earnings for the Three Months Ended March 31, 1994 and the Year
Ended December 31, 1993............................................................................. F-97
Statement of Cash Flows for the Three Months Ended March 31, 1994 and the Year Ended December 31,
1993................................................................................................ F-98
Notes to the Financial Statements.................................................................... F-99
Professional Athletic Rehabilitation, Inc.:
Report of Independent Accountants -- Price Waterhouse LLP............................................ F-101
Balance Sheet as of March 31, 1994 and December 31, 1993............................................. F-102
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
Statement of Operations and Retained Earnings for the Three Months Ended March 31, 1994 and the Year
Ended December 31, 1993............................................................................. F-103
<S> <C>
Statement of Cash Flows for the Three Months Ended March 31, 1994 and the Year Ended December 31,
1993................................................................................................ F-104
Notes to the March 31, 1994 and December 31, 1993 Financial Statements............................... F-105
Oregon Acquisitions:
Report of Independent Accountants -- Price Waterhouse LLP............................................ F-107
Balance Sheets as of June 30, 1995 and December 31, 1994 (April 30, 1995 and October 31, 1994,
respectively, with respect to Oregon City).......................................................... F-108
Statements of Operations and Retained Earnings/Partners' Capital for the Six Months Ended June 30,
1995 and the Year Ended December 31, 1994 (for the Six Months Ended April 30, 1995 and the Year
Ended October 31, 1994, respectively, with respect to Oregon City).................................. F-110
Statements of Cash Flows for the Six Months Ended June 30, 1995 and the Year Ended December 31, 1994
(for the Six Months Ended April 30, 1995 and the Year Ended October 31, 1994, respectively, with
respect to Oregon City)............................................................................. F-112
Notes to Financial Statements........................................................................ F-114
Samuel H. Esterson, P.T.:
Report of Independent Accountants -- Price Waterhouse LLP............................................ F-124
Balance Sheet as of March 31, 1995 and December 31, 1994............................................. F-125
Statement of Operations and Retained Earnings for the Three Months Ended March 31, 1995 and the Year
Ended December 31, 1994............................................................................. F-126
Statements of Cash Flows for the Three Months Ended March 31, 1995 and the Year Ended December 31,
1994................................................................................................ F-127
Notes to the March 31, 1995 and December 31, 1994 Financial Statements............................... F-128
</TABLE>
F-3
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
1994
SEPTEMBER 30, ------------
1995
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................................................... $ 594 $ 1,085
Patient accounts receivable, net (Note 3)......................................... 13,262 8,916
Other receivables................................................................. 1,008 1,042
Refundable income taxes........................................................... 31 391
Prepaid expenses.................................................................. 759 367
Deferred income taxes, current portion............................................ 1,874 --
------------- ------------
Total current assets............................................................ 17,528 11,801
------------- ------------
Property and equipment, net (Note 4)................................................ 2,919 1,757
------------- ------------
Other Assets:
Intangible assets, at cost, less accumulated amortization (Note 5)................ 50,194 22,448
Other............................................................................. 528 185
------------- ------------
Total other assets.............................................................. 50,722 22,633
------------- ------------
$ 71,169 $ 36,191
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations (Note 6).............................. $ 4,613 $ 1,544
Notes payable and other obligations............................................... 1,215 --
Line of credit (Note 7)........................................................... 10,683 --
Accounts payable.................................................................. 970 207
Accrued liabilities (Note 8)...................................................... 3,693 1,217
Accrued income taxes.............................................................. 400 --
Deferred income taxes, current portion (Note 9)................................... -- 586
------------- ------------
Total current liabilities....................................................... 21,574 3,554
------------- ------------
Deferred income taxes, less current portion (Note 9)................................ 4,848 2,167
------------- ------------
Long-term obligations, less current maturities (Note 6)............................. 6,065 2,029
------------- ------------
Shareholders' Equity:
Preferred stock -- $.01 par value, 5,000,000 shares authorized; none issued and
outstanding......................................................................
Common stock -- $.01 par value, 20,000,000 shares authorized; 8,002,425 (including
492,874 shares to be released in January 1996) and 6,999,786 shares issued and
outstanding (Note 2)............................................................. 80 70
Additional paid-in capital........................................................ 33,086 24,237
Retained earnings................................................................. 5,516 4,134
------------- ------------
38,682 28,441
------------- ------------
$ 71,169 $ 36,191
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-4
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Net revenues............................................................................... $ 24,903 $ 14,159
Cost of revenues........................................................................... 13,991 7,188
--------- ---------
Gross profit........................................................................... 10,912 6,971
--------- ---------
Operating expenses:
Selling, general and administrative expenses............................................. 6,488 3,732
Depreciation and amortization............................................................ 1,327 669
--------- ---------
7,815 4,401
--------- ---------
Operating income....................................................................... 3,097 2,570
--------- ---------
Nonoperating income (expense):
Interest expense......................................................................... (728) (131)
Interest income.......................................................................... 10 44
--------- ---------
(718) (87)
--------- ---------
Earnings before income taxes............................................................. 2,379 2,483
--------- ---------
Income taxes (Note 9)...................................................................... 997 968
--------- ---------
Net earnings........................................................................... $ 1,382 $ 1,515
--------- ---------
--------- ---------
Net earnings per common share:
Primary.................................................................................. $ 0.18 $ 0.26
--------- ---------
--------- ---------
Fully diluted............................................................................ $ 0.18 $ 0.26
--------- ---------
--------- ---------
Weighted average number of common and common equivalent shares outstanding:
Primary.................................................................................. 7,855 5,815
Fully diluted............................................................................ 8,190 5,815
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND THE
YEAR ENDED DECEMBER 31, 1994 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993................................ 3,894 $ 39 $ 8,754 $ 2,008 $ 10,801
Common stock issued for cash................................ 26 -- 126 -- 126
Common stock issued in connection with the initial public
offering, net of costs of issuance......................... 2,560 26 12,489 -- 12,515
Common stock issued in connection with clinic
acquisitions............................................... 437 4 2,618 -- 2,622
Additional common stock issued in connection with 1993
acquisition of two clinics in Texas........................ 83 1 250 -- 251
Net earnings for the year................................... -- -- -- 2,126 2,126
--------- --- ----------- ----------- ---------
Balance at December 31, 1994................................ 7,000 70 24,237 4,134 28,441
Common stock issued in connection with clinic acquisitions
(including 493 shares to be released in January 1996) (Note
2)......................................................... 779 8 6,903 -- 6,911
Warrant issued in connection with clinic acquisitions....... -- -- 160 -- 160
Additional common stock issued in connection with 1994
acquisition of six clinics in Maryland attributed to their
earn-out................................................... 122 1 974 -- 975
Common stock issued in connection with a promissory note
conversion related to a 1994 acquisition in Hawaii......... 101 1 812 -- 813
Net earnings for the period................................. -- -- -- 1,382 1,382
--------- --- ----------- ----------- ---------
Balance at September 30, 1995............................... 8,002 $ 80 $ 33,086 $ 5,516 $ 38,682
--------- --- ----------- ----------- ---------
--------- --- ----------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
1995 1994
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings........................................................................... $ 1,382 $ 1,515
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization........................................................ 1,327 669
Loss on disposal of assets........................................................... 1 --
Deferred income taxes................................................................ 283 283
Change in assets and liabilities, net of effects from acquisitions:
Patient accounts receivable, net................................................... (2,157) (1,685)
Other receivables.................................................................. 409 (796)
Prepaid expenses and other assets.................................................. (371) (181)
Accounts payable................................................................... 650 (68)
Accrued liabilities and income taxes............................................... 1,768 910
---------- ----------
Net cash provided by operating activities........................................ 3,292 647
---------- ----------
Cash flows from investing activities:
Additions to property and equipment, net of amounts purchased in acquisitions.......... (260) (380)
Acquisitions, including other direct costs, net of cash acquired....................... (13,466) (12,430)
---------- ----------
Net cash used in investing activities............................................ (13,726) (12,810)
---------- ----------
Cash flows from financing activities:
Proceeds from line of credit borrowings................................................ 10,833 --
Payments on line of credit borrowings.................................................. (150) --
Payments on notes payable and long-term obligations.................................... (740) (349)
Costs incurred in connection with stock issuance....................................... -- (836)
Proceeds from issuance of common stock................................................. -- 14,332
---------- ----------
Net cash provided by financing activities.......................................... 9,943 13,147
---------- ----------
Net increase (decrease) in cash and cash equivalents..................................... (491) 984
Cash and cash equivalents at beginning of year........................................... 1,085 709
---------- ----------
Cash and cash equivalents at end of the period........................................... $ 594 $ 1,693
---------- ----------
---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest............................................................................. $ 303 $ 93
---------- ----------
---------- ----------
Income taxes......................................................................... $ 578 $ 726
---------- ----------
---------- ----------
Supplemental schedule of noncash and financing activities:
Acquisition of clinics:
Cost of acquisitions in excess of fair market value of net assets
received............................................................................ $ 27,466 $ 2,063
Liabilities assumed or issued........................................................ 10,117 2,890
Common stock issued in connection with acquisitions.................................. 6,911 2,134
Warrant value issued in connection with acquisitions................................. 160 --
Tangible assets acquired in connection with acquisitions............................. 4,512 3,337
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements for the nine
months ended September 30, 1995 and 1994, have been prepared in accordance with
the rules and regulations of the Securities and Exchange Commission. They do not
include all of the information and footnotes required by generally accepted
accounting principles and should be read in conjunction with the Company's
audited financial statements and notes thereto for the year ended December 31,
1994, included in its Form 10-K as filed with the Securities and Exchange
Commission. In the opinion of Company management, the unaudited consolidated
financial statements for the interim periods presented include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the results for such interim periods.
Operating results for the nine months ended September 30, 1995 are not
necessarily indicative of the results that may be expected for the entire fiscal
year ending December 31, 1995 or any portion thereof.
NOTE 2 -- ACQUISITIONS
During January 1995, the Company acquired substantially all of the assets of
a practice that included three clinics located in the Tacoma, Washington area.
The purchase price of $1,250 includes $950 paid in cash at closing and up to
$300 to be paid in three annual installments if certain pre-tax profit levels
are achieved within 36 months of the closing date of the acquisition. The seller
was also granted a Common Stock Purchase Warrant to purchase 75 shares of common
stock of the Company at an exercise price of $6.00 per share.
During February 1995, the Company acquired all of the outstanding common
stock of a physical therapy/prosthetic-orthotic practice located in Miami,
Florida. The purchase price of this acquisition of $1,156 includes $650 paid in
cash and 75 shares of the Company's common stock valued at $506.
During February 1995, the Company acquired all of the outstanding common
stock of a physical therapy practice located in Temecula, California. The
purchase price of $350 includes $175 paid in cash at closing and $175 in the
form of a promissory note. The promissory note, including interest, is due by
maturity on February 28, 1997 and includes a provision, effective February 28,
1996, allowing conversion at the option of the note holder of all unpaid
principal and accrued interest into shares of the Company's common stock at a
price equal to $7.00 per share. The principal of the note is convertible into 25
shares of the Company's common stock
During March 1995, the Company acquired all of the outstanding common stock
of a medical and physical therapy practice located in San Diego, California. The
purchase price of this acquisition of $2,100 includes $975 paid in cash at
closing and $1,125 in the form of two promissory notes, both of which are due on
or before March 1, 1997. At the option of the holder of each promissory note,
one-half of the principal amount due is payable after March 1, 1996. The unpaid
principal amount of each note with accrued interest is convertible into shares
of the Company's common stock at a price equal to $7.00 per share; the holder of
one of the promissory notes may convert not less than half of the unpaid
principal and accrued interest anytime after February 28, 1996, and the holder
of the other note may convert all but not less than all of the unpaid principal
and accrued interest after that date. The principal of the notes are convertible
into 161 shares of the Company's common stock.
During March 1995, the Company acquired substantially all of the assets of a
physical therapy practice that included two clinics located in the north Los
Angeles, California area. The purchase price of $950 includes $500 paid in cash
at closing and $450 in the form of a promissory note. The promissory note,
including interest, is due by maturity on February 28, 1996 and includes a
provision,
F-8
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 -- ACQUISITIONS (CONTINUED)
effective February 28, 1996, allowing conversion at the option of the note
holder of all unpaid principal and accrued interest into shares of the Company's
common stock at a price equal to $7.25 per share. The principal of the note is
convertible into 63 shares of the Company's common stock.
During March 1995, the Company acquired all of the outstanding common stock
of a physical therapy practice with one clinic located in Baltimore, Maryland.
The purchase price of $2,500 includes $1,250 paid in cash and $1,250 paid in the
form of a promissory note. Interest is payable quarterly in arrears. One-half of
the promissory note is due in March 1996, with the remaining portion due at
maturity in February 1997.
During April 1995, the Company acquired all of the assets of a physical
therapy practice that included two clinics in the Las Vegas, Nevada area. The
purchase price of $2,500 includes $1,500 paid in cash and $1,000 in the form of
a promissory note. The promissory note, including interest, is due at maturity
in March 1996.
During June 1995, the Company acquired all of the assets of a physical
therapy practice located in Silverdale, Washington. The purchase price of $575
includes $300 paid in cash and 30 shares of the Company's common stock valued at
$275.
During June 1995, the Company acquired all of the assets of a physical
therapy practice located in Tumwater, Washington. The purchase price of $325
includes $185 in cash and $140 in the form of a promissory note. The promissory
note, including interest, is due in monthly installments until paid on or before
May 31, 1998.
During June 1995, the Company acquired all of the outstanding common stock
of a physical therapy practice located in Chehalis, Washington. The purchase
price of $445 includes $130 in cash and 34 shares of the Company's common stock
valued at $315.
During June 1995, the Company acquired all of the outstanding common stock
of a physical therapy practice located in Kirkland, Washington. The purchase
price of $750 includes $375 paid in cash and 42 shares of the Company's common
stock valued at $375.
During June 1995, the Company acquired all of the outstanding common stock
of a physical therapy practice that included three clinics located in the
Seattle, Washington area. The purchase price of $1,400 includes $700 paid in
cash and 76 shares of the Company's common stock valued at $700. In addition, up
to $750 will be paid in five annual installments if certain pre-tax profit
levels are achieved within 60 months of the closing date of the acquisition.
During June 1995, the Company acquired all of the assets of a
prosthetic/orthotic practice located in Miami, Florida. The purchase price of
$325 includes $50 paid in cash at closing with an additional $100 to be paid in
cash in January 1996 and $175 in the form of a promissory note. The promissory
note, including interest, is due at maturity on January 31, 1997.
During July 1995, the Company acquired all of the assets of a physical
therapy practice located in Tigard, Oregon. The purchase price of $2,500
includes $500 paid in cash and on January 2, 1996, the Company will issue up to
250 shares of the Company's common stock valued at $2,000, depending on the
average closing price of the Company's common stock between July 3, 1995 and
December 31, 1995.
During July 1995, the Company acquired all of the assets of a physical
therapy practice located in Portland, Oregon. The purchase price of $600
includes $120 paid in cash, $300 in the form of a
F-9
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 -- ACQUISITIONS (CONTINUED)
convertible promissory note, and on January 2, 1996 the Company will issue
approximately 21 shares of the Company's common stock valued at $180. The
promissory note is due by maturity on June 30, 1997 and includes a provision,
effective June 30, 1996, allowing conversion at the option of the note holder of
all unpaid principal into shares of the Company's common stock at a price equal
to $8.75 per share. The principal of the note is convertible into 34 shares of
the Company's common stock.
During July 1995, the Company acquired all of the outstanding common stock
of a physical therapy practice located in Tualatin, Oregon. The purchase price
of $720 includes $150 paid in cash and $570 in the form of promissory notes. In
addition, up to $100 will be paid in two annual installments if certain pre-tax
profits are achieved within 24 months beginning January 1, 1996.
During July 1995, the Company acquired all of the outstanding common stock
of a physical therapy practice that included two clinics located in Tigard and
Portland, Oregon. The purchase price of $850 includes $125 paid in cash at
closing with an additional $175 to be paid in cash on March 1, 1996, $250 in the
form of convertible promissory notes and on January 2, 1996, the Company will
issue approximately 34 shares of the Company's common stock valued at $300. The
promissory notes are due by maturity on June 30, 1997 and include a provision,
effective June 30, 1996, allowing conversion at the option of the note holders
of all unpaid principal into shares of the Company's common stock at a price
equal to $8.75 per share. The principal of the note is convertible into 29
shares of the Company's common stock. In addition, up to $450 will be paid in
four annual installments if certain pre-tax profits are achieved within 48
months of the closing date of the acquisition.
During July 1995, the Company acquired all of the outstanding common stock
of a physical therapy practice that included two clinics located in the Oregon
City, Oregon area. The purchase price of $1,300 includes $400 paid in cash at
closing with an additional $400 to be paid in cash on March 1, 1996, $300 in the
form of a convertible promissory note and on January 2, 1996, the Company will
issue approximately 23 shares of the Company's common stock valued at $200. The
promissory note is due by maturity on June 30, 1997 and includes a provision,
effective June 30, 1996, allowing conversion at the option of the note holder of
all unpaid principal into shares of the Company's common stock at a price equal
to $8.75 per share. The principal of the note is convertible into 34 shares of
the Company's common stock.
During July 1995, the Company acquired all of the outstanding common stock
of a physical therapy practice that included two clinics located in Gresham and
Portland, Oregon. The purchase price of $1,508 includes $380 paid in cash at
closing with an additional $250 to be paid in cash on March 1, 1996, and on
January 2, 1996 the Company will issue approximately 100 shares of the Company's
common stock valued at $878. In addition, up to $300 will be paid in two annual
installments if certain pre-tax profits are achieved within 48 months beginning
July 1, 1996.
During July 1995, the Company acquired all of the assets of a physical
therapy practice located in Portland, Oregon. The purchase price of $250
includes $100 paid in cash and $150 in the form of a promissory note. In
addition, up to $300 will be paid in three annual installments if certain
pre-tax profits are achieved within 36 months beginning January 1, 1996.
During July 1995, the Company acquired all of the outstanding common stock
of a physical therapy practice located in Newberg, Oregon. The purchase price of
$660 includes $66 paid in cash, $132 in the form of a promissory note and on
January 2, 1996, the Company will issue approximately 53 shares of the Company's
common stock valued at $462.
F-10
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 -- ACQUISITIONS (CONTINUED)
During July 1995, the Company acquired all of the outstanding common stock
of a physical therapy practice located in Lake Oswego, Oregon. The purchase
price of $900 includes $360 paid in cash at closing with an additional $90 to be
paid in cash on January 2, 1996, and on January 2, 1996 the Company will issue
approximately 51 shares of the Company's common stock valued at $450.
During July 1995, the Company acquired all of the outstanding common stock
of a physical therapy practice located in Longview, Washington. The purchase
price of $2,700 includes $1,080 paid in cash, $945 in the form of a promissory
note, $405 in the form of a convertible promissory note and up to approximately
34 shares of the Company's common stock valued at $270 depending on the average
closing price of the Company's common stock between the date of closing and
December 31, 1995. The $405 promissory note is due by maturity on January 15,
1997 and includes a provision, effective June 30, 1996, allowing conversion at
the option of the note holder of all unpaid principal into shares of the
Company's common stock at a price equal to $9.00 per share. The principal of the
note is convertible into approximately 45 shares of the Company's common stock.
In addition, up to $365 will be paid in three annual installments if certain
pre-tax profits are achieved within 36 months of the closing date of the
acquisition.
During August 1995, the Company acquired all of the assets of a physical
therapy practice located in Hillsboro, Oregon. The purchase price of $1,500
includes $350 paid in cash and $1,150 in the form of convertible promissory
notes. The promissory notes are due by maturity on June 30, 1997 and include a
provision, effective June 30, 1996, allowing conversion at the option of the
note holders of all unpaid principal into shares of the Company's common stock
at a price equal to $8.75 per share. The principal of the notes is convertible
into 131 shares of the Company's common stock.
The above acquisitions have been accounted for using the purchase method and
the cost of acquisition in excess of the fair value of net assets acquired is
being amortized using the straight-line method over forty years (see Note 5).
The results of operations of these companies have been included in the financial
statements of the Company since the dates of acquisition.
The purchase prices reported above represent the initial amounts of cash,
notes payable, warrants and common stock of the Company issued at the time of
the acquisitions. Seven of the agreements contain provisions for additional
annual payments if certain pre-tax profits are achieved. Amounts earned under
the terms of the agreements may aggregate up to $2,565 and will be recorded as
increases in the excess of the total acquisition cost over the fair value of the
net assets acquired.
The value of Pacific Rehab's common stock and the conversion price for
convertible promissory notes issued in connection with acquisitions was set
equal to the last sale price of Pacific Rehab's common stock on The Nasdaq Stock
Market on the date the parties reached final agreement. The accounting for
contingent consideration is based on the specific facts and circumstances of
each acquisition. If contingent consideration is based upon the ownership of
stock, then it is recorded as an adjustment to the acquisition purchase price in
accordance with APB 16. However, if the prior owner continues as an employee and
is responsible for the future earnings of the acquired business, then the
contingent consideration is recorded as compensation expense in the period
earned.
F-11
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 -- ACQUISITIONS (CONTINUED)
The direct costs of the above 1995 transactions are summarized by the table
below:
<TABLE>
<CAPTION>
PURCHASE PRICE
NUMBER ---------------------------------- VALUE
EFFECTIVE OF CASH WARRANT SHARES OF STOCK ASSIGNED TO
REGION DATE CLINICS AND NOTES VALUE COMMON STOCK AMOUNTS PURCHASE PRICE
- --------------------------------------------- --------- ------ --------- ------- ------------ ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Washington................................... 2-1-95 3 $ 950 $160 -- $ -- $ 1,110
Florida...................................... 2-1-95 1 650 -- 75 506 1,156
California................................... 3-1-95 3 3,400 -- -- -- 3,400
Maryland..................................... 3-1-95 1 2,500 -- -- -- 2,500
Nevada....................................... 4-1-95 2 2,500 -- -- -- 2,500
Washington................................... 6-1-95 7 1,830 -- 182 1,665 3,495
Florida...................................... 6-1-95 1 325 -- -- -- 325
Oregon....................................... 7-1-95 12 4,693 -- 493 4,470 9,163
Washington................................... 7-1-95 1 2,384 -- 30 270 2,654
Oregon....................................... 8-1-95 1 1,500 -- -- -- 1,500
------ --------- ------- --- ------- --------------
32 $ 20,732 $160 780 $6,911 $27,803
------ --------- ------- --- ------- --------------
------ --------- ------- --- ------- --------------
</TABLE>
Pursuant to acquisition agreements, 493 shares to be issued in connection
with certain acquisitions will not be released until 1996. However, the Company
considers such shares to be outstanding at the date of acquisition.
As of September 30, 1995, the Company's operations consist of 74 outpatient
rehabilitation clinics located in Washington, Oregon, Hawaii, California,
Nevada, Arizona, Texas, Mississippi, Florida and Maryland.
The following unaudited pro forma information represents the results of
operations of the Company as if all of the acquisitions had occurred at the
beginning of each period presented, after giving effect to amortization of the
cost of acquisition in excess of the fair value of net assets acquired,
adjustments to reflect the difference in compensation between historical amounts
and amounts specified in agreements, depreciation of acquired property and
equipment, increased interest expense for notes issued related to the
acquisitions and increased income taxes:
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Net revenues.......................................................... $ 32,506 $ 32,682
--------- ---------
--------- ---------
Net earnings.......................................................... $ 2,128 $ 3,622
--------- ---------
--------- ---------
Earnings per share.................................................... $ 0.24 $ 0.51
--------- ---------
--------- ---------
</TABLE>
The unaudited pro forma information does not purport to be indicative of the
results which would actually have been obtained had the acquisitions occurred as
of the date of the periods indicated or which may be obtained in the future.
F-12
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3 -- PATIENT ACCOUNTS RECEIVABLE
Patient accounts receivable consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Gross accounts receivable......................... $ 20,056 $ 15,479
Less allowance for doubtful accounts and
contractual adjustments........................ 6,794 6,563
-------------- --------------
Total patient accounts receivable, net.......... $ 13,262 $ 8,916
-------------- --------------
-------------- --------------
</TABLE>
The allowance for contractual adjustments represents an estimate of the
difference between the amount billed by the Company and the amount which the
patient, third-party payor or other party is contractually obligated to pay the
Company. The allowance for revenue adjustments was $1,736 at September 30, 1995
and $1,701 at December 31, 1994. During the nine months ended September 30, 1995
and 1994, revenue adjustments amounted to approximately $6,029 and $2,618,
respectively, and have been netted against revenues in the accompanying
consolidated statements of earnings. During the nine months ended September 30,
1995 and 1994, bad debt expense amounted to approximately $1,528 and $834,
respectively, and is included in selling, general and administrative expenses in
the accompanying consolidated statements of earnings.
During the nine months ended September 30, 1995, in conjunction with
acquisitions, the Company purchased patient accounts receivable, net totaling
$2,182.
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Autos............................................. $ 30 $ 34
Office equipment.................................. 1,182 811
Physical therapy equipment........................ 2,307 1,395
Leasehold improvements............................ 955 519
------- -------
4,474 2,759
Less accumulated depreciation and amortization.... 1,555 1,002
------- -------
$ 2,919 $ 1,757
------- -------
------- -------
</TABLE>
During the nine months ended September 30, 1995, in conjunction with
acquisitions, the Company purchased fixed assets with an estimated fair market
value of $1,435.
NOTE 5 -- INTANGIBLE ASSETS
The Company acquired 24 therapy practices that included 32 physical therapy
clinics during the nine months ended September 30, 1995 with a combination of
cash, notes payable, warrant and common stock. The aggregate purchase price,
including both direct and indirect costs, of $29,065 exceeded the fair value of
net assets acquired by $27,466.
F-13
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5 -- INTANGIBLE ASSETS (CONTINUED)
Intangible assets consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Cost of acquisitions in excess of the fair value
of net assets acquired........................... $ 51,306 $ 22,857
Lease costs....................................... 205 205
Covenant not-to-compete........................... 307 240
Organizational costs.............................. 75 75
-------------- --------------
51,893 23,377
Less accumulated amortization..................... 1,699 929
-------------- --------------
$ 50,194 $ 22,448
-------------- --------------
-------------- --------------
</TABLE>
The Company's acquisition strategy has been premised on the establishment of
regional networks of clinics in defined geographical markets. Such networks are
focused on establishing relationships with referral sources and third-party
payors. In a market that is primarily built around such relationships, items
with an indeterminate useful life, such as geographic location and presence
represent value to Pacific Rehab. The Company uses a forty-year estimate of the
useful life of the cost of acquisitions in excess of the fair value of net
assets acquired. This life is based on an analysis of the factors influencing
the acquisition decision and on industry practice. These factors include clinic
location, referral sources, profitability and general industry outlook. The
Company reviews for asset impairment at the end of each quarter or more
frequently when events or changes in circumstances indicate that the carrying
amount of the cost of acquisition in excess of the fair value of net assets
acquired may not be recoverable. To perform that review, the Company estimates
the sum of expected future undiscounted net cash flows from operating activity
of each acquired business. If these estimated net cash flows are less than the
carrying amount of the cost of acquisition in excess of the fair value of net
assets acquired, the Company recognizes an impairment loss in an amount
necessary to write down the cost of acquisition in excess of the fair value of
net assets acquired to a fair value as determined from expected future cash
flows. To date, no write-down for impairment loss has been recorded.
The assets acquired and liabilities assumed in connection with acquisitions
are recorded at their respective fair values as of the related dates of
acquisition. Deferred taxes have been recorded to give effect to the differences
between the fair values and tax bases of the assets acquired and liabilities
assumed.
Amortization expense for the nine months ended September 30, 1995 and 1994
was $770 and $286, respectively.
NOTE 6 -- LONG-TERM OBLIGATIONS
Long-term debt consists of the following (the repayment terms for certain of
these obligations were restructured during December 1995, see Note 10 --
Subsequent Events):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
-------------- --------------
(UNAUDITED)
<S> <C> <C>
9.5% unsecured note payable to an individual, due
in monthly installments of $7, including
interest......................................... $ 195 $ 240
</TABLE>
F-14
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6 -- LONG-TERM OBLIGATIONS (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
-------------- --------------
(UNAUDITED)
<S> <C> <C>
8.5% unsecured note payable to an individual, due
in monthly installments of $8, including
interest. A balloon payment of unpaid principal
of $771 is due August 15, 1996................... 792 810
5% unsecured long-term obligation to a
corporation, due in two annual installments of
$450, plus interest, which commenced May 1,
1995............................................. 450 900
4.75% unsecured convertible note payable to a
corporation, due on June 1, 1995, plus interest
(converted June 15, 1995)........................ -- 800
5% unsecured convertible note payable to an
individual, plus interest, due May 1, 1996....... 200 200
5% unsecured note payable to an individual, plus
interest, paid May 1, 1995....................... -- 100
4.75% unsecured convertible note payable to an
individual, due May 1, 1996, plus interest....... 140 140
Obligation in connection with non-compete
agreement, due in three annual installments of
$47, which commenced June 1, 1995................ 93 140
4.75% unsecured convertible note payable to a
corporation, plus interest, due May 1, 1996...... 100 100
4.75% unsecured convertible note payable to a
corporation, due in two annual installments of
$35, plus interest, which commenced May 1,
1995............................................. 35 70
7% unsecured convertible note payable to a
corporation, due in two annual installments of
$40, plus interest, commencing March 1, 1996..... 80 --
7% unsecured convertible note payable to an
individual, due in two annual installments of
$522, plus interest, commencing March 1,
1996............................................. 1,045 --
7% unsecured convertible note payable to an
individual, plus interest, due March 1, 1997..... 175 --
7% unsecured convertible note payable to a
corporation, plus interest, due February 28,
1996............................................. 450 --
8% unsecured note payable to an individual, due in
two annual installments of $625, plus interest,
commencing March 1, 1996......................... 1,250 --
9% unsecured note payable to a corporation, plus
interest, due March 31, 1996..................... 1,000 --
6.25% unsecured note payable to an individual, due
in monthly installments of $4, including
interest......................................... 130 --
8% unsecured note payable to a corporation, plus
interest due January 31, 1997.................... 175 --
10% unsecured note payable to a bank, due in
monthly installments of $3, including interest... 124 --
</TABLE>
F-15
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6 -- LONG-TERM OBLIGATIONS (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
-------------- --------------
(UNAUDITED)
<S> <C> <C>
$125 face amount, noninterest bearing convertible
note, payable to an individual, due June 30, 1997
(less unamortized discount based on imputed
interest rate of 8%)............................. 109 --
$125 face amount, noninterest bearing convertible
note, payable to an individual, due June 30, 1997
(less unamortized discount based on imputed
interest rate of 8%)............................. 109 --
$300 face amount, noninterest bearing convertible
note, payable to an individual, due June 30, 1997
(less unamortized discount based on imputed
interest rate of 8%)............................. 261 --
8% unsecured note payable to a corporation, plus
interest due June 30, 1997....................... 150 --
8% unsecured note payable to an individual, plus
interest, due June 30, 1997...................... 143 --
8% unsecured note payable to an individual, plus
interest, due June 30, 1997...................... 285 --
8% unsecured note payable to an individual, plus
interest, due June 30, 1997...................... 143 --
8% unsecured note payable to an individual, plus
interest, due in two installments commencing June
30, 1996......................................... 132 --
$300 face amount, noninterest bearing convertible
note, payable to an individual, due June 30, 1997
(less unamortized discount based on imputed
interest rate of 8%)............................. 261 --
7% unsecured convertible note payable to an
individual, plus interest, due June 30, 1997..... 575 --
7% unsecured convertible note payable to an
individual, plus interest, due June 30, 1997..... 575 --
$405 face amount, noninterest bearing convertible
note, payable to an individual, due January 15,
1997 (less unamortized discount based on imputed
interest rate of 8%)............................. 365 --
8% unsecured note payable to an individual, plus
interest, due in two installments commencing
December 15, 1996................................ 945 --
Obligation in connection with non-compete
agreement, due in monthly installments of $1..... 64 --
Other............................................. 127 73
-------------- -------
10,678 3,573
</TABLE>
F-16
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6 -- LONG-TERM OBLIGATIONS (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Less current maturities........................... 4,613 1,544
-------------- -------
$ 6,065 $ 2,029
-------------- -------
-------------- -------
</TABLE>
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30,
- -----------------
<S> <C>
1996.................................................................................... $ 4,613
1997.................................................................................... 5,753
1998.................................................................................... 156
1999.................................................................................... 109
2000 and beyond......................................................................... 47
---------
$ 10,678
---------
---------
</TABLE>
NOTE 7 -- LINE OF CREDIT
At December 1994, the Company had with Bank of America Oregon a $5,000
credit facility (the "Line of Credit") and a $1,000 non-revolving credit
facility for equipment purchases secured by the assets of the Company. The Line
of Credit interest rate, at the option of the Company, is a floating rate
generally based on a defined prime rate plus 0.5% (9.5% as of September 30,
1995), or a fixed rate related to an offshore rate plus 2.0% (7.8438% as of
September 30, 1995). The Line of Credit expires on July 1, 1996. The
non-revolving credit facility interest rate, at the option of the Company, is a
floating rate based on a defined prime rate plus 0.75%, or a defined long term
fixed rate. The principal amount outstanding on January 1, 1996, under the
non-revolving facility, is due in 60 successive equal monthly installments
starting February 1, 1996. In April 1995, the maximum amount which can be
borrowed under the Line of Credit was increased to $12,000. To the extent that
the Borrowing Base (defined in the Line of Credit as 70% to 98% of certain net
accounts receivable or 70% to 98% of a calculated revenue amount) is below the
$12,000 maximum, the Line of Credit is limited to the Borrowing Base. The
Borrowing Base was $12,000 at September 30, 1995. The agreement contains
restrictive covenants relating to cash flow ratios, certain types of debt,
capital expenditures and other restrictive covenants which limit the Company's
ability to pay cash dividends and make stock repurchases. The commitment fee on
the unused portion of the Line of Credit is .125% per year. The Company had
borrowings under the Line of Credit of $10,683 at September 30, 1995, $10,000 of
which was locked up at 30 day off shore rates ranging from 7.8348% to 7.875%. No
amounts have been borrowed under the non-revolving credit facility.
As of September 30, 1995, the Company was out of compliance with a condition
contained in the Line of Credit Agreement which specified that the Company's
fixed charges maintain a certain ratio relative to its earnings before interest,
taxes, depreciation and amortization ("EBITDA"). As of November 1, 1995, the
amount outstanding under the Line of Credit exceeded the borrowing base
established in the Line of Credit Agreement. Additionally, the Company
anticipates that as of December 31, 1995, and for the foreseeable future, it
will be out of compliance with the "Funded Debt to EBITDA Ratio", as defined in
the Line of Credit Agreement. Under the terms of the Line of Credit, the
Company's failure to satisfy the conditions described above permits Bank of
America Oregon to
F-17
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 7 -- LINE OF CREDIT (CONTINUED)
declare the Company in default under the Line of Credit and demand immediate
payment of all amounts due thereunder. The Company and Bank of America Oregon
are in discussions regarding an appropriate resolution. See Note 10 --
Subsequent Events for information regarding resolution of these matters and
revisions to the Line of Credit arrangements. (SEE MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL
RESOURCES)
NOTE 8 -- ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Accrued compensation.............................. $ 869 $ 274
Accrued professional fees......................... 465 141
Deferred acquisition payments..................... 1,015 --
Other accrued liabilities......................... 1,344 802
------- -------
$ 3,693 $ 1,217
------- -------
------- -------
</TABLE>
NOTE 9 -- INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1995 1994
------------- ---------------
(UNAUDITED)
<S> <C> <C>
Current.............................................................. $ 619 $ 454
Deferred............................................................. 378 514
----- -----
$ 997 $ 968
----- -----
----- -----
</TABLE>
Deferred income taxes were recorded at the time certain clinic acquisitions
were consummated during 1993 because an election was available to the Company to
step up the asset basis for tax purposes. In May 1994, prior to issuance of the
March 31, 1994 financial statements, management determined not to make such an
election. As a result, deferred taxes were reduced by $2,521 as of March 31,
1994, with an equal corresponding decrease to cost of acquisitions in excess of
fair value of net assets acquired. The adjustment had no effect on shareholders'
equity, net earnings, working capital or cash flows.
NOTE 10 -- SUBSEQUENT EVENTS
On November 9, 1995, the Company agreed to be acquired by Horizon/CMS
Healthcare Corporation ("Horizon/CMS") pursuant to a merger agreement
unanimously approved by the Board of Directors of both the Company and
Horizon/CMS. Under the terms of the agreement, the Company's shareholders will
receive .3483 shares of Horizon/CMS common stock for each share of the Company's
common stock. The transaction is intended to be tax free to the Company's
shareholders. The consumation of the merger is subject to a vote of the
Company's shareholders, regulatory review and other conditions, and there can be
no assurance that the acquisition will be consummated. Certain of the Company's
principal insider shareholders entered into an agreement with Horizon/CMS to
vote shares of the Company's common stock owned or controlled by them in favor
of the merger. The
F-18
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10 -- SUBSEQUENT EVENTS (CONTINUED)
Company also entered into a stock option agreement under which Horizon/CMS has
the option to purchase up to 15% of the Company's outstanding common stock at
$7.75 under certain circumstances.
During December 1995, Pacific Rehab restructured the repayment terms with
the holders of approximately $3,200 of its debt and obligations previously
incurred in connection with acquisitions. The holders of certain notes payable
(see Note 6) agreed to changes in terms as follows: the 8.5% unsecured note
payable to an individual, due in monthly installments of $8, including interest,
with a balloon payment of unpaid principal of $771 due in August 1996, has been
amended such that the balloon payment is due in March 1997; the 5.0% unsecured
long-term obligation to a corporation, due in two annual installments of $450,
plus interest, has been amended such that the $450 installment, plus interest,
due May 1, 1996 will be due March 1, 1997 and the interest rate will increase
from 5.0% to 8.0% effective May 1, 1996; the 4.75% unsecured convertible note
payable to an individual, due May 1, 1996, plus interest, has been amended such
that $100, of the $140 due May 1, 1996, will be due March 1, 1997 and the
interest rate will increase from 4.75% to 6.75% effective May 1, 1996; the 8.0%
unsecured note payable to an individual, due in two annual installments of $625,
plus interest, commencing March 1, 1996 has been amended such that the $625 due
March 1, 1996 will be paid in the following installments: $200 on March 1, 1996,
$200 on May 1, 1996, and $225 on March 1, 1997 and the interest rate will
increase from 8.0% to 9.0% effective March 1, 1996; the $1,000 payment due on
March 31, 1996 in connection with the 9.0% unsecured note payable to a
corporation, plus interest, has been extended to March 31, 1997 and the interest
rate will increase from 9.0% to 12.0% effective March 31, 1996. In addition,
cash installment payments in connection with certain 1995 acquisitions totaling
$577, originally due in the first quarter of 1996, have been deferred until 1997
and an earnout payment of $100, originally due in the first quarter of 1996 has
been deferred until 1997. The terms of the above amendments may be affected if a
merger with Horizon/CMS is consummated.
During December 1995 and subsequent to the restructure of the above
acquisition related debt and obligations, Pacific Rehab negotiated revisions in
its Line of Credit arrangements with Bank of America Oregon. The maximum amount
which can be borrowed will be increased to $12,500. The Borrowing Base is
defined as 85% of certain net accounts receivable or 85% of a calculated revenue
amount. The effective interest rate will be increased by one half of one percent
to a defined prime rate plus 1.0% or a defined offshore rate plus 2.5%. The bank
has agreed to (1) waive the September 30, 1995 violation of the condition that
specified that Pacific Rehab's fixed charges maintain a certain ratio relative
to EBITDA (the "Fixed Charge Ratio") and (2) waive the anticipated December 31,
1995 violation of the Fixed Charge Ratio and the Funded Debt to EBITDA ratio.
The bank has also agreed to modify the existing ratio condition requirements
such that Pacific Rehab anticipates it will remain in compliance in the future.
The bank approved the over advance of the Borrowing Base that existed as of
November 1, 1995. As part of the revisions, the separate $1,000 non-revolving
credit facility for equipment purchases was eliminated.
See Pacific Rehab Management's Discussion and Analysis of Financial
Condition and Results of Operations, Liquidity and Capital Resources.
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Pacific Rehabilitation & Sports Medicine, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of earnings, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Pacific
Rehabilitation & Sports Medicine, Inc. and its subsidiaries at December 31,
1994, and the results of their operations and their cash flows for the year 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed
above.
In order to address liquidity issues more fully described in Note 16, the
Company, during December 1995, extended the payment terms of certain acquisition
debts and restructured the terms of its line of credit agreement to increase its
borrowing limits and to satisfy covenant requirements.
PRICE WATERHOUSE LLP
Portland, Oregon
February 11, 1995, except as to Note 15,
which is as of March 21, 1995, and as
to Note 16, which is as of December 21, 1995
F-20
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Pacific Rehabilitation & Sports Medicine, Inc.
and Subsidiaries
We have audited the accompanying consolidated balance sheet of Pacific
Rehabilitation & Sports Medicine, Inc. and Subsidiaries (a Delaware corporation)
as of December 31, 1993 and the related consolidated statements of earnings,
shareholders' equity and cash flows for each of the two years in the period then
ended. 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 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pacific
Rehabilitation & Sports Medicine, Inc. and Subsidiaries as of December 31, 1993
and the results of its operations and its cash flows for each of the two years
in the period then ended, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Portland, Oregon
February 4, 1994
F-21
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents.......................................................... $ 1,085 $ 709
Patient accounts receivable, net (Note 3).......................................... 8,916 4,214
Other receivables.................................................................. 1,042 24
Refundable income taxes (Note 10).................................................. 391 109
Prepaid expenses................................................................... 367 270
------------ ------------
Total current assets............................................................. 11,801 5,326
------------ ------------
Property and equipment, net (Note 4)................................................. 1,757 2,102
------------ ------------
Other Assets:
Intangible assets, at cost, less accumulated amortization (Note 5)................. 22,448 9,321
Costs incurred for public offering (Note 11)....................................... -- 855
Other.............................................................................. 185 61
------------ ------------
Total other assets............................................................... 22,633 10,237
------------ ------------
$ 36,191 $ 17,665
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations (Note 6)............................... $ 1,544 $ 294
Line of credit (Note 7)............................................................ -- 100
Accounts payable................................................................... 207 284
Accrued liabilities (Note 9)....................................................... 1,217 936
Accrued income taxes (Note 10)..................................................... -- 46
Deferred income taxes, current portion (Note 10)................................... 586 1,366
------------ ------------
Total current liabilities........................................................ 3,554 3,026
------------ ------------
Deferred income taxes, less current portion (Note 10)................................ 2,167 2,764
------------ ------------
Long-term obligations, less current maturities (Note 6).............................. 2,029 1,074
------------ ------------
Commitments and contingent liabilities (Notes 2, 8, 11, and 14)...................... -- --
Shareholders' Equity:
Preferred stock -- $.01 par value, 5,000,000 shares authorized; none issued and
outstanding....................................................................... -- --
Common stock -- $.01 par value, 20,000,000 shares authorized; 6,999,786 and
3,894,098 shares issued and outstanding........................................... 70 39
Additional paid-in capital......................................................... 24,237 8,754
Retained earnings.................................................................. 4,134 2,008
------------ ------------
28,441 10,801
------------ ------------
$ 36,191 $ 17,665
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Net revenues...................................................................... $ 20,504 $ 8,162 $ 4,396
Cost of revenues.................................................................. 10,290 4,028 1,426
--------- --------- ---------
Gross profit.................................................................. 10,214 4,134 2,970
--------- --------- ---------
Operating expenses:
Selling, general and administrative expenses.................................... 5,618 1,878 872
Depreciation and amortization................................................... 979 505 375
--------- --------- ---------
6,597 2,383 1,247
--------- --------- ---------
Operating income.............................................................. 3,617 1,751 1,723
--------- --------- ---------
Nonoperating income (expense):
Interest expense................................................................ (170) (47) (229)
Interest income................................................................. 54 45 30
Other........................................................................... -- (53) --
--------- --------- ---------
(116) (55) (199)
--------- --------- ---------
Earnings before income taxes.................................................. 3,501 1,696 1,524
Income taxes (Note 10)............................................................ 1,375 649 563
--------- --------- ---------
Net earnings.................................................................. $ 2,126 $ 1,047 $ 961
--------- --------- ---------
--------- --------- ---------
Net earnings per common share (Note 1)............................................ $ 0.35 $ 0.26 $ 0.26
--------- --------- ---------
--------- --------- ---------
Weighted average number of common and common equivalent shares outstanding........ 6,115 3,996 3,738
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1991................................. -- $ -- $ -- $ -- $ --
Common stock issued in a private placement................... 1,294 13 4,544 -- 4,557
Common stock issued in connection with clinic acquisitions... 665 7 1,101 -- 1,108
Common stock issued for cash................................. 1,560 15 5 -- 20
Net earnings for the year.................................... -- -- -- 961 961
--------- --- ----------- ----------- ---------
Balance at December 31, 1992................................. 3,519 35 5,650 961 6,646
Common stock issued in connection with clinic acquisitions... 373 4 3,090 -- 3,094
Common stock issued in lieu of cash compensation............. 2 -- 14 -- 14
Net earnings for the year.................................... -- -- -- 1,047 1,047
--------- --- ----------- ----------- ---------
Balance at December 31, 1993................................. 3,894 39 8,754 2,008 10,801
Common stock issued for cash................................. 26 -- 126 -- 126
Common stock issued in connection with the initial public
offering, net of costs of issuance.......................... 2,560 26 12,489 -- 12,515
Common stock issued in connection with clinic acquisitions... 437 4 2,618 -- 2,622
Additional common stock issued in connection with 1993
acquisition of two clinics in Texas......................... 83 1 250 -- 251
Net earnings for the year.................................... -- -- -- 2,126 2,126
--------- --- ----------- ----------- ---------
Balance at December 31, 1994................................. 7,000 $ 70 $ 24,237 $ 4,134 $ 28,441
--------- --- ----------- ----------- ---------
--------- --- ----------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------
1994 1993 1992
---------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings................................................................... $ 2,126 $ 1,047 $ 961
Adjustments to reconcile net earnings to net cash (used in) provided by
operating activities:
Depreciation and amortization................................................ 979 505 375
Deferred income taxes........................................................ 1,389 182 410
Common stock issued in lieu of cash compensation............................. -- 14 --
Change in assets and liabilities, net of amounts purchased in acquisitions:
Patient accounts receivable, net........................................... (2,390) 66 (467)
Other receivables.......................................................... (949) 295 (428)
Prepaid expenses and other assets.......................................... (450) (244) 71
Accounts payable........................................................... (122) (295) 22
Accrued liabilities and income taxes....................................... (425) 670 42
Deferred income taxes...................................................... (361) -- --
---------- --------- ---------
Net cash (used in) provided by operating activities...................... (203) 2,240 986
---------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment, net of amounts purchased in
acquisitions................................................................ (495) (234) (43)
Proceeds received in purchase of partnership interests....................... -- -- 221
Proceeds from sale of marketable securities.................................. -- -- 2,287
Acquisition and organizational costs incurred................................ -- (101) (1)
Cash paid for acquisitions, including other direct costs, net of cash
acquired.................................................................... (11,950) (2,180) (600)
---------- --------- ---------
Net cash (used in) provided by investing activities...................... (12,445) (2,515) 1,864
---------- --------- ---------
Cash flows from financing activities:
(Payments) proceeds from short-term borrowings............................... (100) 100 --
Payments on notes payable and long-term obligations.......................... (259) (486) (2,830)
Costs incurred in connection with stock issuance............................. (824) (868) --
Proceeds from issuance of common stock....................................... 14,207 1 2,217
---------- --------- ---------
Net cash provided by (used in) financing activities...................... 13,024 (1,253) (613)
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents........................... 376 (1,528) 2,237
Cash and cash equivalents at beginning of year................................. 709 2,237 --
---------- --------- ---------
Cash and cash equivalents at end of year....................................... $ 1,085 $ 709 $ 2,237
---------- --------- ---------
---------- --------- ---------
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest..................................................................... $ 107 $ 78 $ 135
---------- --------- ---------
---------- --------- ---------
Income taxes................................................................. $ 799 $ 119 $ 564
---------- --------- ---------
---------- --------- ---------
Supplemental schedule of noncash investing and financing activities:
Acquisition of clinics:
Cost of acquisitions in excess of fair market value of net assets
received.................................................................. $ 14,452 $ 7,249 $ 2,278
Liabilities assumed or issued.............................................. 2,927 5,986 4,097
Common stock issued in connection with acquisitions........................ 2,622 3,106 79
Tangible assets acquired in connection with acquisitions................... 3,047 4,023 1,677
Common stock issued in exchange for marketable securities.................. -- -- 2,287
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pacific Rehabilitation & Sports Medicine, Inc. and Subsidiaries ("the
Company") was incorporated in December 1991. The Company provides comprehensive
outpatient rehabilitation services to patients suffering from work, sports and
accident-related injuries. As of December 31, 1994, the Company's operations
consist of 39 outpatient rehabilitation clinics located in Hawaii, California,
Nevada, Arizona, Texas, Mississippi, Florida and Maryland.
A summary of significant accounting policies applied in the preparation of
the accompanying consolidated financial statements follows.
a. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Pacific
Rehabilitation & Sports Medicine, Inc. and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated.
On March 28, 1994, Pacific Rehab, Inc., an Oregon corporation engaged in
outpatient rehabilitation services, merged with the Company. Pursuant to the
merger, the Company issued 1,963 shares of common stock to the former Pacific
Rehab, Inc. shareholders. The merger was accounted for as a pooling of interests
and, accordingly, the consolidated financial statements of the Company have been
restated as if the merger with Pacific Rehab, Inc. had occurred as of the
beginning of the years presented.
b. NET REVENUES
Net revenues include provisions for contractual allowances which represent
an estimate of the difference between the amount billed by the Company and the
amount which the patient, third party payor or other party is contractually
obligated to pay the Company.
c. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and include those additions and
improvements that add to productive capacity or extend useful life. When
property or equipment are sold or otherwise retired, the cost and related
accumulated depreciation are removed from the respective accounts and the
resulting gain or loss is recorded in operations. The costs of repair and
maintenance are charged to expense as incurred. Leasehold improvements are
amortized on the straight-line basis over the shorter of the asset life or lease
term. Depreciation is computed using the straight-line method over useful lives
of five to ten years.
d. CASH EQUIVALENTS
Cash equivalents consist of liquid investments with maturities at the date
of purchase of 90 days or less.
e. INTANGIBLE ASSETS
The Company's acquisition strategy has been premised on the establishment of
regional networks of clinics in defined geographical markets. Such networks are
focused on establishing relationships with referral sources and third-party
payors. In a market that is primarily built around such relationships, items
with an indeterminate useful life, such as geographic location and presence
represent value to Pacific Rehab. The Company uses a forty-year estimate of the
useful life of cost of acquisition in excess of the fair value of net assets
acquired. This life is based on an analysis of the factors influencing the
acquisition decision and on industry practice. These factors include clinic
location, referral sources, profitability and general industry outlook. The
Company reviews for asset
F-26
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
impairment at the end of each quarter or more frequently when events or changes
in circumstances indicate that the carrying amount of cost of acquisition in
excess of the fair value of net assets acquired may not be recoverable. To
perform that review, the Company estimates the sum of expected future
undiscounted net cash flows from the operating activity of each acquired
business. If the estimated net cash flows are less than the carrying amount of
the cost of acquisition in excess of the fair value of net assets acquired, the
Company recognizes an impairment loss in an amount necessary to write down the
cost of acquisition in excess of the fair value of net assets acquired to a fair
value as determined from expected future cash flows. No write-down for
impairment loss was recorded for the years ended December 31, 1994, 1993 and
1992.
The assets acquired and liabilities assumed in connection with acquisitions
are recorded at their respective fair values as of the related dates of
acquisition. Deferred taxes have been recorded to give effect to the differences
between the fair values and tax bases of the assets acquired and liabilities
assumed.
Other intangible assets are amortized on the straight-line method over their
estimated useful lives, ranging from five to forty years. (See Note 5.)
f. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109. Accordingly, under the liability
method specified by SFAS No. 109, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities as measured by the enacted tax rates which are expected
to be in effect when these differences reverse. Deferred tax expense is the
result of changes in deferred tax assets and liabilities.
g. EARNINGS PER SHARE
Primary earnings per share are based upon the weighted average number of
common shares and common share equivalents outstanding. Fully diluted earnings
per common share are based on the assumption that all convertible notes were
converted on the date the notes were issued.
Net earnings per common share are based upon the weighted average number of
outstanding shares of common stock and common stock equivalent shares from
convertible notes payable and the exercise of stock options and warrants. Common
stock equivalent shares from convertible notes payable, stock options and
warrants are excluded from the computation if their effect is anti-dilutive,
except that, pursuant to SAB No. 83, common stock equivalent shares issued
during the 12-month period prior to an initial public offering are included in
the calculations as if they were outstanding for all periods presented (using
the treasury stock method and the initial public offering price). Application of
the provisions of SAB No. 83 resulted in a reduction in net earnings per common
share of $0.02 and $0.03 for 1993 and 1992 from amounts previously reported on a
pro forma basis in the Company's registration statement on Form S-1 dated April
13, 1994.
h. FAIR VALUE OF FINANCIAL INSTRUMENTS
All of the Company's significant financial instruments are recognized in its
balance sheet. The carrying value of financial assets and liabilities generally
approximates fair value as of December 31, 1994. The Company has made this
determination using the following methodology:
F-27
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-term obligations -- Due to the private nature of the Company's
convertible notes payable and the subjectivity of assessing the impact of
the Company's future common stock price, the fair value of the long-term
obligations is judged to be materially the same as that reflected in the
financial statements.
i. RECLASSIFICATIONS
Certain reclassifications have been made to the 1993 and 1992 financial
statements to conform to the 1994 presentation. Such reclassifications had no
effect on the results of operations or shareholders' equity.
NOTE 2 -- ACQUISITIONS
During April 1994, the Company acquired substantially all of the assets of
six clinics located in the metropolitan Baltimore, Maryland area. The purchase
price of this acquisition was $7,385, of which $6,000 was paid in cash and 231
shares of the Company's common stock valued at $1,385 in the aggregate. In
addition, the Company may be obligated to issue up to 122 shares of common stock
one year after closing if certain revenue levels are met.
During May 1994, the Company acquired all of the outstanding common stock of
a therapy practice that included three clinics located in Palm Springs,
California. The outstanding shares of common stock of this practice were
acquired for $1,000 in cash and 125 shares of the Company's common stock valued
at $750 in the aggregate.
During May 1994, the Company acquired substantially all of the assets of a
clinic located in Miami, Florida. The purchase price was $1,900, of which $1,000
was paid in cash at closing and $900 was paid in the form of a long-term
obligation payable in two annual installments of $450 plus interest. (See Note
6.)
During May 1994, the Company acquired substantially all of the assets of
four practices that included four clinics located in the metropolitan San Diego,
California area. The purchase price for these acquisitions totaled $1,124, of
which $954 was paid in cash at closing and $170 was paid in the form of two
promissory notes. One note is due in two annual installments of $35 plus
interest and matures in May 1996. The other note, including interest, is due at
maturity in May 1996. At the option of the note holders, both notes are
convertible into 21 shares of the Company's common stock, plus an additional
amount representing unpaid interest, anytime after May 1, 1995 at the rate of
$8.00 per share. (See Note 6.)
During May 1994, the Company acquired substantially all of the assets of two
therapy practices located in Las Vegas, Nevada, one of which was integrated into
existing clinic locations. The purchase price for these acquisitions totaled
$890, of which $450 was paid in cash at closing and $440 was paid in the form of
three promissory notes. One note totaling $100, including interest, is due at
maturity in May 1995. The remaining notes, including interest, are due at
maturity in May 1996 and include conversion provisions into 43 shares of the
Company's common stock, plus an additional amount representing unpaid interest,
anytime after May 1, 1995 at the rate of $8.00 per share. (See Note 6.)
During June 1994, the Company acquired substantially all of the assets of
two therapy practices located in Oahu, Hawaii. Of the three clinics included,
one was integrated into existing clinic locations. The purchase price for these
acquisitions totaled $2,690, of which $1,750 was paid in cash at closing and
$940 was paid in the form of a promissory note and a long-term obligation. The
long-term
F-28
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 -- ACQUISITIONS (CONTINUED)
obligation relates to a non-compete agreement and is due in three annual
installments of $47 commencing June 1995. The $800 promissory note, including
interest, is due at maturity in June 1995 and includes a conversion provision
into 100 shares of the Company's common stock, plus an additional amount
representing unpaid interest, anytime after June 1, 1995 at the rate of $8.00
per share. (See Note 6.)
During November 1994, the Company acquired substantially all of the assets
and liabilities of a therapy practice that consisted of two locations in
Gulfport, Mississippi: one outpatient clinic and a contract with a hospital for
the provision of inpatient, outpatient and ECU therapy services. The purchase
price of this acquisition was $974, of which $487 was paid in cash at closing
and 81 shares of the Company's common stock valued at $487 in the aggregate.
The purchase prices reported above represent the initial amounts of cash,
notes payable and common stock of the Company issued at the time of the
acquisitions. One of the agreements also contains a provision for two additional
annual payments if certain revenue levels are met. These provisions expire June
1, 1996. Amounts earned under the terms of the agreement may aggregate up to
$100 and will be recorded as increases in the excess of the total acquisition
cost over the fair value of the net assets acquired.
The value of Pacific Rehab's common stock and the conversion price for
covertible promissory notes issued in connection with acquisitions was set equal
to the last sale price of Pacific Rehab's common stock on The Nasdaq Stock
Market on the date the parties reached final agreement. The accounting for
contingent consideration is based on the specific facts and circumstances of
each acquisition. If contingent consideration is based upon the ownership of
stock, then it is recorded as an adjustment to the acquisition purchase price in
accordance with APB 16. However, if the prior owner continues as an employee and
is responsible for the future earnings of the acquired business, then the
contingent consideration is recorded as compensation expense in the period
earned.
The above 1994 transactions are summarized by the table below:
<TABLE>
<CAPTION>
PURCHASE PRICE
NUMBER ------------------------ COMMON TOTAL VALUE
EFFECTIVE OF CASH AND SHARES OF STOCK ASSIGNED TO
REGION DATE CLINICS NOTES COMMON STOCK AMOUNTS PURCHASE PRICE
- -------------------------------------------------- --------- ------ --------- ------------ ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Maryland.......................................... 4-16-94 6 $ 6,000 231 $1,385 $ 7,385
California........................................ 5-1-94 7 2,124 125 750 2,874
Florida........................................... 5-1-94 1 1,900 -- -- 1,900
Nevada............................................ 5-1-94 1 890 -- -- 890
Hawaii............................................ 6-1-94 2 2,690 -- -- 2,690
Mississippi....................................... 11-1-94 2 487 81 487 974
------ --------- --- ------ --------------
19 $ 14,091 437 $2,622 $16,713
------ --------- --- ------ --------------
------ --------- --- ------ --------------
</TABLE>
F-29
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 -- ACQUISITIONS (CONTINUED)
During 1993, the Company consummated acquisitions of several physical
therapy and related treatment clinics. A summary of the clinics acquired and
operated by the Company's wholly-owned subsidiaries follows.
<TABLE>
<CAPTION>
PURCHASE PRICE
NUMBER ------------------------ COMMON TOTAL VALUE
EFFECTIVE OF CASH AND SHARES OF STOCK ASSIGNED TO
REGION DATE CLINICS NOTES COMMON STOCK AMOUNTS PURCHASE PRICE
- -------------------------------------------------- --------- ------ --------- ------------ ------ --------------
<S> <C> <C> <C> <C> <C> <C>
California........................................ 3-1-93 2 $ -- 62 $ 500 $ 500
Hawaii............................................ 7-1-93 2 875 116 925 1,800
Nevada and Arizona................................ 8-1-93 7 910 133 1,053 1,963
Texas............................................. 9-1-93 2 500 62 616 1,116
------ --------- --- ------ --------------
13 $ 2,285 373 $3,094 $ 5,379
------ --------- --- ------ --------------
------ --------- --- ------ --------------
</TABLE>
Certain 1993 acquisition agreements include provisions for additional shares
of the Company's common stock and cash, if specified revenue goals are achieved.
The Company's obligation, if all specified revenue goals are met, would be $30
in cash and 34 shares of the Company's common stock. This provision expires
December 31, 1995.
The above acquisitions have been accounted for using the purchase method of
accounting. The excess of the total acquisition cost over the fair value of the
net assets acquired is being amortized over forty years using the straight-line
method. The results of operations of these companies have been included in the
consolidated financial statements of the Company since the dates of acquisition.
The following unaudited pro forma information represents the results of
operations of the Company as if all of the acquisitions had occurred at the
beginning of 1993, after giving effect to amortization of the cost of
acquisition in excess of the fair value of net assets acquired, adjustments to
reflect the difference in compensation between historical amounts and amounts
specified in agreements, depreciation of acquired property and equipment,
increased interest expense for notes issued related to the acquisitions and
increased income taxes:
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEAR ENDED
DECEMBER 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Net revenues..................................................................... $ 25,158 $ 25,302
--------- ---------
--------- ---------
Net earnings..................................................................... $ 2,415 $ 2,332
--------- ---------
--------- ---------
Earnings per share............................................................... $ 0.43 $ 0.41
--------- ---------
--------- ---------
</TABLE>
The unaudited pro forma information does not purport to be indicative of the
results which would actually have been achieved had the acquisitions occurred as
of the date of the periods indicated or which may be obtained in the future.
F-30
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3 -- PATIENT ACCOUNTS RECEIVABLE
Patient accounts receivable consist of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1993
------------ -------------
<S> <C> <C>
Gross accounts receivable.................................................. $ 15,479 $ 5,724
Less allowance for doubtful accounts and contractual adjustments........... 6,563 1,510
------------ -------------
Total patient accounts receivable, net..................................... $ 8,916 $ 4,214
------------ -------------
------------ -------------
</TABLE>
The allowance for contractual adjustments was $1,701 at December 31, 1994
and $1,114 at December 31, 1993. During the year ended December 31, 1994 and the
year ended December 31, 1993, contractual adjustments amounted to approximately
$3,900 and $1,228, respectively, and have been netted with revenues in the
accompanying consolidated statement of earnings. During the year ended December
31, 1994 and the year ended December 31, 1993, bad debt expense amounted to
approximately $1,297 and $269, respectively, and is included in selling, general
and administrative expenses in the accompanying consolidated statements of
earnings.
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1993
------------- -------------
<S> <C> <C>
Autos...................................................................... $ 34 $ 30
Office equipment........................................................... 811 484
Physical therapy equipment................................................. 1,395 1,647
Leasehold improvements..................................................... 519 369
------------- -------------
2,759 2,530
Less accumulated depreciation and amortization............................. 1,002 428
------------- -------------
$ 1,757 $ 2,102
------------- -------------
------------- -------------
</TABLE>
NOTE 5 -- INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1993
------------ -------------
<S> <C> <C>
Cost of acquisitions in excess of the fair value of net assets acquired.... $ 22,857 $ 9,456
Lease costs................................................................ 205 205
Covenants not-to-compete................................................... 240 36
Organizational costs....................................................... 75 75
------------ -------------
23,377 9,772
Less accumulated amortization.............................................. 929 451
------------ -------------
$ 22,448 $ 9,321
------------ -------------
------------ -------------
</TABLE>
F-31
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6 -- LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1993
------------- -------------
<S> <C> <C>
9.5% unsecured note payable to an individual, due in monthly installments
of $7, including interest................................................. $ 240 $ 295
8.5% unsecured note payable to an individual, due in monthly installments
of $8, including interest. A balloon payment of unpaid principal of $771
is due August 15, 1996.................................................... 810 830
Note payable to an individual, paid May 15, 1994........................... -- 100
5% unsecured long-term obligation to a corporation, due in two annual
installments of $450, plus interest, commencing in 1995................... 900 --
4.75% unsecured convertible note payable to a corporation, due on June 1,
1995, plus interest....................................................... 800 --
5% unsecured convertible note payable to an individual, plus interest, due
May 1, 1996............................................................... 200 --
5% unsecured note payable to an individual, plus interest, due May 1,
1995...................................................................... 100 --
4.75% unsecured convertible note payable to an individual, due on May 1,
1996, plus interest....................................................... 140 --
Obligation in connection with non-compete agreement, due in three annual
installments of $47, commencing in 1995................................... 140 --
4.75% unsecured convertible note payable to a corporation, plus interest,
due May 1, 1996........................................................... 100 --
4.75% unsecured convertible note payable to a corporation, due in two
annual installments of $35, plus interest, commencing in 1995............. 70 --
Other...................................................................... 73 143
------------- -------------
3,573 1,368
Less current maturities.................................................... 1,544 294
------------- -------------
$ 2,029 $ 1,074
------------- -------------
------------- -------------
</TABLE>
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ---------------
<S> <C> <C>
1995....................................................................................... $ 1,544
1996....................................................................................... 1,871
1997....................................................................................... 121
1998....................................................................................... 37
---------
$ 3,573
---------
---------
</TABLE>
F-32
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 7 -- LINE OF CREDIT
In December 1994, the Company arranged with Bank of America Oregon a $5,000
credit facility (the "Line of Credit") and a $1,000 non-revolving credit
facility for equipment purchases. The Line of Credit is secured by the assets of
the Company. The interest rate, at the option of the Company, is a floating rate
generally based on a defined prime rate, or a fixed rate related to an offshore
rate, with principal due on demand. To the extent that the Borrowing Base
(defined in the Line of Credit as 55% of specified accounts receivable) is below
the $5,000 maximum, the Line of Credit is limited to the Borrowing Base. The
Borrowing Base was approximately $4,000 at December 31, 1994. The agreement
contains restrictive covenants relating to cash flow ratios, certain types of
debt, capital expenditures and other restrictive covenants which limit the
Company's ability to pay cash dividends and make stock repurchases. There were
no borrowings at December 31, 1994. The Bank of America Oregon Line of Credit
replaces a $2,000 line established with United States National Bank of Oregon in
1993.
NOTE 8 -- COMMITMENTS AND CONTINGENT LIABILITIES
The Company conducts a majority of its business utilizing leased facilities
and equipment in the various cities in which it operates. The Company also
leases office space for its corporate headquarters. Certain lease agreements
provide for payment of taxes, insurance, maintenance and other expenses related
to the leased property. Certain lease agreements also provide an option for
renewal at varying terms, depending on the location and type of equipment. The
aggregate future minimum commitments under operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ----------------------------------------------------------------
<S> <C>
1995............................................................ $ 2,502
1996............................................................ 2,097
1997............................................................ 1,692
1998............................................................ 1,213
1999............................................................ 623
Thereafter...................................................... 179
---------
$ 8,306
---------
---------
</TABLE>
Rent expense for the periods ended December 31, 1994, 1993, and 1992
amounted to $1,938, $623, and $254, respectively.
In the ordinary course of its business, the Company may be subject from time
to time to claims and legal actions. The Company has no history of material
claims and no material actions are currently pending against the Company.
NOTE 9 -- ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1993
------------- ---------------
<S> <C> <C>
Accrued compensation.................................................. $ 274 $ 261
Accrued professional fees............................................. 141 605
Other accruals........................................................ 802 70
------------- -----
$ 1,217 $ 936
------------- -----
------------- -----
</TABLE>
F-33
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10 -- INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Current tax expense (benefit):
Federal........................................................... $ (9) $ 390 $ 127
State............................................................. (5) 77 26
--------- --------- ---------
(14) 467 153
--------- --------- ---------
Deferred tax expense:
Federal........................................................... 1,263 165 341
State............................................................. 126 17 69
--------- --------- ---------
1,389 182 410
--------- --------- ---------
$ 1,375 $ 649 $ 563
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company's effective tax rate is reconciled to the tax computed at the
statutory federal rate as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Tax expense at federal statutory rate............................. 34.00% 34.00% 34.00%
State income taxes, net of federal benefit........................ 3.40 3.90 4.20
Surtax exemption.................................................. -- -- (.30)
Other............................................................. 1.90 .40 (.90)
----- ----- -----
39.30% 38.30% 37.00%
----- ----- -----
----- ----- -----
</TABLE>
The deferred tax (assets) liabilities are comprised of the following
components:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Property and equipment.............................................. $ -- $ 2,859 $ 6
Cost of acquisitions in excess of the fair value of net assets
acquired and other intangibles..................................... 157 -- --
Cash versus accrual reporting for tax purposes...................... 2,687 1,345 456
--------- --------- ---------
Gross deferred tax liabilities.................................... 2,844 4,204 462
--------- --------- ---------
Property and equipment.............................................. (5) -- (25)
Net operating losses................................................ (86) (74) (27)
--------- --------- ---------
Gross deferred tax assets......................................... (91) (74) (52)
--------- --------- ---------
Net deferred tax liabilities........................................ $ 2,753 $ 4,130 $ 410
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred income taxes were recorded at the time certain clinic acquisitions
were consummated during 1993 because an election was available to the Company to
increase the asset basis for tax purposes. In May 1994, prior to issuance of the
March 31, 1994 financial statements, management determined not to make such an
election. As a result, deferred taxes were reduced by $2,521 as of March 31,
1994, with a corresponding decrease to costs in excess of fair market value of
net assets acquired. The adjustment had no effect on shareholders' equity, net
earnings, working capital or cash flows. Due primarily to the circumstances
described above, the deferred tax expense differs from the change in the net
deferred tax liabilities as a result of the $2,521 charge to deferred taxes.
F-34
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)
(In thousands, except per share amounts)
NOTE 11 -- SHAREHOLDERS' EQUITY
By way of closings on April 21, 1994 and May 9, 1994, the Company concluded
an initial public offering of 2,760 shares of common stock (of which 2,560 was
sold by the Company) at $6.00 per share (the "Offering"). Following the
Offering, 6,794 shares were outstanding. Prior to the Offering, there was no
public market for the Company's common stock. The Company's common stock
offering was declared effective on April 14, 1994, for trading on the Nasdaq
National Market System, under the symbol "PRHB."
During 1994, in connection with the 1993 California acquisition, a warrant
to exercise 6 shares of common stock at $0.13 per share issued in connection
with the acquisition was exercised on March 18, 1994. Such amount is included in
the common stock issued for cash in the Consolidated Statement of Shareholders'
Equity.
During 1994, in connection with the 1993 Texas acquisition, the Company
issued an additional 83 shares of common stock.
In July 1993, the Board of Directors authorized a three-for-four stock
split. This split was approved by the shareholders in August 1993. All share
references and related per share amounts have been adjusted in the accompanying
consolidated financial statements to reflect the reverse stock split.
NOTE 12 -- STOCK OPTION PLANS
1993 AMENDED AND RESTATED COMBINATION STOCK OPTION PLAN. The 1993 Amended
and Restated Combination Stock Option Plan (the "Plan") provides for the grant
of incentive and nonqualified stock options to selected employees, officers,
directors, consultants and advisors to purchase up to 1,000 shares of common
stock. As of December 31, 1994, options to purchase 833 shares of common stock
were outstanding, no shares of common stock had been issued upon exercise of
options, and 167 shares of common stock were available for future grants under
the Option Plan. These 833 options were granted at various exercise prices
ranging from $4.00 to $6.75 per share and began vesting on January 1, 1994, and
expire between January 26, 1999 through September 23, 2004. A total of 248 of
the incentive and nonqualified stock options were exercisable at December 31,
1994. As of December 31, 1994, non-plan options to purchase 17 shares of common
stock were outstanding at an average exercise price of $6.86 per share and no
shares of common stock had been issued upon exercise of these options. These
options expire between five and ten years from date of grant. A total of 6 of
the non-plan options were exercisable at December 31, 1994.
DIRECTORS' STOCK OPTION PLAN. On September 23, 1994, the Board of Directors
adopted the Directors' Stock Option Plan (the "Directors' Plan"), which became
effective on October 1, 1994. The Directors' Plan is subject to approval at the
Company's Annual Meeting of Shareholders in June 1995.
A maximum of 100 shares may be issued under the Directors' Plan. Only
directors who are not officers or employees of the Company may be granted
options under the Directors' Plan.
Options are granted automatically under the Directors' Plan as follows: on
the effective date of the Directors' Plan, options to purchase 10 shares of
common stock were granted to the two outside directors; options to acquire 10
shares will be automatically granted to an outside director when he or she is
appointed or elected to the Board of Directors; and options to acquire 1 share
will be automatically granted to each outside director on the anniversary of the
effective date of the Directors' Plan in the case of the two existing outside
directors and on the anniversary of the date when any additional outside
directors became a member of the Board of Directors.
F-35
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 12 -- STOCK OPTION PLANS (CONTINUED)
On October 1, 1994, options to acquire a total of 20 shares of common stock
were granted at an exercise price of $6.38. These options vest over 5 years, and
at December 31, 1994, 4 of the Directors' Plan options were exercisable.
NOTE 13 -- CONCENTRATION OF CREDIT RISK
The Company maintains its cash balances in financial institutions located in
various parts of the United States. These balances are insured by the Federal
Deposit Insurance Corporation up to $100. At December 31, 1994, uninsured
amounts held at these financial institutions totaled approximately $359.
Management estimates that approximately 95% of its net realizable accounts
receivable are due from third-party payors. No one third-party payor balance
exceeds 10% of net realizable receivables.
NOTE 14 -- RETIREMENT PLAN -- 401(K)
Beginning January 1, 1993, the Company began contributing to a 401(k) Profit
Sharing Plan in accordance with the Employee Retirement Income Security Act of
1974. The plan is for all employees meeting the eligibility requirement of one
year of service and 21 years of age and older. Participants in the plan may
elect to contribute from 2% to 15% of their compensation. The Company will match
50% of up to 6% of the employees' compensation. The Company contributed $35 and
$18 for the years ended December 31, 1994 and 1993, respectively.
NOTE 15 -- SUBSEQUENT EVENTS
In 1995, the Company borrowed approximately $3,312 under the new Line of
Credit to partially fund the following acquisitions (see Note 7):
During January 1995, the Company acquired substantially all of the assets of
a practice that included three clinics located in the Tacoma, Washington area.
The purchase price of $1,250 includes $950 paid in cash at closing and up to
$300 will be paid in three annual installments if certain pre-tax profit levels
are achieved within 36 months of the closing date of the acquisition. The seller
was also granted a Common Stock Purchase Warrant to purchase 75 shares of common
stock of the Company at an exercise price of $6.00 per share.
During February 1995, the Company acquired all of the outstanding common
stock of a therapy/ prosthetic-orthotic practice located in Miami, Florida. The
purchase price of this acquisition of $1,100 includes $650 paid in cash and 75
shares of the Company's common stock valued at $450.
During February 1995, the Company acquired all of the outstanding common
stock of a therapy practice located in Temecula, California. The purchase price
was $350 of which $175 was paid in cash and $175 was paid in the form of a
promissory note. The promissory note, including interest, is due at maturity in
March 1997 and includes a conversion provision effective February 28, 1996 into
25 shares of the Company's common stock, plus an additional amount representing
unpaid interest, between February 28, 1996 and February 28, 1997, at the rate of
$7.00 per share.
During March 1995, the Company acquired all of the outstanding common stock
of a medical and physical therapy practice located in San Diego, California. The
clinic included in this practice was integrated into existing locations. The
purchase price of this acquisition of $2,100 includes $975 paid in cash at
closing and the remainder represents a promissory note in the amount of $1,125.
The promissory note, including interest, is due at maturity in March 1997 and
includes a conversion provision effective February 28, 1996 into 161 shares of
the Company's common stock, plus an additional amount representing unpaid
interest, between February 28, 1996 and February 1997, at the rate of $7.00 per
share.
F-36
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15 -- SUBSEQUENT EVENTS (CONTINUED)
During March 1995, the Company acquired substantially all of the assets of a
therapy practice that included two clinics located in the North Los Angeles,
California area. The purchase price of $950 includes $500 paid in cash at
closing and $450 paid in the form of a promissory note. The promissory note,
including interest, is due at maturity in March 1997 and includes a conversion
provision effective February 28, 1996 into 63 shares of the Company's common
stock, plus an additional amount representing unpaid interest, at a rate of
$7.25 per share.
During March 1995, the Company acquired all of the outstanding common stock
of a therapy practice with one clinic located in Baltimore, Maryland. The
purchase price of $2,500 includes $1,250 paid in cash and $1,250 paid in the
form of a promissory note. Interest is payable quarterly in arrears. One-half of
the promissory note is due in March 1996, with the remaining portion due at
maturity in February 1997.
The value of Pacific Rehab's common stock and the conversion price for
convertible promissory notes issued in connection with acquisitions was set
equal to the last sale price of Pacific Rehab's common stock on The Nasdaq Stock
Market on the date the parties reached final agreement. The accounting for
contingent consideration is based on the specific facts and circumstances of
each acquisition. If contingent consideration is based upon the ownership of
stock, then it is recorded as an adjustment to the acquistion purchase price in
accordance with APB 16. However, if the prior owner continues as an employee and
is responsible for the future earnings of the acquired business, then the
contingent consideration is recorded as compensation expense in the period
ended.
As of March 28, 1995, the Company's operations consist of 47 outpatient
rehabilitation clinics located in Washington, Hawaii, California, Nevada,
Arizona, Texas, Mississippi, Florida and Maryland.
NOTE 16 -- SUBSEQUENT FINANCING ACTIVITIES AND MERGER AGREEMENT
As reported in the Company's Form 10-Q for the nine months ended September
30, 1995, the Company had an excess of current liabilities over current assets
of $4,046 (unaudited) at September 30, 1995. In addition, the Company's
outstanding borrowings under its Line of Credit exceeded the borrowing base
established in the Line of Credit Agreement, and the Company was not in
compliance with one of the conditions set forth in such Agreement. As a result,
the bank could have, under the terms of the Line of Credit, declared the Company
in default and demanded immediate payment of all amounts due thereunder. At
September 30, 1995, such borrowings aggregated $10,683 (unaudited). Further, the
Form 10-Q for the nine months ended September 30, 1995 indicated that the
Company's existing cash and cash flow from operations were not sufficient to
meet the Company's working capital requirements for the period from October 1,
1995 to December 31, 1996.
During December 1995, the Company restructured the repayment terms with the
holders of approximately $3,200 of its debt and other obligations to extend
payments from fiscal 1996 into the first two quarters of fiscal 1997.
In addition, during December 1995, the Company negotiated revisions in its
Line of Credit arrangements with Bank of America Oregon. The maximum amount
which can be borrowed will be increased to $12,500. The Borrowing Base is
defined as 85% of certain net accounts receivable or 85% of a calculated revenue
amount. The effective interest rate will be increased by one half of one percent
to a defined prime rate plus 1.0% or a defined offshore rate plus 2.5%. The bank
has agreed to (1) waive the September 30, 1995 violation of the condition that
specified that the Company maintain a certain ratio of fixed charges relative to
EBITDA (the "Fixed Charge Ratio") and (2) waive the anticipated December 31,
1995 violation of the Fixed Charge Ratio and the Funded Debt to EBITDA ratio.
The
F-37
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 16 -- SUBSEQUENT FINANCING ACTIVITIES AND MERGER AGREEMENT (CONTINUED)
bank has also agreed to modify the existing ratio condition requirements such
that the Company anticipates it will remain in compliance in the future through
the renewal date of June 30, 1998. The bank approved the over advance of the
Borrowing Base that existed as of November 1, 1995. As part of the revisions,
the separate $1,000 nonrevolving credit facility for equipment purchases will be
eliminated.
On November 9, 1995, the Company agreed to be acquired by Horizon/CMS
Healthcare Corporation ("Horizon/CMS") pursuant to a merger agreement approved
by the Board of Directors of both the Company and Horizon/CMS. Under the terms
of the agreement, the Company's shareholders will receive .3483 shares of
Horizon/CMS common stock for each share of the Company's common stock. The
consummation of the merger is subject to a vote of the Company's shareholders,
regulatory review and other conditions, and there can be no assurance that the
acquisition will be consummated.
NOTE 17 -- QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1994
Net revenue............................................................. $ 3,057 $ 5,213 $ 5,889 $ 6,345
Gross profit............................................................ 1,413 2,608 2,949 3,244
Net earnings............................................................ 266 572 676 612
Net earnings per common share........................................... $ 0.07 $ 0.09 $ 0.10 $ 0.09
Weighted average number of common and common equivalent shares
outstanding............................................................ 4,031 6,397 7,018 7,014
1993
Net revenue............................................................. $ 1,360 $ 1,528 $ 2,487 $ 2,787
Gross profit............................................................ 901 1,012 1,028 1,193
Net earnings............................................................ 287 371 247 142
Net earnings per common share........................................... $ 0.07 $ 0.09 $ 0.06 $ 0.04
Weighted average number of common and common equivalent shares
outstanding............................................................ 3,965 4,006 4,006 4,006
</TABLE>
The 1993 quarterly earnings per share amounts have been adjusted, by $0.01
per share for each of the first, second and third quarters, to reflect the
impact of Securities and Exchange Commission ("SEC") Staff Accounting Bulletin
(SAB) No. 83. See Note 1g. to the Consolidated Financial Statements.
F-38
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Dr. Judman and Dr. Gober St. Paul
and Biddle Medical Associates, P.A.
We have audited the accompanying balance sheets of Dr. Judman and Dr. Gober
St. Paul and Biddle Medical Associates, P.A. as of December 31, 1993 and 1992,
and the related statements of earnings, retained earnings and cash flows for the
three years in the period ended December 31, 1993. 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 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Dr. Judman and Dr. Gober St.
Paul and Biddle Medical Associates, P.A. as of December 31, 1993 and 1992, and
the results of its operations and its cash flows for the three years in the
period ended December 31, 1993, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Baltimore, Maryland
January 27, 1994
F-39
<PAGE>
DR. JUDMAN AND DR. GOBER
ST. PAUL AND BIDDLE MEDICAL ASSOCIATES, P.A.
BALANCE SHEETS
DECEMBER 31,
ASSETS
<TABLE>
<CAPTION>
1993 1992
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash.............................................................................. $ 72,647 $ 75,962
Patient accounts receivable, net of allowance for uncollectibles of $2,320,697 in
1993 and $2,796,784 in 1992 (note A2)............................................ 2,779,480 2,607,255
Prepaid expenses.................................................................. 21,700 15,000
------------- -------------
Total current assets............................................................ 2,873,827 2,698,217
PROPERTY AND EQUIPMENT -- AT COST (note A3).........................................
Medical and physical therapy equipment............................................ 316,004 279,025
Leasehold improvements and fixtures............................................... 116,052 102,304
------------- -------------
432,056 381,329
Less accumulated depreciation and amortization.................................... 288,774 207,580
------------- -------------
143,282 173,749
OTHER ASSETS........................................................................ 11,372 11,372
------------- -------------
$ 3,028,481 $ 2,883,338
------------- -------------
------------- -------------
LIABILITIES
CURRENT LIABILITIES
Accounts payable.................................................................. $ 69,932 $ 19,229
Accrued liabilities............................................................... 56,421 58,377
------------- -------------
Total current liabilities....................................................... 126,353 77,606
COMMITMENTS (notes B, C and D)...................................................... -- --
STOCKHOLDERS' EQUITY (note D)
Common stock -- authorized 1,000 shares of no par value; issued
and outstanding, 200 shares...................................................... 20,000 20,000
Retained earnings................................................................. 2,882,128 2,785,732
------------- -------------
2,902,128 2,805,732
------------- -------------
$ 3,028,481 $ 2,883,338
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-40
<PAGE>
DR. JUDMAN AND DR. GOBER
ST. PAUL AND BIDDLE MEDICAL ASSOCIATES, P.A.
STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1993 1992 1991
------------- ------------- -------------
<S> <C> <C> <C>
Net revenues......................................................... $ 4,868,702 $ 4,880,677 $ 7,313,388
Cost of revenues..................................................... 3,141,257 3,450,246 4,703,101
------------- ------------- -------------
Gross profit..................................................... 1,727,445 1,430,431 2,610,287
Operating expenses
Selling, general and administrative expenses....................... 1,471,447 1,351,137 2,269,840
Depreciation and amortization...................................... 81,194 54,066 65,906
------------- ------------- -------------
Earnings before nonoperating income.............................. 174,804 25,228 274,541
Nonoperating income
Interest income.................................................... 592 1,524 1,346
------------- ------------- -------------
NET EARNINGS (note A4)........................................... $ 175,396 $ 26,752 $ 275,887
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-41
<PAGE>
DR. JUDMAN AND DR. GOBER
ST. PAUL AND BIDDLE MEDICAL ASSOCIATES, P.A.
STATEMENTS OF RETAINED EARNINGS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1993 1992 1991
------------- ------------- -------------
<S> <C> <C> <C>
Retained earnings at beginning of year............................... $ 2,785,732 $ 3,418,824 $ 3,200,937
Shareholder distributions............................................ (79,000) (659,844) (58,000)
Net earnings for the year............................................ 175,396 26,752 275,887
------------- ------------- -------------
Retained earnings at end of year..................................... $ 2,882,128 $ 2,785,732 $ 3,418,824
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-42
<PAGE>
DR. JUDMAN AND DR. GOBER
ST. PAUL AND BIDDLE MEDICAL ASSOCIATES, P.A.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1993 1992 1991
-------------- ------------ --------------
<S> <C> <C> <C>
Increase (Decrease) in Cash
Cash flows from operating activities
Net earnings.................................................... $ 175,396 $ 26,752 $ 275,887
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation and amortization................................. 81,194 54,012 65,806
Provision for uncollectible accounts.......................... 973,439 979,503 1,816,312
Changes in assets and liabilities
(Increase) in accounts receivable........................... (1,145,666) (398,640) (1,925,855)
Decrease (increase) in accounts payable and accrued
liabilities................................................ 48,748 (43,387) 49,665
(Increase) decrease in prepaid expenses and other assets.... (6,700) (2,947) 9,607
-------------- ------------ --------------
Net cash provided by operating activities................... 126,411 615,293 291,422
-------------- ------------ --------------
Cash flows used in investing activities
Purchase of property and equipment................................ (50,726) (80,288) (85,015)
-------------- ------------ --------------
Cash flows used in financing activities
Shareholder distributions......................................... (79,000) (659,844) (58,000)
Repayment of amounts due shareholder.............................. -- (23,856) --
-------------- ------------ --------------
Net cash used in financing activities....................... (79,000) (683,700) (58,000)
-------------- ------------ --------------
Net (decrease) increase in cash............................. (3,315) (148,695) 148,407
Cash at beginning of year........................................... 75,962 224,657 76,250
-------------- ------------ --------------
Cash at end of year................................................. $ 72,647 $ 75,962 $ 224,657
-------------- ------------ --------------
-------------- ------------ --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-43
<PAGE>
DR. JUDMAN AND DR. GOBER
ST. PAUL AND BIDDLE MEDICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1992 AND 1991
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. BUSINESS DESCRIPTION
Dr. Judman and Dr. Gober St. Paul and Biddle Medical Associates, P.A. (the
Company) derives substantially all of its revenue from medical and physical
therapy services to patients who are referred by plaintiff attorneys.
2. REVENUE RECOGNITION
Revenue is reported at the estimated net realizable amounts due from
patients and third-party payers. Net patient service revenue is adjusted as
required in subsequent periods based on final settlements.
3. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized on the straight-line basis over the lives
of the respective leases or the service lives of the improvements, whichever is
shorter.
4. INCOME TAXES
The Company has elected S Corporation status under the Internal Revenue
Code; therefore, income taxes are payable personally by the Company's
shareholders and the Company is not taxed as a corporation. Accordingly, no
provision has been made for federal or state income taxes. Had such taxes been
payable by the Company on financial statement earnings, they would have
approximated $70,000 in 1993, $11,000 in 1992 and $110,000 in 1991 .
Revenues and expenses are reported on the cash basis for income tax
purposes. The Company determines annually what portion, if any, of the
shareholders' personal tax liabilities will be funded by cash distributions.
5. CASH AND CASH EQUIVALENTS
For purposes of the Statement of Cash Flows, the Company considers all
highly liquid debt instruments with a maturity of three months or less to be
cash equivalents.
NOTE B -- LEASES
The Company leases office space from related and nonrelated parties under
operating lease agreements that expire on various dates through January 1997. In
addition to minimum rental payments, certain leases provide for payment of real
estate taxes, insurance and other operating expenses.
Net minimum rental commitments under all operating leases as of December 31,
1993 are as follows:
<TABLE>
<CAPTION>
RELATED
PARTIES OTHER
----------- -----------
<S> <C> <C>
1994................................................................ $ 142,600 $ 104,128
1995................................................................ 142,600 41,000
1996................................................................ 142,600 12,500
</TABLE>
F-44
<PAGE>
DR. JUDMAN AND DR. GOBER
ST. PAUL AND BIDDLE MEDICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
NOTE B -- LEASES (CONTINUED)
Payments under certain leases with nonrelated parties are personally
guaranteed by the shareholders. Certain leases have options for renewal,
purchase or termination. Total rental expense charged to operations for the
years ended December 31, 1993, 1992, and 1991 was $320,000, $185,000, and
$167,700, respectively, of which $196,000, $96,800 and $30,000 was paid to a
related party.
NOTE C -- COMMITMENTS
On January 1, 1989, the Company entered into employment contracts with its
two officers/ shareholders. The agreements are cancelable at any time and
automatically terminate in the event of certain specified occurrences. The
agreements provide for deferred compensation payments based on a formula defined
in the agreement if employment is terminated for any reason, and for disability
payments in the event of total disability.
The Company has also entered into employment contracts with three employees.
These contracts expire on June 30, 1994, or earlier in the event of termination.
NOTE D -- STOCKHOLDERS' EQUITY
The transferability of the Company's common stock is restricted by the terms
of an agreement between the Company and its common stockholders. In the event of
termination of employment of either shareholder for any reason including death,
the remaining shareholder is required to purchase his common stock at "book
value on the cash basis" as defined in the agreement.
NOTE E -- SUBSEQUENT EVENT
The Company has agreed in principle to sell all of the assets associated
with its physical therapy operations and, to the extent permitted by applicable
law, the non-professional assets of the medical practice operations for
$6,000,000 in cash and $1,500,000 of the acquiring company's common stock. If
gross revenue for 1994 exceeds $5,520,000, the purchase price will be increased
by a maximum of $975,000, of the acquiring company's common stock based on an
agreed upon formula. The acquiring company has agreed in principal to provide
administrative, non-professional services to the Company in connection with its
medical practice.
F-45
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Pacific Rehabilitation & Sports Medicine, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations and retained earnings and of cash flows present fairly, in all
material respects, the financial position of Arthritis, Trauma & Sports Physical
Therapy, Inc. at December 31, 1994 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed
above.
As described in Note 6, substantially all of the assets and operating
business of Arthritis, Trauma & Sports Physical Therapy, Inc. were sold as of
April 1, 1995 to Pacific Rehabilitation & Sports Medicine, Inc.
PRICE WATERHOUSE LLP
Portland, Oregon
June 30, 1995
F-46
<PAGE>
ARTHRITIS, TRAUMA & SPORTS PHYSICAL THERAPY, INC.
BALANCE SHEET
DECEMBER 31, 1994
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash........................................................................... $ 225
Patient accounts receivable, net (Note 2)...................................... 212,952
Other receivables.............................................................. 2,128
---------
Total current assets......................................................... 215,305
Furniture and equipment, net (Note 3)............................................ 6,315
---------
$ 221,620
---------
---------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Bank overdraft................................................................. $ 1,763
Related party payable.......................................................... 2,028
Accrued liabilities............................................................ 23,438
---------
Total current liabilities.................................................... 27,229
---------
Commitments and contingent liabilities (Note 5)
Shareholders' equity:
Common stock, $1 par value; 25,000 shares authorized; 995 shares issued and
outstanding................................................................... 995
Retained earnings, per accompanying statement.................................. 193,396
---------
194,391
---------
$ 221,620
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-47
<PAGE>
ARTHRITIS, TRAUMA & SPORTS PHYSICAL THERAPY, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Net revenues................................................................... $1,417,273
Cost of revenues............................................................... 476,205
----------
Gross profit................................................................. 941,068
----------
Operating expenses:
Selling, general and administrative.......................................... 322,908
Depreciation and amortization................................................ 1,742
----------
324,650
----------
Net income..................................................................... 616,418
Retained earnings, beginning of year........................................... 173,960
Cash distributions to shareholders............................................. (596,982)
----------
Retained earnings, end of year................................................. $ 193,396
----------
----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-48
<PAGE>
ARTHRITIS, TRAUMA & SPORTS PHYSICAL THERAPY, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income.................................................................... $ 616,418
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization............................................... 1,742
Net change in current assets and liabilities:
Patient accounts receivable, net............................................ (64,121)
Other receivables........................................................... 811
Accrued liabilities......................................................... (32,274)
Related party payable....................................................... (376)
---------
Net cash provided by operating activities................................. 522,200
---------
Cash flows from investing activities:
Additions to furniture and equipment.......................................... (4,229)
---------
Net cash used in investing activities..................................... (4,229)
---------
Cash flows from financing activities:
Bank overdraft................................................................ 1,763
Cash distributions to shareholder............................................. (596,982)
---------
Net cash used in financing activities..................................... (595,219)
---------
Net decrease in cash............................................................ (77,248)
Cash at beginning of year....................................................... 77,473
---------
Cash at end of year............................................................. $ 225
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-49
<PAGE>
ARTHRITIS, TRAUMA & SPORTS PHYSICAL THERAPY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Arthritis, Trauma & Sports Physical Therapy, Inc. (the Company) is a Nevada
corporation that operates two rehabilitation and sports medicine clinics in the
Las Vegas, Nevada area. The Company has elected to be taxed under subchapter S
of the Internal Revenue Code of 1986 as amended. The Company provides
comprehensive outpatient rehabilitation services to patients suffering from
arthritis and sports related injuries.
See Note 6.
SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues are recognized as services are rendered to patients. Net revenues
are reported at the estimated amounts which the patients, third party payors and
others are contractually obligated to pay for services rendered. See Note 2.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost and include those additions and
improvements that add to productive capacity or extend useful life. When
property or equipment are sold or otherwise retired, the cost and related
accumulated depreciation are removed from the respective accounts and the
resulting profit or loss is recorded in operations. The costs of repairs and
maintenance are charged to expense as incurred.
Depreciation is computed using the double-declining balance method over
useful lives of five to seven years for computers, software, furniture and
operating equipment. Leasehold improvements are amortized on the straight-line
basis over the shorter of the asset life or lease term.
INCOME TAXES
As an S Corporation, the Company's taxable income or loss is attributed
directly to the Company's shareholders for inclusion in their separate income
tax returns. Accordingly, the accompanying statement of operations does not
include a provision for income taxes.
2. PATIENT ACCOUNTS RECEIVABLE
Patient accounts receivable consist of:
<TABLE>
<S> <C>
Gross patient accounts receivable................................ $ 467,496
Less allowances for doubtful accounts and contractual
adjustments..................................................... 254,544
---------
$ 212,952
---------
---------
</TABLE>
The allowance for contractual adjustments represents the difference between
the amounts billed by the Company at its normal rates and the amounts which the
patients, third party payors or other parties are contractually obligated to pay
the Company. During the year ended December 31, 1994 the Company charged
revenues for contractual adjustments aggregating $437,584. During the year ended
December 31, 1994, bad debt expense aggregated $134,787 and is included in
selling, general and administrative expenses in the accompanying statement of
operations.
F-50
<PAGE>
ARTHRITIS, TRAUMA & SPORTS PHYSICAL THERAPY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
3. FURNITURE AND EQUIPMENT
Furniture and equipment consist of:
<TABLE>
<S> <C>
Medical equipment................................................ $ 15,597
Furniture and operating equipment................................ 5,536
Leasehold improvements........................................... 1,672
---------
22,805
Accumulated depreciation......................................... (16,490)
---------
$ 6,315
---------
---------
</TABLE>
4. EMPLOYEE 401(K) PLAN
During 1994, the defined contribution retirement plan offered to the
Company's employees was terminated and all participant balances were refunded to
the participants or transferred to another retirement plan. The Company incurred
no significant costs related to the termination of the plan.
5. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases its operating facilities and certain equipment under
agreements which require minimum annual lease payments as follows:
<TABLE>
<S> <C>
1995........................................................... $ 79,500
1996........................................................... 79,500
1997........................................................... 80,105
1998........................................................... 77,700
1999........................................................... 77,700
Thereafter..................................................... 1,864,800
----------
$2,259,305
----------
----------
</TABLE>
The Company leases operating space for its Las Vegas West facility from BMT
Partnership, which is a partnership under common control by the shareholders of
the Company. Rent expense related to this facility totaled $77,706 for the year
ended December 31, 1994.
Rent expense under all noncancelable leases, including the Las Vegas
facility lease, aggregated $92,741 in 1994.
6. SUBSEQUENT EVENT
Effective April 1, 1995 substantially all of the Company's assets and
operating business were sold to Pacific Rehabilitation & Sports Medicine, Inc.,
a Vancouver, Washington corporation engaged in owning and operating physical
therapy clinics. The purchase price included cash of $1,500,000 and an unsecured
promissory note payable of $1,000,000 bearing interest at 9%. The promissory
note is due March 31, 1996.
The accompanying financial statements do not reflect the effects of the
sale.
F-51
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Pacific Rehabilitation & Sports Medicine, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and retained earnings and of cash flows
present fairly, in all material respects, the financial position of Care
Concepts, Inc., dba Pacific Physical Therapy, and its subsidiaries at December
31, 1993 and the results of their operations and their cash flows for the year
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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed
above.
As described in Note 8, the shareholders of Care Concepts, Inc., dba Pacific
Physical Therapy, approved and authorized the sale of all of the Company's
outstanding shares of common stock effective May 1, 1994.
PRICE WATERHOUSE LLP
Portland, Oregon
July 9, 1994
F-52
<PAGE>
CARE CONCEPTS, INC.
DBA PACIFIC PHYSICAL THERAPY
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash.......................................... $ 74,289 $ 73,924
Accounts receivable, net (Note 2)............. 455,291 423,951
Prepaids and other current assets............. 45,199 33,775
Advances to shareholder (Note 6).............. 36,906 6,681
--------------- ---------------
Total current assets........................ 611,685 538,331
Furniture and equipment (Note 3)................ 81,697 84,723
Other non-current assets........................ 13,290 13,290
--------------- ---------------
$ 706,672 $ 636,344
--------------- ---------------
--------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 41,512 $ 35,431
Accrued payroll liabilities (Note 7).......... 114,080 87,487
Other accrued liabilities..................... 71,000 56,000
Income taxes payable (Note 5)................. 60,493 58,451
Current portion of capital lease obligations
(Note 4)..................................... 9,666 9,955
Deferred income taxes, current (Note 5)....... 111,024 104,569
--------------- ---------------
Total current liabilities................... 407,775 351,893
Capital lease obligations, net of current
portion (Note 4)............................... 5,397 7,340
Deferred income taxes, non-current (Note 5)..... 4,420 4,397
--------------- ---------------
417,592 363,630
--------------- ---------------
Commitments and contingencies (Notes 2 and 4)
Shareholders' equity:
Common stock, no par value, 10,000,000 shares
authorized, 3,020,000 shares issued and
outstanding.................................. 50,171 50,171
Retained earnings............................. 238,909 222,543
--------------- ---------------
289,080 272,714
--------------- ---------------
$ 706,672 $ 636,344
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-53
<PAGE>
CARE CONCEPTS, INC.
DBA PACIFIC PHYSICAL THERAPY
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE THREE FOR THE YEAR
MONTHS ENDED ENDED DECEMBER
MARCH 31, 1994 31, 1993
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
Net revenues (Note 2)........................... $ 471,941 $ 1,885,739
Cost of revenues................................ 168,890 893,421
--------------- ---------------
Gross profit.................................. 303,051 992,318
General and administrative expenses (Note 2).... 278,243 855,720
--------------- ---------------
Earnings before non-operating expense......... 24,808 136,598
Interest income (expense), net.................. 78 (4,316)
--------------- ---------------
Income before income taxes.................... 24,886 132,282
Income taxes (Note 5)........................... 8,520 49,451
--------------- ---------------
Net income.................................... 16,366 82,831
Retained earnings, beginning of period.......... 222,543 139,712
--------------- ---------------
Retained earnings, end of period................ $ 238,909 $ 222,543
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-54
<PAGE>
CARE CONCEPTS, INC.
DBA PACIFIC PHYSICAL THERAPY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE FOR THE YEAR
MONTHS ENDED ENDED
MARCH 31, DECEMBER 31,
1994 1993
------------- ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income............................ $ 16,366 $ 82,831
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization....... 3,026 10,438
Net change in current assets and
liabilities:
Accounts receivable............... (31,340) 51,493
Prepaids and other current
assets........................... (11,424) (21,353)
Accounts payable.................. 6,081 8,263
Accrued payroll liabilities....... 26,593 21,172
Other accrued liabilities......... 15,000 31,000
Income taxes payable.............. 2,042 47,835
Deferred income taxes............. 6,478 (18,666)
------------- ------------
Net cash provided by operating
activities..................... 32,822 213,013
------------- ------------
Cash flows from financing activities:
Collection of notes receivable........ 32,000
Advances to shareholder (Note 6)...... (30,225) (6,681)
Purchase of furniture and equipment... (51,091)
------------- ------------
Net cash used for investing
activities..................... (30,225) (25,722)
------------- ------------
Cash flows from financing activities:
Principal payments on capital lease
obligations.......................... (2,232) (7,617)
Reduction of shareholder loan (Note
6)................................... (107,040)
------------- ------------
Net cash used for financing
activities..................... (2,232) (114,657)
------------- ------------
Net increase in cash.................... 365 72,634
Cash at beginning of period............. 73,924 1,290
------------- ------------
Cash at end of period................... $ 74,289 $ 73,924
------------- ------------
------------- ------------
Supplemental cash flows disclosures:
Interest paid......................... $ 1,134 $ 5,897
Income taxes paid..................... 10,616
</TABLE>
The accompanying notes are an integral part of this statement.
F-55
<PAGE>
CARE CONCEPTS, INC.
DBA PACIFIC PHYSICAL THERAPY
NOTES TO THE MARCH 31, 1994 AND DECEMBER 31, 1993
CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS AND ORGANIZATION
Care Concepts, Inc. (the Company), dba Pacific Physical Therapy, provides
healthcare services in the nature of physical rehabilitation therapy at three
locations in Southern California.
The Company has three subsidiaries, all of which are inactive: Contracted
Care, Inc.; Beach Cities Rehabilitation Services; and PPTS, Inc. All
intercompany accounts have been eliminated in consolidation.
UNAUDITED INTERIM RESULTS
The accompanying consolidated financial statements at March 31, 1994 and for
the three months then ended are unaudited. In the opinion of management, these
statements have been prepared on the same basis as the audited consolidated
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the Company's
financial position at March 31, 1994, and the results of its operations and cash
flows for the three months then ended. The results of operations for the three
months ended March 31, 1994 are not necessarily indicative of results which may
be obtained during any future period.
REVENUE RECOGNITION
Revenues are recognized once services have been provided to patients. Net
revenues are reported at the estimated amounts to be realized through payments
from patients, third-party payors and others for services rendered. See Note 2.
CASH
Cash consists of accounts held in the Company's and in checking and money
market accounts.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost and include those additions and
improvements that add to productive capacity or extend useful life. When
furniture or equipment are sold or otherwise retired, the cost and related
accumulated depreciation are removed from the respective accounts and the
resulting profit or loss is recorded in operations. The costs of repairs and
maintenance are charged to expense as incurred.
Depreciation of the Company's assets is computed using the straight-line
method over seven years.
INCOME TAXES
The Company accounts for income taxes using the asset and liability approach
prescribed by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under this method, the Company recognizes deferred tax
liabilities and assets for the expected tax consequences of temporary
differences between the book basis and tax basis of its assets and liabilities.
The Company files a cash basis consolidated tax return with its subsidiaries.
F-56
<PAGE>
CARE CONCEPTS, INC.
DBA PACIFIC PHYSICAL THERAPY
NOTES TO THE MARCH 31, 1994 AND DECEMBER 31, 1993
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
----------- ------------
(UNAUDITED)
<S> <C> <C>
Gross accounts receivable....................... $852,045 $873,951
Less allowances for doubtful accounts and
contractual adjustments........................ 396,754 450,000
----------- ------------
$455,291 $423,951
----------- ------------
----------- ------------
</TABLE>
The allowance for contractual adjustments represents an estimate of the
difference between the amount billed by the Company at its normal rates and the
amount which the patient, third-party payor or other party is contractually
obligated to pay the Company. During the three months ended March 31, 1994 and
the year ended December 31, 1993, contractual adjustments aggregated
approximately $92,000 and $315,000, respectively, and have been netted against
revenues in the accompanying consolidated statement of operations. During the
three months ended March 31, 1994 and the year ended December 31, 1993, bad debt
expense aggregated approximately $112,000 and $393,000, respectively, and is
included in general and administrative expenses in the accompanying consolidated
statement of operations.
The Company's billings with certain governmental agencies are subject to
annual audits and retroactive adjustment by program representatives. Such
adjustments, if any, are recorded as contractual adjustments to revenue when
determined. While the potential outcomes of such audits and resulting
adjustments cannot be predicted, management believes that revenues and related
receivables have been recorded at their estimated net realizable values.
3. FURNITURE AND EQUIPMENT
Furniture and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, 1994 1993
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
Leasehold improvements.......................... $ 60,132 $ 60,132
Medical equipment............................... 144,450 144,450
Office equipment and furniture and fixtures..... 55,651 55,651
--------------- ---------------
260,233 260,233
Accumulated depreciation and amortization....... 178,536 175,510
--------------- ---------------
$ 81,697 $ 84,723
--------------- ---------------
--------------- ---------------
</TABLE>
Furniture and equipment include medical equipment held under capital leases
with an aggregate cost of $28,500 at both March 31, 1994 and December 31, 1993.
Accumulated amortization on these assets aggregated $8,696 and $7,678 at March
31, 1994 and December 31, 1993, respectively.
F-57
<PAGE>
CARE CONCEPTS, INC.
DBA PACIFIC PHYSICAL THERAPY
NOTES TO THE MARCH 31, 1994 AND DECEMBER 31, 1993
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LEASE OBLIGATIONS
The Company leases certain medical equipment under capital lease obligations
and leases office and clinic space under operating lease agreements. Minimum
lease payments required under capital and operating leases with noncancelable
terms in excess of one year as of December 31, 1993 are summarized as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- --------------------------------------------------------------------- --------- -----------
<S> <C> <C>
1994................................................................. $ 13,464 $ 71,484
1995................................................................. 7,974 71,484
1996................................................................. 69,854
1997................................................................. 23,710
--------- -----------
Total minimum lease payments......................................... 21,438 $ 236,532
-----------
-----------
Less amounts representing interest................................... 4,143
---------
Present value of capital lease payments.............................. $ 17,295
---------
---------
</TABLE>
Rent expense under operating leases approximated $25,000 and $102,000 for
the three months ended March 31, 1994 and the year ended December 31, 1993,
respectively.
5. INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS FOR THE
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1994 1993
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current:
Federal....................................... $1,123 $44,885
State......................................... 919 23,232
------------ ------------
2,042 68,117
------------ ------------
Deferred:
Federal....................................... 4,269 (12,186)
State......................................... 2,209 (6,480)
------------ ------------
6,478 (18,666)
------------ ------------
$8,520 $49,451
------------ ------------
------------ ------------
</TABLE>
F-58
<PAGE>
CARE CONCEPTS, INC.
DBA PACIFIC PHYSICAL THERAPY
NOTES TO THE MARCH 31, 1994 AND DECEMBER 31, 1993
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) consist of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
--------- ------------
(UNAUDITED)
<S> <C> <C>
Accounts payable and accrued liabilities........ $ 48,383 $ 44,285
--------- ------------
Gross deferred tax asset...................... 48,383 44,285
--------- ------------
Accounts receivable............................. (154,799) (144,242)
Prepaids and other current assets............... (4,608) (4,612)
Depreciation.................................... (4,420) (4,397)
--------- ------------
Gross deferred tax liability.................. (163,827) (153,251)
--------- ------------
Net deferred tax liability...................... $(115,444) $(108,966)
--------- ------------
--------- ------------
</TABLE>
The net deferred tax liability consists of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
Net current deferred tax liability.............. $ 111,024 $ 104,569
Net non-current deferred tax liability.......... 4,420 4,397
--------------- ---------------
$ 115,444 $ 108,966
--------------- ---------------
--------------- ---------------
</TABLE>
The provision for income taxes differed from the amount of income taxes
determined by applying the U.S. statutory federal rate as shown below:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
------------ ------------
(UNAUDITED)
<S> <C> <C>
Graduated statutory federal rate................ 22.2% 28.4%
State taxes, net of federal benefit............. 8.2% 6.8%
Other, net...................................... 2.0% 2.2%
--- ---
32.4% 37.4%
--- ---
--- ---
</TABLE>
6. RELATED PARTY TRANSACTIONS
In 1991, one of the Company's two shareholders loaned the Company
approximately $200,000 under terms that required no interest or set principal
payments. Since that time, the Company has made various payments on behalf of
the Company's shareholder which have served to repay this loan. During the three
months ended March 31, 1994 and the year ended December 31, 1993, the Company
made payments on behalf of the shareholder aggregating approximately $30,000 and
$114,000, respectively. At March 31, 1994 and December 31, 1993, the Company had
a net receivable of $36,906 and $6,681, respectively, from the shareholder.
7. EMPLOYEE BENEFIT PLAN
The Company sponsors an employee tax-deferred savings plan under which the
Company may make voluntary contributions. During the three months ended March
31, 1994 and the year ended December 31, 1993, the Company's contributions to
this plan aggregated approximately $21,000 and $64,000, respectively, and are
allocated between cost of revenues and general and administrative
F-59
<PAGE>
CARE CONCEPTS, INC.
DBA PACIFIC PHYSICAL THERAPY
NOTES TO THE MARCH 31, 1994 AND DECEMBER 31, 1993
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFIT PLAN (CONTINUED)
expenses. At March 31, 1994 and December 31, 1993, accrued payroll liabilities
in the accompanying consolidated balance sheet include accrued contributions of
$56,000 and $35,000, respectively, to this plan.
8. SUBSEQUENT EVENT
Effective May 1, 1994, all of the Company's outstanding shares of common
stock were acquired by Pacific Rehabilitation & Sports Medicine, Inc., a
Vancouver, Washington corporation engaged in owning and operating physical
therapy clinics in various locations throughout the United States. The Company's
outstanding shares of common stock were acquired for $1,000,000 in cash and
125,000 shares of Pacific Rehabilitation & Sports Medicine, Inc.'s common stock.
The accompanying financial statements do not reflect the effects of the
acquisition.
F-60
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Pacific Rehabilitation & Sports Medicine, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations and accumulated deficit and of cash flows present fairly, in all
material respects, the financial position of the Center for Industrial Medicine,
Inc. at December 31, 1994 and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the owner; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed
above.
As described in Note 8, substantially all of the assets and operating
business of the Center for Industrial Medicine, Inc. were sold as of March 1,
1995 to Pacific Rehabilitation & Sports Medicine, Inc.
PRICE WATERHOUSE LLP
Portland, Oregon
May 12, 1995
F-61
<PAGE>
CENTER FOR INDUSTRIAL MEDICINE, INC.
BALANCE SHEET
DECEMBER 31, 1994
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash........................................................................... $ 2,486
Patient accounts receivable, net (Note 2)...................................... 278,859
Prepaid and other current assets............................................... 1,200
Note receivable from shareholder (Note 3)...................................... 38,954
---------
Total current assets......................................................... 321,499
Note receivable from shareholder (Note 3)........................................ 162,830
Furniture and equipment, net (Note 4)............................................ 49,725
Other assets..................................................................... 23,517
---------
$ 557,571
---------
---------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Line of credit (Note 5)........................................................ $ 200,000
Accounts payable............................................................... 43,154
Accrued liabilities............................................................ 20,306
Deferred compensation -- officer............................................... 286,901
---------
Total current liabilities.................................................... 550,361
---------
Commitments and contingent liabilities (Note 6)
Shareholder's equity:
Common stock, no par value; 100,000 shares authorized; 1,000 shares issued and
outstanding................................................................... 10,000
Accumulated deficit, per accompanying statement.................................. (2,790)
---------
7,210
---------
$ 557,571
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-62
<PAGE>
CENTER FOR INDUSTRIAL MEDICINE, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Net revenues................................................................... $2,307,166
Cost of revenues............................................................... 1,399,269
----------
Gross profit............................................................... 907,897
----------
Operating expenses:
Selling, general and administrative.......................................... 865,277
Depreciation and amortization................................................ 14,255
----------
879,532
----------
Income from operations......................................................... 28,365
Nonoperating income (expense):
Interest expense............................................................. (23,628)
Interest income.............................................................. 8,866
Other income................................................................. 155
----------
(14,607)
----------
Income before income taxes..................................................... 13,758
----------
Income taxes................................................................... 800
----------
Net income..................................................................... 12,958
Accumulated deficit, beginning of year......................................... (15,748)
----------
Accumulated deficit, end of year............................................... $ (2,790)
----------
----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-63
<PAGE>
CENTER FOR INDUSTRIAL MEDICINE, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income.................................................................... $ 12,958
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization............................................... 14,255
Net change in current assets and liabilities:
Patient accounts receivable, net............................................ (121,128)
Prepaids and other current assets........................................... 871
Other assets................................................................ 64,341
Accounts payable............................................................ 15,810
Deferred compensation....................................................... 50,000
Accrued liabilities......................................................... 3,089
---------
Net cash provided by operating activities................................. 40,196
---------
Cash flows from investing activities:
Capital expenditures.......................................................... (325)
---------
Net cash used in investing activities..................................... (325)
---------
Cash flows from financing activities:
Proceeds from line of credit, net............................................. 152,882
Payments on long-term obligation.............................................. (80,500)
Advances on note receivable from shareholder, net............................. (125,411)
---------
Net cash used in financing activities..................................... (53,029)
---------
Net decrease in cash............................................................ (13,158)
Cash at beginning of year....................................................... 15,644
---------
Cash at end of year............................................................. $ 2,486
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-64
<PAGE>
CENTER FOR INDUSTRIAL MEDICINE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Center for Industrial Medicine, Inc. (the Company) is a California
corporation that operates a primary medical care and physical therapy clinic in
the San Diego, California area. The Company provides primary medical care and
physical therapy services to patients covered by worker's compensation and
suffering from work and accident-related injuries. See Note 8.
SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues are recognized as services are rendered to patients. Net revenues
are reported at the estimated amounts which the patients, third party payors and
others are contractually obligated to pay for services rendered. See Note 2.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost and include those additions and
improvements that add to productive capacity or extend useful life. The costs of
repairs and maintenance are charged to expense as incurred.
Depreciation is computed using an accelerated method over useful lives of
five to seven years for computers, software, furniture and operating equipment.
Leasehold improvements are amortized on the straight-line basis over the shorter
of the asset life or lease term.
INCOME TAXES
No provision for deferred income taxes is presented as timing differences
between earnings from operations and taxable earnings are not significant.
STATEMENT OF CASH FLOWS
Interest paid approximated interest expense for the year ended December 31,
1994. No income tax payments were made.
2. PATIENT ACCOUNTS RECEIVABLE
Patient accounts receivable consist of:
<TABLE>
<S> <C>
Gross patient accounts receivable................................ $ 323,651
Less allowances for doubtful accounts and contractual
adjustments..................................................... (44,792)
---------
$ 278,859
---------
---------
</TABLE>
The allowance for contractual adjustments represents the difference between
the amounts billed by the Company at its normal rates and the amounts which the
patients, third party payors or other parties are contractually obligated to pay
the Company. During the year ended December 31, 1994 the Company charged
revenues for contractual adjustments aggregating $185,374. During the year ended
December 31, 1994, bad debt expense aggregated $62,000 and is included in
selling, general and administrative expenses in the accompanying statement of
operations.
F-65
<PAGE>
CENTER FOR INDUSTRIAL MEDICINE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
3. NOTE RECEIVABLE FROM SHAREHOLDER
Note receivable from shareholder consists of:
<TABLE>
<S> <C>
Note receivable from shareholder, due June 1, 1999 in monthly
instalments of $4,278, including interest at the rate of 7.0%
per annum, unsecured............................................ $ 201,784
Less principal balance receivable in 1995........................ (38,954)
---------
$ 162,830
---------
---------
</TABLE>
4. FURNITURE AND EQUIPMENT
Furniture and equipment consist of:
<TABLE>
<S> <C>
Medical equipment................................................ $ 124,888
Furniture, fixtures and computer equipment....................... 201,163
Leasehold improvements........................................... 78,795
Automobiles...................................................... 18,675
---------
423,521
Accumulated depreciation and amortization........................ (373,796)
---------
$ 49,725
---------
---------
</TABLE>
5. LINE OF CREDIT
The Company has a bank credit line which permits borrowings to a maximum of
$200,000. At December 31, 1994 borrowings under the line bear interest at 11.5%
and are secured by substantially all assets of the Company. At December 31,
1994, outstanding borrowings under the line aggregated $200,000.
6. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases its operating facility and certain medical equipment
under agreements which require minimum annual lease payments as follows:
<TABLE>
<S> <C>
1995............................................................. $ 165,341
1996............................................................. 163,097
1997............................................................. 166,938
1998............................................................. 173,513
1999............................................................. 181,942
Thereafter....................................................... 30,558
---------
$ 881,389
---------
---------
</TABLE>
The Company leases operating space on a month to month basis. Rent expense
related to the facility totaled $141,815 for the year ended December 31, 1994.
In March 1995, the Company entered into a new facility lease with the Carey
Family Trust and the Carey Grandchildren's Trust for clinic space for the
following five years.
The Company leases medical equipment with various term lengths.
F-66
<PAGE>
CENTER FOR INDUSTRIAL MEDICINE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
7. RELATED PARTY TRANSACTIONS
The Company has advanced funds to the sole shareholder. Such advances do not
provide for set interest and principal payments. The advances, which aggregate
$18,217 at December 31, 1994, are recorded as noncurrent other assets in the
accompanying balance sheet.
8. SUBSEQUENT EVENT
Effective March 1, 1995 substantially all of the Company's assets and
operating business were sold to Pacific Rehabilitation & Sports Medicine, Inc.,
a Vancouver, Washington corporation engaged in owning and operating physical
therapy clinics. The purchase price included cash of $975,000, and two
promissory notes in the amount of $1,125,000 with an interest rate of 7%. The
notes are convertible into shares of common stock of the acquiring company.
The accompanying financial statements do not reflect the effects of the
sale.
F-67
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Pacific Rehabilitation & Sports Medicine, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations and owner's equity and of cash flows present fairly, in all material
respects, the financial position of Michael C. Gibbons, P.T. dba Tigard Physical
Therapy at December 31, 1994 and the results of its operations and its cash
flows for the year in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the owner; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed
above.
As described in Note 5, substantially all of the assets of Michael C.
Gibbons, P.T. dba Tigard Physical Therapy were sold as of July 5, 1995 to
Pacific Rehabilitation & Sports Medicine, Inc.
PRICE WATERHOUSE LLP
Portland, Oregon
September 1, 1995
F-68
<PAGE>
MICHAEL C. GIBBONS, P.T.
DBA TIGARD PHYSICAL THERAPY
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, DECEMBER
1995 31, 1994
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................... $ 99,814 $ 59,492
Accounts receivable, net (Note 2).................................. 213,172 205,137
Prepaid expenses................................................... 1,620 1,620
----------- -----------
Total current assets............................................. 314,606 266,249
Equipment and leasehold improvements, net (Note 3)................... 107,388 110,931
----------- -----------
$ 421,994 $ 377,180
----------- -----------
----------- -----------
LIABILITIES AND OWNER'S EQUITY
Accounts payable..................................................... $ 4,340 $ 4,968
Accrued payroll...................................................... 26,944 23,469
Accrued payroll taxes................................................ 15,863 15,906
Accrued vacation..................................................... 12,761 9,199
----------- -----------
Total current liabilities........................................ 59,908 53,542
Commitments and contingent liabilities (Note 4)
Owner's equity....................................................... 362,086 323,638
----------- -----------
$ 421,994 $ 377,180
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-69
<PAGE>
MICHAEL C. GIBBONS, P.T.
DBA TIGARD PHYSICAL THERAPY
STATEMENT OF OPERATIONS AND OWNER'S EQUITY
<TABLE>
<CAPTION>
FOR THE
THREE FOR THE
MONTHS YEAR ENDED
ENDED DECEMBER
MARCH 31, 31,
1995 1994
----------- ----------
(UNAUDITED)
<S> <C> <C>
Net revenues....................................................... $ 303,491 $1,158,795
Cost of revenues................................................... 139,549 536,249
----------- ----------
Gross profit..................................................... 163,942 622,546
----------- ----------
Operating expenses:
Selling, general and administrative.............................. 24,902 180,087
Depreciation..................................................... 6,008 18,228
----------- ----------
30,910 198,315
----------- ----------
Net income......................................................... 133,032 424,231
Owner's equity, beginning of period................................ 323,638 366,428
Cash distributions to owner........................................ (94,584) (467,021)
----------- ----------
Owner's equity, end of period...................................... $ 362,086 $ 323,638
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-70
<PAGE>
MICHAEL C. GIBBONS, P.T. DBA TIGARD PHYSICAL THERAPY
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS FOR THE
ENDED MARCH YEAR ENDED
31, DECEMBER
1995 31, 1994
------------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income..................................................... $ 133,032 $ 424,231
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation................................................. 6,008 18,228
Net change in current assets and liabilities:
Accounts receivable.......................................... (8,035) 58,145
Accounts payable............................................. (628) 1,173
Accrued payroll.............................................. 3,475 2,774
Accrued payroll taxes........................................ (43) 2,430
Accrued vacation............................................. 3,562 --
------------- -----------
Net cash provided by operating activities.................. 137,371 506,981
------------- -----------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements............... (2,465) (62,125)
------------- -----------
Net cash used in investing activities...................... (2,465) (62,125)
------------- -----------
Cash flows from financing activities:
Cash distributions to owner.................................. (94,584) (467,021)
------------- -----------
Net cash used in financing activities...................... (94,584) (467,021)
------------- -----------
Net increase (decrease) in cash.................................. 40,322 (22,165)
Cash at beginning of period...................................... 59,492 81,657
------------- -----------
Cash at end of period............................................ $ 99,814 $ 59,492
------------- -----------
------------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-71
<PAGE>
MICHAEL C. GIBBONS, P.T. DBA TIGARD PHYSICAL THERAPY
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1995 IS UNAUDITED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Michael C. Gibbons, P.T. dba Tigard Physical Therapy (the Company) is an
Oregon sole proprietorship that operates a physical and occupational therapy
clinic in Tigard, Oregon.
UNAUDITED INTERIM RESULTS
The accompanying financial statements at March 31, 1995 and for the three
months then ended are unaudited. In the opinion of management, these statements
have been prepared on the same basis as the audited financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position at March 31, 1995
and the results of operations and cash flows for the three months ended March
31, 1995. The results of operations for the three months ended March 31, 1995
are not necessarily indicative of results which may be obtained during any
future period.
REVENUE RECOGNITION
Revenues are recognized as services are rendered to patients. Net revenues
are reported at the estimated amounts to be realized through payments from
patients, third-party payors and others for services rendered. Differences
between amounts billed by the Company at its normal rates and the estimated
amounts to be realized are recognized as contractual allowances when services
are rendered. Such contractual allowances are deducted from revenues in the
accompanying statement of operations and owner's equity (see Note 2).
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost and include those
additions and improvements that add to productive capacity or extend useful
life. When equipment or leasehold improvements are sold or otherwise retired,
the cost and related accumulated depreciation are removed from the respective
accounts and the resulting profit or loss is recorded in operations. The cost of
repairs and maintenance are charged to expense as incurred.
Depreciation is computed using the straight-line method over useful lives as
follows:
<TABLE>
<S> <C>
Evaluation equipment................................................ 5-7 years
Office equipment, furniture and fixtures............................ 5-7 years
Leasehold improvements.............................................. 10 years
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The net book values of the Company's financial instruments, as reported in
the accompanying balance sheet, approximate their current fair values.
INCOME TAXES
The Company is a sole proprietorship and is therefore not liable for federal
or state income taxes since the Company's taxable income or loss is attributable
to the owner. Accordingly, the accompanying statement of operations does not
include a provision for income taxes.
F-72
<PAGE>
MICHAEL C. GIBBONS, P.T. DBA TIGARD PHYSICAL THERAPY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1995 IS UNAUDITED)
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of:
<TABLE>
<CAPTION>
DECEMBER
MARCH 31, 31,
1995 1994
--------- -----------
(UNAUDITED)
<S> <C> <C>
Gross accounts receivable.................................... $ 398,546 $ 390,511
Less allowances for doubtful accounts and contractual
adjustments................................................. (185,374) (185,374)
--------- -----------
$ 213,172 $ 205,137
--------- -----------
--------- -----------
</TABLE>
The allowance for contractual adjustments represents the difference between
the amount billed by the Company at its normal rates and the amount which the
patient, third party payor or other party is contractually obligated to pay the
Company (see Note 1). During the three months ended March 31, 1995, the Company
has not recorded any provisions or allowances. During the year ended December
31, 1994 the Company charged revenues for contractual adjustments aggregating
$67,000 and recorded provisions for doubtful accounts aggregating $84,000. The
provisions for doubtful accounts are included in selling, general and
administrative expenses in the accompanying statement of operations and owner's
equity.
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of:
<TABLE>
<CAPTION>
DECEMBER
MARCH 31, 31,
1995 1994
--------- -----------
(UNAUDITED)
<S> <C> <C>
Evaluation equipment......................................... $ 158,518 $ 156,053
Office equipment, furniture and fixtures..................... 47,250 47,250
Leasehold improvements....................................... 11,543 11,543
--------- -----------
217,311 214,846
Accumulated depreciation..................................... (109,923) (103,915)
--------- -----------
$ 107,388 $ 110,931
--------- -----------
--------- -----------
</TABLE>
4. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases its operating facility under an operating lease agreement
which requires minimum lease payments as follows:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING
DECEMBER 31, LEASE
- ---------------------------------------------------------------------------------------- ---------
<S> <C>
1995................................................................................. $ 22,600
---------
---------
</TABLE>
Rent expense approximated $6,750 and $27,000, respectively, for the three
months ended March 31, 1995 and year ended December 31, 1994. The lease may be
renewed for a period of five additional years beginning October 31, 1995 at an
increased rate based on the consumer price index.
5. SUBSEQUENT EVENT
Effective July 5, 1995, substantially all of the Company's assets were sold
to Pacific Rehabilitation & Sports Medicine, Inc., a Vancouver, Washington
corporation engaged in owning and operating physical therapy clinics. The assets
were sold for an aggregate purchase price of $2,500,000. The accompanying
financial statements do not reflect the effects of the sale.
F-73
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Pacific Rehabilitation & Sports Medicine, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations and retained earnings and of cash flows present fairly, in all
material respects, the financial position of Michael D. Mericle, P.T. at
December 31, 1993 and the results of its operations and its cash flows for the
year in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the owner; our responsibility is
to express an opinion on these financial statements based on our audit. We
conducted our audit 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
audit provides a reasonable basis for the opinion expressed above.
As described in Note 5, substantially all of the assets and operating
business of Michael D. Mericle, P.T. were sold as of May 1, 1994 to Pacific
Rehabilitation & Sports Medicine, Inc.
PRICE WATERHOUSE LLP
Portland, Oregon
July 19, 1994
F-74
<PAGE>
MICHAEL D. MERICLE, P.T.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER
1994 31, 1993
----------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash............................................................... $ 20,003 $ 16,189
Patient accounts receivable, net (Note 2).......................... 22,251 29,687
Prepaid expenses................................................... 2,775 3,022
----------- -----------
Total current assets............................................. 45,029 48,898
Furniture and equipment, net (Note 3)................................ 14,846 16,021
Other assets......................................................... 211 246
----------- -----------
$ 60,086 $ 65,165
----------- -----------
----------- -----------
LIABILITIES AND OWNER'S EQUITY
Current liabilities:
Accrued liabilities................................................ $ -- $ 3,489
----------- -----------
Total current liabilities........................................ -- 3,489
----------- -----------
Commitments and contingencies (Note 4)
Owner's equity (Note 5):
Retained earnings, per accompanying statement...................... 60,086 61,676
----------- -----------
60,086 61,676
----------- -----------
$ 60,086 $ 65,165
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-75
<PAGE>
MICHAEL D. MERICLE, P.T.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE
THREE FOR THE
MONTHS YEAR ENDED
ENDED MARCH DECEMBER
31, 1994 31, 1993
----------- -----------
(UNAUDITED)
<S> <C> <C>
Net revenues....................................................... $ 52,856 $ 343,227
Cost of revenues................................................... 24,740 157,421
----------- -----------
Gross profit..................................................... 28,116 185,806
----------- -----------
Operating expenses:
Selling, general and administrative.............................. 6,804 40,397
Depreciation..................................................... 1,175 4,583
----------- -----------
7,979 44,980
----------- -----------
Net income....................................................... 20,137 140,826
Retained earnings, beginning of period............................. 61,676 67,540
Cash distributions to owner........................................ (21,727) (146,690)
----------- -----------
Retained earnings, end of period................................... $ 60,086 $ 61,676
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-76
<PAGE>
MICHAEL D. MERICLE, P.T.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
THREE
MONTHS FOR THE
ENDED YEAR ENDED
MARCH 31, DECEMBER
1994 31, 1993
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................... $ 20,137 $ 140,826
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation................................................... 1,175 4,583
Net change in current assets and liabilities:
Accounts receivable............................................ 7,436 (767)
Prepaid expenses and other assets.............................. 282 2,923
Accrued liabilities............................................ (3,489) (1,082)
----------- -----------
Net cash provided by operating activities.................... 25,541 146,483
----------- -----------
Cash flows from investing activities:
Additions to property and equipment.............................. -- (1,155)
----------- -----------
Net cash used in investing activities........................ -- (1,155)
----------- -----------
Cash flows from financing activities:
Cash distributions to owner...................................... (21,727) (146,690)
----------- -----------
Net cash used in financing activities........................ (21,727) (146,690)
----------- -----------
Net increase (decrease) in cash.................................... 3,814 (1,362)
Cash at beginning of period........................................ 16,189 17,551
----------- -----------
Cash at end of period.............................................. $ 20,003 $ 16,189
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-77
<PAGE>
MICHAEL D. MERICLE, P.T.
NOTES TO THE MARCH 31, 1994 AND DECEMBER 31, 1993
FINANCIAL STATEMENTS
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Michael D. Mericle, P.T. (the Company) is a Nevada proprietorship that
operates a rehabilitation and sports medicine clinic in Las Vegas, Nevada.
UNAUDITED INTERIM RESULTS
The accompanying financial statements at March 31, 1994 and for the three
months then ended are unaudited. In the opinion of the owner, these statements
have been prepared on the same basis as the audited financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position at March 31, 1994
and the results of operations and cash flows for the three months ended March
31, 1994. The results of operations for the three months ended March 31, 1994
are not necessarily indicative of results which may be obtained during any
future period.
SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues are recognized as services are rendered to patients. Net revenues
are reported at the estimated amounts to be realized through payments from
patients, third party payors and others for services rendered. See Note 2.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost and include those additions and
improvements that add to productive capacity or extend useful life. When
property or equipment are sold or otherwise retired, the cost and related
accumulated depreciation are removed from the respective accounts and the
resulting profit or loss is recorded in operations. The costs of repairs and
maintenance are charged to expense as incurred.
Depreciation is computed using the straight-line method over useful lives of
five to seven years.
INCOME TAXES
As a proprietorship, the Company is not liable for federal or state income
taxes since the Company's taxable income or loss is recognized in the separate
income tax returns of the owner. Accordingly, the accompanying statements of
operations do not include a provision for income taxes.
STATEMENT OF CASH FLOWS
No interest or income tax payments were made during the three months ended
March 31, 1994 or the year ended December 31, 1993.
2. PATIENT ACCOUNTS RECEIVABLE
Patient accounts receivable consist of:
<TABLE>
<CAPTION>
DECEMBER
MARCH 31, 31,
1994 1993
----------- -----------
(UNAUDITED)
<S> <C> <C>
Gross accounts receivable.................................... $ 58,785 $ 71,734
Less allowances for doubtful accounts and contractual
adjustments................................................. (36,534) (42,047)
----------- -----------
$ 22,251 $ 29,687
----------- -----------
----------- -----------
</TABLE>
The allowance for contractual adjustments represents the difference between
the amount billed by the Company at its normal rate, and the amount which the
patient, third party payor or other party is contractually obligated to pay the
Company. During the three months ended March 31, 1994, the
F-78
<PAGE>
MICHAEL D. MERICLE, P.T.
NOTES TO THE MARCH 31, 1994 AND DECEMBER 31, 1993
FINANCIAL STATEMENTS (CONTINUED)
2. PATIENT ACCOUNTS RECEIVABLE (CONTINUED)
Company provided $22,653 (unaudited) and $3,775 (unaudited) for contractual
allowances and bad debts, respectively. During the year ended December 31, 1993
the Company charged revenues for contractual adjustments aggregating $114,658
and provided, as bad debt expense, $22,932. Contractual adjustments have been
netted against revenues in the accompanying statement of operations and bad debt
expense is included in selling, general and administrative expenses in the
accompanying statement of operations.
3. FURNITURE AND EQUIPMENT
Furniture and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER
MARCH 31, 31,
1994 1993
----------- -----------
(UNAUDITED)
<S> <C> <C>
Medical and office equipment................................. $ 22,408 $ 22,408
Furniture and fixtures....................................... 6,560 6,560
----------- -----------
28,968 28,968
Accumulated depreciation..................................... (14,122) (12,947)
----------- -----------
$ 14,846 $ 16,021
----------- -----------
----------- -----------
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company leases its operating facility under agreements which require
minimum lease payments as follows:
<TABLE>
<S> <C>
1994................................................................. $ 39,930
1995................................................................. 43,032
1996................................................................. 43,032
1997................................................................. 43,032
1998................................................................. 43,032
Thereafter........................................................... 21,516
---------
$ 233,574
---------
---------
</TABLE>
Rent expense under noncancelable leases aggregated $9,193 (unaudited) for
the three months ended March 31, 1994 and $38,583 in 1993.
5. SUBSEQUENT EVENT
Effective May 1, 1994 substantially all of the Company's assets and
operating business were sold to Pacific Rehabilitation & Sports Medicine, Inc.,
a Vancouver, Washington corporation engaged in owning and operating physical
therapy clinics. The assets were sold for an aggregate purchase price of
$265,000. The accompanying financial statements do not reflect the effects of
the sale.
F-79
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Pacific Rehabilitation & Sports Medicine, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations and retained earnings and of cash flows present fairly, in all
material respects, the financial position of NW Center for Sports Medicine and
Physical Therapy, Inc. at December 31, 1994 and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
owner; our responsibility is to express an opinion on these financial statements
based on our audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed
above.
As described in Note 7, substantially all of the assets and operating
business of NW Center for Sports Medicine and Physical Therapy, Inc. were sold
as of January 31, 1995 to Pacific Rehabilitation & Sports Medicine, Inc.
PRICE WATERHOUSE LLP
Portland, Oregon
April 7, 1995
F-80
<PAGE>
NW CENTER FOR SPORTS MEDICINE AND PHYSICAL THERAPY, INC.
BALANCE SHEET
DECEMBER 31, 1994
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 97,874
Patient accounts receivable, net (Note 2)...................................... 156,723
Other receivables.............................................................. 5,398
Prepaid expenses............................................................... 4,838
---------
Total current assets......................................................... 264,833
Furniture and equipment, net (Note 3)............................................ 136,868
Other assets..................................................................... 2,000
---------
$ 403,701
---------
---------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Current maturity of long-term obligation (Note 4).............................. $ 18,598
Accounts payable............................................................... 2,100
Accrued liabilities............................................................ 18,530
---------
Total current liabilities.................................................... 39,228
---------
Long-term obligation, less current portion (Note 4).............................. 8,708
---------
Commitments and contingent liabilities (Note 6)
Shareholder's equity:
Common stock, $1 par value; 200,000 shares authorized; 500 shares issued and
outstanding................................................................... 500
Additional paid-in capital..................................................... 6,695
Retained earnings, per accompanying statement.................................. 348,570
---------
355,765
---------
$ 403,701
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-81
<PAGE>
NW CENTER FOR SPORTS MEDICINE AND PHYSICAL THERAPY, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Net revenues................................................................... $1,158,827
Cost of revenues............................................................... 785,498
----------
Gross profit................................................................. 373,329
----------
Operating expenses:
Selling, general and administrative.......................................... 244,692
Depreciation................................................................. 29,612
----------
274,304
----------
Income from operations......................................................... 99,025
----------
Non-operating income:
Gain on sale of equipment.................................................... 500
Other income................................................................. 6,968
----------
7,468
----------
Net income..................................................................... 106,493
Retained earnings, beginning of year........................................... 247,977
Cash distributions to shareholder.............................................. (5,900)
----------
Retained earnings, end of year................................................. $ 348,570
----------
----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-82
<PAGE>
NW CENTER FOR SPORTS MEDICINE AND PHYSICAL THERAPY, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income.................................................................. $ 106,493
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation.............................................................. 29,612
Gain on sale of equipment................................................. (500)
Net change in current assets and liabilities:
Patient accounts receivable, net.......................................... (34,391)
Other receivables......................................................... (3,634)
Prepaid expenses and other assets......................................... (6,838)
Accounts payable.......................................................... (2,221)
Accrued liabilities....................................................... 7,921
-----------
Net cash provided by operating activities............................... 96,442
-----------
Cash flows from investing activities:
Additions to furniture and equipment........................................ (50,385)
-----------
Net cash used in investing activities................................... (50,385)
-----------
Cash flows from financing activities:
Payments on long-term obligation............................................ (17,042)
Cash distributions to shareholder........................................... (5,900)
-----------
Net cash used in financing activities................................... (22,942)
-----------
Net increase in cash.......................................................... 23,115
Cash at beginning of year..................................................... 74,759
-----------
Cash at end of year........................................................... $ 97,874
-----------
-----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-83
<PAGE>
NW CENTER FOR SPORTS MEDICINE AND PHYSICAL THERAPY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NW Center for Sports Medicine and Physical Therapy, Inc. (the Company) is a
Washington corporation that operates three rehabilitation and sports medicine
clinics in the Tacoma, Washington area. The Company provides comprehensive
outpatient rehabilitation services to patients suffering from work and
accident-related injuries.
See Note 7.
SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues are recognized as services are rendered to patients. Net revenues
are reported at the estimated amounts which the patients, third party payors and
others are contractually obligated to pay for services rendered. See Note 2.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost and include those additions and
improvements that add to productive capacity or extend useful life. When
property or equipment are sold or otherwise retired, the cost and related
accumulated depreciation are removed from the respective accounts and the
resulting profit or loss is recorded in operations. The costs of repairs and
maintenance are charged to expense as incurred.
Depreciation is computed using the double-declining balance method over
useful lives of five to seven years for computers, software, furniture and
operating equipment. Leasehold improvements are amortized on the straight-line
basis over the shorter of the asset life or lease term.
INCOME TAXES
The Company has elected to be taxed under subchapter S of the Internal
Revenue Code of 1986 as amended. As an S Corporation, the Company's taxable
income or loss is attributed directly to the Company's shareholder for inclusion
in his separate income tax returns. Accordingly, the accompanying statement of
operations does not include a provision for income taxes.
STATEMENT OF CASH FLOWS
Cash equivalents include short-term investments with maturities of three
months or less. Interest paid approximated interest expense for the year ended
December 31, 1994. No income tax payments were made.
2. PATIENT ACCOUNTS RECEIVABLE
Patient accounts receivable consist of:
<TABLE>
<S> <C>
Gross patient accounts receivable................................ $ 226,370
Less allowances for doubtful accounts and contractual
adjustments..................................................... (69,647)
---------
$ 156,723
---------
---------
</TABLE>
The allowance for contractual adjustments represents the difference between
the amounts billed by the Company at its normal rates and the amounts which the
patients, third party payors or other parties are contractually obligated to pay
the Company. During the year ended December 31, 1994 the Company charged
revenues for contractual adjustments aggregating $282,000. During the year ended
December 31, 1994, bad debt expense aggregated $7,500 and is included in
selling, general and administrative expenses in the accompanying statement of
operations.
F-84
<PAGE>
NW CENTER FOR SPORTS MEDICINE AND PHYSICAL THERAPY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
3. FURNITURE AND EQUIPMENT
Furniture and equipment consist of:
<TABLE>
<S> <C>
Computers and software........................................... $ 23,260
Furniture and operating equipment................................ 131,816
Leasehold improvements........................................... 110,083
---------
265,159
Accumulated depreciation......................................... (128,291)
---------
$ 136,868
---------
---------
</TABLE>
4. LONG-TERM OBLIGATION
At December 31, 1994 the Company had a long-term obligation aggregating
$27,306 with a bank. The obligation was due in monthly instalments of $1,677,
including interest at the bank's prime rate plus 1.5% (10.0% at December 31,
1994), and was secured by the Company's equipment.
During March 1995, in connection with the sale of substantially all of the
Company's assets (Note 7), the long-term obligation was paid in full.
5. PROFIT SHARING AND 401(K) SAVINGS PLANS
The Company has a profit sharing plan for all full-time employees who have
attained 21 years of age and have completed one full year of employment. The
Company may, at its discretion, contribute to the plan. No contributions were
made to the plan during the year ended December 31, 1994.
The Company has a 401(k) savings plan available to all employees.
Participants in the plan may elect to contribute from 1% to 12% of their
compensation. The Company will match 50% of up to 6% of the employees'
compensation. The Company contributed approximately $19,000 for the year ended
December 31, 1994.
6. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases its operating facility under agreements which require
minimum annual lease payments as follows:
<TABLE>
<S> <C>
1995............................................................. $ 128,932
1996............................................................. 130,375
1997............................................................. 135,841
1998............................................................. 129,979
1999............................................................. 85,914
Thereafter....................................................... 142,047
---------
$ 753,088
---------
---------
</TABLE>
The Company leases operating space for its Tacoma facility from the Income
Medical Center Partnership, of which the Company's sole shareholder is a 10%
partner. Rent expense related to the Tacoma facility totaled $59,792 for the
year ended December 31, 1994.
Rent expense under all noncancelable leases, including the Tacoma facility
lease, aggregated $115,000 in 1994.
7. SUBSEQUENT EVENT
Effective January 31, 1995 substantially all of the Company's assets and
operating business were sold to Pacific Rehabilitation & Sports Medicine, Inc.,
a Vancouver, Washington corporation engaged
F-85
<PAGE>
NW CENTER FOR SPORTS MEDICINE AND PHYSICAL THERAPY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
7. SUBSEQUENT EVENT (CONTINUED)
in owning and operating physical therapy clinics. The purchase price included
cash of $950,000, and the grant of a Common Stock Purchase Warrant for the
Company's sole shareholder to purchase 75,000 shares of common stock of the
acquiring company at an exercise price of $6.00 per share. In addition, pursuant
to the terms of sale, additional cash proceeds of up to $300,000 may be paid to
the Company based upon earnings levels over three years at one of the Company's
clinics.
The accompanying financial statements do not reflect the effects of the
sale.
F-86
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Pacific Rehabilitation & Sports Medicine, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations and retained earnings and of cash flows present fairly, in all
material respects, the financial position of Northwest Evaluations for the
Injured, Inc. at December 31, 1994 and the results of its operations and its
cash flows for the year in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the owner; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed
above.
As described in Note 8, all of the outstanding shares of common stock of
Northwest Evaluations for the Injured, Inc. were sold as of June 1, 1995 to
Pacific Rehabilitation & Sports Medicine, Inc.
PRICE WATERHOUSE LLP
Portland, Oregon
August 4, 1995
F-87
<PAGE>
NORTHWEST EVALUATION FOR THE INJURED, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, DECEMBER
1995 31, 1994
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................... $ 108,434 $ 171,404
Accounts receivable, net (Note 2).................................. 267,273 219,202
Prepaid expenses................................................... 20,023 3,443
----------- -----------
Total current assets............................................. 395,730 394,049
Fixed assets, net (Note 3)........................................... 204,678 186,934
Other assets......................................................... 260 303
----------- -----------
$ 600,668 $ 581,286
----------- -----------
----------- -----------
LIABILITIES AND OWNER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses.............................. $ 65,671 $ 78,645
Line of credit (Note 4)............................................ -- 75,000
Current portion of notes payable (Note 5).......................... 19,786 19,714
Current portion of capital lease obligation (Note 6)............... 4,413 5,680
----------- -----------
Total current liabilities........................................ 89,870 179,039
Notes payable, less current portion (Note 5)......................... 60,235 40,908
Capital lease obligation, less current portion (Note 6).............. 23,123 22,715
----------- -----------
173,228 242,662
----------- -----------
Commitments and contingencies (Note 7)
Owner's equity (Note 8):
Common stock, $1.00 par value, 50,000 shares authorized, issued and
outstanding....................................................... 50,000 50,000
Additional paid-in capital......................................... 122,650 77,000
Retained earnings, per accompanying statement...................... 254,790 211,624
----------- -----------
427,440 338,624
----------- -----------
$ 600,668 $ 581,286
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-88
<PAGE>
NORTHWEST EVALUATION FOR THE INJURED, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE
THREE FOR THE
MONTHS YEAR ENDED
ENDED DECEMBER
MARCH 31, 31,
1995 1994
----------- ----------
(UNAUDITED)
<S> <C> <C>
Net revenues....................................................... $ 446,998 $1,643,476
Cost of revenues................................................... 230,917 754,659
----------- ----------
Gross profit..................................................... 216,081 888,817
----------- ----------
Operating expenses:
Selling, general and administrative.............................. 157,609 744,034
Depreciation..................................................... 10,414 27,467
----------- ----------
168,023 771,501
----------- ----------
Other income (expense):
Interest income.................................................. 823 808
Interest expense................................................. (3,130) (17,877)
Other income (expense)........................................... 415 (14,226)
----------- ----------
(1,892) (31,295)
----------- ----------
Net income......................................................... 46,166 86,021
Retained earnings, beginning of period............................. 211,624 133,353
Cash distributions to owner........................................ (3,000) (7,750)
----------- ----------
Retained earnings, end of period................................... $ 254,790 $ 211,624
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-89
<PAGE>
NORTHWEST EVALUATION FOR THE INJURED, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
THREE FOR THE
MONTHS YEAR ENDED
ENDED DECEMBER
MARCH 31, 31,
1995 1994
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................... $ 46,166 $ 86,021
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization.................................. 10,462 25,099
Net change in current assets and liabilities:
Accounts receivable............................................ (48,071) (55,317)
Prepaid expenses............................................... (16,580) 11,928
Accounts payable and accrued expenses.......................... (12,974) 51,858
----------- -----------
Net cash provided by (used in) operating activities.......... (20,997) 119,589
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets......................................... (28,163) (99,147)
----------- -----------
Net cash used in investing activities........................ (28,163) (99,147)
----------- -----------
Cash flows from financing activities:
Cash distributions to owner...................................... (3,000) (7,750)
Principal payments on capital lease obligations.................. (859) (10,620)
Proceeds from issuance of line of credit......................... -- 50,000
Payments on line of credit....................................... (75,000) --
Proceeds from issuance of notes payable.......................... 23,840 32,450
Principal payments on notes payable.............................. (4,441) (15,951)
Proceeds from shareholder capital investment..................... 45,650 77,000
----------- -----------
Net cash provided by (used in) financing activities.......... (13,810) 125,129
----------- -----------
Net increase (decrease) in cash.................................... (62,970) 145,571
Cash at beginning of period........................................ 171,404 25,833
----------- -----------
Cash at end of period.............................................. $ 108,434 $ 171,404
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-90
<PAGE>
NORTHWEST EVALUATION FOR THE INJURED, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1995 IS UNAUDITED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Northwest Evaluations for the Injured, Inc. (the Company) is a Washington
Subchapter S corporation that operates physical and occupational therapy clinics
in Seattle, Bremerton and Kent, Washington. The Bremerton location was opened
during March 1995.
UNAUDITED INTERIM RESULTS
The accompanying financial statements at March 31, 1995 and for the three
months then ended are unaudited. In the opinion of management, these statements
have been prepared on the same basis as the audited financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position at March 31, 1995
and the results of operations and cash flows for the three months ended March
31, 1995. The results of operations for the three months ended March 31, 1995
are not necessarily indicative of results which may be obtained during any
future period.
REVENUE RECOGNITION
Revenues are recognized as services are rendered to patients. Net revenues
are reported at the estimated amounts to be realized through payments from
patients, third-party payors and others for services rendered. Such estimated
amounts have approximated normal charges to date; as a result, contractual
allowances have been insignificant.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and include those additions and
improvements that add to productive capacity or extend useful life. When
property or equipment are sold or otherwise retired, the cost and related
accumulated depreciation are removed from the respective accounts and the
resulting profit or loss is recorded in operations. The cost of repairs and
maintenance are charged to expense as incurred.
Depreciation is computed using the straight-line method over useful lives as
follows:
<TABLE>
<S> <C>
Evaluation equipment.............................................. 7 years
Furniture and fixtures and office equipment....................... 7 years
Leasehold improvements............................................ 15 years
Database program.................................................. 5 years
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
There are no significant differences between the carrying value and fair
market value of the Company's financial instruments.
INCOME TAXES
The Company is a Subchapter S corporation and is therefore not liable for
federal or state income taxes since the Company's income or loss is attributable
to the shareholders. Accordingly, the accompanying statements of operations do
not include a provision for income taxes.
STATEMENT OF CASH FLOWS
Interest paid approximated interest expense for the three months ended March
31, 1995 and for the year ended December 31, 1994.
F-91
<PAGE>
NORTHWEST EVALUATION FOR THE INJURED, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1995 IS UNAUDITED)
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER
1995 31, 1994
----------- -----------
(UNAUDITED)
<S> <C> <C>
Gross accounts receivable.................................... $ 318,102 $ 270,031
Less allowances for doubtful accounts........................ (50,829) (50,829)
----------- -----------
$ 267,273 $ 219,202
----------- -----------
----------- -----------
</TABLE>
During the three months ended March 31, 1995 and 1994, the Company processed
billings and collections for an unaffiliated third party in exchange for a
monthly service fee of $2,000. Gross accounts receivable from such billings at
March 31, 1995 and December 31, 1994 aggregate $11,080 and $24,089,
respectively, with corresponding amounts included in accounts payable and
accrued expenses.
3. FIXED ASSETS
Fixed assets consist of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER
1995 31, 1994
----------- -----------
(UNAUDITED)
<S> <C> <C>
Evaluation equipment......................................... $ 158,369 $ 150,941
Furniture and fixtures....................................... 24,658 24,657
Office equipment............................................. 89,723 68,989
Leasehold improvements....................................... 6,023 6,023
Database program............................................. 2,525 2,525
----------- -----------
281,298 253,135
Accumulated depreciation..................................... (76,620) (66,201)
----------- -----------
$ 204,678 $ 186,934
----------- -----------
----------- -----------
</TABLE>
Evaluation equipment includes the cost of equipment held by the Company
under a capital lease agreement. The cost related to assets under capital leases
aggregated $32,900 at March 31, 1995 and December 31, 1994, and related
accumulated depreciation aggregated $7,442 and $6,267, respectively.
4. LINE OF CREDIT
The Company has a revolving line of credit agreement which provides a
maximum borrowing limit of $75,000 at December 31, 1994. Borrowings under the
revolving line of credit bear interest at 8.75% and are secured by accounts
receivable and certain fixed assets. The line of credit matured in May 1995. The
agreement was renewed in May 1995 for a maximum borrowing limit of $100,000.
F-92
<PAGE>
NORTHWEST EVALUATION FOR THE INJURED, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1995 IS UNAUDITED)
5. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER
1995 31, 1994
----------- -----------
(UNAUDITED)
<S> <C> <C>
Note payable to bank, due in monthly instalments of $1,271
through June 1977, including interest at 11.5%.............. $ 30,373 $ 33,156
Note payable to bank, due in monthly instalments of $839
through March 1998, including interest at 11.0%............. 25,808 27,466
Note payable to bank, due in monthly instalments of $622
through March 1999, including interest at 11.5%............. 23,840 --
----------- -----------
80,021 60,622
Less current portion......................................... (19,786) (19,714)
----------- -----------
$ 60,235 $ 40,908
----------- -----------
----------- -----------
</TABLE>
As of December 31, 1994, the note payable obligations mature as follows:
<TABLE>
<S> <C>
1995.............................................................. $ 19,714
1996.............................................................. 21,820
1997.............................................................. 16,615
1998.............................................................. 2,473
---------
$ 60,622
---------
---------
</TABLE>
6. CAPITAL LEASE OBLIGATION
Future minimum lease payments under capital leases at December 31, 1995 are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- -----------------------------------------------------------------------------------
<S> <C>
1995............................................................................... $ 9,471
1996............................................................................... 9,471
1997............................................................................... 9,471
1998............................................................................... 6,314
---------
Total minimum lease payments....................................................... 34,727
Less amount representing interest.................................................. 6,332
---------
28,395
Less amounts due in one year....................................................... 5,680
---------
Obligations under capital leases, net of current portion........................... $ 22,715
---------
---------
</TABLE>
F-93
<PAGE>
NORTHWEST EVALUATION FOR THE INJURED, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1995 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases one of its operating facilities and certain equipment
under operating lease agreements. Minimum lease payments required under
operating leases with noncancelable terms in excess of one year as of December
31, 1994 are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING
DECEMBER 31, LEASES
- ------------- -----------
<S> <C>
1995............................................................................. $ 41,078
1996............................................................................. 40,508
1997............................................................................. 37,030
1998............................................................................. 36,144
-----------
$ 154,760
-----------
-----------
</TABLE>
Rent expense approximated $46,000 and $155,000, respectively, for the three
months ended March 31, 1995 and the year ended December 31, 1994.
8. SUBSEQUENT EVENT
Effective June 1, 1995, all of the Company's outstanding shares of common
stock were sold to Pacific Rehabilitation & Sports Medicine, Inc., a Vancouver,
Washington corporation engaged in owning and operating physical therapy clinics.
The assets were sold for an aggregate purchase price of $1,400,000. The
accompanying financial statements do not reflect the effects of the sale.
F-94
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Pacific Rehabilitation & Sports Medicine, Inc.
In our opinion, the accompanying balance sheet and the related statement of
operations and retained earnings and of cash flows present fairly, in all
material respects, the financial position of Advanced Rehabilitation
Technologies, Inc. at December 31, 1993 and the results of its operations and
its cash flows for the year 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed
above.
As described in Note 6, substantially all of the assets and operating
business of Advanced Rehabilitation Technologies, Inc. were sold as of June 1,
1994 to Pacific Rehabilitation & Sports Medicine, Inc.
PRICE WATERHOUSE LLP
Portland, Oregon
August 19, 1994
F-95
<PAGE>
ADVANCED REHABILITATION TECHNOLOGIES, INC.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash............................................ $ 196,110 $ 240,116
Accounts receivable, net (Note 2)............... 222,000 197,922
------------ ------------
Total current assets.......................... 418,110 438,038
Furniture and equipment, net (Note 3)............. 34,989 35,610
Receivables from affiliate (Note 5)............... 299,741 220,000
------------ ------------
$ 752,840 $ 693,648
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable................................ $ 9,384 $ 12,590
Accrued liabilities............................. 3,323 3,323
------------ ------------
Total current liabilities..................... 12,707 15,913
------------ ------------
Commitments (Note 4)
Shareholder's equity (Note 6):
Common stock, $1.00 par value, 500,000 shares
authorized, 1,000 shares issued and
outstanding.................................... 1,000 1,000
Retained earnings, per accompanying statement... 739,133 676,735
------------ ------------
740,133 677,735
------------ ------------
$ 752,840 $ 693,648
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-96
<PAGE>
ADVANCED REHABILITATION TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE FOR THE YEAR
THREE MONTHS ENDED
ENDED MARCH DECEMBER 31,
31, 1994 1993
------------ ------------
(UNAUDITED)
<S> <C> <C>
Net revenues......................................................... $ 276,947 $ 1,203,287
Cost of revenues..................................................... 118,373 362,982
------------ ------------
Gross profit....................................................... 158,574 840,305
------------ ------------
Operating expenses:
Selling, general and administrative................................ 95,909 462,571
Depreciation and amortization...................................... 1,116 4,327
------------ ------------
97,025 466,898
------------ ------------
Income from operations............................................... 61,549 373,407
Interest income...................................................... 849 2,391
------------ ------------
Net income......................................................... 62,398 375,798
Retained earnings, beginning of period............................... 676,735 300,937
------------ ------------
Retained earnings, end of period..................................... $ 739,133 $ 676,735
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-97
<PAGE>
ADVANCED REHABILITATION TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE YEAR
THREE MONTHS ENDED
ENDED MARCH DECEMBER 31,
31, 1994 1993
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 62,398 $ 375,798
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization........................... 1,116 4,327
Net change in current assets and liabilities:
Accounts receivable................................... (24,078) (20,574)
Receivable from affiliate............................. (79,741) (199,188)
Accounts payable and accrued liabilities.............. (3,206) 2,478
------------ ------------
Net cash (used in) provided by operating activities... (43,511) 162,841
------------ ------------
Cash flows from investing activities:
Additions to property and equipment....................... (495) (31,226)
------------ ------------
Net cash used in investing activities................. (495) (31,226)
------------ ------------
Net (decrease) increase in cash............................. (44,006) 131,615
Cash at beginning of period................................. 240,116 108,501
------------ ------------
Cash at end of period....................................... $ 196,110 $ 240,116
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-98
<PAGE>
ADVANCED REHABILITATION TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 1994 AND DECEMBER 31, 1993 (UNAUDITED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Advanced Rehabilitation Technologies, Inc. (the Company) is a Hawaii
Subchapter S Corporation that operates a rehabilitation and sports medicine
clinic in Ewa Beach, Hawaii.
UNAUDITED INTERIM RESULTS
The accompanying financial statements at March 31, 1994 and for the three
months then ended are unaudited. In the opinion of management, these statements
have been prepared on the same basis as the audited financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position at March 31, 1994
and the results of operations and cash flows for the three months ended March
31, 1994. The results of operations for the three months ended March 31, 1994
are not necessarily indicative of results which may be obtained during any
future period.
SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues are recognized as services are rendered to patients. Net revenues
are reported at the estimated amounts to be realized through payments from
patients, third-party payors and others for services rendered.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost and include those additions and
improvements that add to productive capacity or extend useful life. When
property or equipment are sold or otherwise retired, the cost and related
accumulated depreciation are removed from the respective accounts and the
resulting profit or loss is recorded in operations. The costs of repairs and
maintenance are charged to expense as incurred.
Depreciation is computed using the straight-line method over useful lives of
five to seven years.
INCOME TAXES
The Company is a Subchapter S Corporation and is therefore not liable for
federal or state income taxes since the Company's taxable income or loss is
attributable to the shareholder. Accordingly, the accompanying statement of
operations does not include a provision for income taxes.
STATEMENT OF CASH FLOWS
Interest paid approximated interest expense for the three months ended March
31, 1994 and for the year ended December 31, 1993. No income tax payments were
made.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER
1994 31, 1993
--------- -----------
(UNAUDITED)
<S> <C> <C>
Gross accounts receivable.................................... $ 590,426 $ 526,212
Less allowance for doubtful accounts......................... (368,426) (328,290)
--------- -----------
Accounts receivable, net..................................... $ 222,000 $ 197,922
--------- -----------
--------- -----------
</TABLE>
During the three months ended March 31, 1994 and the year ended December 31,
1993, the Company provided, as bad debt expense, $40,136 (unaudited) and
$198,199, respectively. Such expense is included in selling, general and
administrative expenses in the accompanying statement of operations.
F-99
<PAGE>
ADVANCED REHABILITATION TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1994 AND DECEMBER 31, 1993 (UNAUDITED)
3. FURNITURE AND EQUIPMENT
Furniture and equipment consist of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER
1994 31, 1993
----------- -----------
(UNAUDITED)
<S> <C> <C>
Medical and office equipment.................................. $ 25,759 $ 25,264
Furniture and fixtures........................................ 3,717 3,717
Leasehold improvements........................................ 11,517 11,517
----------- -----------
40,993 40,498
Accumulated depreciation and amortization..................... (6,004) (4,888)
----------- -----------
Furniture and equipment, net.................................. $ 34,989 $ 35,610
----------- -----------
----------- -----------
</TABLE>
4. COMMITMENTS
The Company leases its operating facility under agreements which require
future minimum lease payments as of December 31, 1993 as follows:
<TABLE>
<S> <C>
1994............................................................. $ 44,862
1995............................................................. 46,645
1996............................................................. 40,109
---------
$ 131,616
---------
---------
</TABLE>
Rent expense under the noncancelable lease aggregated $26,006 (unaudited)
for the three months ended March 31, 1994 and $44,158 in 1993.
5. RELATED PARTY TRANSACTIONS
The Company has advanced funds to the sole shareholder's medical practice.
Such advances do not provide for set interest or principal payments and
accordingly are recorded as noncurrent receivables from affiliate in the
accompanying balance sheet.
6. SUBSEQUENT EVENT
Effective June 1, 1994, substantially all of the Company's assets and
operating business were sold to Pacific Rehabilitation & Sports Medicine, Inc.,
a Vancouver, Washington corporation engaged in owning and operating physical
therapy clinics. The assets were sold for an aggregate purchase price of
$2,400,000. The accompanying financial statements do not reflect the effects of
the sale.
F-100
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Pacific Rehabilitation & Sports Medicine, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations and retained earnings and of cash flows present fairly, in all
material respects, the financial position of Professional Athletic
Rehabilitation, Inc. at December 31, 1993 and the results of its operations and
its cash flows for the year 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed
above.
As described in Note 6, the shareholders of Professional Athletic
Rehabilitation, Inc. approved and authorized the sale of its assets, effective
May 1, 1994.
PRICE WATERHOUSE LLP
Portland, Oregon
July 1, 1994
F-101
<PAGE>
PROFESSIONAL ATHLETIC REHABILITATION, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, DECEMBER
1994 31, 1993
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................... $ 51,553 $ 51,826
Accounts receivable, net (Note 2).................................. 119,250 124,529
----------- -----------
Total current assets............................................. 170,803 176,355
Property and equipment, net (Note 3)................................. 126,397 133,564
----------- -----------
$ 297,200 $ 309,919
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 10,000 $ 12,002
Current portion of long-term debt (Note 4)......................... 31,390 31,390
----------- -----------
Total current liabilities........................................ 41,390 43,392
Long-term debt (Note 4).............................................. 5,335 13,335
----------- -----------
46,725 56,727
----------- -----------
Shareholders' equity:
Common stock, $1.00 par value, 1,500 shares authorized, 1,000
shares issued and outstanding..................................... 1,000 1,000
Additional paid-in capital......................................... 9,000 9,000
Retained earnings, per accompanying statement...................... 240,475 243,192
----------- -----------
250,475 253,192
----------- -----------
$ 297,200 $ 309,919
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-102
<PAGE>
PROFESSIONAL ATHLETIC REHABILITATION, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE THREE FOR THE YEAR
MONTHS ENDED ENDED
MARCH 31, DECEMBER 31,
1994 1993
------------- -------------
<S> <C> <C>
(UNAUDITED)
Net revenues........................................................................ $ 271,096 $ 1,125,550
Cost of revenues.................................................................... 150,169 526,363
------------- -------------
Gross profit...................................................................... 120,927 599,187
------------- -------------
Operating expenses:
Selling, general and administration............................................... 25,685 240,284
Depreciation and amortization..................................................... 7,167 35,439
------------- -------------
32,852 275,723
------------- -------------
Income from operations............................................................ 88,075 323,464
Interest expense.................................................................... (792) (3,519)
------------- -------------
Net earnings...................................................................... 87,283 319,945
Retained earnings, beginning of period.............................................. 243,192 233,247
Cash distributions to shareholders.................................................. (90,000) (310,000)
------------- -------------
Retained earnings, end of period.................................................... $ 240,475 $ 243,192
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-103
<PAGE>
PROFESSIONAL ATHLETIC REHABILITATION, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
THREE
MONTHS FOR THE
ENDED YEAR ENDED
MARCH 31, DECEMBER
1994 31, 1993
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net earnings..................................................... $ 87,283 $ 319,945
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization.................................. 7,167 35,439
Net change in current assets and liabilities:
Accounts receivable............................................ 5,279 4,734
Other current assets........................................... -- 14,746
Accounts payable............................................... (2,002) 12,002
----------- -----------
Net cash provided by operating activities.................... 97,727 386,866
----------- -----------
Cash flows from financing activities:
Cash distributions to shareholders............................... (90,000) (310,000)
Repayment of long-term debt...................................... (8,000) (36,323)
----------- -----------
Net cash used in financing activities........................ (98,000) (346,323)
----------- -----------
Net (decrease) increase in cash.................................... (273) 40,543
Cash at beginning of period........................................ 51,826 11,283
----------- -----------
Cash at end of period.............................................. $ 51,553 $ 51,826
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-104
<PAGE>
PROFESSIONAL ATHLETIC REHABILITATION, INC.
NOTES TO THE MARCH 31, 1994 AND DECEMBER 31, 1993 FINANCIAL STATEMENTS
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Professional Athletic Rehabilitation, Inc. (the Company) is a Florida
Subchapter S corporation that operates a rehabilitation and sports medicine
clinic in Miami, Florida.
UNAUDITED INTERIM RESULTS
The accompanying financial statements at March 31, 1994 and for the three
months then ended are unaudited. In the opinion of management, these statements
have been prepared on the same basis as the audited financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position at March 31, 1994,
and the results of operations and cash flows for the three months ended March
31, 1994. The results of operations for the three months ended March 31, 1994
are not necessarily indicative of results which may be obtained during any
future period.
SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues are recognized as services are rendered to patients. Net revenues
are reported at the estimated amounts to be realized through payments from
patients, third party payors and others for services rendered. See Note 2.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and include those additions and
improvements that add to productive capacity or extend useful life. When
property or equipment are sold or otherwise retired, the cost and related
accumulated depreciation are removed from the respective accounts and the
resulting profit or loss is recorded in operations. The costs of repairs and
maintenance are charged to expense as incurred.
Depreciation is computed using the straight-line method over useful lives as
follows:
<TABLE>
<S> <C>
Leasehold improvements....................................... 8 to 10 years
Medical equipment............................................ 7 years
Office equipment and furniture and fixtures.................. 5 years
</TABLE>
INCOME TAXES
The Company is a Subchapter S corporation and is therefore not liable for
federal or state income taxes since the Company's income or loss is recognized
in the separate tax returns of the shareholders. Accordingly, the accompanying
statements of operations do not include a provision for income taxes.
STATEMENT OF CASH FLOWS
Interest paid approximated interest expense for the three months ended March
31, 1994 and for the year ended December 31, 1993. No income tax payments were
made.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER
1994 31, 1993
--------- -----------
(UNAUDITED)
<S> <C> <C>
Gross accounts receivable............................ $ 285,745 $ 337,818
Less allowances for doubtful accounts and contractual
adjustments......................................... (166,495) (213,289)
--------- -----------
$ 119,250 $ 124,529
--------- -----------
--------- -----------
</TABLE>
F-105
<PAGE>
PROFESSIONAL ATHLETIC REHABILITATION, INC.
NOTES TO THE MARCH 31, 1994 AND DECEMBER 31, 1993 FINANCIAL STATEMENTS
(CONTINUED)
2. ACCOUNTS RECEIVABLE (CONTINUED)
The allowance for contractual adjustments represents the difference between
the amount billed by the Company at its normal rates and the amount which the
patient, third party payor or other party is contractually obligated to pay the
Company. During the three months ended March 31, 1994, the Company provided
$47,800 and $0 for contractual allowances and bad debts, respectively. During
the year ended December 31, 1993 the Company charged revenues for contractual
adjustments aggregating $194,000 and provided, as bad debt expense, $84,400.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER
1994 31, 1993
--------- -----------
(UNAUDITED)
<S> <C> <C>
Leasehold improvements............................... $ 187,095 $ 187,095
Medical equipment.................................... 51,278 51,278
Office equipment and furniture and fixtures.......... 104,802 104,802
--------- -----------
343,175 343,175
Accumulated depreciation and amortization............ (216,778) (209,611)
--------- -----------
$ 126,397 $ 133,564
--------- -----------
--------- -----------
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of an unsecured note, payable in installments, with
interest at the prime rate (6% at December 31, 1993) plus 1%, through June 1995.
Future maturities of the note, as of December 31, 1993, are $31,390 in 1994 and
$13,335 in 1995.
5. RELATED PARTY TRANSACTIONS
The Company leases its operating facility from its shareholders. Lease
commitments with respect to this lease are summarized as follows:
<TABLE>
<S> <C>
1994............................................................. $ 159,000
1995............................................................. 164,000
1996............................................................. 169,000
1997............................................................. 174,000
1998............................................................. 179,000
Thereafter....................................................... 62,000
---------
$ 907,000
---------
---------
</TABLE>
Rent expense under noncancelable leases aggregated $39,871 (unaudited) for
the three months ended March 31, 1994 and $149,318 in 1993.
The Company's shareholders, who also operate an orthopedic medical practice,
refer nearly all of the Company's patients to the Company. No amounts are paid
to the shareholders or their other businesses for such referrals.
6. SUBSEQUENT EVENT
Effective May 1, 1994 substantially all of the Company's assets and
operating business were acquired by Pacific Rehabilitation & Sports Medicine,
Inc., a Vancouver, Washington corporation engaged in owning and operating
physical therapy clinics. The assets were sold for an aggregate purchase price
of $1,900,000. The accompanying financial statements do not reflect the effects
of the acquisition.
F-106
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Pacific Rehabilitation & Sports Medicine, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations and retained earnings/partners' capital and of cash flows present
fairly, in all material respects, the financial position of Physical Therapy
Clinic of Tualatin, Inc.; Roger J. Miller Enterprises, Inc. dba Lake Oswego
Physical Therapy; John Phillipe and Wayne Crinklaw dba Hillsboro Physical
Therapy Clinic; Northwest Physical Therapy Clinic, Inc.; Eischen Physical
Therapy, Inc.; and Longview Physicians' Physical Therapy Services, P.S. at
December 31, 1994 and Oregon City Physical Therapy, Inc. at October 31, 1994,
and the results of their operations and their cash flows for the year in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the management of the respective companies;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As described in Note 12, Pacific Rehabilitation & Sports Medicine, Inc.
acquired the physical therapy practices of the aforementioned companies as of
July 1, 1995.
PRICE WATERHOUSE LLP
Portland, Oregon
September 29, 1995
F-107
<PAGE>
OREGON ACQUISITIONS
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
APRIL 30,
JUNE 30, 1995 (UNAUDITED) (NOTE 1) 1995
------------------------------------------------------------------- ------------
LAKE OREGON
TUALATIN OSWEGO HILLSBORO NORTHWEST EISCHEN LONGVIEW CITY TOTAL
--------- --------- ---------- ---------- --------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash............................. $ 16,627 $ 18,538 $ 26,472 $ 9,421 $ 49,153 $ 225,717 $ 57,186 $ 403,114
Investments (Note 1)............. -- -- -- -- -- -- 96,977 96,977
Accounts receivable, net (Note
2).............................. 28,408 65,456 59,816 93,813 132,424 236,476 130,777 747,170
Notes receivable................. -- -- -- -- 29,165 -- 30,425 59,590
Taxes receivable................. -- -- -- 8,158 15,051 -- -- 23,209
Deferred taxes................... -- -- -- -- 20,500 -- -- 20,500
Prepaid expenses................. -- -- -- -- 58 -- -- 58
--------- --------- ---------- ---------- --------- ---------- ------------ -----------
Total current assets........... 45,035 83,994 86,288 111,392 246,351 462,193 315,365 1,350,618
Property and equipment, net
(Note 3)........................ 32,838 33,142 35,351 110,120 65,152 51,089 128,185 455,877
Notes receivable, less current
portion......................... -- -- -- -- 108,744 -- -- 108,744
Other assets..................... 11,000 4,170 -- -- 27,000 6,130 -- 48,300
--------- --------- ---------- ---------- --------- ---------- ------------ -----------
$ 88,873 $ 121,306 $ 121,639 $ 221,512 $ 447,247 $ 519,412 $ 443,550 $ 1,963,539
--------- --------- ---------- ---------- --------- ---------- ------------ -----------
--------- --------- ---------- ---------- --------- ---------- ------------ -----------
LIABILITIES, SHAREHOLDER'S EQUITY/PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued
expenses........................ $ 12,133 $ 31,067 $ 5,163 $ 50,572 $ 34,890 $ 53,002 $ 47,292 $ 234,119
Deferred compensation............ -- -- -- -- 134,617 -- -- 134,617
Line of credit (Note 4).......... -- -- -- -- -- -- -- --
Current portion of notes payable
(Note 5 )....................... 20,831 -- -- 11,507 10,243 -- 48,920 91,501
Current portion of capital-lease
obligation (Note 6)............. -- -- -- 4,887 485 -- -- 5,372
Current portion of deferred
income
taxes........................... 11,000 21,500 -- 30,500 -- 81,500 31,500 176,000
Taxes payable.................... 5,401 5,263 -- -- -- 75,120 14,723 100,507
--------- --------- ---------- ---------- --------- ---------- ------------ -----------
Total current liabilities...... 49,365 57,830 5,163 97,466 180,235 209,622 142,435 742,116
Notes payable, less current
portion
(Note 5)........................ 16,346 -- -- 30,575 56,875 -- -- 103,796
Capital lease obligation, less
current portion (Note 6)........ -- -- -- 11,576 2,517 -- -- 14,093
Deferred income taxes, net of
current portion................. -- -- -- -- 52,500 -- -- 52,500
Commitment and contingencies
(Note 7)........................ -- -- -- -- -- -- -- --
Shareholders' equity/partners'
capital:
Common stock (Note 9).............. 12,738 100 -- 3,857 41,000 4,287 5,000 26,982
Increase in investment valuation... -- -- -- -- -- -- 12,801 12,801
Additional paid-in capital......... -- 3,967 -- -- -- 11,611 -- 15,578
Retained earnings.................. 10,424 59,409 -- 78,038 114,120 293,892 283,314 879,197
Partners' capital.................. -- -- 116,476 -- -- -- -- 116,476
--------- --------- ---------- ---------- --------- ---------- ------------ -----------
$ 88,873 $ 121,306 $ 121,639 $ 221,512 $ 447,247 $ 519,412 $ 443,550 $ 1,963,539
--------- --------- ---------- ---------- --------- ---------- ------------ -----------
--------- --------- ---------- ---------- --------- ---------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-108
<PAGE>
OREGON ACQUISITIONS
BALANCE SHEETS (CONTINUED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1994 OCTOBER 31,
------------------------------------------------------------------- 1994
LAKE ------------
TUALATIN OSWEGO HILLSBORO NORTHWEST EISCHEN LONGVIEW OREGON CITY TOTAL
--------- --------- ---------- ---------- --------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash............................. $ 4,959 $ 1,804 $ 22,639 $ 23,814 $ 31,164 $ 122,467 $ 47,794 $ 254,641
Investments (Note 1)............. -- -- -- -- -- -- 107,994 107,994
Accounts receivable, net (Note
2).............................. 41,440 59,930 80,597 68,953 73,691 118,410 109,751 552,772
Notes receivable................. -- -- -- -- 27,657 -- 26,000 53,657
Taxes receivable................. 5,790 2,053 -- 3,473 -- 22,479 10,391 44,186
Deferred taxes................... -- -- -- -- 51,000 -- -- 51,000
Prepaid expenses................. -- -- -- -- 108,936 -- 55 108,991
--------- --------- ---------- ---------- --------- ---------- ------------ -----------
Total current assets........... 52,189 63,787 103,236 96,240 292,448 263,356 301,985 1,173,241
Property and equipment, net (Note
3).............................. 34,122 48,673 34,845 116,408 112,561 46,036 128,475 521,120
Notes receivable, less current
portion......................... -- -- -- -- 123,435 -- -- 123,435
Other assets..................... 10,733 4,200 -- -- 36,000 -- 79 51,012
--------- --------- ---------- ---------- --------- ---------- ------------ -----------
$ 97,044 $ 116,660 $ 138,081 $ 212,648 $ 564,444 $ 309,392 $ 430,539 $ 1,868,808
--------- --------- ---------- ---------- --------- ---------- ------------ -----------
--------- --------- ---------- ---------- --------- ---------- ------------ -----------
LIABILITIES, SHAREHOLDERS' EQUITY/PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued
expenses........................ $ 11,316 $ 61,350 $ 10,949 $ 39,733 $ 27,001 $ 172,994 $ 18,378 $ 341,721
Deferred compensation............ -- -- -- -- 214,500 -- -- 214,500
Line of credit (Note 4).......... -- -- -- -- -- -- 17,197 17,197
Current portion of notes payable
(Note 5)........................ 24,404 -- -- 11,150 7,672 -- 48,920 92,146
Current portion of capital lease
obligation (Note 6)............. -- -- -- 4,232 3,647 -- -- 7,879
Current portion of deferred
income taxes.................... 19,100 16,350 -- 24,000 -- 58,600 49,079 167,129
Taxes payable.................... -- -- -- 9,469 58,813 -- -- 68,282
--------- --------- ---------- ---------- --------- ---------- ------------ -----------
Total current liabilities...... 54,820 77,700 10,949 88,584 311,633 231,594 133,574 908,854
Notes payable, less current portion
(Note 5).......................... 23,308 -- -- 34,533 63,194 -- -- 121,035
Capital lease obligation, less
current portion (Note 6).......... -- -- -- 14,675 27,831 -- -- 42,506
Deferred income taxes, net of
current portion................... -- -- -- -- 57,500 -- -- 57,500
Commitment and contingencies (Note
7)
Shareholders' equity /partners'
capital:
Common Stock (Note 9).............. 12,738 100 -- 3,857 41,000 4,287 5,000 66,980
Additional paid-in capital......... -- 3,967 -- -- -- 5,935 -- 9,900
Increase in investment valuation... -- -- -- -- -- -- 23,818 23,818
Retained earnings.................. 6,178 34,893 -- 70,999 63,286 67,580 268,147 511,083
Partners' capital.................. -- -- 127,132 -- -- -- -- 127,132
--------- --------- ---------- ---------- --------- ---------- ------------ -----------
$ 97,044 $ 116,660 $ 138,081 $ 212,648 $ 564,444 $ 309,392 $ 430,539 $ 1,868,808
--------- --------- ---------- ---------- --------- ---------- ------------ -----------
--------- --------- ---------- ---------- --------- ---------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-109
<PAGE>
OREGON ACQUISITIONS
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS/PARTNERS' CAPITAL
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED) (NOTE 1) ENDED APRIL
---------------------------------------------------------------- 30, 1995
LAKE -----------
TUALATIN OSWEGO HILLSBORO NORTHWEST EISCHEN LONGVIEW OREGON CITY TOTAL
--------- --------- --------- --------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues.................... $ 219,442 $ 272,388 $ 305,767 $ 416,720 $ 566,573 $ 837,185 $ 747,829 $3,365,904
Cost of revenues................ 178,781 217,040 112,001 343,542 393,662 417,401 563,573 2,226,000
--------- --------- --------- --------- --------- --------- ----------- ----------
Gross profit................ 40,661 55,348 193,766 73,178 172,911 419,784 184,256 1,139,904
--------- --------- --------- --------- --------- --------- ----------- ----------
Operating expenses:
Selling, general and
administrative............... 24,979 6,245 27,154 53,600 64,873 57,079 139,292 373,222
Depreciation and
amortization................. 6,258 9,448 (5,232) 8,250 8,904 8,663 18,915 55,206
--------- --------- --------- --------- --------- --------- ----------- ----------
31,237 15,693 21,922 61,850 73,777 65,742 158,207 428,428
--------- --------- --------- --------- --------- --------- ----------- ----------
Other income (expense):
Interest income............... -- 164 -- 2,919 -- 1,205 853 5,141
Interest expense.............. (2,577) -- -- -- -- -- -- (2,577)
Loss on sale of assets........ -- -- -- -- (8,952) -- -- (8,952)
Other income (expense)........ -- 1,663 -- -- 5,913 -- (200) 7,376
--------- --------- --------- --------- --------- --------- ----------- ----------
(2,577) 1,827 -- 2,919 (3,039) 1,205 653 988
--------- --------- --------- --------- --------- --------- ----------- ----------
Net income before income taxes.. 6,847 41,482 171,844 14,247 96,095 355,247 26,702 712,464
--------- --------- --------- --------- --------- --------- ----------- ----------
Provision for income taxes...... (2,601) (16,966) -- (7,208) (45,261) (128,935) (11,535) (212,506)
--------- --------- --------- --------- --------- --------- ----------- ----------
Net income...................... 4,246 24,516 171,844 7,039 50,834 226,312 15,167 499,958
Retained earnings, beginning of
period......................... 6,178 34,893 -- 70,999 103,286 67,580 268,147 551,083
Partners' capital, beginning of
period......................... -- -- 127,132 -- -- -- -- 127,132
Cash distributions to
partners....................... -- -- (182,500) -- -- -- -- (182,500)
--------- --------- --------- --------- --------- --------- ----------- ----------
Retained earnings, end of
period......................... $ 10,424 $ 59,409 -- $ 78,038 $ 154,120 $ 293,892 $ 283,314 $ 879,197
--------- --------- --------- --------- --------- ----------- ----------
--------- --------- --------- --------- --------- ----------- ----------
Partners' capital, end of
period......................... $ -- $ -- $ 116,476 $ -- $ -- $ -- $ -- $ 116,476
--------- --------- --------- --------- --------- --------- ----------- ----------
--------- --------- --------- --------- --------- --------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-110
<PAGE>
OREGON ACQUISITIONS
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS/PARTNERS' CAPITAL (CONTINUED)
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
FOR THE YEAR ENDED DECEMBER 31, 1994 (NOTE 1) OCTOBER 31,
------------------------------------------------------------------- 1994
LAKE -----------
TUALATIN OSWEGO HILLSBORO NORTHWEST EISCHEN LONGVIEW OREGON CITY
--------- --------- --------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues.............................. $ 389,815 $ 603,099 $ 473,243 $ 889,234 $ 954,439 $1,262,524 $1,073,543
Cost of revenues.......................... 323,352 504,430 154,126 766,210 760,249 951,068 745,991
--------- --------- --------- ----------- --------- ---------- -----------
Gross profit............................ 66,463 98,669 319,117 123,024 194,190 311,456 327,552
--------- --------- --------- ----------- --------- ---------- -----------
Operating expenses:
Selling, general and administrative..... 43,121 110,448 35,517 111,586 177,259 318,051 288,848
Depreciation and amortization........... 16,312 11,515 12,792 37,357 46,558 16,543 46,255
--------- --------- --------- ----------- --------- ---------- -----------
59,433 121,963 48,309 148,943 223,817 334,594 335,103
--------- --------- --------- ----------- --------- ---------- -----------
Other income (expense):
Interest income......................... -- 751 889 10,032 -- 4,534 8,179
Interest expense........................ (4,339) -- -- -- -- -- --
Gain on sale of assets.................. -- -- -- -- 88,530 -- --
Other income (expense).................. -- 10,965 -- -- 15,211 -- 12,538
--------- --------- --------- ----------- --------- ---------- -----------
(4,339) 11,716 889 10,032 103,741 4,534 20,717
--------- --------- --------- ----------- --------- ---------- -----------
Net income (loss) before income taxes..... 2,691 (11,578) 271,697 (15,887) 74,114 (18,604) 13,166
Provision for income taxes................ (1,020) 4,703 -- 7,944 (147,328) 9,228 (6,056)
--------- --------- --------- ----------- --------- ---------- -----------
Net income (loss)......................... 1,671 (6,875) 271,697 (7,943) (73,214) (9,376) 7,110
Retained earnings, beginning of period.... 4,507 41,768 -- 78,942 136,500 76,956 261,237
Partner's capital, beginning of period.... -- -- 111,645 -- -- -- --
Cash distributions to partners............ -- -- (256,210) -- -- -- (200)
--------- --------- --------- ----------- --------- ---------- -----------
Retained earnings, end of period.......... $ 6,178 $ 34,893 $ 70,999 $ 63,286 $ 67,580 $ 268,147
--------- --------- ----------- --------- ---------- -----------
--------- --------- ----------- --------- ---------- -----------
Partners' capital, end of period.......... $ -- $ -- $ 127,132 $ -- $ -- $ -- $ --
--------- --------- --------- ----------- --------- ---------- -----------
--------- --------- --------- ----------- --------- ---------- -----------
<CAPTION>
TOTAL
----------
<S> <C>
Net revenues.............................. $5,645,897
Cost of revenues.......................... 4,205,426
----------
Gross profit............................ 1,440,471
----------
Operating expenses:
Selling, general and administrative..... 1,084,830
Depreciation and amortization........... 187,332
----------
1,272,162
----------
Other income (expense):
Interest income......................... 24,385
Interest expense........................ (4,339)
Gain on sale of assets.................. 88,530
Other income (expense).................. 38,714
----------
147,290
----------
Net income (loss) before income taxes..... 315,599
Provision for income taxes................ (132,529)
----------
Net income (loss)......................... 183,070
Retained earnings, beginning of period.... 599,910
Partner's capital, beginning of period.... 111,645
Cash distributions to partners............ (256,410)
----------
Retained earnings, end of period.......... $ 511,083
----------
----------
Partners' capital, end of period.......... $ 127,132
----------
----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-111
<PAGE>
OREGON ACQUISITIONS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS
ENDED
FOR THE SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED) (NOTE 1) APRIL 30,
-------------------------------------------------------------------- 1995
LAKE -----------
TUALATIN OSWEGO HILLSBORO NORTHWEST EISCHEN LONGVIEW OREGON CITY TOTAL
--------- --------- ----------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income...................... $ 4,246 $ 24,516 $ 171,844 $ 7,039 $ 50,834 $ 231,993 $ 15,167 $ 505,639
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation and
amortization................. 6,258 9,448 (5,232) 8,250 8,904 8,663 18,915 55,206
Gain on sale of assets.......... -- -- -- -- (8,952) -- -- (8,952)
Deferred tax expense............ (4,900) (1,403) -- 6,500 25,500 20,363 (17,579) 28,481
Net change in current assets and
liabilities....................
Patient accounts receivable..... 13,032 (5,526) 20,781 (24,860) (58,733) (118,066) (21,025) (194,397)
Prepaids and other assets....... 1,533 30 -- (4,685) 117,951 (6,130) 134 108,833
Accounts payable and accrued
liabilities.................... 817 (30,283) (5,786) 10,839 16,889 (119,992) 28,914 (98,602)
Deferred compensation........... -- -- -- -- (79,883) -- -- (79,883)
Taxes payable................... 6,191 13,869 -- (9,469) (82,937) 100,135 25,114 52,903
--------- --------- ----------- ----------- --------- --------- ----------- ---------
Net cash provided by (used in)
operating activities......... 27,177 10,651 181,607 (6,386) (10,427) 116,966 49,640 369,228
--------- --------- ----------- ----------- --------- --------- ----------- ---------
Cash flows from investing
activities:
Purchase of equipment and
leasehold improvements, net.... (4,974) 6,083 4,726 (1,962) 47,457 (13,716) (18,626) 18,988
Notes receivable................ -- -- -- -- 13,183 -- (4,425) 8,758
--------- --------- ----------- ----------- --------- --------- ----------- ---------
Net cash (used in) provided by
investing activities......... (4,974) 6,083 4,726 (1,962) 60,640 (13,716) (23,051) 27,746
--------- --------- ----------- ----------- --------- --------- ----------- ---------
Cash flows from financing
activities:
Cash distribution to
shareholders or partners....... -- -- (182,500) -- -- -- -- (182,500)
Principal payments on capital
lease obligations.............. -- -- -- (2,444) (28,476) -- -- (30,920)
Net payments on line of
credit......................... -- -- -- -- -- -- (17,197) (17,197)
Net payments from notes
payable........................ (10,535) -- -- (3,601) (3,748) -- -- (17,884)
--------- --------- ----------- ----------- --------- --------- ----------- ---------
Net cash (used in) provided by
financing activities......... (10,535) -- (182,500) (6,045) (32,224) -- (17,197) (248,501)
--------- --------- ----------- ----------- --------- --------- ----------- ---------
Net increase (decrease) in cash... 11,668 16,734 3,833 (14,393) 17,989 103,250 9,392 148,473
Cash at beginning of period....... 4,959 1,804 22,639 23,814 31,164 122,467 47,794 254,641
--------- --------- ----------- ----------- --------- --------- ----------- ---------
Cash at end of period............. $ 16,627 $ 18,538 $ 26,472 $ 9,421 $ 49,153 $ 225,717 $ 57,186 $ 403,114
--------- --------- ----------- ----------- --------- --------- ----------- ---------
--------- --------- ----------- ----------- --------- --------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-112
<PAGE>
OREGON ACQUISITIONS
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
FOR THE YEAR ENDED DECEMBER 31, 1994 OCTOBER 31,
------------------------------------------------------------------ 1994
LAKE -----------
TUALATIN OSWEGO HILLSBORO NORTHWEST EISCHEN LONGVIEW OREGON CITY
--------- --------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 1,671 $ (6,875) $ 271,697 $ (7,943) $ (73,214) $ (9,376) $ 7,110
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization.............. 16,312 11,515 12,792 37,357 46,558 16,543 46,255
Gain on sale of assets..................... -- -- -- -- (88,530) -- --
Deferred tax expense....................... 6,800 1,850 -- (13,000) 39,500 6,600 9,079
Net change in current assets and
liabilities...............................
Patient accounts receivable................ (8,114) (33,518) (6,992) 72,028 31,282 24,163 26,749
Prepaids and other assets.................. (1,800) 4,365 -- -- -- -- --
Accounts payable and accrued liabilities... (24,047) 14,127 1,738 2,130 (14,139) 45,772 (29,259)
Deferred taxes............................. (3,200) 20,400 -- -- -- 2,142 --
Deferred compensation...................... -- -- -- -- (33,000) -- --
Taxes payable.............................. (790) (12,823) -- 7,518 (10,967) (25,606) (15,042)
--------- --------- --------- ----------- --------- --------- -----------
Net cash (used in) provided by operating
activities.............................. (13,168) (959) 279,235 98,090 (102,510) 60,238 44,892
--------- --------- --------- ----------- --------- --------- -----------
Cash flows from investing activities:
Purchase of investments.................... -- -- -- -- -- -- (9,785)
Purchase of equipment and leasehold
improvements, net......................... (2,768) 1,703 (43,624) (63,561) 58,805 (25,306) (48,884)
Notes receivable........................... -- -- -- -- -- -- --
--------- --------- --------- ----------- --------- --------- -----------
Net cash (used in) provided by investing
activities.............................. (2,768) 1,703 (43,624) (63,561) 58,805 (25,306) (58,669)
--------- --------- --------- ----------- --------- --------- -----------
Cash flows from financing activities:
Stockholder note receivable................ -- -- -- -- (84,774) -- 13,000
Cash distribution to shareholders or
partners.................................. -- -- (256,211) -- -- -- (200)
Principal payments on capital lease
obligations............................... -- -- -- 18,907 31,478 -- (10,758)
Net payments on line of credit............. -- -- -- -- -- -- 17,197
Net payments on notes payable.............. (6,150) (4,982) -- (36,087) (20,395) (4,500) (11,074)
--------- --------- --------- ----------- --------- --------- -----------
Net cash provided by (used in) financing
activities.............................. (6,150) (4,982) (256,211) (17,180) (73,691) (4,500) 8,165
--------- --------- --------- ----------- --------- --------- -----------
Net (decrease) increase in cash.............. (22,086) (4,238) (20,600) 17,349 (117,396) 30,432 (5,612)
Cash at beginning of period.................. 27,045 6,042 43,239 6,465 148,560 92,035 53,406
--------- --------- --------- ----------- --------- --------- -----------
Cash at end of period........................ $ 4,959 $ 1,804 $ 22,639 $ 23,814 $ 31,164 $ 122,467 $ 47,794
--------- --------- --------- ----------- --------- --------- -----------
--------- --------- --------- ----------- --------- --------- -----------
<CAPTION>
TOTAL
---------
<S> <C>
Cash flows from operating activities:
Net income................................... $ 183,070
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization.............. 187,332
Gain on sale of assets..................... (88,530)
Deferred tax expense....................... 50,829
Net change in current assets and
liabilities...............................
Patient accounts receivable................ 105,598
Prepaids and other assets.................. 2,565
Accounts payable and accrued liabilities... (3,678)
Deferred taxes............................. 19,342
Deferred compensation...................... (33,000)
Taxes payable.............................. (57,710)
---------
Net cash (used in) provided by operating
activities.............................. 365,818
---------
Cash flows from investing activities:
Purchase of investments.................... (9,785)
Purchase of equipment and leasehold
improvements, net......................... (123,635)
Notes receivable........................... --
---------
Net cash (used in) provided by investing
activities.............................. (133,420)
---------
Cash flows from financing activities:
Stockholder note receivable................ (71,774)
Cash distribution to shareholders or
partners.................................. (256,411)
Principal payments on capital lease
obligations............................... 39,627
Net payments on line of credit............. 17,197
Net payments on notes payable.............. (83,188)
---------
Net cash provided by (used in) financing
activities.............................. (354,549)
---------
Net (decrease) increase in cash.............. (122,151)
Cash at beginning of period.................. 376,792
---------
Cash at end of period........................ $ 254,641
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-113
<PAGE>
OREGON ACQUISITIONS
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1995 IS UNAUDITED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The Oregon Acquisitions is not a legal entity but rather a combination of
seven independent entities which were purchased by Pacific Rehabilitation and
Sports Medicine, Inc. subsequent to December 31, 1994. The seven entities, known
hereafter as the "Companies" are as follows:
Physical Therapy Clinic of Tualatin, Inc. (Tualatin) is an Oregon
corporation that operates a physical therapy practice in Tualatin, Oregon.
Roger J. Miller Enterprises, Inc., dba Lake Oswego Physical Therapy, (Lake
Oswego) is an Oregon corporation that operates a physical therapy practice
in Lake Oswego, Oregon.
Oregon City Physical Therapy, Inc., (Oregon City) is an Oregon corporation
that operates physical therapy practices in Oregon City and Canby, Oregon.
John Phillipe and Wayne Crinklaw, dba Hillsboro Physical Therapy Clinic
(Hillsboro), is an Oregon partnership that operates a physical therapy
practice in Hillsboro, Oregon.
Northwest Physical Therapy Clinic, Inc. (Northwest) is an Oregon corporation
that operates physical therapy practices in Tigard and Portland, Oregon.
Eischen Physical Therapy, Inc. (Eischen) is an Oregon corporation that
operates physical therapy practices in Portland and Gresham, Oregon.
Longview Physicians' Physical Therapy Services, P.S. (Longview) is a
Washington corporation that operates a physical therapy practice in
Longview, Washington.
UNAUDITED INTERIM RESULTS
The accompanying financial statements at June 30, 1995 and for the six
months then ended are unaudited. In the opinion of each Company's management,
these statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position at June
30, 1995 and the results of operations and cash flows for the six months ended
June 30, 1995. The results of operations for the six months ended June 30, 1995
are not necessarily indicative of results which may be obtained during any
future period.
REVENUE RECOGNITION
Revenues are recognized as services are rendered to patients. Net revenues
are reported at the estimated amounts to be realized through payments from
patients, third-party payors and others for services rendered. Differences
between amounts billed by the Companies at their normal rates and the estimated
amounts to be realized are recognized as contractual allowances when services
are rendered. Such contractual allowances are deducted from revenues in the
accompanying statement of operations, retained earnings and partner's capital
(see Note 2).
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and include those additions and
improvements that add to productive capacity or extend useful life. When
property or equipment are sold or otherwise retired, the cost and related
accumulated depreciation are removed from the respective accounts and the
resulting profit or loss is recorded in operations. The cost of repairs and
maintenance are charged to expense as incurred.
F-114
<PAGE>
OREGON ACQUISITIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1995 IS UNAUDITED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation is computed using primarily the straight-line method over
useful lives as follows:
<TABLE>
<S> <C>
Automobile.................................................... 5 years
5 - 7
Evaluation equipment.......................................... years
5 - 7
Office equipment, furniture and fixtures...................... years
2 - 15
Leasehold improvements........................................ years
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
There are no significant differences between the carrying value and fair
market value of the Companies financial instruments.
INVESTMENTS
In accordance with Financial Accounting Standards Board Statement No. 115
(SFAS No. 115) investments, consisting primarily of equity securities, are
designated as securities available for sale. Securities available for sale are
reported at fair value, with unrealized gains and losses reported in a separate
component of shareholders' equity.
INCOME TAXES
Hillsboro is a partnership and is therefore not liable for federal or state
income taxes since Hillsboro's taxable income or loss is attributable to its
partners. Accordingly, the accompanying statement of operations, retained
earnings and partner's capital does not include a provision for income taxes for
Hillsboro.
The remaining Companies provide deferred income taxes to give effect to the
temporary differences between the financial reporting basis and the tax basis of
each company's assets and liabilities. The major temporary differences that give
rise to the deferred tax asset are certain expense accruals which are not
currently deductible.
STATEMENT OF CASH FLOWS
Interest paid approximated interest expense for the six months ended June
30, 1995 and for the year ended December 31, 1994.
FISCAL YEAR ENDS
The six month period and fiscal year end presented in the financial
statements is June 30, 1995 and December 31, 1994, respectively, for all
companies except for Oregon City which has a six month period ended April 30,
1995 and an October 31, 1994 year end.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of:
<TABLE>
<CAPTION>
JUNE 30, 1995 (UNAUDITED) APRIL 30,
---------------------------------------------------------------- 1995
LAKE -----------
TUALATIN OSWEGO HILLSBORO NORTHWEST EISCHEN LONGVIEW OREGON CITY TOTAL
--------- --------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross accounts receivable..... $ 73,209 $ 98,621 $ 106,090 $ 132,429 $ 242,771 $ 404,174 $ 245,214 $ 1,302,508
Less allowances for doubtful
accounts and contractual
adjustments.................. (44,801) (33,165) (46,274) (38,616) (110,347) (167,698) (114,437) (555,338)
--------- --------- --------- --------- --------- --------- ----------- -----------
$ 28,408 $ 65,456 $ 59,816 $ 93,813 $ 132,424 $ 236,476 $ 130,777 $ 747,170
--------- --------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- --------- ----------- -----------
</TABLE>
F-115
<PAGE>
OREGON ACQUISITIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1995 IS UNAUDITED)
2. ACCOUNTS RECEIVABLE (CONTINUED)
The allowance for contractual adjustments represent the difference between
the amount billed by the Companies at their normal rates and the amount which
the patient, third party payor or other party is contractually obligated to pay
the Companies (see Note 1). During the six months June 30, 1995 the Companies
charged revenues for contractual adjustments and recorded provisions for
doubtful accounts as follows:
<TABLE>
<CAPTION>
LAKE
TUALATIN OSWEGO HILLSBORO NORTHWEST EISCHEN LONGVIEW OREGON CITY TOTAL
--------- --------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contractual adjustments
charged to revenue........... $ 32,790 $ 19,186 $ 23,015 $ 31,366 $ 42,645 $ 82,799 $ 56,288 $ 288,089
--------- --------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- --------- ----------- -----------
Provisions for doubtful
accounts..................... $ 21,080 $ (4,961) $ -- $ (1,314) $ (23,029) $ (33,125) $ 9,833 $ (31,516)
--------- --------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- --------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994 OCTOBER 31,
---------------------------------------------------------------- 1994
LAKE -----------
TUALATIN OSWEGO HILLSBORO NORTHWEST EISCHEN LONGVIEW OREGON CITY TOTAL
--------- --------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross accounts receivable..... $ 78,157 $ 97,878 $ 112,470 $ 120,676 $ 237,095 $ 319,233 $ 230,955 $ 1,196,464
Less allowances for doubtful
accounts and contractual
adjustments.................. (36,717) (37,948) (31,873) (51,723) (163,404) (200,823) (121,204) (643,692)
--------- --------- --------- --------- --------- --------- ----------- -----------
$ 41,440 $ 59,930 $ 80,597 $ 68,953 $ 73,691 $ 118,410 $ 109,751 $ 552,772
--------- --------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- --------- ----------- -----------
</TABLE>
The allowance for contractual adjustments represent the difference between
the amount billed by the Companies at their normal rates and the amount which
the patient, third party payor or other party is contractually obligated to pay
the Companies (see Note 1). During the year ended December 31, 1994 the
Companies charged revenues for contractual adjustments and recorded provisions
for doubtful accounts as follows:
<TABLE>
<CAPTION>
LAKE
TUALATIN OSWEGO HILLSBORO NORTHWEST EISCHEN LONGVIEW OREGON CITY TOTAL
--------- --------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contractual adjustments
charged to revenue........... $ 56,889 $ 39,422 $ 35,236 $ 71,921 $ 74,906 $ 113,958 $ 81,776 $ 474,108
--------- --------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- --------- ----------- -----------
Provisions for doubtful
accounts..................... $ 985 $ (1,245) $ (1,000) $ (17,978) $ 29,137 $ 138,976 $ 20,990 $ 169,865
--------- --------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- --------- ----------- -----------
</TABLE>
The provisions for doubtful accounts are included in selling, general and
administrative expenses in the accompanying statement of operations retained
earnings and owner's equity.
F-116
<PAGE>
OREGON ACQUISITIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1995 IS UNAUDITED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
JUNE 30, 1995 (UNAUDITED) APRIL 30,
---------------------------------------------------------------- 1995
LAKE -----------
TUALATIN OSWEGO HILLSBORO NORTHWEST EISCHEN LONGVIEW OREGON CITY TOTAL
--------- --------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Automobiles................... $ -- $ -- $ -- $ 32,072 $ 32,338 $ 22,924 $ 22,387 $ 109,721
Physical therapy equipment.... 76,440 32,201 81,346 157,481 100,414 100,789 324,966 873,637
Office equipment.............. 15,763 45,564 12,298 48,629 52,006 28,677 77,049 279,986
Leasehold improvements........ 49,865 24,926 23,433 15,016 64,014 -- 80,407 257,661
--------- --------- --------- --------- --------- --------- ----------- -----------
142,068 102,691 117,077 253,198 248,772 152,390 504,809 1,521,005
Less accumulated depreciation
and amortization............. (109,230) (69,549) (81,726) (143,078) (183,620) (101,301) (376,624) (1,065,128)
--------- --------- --------- --------- --------- --------- ----------- -----------
$ 32,838 $ 33,142 $ 35,351 $ 110,120 $ 65,152 $ 51,089 $ 128,185 $ 455,877
--------- --------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- --------- ----------- -----------
<CAPTION>
DECEMBER 31, 1994 OCTOBER 31,
---------------------------------------------------------------- 1994
LAKE -----------
TUALATIN OSWEGO HILLSBORO NORTHWEST EISCHEN LONGVIEW OREGON CITY TOTAL
--------- --------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Automobiles................... $ -- $ -- $ -- $ 32,072 $ 59,601 $ 22,924 $ 22,387 $ 136,984
Physical therapy equipment.... 71,497 42,392 84,037 155,520 129,491 87,073 317,280 887,290
Office equipment.............. 15,763 45,564 12,298 48,629 52,006 28,677 59,522 262,459
Leasehold improvements........ 49,865 24,926 23,433 15,016 64,014 -- 80,407 257,661
--------- --------- --------- --------- --------- --------- ----------- -----------
137,125 112,882 119,768 251,237 305,112 138,674 479,596 1,544,394
Less accumulated depreciation
and amortization............. (103,003) (64,209) (84,923) (134,829) (192,551) (92,638) (351,121) (1,023,274)
--------- --------- --------- --------- --------- --------- ----------- -----------
$ 34,122 $ 48,673 $ 34,845 $ 116,408 $ 112,561 $ 46,036 $ 128,475 $ 521,120
--------- --------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- --------- ----------- -----------
</TABLE>
4. LINE OF CREDIT
Oregon City has a revolving line of credit agreement which provides a
maximum borrowing limit of $80,000 at October 31, 1994. Borrowings under the
revolving line of credit bear interest at prime plus 2.75%. The line was paid
off during 1995.
F-117
<PAGE>
OREGON ACQUISITIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1995 IS UNAUDITED)
5. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
JUNE 30, ------------
1995
-----------
(UNAUDITED)
<S> <C> <C>
PHYSICAL THERAPY CLINIC OF TUALATIN:
Notes payable to bank, due in monthly installments of $750 through May
1996, including interest of 10%........................................... $ 8,461 $ 12,421
Note payable to bank, due in monthly installments of $661 through September
1998, including interest at 9.5%.......................................... 21,978 24,829
Note payable to shareholder due December 1995.............................. -- 3,500
Note payable to shareholder due December 1995, a noninterest note.......... 6,738 6,962
----------- ------------
37,177 47,712
Less current portion......................................................... (20,831) (24,404)
----------- ------------
$ 16,346 $ 23,308
----------- ------------
----------- ------------
OREGON CITY PHYSICAL THERAPY:
Note payable to Paulson Investment Group, including interest at 9.125%..... $ 48,920 $ 48,920
Less current portion....................................................... (48,920) (48,920)
----------- ------------
$ -- $ --
----------- ------------
----------- ------------
NORTHWEST PHYSICAL THERAPY:
Note payable to shareholder family member, due in monthly installments of
$630 through July 1998, including interest at 9.5%........................ $ 21,045 $ 22,864
Note payable to shareholder family member, due in monthly instalments of
$621 through August 1998, including interest at 9.5%...................... 21,037 22,819
----------- ------------
42,082 45,683
Less current portion....................................................... (11,507) (11,150)
----------- ------------
$ 30,575 $ 34,533
----------- ------------
----------- ------------
EISCHEN PHYSICAL THERAPY, INC.:
Note payable to shareholder, due in monthly installments of $1,140 through
December 2002, including interest at 9.0%................................. $ 67,118 $ 70,866
Less current portion....................................................... (10,243) (7,672)
----------- ------------
$ 56,875 $ 63,194
----------- ------------
----------- ------------
</TABLE>
As of December 31, 1994 or October 31, 1994, the note payable obligations
mature as follows:
<TABLE>
<CAPTION>
YEAR ENDING LAKE OREGON
DECEMBER 31, TUALATIN OSWEGO HILLSBORO NORTHWEST EISCHEN LONGVIEW CITY TOTAL
- ----------------------------- ----------- --------- ----------- ----------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995..................... $ 24,404 $ -- $ -- $ 11,150 $ 7,672 $ -- $ 48,920 $ 92,146
1996..................... 10,693 -- -- 12,256 8,405 -- -- 31,354
1997..................... 7,031 -- -- 13,473 9,193 -- -- 29,697
1998..................... 5,584 -- -- 8,804 10,055 -- -- 24,443
1999..................... -- -- -- -- 10,998 -- -- 10,998
Thereafter............... -- -- -- -- 24,543 -- -- 24,543
----------- --------- ----------- ----------- --------- ----------- --------- ---------
$ 47,712 $ -- $ -- $ 45,683 $ 70,866 $ -- $ 48,920 $ 213,181
----------- --------- ----------- ----------- --------- ----------- --------- ---------
----------- --------- ----------- ----------- --------- ----------- --------- ---------
</TABLE>
F-118
<PAGE>
OREGON ACQUISITIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1995 IS UNAUDITED)
6. CAPITAL LEASE OBLIGATIONS
Future minimum lease payments under capital leases as of December 31, 1994
or October 31, 1994 are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDING LAKE OREGON
DECEMBER 31, TUALATIN OSWEGO HILLSBORO NORTHWEST EISCHEN LONGVIEW CITY TOTAL
- ----------------------------- ----------- --------- ----------- ----------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995..................... $ -- $ -- $ -- $ 5,643 $ 6,468 $ -- $ -- $ 12,111
1996..................... -- -- -- 5,643 6,468 -- -- 12,111
1997..................... -- -- -- 5,643 6,468 -- -- 12,111
1998..................... -- -- -- 5,643 20,821 -- -- 26,464
1999..................... -- -- -- 274 -- -- -- 274
Thereafter............... -- -- -- -- -- -- --
----------- --------- ----------- ----------- --------- ----------- --------- ---------
Total minimum lease
payments.................... 22,846 40,225 -- 63,071
Less amount representing
interest.................... -- -- -- (3,939) (8,747) -- -- (12,686)
Less current portion......... -- -- -- (4,232) (3,647) -- -- (7,879)
----------- --------- ----------- ----------- --------- ----------- --------- ---------
$ -- $ -- $ -- $ 14,675 $ 27,831 $ -- $ -- $ 42,506
----------- --------- ----------- ----------- --------- ----------- --------- ---------
----------- --------- ----------- ----------- --------- ----------- --------- ---------
</TABLE>
7. COMMITMENTS AND CONTINGENT LIABILITIES
The Companies lease certain operating facilities under operating lease
agreements. Minimum lease payments required under operating leases with
noncancelable terms in excess of one year as of December 31, 1994 or October 31,
1994 are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDING LAKE OREGON
DECEMBER 31, TUALATIN OSWEGO HILLSBORO NORTWEST EISCHEN LONGVIEW CITY TOTAL
- ----------------------- --------- --------- ----------- ----------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995................... $ 29,280 $ 51,240 $ 33,552 $ 84,660 $ 58,810 $ -- $ 51,300 $ 308,842
1996................... 30,192 51,840 16,776 80,868 58,810 -- 64,200 302,686
1997 31,110 53,040 -- 39,156 58,908 -- 64,200 246,414
1998................... 32,025 53,640 -- 26,104 39,581 -- 64,200 215,550
1999................... -- 17,880 -- -- 14,970 -- 64,200 97,050
Thereafter............. -- -- -- -- -- -- 19,800 19,800
--------- --------- ----------- ----------- --------- ----------- --------- ----------
$ 122,607 $ 227,640 $ 50,328 $ 230,788 $ 231,079 $ -- $ 327,900 $1,190,342
--------- --------- ----------- ----------- --------- ----------- --------- ----------
--------- --------- ----------- ----------- --------- ----------- --------- ----------
</TABLE>
Rent expense for the six months ended June 30, 1995 or April 30, 1995 was
approximately:
<TABLE>
<CAPTION>
LAKE OREGON
TUALATIN OSWEGO HILLSBORO NORTWEST EISCHEN LONGVIEW CITY TOTAL
--------- --------- ----------- ----------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 15,189 $ 25,941 $ 19,572 $ 52,596 $ 46,856 $ 26,563 $ 41,300 $ 228,017
--------- --------- ----------- ----------- --------- ----------- --------- ----------
--------- --------- ----------- ----------- --------- ----------- --------- ----------
</TABLE>
Rent expense for the year ended December 31, 1994 or October 31, 1994 was
approximately:
<TABLE>
<CAPTION>
LAKE OREGON
TUALATIN OSWEGO HILLSBORO NORTWEST EISCHEN LONGVIEW CITY TOTAL
--------- --------- ----------- ----------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 30,377 $ 51,583 $ 27,572 $ 97,187 $ 107,077 $ 36,581 $ 64,639 $ 415,016
--------- --------- ----------- ----------- --------- ----------- --------- ----------
--------- --------- ----------- ----------- --------- ----------- --------- ----------
</TABLE>
8. PROFIT SHARING PLANS, 401(K) SAVINGS PLANS AND SELF EMPLOYMENT PENSION PLANS
Tualatin has a simplified employee pension for all full-time employees who
have attained 21 years of age and have completed three full years of employment.
The Company contributed approximately $2,800 for the six months ended June 30,
1995 and $26,700 for the year ended December 31, 1994.
F-119
<PAGE>
OREGON ACQUISITIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1995 IS UNAUDITED)
8. PROFIT SHARING PLANS, 401(K) SAVINGS PLANS AND SELF EMPLOYMENT PENSION
PLANS (CONTINUED)
Lake Oswego has a profit sharing plan for all full-time employees who have
attained 18 years of age and have completed 1,000 hours of service. The Company
may, at its discretion, contribute to the plan. The Company contributed
approximately $22,700 for the year ended December 31, 1994 and no contributions
were made for six months ended June 30, 1995.
Lake Oswego has a 401(k) savings plan available to all employees who have
attained 18 years of age and have completed 1,000 hours of service. The Company
may, at its discretion, contribute to the plan. The Company will match 50% of up
to 6% of the employees' compensation. The Company contributed approximately
$3,700 for the year ended December 31, 1994 and no contributions were made for
the six months ended June 30, 1995.
Oregon City has a target benefit plan for all full-time employees who have
attained 21 years of age and have completed 1,000 hours of service. The Company
contributed approximately $34,650 for the year ended December 31, 1994 and no
contributions were made for the six months ended June 30, 1995.
Oregon City has a 401(k) savings plan available to all employees who have
attained 21 years of age and have completed 1,000 hours of service. The Company
may, at its discretion, contribute to the plan. No contributions were made to
the plan during the six months ended June 30, 1995 and the year ended December
31, 1994.
Hillsboro has a profit sharing plan for all full-time employees who have
completed three full years of employment. The Company may, at its discretion,
contribute to the plan. No contributions were made for the year ended December
31, 1994 and approximately $14,600 for the six months ended June 30, 1995.
Hillsboro has a simplified employee pension plan available to all employees
who have completed three full years of employment. The Company may, at its
discretion, contribute to the plan. The Company contributed approximately
$32,300 for the year ended December 31, 1994 and no contributions were made for
the six months ended June 30, 1995.
Northwest has a simplified employee pension plan for all full-time employees
who have attained 21 years of age and have completed three years of employment.
The Company may, at its discretion, contribute to the plan. The Company
contributed approximately $21,000 for the year ended December 31, 1994 and no
contributions were made for the six months ended 1995.
Eischen has a 401(k) savings plan available to all employees who have
attained 21 years of age and have completed one full year of employment in
addition to 1,000 hours of service. The Company will match 50% of up to 6% of
the employees' compensation. The Company contributed approximately $8,200 for
the year ended December 31, 1994 and no contributions were made for the six
months ended June 30, 1995.
Longview has a profit sharing plan for all full-time employees who have
attained 21 years of age and have completed 1,000 hours of service. The Company
may, at its discretion, contribute to the plan. The Company contributed
approximately $22,150 for the six months ended June 30, 1995 and $57,700 for the
year ended December 31, 1994.
9. COMMON STOCK
Tualatin's common stock consists of 500 shares, no par value, of which 500
shares are issued and outstanding.
F-120
<PAGE>
OREGON ACQUISITIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1995 IS UNAUDITED)
9. COMMON STOCK (CONTINUED)
Lake Oswego's common stock consists of 100 shares, $1 par value, of which
100 shares are issued and outstanding.
Northwest's common stock consists of 500 shares, no par value, of which 500
shares are issued and outstanding.
Eischen's common stock consists of 50,000 shares, $1 par value, of which
41,000 shares are issued and outstanding.
Longview's common stock consists of 50,000 shares, $1 par value, of which
3,600 shares are issued and outstanding.
Oregon City's common stock consists of 500 shares, no par value, of which 90
shares are issued and outstanding.
F-121
<PAGE>
OREGON ACQUISITIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1995 IS UNAUDITED)
10. INCOME TAXES
In January 1994, the Companies, with the exception of Hillsboro,
prospectively adopted Statement of Financial Accounting Standards No. 109 (FAS
109), Accounting for Income Taxes. FAS 109 is an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
company's financial statements or tax returns. In estimating future tax
consequences, FAS 109 generally considers all expected future events other than
enactments of changes in the tax law or rates. Previously, the Companies
prepared their financial statements on a tax basis and therefore, no provision
or deferred tax items were recorded.
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED) ENDED APRIL
------------------------------------------------------------------ 30, 1995
LAKE -----------
TUALATIN OSWEGO HILLSBORO NORTHWEST EISCHEN LONGVIEW OREGON CITY TOTAL
--------- --------- --------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross deferred tax assets........ $ 28,000 $ 16,000 $ -- $ 20,000 $ 113,000 $ 72,000 $ 61,500 $ 310,500
Gross deferred tax liabilities... (28,000) (37,500) -- (50,500) (145,000) (153,500) (93,000) (507,500)
--------- --------- --------- ----------- --------- --------- ----------- ---------
Deferred income taxes, net....... $ -- $ (21,500) $ -- $ (30,500) $ (32,000) $ (81,500) $ (31,500) $(197,000)
--------- --------- --------- ----------- --------- --------- ----------- ---------
--------- --------- --------- ----------- --------- --------- ----------- ---------
<CAPTION>
FOR THE SIX
MONTHS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED) ENDED APRIL
------------------------------------------------------------------ 30, 1995
LAKE -----------
TUALATIN OSWEGO HILLSBORO NORTHWEST EISCHEN LONGVIEW OREGON CITY TOTAL
--------- --------- --------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current provision................ $ 11,201 $ 11,816 $ -- $ 708 $ 19,761 $ 106,035 $ 29,114 $ 178,635
Deferred provision............... (8,600) 5,150 -- 6,500 25,500 22,900 (17,579) 33,871
--------- --------- --------- ----------- --------- --------- ----------- ---------
Total income tax provision....... $ 2,601 $ 16,966 $ -- $ 7,208 $ 45,261 $ 128,935 $ 11,535 $ 212,506
--------- --------- --------- ----------- --------- --------- ----------- ---------
--------- --------- --------- ----------- --------- --------- ----------- ---------
<CAPTION>
FOR THE
YEAR ENDED
FOR THE YEAR ENDED DECEMBER 31, 1994 OCTOBER 31,
------------------------------------------------------------------ 1994
LAKE -----------
TUALATIN OSWEGO HILLSBORO NORTHWEST EISCHEN LONGVIEW OREGON CITY TOTAL
--------- --------- --------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross deferred tax assets........ $ 21,100 $ 20,650 $ -- $ 22,000 $ 141,000 $ 62,700 $ 38,921 $ 306,371
Gross deferred tax liabilities... (29,700) (37,000) -- (46,000) (147,500) (121,300) (88,000) (469,500)
--------- --------- --------- ----------- --------- --------- ----------- ---------
Deferred income taxes, net....... $ (8,600) $ (16,350) $ -- $ (24,000) $ (6,500) $ (58,600) $ (49,079) $(163,129)
--------- --------- --------- ----------- --------- --------- ----------- ---------
--------- --------- --------- ----------- --------- --------- ----------- ---------
<CAPTION>
FOR THE
YEAR ENDED
FOR THE YEAR ENDED DECEMBER 31, 1994 OCTOBER 31,
------------------------------------------------------------------ 1994
LAKE -----------
TUALATIN OSWEGO HILLSBORO NORTHWEST EISCHEN LONGVIEW OREGON CITY TOTAL
--------- --------- --------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current provision................ $ (5,780) $ (6,553) $ -- $ 5,056 $ 107,828 $ (15,828) $ (3,023) $ 81,700
Deferred provision............... 6,800 1,850 -- (13,000) 39,500 6,600 9,079 50,829
--------- --------- --------- ----------- --------- --------- ----------- ---------
Total income tax provision....... $ 1,020 $ (4,703) $ -- $ (7,944) $ 147,328 $ (9,228) $ 6,056 $ 132,529
--------- --------- --------- ----------- --------- --------- ----------- ---------
--------- --------- --------- ----------- --------- --------- ----------- ---------
</TABLE>
F-122
<PAGE>
OREGON ACQUISITIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1995 IS UNAUDITED)
10. INCOME TAXES (CONTINUED)
A reconciliation of the statutory federal income tax rate to the effective
tax rate is as follows:
<TABLE>
<CAPTION>
JUNE 30, 1995 (UNAUDITED)
--------------------------------------------------------------------
TUALATIN LAKE OSWEGO OREGON HILLSBORO NORTHWEST
----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Federal taxes....................................... 34.0% 34.0% 34.0% -- % 34.0%
State taxes, net of federal benefit................. 4.0 4.0 4.0 -- 4.0
Permanently non-deductible items.................... -- 2.9 5.2 -- 12.6
Permanently non-taxable items....................... -- -- -- -- --
----- --- --- --- ---
38.0% 40.9% 43.2% -- % 50.6%
----- --- --- --- ---
----- --- --- --- ---
<CAPTION>
DECEMBER 31, 1994
--------------------------------------------------------------------
TUALATIN LAKE OSWEGO OREGON HILLSBORO NORTHWEST
----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Federal taxes....................................... 34.0% 34.0% 34.0% -- % 34.0%
State taxes, net of federal benefit................. 4.0 4.0 4.0 -- 4.0
Permanently non-deductible items.................... -- 2.6 8.0 -- 12.0
Permanently non-taxable items....................... (0.1) -- -- -- --
----- --- --- --- ---
37.9% 40.6% 46.0% -- % 50.0%
----- --- --- --- ---
----- --- --- --- ---
<CAPTION>
EISCHEN LONGVIEW
----------- ------------
<S> <C> <C>
Federal taxes....................................... 34.0% 34.0%
State taxes, net of federal benefit................. 4.0 4.0
Permanently non-deductible items.................... 9.1 --
Permanently non-taxable items....................... -- (1.7)
----- ---
47.1% 36.3%
----- ---
----- ---
EISCHEN LONGVIEW
----------- ------------
<S> <C> <C>
Federal taxes....................................... 34.0% 34.0%
State taxes, net of federal benefit................. 4.0 4.0
Permanently non-deductible items.................... 160.8 18.0
Permanently non-taxable items....................... -- (6.5)
----- ---
198.8% 49.5%
----- ---
----- ---
</TABLE>
11. RELATED PARTY TRANSACTIONS
Oregon City has a note receivable from a shareholder which does not provide
for stated periodic interest or principal payments and is recorded as notes
receivable in the accompanying balance sheet.
Oregon City leases its clinic space from a shareholder of the Company. Rent
approximates $65,000 per year.
12. SUBSEQUENT EVENT
Effective July 1, 1995, all of the Companies' (with the exception of
Hillsboro) outstanding shares of common stock were sold to Pacific
Rehabilitation & Sports Medicine, Inc., a Vancouver, Washington corporation
engaged in owning and operating physical therapy clinics.
Effective August 1, 1995, substantially all of Hillsboro's assets were sold
to Pacific Rehabilitation & Sports Medicine, Inc., a Vancouver, Washington
corporation engaged in owning and operating physical therapy clinics.
The accompanying financial statements do not reflect the effects of these
sales.
F-123
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Pacific Rehabilitation & Sports Medicine, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations and retained earnings and of cash flows present fairly, in all
material respects, the financial position of Samuel H. Esterson, P.T. at
December 31, 1994 and the results of its operations and its cash flows for the
year in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the owner; our responsibility is
to express an opinion on these financial statements based on our audit. We
conducted our audit 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
audit provides a reasonable basis for the opinion expressed above.
As described in Note 6, substantially all of the assets and operating
business of Samuel H. Esterson, P.T. were sold as of March 1, 1995 to Pacific
Rehabilitation & Sports Medicine, Inc.
PRICE WATERHOUSE LLP
Portland, Oregon
September 15, 1995
F-124
<PAGE>
SAMUEL H. ESTERSON, P.T.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Current assets:
Cash.............................................................................................. $ 53,106
Patient accounts receivable, net (Note 2)......................................................... 384,987
Due from shareholder.............................................................................. 2,390
------------
Total current assets............................................................................ 440,483
Fixed assets, net................................................................................... 35,916
------------
$ 476,399
------------
------------
LIABILITIES AND OWNER'S EQUITY
Current liabilities:
Accounts payable.................................................................................. $ 1,392
Payroll taxes payable............................................................................. 82,079
SEP payable (Note 5).............................................................................. 11,558
Accrued payroll................................................................................... 11,300
------------
Total current liabilities....................................................................... 106,329
------------
Commitments and contingencies
Owner's equity:
Common stock (100,000 shares of $1 par value authorized, 3,190 shares issued and outstanding)..... 3,190
------------
Retained earnings................................................................................. 366,880
------------
Total owner's equity............................................................................ 370,070
------------
$ 476,399
------------
------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-125
<PAGE>
SAMUEL H. ESTERSON, P.T.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31,
1994
-------------
<S> <C>
Net revenues............................................................................. $ 1,158,829
Cost of revenues......................................................................... 863,301
-------------
Gross profit........................................................................... 295,528
-------------
Operating expenses:
Selling, general and administrative.................................................... 270,725
Depreciation........................................................................... 3,707
-------------
274,432
-------------
Net income............................................................................. 21,096
Retained earnings, beginning of period................................................... 345,784
-------------
Retained earnings, end of period......................................................... $ 366,880
-------------
-------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-126
<PAGE>
SAMUEL H. ESTERSON, P.T.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Cash flows from operating activities:
Net income.............................................................................. $ 21,096
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation.......................................................................... 3,707
Net change in current assets and liabilities:
Patient accounts receivable, net...................................................... (46,626)
Accounts payable...................................................................... (17,076)
Payroll taxes payable................................................................. 75,337
SEP payable........................................................................... 11,558
Accrued payroll....................................................................... 2,218
------------
Net cash provided by operating activities........................................... 50,214
------------
Cash flows from investing activities:
Additions to property and equipment..................................................... (2,625)
------------
Net cash used in investing activities............................................... (2,625)
------------
Net increase (decrease) in cash........................................................... 47,589
Cash at beginning of period............................................................... 5,517
------------
Cash at end of period..................................................................... $ 53,106
------------
------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-127
<PAGE>
SAMUEL H. ESTERSON, P.T.
NOTES TO THE DECEMBER 31, 1994
FINANCIAL STATEMENTS
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Samuel H. Esterson, P.T. (the Company) is a Maryland S Corporation that
operates a rehabilitation and sports medicine clinic in Baltimore, Maryland.
SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues are recognized as services are rendered to patients. Net revenues
are reported at the estimated amounts to be realized through payments from
patients, third party payors and others for services rendered. See Note 2.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost and include those additions and
improvements that add to productive capacity or extend useful life. When
property or equipment are sold or otherwise retired, the cost and related
accumulated depreciation are removed from the respective accounts and the
resulting profit or loss is recorded in operations. The costs of repairs and
maintenance are charged to expense as incurred.
Depreciation is computed using the straight-line method over useful lives of
seven years.
INCOME TAXES
As an S Corporation the Company is not liable for federal or state income
taxes since the Company's taxable income or loss is recognized in the separate
income tax returns of the owner. Accordingly, the accompanying statement of
operations and retained earnings does not include a provision for income taxes.
STATEMENT OF CASH FLOWS
No interest or income tax payments were made during the year ended December
31, 1994.
2. PATIENT ACCOUNTS RECEIVABLE
Patient accounts receivable consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Gross accounts receivable................................................................. $ 549,977
Less allowances for doubtful accounts and contractual adjustments......................... (164,990)
------------
$ 384,987
------------
------------
</TABLE>
The allowance for contractual adjustments represents the difference between
the amount billed by the Company at its normal rate, and the amount which the
patient, third party payor or other party is contractually obligated to pay the
Company. During the year ended December 31, 1994 the Company charged revenues
for contractual adjustments aggregating $323,751 and provided, as bad debt
expense, $64,764. Contractual adjustments have been netted against revenues in
the accompanying statement of operations and bad debt expense is included in
selling, general and administrative expenses in the accompanying statement of
operations.
F-128
<PAGE>
SAMUEL H. ESTERSON, P.T.
NOTES TO THE DECEMBER 31, 1994
FINANCIAL STATEMENTS (CONTINUED)
3. FURNITURE AND EQUIPMENT
Furniture and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Computer equipment........................................................................ $ 12,744
Furniture................................................................................. 3,995
Equipment................................................................................. 66,860
------------
83,599
Accumulated depreciation.................................................................. 47,683
------------
$ 35,916
------------
------------
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company leases its operating facility under agreements which require
minimum lease payments as follows:
<TABLE>
<S> <C>
1995............................................................. $ 48,360
1996............................................................. 48,360
1997............................................................. 49,809
1998............................................................. 51,804
1999............................................................. 53,874
Thereafter....................................................... 13,594
---------
$ 265,801
---------
---------
</TABLE>
Rent expense under noncancelable leases aggregated $53,283 in 1994.
5. PENSION PLAN
In 1990, the Company initiated a Simplified Employee Pension (SEP) plan.
Total SEP contributions for the year ended December 31, 1994 were $11,558.
6. SUBSEQUENT EVENT
Effective March 1, 1995 substantially all of the Company's assets and
operating business were sold to Pacific Rehabilitation & Sports Medicine, Inc.,
a Vancouver, Washington corporation engaged in owning and operating physical
therapy clinics. The assets were sold for an aggregate purchase price of
$2,500,000. The accompanying financial statements do not reflect the effects of
the sale.
F-129
<PAGE>
INDEX TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
HORIZON/CMS HEALTHCARE CORPORATION AND SUBSIDIARIES
AND PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Introduction to Unaudited Pro Forma Financial Statements.................................................. P-2
Horizon/CMS Healthcare Corporation and Subsidiaries and Pacific Rehabilitation & Sports Medicine, Inc. and
Subsidiaries:
Unaudited Pro Forma Balance Sheet at November 30, 1995................................................ P-4
Unaudited Pro forma Statement of Operations for the Six Months Ended November 30, 1995................ P-5
Unaudited Pro Forma Statement of Operations for the Year Ended May 31, 1995........................... P-6
Unaudited Pro Forma Statement of Operations for the Year Ended May 31, 1994........................... P-7
Unaudited Pro Forma Statement of Operations for the Year Ended May 31, 1993........................... P-8
Horizon/CMS Healthcare Corporation and Subsidiaries:
Unaudited Pro Forma Balance Sheet at November 30, 1995................................................ P-9
Unaudited Pro Forma Statement of Operations for the Six Months Ended November 30, 1995................ P-10
Unaudited Pro Forma Statement of Operations for the Year Ended May 31, 1995........................... P-11
Pacific Rehabilitation & Sports Medicine, Inc. and Subsidiaries Unaudited Pro Forma Statement of
Operations for the Nine Months Ended September 30, 1995.................................................. P-12
Pacific Rehabilitation & Sports Medicine, Inc. and Subsidiaries Unaudited Pro Forma Statement of
Operations for the Year Ended December 31, 1994.......................................................... P-13
Notes to Unaudited Pro Forma Financial Statements......................................................... P-14
</TABLE>
P-1
<PAGE>
INTRODUCTION TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
The unaudited pro forma balance sheet at November 30, 1995 (on page P-4)
gives effect to the combination of Horizon's historical assets, liabilities and
stockholders' equity at November 30, 1995 with: (i) the historical assets,
liabilities and stockholders' equity of Pacific Rehab as of September 30, 1995
accounted for as a pooling of interests as if the Merger had occurred on
November 30, 1995 (ii) the historical assets, liabilities and stockholders'
equity of Horizon's individually insignificant pending acquisitions, including,
Medical Innovations as of September 30, 1995 accounted for as a pooling of
interests and Physical Therapy Institute, Inc. ("Physical Therapy") as of
December 31, 1995 accounted for as a purchase as if the acquisitions had
occurred on November 30, 1995. The Horizon unaudited pro forma balance sheet at
November 30, 1995 (on page P-9) gives effect to all of the above except for item
(i).The pending acquisitions are more fully described in the accompanying notes
to the unaudited pro forma balance sheet. All adjustments are more fully
described in the accompanying notes to the unaudited pro forma balance sheet.
The unaudited pro forma statement of operations for the six months ended
November 30, 1995 (on page P-5) gives effect to the Merger and Horizon's
individually insignificant pending acquisitions. There were no acquisitions by
Horizon or Pacific Rehab during the period that were individually or in the
aggregate significant, except for Horizon's acquisition of CMS as previously
discussed. The unaudited pro forma statement of operations for the six months
ended November 30, 1995 includes historical results of operations as follows:
(i) the results of operations of Horizon for the six months ended November 30,
1995, (ii) the results of operations of Pacific Rehab for the six months ended
September 30, 1995 and (iii) the results of operations of Horizon's individually
insignificant pending acquisitions, including, Medical Innovations for the six
months ended September 30, 1995 and Physical Therapy for the six months ended
December 31, 1995. The Horizon unaudited pro forma statement of operations for
the six months ended November 30, 1995 (on page P-10) gives effect to all of the
above except for item (ii). The combined historical amounts have been adjusted
by giving effect to the assumptions and adjustments included in the accompanying
notes to the unaudited pro forma financial statements.
The Horizon and Pacific Rehab combined unaudited pro forma statement of
operations for the year ended May 31, 1995 (on page P-6) gives effect to (i) the
Merger accounted for as a pooling of interests; (ii) Horizon's individually
insignificant pending acquisitions; (iii) the acquisition of peopleCARE and (iv)
other acquisitions effected during the period by Horizon and Pacific Rehab, as
if all such transactions had occurred on June 1, 1994. The unaudited pro forma
statement of operations for the year ended May 31, 1995 includes historical
results of operations as follows: (i) the results of operations of Horizon for
its fiscal year ended May 31, 1995, (ii) the results of operations of Pacific
Rehab for the twelve months ended June 30, 1995, (iii) the results of operations
of Horizon's individually insignificant pending acquisitions, including, Medical
Innovations and Physical Therapy for the twelve months ended June 30, 1995, (iv)
the results of operations of peopleCARE for the ten months ended May 31, 1995
and (v) the results of operations of the other acquisitions for varying fiscal
periods to the extent not already included in the historical amounts of Horizon
and Pacific Rehab, as more fully described in the accompanying notes to the
unaudited pro forma financial statements. The historical amounts have been
adjusted by giving effect to the assumptions and adjustments included in the
accompanying notes to the unaudited pro forma financial statements.
The unaudited pro forma statements of operations for the years ended May 31,
1994 and 1993 (on pages P-7 and P-8, respectively) give effect to the Merger
accounted for as a pooling of interests as if the transaction had occurred on
June 1, 1993 and 1992, respectively. The unaudited pro forma statements of
operations for the years ended May 31, 1994 and 1993 include the historical
results of operations as follows: (i) the results of operations of Horizon for
its fiscal years ended May 31, 1994 and 1993, respectively and (ii) the results
of operations of Pacific Rehab for the twelve months ended
P-2
<PAGE>
June 30, 1994 and 1993, respectively. The combined historical amounts have been
adjusted by giving effect to the assumptions and adjustments included in the
accompanying notes to the unaudited pro forma financial statements.
The Horizon unaudited pro forma statement of operations for the year ended
May 31, 1995 (on page P-9) gives effect to (i) the acquisition of peopleCARE,
(ii) Horizon's individually insignificant pending acquisitions (iii) other
acquisitions effected during the period by Horizon, as if all such transactions
had occurred on June 1, 1994. The unaudited pro forma statement of operations
for the year ended May 31, 1995 includes the historical results of operations as
follows: (i) the results of operations of Horizon for its fiscal year ended May
31, 1995, (ii) the results of Horizon's individually insignificant pending
acquisitions, including Medical Innovations and Physical Therapy for the twelve
months ended June 30, 1995, (iii) the results of operations of peopleCARE for
the ten months ended May 31, 1995 and (iv) the results of operations of the
other acquisitions for varying fiscal periods to the extent not already included
in the historical amounts of Horizon, as more fully described in the
accompanying notes to the unaudited pro forma financial statements.
The Pacific Rehab unaudited pro forma statements of operations for the nine
months ended September 30, 1995 and the year ended December 31, 1994 (on pages
P-10 and P-11, respectively) give effect to acquisitions effected during the
periods, as if all such transactions had occurred on January 1, 1994. The
unaudited pro forma statements of operations for the nine months ended September
30, 1995 and the year ended December 31, 1994 include historical results of
operations of Pacific Rehab for its fiscal year ended December 31, 1994 and the
results of operations of the acquisitions for varying fiscal periods to the
extent not already included in the historical amounts of Pacific Rehab, as more
fully described in the accompanying notes to the unaudited pro forma financial
statements. The historical amounts have been adjusted by giving effect to the
assumptions and adjustments included in the accompanying notes to the unaudited
pro forma financial statements.
The following pro forma financial information may not necessarily reflect
the financial condition or results of operations of Horizon or Pacific Rehab or
of the companies on a combined basis, which would have actually resulted had the
transactions referred to above occurred as of the date and for the periods
indicated or reflect the future earnings of Horizon or Pacific Rehab or of the
companies on a combined basis. The pro forma financial information should be
read in conjunction with the accompanying notes to the unaudited pro forma
financial statements and the financial statements of Horizon, Pacific Rehab and
other acquisitions included or incorporated by reference herein.
P-3
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION AND SUBSIDIARIES AND
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
AT NOVEMBER 30, 1995
ASSETS
<TABLE>
<CAPTION>
INDIVIDUALLY INDIVIDUALLY
INSIGNIFICANT INSIGNIFICANT PRO FORMA
POOLING OF PENDING PENDING COMBINED
INTERESTS PRO FORMA ACQUISITIONS ACQUISITIONS AFTER
HORIZON PACIFIC ADJUSTMENTS (1) COMBINED HISTORICAL ADJUSTMENTS (2) ACQUISITIONS
---------- --------- ----------------- ---------- ----------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents......... $ 26,422 $ 594 $ -- $ 27,016 $ 623 $ (9,000)(d) $ 18,639
Accounts receivable, net.......... 347,709 13,262 -- 360,971 13,629 -- 374,600
Other current assets.............. 136,359 3,672 -- 140,031 1,732 -- 141,763
---------- --------- ------ ---------- ----------- ------- -----------
Total current assets.............. 510,490 17,528 -- 528,018 15,984 (9,000) 535,002
Property and equipment, net....... 632,814 2,919 -- 635,733 2,518 -- 638,251
Goodwill, net..................... 173,939 49,860 -- 223,799 12,096 7,660(e) 243,555
Other intangible assets, net...... 37,808 334 -- 38,142 102 850(e) 39,094
Notes receivable, excluding
current portion.................. 44,337 -- -- 44,337 64 -- 44,401
Other assets...................... 52,586 528 -- 53,114 1,261 -- 54,375
---------- --------- ------ ---------- ----------- ------- -----------
Total assets.................. $1,451,974 $ 71,169 $ -- $1,523,143 $ 32,025 $ (490) $1,554,678
---------- --------- ------ ---------- ----------- ------- -----------
---------- --------- ------ ---------- ----------- ------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities............... $ 180,700 $ 21,574 $ 750(b) $ 203,024 $ 19,049 $ 500(b) $ 222,328
(245)(c)
Long-term debt, excluding current
portion.......................... 601,319 6,065 -- 607,384 1,105 (147)(c) 610,342
2,000(d)
Deferred income taxes............. 6,326 4,848 -- 11,174 81 -- 11,255
Other long-term liabilities and
minority interests............... 35,979 -- -- 35,979 501 -- 36,480
Stockholders' equity:
Common stock $.001 par value,
150,000,000 shares authorized,
51,882,060 shares issued with
51,304,552 shares outstanding,
55,696,394 shares pro forma
combined issued................ 52 80 (77)(a) 55 378 (119)(a) 56
(258)(f)
Additional paid-in capital...... 574,862 33,086 77(a) 608,025 7,502 119(a) 615,646
Retained earnings............... 63,803 5,516 (750)(b) 68,569 3,409 (500)(b) 69,638
(1,840)(f)
Treasury stock.................. (8,705) -- -- (8,705) -- -- (8,705)
Note receivable from sale of
common stock................... (2,362) -- -- (2,362) -- -- (2,362)
---------- --------- ------ ---------- ----------- ------- -----------
Total stockholders' equity.... 627,650 38,682 (750) 665,582 11,289 (2,598) 674,273
---------- --------- ------ ---------- ----------- ------- -----------
Total liabilities and
stockholders' equity......... $1,451,974 $ 71,169 $ -- $1,523,143 $ 32,025 $ (490) $1,554,678
---------- --------- ------ ---------- ----------- ------- -----------
---------- --------- ------ ---------- ----------- ------- -----------
</TABLE>
(See Notes to Unaudited Pro Forma Financial
Statements for explanations of adjustments)
P-4
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION AND SUBSIDIARIES AND
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1995
<TABLE>
<CAPTION>
INDIVIDUALLY INDIVIDUALLY
HISTORICAL INSIGNIFICANT INSIGNIFICANT PRO FORMA
------------------------ PENDING PENDING COMBINED
PACIFIC PRO FORMA ACQUISITIONS ACQUISITIONS AFTER
HORIZON REHAB COMBINED HISTORICAL (3) ADJUSTMENTS (6) ACQUISITIONS
---------- ------------ ----------- -------------- ----------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Total operating revenues................... $ 872,159 $ 17,955 $ 890,114 $ 38,842 $ -- $ 928,956
---------- ------------ ----------- -------------- ------ -----------
Cost of services........................... 706,810 10,522 717,332 22,979 -- 740,311
Administrative and general................. 41,892 4,582 46,474 12,867 -- 59,341
Depreciation and amortization.............. 29,758 987 30,745 630 181(a) 31,556
Interest expense........................... 24,476 649 25,125 616 54(b) 25,795
Special charge............................. 63,540 -- 63,540 -- -- 63,540
---------- ------------ ----------- -------------- ------ -----------
Total operating expenses............... 866,476 16,740 883,216 37,092 235 920,543
---------- ------------ ----------- -------------- ------ -----------
Earnings (loss) before minority
interests and income taxes............ 5,683 1,215 6,898 1,750 (235) 8,413
Minority interests......................... (3,402) -- (3,402) -- -- (3,402)
---------- ------------ ----------- -------------- ------ -----------
Earnings (loss) before income taxes.... 2,281 1,215 3,496 1,750 (235) 5,011
Income taxes............................... 11,663 537 12,200 495 111 (10 12,806
---------- ------------ ----------- -------------- ------ -----------
Earnings (loss) from continuing
operations............................ $ (9,382) $ 678 $ (8,704) $ 1,255 $ (346) $ (7,795)
---------- ------------ ----------- -------------- ------ -----------
---------- ------------ ----------- -------------- ------ -----------
Earnings (loss) from continuing operations
per common and common equivalent share.... $ (0.18) $ 0.08 $ (0.16) $ (0.14)
---------- ------------ ----------- -----------
---------- ------------ ----------- -----------
Weighted average shares outstanding........ 51,696 8,027 54,492 55,594
---------- ------------ ----------- -----------
---------- ------------ ----------- -----------
</TABLE>
(See Notes to Unaudited Pro Forma Financial
Statements for explanations of adjustments)
P-5
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION AND SUBSIDIARIES AND
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1995
<TABLE>
<CAPTION>
HISTORICAL
-------------------
PACIFIC PRO FORMA HISTORICAL ACQUISITIONS
HORIZON REHAB COMBINED ACQUISITIONS (4) ADJUSTMENTS (7)
---------- ------- ---------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total operating revenues.................................... $1,625,326 $27,130 $1,652,456 $63,311 $ (33)
---------- ------- ---------- -------- -------
Cost of services............................................ 1,342,590 13,719 1,356,309 47,458 (956)
Administrative and general 82,533 7,474 90,007 9,067 (50)
Depreciation and amortization 56,618 1,332 57,950 1,044 1,138
Interest expense............................................ 53,045 426 53,471 1,772 2,579
Special charge.............................................. 23,422 -- 23,422 -- --
Settlement charge........................................... 13,500 -- 13,500 -- --
---------- ------- ---------- -------- -------
Total operating expenses.................................. 1,571,708 22,951 1,594,659 59,341 2,711
---------- ------- ---------- -------- -------
Earnings before minority interests and income taxes......... 53,618 4,179 57,797 3,970 (2,744)
Minority interests.......................................... (5,245) -- (5,245) -- --
---------- ------- ---------- -------- -------
Earnings before income taxes................................ 48,373 4,179 52,552 3,970 (2,744)
Income taxes................................................ 23,375 1,650 25,025 -- --
---------- ------- ---------- -------- -------
Earnings from continuing operations......................... $ 24,998 $ 2,529 $ 27,527 $ 3,970 $(2,744)
---------- ------- ---------- -------- -------
---------- ------- ---------- -------- -------
Earnings from continuing operations per common and common
equivalent share........................................... $ 0.52 $ 0.35 $ 0.55
---------- ------- ----------
---------- ------- ----------
Weighted average shares outstanding......................... 47,850 7,286 50,388
---------- ------- ----------
---------- ------- ----------
<CAPTION>
INDIVIDUALLY INDIVIDUALLY
INSIGNIFICANT INSIGNIFICANT PRO FORMA
PENDING PENDING COMBINED
ACQUISITIONS ACQUISITIONS AFTER
HISTORICAL (4) ADJUSTMENTS (8) ACQUISITIONS
-------------- --------------- ------------
<S> <C> <C> <C>
Total operating revenues.................................... $70,489 $ -- $1,786,223
-------------- --------------- ------------
Cost of services............................................ 43,524 -- 1,446,335
Administrative and general 21,604 -- 120,628
Depreciation and amortization 1,223 362(a) 61,717
Interest expense............................................ 1,102 104(b) 59,028
Special charge.............................................. -- -- 23,422
Settlement charge........................................... -- -- 13,500
-------------- --------------- ------------
Total operating expenses.................................. 67,453 466 1,724,630
-------------- --------------- ------------
Earnings before minority interests and income taxes......... 3,036 (466) 61,593
Minority interests.......................................... -- -- (5,245)
-------------- --------------- ------------
Earnings before income taxes................................ 3,036 (466) 56,348
Income taxes................................................ 410 1,108(10) 26,543
-------------- --------------- ------------
Earnings from continuing operations......................... $ 2,626 $ (1,574) $ 29,805
-------------- --------------- ------------
-------------- --------------- ------------
Earnings from continuing operations per common and common
equivalent share........................................... $ 0.57
------------
------------
Weighted average shares outstanding......................... 52,261
------------
------------
</TABLE>
(See Notes to Unaudited Pro Forma Financial
Statements for explanations of adjustments)
P-6
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION AND SUBSIDIARIES AND
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1994
<TABLE>
<CAPTION>
HISTORICAL
---------------------------
PACIFIC PRO FORMA
HORIZON REHAB COMBINED
------------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Total operating revenues............................................. $ 1,382,162 $ 13,585 $ 1,395,747
------------- ------------ -------------
Cost of services..................................................... 1,167,994 7,355 1,175,349
Administrative and general........................................... 60,108 3,336 63,444
Depreciation and amortization........................................ 48,249 765 49,014
Interest expense..................................................... 44,396 123 44,519
Special charge....................................................... 74,834 -- 74,834
------------- ------------ -------------
Total operating expenses......................................... 1,395,581 11,579 1,407,160
------------- ------------ -------------
Earnings (loss) before minority interests and income taxes....... (13,419) 2,006 (11,413)
Minority interests................................................... (4,664) -- (4,664)
------------- ------------ -------------
Earnings (loss) before income taxes.............................. (18,083) 2,006 (16,077)
Income taxes......................................................... 1,731 779 2,510
------------- ------------ -------------
Earnings (loss) from continuing operations....................... $ (19,814) $ 1,227 $ (18,587)
------------- ------------ -------------
------------- ------------ -------------
Earnings (loss) from continuing operations per common and common
equivalent share.................................................... $ (0.54) $ 0.25 $ (0.48)
------------- ------------ -------------
------------- ------------ -------------
Weighted average shares outstanding.................................. 37,078 4,849 38,767
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
(See Notes to Unaudited Pro Forma Financial
Statements for explanations of adjustments)
P-7
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION AND SUBSIDIARIES AND
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1993
<TABLE>
<CAPTION>
HISTORICAL
---------------------------- PRO FORMA
HORIZON PACIFIC REHAB COMBINED
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Total operating revenues............................................. $ 1,136,358 $ 5,509 $ 1,141,867
------------- ------------- -------------
Cost of services..................................................... 957,363 1,833 959,196
Administrative and general........................................... 42,284 1,251 43,535
Depreciation and amortization........................................ 33,915 350 34,265
Interest expense..................................................... 26,999 73 27,072
Special charge....................................................... 17,154 -- 17,154
------------- ------------- -------------
Total operating expenses......................................... 1,077,715 3,507 1,081,222
------------- ------------- -------------
Earnings before minority interests and income taxes.............. 58,643 2,002 60,645
Minority interests................................................... (6,787) -- (6,787)
------------- ------------- -------------
Earnings before income taxes..................................... 51,856 2,002 53,858
Income taxes......................................................... 21,520 750 22,270
------------- ------------- -------------
Earnings from continuing operations.............................. $ 30,336 $ 1,252 $ 31,588
------------- ------------- -------------
------------- ------------- -------------
Earnings from continuing operations per common and common equivalent
share............................................................... $ 0.94 $ 0.34 $ 0.94
------------- ------------- -------------
------------- ------------- -------------
Earnings from continuing operations per common share - assuming full
dilution............................................................ $ 0.89 $ 0.34 $ 0.89
------------- ------------- -------------
------------- ------------- -------------
Weighted average shares outstanding:
Primary............................................................ 32,248 3,656 33,521
------------- ------------- -------------
------------- ------------- -------------
Fully diluted...................................................... 36,941 3,656 38,214
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
(See Notes to Unaudited Pro Forma Financial
Statements for explanations of adjustments)
P-8
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
AT NOVEMBER 30, 1995
ASSETS
<TABLE>
<CAPTION>
INDIVIDUALLY INDIVIDUALLY
INSIGNIFICANT INSIGNIFICANT
PENDING PENDING PRO FORMA
ACQUISITIONS ACQUISITIONS AFTER
HORIZON HISTORICAL ADJUSTMENTS (2) ACQUISITIONS
---------- ----------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents................................... $ 26,422 $ 623 $ (9,000)(d) $ 18,045
Accounts receivable, net.................................... 347,709 13,629 -- 361,338
Other current assets........................................ 136,359 1,732 -- 138,091
---------- ----------- ------- -----------
Total current assets........................................ 510,490 15,984 (9,000) 517,474
Property and equipment, net................................. 632,814 2,518 -- 635,332
Goodwill, net............................................... 173,939 12,096 7,660(e) 193,695
Other intangible assets, net................................ 37,808 102 850(e) 38,760
Notes receivable, excluding current portion................. 44,337 64 -- 44,401
Other assets................................................ 52,586 1,261 -- 53,847
---------- ----------- ------- -----------
Total assets............................................ $1,451,974 $ 32,025 $ (490) $1,483,509
---------- ----------- ------- -----------
---------- ----------- ------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities......................................... $ 180,700 $ 19,049 $ 500(b) $ 200,004
(245)(c)
Long-term debt, excluding current portion................... 601,319 1,105 (147)(c) 604,277
2,000(d)
Deferred income taxes....................................... 6,326 81 -- 6,407
Other long-term liabilities and minority interests.......... 35,979 501 -- 36,480
Stockholders' equity:
Common stock $.001 par value, 150,000,000 shares
authorized, 51,882,060 shares issued with 51,304,552
shares outstanding, 52,909,150 shares pro forma issued... 52 378 (119)(a) 53
(258)(f)
Additional paid-in capital................................ 574,862 7,502 119(a) 582,483
Retained earnings......................................... 63,803 3,409 (500)(b) 64,872
(1,840)(f)
Treasury stock............................................ (8,705) -- -- (8,705)
Note receivable from sale of common stock................. (2,362) -- -- (2,362)
---------- ----------- ------- -----------
Total stockholders' equity.............................. 627,650 11,289 (2,598) 636,341
---------- ----------- ------- -----------
Total liabilities and stockholders' equity.............. $1,451,974 $ 32,025 $ (490) $1,483,509
---------- ----------- ------- -----------
---------- ----------- ------- -----------
</TABLE>
(See Notes to Unaudited Pro Forma Financial
Statements for explanations of adjustments)
P-9
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1995
<TABLE>
<CAPTION>
INDIVIDUALLY INDIVIDUALLY
INSIGNIFICANT INSIGNIFICANT
PENDING PENDING PRO FORMA
HORIZON ACQUISITIONS ACQUISITIONS AFTER
HISTORICAL HISTORICAL (3) ADJUSTMENTS (8) ACQUISITIONS
---------- -------------- ----------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total operating revenues..................................... $ 872,159 $ 38,842 $ -- $ 911,001
---------- -------------- ------ -----------
Cost of services............................................. 706,810 22,979 -- 729,789
Administrative and general................................... 41,892 12,867 -- 54,759
Depreciation and amortization................................ 29,758 630 181(a) 30,569
Interest expense............................................. 24,476 616 54(b) 25,146
Special charge............................................... 63,540 -- -- 63,540
---------- -------------- ------ -----------
Total operating expenses................................. 866,476 37,092 235 903,803
---------- -------------- ------ -----------
Earnings (loss) before minority interests and income
taxes................................................... 5,683 1,750 (235) 7,198
Minority interests........................................... (3,402) -- -- (3,402)
---------- -------------- ------ -----------
Earnings (loss) before income taxes...................... 2,281 1,750 (235) 3,796
Income taxes................................................. 11,663 495 111 (10 12,269
---------- -------------- ------ -----------
Earnings (loss) from continuing operations............... $ (9,382) $ 1,255 $ (346) $ (8,473)
---------- -------------- ------ -----------
---------- -------------- ------ -----------
Earnings (loss) from continuing operations per common and
common equivalent share..................................... $ (0.18) $ (0.16)
---------- -----------
---------- -----------
Weighted average shares outstanding.......................... 51,696 52,798
---------- -----------
---------- -----------
</TABLE>
(See Notes to Unaudited Pro Forma Financial
Statements for explanations of adjustments)
P-10
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1995
<TABLE>
<CAPTION>
INDIVIDUALLY
HISTORICAL INSIGNIFICANT
----------------------------------------------- PENDING
OTHER PEOPLECARE OTHER ACQUISTIONS
ACQUISITIONS ACQUISITION ACQUISITIONS HISTORICAL
HORIZON PEOPLECARE (4) (4) ADJUSTMENTS (7) ADJUSTMENTS (7) (4)
----------- ----------------- --------------- ----------------- ---------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Total operating revenues... $ 1,625,326 $ 9,021 $ 42,079 $ (33) $ -- $ 70,489
----------- ------- --------------- ------ -------- -------------
Cost of services........... 1,342,590 6,882 33,482 (35) (921) 43,524
Administrative and
general................... 82,533 301 5,676 (50) -- 21,604
Depreciation and
amortization.............. 56,618 320 463 155 682 1,223
Interest expense........... 53,045 765 972 641 1,424 1,102
Special charge............. 23,422 -- -- -- -- --
Settlement charge.......... 13,500 -- -- -- -- --
----------- ------- --------------- ------ -------- -------------
Total operating
expenses................ 1,571,708 8,268 40,593 711 1,185 67,453
----------- ------- --------------- ------ -------- -------------
Earnings before minority
interests and income
taxes................... 53,618 753 1,486 (744) (1,185) 3,036
Minority interests......... (5,245) -- -- -- -- --
----------- ------- --------------- ------ -------- -------------
Earnings before income
taxes................... 48,373 753 1,486 (744) (1,185) 3,036
Income taxes............... 23,375 -- -- -- -- 410
----------- ------- --------------- ------ -------- -------------
Earnings from continuing
operations.............. $ 24,998 $ 753 $ 1,486 $ (744) $ (1,185) $ 2,626
----------- ------- --------------- ------ -------- -------------
----------- ------- --------------- ------ -------- -------------
Earnings from continuing
operations per common and
common equivalent share... $ 0.52
-----------
-----------
Weighted average shares
outstanding............... 47,850
-----------
-----------
<CAPTION>
INDIVIDUALLY
INSIGNIFICANT
PENDING PRO FORMA
ACQUISITIONS AFTER
ADJUSTMENTS (8) ACQUISITIONS
---------------- ------------
<S> <C> <C>
Total operating revenues... $ -- $1,746,882
-------- ------------
Cost of services........... -- 1,425,522
Administrative and
general................... -- 110,064
Depreciation and
amortization.............. 362(j) 59,823
Interest expense........... 104(k) 58,053
Special charge............. -- 23,422
Settlement charge.......... -- 13,500
-------- ------------
Total operating
expenses................ 466 1,690,384
-------- ------------
Earnings before minority
interests and income
taxes................... (466) 56,498
Minority interests......... -- (5,245)
-------- ------------
Earnings before income
taxes................... (466) 51,253
Income taxes............... 742 (10 24,527
-------- ------------
Earnings from continuing
operations.............. $ (1,208) $ 26,726
-------- ------------
-------- ------------
Earnings from continuing
operations per common and
common equivalent share... $ 0.54
------------
------------
Weighted average shares
outstanding............... 49,533
------------
------------
</TABLE>
(See Notes to Unaudited Pro Forma Financial
Statements for explanations of adjustments)
P-11
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
HISTORICAL
---------------------------- PRO FORMA
PACIFIC ACQUISITIONS ACQUISITIONS AFTER
REHAB (5) ADJUSTMENTS (9) ACQUISITIONS
------------ -------------- --------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net revenues........................................ $ 24,903 $ 7,603 $ -- $ 32,506
Cost of revenues.................................... 13,991 4,680 -- 18,671
------------ -------------- ------- -----------
Gross profit...................................... 10,912 2,923 -- 13,835
------------ -------------- ------- -----------
Operating expenses:
Selling, general and administrative expenses...... 6,488 1,032 -- 7,520
Depreciation and amortization..................... 1,327 113 233 1,673
------------ -------------- ------- -----------
7,815 1,145 233 9,193
------------ -------------- ------- -----------
Operating income.................................. 3,097 1,778 (233) 4,642
------------ -------------- ------- -----------
Nonoperating income (expense):
Interest expense.................................. (728) -- (224) (952)
Interest income................................... 10 -- -- 10
------------ -------------- ------- -----------
(718) -- (224) (942)
------------ -------------- ------- -----------
Earnings before income taxes...................... 2,379 1,778 (457) 3,700
Income taxes........................................ 997 -- 528 (10 1,525
------------ -------------- ------- -----------
Earnings from continuing operations............... $ 1,382 $ 1,778 $ (985) $ 2,175
------------ -------------- ------- -----------
------------ -------------- ------- -----------
Earnings from continuing operations per common and
common equivalent share............................ $ 0.18 $ 0.25
------------ -----------
------------ -----------
Earnings from continuing operations per common share
-- assuming full dilution.......................... $ 0.18 $ 0.24
------------ -----------
------------ -----------
Weighted average shares outstanding:
Primary........................................... 7,855 8,877
------------ -----------
------------ -----------
Fully diluted..................................... 8,190 9,212
------------ -----------
------------ -----------
</TABLE>
(See Notes to Unaudited Pro Forma Financial
Statements for explanations of adjustments)
P-12
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
HISTORICAL
---------------------------- PRO FORMA
PACIFIC ACQUISITIONS ACQUISITIONS AFTER
REHAB (5) ADJUSTMENTS (9) ACQUISITIONS
------------ -------------- --------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net revenues........................................ $ 20,504 $ 17,146 $ -- $ 37,650
Cost of revenues.................................... 10,290 9,449 -- 19,739
------------ -------------- ------- -----------
Gross profit...................................... 10,214 7,697 -- 17,911
------------ -------------- ------- -----------
Operating expenses:
Selling, general and administrative expenses...... 5,618 4,718 -- 10,336
Depreciation and amortization..................... 979 324 440 1,743
------------ -------------- ------- -----------
6,597 5,042 440 12,079
------------ -------------- ------- -----------
Operating income.................................. 3,617 2,655 (440) 5,832
Nonoperating income (expense):
Interest expense.................................. (170) (47) (628) (845)
Interest income................................... 54 36 -- 90
------------ -------------- ------- -----------
(116) (11) (628) (755)
------------ -------------- ------- -----------
Earnings before income taxes...................... 3,501 2,644 (1,068) 5,077
Income taxes........................................ 1,375 150 480 (10 2,005
------------ -------------- ------- -----------
Earnings from continuing operations............... $ 2,126 $ 2,494 $ (1,548) $ 3,072
------------ -------------- ------- -----------
------------ -------------- ------- -----------
Net earnings per common and common equivalent
share.............................................. $ 0.35 $ 0.44
------------ -----------
------------ -----------
Weighted average number of common and common
equivalent shares outstanding...................... 6,115 7,029
------------ -----------
------------ -----------
</TABLE>
(See Notes to Unaudited Pro Forma Financial
Statements for explanations of adjustments)
P-13
<PAGE>
NOTES TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
I. GENERAL
The Merger Agreement provides that each share of Pacific Rehab Common Stock
will be converted into .3483 of one share of Horizon Common Stock.
Facility leases expense of Horizon, which has been reported separately on
Horizon's historical statements of operations, have been reclassified to cost of
services for purposes of presentation in the unaudited pro forma statements of
operations.
Interest income and other expenses of Pacific Rehab, which have been
reported separately in Pacific Rehab's historical statements of operations, have
been reclassified to total operating revenues and cost of services,
respectively, for purposes of presentation in the unaudited pro forma statements
of operations.
Estimated Medicare and Medicaid settlements of Horizon, which has been
reported separately in Horizon's historical balance sheets, has been
reclassified to accounts receivable for purposes of presentation in the
unaudited pro forma balance sheet.
Pacific Rehab goodwill, which has been classified as intangible assets on
Pacific Rehab's historical balance sheet, has been reclassified to a separate
line item for purposes of presentation in the unaudited pro forma balance sheet.
The pro forma combined earnings per share amounts for all periods presented
are based on the weighted average shares outstanding for Horizon plus Pacific
Rehab weighted average shares outstanding multiplied by the Exchange Ratio.
The pro forma combined after acquisitions earnings per share amounts for the
year ended May 31, 1995 reflect additional weighted average shares of 1,873
relating to the issuance of Horizon Common Stock in connection with completed
and pending acquisitions of Horizon and Pacific Rehab described herein.
II. EXPLANATION OF PRO FORMA ADJUSTMENTS:
PRO FORMA BALANCE SHEETS
(1) ISSUANCE OF SHARES AND MERGER COSTS
(a) To record the issuance of 2,787 shares of Horizon Common Stock, par
value $.001 per share, upon conversion of the 8,002 shares of Pacific Rehab
Common Stock, par value $.01 per share, outstanding at September 30, 1995.
(b) To record estimated expenses of $750 ($1,250, net of related income
tax effect of $500) related to effecting the Merger.
(2) INDIVIDUALLY INSIGNIFICANT PENDING ACQUISITION ADJUSTMENTS
In connection with the pending acquisition of Medical Innovations to be
accounted for under the pooling of interests method of accounting, the following
adjustments have been recorded:
(a) To record the issuance of 1,027 shares of Horizon Common Stock, par
value $.001 per share, upon conversion of the 15,924 shares of Medical
Innovations Common Stock, par value $.0075 per share, outstanding at
September 30, 1995.
(b) To record estimated expenses of $500 ($850, net of related income
tax effect of $350) related to effecting the acquisition of Medical
Innovations.
P-14
<PAGE>
NOTES TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In connection with the pending acquisition of Physical Therapy to be
accounted for as a purchase, the following adjustments have been recorded:
(c) Adjustments of $245 and $147 have been recorded to current
liabilities and long-term debt, respectively, to eliminate certain
liabilities that will not be assumed by Horizon in connection with the
acquisition.
(d) Adjustments have been recorded to reflect the purchase price
consisting of a cash payment of $9,000 and the issuance of a promissory note
in the amount of $2,000.
(e) Adjustments for $7,660 and $850 have been recorded to reflect the
allocation of the excess purchase price to goodwill and other intangible
assets, respectively.
(f) Adjustments for $258 and $1,840 have been recorded to common stock
and retained earnings to eliminate the historical stockholders' equity
accounts of the predecessor entity.
Giving effect to the estimated expenses to effect the Pacific Rehab and Medical
Innovations acquisitions in the period, earnings (loss) from continuing
operations per common share for the six months ended November 30, 1995 would
have been $(0.17) and $(0.16) on a pro forma combined basis and a pro forma
combined after acquisitions basis, respectively.
PRO FORMA STATEMENTS OF OPERATIONS
(3) The unaudited pro forma statement of operations for the six months ended
November 30, 1995 includes: (i) the historical results of operations of Horizon
for the six months ended November 30, 1995, (ii) the historical results of
operations of Horizon's individually insignificant pending acquisitions,
including, Medical Innovations for the six months ended September 30, 1995 and
Physical Therapy for the six months ended December 31, 1995 and (iii) the
historical results of operations of Pacific Rehab for the six months ended
September 30, 1995. The Horizon unaudited pro forma statement of operations for
the year ended May 31, 1995 on page P-10 include all of the above except for
item (iii).
(4) The unaudited pro forma statement of operations for the year ended May
31, 1995 includes: (i) the historical results of operations of Horizon for the
year ended May 31, 1995, (ii) the historical results of operations of Horizon's
individually significant acquisition accounted for under the purchase method of
accounting, peopleCARE, for the period from June 1, 1994 through the date of
acquisition on July 29, 1994, (iii) the historical results of operations of
Horizon's individually insignificant acquisitions accounted for under the
purchase method of accounting for periods from June 1, 1994 through the dates of
acquisition, which occurred throughout the year ended May 31, 1995, (iv) the
historical results of operations of Horizon's individually insignificant pending
acquisitions, including, Medical Innovations and Physical Therapy, for the
twelve months ended June 30, 1995, (items (i) through (iv) are included in the
Horizon unaudited pro forma statement of operations for the year ended May 31,
1995 on page P-11), (v) the historical results of operations of Pacific Rehab
for the twelve months ended June 30, 1995, (vi) the historical results of
operations of Pacific Rehab's individually significant acquisitions accounted
for under the purchase method of accounting, Center for Industrial Medicine and
Arthritis Trauma & Sports Physical Therapy, for the period from July 1, 1994
through the dates of acquisition on March 1, 1995 and April 1, 1995,
respectively, and (vii) the historical results of operations of Pacific Rehab's
individually insignificant acquisitions accounted for under the purchase method
of accounting for periods from July 1, 1994 through the dates of acquisition,
which occurred throughout the twelve months ended June 30, 1995. The following
table presents the historical results of operations for Horizon's and Pacific
Rehab's individually significant historical
P-15
<PAGE>
NOTES TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
acquisitions, presented separately, and Horizon's and Pacific Rehab's
individually insignificant historical acquisitions, presented in the aggregate
(Horizon's individually insignificant pending acquisitions are presented in the
aggregate on pages P-6 and P-11):
<TABLE>
<CAPTION>
PACIFIC REHAB
HORIZON -------------------------------------------
-------------------------- ARTHRITIS TOTAL HORIZON
INDIVIDUALLY CENTER FOR TRAUMA & SPORTS INDIVIDUALLY AND PACIFIC
INSIGNIFICANT INDUSTRIAL PHYSICAL INSIGNIFICANT REHAB
PEOPLECARE ACQUISITIONS MEDICINE THERAPY ACQUISITIONS ACQUISITIONS
HISTORICAL HISTORICAL HISTORICAL HISTORICAL HISTORICAL HISTORICAL
------------- ----------- ----------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Total operating revenues..... $ 9,021 $ 42,079 $ 1,235 $ 1,062 $ 9,914 $ 63,311
------------- ----------- ----------- ------- ------------- -------------
Cost of services............. 6,882 33,482 259 357 6,478 47,458
Administrative and general... 301 5,676 577 242 2,271 9,067
Depreciation and
amortization................ 320 463 9 1 251 1,044
Interest expense............. 765 972 15 -- 20 1,772
Special charge............... -- -- -- -- -- --
Settlement charge............ -- -- -- -- -- --
------------- ----------- ----------- ------- ------------- -------------
Total operating expenses..... 8,268 40,593 860 600 9,020 59,341
------------- ----------- ----------- ------- ------------- -------------
Earnings (loss) before
minority interest and income
taxes....................... 753 1,486 375 462 894 3,970
Minority interests........... -- -- -- -- -- --
------------- ----------- ----------- ------- ------------- -------------
Earnings (loss) before
income taxes.............. $ 753 $ 1,486 $ 375 $ 462 $ 894 $ 3,970
------------- ----------- ----------- ------- ------------- -------------
------------- ----------- ----------- ------- ------------- -------------
</TABLE>
(5) The Pacific Rehab unaudited pro forma statements of operations for the
nine months ended September 30, 1995 and the year ended December 31, 1994
include: (i) the historical results of operations of Pacific Rehab for the nine
months ended September 30, 1995 and the year ended December 31, 1994,
respectively, (ii) the historical results of operations of Pacific Rehab's
individually significant acquisitions accounted for under the purchase method of
accounting, Center for Industrial Medicine and Arthritis Trauma & Sports
Physical Therapy, for the period from January 1, 1995 and January 1, 1994,
respectively, through the dates of acquisition on March 1, 1995 and April 1,
1995, respectively, and (iii) the historical results of operations of Pacific
Rehab's individually insignificant acquisitions accounted for under the purchase
method of accounting for periods from January 1, 1995 and January 1, 1994,
respectively, through the date of acquisition, which occurred throughout the
nine months ended September 30, 1995 and the year ended December 31, 1994. The
following table
P-16
<PAGE>
NOTES TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
presents the historical results of operations for Pacific Rehab's individually
significant acquisitions, presented separately, and Pacific Rehab's individually
insignificant acquisitions, presented in the aggregate:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED SEPTEMBER 30, 1995 1994
-------------------------------------------------------- ------------------------
ARTHRITIS ARTHRITIS
TRAUMA & TRAUMA &
CENTER FOR SPORTS INDIVIDUALLY TOTAL PACIFIC CENTER FOR SPORTS
INDUSTRIAL PHYSICAL INSIGNIFICANT REHAB INDUSTRIAL PHYSICAL
MEDICINE THERAPY ACQUISITIONS ACQUISITIONS MEDICINE THERAPY
HISTORICAL HISTORICAL HISTORICAL HISTORICAL HISTORICAL HISTORICAL
----------- ------------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues...................... $ 348 $ 324 $ 6,931 $ 7,603 $ 1,846 $ 1,417
Cost of Revenues.................. 139 109 4,432 4,680 388 476
----------- ----- ------------- ------------- ----------- -----------
Gross Profit.................... 209 215 2,499 2,923 1,458 941
Operating expenses:
Selling, general and
administrative expenses........ 92 76 864 1,032 866 323
Depreciation and amortization... 2 1 110 113 14 2
----------- ----- ------------- ------------- ----------- -----------
94 77 974 1,145 880 325
----------- ----- ------------- ------------- ----------- -----------
Operating income................ 115 138 1,525 1,778 578 616
----------- ----- ------------- ------------- ----------- -----------
Nonoperating income (expense):
Interest expense................ -- -- -- -- (23) --
Interest income................. -- -- -- -- 9 --
----------- ----- ------------- ------------- ----------- -----------
-- -- -- -- (14) --
----------- ----- ------------- ------------- ----------- -----------
Earnings before income taxes...... $ 115 $ 138 $ 1,525 $ 1,778 $ 564 $ 616
----------- ----- ------------- ------------- ----------- -----------
----------- ----- ------------- ------------- ----------- -----------
<CAPTION>
INDIVIDUALLY TOTAL PACIFIC
INSIGNIFICANT REHAB
ACQUISITIONS ACQUISITIONS
HISTORICAL HISTORICAL
------------- -------------
<S> <C> <C>
Net revenues...................... $ 13,883 $ 17,146
Cost of Revenues.................. 8,585 9,449
------------- -------------
Gross Profit.................... 5,298 7,697
Operating expenses:
Selling, general and
administrative expenses........ 3,259 4,718
Depreciation and amortization... 308 324
------------- -------------
3,837 5,042
------------- -------------
Operating income................ 1,461 2,655
------------- -------------
Nonoperating income (expense):
Interest expense................ (24) (47)
Interest income................. 27 36
------------- -------------
3 (11)
------------- -------------
Earnings before income taxes...... $ 1,464 $ 2,644
------------- -------------
------------- -------------
</TABLE>
(6) INDIVIDUALLY INSIGNIFICANT PENDING ACQUISITIONS ADJUSTMENTS FOR THE SIX
MONTHS ENDED NOVEMBER 30, 1995
In connection with the pending acquisition of Physical Therapy, the
following adjustments have been recorded:
(a) An adjustment for $181 has been recorded to depreciation and
amortization expense to reflect amortization of goodwill and covenants not
to compete resulting from the allocation of the purchase price. The
adjustment is comprised of the following: (i) amortization of $85 related to
the covenants not to compete amortized over five years and (ii) amortization
of $96 related to goodwill amortized over 40 years.
(b) An adjustment for $54 has been recorded to interest expense to
reflect the following: (i) additional interest expense of $75 on the
issuance of a $2,000 promissory note bearing interest at 7.5% and (ii) the
elimination of historical interest expense of the predecessor entity of $21.
(7) COMPLETED ACQUISITION ADJUSTMENTS FOR THE YEAR ENDED MAY 31, 1995:
The following table presents the historical pro forma adjustments for: (i)
Horizon's individually significant acquisition, presented separately, and
Horizon's individually insignificant acquisitions, presented in the aggregate,
to reflect the results of operations of all these acquisitions to the extent not
included in Horizon's historical results of operations for the year ended May
31, 1995 as if such acquisitions had occurred as of June 1, 1994 and (ii)
Pacific Rehab's individually significant acquisitions, presented separately, and
Pacific Rehab's individually insignificant acquisitions, presented in
P-17
<PAGE>
NOTES TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
the aggregate, to reflect the results of operations of all these acquisitions to
the extent not included in Pacific Rehab's historical results of operations for
the year ended June 30, 1995 as if such acquisitions had occurred as of July 1,
1994:
<TABLE>
<CAPTION>
HORIZON PACIFIC REHAB
---------------------------- ------------------------------------------------- TOTAL HORIZON
INDIVIDUALLY CENTER FOR ARTHRITIS TRAUMA INDIVIDUALLY AND PACIFIC
INSIGNIFICANT INDUSTRIAL & SPORTS PHYSICAL INSIGNIFICANT REHAB
PEOPLECARE ACQUISITIONS MEDICINE THERAPY ACQUISITIONS ACQUISITIONS
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
------------- ------------- --------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Total operating revenues... $ (33)(a) $ -- $ -- $ -- $ -- $ (33)
------ ------------- --- ------ ------ -------------
Cost of services......... (35)(a) (921)(e) -- -- -- (956)
Administrative and
general................. (50)(b) -- -- -- -- (50)
Depreciation and
amortization............ 155(c) 682(f) 32(h) 47(h) 222(h) 1,138
Interest expense......... 641(d) 1,424(g) 53(i) 68(i) 393(i) 2,579
Special charge........... -- -- -- -- -- --
Settlement charge........ -- -- -- -- -- --
------ ------------- --- ------ ------ -------------
Total operating
expenses................ 711 1,185 85 115 615 2,711
------ ------------- --- ------ ------ -------------
Earnings before minority
interest and income
taxes..................... (744) (1,185) (85) (115) (615) (2,744)
Minority interests......... -- -- -- -- -- --
------ ------------- --- ------ ------ -------------
Earnings before income
taxes................... $ (744) $ (1,185) $ (85) $ (115) $ (615) $ (2,744)
------ ------------- --- ------ ------ -------------
------ ------------- --- ------ ------ -------------
</TABLE>
PEOPLECARE ACQUISITION ADJUSTMENTS
Horizon completed the peopleCARE acquisition on July 29, 1994. As a result,
the historical financial statements of Horizon for the twelve months ended May
31,1995 include approximately ten months of peopleCARE operations. Following are
adjustments recorded to reflect the effects of the peopleCARE acquisition and
related transactions for the two month period ended July 29, 1994 as if the
peopleCARE acquisition had occurred on June 1, 1994. The adjustments for the
peopleCARE acquisition consist of the following:
(a) The historical financial information reported for peopleCARE
includes certain de minimis amounts which were not acquired or assumed by
Horizon in connection with this acquisition. Therefore, adjustments have
been recorded to eliminate interest and other operating revenues of $33 for
the year ended May 31, 1995 and cost of services expense of $35 for the year
ended May 31, 1995 associated with the predecessor entity operations which
were not acquired by Horizon.
(b) Adjustments of $50 have been recorded to eliminate distributions to
peopleCARE's prior owners for the year ended May 31, 1995.
P-18
<PAGE>
NOTES TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(c) Adjustments have been recorded to depreciation and amortization
expense to reflect the purchase of seven facilities and capital lease of six
facilities in connection with the peopleCARE acquisition for the year ended
May 31, 1995, as follows:
<TABLE>
<S> <C>
Purchase price allocated to equipment of $5,500 depreciated over 10
years.............................................................. $ 91
Purchase price allocated to buildings of $86,240 depreciated over 40
years.............................................................. 370
Purchase price allocated to noncompete agreements of $250 amortized
over 3 years....................................................... 14
Less historical peopleCARE depreciation expense..................... (320)
---------
Increase in depreciation and amortization expense................... $ 155
---------
---------
</TABLE>
(d) The peopleCARE acquisition purchase price included the payment of
$55,616 in cash, which was funded from Horizon's line of credit, for title
to seven facilities. This acquisition also called for Horizon to enter into
a capital lease for six facilities formerly owned by peopleCARE. As a
result, interest expense has been adjusted as follows for the year ended May
31, 1995:
<TABLE>
<S> <C>
Increase in line of credit sufficient to retire outstanding
peopleCARE debt during the period ($55,716 principal balance at
7.25%)............................................................. $ 672
Increase in capital lease obligations of $48,700. Interest expense
amortized based on an interest rate of 9.09%....................... 734
Less historical peopleCARE interest expense......................... (765)
---------
Increase in interest expense........................................ $ 641
---------
---------
</TABLE>
HORIZON INDIVIDUALLY INSIGNIFICANT ACQUISITION ADJUSTMENTS:
The aggregate purchase price of Horizon's individually insignificant
acquisitions approximated $75,300, consisting of the payment of cash and the
issuance of Horizon common stock. The Horizon individually insignificant
acquisition adjustments for the year ended May 31, 1995 consist of the
following:
(e) An adjustment for ($921) has been recorded to reflect the net effect
on lease expense in connection with acquisitions. This amount is comprised
of: (i) the elimination of historical lease expense on certain facilities
acquired by purchase by Horizon that were previously operated under
long-term leases by the predecessor and (ii) the substitution of the
predecessor's historical lease expense with Horizon's lease expense on
certain facilities acquired by Horizon under a long-term lease.
(f) An adjustment for $682 has been recorded to reflect additional
depreciation and amortization expense in connection with the acquisitions.
This amount is comprised of: (i) additional depreciation expense on property
and equipment related to certain facilities acquired by purchase by Horizon
that were previously operated under long-term leases by the predecessor,
(ii) additional depreciation expense on property and equipment recorded as a
result of the allocation of the purchase price based on Horizon's historical
depreciable lives (buildings -- 40 years; equipment -- 10 years) and (iii)
additional amortization expense on goodwill recorded as a result of the
allocation of the purchase price based on an amortization period of 40
years.
(g) An adjustment for $1,424 has been recorded to reflect the net effect
on interest expense in connection with the acquisitions. This amount is
comprised of: (i) additional interest expense
P-19
<PAGE>
NOTES TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
in the amount of $2,750 recorded in connection with additional debt incurred
to fund acquisitions, computed based on principle amount of debt incurred
times the stated interest rates, prorated for the period from June 1, 1994
through the date of acquisition and (ii) the elimination of historical
interest expense in the amount of $1,326 related to certain acquisitions
acquired under long-term leases by Horizon in which the related debt of the
predecessor was not assumed.
PACIFIC REHAB INDIVIDUALLY SIGNIFICANT AND INDIVIDUALLY INSIGNIFICANT
ACQUISITION ADJUSTMENTS:
The aggregate purchase price of Pacific Rehab's individually significant and
individually insignificant acquisitions for the year ended May 31, 1995
approximated $21,461, consisting of the payment of cash, issuance of Pacific
Rehab common stock and the issuance of debt. The Pacific Rehab individually
significant and individually insignificant acquisition adjustments for the year
ended May 31, 1995 consist of the following:
(h) Adjustments for $32, $47 and $222 have been recorded to reflect
additional depreciation and amortization expense in connection with the
Center for Industrial Medicine, Arthritis Trauma & Sports Therapy and other
individually insignificant acquisitions, respectively. These amounts are
comprised of: (i) additional depreciation expense on property and equipment
recorded as a result of the allocation of the purchase price based on an
average depreciable life of 7 years and (ii) additional amortization expense
on goodwill recorded as a results of the allocation of the purchase price
based on an amortization period of 40 years.
(i) Adjustments for $53, $68 and $393 have been recorded to reflect
additional interest expense in connection with the Center for Industrial
Medicine, Arthritis Trauma & Sports Therapy and other individually
insignificant acquisitions, respectively. These amounts are comprised of
additional interest expense in connection with additional debt incurred to
fund the acquisitions. These amounts were computed based on: (i) additional
debt incurred, (ii) stated interests rates on the additional debt and (iii)
prorated for the period from July 1, 1994 through the date of acquisition.
(8) PENDING ACQUISITIONS ADJUSTMENTS FOR THE YEAR ENDED MAY 31, 1995
In connection with the pending acquisition of Physical Therapy, the
following adjustments have been recorded:
(a) An adjustment for $362 has been recorded to depreciation and
amortization expense to reflect amortization of goodwill and covenants not
to compete resulting from the allocation of the purchase price. The
adjustment is comprised of the following: (i) amortization of $170 related
to the covenants not to compete amortized over five years and (ii)
amortization of $192 related to goodwill amortized over 40 years.
(b) An adjustment for $104 has been recorded to interest expense to
reflect the following: (i) additional interest expense of $150 on the
issuance of a $2,000 promissory note bearing interest at 7.5% and (ii) the
elimination of historical interest expense of the predecessor entity of $46.
(9) ACQUISITION ADJUSTMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
AND THE YEAR ENDED DECEMBER 31, 1994:
The following table presents the pro forma adjustments for: (i) Pacific
Rehab's individually significant acquisitions, presented separately, and Pacific
Rehab's individually insignificant acquisitions, presented in the aggregate, to
reflect the results of operations of all these acquisitions to the
P-20
<PAGE>
NOTES TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
extent not included in Pacific Rehab's historical results of operations for the
nine months ended September 30, 1995 and the year ended December 31, 1994 as if
such acquisitions had occurred as of January 1, 1994:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1995
-----------------------------------------------------
ARTHRITIS
TRAUMA &
CENTER FOR SPORTS INDIVIDUALLY TOTAL PACIFIC
INDUSTRIAL PHYSICAL INSIGNIFICANT REHAB
MEDICINE THERAPY ACQUISITIONS ACQUISITIONS
HISTORICAL HISTORICAL HISTORICAL HISTORICAL
---------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues................................................ -$- $-- -$- -$-
Cost of Revenues............................................ -- -- -- --
----- -------- ------ ------
Gross Profit.............................................. -- -- -- --
----- -------- ------ ------
Operating expenses:
Selling, general and administrative expenses.............. -- -- -- --
Depreciation and amortization............................. 5(a) 13(a) 215(a) 233
----- -------- ------ ------
5 13 215 233
----- -------- ------ ------
Operating income.......................................... (5) (13) (215) (233)
----- -------- ------ ------
Nonoperating income (expense):
Interest expense.......................................... (13)(b) (23)(b) (188)(b) (224)
Interest income........................................... -- -- -- --
----- -------- ------ ------
(13) (23) (188) (224)
----- -------- ------ ------
Earnings before income taxes................................ $(18) $(36) $(403) $(457)
----- -------- ------ ------
----- -------- ------ ------
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
-----------------------------------------------------
ARTHRITIS
TRAUMA &
CENTER FOR SPORTS INDIVIDUALLY TOTAL PACIFIC
INDUSTRIAL PHYSICAL INSIGNIFICANT REHAB
MEDICINE THERAPY ACQUISITIONS ACQUISITIONS
HISTORICAL HISTORICAL HISTORICAL HISTORICAL
---------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues................................................ $-- $-- -$- $--
Cost of Revenues............................................ -- -- -- --
---------- -------- ------ -------------
Gross Profit.............................................. -- -- -- --
---------- -------- ------ -------------
Operating expenses:
Selling, general and administrative expenses.............. -- -- -- --
Depreciation and amortization............................. 49(a) 62(a) 329(a) 440
---------- -------- ------ -------------
49 62 329 440
---------- -------- ------ -------------
Operating income.......................................... (49) (62) (329) (440)
---------- -------- ------ -------------
Nonoperating income (expense):
Interest expense.......................................... (79)(b) (90)(b) (459)(b) (628)
Interest income........................................... -- -- -- --
---------- -------- ------ -------------
(79) (90) (459) (628)
---------- -------- ------ -------------
Earnings before income taxes................................ $(128) $(152) $(788) $(1,068)
---------- -------- ------ -------------
---------- -------- ------ -------------
</TABLE>
The aggregate purchase price of Pacific Rehab's individually significant and
individually insignificant acquisitions for the nine months ended September 30,
1995 and the year ended December 31, 1994 approximated $21,461 and $35,161,
respectively, consisting of the payment of cash, issuance of Pacific Rehab
common stock and the issuance of debt. The Pacific Rehab adjustments for the
nine months ended September 30, 1995 and the year ended December 31, 1994
consist of the following:
(a) Adjustments for $5, $13 and $215 for the nine months ended September
30, 1995 and $49, $62 and $329 for the year ended December 31, 1994 have
been recorded to reflect additional depreciation and amortization expense in
connection with the Center for Industrial Medicine, Arthritis Trauma &
Sports Therapy and other individually insignificant acquisitions,
respectively. These amounts are comprised of: (i) additional depreciation
expense on property and equipment recorded as a result of the allocation of
the purchase price based on an average depreciable life of 7 years and (ii)
additional amortization expense on goodwill recorded as a results of the
allocation of the purchase price based on an amortization period of 40
years.
(b) Adjustments for $13, $23 and $188 for the nine months ended
September 30, 1995 and $79, $90 and $459 for the year ended December 31,
1994 have been recorded to reflect additional interest expense in connection
with the Center for Industrial Medicine, Arthritis Trauma & Sports Therapy
and other individually insignificant acquisitions, respectively. These
amounts are comprised of additional interest expense in connection with
additional debt incurred to fund the acquisitions. These amounts were
computed based on: (i) additional debt incurred, (ii) stated interest rates
on the additional debt and (iii) prorated for the period from January 1,
1994 through the date of acquisition.
(10) INCOME TAXES:
An effective tax rate of 40% has been applied to all acquisitions for all
periods, except with respect to historical Pacific Rehab for which the actual
historical effective tax rate has been maintained.
P-21
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
HORIZON/CMS HEALTHCARE CORPORATION,
HORIZON PRSM CORPORATION,
AND
PACIFIC REHABILITATION & SPORTS MEDICINE, INC.
DATED AS OF NOVEMBER 9, 1995
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I
THE MERGER
1.1 THE MERGER....................................................................... A-5
1.2 CLOSING.......................................................................... A-5
1.3 EFFECTIVE TIME................................................................... A-5
1.4 EFFECT OF THE MERGER............................................................. A-5
1.5 CERTIFICATE OF INCORPORATION AND BYLAWS.......................................... A-6
1.6 DIRECTORS AND OFFICERS........................................................... A-6
1.7 CONSIDERATION; CONVERSION OF SECURITIES.......................................... A-6
1.8 EXCHANGE OF CERTIFICATES......................................................... A-7
1.9 STOCK TRANSFER BOOKS............................................................. A-8
1.10 COMPANY STOCK OPTIONS AND PLANS................................................. A-8
1.11 OTHER OUTSTANDING RIGHTS TO ACQUIRE OR RECEIVE COMPANY COMMON STOCK............. A-9
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
2.1 ORGANIZATION AND QUALIFICATION................................................... A-10
2.2 CAPITALIZATION OF THE COMPANY.................................................... A-10
2.3 AUTHORIZATION AND VALIDITY OF AGREEMENT.......................................... A-10
2.4 CONSENTS AND APPROVALS........................................................... A-10
2.5 NO VIOLATION..................................................................... A-11
2.6 SEC REPORTS; FINANCIAL STATEMENTS................................................ A-11
2.7 FORM S-4 AND PROXY STATEMENT..................................................... A-12
2.8 COMPLIANCE WITH LAW.............................................................. A-12
2.9 ABSENCE OF CERTAIN CHANGES....................................................... A-12
2.10 LITIGATION...................................................................... A-12
2.11 EMPLOYEE BENEFIT MATTERS........................................................ A-12
2.12 TAXES........................................................................... A-13
2.13 INSURANCE....................................................................... A-13
2.14 EMPLOYMENT AGREEMENTS........................................................... A-13
2.15 BROKERS AND FINDERS............................................................. A-14
2.16 OPINION OF FINANCIAL ADVISOR.................................................... A-14
2.17 TAX MATTERS; POOLING............................................................ A-14
2.18 AFFILIATES...................................................................... A-14
2.19 CERTAIN BUSINESS PRACTICES...................................................... A-14
2.20 PERMITS; COMPLIANCE............................................................. A-14
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF PARENT AND MERGER SUB
3.1 ORGANIZATION AND QUALIFICATION................................................... A-15
3.2 CAPITALIZATION OF THE PARENT AND MERGER SUB...................................... A-16
3.3 AUTHORIZATION AND VALIDITY OF AGREEMENT.......................................... A-16
3.4 CONSENTS AND APPROVALS........................................................... A-17
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C>
3.5 NO VIOLATION..................................................................... A-17
3.6 COMPLIANCE WITH LAW.............................................................. A-17
3.7 ABSENCE OF CERTAIN CHANGES....................................................... A-17
3.8 EMPLOYEE BENEFIT MATTERS......................................................... A-17
3.9 TAXES............................................................................ A-18
3.10 INSURANCE....................................................................... A-18
3.11 EMPLOYMENT AGREEMENTS........................................................... A-18
3.12 LITIGATION...................................................................... A-18
3.13 SUFFICIENT FUNDS................................................................ A-19
3.14 OPERATIONS OF MERGER SUB........................................................ A-19
3.15 SEC REPORTS AND FINANCIAL STATEMENTS; ABSENCE OF UNDISCLOSED LIABILITIES........ A-19
3.16 FORM S-4 AND PROXY STATEMENT.................................................... A-19
3.17 BROKERS AND FINDERS............................................................. A-19
3.18 TAX MATTERS; POOLING............................................................ A-20
3.19 AFFILIATES...................................................................... A-20
3.20 CERTAIN BUSINESS PRACTICES...................................................... A-20
3.21 PERMITS; COMPLIANCE............................................................. A-20
ARTICLE IV
COVENANTS
4.1 CONDUCT OF BUSINESS PENDING THE MERGER........................................... A-21
4.2 ACCESS; CONFIDENTIALITY.......................................................... A-22
4.3 FURTHER ACTIONS.................................................................. A-22
4.4 NOTICE OF CERTAIN MATTERS........................................................ A-23
4.5 FORM S-4, PROXY STATEMENT AND OTHER FILINGS...................................... A-23
4.6 POOLING AND TAX-FREE REORGANIZATION TREATMENT.................................... A-23
4.7 AFFILIATE AGREEMENTS............................................................. A-24
4.8 COMPANY'S STOCKHOLDERS' MEETING.................................................. A-24
4.9 COOPERATION...................................................................... A-24
4.10 PUBLIC ANNOUNCEMENTS............................................................ A-25
4.11 ACQUISITION PROPOSALS........................................................... A-25
4.12 D&O INDEMNIFICATION AND INSURANCE............................................... A-25
4.13 THE COMPANY'S PLANS............................................................. A-26
ARTICLE V
CLOSING CONDITIONS
5.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER..................... A-27
5.2 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY........................... A-28
5.3 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PARENT AND MERGER SUB................. A-28
ARTICLE VI
TERMINATION
6.1 TERMINATION...................................................................... A-28
6.2 EFFECT OF TERMINATION............................................................ A-29
6.3 FEES, EXPENSES AND OTHER PAYMENTS................................................ A-29
</TABLE>
A-3
<PAGE>
<TABLE>
<S> <C>
ARTICLE VII
MISCELLANEOUS
7.1 NO SURVIVAL...................................................................... A-30
7.2 NOTICES.......................................................................... A-30
7.3 CERTAIN DEFINITIONS.............................................................. A-31
7.4 ENTIRE AGREEMENT................................................................. A-32
7.5 ASSIGNMENT; BINDING EFFECT....................................................... A-32
7.6 AMENDMENTS....................................................................... A-32
7.7 WAIVERS.......................................................................... A-32
7.8 CAPTIONS......................................................................... A-32
7.9 COUNTERPARTS..................................................................... A-32
7.10 GOVERNING LAW................................................................... A-33
</TABLE>
A-4
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of November 9, 1995 by and among
PACIFIC REHABILITATION & SPORTS MEDICINE, INC., a Delaware corporation (the
"Company"), HORIZON/CMS HEALTHCARE CORPORATION, a Delaware corporation
("Parent"), and HORIZON PRSM CORPORATION, a Delaware corporation ("Merger Sub").
RECITALS
WHEREAS, the Boards of Directors of the Company, Parent and Merger Sub each
have determined that it is advisable and in the best interests of their
respective stockholders for Merger Sub to merge with and into the Company, upon
the terms and subject to the conditions of this Agreement;
WHEREAS, for federal income tax purposes, it is intended that the Merger (as
defined in Section 1.1) shall qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended;
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a "pooling of interests"; and
WHEREAS, the Company, Parent and Merger Sub desire to make certain
representations, warranties, covenants and agreements in connection with this
Agreement.
NOW, THEREFORE, in consideration of the foregoing and of the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties hereto hereby agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. Upon the terms and subject to the conditions of this
Agreement, and in accordance with the General Corporation Law of the State of
Delaware (the "DGCL"), at the Effective Time (as defined below), Merger Sub
shall be merged with and into the Company (the "Merger"). As a result of the
Merger, the separate corporate existence of Merger Sub shall cease, and the
Company shall continue as the surviving corporation of the Merger (the
"Surviving Corporation").
1.2 CLOSING. Unless this Agreement shall have been terminated pursuant to
Article VI and subject to the satisfaction or, if permissible, waiver of the
conditions set forth in Article V, the consummation of the Merger and the other
transactions contemplated hereby (the "Closing") shall take place at the offices
of Garvey, Schubert & Barer, 11th Floor, 121 S.W. Morrison Street, Portland,
Oregon 97204, as promptly as practicable (and in any event within two business
days) following the satisfaction or, if permissible, waiver of the conditions
set forth in Article V, unless another place, date or time is agreed to in
writing by Parent and the Company.
1.3 EFFECTIVE TIME. As promptly as practicable after the satisfaction or,
if permissible, waiver of the conditions set forth in Article V, the parties
hereto will cause a certificate of merger (the "Certificate of Merger") to be
executed, verified and filed with the Delaware Secretary of State in accordance
with the DGCL. The Merger shall become effective at such time as the Certificate
of Merger is filed with the Delaware Secretary of State in accordance with the
DGCL, or at such later time as may be agreed to by Parent and the Company and
specified in the Certificate of Merger in accordance with applicable law. The
date and time when the Merger shall become effective is referred to herein as
the "Effective Time".
1.4 EFFECT OF THE MERGER. The Merger shall have the effects set forth in
the DGCL. Without limiting the generality of the foregoing, and subject thereto,
at the Effective Time, all properties,
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rights, privileges, powers and franchises of the Company and Merger Sub shall
vest in the Surviving Corporation, and all debts, liabilities and duties of the
Company and Merger Sub shall become the debts, liabilities and duties of the
Surviving Corporation.
1.5 CERTIFICATE OF INCORPORATION AND BYLAWS. At the Effective Time, the
Amended and Restated Certificate of Incorporation and the Amended and Restated
Bylaws of the Company, as in effect immediately prior to the Effective Time,
shall be the Certificate of Incorporation and the Bylaws of the Surviving
Corporation.
1.6 DIRECTORS AND OFFICERS. At the Effective Time, the officers and
directors of Merger Sub immediately prior to the Effective Time shall become the
officers and directors of the Surviving Corporation, each to hold office from
the Effective Time until their respective successors are duly elected or
appointed and qualified in the manner provided in the Certificate of
Incorporation and Bylaws of the Surviving Corporation and applicable law. The
Company shall use commercially reasonable efforts to cause each officer and
director of the Company to tender his or her resignation immediately prior to
the Effective Time.
1.7 CONSIDERATION; CONVERSION OF SECURITIES. At the Effective Time, by
virtue of the Merger and without any action on the part of any of the parties
hereto or the holders of any of the following securities:
(a) Each share of common stock, par value $.01 per share, of the Company
("Company Common Stock") which is issued and outstanding immediately prior
to the Effective Time (other than any shares of Company Common Stock to be
cancelled pursuant to Section 1.7(b)) shall be changed and converted into
and represent the right to .3483 shares of common stock, par value $.001 per
share, of the Parent ("Parent Common Stock") (the "Common Stock Exchange
Ratio"). All such shares of Company Common Stock shall no longer be
outstanding and shall automatically be cancelled and extinguished and shall
cease to exist, and each certificate which immediately prior to the
Effective Time evidenced any such shares shall thereafter represent the
right to receive (without interest), upon surrender of such certificate in
accordance with the provisions of Section 1.8, that number of shares of
Parent Common Stock determined pursuant to the Common Stock Exchange Ratio
(the "Merger Consideration"). The holders of certificates previously
evidencing shares of Company Common Stock outstanding immediately prior to
the Effective Time shall cease to have any rights with respect thereto
(including, without limitation, any rights to vote or to receive dividends
and distributions in respect of such shares), except as otherwise provided
herein or by law.
(b) All shares of Company Common Stock, which immediately prior to the
Effective Time are owned of record by Parent or any of Parent's affiliates
(other than natural persons), shall remain outstanding and shall not be
cancelled or converted into any consideration by reason of the Merger and
shall continue as shares of the capital stock of the Surviving Corporation,
and each certificate evidencing ownership of any such shares shall continue
to evidence ownership of the same number and kind of shares of the Surviving
Corporation. All shares of Company Common Stock held by the Company in its
treasury shall be cancelled and extinguished and shall cease to exist and no
consideration shall be delivered with respect thereto.
(c) Each share of capital stock of Merger Sub issued and outstanding
immediately prior to the Effective Time shall be converted into and
exchanged for one validly issued, fully paid and nonassessable share of
common stock of the Surviving Corporation.
(d) In the event of any reclassification, stock split or stock dividend
with respect to Parent Common Stock, any change or conversion of Parent
Common Stock into other securities, or any other dividend or distribution
with respect to Parent Common Stock prior to the Effective Time,
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appropriate and proportionate adjustment, if any, shall be made to the
Merger Consideration and all references to Merger Consideration in this
Agreement shall be deemed to be the Merger Consideration as so adjusted.
1.8 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. As of the Effective Time, Parent shall, pursuant to an
agreement with Chemical Mellon Shareholder Services (the "Exchange Agent"),
deposit, or cause to be deposited, with or for the account of the Exchange Agent
in trust for the benefit of the holders of shares of Company Common Stock for
exchange through the Exchange Agent in accordance with this Article I,
certificates representing shares of Parent Common Stock in the aggregate number
required to be exchanged for shares of Company Common Stock pursuant to Section
1.7, together with cash payable in respect of fractional shares (the "Exchange
Fund"). The Exchange Agent shall, pursuant to irrevocable instructions, deliver
certificates representing shares of Parent Common Stock (together with cash
payable in respect of fractional shares) out of the Exchange Fund to holders of
shares of Company Common Stock. The Exchange Fund shall not be used for any
other purpose.
(b) EXCHANGE PROCEDURE. Promptly after the Effective Time, Parent will
cause the Exchange Agent to mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time evidenced outstanding
shares of Company Common Stock ("Certificates"), (i) a notice of the
effectiveness of the Merger; (ii) a letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to the Exchange Agent and
shall be in such customary form and have such other provisions as Parent may
reasonably specify in accordance with the terms of this Agreement); and (iii)
instructions to effect the surrender of the Certificates in exchange for
certificates representing shares of Parent Common Stock. Upon surrender of a
Certificate for cancellation to the Exchange Agent together with such letter of
transmittal, duly executed, and such other customary documents as may be
required pursuant to such instructions, the holder of such Certificate shall be
entitled to receive in exchange therefor a certificate representing that number
of whole shares of Parent Common Stock and, if applicable, a check representing
the cash consideration to which such holder may be entitled on account of a
fractional share of Parent Common Stock, which such holder has the right to
receive pursuant to the provisions of this Article I, and the Certificate so
surrendered shall forthwith be cancelled. In the event of a transfer of
ownership of shares of Company Common Stock which is not registered in the
transfer records of the Company, a certificate representing that number of whole
shares of Parent Common Stock and, if applicable, a check representing the cash
consideration to which such holder may be entitled on account of a fractional
share of Parent Common Stock, which such holder has the right to receive
pursuant to the provisions of this Article I, may be paid or issued to the
transferee if the Certificate representing such Company Common Stock is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. In the event that any certificate for Company
Common Stock shall have been lost, stolen or destroyed, the Exchange Agent shall
issue in exchange therefor, upon the making of an affidavit of that fact by the
holder thereof and such bond, security, or indemnity as Parent may reasonably
require, a certificate representing that number of whole shares of Parent Common
Stock and, if applicable, a check representing the cash consideration to which
such holder may be entitled on account of a fractional share of Parent Common
Stock, which such holder has the right to receive pursuant to the provisions of
this Article I. Until surrendered as contemplated by this Section 1.8, each
Certificate shall be deemed at any time after the Effective Time to evidence
only the right to receive upon such surrender a certificate representing that
number of whole shares of Parent Common Stock and, if applicable, a check
representing the cash consideration to which such holder may be entitled on
account of a fractional share of Parent Common Stock, which such holder has the
right to receive pursuant to the provisions of this Article I.
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or
other distributions declared or made after the Effective Time with respect to
Parent Common Stock with a record date after the Effective Time shall be paid to
any holder of any unsurrendered Certificate with respect to
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the shares of Parent Common Stock represented thereby and no cash payment in
lieu of fractional shares shall be paid to any such holder until the holder of
record of such Certificate shall surrender such Certificate. Subject to the
effect of applicable laws, following surrender of any such Certificate, there
shall be paid to the record holder of the certificates representing whole shares
of Parent Common Stock issued in exchange therefor, without interest, (i) at the
time of such surrender, the amount of cash payable in lieu of a fractional share
of Parent Common Stock to which such holder is entitled and the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to whole shares of Parent Common Stock, and (ii)
after the Effective Time but prior to surrender and a payment date subsequent to
surrender payable with respect to such whole shares of Parent Common Stock.
(d) NO FRACTIONAL SHARES. No fractional shares of Parent Common Stock
shall be issued in the Merger, but in lieu thereof each holder of Company Common
Stock otherwise entitled to a fraction of a share of Parent Common Stock shall,
upon surrender of his or her Certificate or Certificates, be entitled to receive
an amount of cash (without interest) determined by multiplying the closing price
for Parent Common Stock as reported on the New York Stock Exchange (the "NYSE")
Composite Transactions on the business day two days prior to the Effective Date
by the fractional share interest to which such holder would otherwise be
entitled.
(e) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund which
remains undistributed to the holders of Company Common Stock for one year after
the Effective Time shall be delivered to the Parent upon demand, and any holders
of Company Common Stock who have not theretofore complied with this Article I
shall thereafter look, subject to Section 1.8(d), only to Parent for payment of
their claim for Parent Common Stock, any cash in lieu of fractional shares of
parent Common Stock and any dividend or distributions with respect to Parent
Common Stock.
(f) ABANDONED PROPERTY LAWS. Neither the Surviving Corporation nor the
Exchange Agent shall be liable to any holder of a Certificate for any shares of
Parent Common Stock (or dividends or distributions with respect thereto or cash)
from the Exchange Fund delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
(g) TRANSFER TAXES. Except as provided in paragraph (b) above, Parent
shall pay or cause to be paid any transfer or gains tax (including, without
limitation, any real property gains or transfer tax) imposed in connection with
or as a result of the Merger, including any such transfer or gains tax that is
imposed on a shareholder of the Company.
1.9 STOCK TRANSFER BOOKS. At the Effective Time, the stock transfer books
of the Company shall be closed, and there shall be no further registration of
transfers of shares of Company Common Stock thereafter on the records of the
Company. At and after the Effective Time, any Certificates presented to the
Exchange Agent or the Surviving Corporation for any reason shall be cancelled
and exchanged as provided in this Article I.
1.10 COMPANY STOCK OPTIONS AND PLANS.
(a) VESTING; EXERCISABILITY. Effective at the Effective Time, all
outstanding stock options (the "Company Options") to purchase shares of Company
Common Stock granted under the Company's Amended and Restated 1993 Combination
Stock Option Plan, as amended, any Company individual stock plans and the
Company's Directors' Stock Option Plan, as amended (the "Option Plans") shall be
or, by the terms of their respective stock option agreements will become, fully
vested and immediately exercisable in their entirety, pursuant to the terms of
the Option Plans.
(b) ELECTION OF OPTION HOLDER. At the Effective Time, each holder of a
Company Option shall have the right to elect to (a) exercise such Company
Options for shares of Company Common Stock (in which case such shares of Company
Common Stock will be converted into shares of Parent Common Stock pursuant to
Section 1.7 above); or (b) have each such Company Option assumed in accordance
with paragraphs (c) and (d) of this Section 1.10.
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(c) ELECTION TO RECEIVE PARENT OPTIONS. At the Effective Time, the
Company's obligations with respect to each outstanding Company Option not
exercised as provided for in Section 1.10(b) hereof shall be assumed by Parent
(the "Assumed Options"). Except as specifically set forth in Section 1.10(d)
below, the Assumed Options shall continue to have, and be subject to, the same
terms and conditions as set forth in the Option Plans and the stock option
agreement pursuant to which such Company Options were issued, as in effect
immediately prior to the Effective Time. It is the intention of the parties
hereto that, to the extent that any such Company Option constituted an
"incentive stock option" (within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "CODE") immediately prior to the Effective
Time, such option shall continue to qualify as an incentive stock option to the
maximum extent permitted by Section 422 of the Code, and that the assumption of
the Company Options provided by this Section 1.10(d) satisfy the conditions of
Section 424(a) of the Code, and, therefore, the provisions of this Section 1.10
shall be interpreted and applied in a manner consistent with such intent.
(d) PARENT OPTIONS. Each Assumed Option shall be exercisable for shares of
Parent Common Stock in a number of shares of Parent Common Stock equal to the
number of shares of Company Common Stock for which such Company Option was
exercisable immediately prior to the Effective Time multiplied by the Common
Stock Exchange Ratio. The exercise price per share of each Assumed Option shall
be equal to the exercise price per share of such option immediately prior to the
Effective Time divided by the Common Stock Exchange Ratio.
(e) RESERVATION OF SHARES. Parent shall reserve for issuance the number of
shares of Parent Common Stock that will become issuable upon the exercise of the
Assumed Options and, promptly after the Effective Time, issue to each holder of
an Assumed Option a document evidencing the assumption by Parent of the
Company's obligations with respect thereto. Parent will use its best efforts to
file and cause to become effective, within 30 days after the Effective Time (or
as soon thereafter as is possible), a Registration Statement on Form S-8 under
the Securities Act of 1933, as amended, registering the sale of the shares to be
issued under the Assumed Options. Parent will use its best efforts to keep such
registration statement effective until all of the Assumed Options have been
exercised in full or have expired unexercised.
1.11 OTHER OUTSTANDING RIGHTS TO ACQUIRE OR RECEIVE COMPANY COMMON STOCK.
(a) RIGHTS OUTSTANDING. At the Effective Time, the Company shall have
outstanding warrants, convertible promissory notes and earnout rights ("Company
Acquisition Rights"), pursuant to which the Company shall be obligated to issue,
in the aggregate, not more than 1,635,229 shares of Company Common Stock. A
schedule of the Company Acquisition Rights is set forth in Section 2.2 of the
Company Disclosure Schedule (as defined in Section 2.1 of this Agreement).
(b) RIGHT TO RECEIVE PARENT COMMON STOCK. At the Effective Time, the
Company Acquisition Rights shall be converted into rights to acquire shares of
Parent Common Stock ("Parent Acquisition Rights") in a number equal to the
number of shares of Company Common Stock for which such Company Acquisition
Right was exercisable immediately prior to the Effective Time multiplied by the
Common Stock Exchange Ratio. The exercise price per share of each Company
Acquisition Right shall be equal to the exercise price per share of such right
immediately prior to the Effective Time divided by the Common Stock Exchange
Ratio.
(c) RESERVATION OF SHARES. Parent shall reserve for issuance the number of
shares of Parent Common Stock that will become issuable upon the exercise of the
Company Acquisition Rights and, promptly after the Effective Time, issue to each
holder of a Company Acquisition Right a document evidencing the assumption by
Parent of the Company's obligations with respect thereto. Parent will use its
best efforts to ensure that shares of Parent Common Stock issued upon exercise
of Parent Acquisition Rights shall be registered under the Securities Act and
all applicable state securities laws, or be freely tradeable under an available
exemption from registration therefrom.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent as follows:
2.1 ORGANIZATION AND QUALIFICATION. Each of the Company and its
subsidiaries (the "Subsidiaries"), which are listed in Section 2.1 of the
Company's disclosure schedule delivered to Parent in connection with this
Agreement (the "Company Disclosure Schedule"), (a) is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation, (b) has all requisite corporate power to carry on its business as
it is now being conducted, and (c) is in good standing and duly qualified to do
business in each jurisdiction in which the transaction of its business makes
such qualification necessary, except where the failure to be in good standing or
so qualified would not have a Material Adverse Effect (as defined in Section
7.3(c) below) on the Company. True and complete copies of the Amended and
Restated Certificate of Incorporation and the Amended and Restated Bylaws, as
amended to date, of the Company have been delivered to Parent.
2.2 CAPITALIZATION OF THE COMPANY. The authorized capital stock of the
Company consists of 20,000,000 shares of Company Common Stock, $.01 par value
and 5,000,000 shares of preferred stock, $0.01 par value ("Company Preferred
Stock"). As of September 30, 1995, 8,002,425 shares of Company Common Stock were
issued and outstanding, including 33,750 shares of Company Common Stock held by
a subsidiary of the Company and including 492,874 to be issued on the date
immediately prior to the Effective Time or January 2, 1996, whichever occurs
sooner, and no shares of Company Preferred Stock were outstanding. All
outstanding shares of Company Common Stock have been validly issued, and are
fully paid and nonassessable. Except as disclosed in the Company SEC Documents
(as defined in Section 2.6) or in Section 2.2 of the Company Disclosure
Schedule, there are no outstanding subscriptions, options, warrants, calls,
rights, commitments or any other agreement to which the Company is a party or by
which the Company is bound which, directly or indirectly, obligate the Company
to issue, deliver or sell or cause to be issued, delivered or sold any
additional shares of Company Common Stock or any other capital stock of the
Company or any other securities convertible into, or exercisable or exchangeable
for, or evidencing the right to subscribe for any such shares.
2.3 AUTHORIZATION AND VALIDITY OF AGREEMENT. The Company has all requisite
corporate power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby in accordance with the terms hereof (subject to
the approval and adoption of this Agreement by the holders of a majority of the
outstanding shares of Company Common Stock). The Company's Board of Directors
(the "Company Board") has duly authorized the execution, delivery and
performance of this Agreement by the Company, and no other corporate proceedings
on the part of the Company are necessary to authorize this Agreement or the
transactions contemplated hereby (other than the approval and adoption of this
Agreement and the Merger by the holders of a majority of the outstanding shares
of Company Common Stock). This Agreement has been duly executed and delivered by
the Company and, assuming this Agreement constitutes the legal, valid and
binding obligation of Parent and Merger Sub, constitutes the legal, valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms, except as may be limited by any bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or other similar laws
affecting the enforcement of creditors' rights generally or by general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
2.4 CONSENTS AND APPROVALS.
(a) Neither the execution and delivery of this Agreement by the Company nor
the consummation by the Company of the transactions contemplated hereby will
require any consent, approval, authorization or permit of, or filing with or
notification to, any governmental or regulatory authority by reason of the
Company's status or operations, except (i) in connection with the applicable
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), (ii) pursuant to the applicable requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and the rules and
regulations promulgated thereunder, and the Securities Exchange Act of
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1934, as amended (the "Exchange Act"), and the rules and regulations promulgated
thereunder, and state securities or "blue sky" laws and state takeover laws,
(iii) the filing and recordation of the Certificate of Merger pursuant to the
DGCL and appropriate documents with the relevant authorities of other states in
which the Company is authorized to do business, (iv) as set forth in Section 2.4
of the Company Disclosure Schedule, or (v) where the failure to obtain such
consent, approval, authorization or permit, or to make such filing or
notification, would not in the aggregate have a Material Adverse Effect on the
Company or prevent the Merger.
(b) The Company Board has approved this Agreement and the Merger for
purposes of Section 203 of the DGCL so that Section 203 of the DGCL is not
applicable to the transactions provided for in this Agreement. The affirmative
vote of the holders of a majority of the outstanding shares of Company Common
Stock is the only vote of the holders of capital stock of the Company necessary
to approve the Merger.
2.5 NO VIOLATION. Except as set forth in Section 2.5 of the Company
Disclosure Schedule, assuming the Merger has been duly approved by the holders
of a majority of the outstanding shares of Company Common Stock, neither the
execution and delivery of this Agreement by the Company nor the consummation by
the Company of the transactions contemplated hereby will (a) conflict with or
violate the Amended and Restated Certificate of Incorporation or Amended and
Restated Bylaws of the Company, (b) result in a violation or breach of,
constitute a default under, give rise to any right of termination, cancellation
or acceleration of, result in the imposition of any lien, charge or other
encumbrance on any material assets or property of the Company pursuant to, any
note, bond, mortgage, indenture, contract, agreement, lease, license or other
instrument or obligation to which the Company is a party or by which the Company
or any of its assets or properties may be bound, except for such violations,
breaches and defaults (or rights of termination, cancellation or acceleration or
lien or other charge or encumbrance) as to which requisite waivers or consents
have been obtained or which in the aggregate would not have a Material Adverse
Effect on the Company or prevent the Merger, or (c) assuming the consents,
approvals, authorizations or permits and filings or notifications referred to in
Section 2.4 and this Section 2.5 are duly and timely obtained or made and the
approval of the Merger by the holders of a majority of the outstanding shares of
Company Common Stock has been obtained, violate any order, writ, injunction,
decree, statute, rule or regulation applicable to the Company or any of its
assets and properties, except for such violations which would not in the
aggregate have a Material Adverse Effect on the Company or prevent the Merger.
2.6 SEC REPORTS; FINANCIAL STATEMENTS.
(a) Since April 14, 1994, the Company has filed with the Securities and
Exchange Commission (the "SEC") all forms, reports, schedules, statements and
other documents required to be filed by it with the SEC pursuant to the Exchange
Act, the Securities Act and the SEC's rules and regulations thereunder (all such
forms, reports and other documents, including any such reports filed prior to
the Effective Time, collectively the "Company SEC Documents"). The Company SEC
Documents, including, without limitation, any financial statements or schedules
included therein, at the time filed, or in the case of registration statements
on their respective effective dates, (i) complied in all material respects with
the applicable requirements of the Exchange Act and the Securities Act, as the
case may be, and the applicable rules and regulations of the SEC thereunder and
(ii) did not at the time they were filed (or, in the case of registration
statements, at the time of effectiveness), contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
(b) Each of the consolidated financial statements of the Company (including
any related notes thereto) included in the Company SEC Documents comply as to
form in all material respects with applicable accounting requirements and with
the published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the period involved (except as may be indicated in
such financial
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statements or in the notes thereto or, in the case of unaudited financial
statements, as permitted by the requirements of Form 10-Q) and fairly present
(subject, in the case of the unaudited statements, to normal year-end
adjustments and the absence of footnotes) the consolidated financial position of
the Company as of the dates thereof and the consolidated results of the
Company's operations and cash flows for the periods presented therein.
2.7 FORM S-4 AND PROXY STATEMENT. None of the information supplied or to
be supplied by the Company for inclusion or incorporation by reference in (i)
the registration statement on Form S-4 to be filed with the SEC by Parent in
connection with the issuance of shares of Parent Common Stock in the Merger (the
"Form S-4") will, at the time the Form S-4 is filed with the SEC and at the time
it becomes effective under the Securities Act, contain any untrue statement of
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and (ii) the proxy
statement together with amendments thereof and supplements thereto ("Proxy
Statement") to be distributed to the stockholders of the Company relating to the
meeting of the Company's stockholders to consider and vote on this Agreement and
the Merger ("Company's Stockholders' Meeting") will contain, on the date the
Proxy Statement or such amendment or supplement is first mailed to stockholders,
and at all times subsequent thereto up to and including the Company's
Stockholders' Meeting, any statement which, at such time and in light of the
circumstances under which it will be made, will be false or misleading with
respect to any material fact, or will omit to state any material fact required
to be stated therein or necessary in order to make the statements therein not
false or misleading or necessary to correct any statement in any earlier
communication with respect to the Company's Stockholders' Meeting which has
become false or misleading. The Proxy Statement, insofar as it relates to the
Company, will comply in all material respects with the provisions of the
Exchange Act and the rules and regulations promulgated thereunder.
2.8 COMPLIANCE WITH LAW. Except as set forth in Section 2.8 of the Company
Disclosure Schedule, neither the Company nor any of its subsidiaries is in
violation of any applicable law, rule, regulation, decree or order of any
governmental or regulatory authority applicable to the Company or any of its
subsidiaries, except for violations which in the aggregate do not have a
Material Adverse Effect on the Company. The Company holds all permits, licenses,
exemptions, order and approvals of all governmental and regulatory authorities
necessary for the lawful conduct of its businesses, except for failures to hold
permits, licenses, exemptions, orders and approvals which do not in the
aggregate have a Material Adverse Effect on the Company.
2.9 ABSENCE OF CERTAIN CHANGES. Except as disclosed in the Company SEC
Documents filed with the SEC prior to the date hereof, since December 31, 1994,
the Company has conducted its business only in the ordinary course of such
business and there has not been (i) any Material Adverse Effect on the Company;
(ii) any declaration, setting aside or payment of any dividend or other
distribution with respect to its capital stock; or (iii) any material change in
its accounting principles, practices or methods.
2.10 LITIGATION. Except as disclosed in the Company SEC Documents or as
set forth in Section 2.10 of the Company Disclosure Schedule, there are no
claims, actions, proceedings or governmental investigations pending or, to the
knowledge of the Company, threatened against the Company or any of its
subsidiaries, by or before any court or other governmental or regulatory body,
which, if adversely determined, would have a Material Adverse Effect on the
Company. To the knowledge of the Company, no action or proceeding has been
instituted or threatened before any court or other governmental or regulatory
body by any Person (as defined in Section 7.3) seeking to restrain or prohibit
the execution, delivery or performance of this Agreement or the consummation of
the transactions contemplated hereby.
2.11 EMPLOYEE BENEFIT MATTERS. All employee benefit plans and other
benefit arrangements covering employees of the Company and the Company's
subsidiaries are listed in the Company SEC Documents or in Section 2.11 of the
Company Disclosure Schedule, except such benefit plans and
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other benefit arrangements which are not material (the "Company Benefit Plans").
True and complete copies of the Company Benefit Plans have been made available
to Parent. To the extent applicable, the Company Benefit Plans comply, in all
material respects, with the requirements of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and the Code, and any Company
Benefit Plan intended to be qualified under Section 401(a) of the Code has
received a determination letter from the Internal Revenue Service (the "IRS")
stating that it is so qualified. No Company Benefit Plan is covered by Title IV
of ERISA or Section 412 of the Code. Neither any Company Benefit Plan nor the
Company has incurred any liability or penalty under Section 4975 of the Code or
Section 502(i) of ERISA. Each Company Benefit Plan has been maintained and
administered in all material respects in compliance with its terms and with
ERISA and the Code to the extent applicable thereto. To the knowledge of the
executive officers of the Company, there are no pending or anticipated material
claims against or otherwise involving any of the Company Benefit Plans and no
suit, action or other litigation (excluding claims for benefits incurred in the
ordinary course of Company Benefit Plan activities) has been brought against or
with respect to any such Company Benefit Plan, except for any of the foregoing
which would not have a Material Adverse Effect on the Company. All material
contributions required to be made as of the date hereof to the Company Benefit
Plans have been made or provided for. Neither the Company nor any entity under
"common control" with the Company within the meaning of ERISA Section 4001 has
contributed to, or been required to contribute to, any "multi-employer plan" (as
defined in Section 3(37) and 4001(a)(3) of ERISA). The Company does not maintain
or contribute to any plan or arrangement which provides or has any liability to
provide life insurance, medical or other employee welfare benefits to any
employee or former employee upon his retirement or termination of employment,
except as required by Section 4980B of the Code, and the Company has never
represented, promised or contracted (whether in oral or written form) to any
employee or former employee that such benefits would be provided. Except as
disclosed in the Company SEC Documents or the Company Disclosure Schedule or as
provided in Section 1.10 hereof, the execution of, and performance of the
transactions contemplated in, this Agreement will not (either alone or upon the
occurrence of any additional or subsequent events) constitute an event under any
benefit plan, policy, arrangement or agreement or any trust or loan that will or
may result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligations to fund benefits with respect to any employee.
2.12 TAXES. The Company and each of its subsidiaries (i) has timely filed
all material federal, state and foreign tax returns required to be filed by any
of them for tax years ended prior to the date of this Agreement or requests for
extensions have been timely filed and any such request shall have been granted
and not expired and all such returns are complete in all material respects, (ii)
has paid or accrued all taxes shown to be due and payable on such returns, (iii)
has properly accrued all such taxes for such periods subsequent to the periods
covered by such returns, and (iv) has "open" years for federal income tax
returns only as set forth in the Company SEC Documents or in Section 2.12 of the
Company Disclosure Schedule.
2.13 INSURANCE. True and complete copies of all material insurance
policies maintained by the Company have been made available to Parent. Such
policies provide coverage for the operations of the Company and its subsidiaries
in amounts and covering such risks as the Company believes is necessary to
conduct its business. Neither the Company nor any of its subsidiaries has
received notice that any such policy is invalid or unenforceable.
2.14 EMPLOYMENT AGREEMENTS. Except as disclosed in the Company SEC
Documents or as set forth in Section 2.14 of the Company Disclosure Schedule,
there are no material employment, consulting, noncompetition, severance or
indemnification agreements between the Company and any current or former officer
or director of the Company.
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2.15 BROKERS AND FINDERS. No broker, finder or investment bank has acted
directly or indirectly for the Company, nor has the Company incurred any
obligation to pay any brokerage, finder's or other fee or commission in
connection with the transactions contemplated hereby, other than Smith Barney
Inc. ("Smith Barney"), the fees and expenses of which shall be borne by the
Company.
2.16 OPINION OF FINANCIAL ADVISOR. Smith Barney has delivered its opinion,
dated the date of this Agreement, to the Board of Directors of the Company to
the effect that, as of the date of this Agreement, the Merger Consideration to
be received by the holders of Company Common Stock is fair, from a financial
point of view, to such holders.
2.17 TAX MATTERS; POOLING. To the knowledge of the Company, neither the
Company nor any of its affiliates has taken or agreed to take any action that
would prevent the Merger from (i) constituting a reorganization qualifying under
the provisions of Section 368(a) of the Code or (ii) being treated for financial
accounting purposes as a "pooling of interests" in accordance with generally
accepted accounting principles ("GAAP") and the rules, regulations and
interpretations of the SEC (a "Pooling Transaction").
2.18 AFFILIATES. Section 2.18 of the Company Disclosure Schedule
identifies all persons who, to the knowledge of the Company, may be deemed to be
affiliates of the Company under Rule 145 of the Securities Act, including,
without limitation, all directors and executive officers of the Company.
2.19 CERTAIN BUSINESS PRACTICES. None of the Company, or to the Company's
knowledge any of its subsidiaries or any directors, officers, agents or
employees of the Company or any of its subsidiaries (in their capacities as
such) has (a) used any funds for unlawful contributions, gifts, entertainment or
other unlawful expenses relating to political activity, (b) made any unlawful
payment to foreign or domestic government officials or employees or to foreign
or domestic political parties or campaigns or violated any provision of the
Foreign Corrupt Practices Act of 1977, as amended, (c) consummated any
transaction, made any payment, entered into any agreement or arrangement or
taken any other action in violation of Section 1128B(b) of the Social Security
Act, as amended, or (d) made any other unlawful payment, in all cases except
where the impact from such contributions, gifts, entertainment, payments,
violations, agreements, arrangements, actions or payments would not in the
aggregate have a Material Adverse Effect on the Company.
2.20 PERMITS; COMPLIANCE.
(a) Except as disclosed in Section 2.02(a) of the Company Disclosure
Schedule, each of the Company and its subsidiaries is in possession of (i) all
franchises, grants, authorizations, licenses, permits, easements, variances,
exemptions, consents, certificates, identification and registration numbers,
approvals and orders necessary to own, lease and operate its properties and to
carry on its business as it is now being conducted and (ii) agreements from all
federal, state and local governmental agencies and accrediting and certifying
organizations having jurisdiction over such facility or facilities that are
required to operate the facility or facilities in the manner in which it or they
are currently operated and receive reimbursement for care provided to patients
covered under the federal Medicare program or any applicable state Medicaid
program (collectively, the "COMPANY PERMITS"), except where the failure to
possess such Company Permits could not reasonably be expected to have a Material
Adverse Effect on the Company. Without limiting the generality of the foregoing,
certain of the Company's facilities are certified for participation or
enrollment in the Medicare program, have a current and valid provider contract
with the Medicare program and are in substantial compliance with the conditions
of participation of such programs. Neither the Company nor any of its
subsidiaries has received notice from the regulatory authorities that enforce
the statutory or regulatory provisions in respect to either the Medicare or
Medicaid programs, of any pending or threatened investigations or surveys, and
no such investigations or surveys are pending or, to the knowledge of the
Company, threatened or imminent that could reasonably be expected to have a
Material Adverse Effect on the Company. Section 2.20 of the Company Disclosure
Schedule sets forth, as of the date of this Agreement, all actions, proceedings,
investigations or surveys pending or, to the knowledge of the
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Company, threatened against the Company or any of its subsidiaries that could
reasonably be expected to result in (i) the loss or revocation of a Company
Permit necessary to operate one or more facilities or for a facility to receive
reimbursement under the Medicare or Medicaid programs, (ii) the suspension or
cancellation of any other Company Permit, except any such Company Permit where
such suspension or cancellation could not reasonably be expected to have a
Material Adverse Effect on the Company. Except as set forth in Section 2.20 of
the Company Disclosure Schedule, neither the Company nor any of its subsidiaries
is in conflict with, or in default or violation of (a) any law applicable to the
Company or any of its subsidiaries or by or to which any of their respective
properties is bound or subject or (b) any of the Company Permits, except for any
such conflicts, defaults or violations that could not reasonably be expected to
have a Material Adverse Effect on the Company. Except as set forth in Section
2.20 of the Company Disclosure Schedule, since December 31, 1993, neither the
Company nor any of its subsidiaries has received from any Governmental Entity
(as defined in Section 4.9) any written notification with respect to possible
conflicts, defaults of violations of laws, except for written notices relating
to possible conflicts, defaults or violations of laws, except for written
notices relating to possible conflicts, defaults or violations that could not
reasonably be expected to have a Material Adverse Effect on the Company.
(b) The Company and its subsidiaries, as appropriate, are approved
participating providers in and under all third-party payment programs from which
they receive revenues. No action or investigation is pending, or to the best
knowledge, threatened to suspend, limit, terminate, condition or revoke the
status of the Company or any of its subsidiaries as a provider in any such
program, and neither the Company nor any of its subsidiaries has been provided
notice by any third-party payor of its intention to suspend, limit, terminate,
revoke, condition or fail to renew in whole or in part or decrease the amounts
payable under any arrangement with the Company or such subsidiary as a provider,
which action, investigation or proceeding would have a Material Adverse Effect
on the Company.
(c) The Company and its subsidiaries have filed on a timely basis all
claims, cost reports or annual filings required to be filed to secure payments
for services rendered by them under any third-party payment program from which
they receive or expect to receive revenues, except where the failure to file
such claim, report or other filing would not have a Material Adverse Effect on
the Company. Except as indicated in its financial statements included in the
Company SEC Documents (as defined in Section 2.6 above), the Company or its
subsidiaries, as applicable, have paid, or caused to be paid, all refunds,
discounts, adjustments, or amounts owing that have become due to such
third-party payors pursuant to such claims, reports or filings, and neither the
Company nor any of its subsidiaries has any knowledge or notice of any material
changes required to be made to any cost reports, claims or filings made by them
for any period or of any deficiency in any such claim, report, or filing, except
for changes and deficiencies that in the aggregate would not have a Material
Adverse Effect on the Company.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF PARENT AND MERGER SUB
Parent and Merger Sub hereby represent and warrant, jointly and severally,
to the Company as follows:
3.1 ORGANIZATION AND QUALIFICATION. Each of Parent and its subsidiaries
(the "Subsidiaries"), which is listed in Section 3.1 of Parent's disclosure
schedule delivered to the Company in connection with this Agreement (the "Parent
Disclosure Schedule") (a) is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, (b) has all
requisite corporate power to carry on its business as it is now being conducted
and (c) is in good standing and duly qualified to do business in each
jurisdiction in which the transaction of its business makes such qualification
necessary, except where the failure to be in good standing or so qualified would
not have a
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Material Adverse Effect on Parent. True and complete copies of their respective
Articles or Certificates of Incorporation, as the case may be, and their
respective Bylaws, as amended to date, have been delivered to the Company.
3.2 CAPITALIZATION OF THE PARENT AND MERGER SUB.
(a) CAPITALIZATION OF PARENT. The authorized capital stock of Parent
consists of (i) 150,000,000 shares of Parent Common Stock, of which, as of
October 31, 1995: (A) 51,368,168 were issued and outstanding, all of which are
duly authorized, validly issued fully paid and nonassessable and were not issued
in violation of any preemptive or similar rights created by statute, Parent's
Certificate of Incorporation or Bylaws or any agreement to which Parent is a
party or is bound; (B) 476,099 were held by Chemical Mellon Shareholder Services
as unexchanged in respect of Parent's previous merger transaction with
Continental Medical Systems, Inc.; (C) 554,623 were held in the treasury of
Parent; and (D) 2,998,714 were reserved for future issuance; and (ii) 500,000
shares of preferred stock, par value $.001 per share ("Parent Preferred Stock"),
of which, as of October 31, 1995, 150,000 shares had been designated Series A
Junior Participating Preferred Stock. No shares of Parent Preferred Stock are
issued and outstanding. Except (1) as disclosed in the Parent SEC Reports (as
defined in Section 3.15 below) or otherwise as set forth in this Section 3.2 or
Section 3.2 of the Parent Disclosure Schedule and (2) pursuant to the terms of
that certain Rights Agreement dated September 15, 1994 by and between Parent and
Chemical Trust Company of California (the "Parent Rights Agreement"), there are
no options, warrants or other rights (including registration rights),
agreements, arrangements or commitments of any character to which Parent or any
of its subsidiaries is a party relating to the issued or unissued capital stock
of, or other equity interests in, Parent or any of its subsidiaries. Except
pursuant to the Parent Rights Agreement or as set forth in Section 3.2 of the
Parent Disclosure Schedule, there are no obligations, contingent or otherwise,
of Parent or any of its subsidiaries to repurchase, redeem or otherwise acquire
any shares of Parent Common Stock or the capital stock of, or other equity
interests in, any subsidiary of Parent. Each of the issued capital stock of, or
other equity interests in, each of Parent's subsidiaries is duly authorized,
validly issued and, in the case of capital stock, fully paid and nonassessable,
and has not been issued in violation of (nor are any of the authorized shares of
capital stock of, or other equity interests in, such entities subject to) any
preemptive or similar rights created by statute, the Certificate of
Incorporation or Bylaws (or the equivalent organizational documents) of any of
Parent's subsidiaries, or any agreement to which Parent or any of its
subsidiaries is a party or bound.
(b) CAPITALIZATION OF MERGER SUB. The authorized capital stock of Merger
Sub consists of 1000 shares of common stock, par value $.001 per share ("Merger
Common Stock"). An aggregate of 100 shares of Merger Sub Common Stock are issued
and outstanding and held by Parent, all of which are duly authorized, validly
issued, fully paid and nonassessable and not subject to preemptive rights
created by statute, Merger Sub's Certificate of Incorporation or Bylaws or any
agreement to which Merger Sub is a party or is bound.
3.3 AUTHORIZATION AND VALIDITY OF AGREEMENT. Each of Parent and Merger Sub
has all requisite corporate power and authority to enter into this Agreement and
to consummate the transactions contemplated hereby in accordance with the terms
hereof. The Boards of Directors of Parent and Merger Sub, respectively, and
Parent, as the sole stockholder of Merger Sub, have duly authorized the
execution, delivery and performance of this Agreement by each of Parent and
Merger Sub, and no other corporate proceedings on the part of either Parent or
Merger Sub are necessary to authorize this Agreement or the transactions
contemplated hereby. This Agreement has been duly executed and delivered by each
of Parent and Merger Sub and, assuming this Agreement constitutes the legal,
valid and binding obligation of the Company, constitutes the legal, valid and
binding obligation of each of Parent and Merger Sub, enforceable against each of
Parent and Merger Sub in accordance with its terms, except as may be limited by
any bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally or by general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
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3.4 CONSENTS AND APPROVALS. Neither the execution and delivery of this
Agreement by Parent and Merger Sub nor the consummation by Parent and Merger Sub
of the transactions contemplated hereby will require any consent, approval,
authorization or permit of, or filing with or notification to, any governmental
or regulatory authority by reason of Parent's or Merger Sub's status or (as
applicable) operations, except (a) in connection with the applicable
requirements of the HSR Act, (b) pursuant to the applicable requirements of the
Securities Act, the Exchange Act, the rules and regulations promulgated under
such Acts, and state securities or "blue sky" laws and state takeover laws, (c)
the filing and recordation of the Certificate of Merger pursuant to the DGCL,
(d) as set forth in Section 3.3 of the Parent Disclosure Schedule, or (e) where
the failure to obtain such consent, approval, authorization or permit, or to
make such filing or notification, would not in the aggregate have a Material
Adverse Effect on either of Parent or Merger Sub or prevent the Merger.
3.5 NO VIOLATION. Except as set forth in Section 3.5 of the Parent
Disclosure Schedule, neither the execution and delivery of this Agreement by
Parent and Merger Sub nor the consummation by Parent and Merger Sub of the
transactions contemplated hereby will (a) conflict with or violate the Articles
or Certificate of Incorporation or Bylaws of Parent or Merger Sub, (b) result in
a violation or breach of, constitute (with or without notice or lapse of time or
both) a default under, give rise to any right of termination, cancellation or
acceleration of, result in the imposition of any lien, charge or other
encumbrance on any material assets or property of either of Parent or Merger Sub
pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease,
license or other instrument or obligation to which either of Parent or Merger
Sub is a party or by which either of Parent or Merger Sub or any of their
respective assets or properties may be bound, except for such violations,
breaches and defaults or rights of termination, cancellation or acceleration or
lien or other consents have been obtained or which in the aggregate would not
have a Material Adverse Effect on either of Parent or Merger Sub or prevent the
Merger, or (c) assuming the consents, approvals, authorizations or permits and
filings or notifications referred to in Section 3.3 and this Section 3.5 are
duly and timely obtained or made, violate any order, writ, injunction, decree,
statute, rule or regulation applicable to either of Parent or Merger Sub or any
of their respective assets or properties, except for such violations which would
not in the aggregate have a Material Adverse Effect on either of Parent or
Merger Sub or prevent the Merger.
3.6 COMPLIANCE WITH LAW. Except as set forth in Section 3.6 of the Parent
Disclosure Schedule, neither the Parent nor any of its subsidiaries is in
violation of any applicable law, rule, regulation, decree or order of any
governmental or regulatory authority applicable to the Parent or any of its
subsidiaries, except for violations which in the aggregate would not have a
Material Adverse Effect on Parent. Parent holds all permits, licenses,
exemptions, order and approvals of all governmental and regulatory authorities
necessary for the lawful conduct of its businesses, except for failures to hold
permits, licenses, exemptions, orders and approvals which would not in the
aggregate have a Material Adverse Effect on Parent.
3.7 ABSENCE OF CERTAIN CHANGES. Except as disclosed in the Parent SEC
Documents filed with the SEC prior to the date hereof, since December 31, 1994,
Parent has conducted its business only in the ordinary course of such business
and there has not been (i) any Material Adverse Effect on Parent; (ii) any
declaration, setting aside or payment of any dividend or other distribution with
respect to its capital stock; or (iii) any material change in its accounting
principles, practices or methods.
3.8 EMPLOYEE BENEFIT MATTERS. All employee benefit plans and other benefit
arrangements covering employees of Parent and Parent's subsidiaries are listed
in the Parent SEC Documents or in Section 3.8 of the Parent Disclosure Schedule,
except such benefit plans and other benefit arrangements which are not material
(the "Parent Benefit Plans"). True and complete copies of the Parent Benefit
Plans have been made available to Company. To the extent applicable, the Parent
Benefit Plans comply, in all material respects, with the requirements of ERISA
and the Code, and any Parent Benefit Plan intended to be qualified under Section
401(a) of the Code has received a determination letter from the IRS stating that
it is so qualified. No Parent Benefit Plan is covered by Title IV of ERISA or
Section 412 of the Code. Neither any Parent Benefit Plan nor the Parent has
incurred any
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liability or penalty under Section 4975 of the Code or Section 502(i) of ERISA.
Each Parent Benefit Plan has been maintained and administered in all material
respects in compliance with its terms and with ERISA and the Code to the extent
applicable thereto. To the knowledge of the executive officers of Parent, there
are no pending or anticipated material claims against or otherwise involving any
of the Parent Benefit Plans and no suit, action or other litigation (excluding
claims for benefits incurred in the ordinary course of Parent Benefit Plan
activities) has been brought against or with respect to any such Parent Benefit
Plan, except for any of the foregoing which would not have a Material Adverse
Effect on the Parent. All material contributions required to be made as of the
date hereof to the Parent Benefit Plans have been made or provided for. Neither
Parent nor any entity under "common control" with the Parent within the meaning
of ERISA Section 4001 has contributed to, or been required to contribute to, any
"multi-employer plan" (as defined in Section 3(37) and 4001(a)(3) of ERISA). The
Parent does not maintain or contribute to any plan or arrangement which provides
or has any liability to provide life insurance, medical or other employee
welfare benefits to any employee or former employee upon his retirement or
termination of employment, except as required by Section 4980B of the Code, and
Parent has never represented, promised or contracted (whether in oral or written
form) to any employee or former employee that such benefits would be provided.
Except as disclosed in the Parent SEC Documents or the Parent Disclosure
Schedule, the execution of, and performance of the transactions contemplated in,
this Agreement will not (either alone or upon the occurrence of any additional
or subsequent events) constitute an event under any benefit plan, policy,
arrangement or agreement or any trust or loan that will or may result in any
payment (whether of severance pay or otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in benefits or obligations to fund
benefits with respect to any employee.
3.9 TAXES. Parent and each of its subsidiaries (i) has timely filed all
material federal, state and foreign tax returns required to be filed by any of
them for tax years ended prior to the date of this Agreement or requests for
extensions have been timely filed and any such request shall have been granted
and not expired and all such returns are complete in all material respects, (ii)
has paid or accrued all taxes shown to be due and payable on such returns, (iii)
has properly accrued all such taxes for such periods subsequent to the periods
covered by such returns, and (iv) has "open" years for federal income tax
returns only as set forth in the Parent SEC Documents or in Section 3.9 of the
Parent Disclosure Schedule.
3.10 INSURANCE. True and complete copies of all material insurance
policies maintained by Parent have been made available to the Company. Such
policies provide coverage for the operations of the Parent and its subsidiaries
in amounts and covering such risks as the Parent believes is necessary to
conduct its business. Neither the Parent nor any of its subsidiaries has
received notice that any such policy is invalid or unenforceable.
3.11 EMPLOYMENT AGREEMENTS. Except as disclosed in the Parent SEC
Documents or as set forth in Section 3.11 of the Parent Disclosure Schedule,
there are no material employment, consulting, noncompetition, severance or
indemnification agreements between the Parent and any current or former officer
or director of the Parent.
3.12 LITIGATION. Except as set forth in the Parent's SEC Documents or as
set forth in Section 3.12 of the Parent Disclosure Schedule, there are no
claims, actions, proceedings or governmental investigations pending or, to the
knowledge of Parent and Merger Sub, threatened against either of Parent or any
of its subsidiaries before any court or other governmental or regulatory body,
which, if adversely determined, would have a Material Adverse Effect on either
of Parent or Merger Sub. No action or proceeding has been instituted or, to the
knowledge of Parent or Merger Sub, threatened before any court or other
governmental or regulatory body by any Person seeking to restrain or prohibit or
to obtain damages with respect to the execution, delivery or performance of this
Agreement or the consummation of the transactions contemplated hereby.
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3.13 SUFFICIENT FUNDS. Parent has sufficient funds to (i) pay in cash an
amount necessary for the cancellation of the Company Stock Options pursuant to
Article I and (ii) pay when due or otherwise refinance all indebtedness and
other liabilities of the Company and its subsidiaries outstanding at the
Effective Time.
3.14 OPERATIONS OF MERGER SUB. Merger Sub has been formed solely for the
purpose of engaging in the transactions contemplated hereby, and prior to the
Effective Time will have engaged in no other business activities, will have
incurred no other liabilities or obligations other than as contemplated herein,
will have no subsidiaries, and will have conducted its operations only as
contemplated hereby.
3.15 SEC REPORTS AND FINANCIAL STATEMENTS; ABSENCE OF UNDISCLOSED
LIABILITIES.
(a) Since January 31, 1993, Parent has filed with the SEC (or other
regulatory authority) all forms, reports, schedules, statements and other
documents required to be filed by it pursuant to the Exchange Act and the
Securities Act and the SEC's rules and regulations thereunder (all such forms,
reports and other documents, including any such reports filed prior to the
Effective Time, collectively, the "PARENT SEC DOCUMENTS"). The Parent SEC
Documents, including, without limitation, any financial statements or schedules
included therein, at the time filed, or, in the case of registration statements,
on their respective effective dates, (a) complied in all material respects with
the applicable requirements of the Exchange Act and the Securities Act, as the
case may be, and the applicable rules and regulations of the SEC thereunder and
(b) did not at the time they were filed (or, in the case of registration
statements, at the time of effectiveness) contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(b) The consolidated financial statements of Parent (including the related
notes thereto) included in the Parent SEC Documents comply as to form in all
material respects with applicable accounting requirements and with the published
rules and regulations of the SEC with respect thereto, have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis during the period involved (except as may be indicated in such financial
statements or in the notes thereto or, in the case of the unaudited financial
statements, as permitted by the requirements of Form 10-Q) and fairly present
(subject, in the case of the unaudited statements, to normal year-end
adjustments and the absence of footnotes) the consolidated financial position of
Parent as of the dates thereof and the consolidated results of Parent's
operations and cash flows for the periods presented therein.
3.16 FORM S-4 AND PROXY STATEMENT. None of the information supplied or to
be supplied by Parent or Merger Sub for inclusion or incorporation by reference
in (i) the Form S-4 will, at the time the Form S-4 is filed with the SEC and at
the time it becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
(ii) the Proxy Statement will, on the date first mailed to stockholders and at
all times subsequent thereto up to and including the time of the Company's
Stockholders' Meeting, contain any statement which, at such time and in light of
the circumstances under which it will be made, will be false or misleading with
respect to any material fact, or will omit to state any material fact required
to be stated therein or necessary in order to make the statements therein not
false or misleading or necessary to correct any statement in any earlier
communication with respect to the Company's Stockholders' Meeting which has
become false or misleading. The Proxy Statement, insofar as it relates to Parent
and Merger Sub, will comply as to form in all material respects with the
provisions of the Exchange Act and the rules and regulations promulgated
thereunder, and the Form S-4 will comply as to form in all material respects
with the provisions of the Securities Act and the rules and regulations
promulgated thereunder.
3.17 BROKERS AND FINDERS. No broker, finder or investment bank has acted
directly or indirectly for either of Parent or Merger Sub, nor has either of
Parent or Merger Sub incurred any obligation to pay any brokerage, finder's or
other fee or commission in connection with the transactions contemplated hereby.
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3.18 TAX MATTERS; POOLING. To the knowledge of Parent, neither Parent nor
Merger Sub, nor any of their respective affiliates has taken or agreed to take
any action that would prevent the Merger from (i) constituting a reorganization
qualifying under the provisions of Section 368(a) of the Code or (ii) being
treated for financial accounting purposes as a Pooling Transaction.
3.19 AFFILIATES. Section 3.19 of the Parent Disclosure Schedule identifies
all persons who, to the knowledge of Parent and Merger Sub, may be deemed to be
affiliates of the Company under Rule 145 of the Securities Act, including,
without limitation, all directors and executive officers of Parent and Merger
Sub.
3.20 CERTAIN BUSINESS PRACTICES. Neither Parent or Merger Sub, or to
Parent's or Merger Sub's knowledge, any of their respective subsidiaries, or any
directors, officers, agents or employees of Parent or Merger Sub or any of their
respective subsidiaries (in their capacities as such) has (a) used any funds for
unlawful contributions, gifts, entertainment or other unlawful expenses relating
to political activity, (b) made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political parties or
campaigns or violated any provision of the Foreign Corrupt Practices Act of
1977, as amended, (c) consummated any transaction, made any payment, entered
into any agreement or arrangement or taken any other action in violation of
Section 1128B(b) of the Social Security Act, as amended, or (d) made any other
unlawful payment, in all cases except where the impact from such contributions,
gifts, entertainment, payments, violations, agreements, arrangements, actions or
payments would not in the aggregate have a Material Adverse Effect on Parent or
Merger Sub.
3.21 PERMITS; COMPLIANCE.
(a) Except as disclosed in Section 3.21 of the Parent Disclosure Schedule,
each of the Parent and its subsidiaries is in possession of all (i) franchises,
grants, authorizations, licenses, permits, easements, variances, exemptions,
consents, certificates, identification and registration numbers, approvals and
orders necessary to own, lease and operate its properties and to carry on its
business as it is now being conducted and (ii) agreements from all federal,
state and local governmental agencies and accrediting and certifying
organizations having jurisdiction over such facility or facilities that are
required to operate the facility or facilities in the manner in which it or they
are currently operated and receive reimbursement for care provided to patients
covered under the federal Medicare program or any applicable state Medicaid
program (collectively, the "Parent Permits"), except where the failure to
possess such Parent Permits could not reasonably be expected to have a Material
Adverse Effect on the Parent. Without limiting the generality of the foregoing,
all of Parent's hospitals are certified for participation or enrollment in the
Medicare program, have a current and valid provider contract with the Medicare
program and are in substantial compliance with the conditions of participation
of such programs. Neither Parent nor any of its subsidiaries has received notice
from the regulatory authorities that enforce the statutory or regulatory
provisions in respect of either the Medicare or Medicaid program of any pending
or threatened investigations or surveys, and no such investigations or surveys
are pending or, to the knowledge of the Parent, threatened or imminent that
could reasonably be expected to have Material Adverse Effect on the Parent.
Section 3.21 of Parent Disclosure Schedule sets forth, as of the date of this
Agreement, all actions, proceedings, investigations or surveys pending or, to
the knowledge of Parent, threatened against Parent or any of its subsidiaries
that could reasonably be expected to result in (i) the loss or revocation of
Parent, Permit necessary to operate one or more facilities or for a facility to
receive reimbursement under the Medicare or Medicaid programs, (ii) the
suspension or cancellation of any other Parent Permit, except any such Parent
Permit where such suspension or cancellation could not reasonably be expected to
have any Material Adverse Effect on the Parent. Neither Parent nor any of its
subsidiaries is in conflict with, or in default or violation of (1) any law
applicable to Parent or any of its subsidiaries or by or to which any of their
respective properties is bound or subject or (2) any of Parent Permits, except
for any such conflicts, defaults or violations that could not reasonably be
expected to have a Material Adverse Effect on the Parent. Since May 31, 1993,
neither Parent nor any of its subsidiaries
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has received from any Governmental Entity any written notification with respect
to possible conflicts, defaults or violations of laws, except for written
notices relating to possible conflicts, defaults or violations that could not
reasonably be expected to have a Material Adverse Effect on the Parent.
(b) Parent and its subsidiaries, as appropriate, are approved participating
providers in and under all third-party payment programs from which they receive
revenues. No action or investigation is pending, or to the best of its
knowledge, threatened to suspend, limit, terminate, condition, or revoke the
status of Parent or any of its subsidiaries as a provider in any such program,
and neither Parent nor any of its subsidiaries have been provided notice by any
third-party payor if its intention to suspend, limit, terminate, revoke,
condition or fail to renew in whole or in part or decrease the amounts payable
under the arrangement with Parent or such subsidiary as a provider, which
action, investigation or proceeding would have a Parent Material Adverse Effect.
(c) Parent and its subsidiaries have filed on timely basis all claims, cost
reports or annual filings required to be filed to secure payments for services
rendered by them under any third-party payment program from which they receive
or expect to receive revenues, except where the failure to file such claim,
report or other filing would not have a Material Adverse Effect on the Parent.
Except as indicated in its financial statements included in the Parent SEC
Documents (as defined in Section 3.15 above), Parent or its subsidiaries, as
applicable, have paid, or caused to be paid, all refunds, discounts,
adjustments, or amounts owing that have become due to such third-party payors
pursuant to such claims, reports or filings, and neither Parent nor any of its
subsidiaries has any knowledge or notice of any material changes required to be
made to any cost reports, claims or filings made by them for any period or of
any deficiency in any such claim, report, or filing, except for changes and
deficiencies that in the aggregate would not have a Material Adverse Effect on
the Parent.
ARTICLE IV
COVENANTS
4.1 CONDUCT OF BUSINESS PENDING THE MERGER. From the date hereof until the
Effective Time, except as otherwise required or contemplated hereunder or as
required by applicable law or as set forth in Section 4.1 of the Company
Disclosure Schedule in the case of the Company and Section 4.1 of the Parent
Disclosure Schedule in the case of Parent, each of the Company and Parent shall:
(a) use all commercially reasonable efforts to conduct its business and
the business of its subsidiaries in all material respects only in the
ordinary course of business and consistent with past practice;
(b) not amend its Amended and Restated Certificate of Incorporation or
Amended and Restated Bylaws or declare, set aside or pay any dividend or
other distribution or payment in cash, stock or property in respect of its
capital stock (other than regular quarterly dividends);
(c) not reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock;
(d) not issue, grant, sell or pledge or agree or authorize the issuance,
grant, sale or pledge of any shares of, or rights of any kind to acquire any
shares of, its capital stock other than the grant of stock options in the
ordinary course of business and consistent with past practice under current
employee benefit plan arrangements and other than Company Common Stock or
Parent Common Stock, as the case may be, issuable upon the exercise of stock
options or issuable upon the exercise of convertibility features in its
securities outstanding on the date hereof;
(e) not acquire, sell, transfer, lease or encumber any material assets
except in the ordinary course of business and consistent with past practice;
(f) use all commercially reasonable efforts to preserve intact its
business organizations and the business organizations of its subsidiaries,
and to keep available the services of its present key officers and
employees; provided, however, that to satisfy the foregoing obligation,
neither the
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Company nor Parent shall not be required to make any payments or enter into
or amend any contractual arrangements or understandings, except in the
ordinary course of business and consistent with past practice;
(g) not adopt a plan of complete or partial liquidation or adopt
resolutions providing for the complete or partial liquidation, dissolution,
consolidation, merger, restructuring or recapitalization of the Company or
Parent, as the case may be, or any of its subsidiaries;
(h) not grant any severance or termination pay (otherwise than pursuant
to policies in effect on the date hereof) to, or enter into any employment
agreement with, any of its executive officers or directors;
(i) not, except as set forth in Section 4.1 of the Company Disclosure
Schedule or the Parent Disclosure Schedule or in the ordinary course of
business consistent with past practice or pursuant to obligations imposed by
collective bargaining agreements, increase the compensation payable or to
become payable to its executive officers or employees, enter into any
contract or other binding commitment in respect of any such increase with
any of its directors, officers or other employees or any director, officer
or other employee of its subsidiaries, and not establish, adopt, enter into,
make any new grants or awards under or amend, any collective bargaining
agreement or Plan, except as required by applicable law, including any
obligation to engage in good faith collective bargaining, to maintain
tax-qualified status or as may be required by any Plan as of the date
hereof;
(j) not settle or compromise any material claims or litigation or,
except in the ordinary course of business, modify, amend or terminate any of
its material contracts or waive, release or assign any material rights or
claims, or make any payment, direct or indirect, of any material liability
before the same becomes due and payable in accordance with its terms;
(k) not take any action, other than reasonable and usual actions in the
ordinary course of business and consistent with past practice with respect
to accounting policies or procedures (including tax accounting policies and
procedures), except as may be required by the SEC or the Financial
Accounting Standards Board;
(l) not make any material tax election or permit any material insurance
policy naming it as a beneficiary or a loss payable payee to be cancelled or
terminated without notice to the Company or Parent, as the case may be,
except in the ordinary course of business; and
(m) not authorize or enter into an agreement to do any of the foregoing.
4.2 ACCESS; CONFIDENTIALITY.
(a) From the date of this Agreement until the Effective Time, upon
reasonable prior notice to the other party, the Company and Parent each shall
(and shall cause each of its subsidiaries to) give the other party and its
authorized representatives reasonable access during normal business hours to its
executive officers, properties, books and records, and shall furnish the other
party and its authorized representatives with such financial and operating data
and other information concerning the business and properties of the Company or
Parent as the Company or Parent, as the case may be, may from time to time
reasonably request.
(b) Each of the Company and Parent will hold and will cause its respective
consultants, advisors and other representatives and affiliates to keep all
documents and information concerning the other party and its subsidiaries
furnished to the other party and its representatives in connection with the
transactions contemplated by this Agreement confidential in accordance with the
Confidentiality Agreement dated August 23, 1995, between the Company and Parent,
which Confidentiality Agreement shall remain in full force and effect until the
termination of this Agreement.
4.3 FURTHER ACTIONS. Upon the terms and subject to the conditions hereof,
each of the parties hereto shall act in good faith toward and use all
commercially reasonable efforts to take, or cause to be
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taken, all actions, and to do, or cause to be done, all things necessary, proper
or advisable, and consult and fully cooperate with and provide reasonable
assistance to each other party in order, to consummate and make effective the
transactions contemplated by this Agreement as soon as practicable hereafter,
including without limitation (i) using all commercially reasonable efforts to
obtain all consents, approvals, authorizations or permits of governmental or
regulatory authorities (including early termination of any waiting period under
the HSR Act) or other Persons as are necessary for the consummation of the
transactions contemplated hereby, (ii) taking such actions and doing such things
as any other party hereto may reasonably request in order to cause any of the
conditions specified in Article V to such other party's obligation to consummate
such transactions to be fully satisfied, and (iii) in the event and to the
extent required, amending this Agreement so that this Agreement and the Merger
comply with the DGCL. Prior to making any application to or filing with any
governmental or regulatory authority or other Person in connection with this
Agreement, the Company, on the one hand, and Parent and Merger Sub, on the other
hand, shall provide the other with drafts thereof and afford the other a
reasonable opportunity to comment on such drafts.
4.4 NOTICE OF CERTAIN MATTERS. The Company shall give prompt notice to
Parent, and Parent and Merger Sub shall give prompt notice to the Company, of
(a) the occurrence or nonoccurrence of any event which would be likely to cause
(i) any representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect or (ii) any covenant, condition or agreement
contained in this Agreement not to be complied with or satisfied in all material
respects and (b) any failure of the Company or of Parent or Merger Sub, as the
case may be, to comply with or satisfy any covenant, condition or agreement to
be complied with or satisfied by it hereunder in any material respect.
4.5 FORM S-4, PROXY STATEMENT AND OTHER FILINGS.
(a) As soon as reasonably practicable, Parent shall prepare the Form S-4 and
the Company and Parent shall prepare the Proxy Statement. Parent and the Company
shall (i) file the Form S-4 and Proxy Statement with the SEC promptly after it
has been prepared in a form reasonably satisfactory to the Company and Parent,
and (ii) use reasonable efforts to respond to the comments of the SEC thereon in
a manner reasonably satisfactory to the Company and Parent. Parent and the
Company shall promptly prepare any amendments to the Form S-4 and Proxy
Statement required in response to the SEC's comments or which either the Company
or Parent with the advice of counsel, deems necessary or advisable. Parent shall
take such actions as may be reasonably required to cause the Form S-4 to be
declared effective under the Securities Act as promptly as possible. Parent also
shall take such actions as may be reasonably required to cause the shares of
Parent Common Stock issuable in the Merger to be registered (or to obtain an
exemption from registration) under applicable "blue sky" or state securities
laws and to be approved for listing on the NYSE upon official notice of
issuance.
(b) Each party shall notify the other party promptly after receipt by such
party of any comments of the SEC on, or of any request by the SEC for amendments
or supplements to, the Form S-4 or Proxy Statement. Each party shall supply the
other party with copies of all correspondence between such party or any of it
representatives and the SEC with respect to any of the foregoing filings.
Whenever Parent or the Company shall learn of the occurrence of any event which
should be described in an amendment of, or a supplement to, the Company Proxy
Statement, such party shall promptly inform the other party and shall cooperate
to promptly cause such amendment or supplement to be prepared, filed with and
cleared by the SEC and, if required by applicable law, disseminated to the
persons in the manner required.
4.6 POOLING AND TAX-FREE REORGANIZATION TREATMENT. Neither the Company nor
Parent or Merger Sub shall intentionally take or cause to be taken any action,
whether on or prior to the Effective Time, which would disqualify the Merger as
a "pooling of interest" for accounting purposes or as a "reorganization" within
the meaning of Section 368(a) of the Code.
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4.7 AFFILIATE AGREEMENTS. The Company and Parent will each use reasonable
efforts to cause each of their respective directors, executive officers and
"affiliates" (within the meaning of Rule 145 under the Securities Act) to
execute and deliver as soon as practicable an agreement in form attached hereto
as Exhibit 4.8 relating to the disposition of shares of Parent Common Stock
issuable to such person pursuant to the Merger.
4.8 COMPANY'S STOCKHOLDERS' MEETING. As soon as reasonably practicable
after the date hereof, the Company will (a) duly call and hold the Company's
Stockholders' Meeting for the purpose of considering and voting upon the
adoption of this Agreement and the approval of the Merger, (b) include in the
Proxy Statement the determination and recommendation of its Board of Directors
that stockholders vote in favor of such matters, and (c) use commercially
reasonable efforts to solicit from its respective stockholders proxies in favor
of such approvals; provided, however, that the Company's Board of Directors may
fail to make such a recommendation, or may withdraw, modify or change any such
recommendation, or recommend any other offer or proposal, if the Company's Board
of Directors determines in good faith, after consultation with outside counsel,
that making such recommendation, or the failure to so withdraw, modify or change
its recommendation, or the failure to recommend any other offer or proposal,
could reasonably be deemed to cause the members of the Company's Board of
Directors to breach their fiduciary duties under applicable law. At the
Company's Stockholders' Meeting, Parent will (and will cause each affiliate of
Parent to) vote all shares of Company Common Stock which are then owned by
Parent or any affiliate thereof (other than natural persons), and which are
entitled to be voted upon the Merger, in favor of approval and adoption of this
Agreement and the Merger.
4.9 COOPERATION. Subject to the terms and conditions of this Agreement and
applicable law, each of the parties shall use its reasonable efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective the transactions
contemplated by this Agreement as soon as practicable, including such actions or
things as any other party may reasonably request in order to cause any of the
conditions to such other party's obligation to consummate the transactions
contemplated by this Agreement to be fully satisfied. Without limiting the
foregoing, the parties shall (and shall cause their respective subsidiaries, and
use their reasonable efforts to cause their respective affiliates, directors,
officers, employees, agents, attorneys, accountants and representatives, to)
consult and fully cooperate with and provide assistance to each other in (i) the
preparation and filing with the SEC of the Form S-4 and the Proxy Statement and
any necessary amendments or supplements thereto; (ii) seeking to have the Form
S-4 and Proxy Statement cleared by the SEC as soon as reasonably practicable
after filing; (iii) obtaining all necessary consents, approvals, waivers,
licenses, permits, authorizations, registrations, qualifications, or other
permission or action by, and giving all necessary notices to and making all
necessary filings with and applications and submissions to, any court,
administrative agency or commission or other governmental authority or
instrumentality, domestic (federal, state or local) or foreign (collectively,
"Governmental Entity") or other person or entity as soon as reasonably
practicable after filing; (iv) seeking early termination of any waiting period
under the HSR Act; (v) providing all such information about such party, its
subsidiaries and its officers, directors, partners and affiliates and making all
applications and filings as may be necessary or reasonably requested in
connection with any of the foregoing; (vi) in general, consummating and making
effective the transactions contemplated hereby; and (vii) in the event and to
the extent required, amending this Agreement so that this Agreement and the
Merger comply with the DGCL. The parties shall (and shall cause their respective
affiliates, directors, officers, employees, agents, attorneys, accountants and
representatives to) use their reasonable efforts to cause the lifting of any
permanent or preliminary injunction or restraining order or other similar order
issued or entered by any court or other Governmental Entity preventing or
restricting consummation of the transactions contemplated hereby in the manner
provided for herein. Prior to making any application to or filing with any
Governmental Entity or other person or entity in connection with this Agreement
(other than filing under the HSR Act), each party shall provide the other party
with drafts thereof and afford the other party a reasonable opportunity to
comment on such drafts.
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4.10 PUBLIC ANNOUNCEMENTS. No party hereto shall or shall permit any of
its subsidiaries to (and each party shall use commercially reasonable efforts to
cause its affiliates, directors, officers, employees, agents and representatives
not to) issue any press release or make any public statement concerning this
Agreement or any of the transactions contemplated hereby, without the prior
written consent of the other parties hereto; provided, however, that a party
may, without the prior written consent of the other parties hereto, issue such a
press release or make such a public statement to the extent required by
applicable law or any listing agreement with a national securities exchange by
which such party is bound if it has used commercially reasonable efforts to
consult with the other parties and to obtain such parties' consent but has been
unable to do so in a timely manner.
4.11 ACQUISITION PROPOSALS. Except as contemplated hereby, the Company
shall not (and shall not permit any of its subsidiaries to, and shall use its
best efforts to cause its officers, directors and employees and any investment
banker, attorney, accountant, or other agent retained by it or any of its
subsidiaries not to) initiate, solicit or encourage (including by way of
furnishing information or assistance), or take any other action to facilitate,
any inquiries or the making of any proposal relating to, or that may reasonably
be expected to lead to, acquire all or a significant part of the business and
properties or capital stock of the Company or its subsidiaries, taken as a
whole, whether by merger, purchase of assets, tender offer or otherwise (a
"Competing Transaction"), or enter into discussions or negotiate with any person
or entity in furtherance of such inquiries or to obtain a Competing Transaction,
or agree to or endorse any Competing Transaction, or authorize or knowingly
permit any of the officers, directors, employees or agents of the Company or its
subsidiaries or any investment banker, financial advisor, attorney, accountant
or other representative retained by the Company or any of its subsidiaries to
take any such action. The Company shall as promptly as practicable notify Parent
of all relevant terms of any such inquiries or proposals received by the Company
or its subsidiaries and, if such inquiry or proposal is in writing, the Company
shall as promptly as practicable deliver or cause to be delivered to Parent a
copy of such inquiry or proposal. Notwithstanding the foregoing, nothing shall
prohibit the Company's Board of Directors from (a) furnishing information to, or
entering into discussions or negotiations with, any persons or entity in
connection with an unsolicited bona fide proposal in connection with a Competing
Transaction if, and only to the extent that (i) such unsolicited bona fide
proposal is on terms that the Company's Board of Directors determines it cannot
reject, based on applicable fiduciary duties and the advice of counsel and
(except with respect to furnishing information) for which financing, to the
extent required, is then committed, or in the good faith judgment of the Board
of Directors could reasonably be expected to be obtained, and (ii) prior to
furnishing such information to, entering into discussions or negotiations with,
such person or entity the Company provides written notice to Parent to the
effect that it is furnishing information to, or entering into discussions or
negotiations with, such person or entity; or (b) complying with Rule 14d-9 or
Rule 14e-2 promulgated under the Exchange Act with regard to a Competing
Transaction.
4.12 D&O INDEMNIFICATION.
(a) From the Effective Time through the later of (i) the sixth anniversary
of the date on which the Effective Time occurs and (ii) the expiration of any
statute of limitations applicable to any claim, action, suit, proceeding or
investigation referred to below, the Surviving Corporation shall indemnify and
hold harmless each present and former director and officer of the Company and
its subsidiaries, determined as of the Effective Time (the "Indemnified
Parties"), against any claims, losses, liabilities, damages, judgments, fines,
fees, costs or expenses, including without limitation attorneys' fees and
disbursements (collectively, "Costs"), incurred in connection with any claim,
action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of or pertaining to matters
existing or occurring at or prior to the Effective Time (including, without
limitation, the Merger, the preparation, filing and mailing of the Proxy
Statement and the other transactions and actions contemplated by this
Agreement), whether asserted or claimed prior to, at or after the Effective
Time, to the fullest extent that the Company or such subsidiary would have been
permitted, under applicable law, indemnification agreements existing on the date
hereof, the
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Amended and Restated Articles or Certificate of Incorporation or Amended and
Restated Bylaws of the Company or such subsidiary in effect on the date hereof,
to indemnify such Person (and the Surviving Corporation shall also advance
expenses as incurred to the fullest extent permitted under applicable law
provided the person to whom expenses are advanced provides an undertaking to
repay such advances if it is ultimately determined that such person is not
entitled to indemnification).
(b) Any Indemnified Party wishing to claim indemnification under this
Section 4.12, upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify the Surviving Corporation thereof, but the
failure to so notify shall not relieve the Surviving Corporation of any
liability or obligation it may have to such Indemnified Party except, and only
to the extent, that such failure materially prejudices the Surviving
Corporation. In the event of any such claim, action, suit, proceeding or
investigation (whether arising before, at or after the Effective Time), the
Surviving Corporation shall have the right to assume the defense thereof and the
Surviving Corporation shall not be liable to such Indemnified Parties for any
legal expenses of other counsel or any other expenses subsequently incurred by
such Indemnified Parties in connection with the defense thereof, except that if
the Surviving Corporation elects not to assume such defense or counsel for the
Indemnified Parties advises that there are issues which raise conflicts of
interest between the Surviving Corporation and the Indemnified Parties, the
Indemnified Parties may retain counsel satisfactory to them, and the Surviving
Corporation shall pay all reasonable fees and expenses of such counsel for the
Indemnified Parties promptly as statements therefor are received. If such
indemnity is not available with respect to any Indemnified Party, then the
Surviving Corporation and the Indemnified Party shall contribute to the amount
payable in such proportion as is appropriate to reflect relative faults and
benefits. In the event that any claim or claims are asserted or made within the
aforesaid six-year period, all rights to indemnification in respect of any such
claim or claims shall continue until the final disposition of any and all such
claims.
(c) Notwithstanding anything herein to the contrary, if any claim, action,
suit, proceeding or investigation (whether arising before, at or after the
Effective Time) is made against any present or former director or officer of the
Company, on or prior to the sixth anniversary of the Effective Time, the
provisions of this Section 4.12 shall continue in effect until the final
disposition of such claim, action, suit, proceeding or investigation.
(d) This covenant is intended to be for the benefit of, and shall be
enforceable by, each of the Indemnified Parties and their respective heirs and
legal representatives. The indemnification provided for herein shall not be
deemed exclusive of any other rights to which an Indemnified Party is entitled,
whether pursuant to law, contract or otherwise.
(e) To the extent that the Surviving Corporation fails to perform any of its
obligations pursuant to this Section 4.12, Parent shall assume the obligations
and rights of the Surviving Corporation under this Section 4.12.
4.13 THE COMPANY'S PLANS.
(a) Following the Effective Time, Parent shall cause the Surviving
Corporation to provide to persons who were employees of the Company or any of
its subsidiaries prior to the Effective Time (the "Company Personnel") employee
benefit plans, programs and arrangements (the "Surviving Corporation Plans")
which in the aggregate are substantially comparable to those employee benefit
plans, programs and arrangements generally provided to the employees of Parent
as of the Effective Time.
(b) Following the Effective Time, Parent shall cause the Surviving
Corporation Plans to recognize any prior accrued service, compensation credit,
credit toward satisfying deductible expense requirements, out-of-pocket expense
limits and maximum lifetime benefit limits of such Company Personnel and/or such
Company Personnel's eligible dependents, to the extent such prior service,
credits and limits were recognized under the comparable employee benefit plans,
programs or arrangements of the Company as of the Effective Time, for all
purposes under the Surviving Corporation Plans (including, but not limited to,
participation, eligibility, vesting and the calculation of
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benefits), and Parent shall cause the Surviving Corporation Plans to waive any
preexisting condition, exclusion or limitation under any such Plan to the extent
such condition, exclusion or limitation would be covered by the comparable plan,
program or arrangement of the Company as of the Effective Time.
(c) Each of the employment agreements and the employment security agreements
for the benefit of Company Personnel identified in Section 4.13(c)-I of the
Company Disclosure Schedule shall be assumed by the Surviving Corporation at the
Effective Time on the same terms and subject to the same conditions as in effect
under such agreements immediately prior to the Effective Time (the "Assumed
Agreements").
(d) Parent hereby absolutely, irrevocably and unconditionally guarantees the
performance of all of the Surviving Corporation's obligations under the Assumed
Plans and the Assumed Agreements, as specified hereunder or otherwise.
(e) Parent shall, and shall cause the Surviving Corporation to, honor and
fully defend all such agreements in accordance with their terms.
ARTICLE V
CLOSING CONDITIONS
5.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER. The
respective obligations of each party hereto to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions, any or all of which may be waived, in whole or in part, to the
extent permitted by applicable law:
(a) STOCKHOLDER APPROVAL. This Agreement shall have been adopted, and the
Merger shall have been approved, by a vote of the holders of a majority of the
outstanding shares of Company Common Stock.
(b) NO INJUNCTION. No federal or state governmental or regulatory body or
court of competent jurisdiction shall have enacted, issued, promulgated or
enforced any statute, rule, regulation, executive order, decree, judgment,
preliminary or permanent injunction or other order which is in effect and which
prohibits, enjoins or otherwise restrains the consummation of the Merger;
provided, however, that the parties shall use all commercially reasonable
efforts to cause any such decree, judgment, injunction or order to be vacated or
lifted.
(c) HSR ACT. Any waiting period under the HSR Act applicable to the Merger
shall have terminated or shall have otherwise expired.
(d) GOVERNMENTAL AND REGULATORY CONSENTS. All material filings required to
be made prior to the Effective Time with, and all material consents, approvals,
permits and authorizations required to be obtained prior to the Effective Time
from, governmental and regulatory authorities in connection with the Merger and
the consummation of the other transactions contemplated hereby which are listed
in Section 2.4 of the Company Disclosure Schedule or Section 3.3 of the Parent
Disclosure Schedule shall have been made or obtained, as the case may be.
(e) REGISTRATION STATEMENT. The Form S-4 shall have become effective in
accordance with the provisions of the Securities Act, and no stop order
suspending such effectiveness shall have been issued and remain in effect.
(f) LISTING OF PARENT COMMON STOCK. The shares of Parent Common Stock
issuable in the Merger (including those issued in connection with the Parent
Acquisition Rights described in Section 1.11 above) shall have been approved for
listing on the NYSE upon official notice of issuance.
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(g) POOLING. Each of the Company and Parent shall have received a letter
from its independent public accountants, dated the date of the Proxy Statement
and the Closing Date, in form and substance reasonably satisfactory to the
Company and Parent, as the case may be, stating that the transactions
contemplated by this Agreement will qualify as a pooling-of-interests
transaction under GAAP and applicable SEC regulations.
5.2 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY. The obligation
of the Company to effect the Merger is also subject to the satisfaction at or
prior to the Effective Time of each of the following additional conditions,
unless waived by the Company:
(a) ACCURACY OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties made by Parent and Merger Sub herein shall be true and correct in all
material respects on and as of the Effective Time, with the same force and
effect as though such representations and warranties had been made on and as of
the Effective Time, except for changes permitted or contemplated by this
Agreement and except for representations and warranties that are made as of a
specific date or time, which shall be true and correct in all material respects
only as of such specific date or time.
(b) COMPLIANCE WITH COVENANTS. Each of Parent and Merger Sub shall have
performed in all material respects all obligations and agreements, and complied
in all material respects with all covenants, contained in this Agreement to be
performed or complied with by it prior to or on the Effective Time.
(c) TAX OPINION. The Company shall have received an opinion from Garvey,
Schubert & Barer to the effect that the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code.
5.3 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PARENT AND MERGER SUB. The
obligation of Parent and Merger Sub to effect the Merger is also subject to the
satisfaction at or prior to the Effective Time of each of the following
additional conditions, unless waived by either of Parent or Merger Sub:
(a) ACCURACY OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties made by the Company herein shall be true and correct in all material
respects on and as of the Effective Time, with the same force and effect as
though such representations and warranties had been made on and as of the
Effective Time, except for changes permitted or contemplated by this Agreement
and except for representations and warranties that are made as of a specific
date or time, which shall be true and correct in all material respects only as
of such specific date or time.
(b) COMPLIANCE WITH COVENANT. The Company shall have performed in all
material respects all obligations and agreements, and complied in all material
respects with all covenants, contained in this Agreement to be performed or
complied with by it prior to or on the Effective Time.
ARTICLE VI
TERMINATION
6.1 TERMINATION. This Agreement may be terminated at any time prior to the
Effective Time:
(a) by mutual written consent of the Company and Parent;
(b) by either the Company or Parent, if the Effective Time shall not
have occurred on or before April 1, 1996; provided, however, that the right
to terminate this Agreement under this clause (b) shall not be available to
any party whose misrepresentation in this Agreement or whose failure to
perform any of its covenants and agreements or to satisfy any obligation
under this Agreement has been the cause of or resulted in the failure of the
Merger to occur on or before such date;
(c) by either the Company or Parent, if any federal or state court of
competent jurisdiction or other federal or state governmental or regulatory
body shall have issued any judgment,
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injunction, order or decree prohibiting, enjoining or otherwise restraining
the transactions contemplated by this Agreement and such judgment,
injunction, order or decree shall have become final and nonappealable
(provided, however, that the party seeking to terminate this Agreement
pursuant to this clause (c) shall have used all commercially reasonable
efforts to remove such judgment, injunction, order or decree) or if any
statute, rule, regulation or executive order promulgated or enacted by any
federal or state governmental authority after the date of this Agreement
which prohibits the consummation of the Merger shall be in effect;
(d) by the Company, if this Agreement is not adopted or the Merger is
not approved by the holders of a majority of the outstanding shares of
Company Common Stock;
(e) by Parent, if there shall have been a material breach of any
representation, warranty or material covenant or agreement on the part of
the Company, which breach is incurable or which is not cured after thirty
(30)-days' written notice by Parent to the Company (a "Terminating Company
Breach");
(f) by the Company, if there shall have been a material breach of any
representation, warranty or material covenant or agreement on the part of
either of Parent or Merger Sub, which breach is incurable or which is not
cured after thirty (30)-days' written notice by the Company to Parent; or
(g) by Parent if (i) the Company's Board of Directors withdraws, its
recommendation of this Agreement and the Merger, or modifies or changes its
recommendation of this Agreement or the Merger in a manner materially
adverse to the Parent, or shall have resolved to do any of the foregoing, or
the Company's Board of Directors shall have recommended to the stockholders
of the Company any Competing Transaction or resolved to do so; (ii) a tender
offer or exchange offer for outstanding shares of capital stock of the
Company then representing 20% or more of the combined power to vote
generally for the election of directors is commenced, and the Company's
Board of Directors does not recommend that stockholders not tender their
shares of Company Common Stock into such tender offer or exchange offer; or
(iii) any person shall have acquired beneficial ownership or the right to
acquire beneficial ownership of, or any "group" (as such term is defined
under Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder), shall have been formed which beneficially owns, or
has the right to acquire beneficial ownership of, outstanding shares of
capital stock of the Company then representing 20% or more of the combined
power to vote generally for the election of directors; and
(h) by the Company or Parent, if the Company accepts a bona fide written
proposal made by a third party relating to a Competing Transaction on terms
that the Company's Board of Directors determines it cannot reject in favor
of the Merger, based on applicable fiduciary duties and the advise of
counsel and for which financing, to the extent required, is then committed
(a "Superior Proposal").
6.2 EFFECT OF TERMINATION. In the event of any termination of this
Agreement pursuant to Section 6.1, this Agreement forthwith shall become void
and of no further force or effect, and no party hereto (or any of its
affiliates, directors, officers, agents or representatives) shall have any
liability or obligation hereunder, except in any such case (a) as provided in
Sections 4.2(b) (Confidentiality), 4.9 (Public Announcements), 4.11
(Indemnification), 6.3 (Fees, Expenses and Other Payments) and Section 7.1,
which shall survive any such termination; and (b) to the extent such termination
results from the breach by such party, Parent or Merger Sub of any of its
representations, warranties, covenants or agreements contained in this
Agreement.
6.3 FEES, EXPENSES AND OTHER PAYMENTS.
(a) PAYMENT OF EXPENSES. Except as provided in Sections 6.3(b) and (c) of
this Agreement, all reasonable out-of-pocket expenses (including, without
limitation, all reasonable fees and expenses of counsel, accountants, investment
bankers, experts and consultants to a party hereto and its affiliates) incurred
by a party or on its behalf in connection with or related to the authorization,
preparation,
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negotiation, execution and performance of this Agreement, the preparation,
printing, filing and mailing of the Registration Statement and the Company Proxy
Statement, the solicitation of stockholder approvals and all other matters
relating to the consummation of the transactions contemplated hereby
("Expenses") incurred by the parties hereto shall be borne solely and entirely
by the party which incurred such Expenses; provided, however, Parent, at its
option may pay any Expenses of the Company. Notwithstanding the foregoing, the
allocable share of the Parent and Merger Sub as a group and the Company for all
Expenses relating to printing, filing and mailing the Registration Statement and
the Company Proxy Statement, and all SEC and other regulatory filing fees
incurred in connection with the Registration Statement and the Company Proxy
Statement shall be borne equally by the Parent and Merger Sub as a group and the
Company.
(b) The Company agrees that, if (i) this Agreement is terminated pursuant to
Section 6.1 (g) and, prior to the Company's Stockholders' Meeting, the Company
shall have furnished information to, entered into discussions or negotiations
with, any person or entity with respect to a Competing Transaction and the
Company's Board of Directors shall not have reaffirmed its recommendations to
the stockholders of the Company with respect to the transactions contemplated by
this Agreement by the time of the Company's Stockholders' Meeting; (ii) the
Company or Parent terminates this Agreement pursuant to Section 6.1(h); or (iii)
the Company or Parent terminates this Agreement pursuant to Section 6.1(e) at a
time that a Terminating Company Breach exists (except solely for purposes of
this Section 6.3(b) a breach of a representation shall not be deemed to be a
Terminating Company Breach if the representation was true and correct as of the
date hereof) then, (x) in the case of (ii) of this Section 6.3(b), if, within
six months following termination (the "Six-Month Date"), a Competing Transaction
is not consummated, then the Company shall pay to Parent on the Six-Month Date,
the actual expenses of Parent up to $1 million, plus a fee equal to $500,000,
payable, at the election of the Company, in cash or Company Common Stock (the
market value of such stock shall be determined by the closing price of the
Company Common Stock on the Six-Month Date, or, if such date is not a day on
which the NASDAQ Stock Market is available for trading, then on the last day for
which a stock price is available), or (y) in the case of (i), (ii) or (iii) of
this Section 6.3(b), if a Competing Transaction has been consummated before the
Six-Month Date or a definitive agreement subsequently resulting in a Competing
Transaction has been executed before the Six-Month Date, then the Company shall
pay to Parent, on the date of the closing of the Competing Transaction, the
actual expenses of Parent up to $1 million, plus a fee equal to $2.1 million,
reduced by any payments previously made by the Company to Parent pursuant to
clause (x) above. In addition, in the case of (i), (ii) or (iii) above, to the
extent that the Profit (as defined in the Stock Option Agreement between the
parties hereto and executed on even date herewith) realized upon exercise of the
option granted thereunder exceeds $1 million (the "Excess Profit"), then the
amount of such Excess Profit shall be set off against any other payments to be
paid by the Company pursuant to this Section 6.3(b), or, if such payments have
already been paid to Parent, Parent shall promptly return, to the extent not
applied to such set-off, such Excess Profit to the Company up to the amount of
the payments previously paid pursuant to this Section 6.3(b).
ARTICLE VII
MISCELLANEOUS
7.1 NO SURVIVAL. None of the representations warranties, covenants or
agreements contained in this Agreement or in any certificate or other instrument
delivered pursuant to this Agreement shall survive the Effective Time, except
for the covenants and agreements contained in Articles I and VII and Sections
4.2(b) (Confidentiality), 4.10 (Public Announcements), 4.12 (D&O Indemnification
and Insurance), 4.13 (Company Plans) and 6.3 (Fees, Expenses and Other
Payments).
7.2 NOTICES. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
as of the date delivered, mailed or transmitted, and shall be effective upon
receipt, if delivered personally, mailed by registered or certified mail
(postage prepaid, return receipt requested) or sent by facsimile (with immediate
confirmation) or nationally recognized overnight courier service, as follows:
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(a) if to Parent or Merger Sub, to:
Horizon/CMS Healthcare Corporation
6001 Indian School Road, N.E.
Albuquerque, New Mexico 97110
Attn: Scot Sauder
Fax: 505/881-5097
with a copy to:
Vinson & Elkins, L.L.P.
2300 First City Tower
1001 Fannin
Houston, Texas 7702-6760
Attn: William E. Joor III
Fax:
(b) if to the Company, to:
Pacific Rehabilitation & Sports Medicine, Inc.
Suite 190
8100 N.E. Parkway Drive
Vancouver, Washington 98662
Attn: John A. Elorriaga
Fax: 360/260-8130
with a copy to:
Garvey, Schubert & Barer
11th Floor
121 S.W. Morrison Street
Portland, Oregon 97204
Attn: Michael McArthur-Phillips
Fax: 503/226-0259
or to such other Person or address or facsimile number as any party shall
specify by like written notice to the other parties hereto (any such notice of a
change of address to be effective only upon actual receipt thereof).
7.3 CERTAIN DEFINITIONS. The following terms shall, when used in this
Agreement, have the following respective meanings:
(a) "Affiliate" shall have the meaning assigned to such term in Section
12(b)-2 of the Exchange Act.
(b) "Business Day" shall have the meaning set forth in Rule 14d-1(c)(6)
under the Exchange Act.
(c) "Material Adverse Effect" means, with respect to any Person, any
change or effect which is materially adverse to the financial condition or
results of operations of such Person and its subsidiaries, taken as a whole,
excluding in all cases: (i) events or conditions generally affecting the
industry in which such Person and its subsidiaries operate or arising from
changes in general business or economic conditions; (ii) all out-of-pocket
fees and expenses (including without limitation legal, accounting,
investigatory, and other fees and expenses) incurred in connection with the
transactions contemplated by this Agreement; (iii) in the case of the
Company, the payment by the Company and/or its subsidiaries of all amounts
due to any officers or employees of the Company or any of its subsidiaries
under employment contracts or other employee benefit
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plans in effect as of the date hereof; (iv) any effect resulting from any
change in law or generally accepted accounting principles, which affect
generally entities such as such Person; and (v) any effect resulting from
compliance by such Person with the terms of this Agreement.
(d) "Person" means any natural person, corporation, limited liability
company, partnership, unincorporated organization or other entity.
(e) "Subsidiary" of any Person means any other corporation or entity of
which such Person owns, directly or indirectly, stock or other equity
interests having a majority of the votes entitled to be cast in the election
of directors of such corporation or entity under ordinary circumstances or
of which such Person owns a majority beneficial interest.
7.4 ENTIRE AGREEMENT. This Agreement (including the schedules, exhibits
and other documents referred to herein), together with the Confidentiality
Agreement referred to in Section 4.2(b), constitutes the entire agreement
between and among the parties hereto and supersedes all prior agreements and
understandings, oral and written, between or among any of the parties with
respect to the subject matter hereof.
7.5 ASSIGNMENT; BINDING EFFECT. Neither this Agreement nor any of the
rights, benefits or obligations hereunder may be assigned, in whole or in part,
by any party (whether by operation of law or otherwise) without the prior
written consent of the other parties hereto. Subject to the preceding sentence,
this Agreement shall be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and assigns. Nothing in this
Agreement, expressed or implied, is intended to confer on any person other than
the parties or their respective successors and assigns, any rights, remedies,
obligations or liabilities under or by reason of this Agreement, other than
rights conferred upon Indemnified Parties under Section 4.11.
7.6 AMENDMENTS. This Agreement may be amended by the parties at any time
prior to the Effective Time; provided, however, that after approval of the
Merger and this Agreement by the stockholders of the Company, no amendment shall
be made which by law requires further approval by the stockholders of the
Company, without such approval. This Agreement may not be amended or modified
except by an instrument in writing signed on behalf of each of the parties
hereto.
7.7 WAIVERS. At any time prior to the Effective Time, Parent (for Parent
and Merger Sub), on the one hand, or the Company, on the other hand, may, to the
extent legally allowed, (a) extend the time specified herein for the performance
of any of the obligations or other acts of the other, (b) waive any inaccuracies
in the representations and warranties of the other contained herein or in any
document delivered pursuant hereto, or (c) waive compliance by the other with
any of the agreements or covenants of such other party or parties (as the case
may be) contained herein. Any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of the party or parties to be
bound thereby. No such extension or waiver shall constitute a waiver of, or
estoppel with respect to, any subsequent or other breach or failure to strictly
comply with the provisions of this Agreement. The failure of any party to insist
on strict compliance with this Agreement or to assert any of its rights or
remedies hereunder or with respect hereto shall not constitute a waiver of such
rights or remedies.
7.8 CAPTIONS. The Table of Contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
7.9 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original, and all of which together shall be
deemed to be one and the same instrument.
7.10 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of Delaware, without regard to
any applicable principles of conflicts of law.
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IN WITNESS WHEREOF, the parties have executed this Agreement and Plan of
Merger as of the date first above written.
PACIFIC REHABILITATION & SPORTS
MEDICINE, INC.
By: /s/ JOHN A. ELORRIAGA
-----------------------------------
Name: John A. Elorriaga
Title: President and Chief
Executive Officer
HORIZON/CMS HEALTHCARE CORPORATION
By: /s/ CHARLES GONZALES
-----------------------------------
Name: Charles Gonzales
Title: Senior Vice President of
Subsidiary Operations
HORIZON PRSM CORPORATION
By: /s/ CHARLES GONZALES
-----------------------------------
Name: Charles Gonzales
Title: Senior Vice President
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APPENDIX B
[LETTERHEAD OF SMITH BARNEY INC.]
November 9, 1995
The Board of Directors
Pacific Rehabilitation & Sports Medicine, Inc.
8100 Northeast Parkway Drive
Suite 190
Vancouver, Washington 98662
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the common stock of Pacific Rehabilitation & Sports
Medicine, Inc. ("Pacific Rehab") of the consideration to be received by such
holders pursuant to the terms and subject to the conditions set forth in the
Agreement and Plan of Merger, dated as of November 9, 1995 (the "Merger
Agreement"), by and among Horizon/CMS Healthcare Corporation ("Horizon"),
Horizon PRSM Corporation, a wholly owned subsidiary of Horizon ("Merger Sub"),
and Pacific Rehab. As more fully described in the Merger Agreement, (i) Merger
Sub will be merged with and into Pacific Rehab (the "Merger") and (ii) each
outstanding share of the common stock, par value $0.01 per share, of Pacific
Rehab (the "Pacific Rehab Common Stock") will be converted into the right to
receive 0.3483 (the "Exchange Ratio") of a share of the common stock, par value
$0.001 per share, of Horizon (the "Horizon Common Stock").
In arriving at our opinion, we reviewed the Merger Agreement and certain related
documents, and held discussions with certain senior officers, directors and
other representatives and advisors of Pacific Rehab and certain senior officers
and other representatives of Horizon concerning the businesses, operations and
prospects of Pacific Rehab and Horizon. We examined certain publicly available
business and financial information relating to Pacific Rehab and Horizon as well
as certain financial forecasts and other data for Pacific Rehab and Horizon
which were provided to us by or otherwise discussed with the respective
managements of Pacific Rehab and Horizon, including information relating to
certain strategic implications and operational benefits anticipated from the
Merger. We reviewed the financial terms of the Merger as set forth in the Merger
Agreement in relation to, among other things: current and historical market
prices and trading volumes of Pacific Rehab Common Stock and Horizon Common
Stock; the respective companies' historical and projected earnings and operating
data; and the capitalization and financial condition of Pacific Rehab and
Horizon. We also considered, to the extent publicly available, the financial
terms of certain other similar transactions recently effected which we
considered relevant in evaluating the Merger and analyzed certain financial,
stock market and other publicly available information relating to the businesses
of other companies whose operations we considered relevant in evaluating those
of Pacific Rehab and Horizon. We also evaluated the potential pro forma
financial impact of the Merger on Horizon. In addition to the foregoing, we
conducted such other analyses and examinations and considered such other
financial, economic and market criteria as we deemed appropriate in arriving at
our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information publicly available or furnished to or otherwise reviewed by or
discussed with us. With respect to financial forecasts and other information and
data provided to or otherwise reviewed by or discussed with us, we have been
advised by the
B-1
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The Board of Directors
Pacific Rehabilitation & Sports Medicine, Inc.
November 9, 1995
Page 2
respective managements of Pacific Rehab and Horizon that such forecasts and
other information and data were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the managements of Pacific Rehab
and Horizon as to the future financial performance of Pacific Rehab and Horizon
and the strategic implications and operational benefits anticipated from the
Merger. We also assumed, with your consent, that the Merger will be treated as a
pooling of interests in accordance with generally accepted accounting principles
and as a tax-free reorganization for federal income tax purposes. Our opinion,
as set forth herein, relates to the relative values of Pacific Rehab and
Horizon. We are not expressing any opinion as to what the value of the Horizon
Common Stock actually will be when issued to Pacific Rehab stockholders pursuant
to the Merger or the price at which the Horizon Common Stock will trade
subsequent to the Merger. We have not made or been provided with an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of Pacific Rehab or Horizon nor have we made any physical inspection of the
properties or assets of Pacific Rehab or Horizon. In connection with our
engagement, we approached, and held discussions with, certain third parties to
solicit indications of interest in a possible acquisition of Pacific Rehab. Our
opinion is necessarily based upon information available to us, and financial,
stock market and other conditions and circumstances existing and disclosed to
us, as of the date hereof.
Smith Barney has been engaged to render financial advisory services to Pacific
Rehab in connection with the Merger and will receive a fee for our services, a
significant portion of which is contingent upon the consummation of the Merger.
We also will receive a fee upon the delivery of this opinion. In the ordinary
course of our business, we and our affiliates may actively trade the securities
of Pacific Rehab and Horizon for our own account or for the account of our
customers and, accordingly, may at any time hold a long or short position in
such securities. In addition, we and our affiliates (including Travelers Group
Inc. and its affiliates) may maintain relationships with Pacific Rehab and
Horizon.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of Pacific Rehab in evaluating the
proposed Merger, and our opinion is not intended to be and does not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
proposed Merger. Our opinion may not be published or otherwise used or referred
to, nor shall any public reference to Smith Barney be made, without our prior
written consent.
Based upon and subject to the foregoing, our experience as investment bankers,
our work as described above and other factors we deemed relevant, we are of the
opinion that, as of the date hereof, the Exchange Ratio is fair, from a
financial point of view, to the holders of Pacific Rehab Common Stock.
Very truly yours,
SMITH BARNEY INC.
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the DGCL, a Delaware corporation has the power, under
specified circumstances, to indemnify its directors, officers, employees and
agents in connection with threatened, pending or completed actions, suits or
proceedings, whether civil, criminal, administrative or investigative (other
than an action by or in right of the corporation), brought against them by
reason of the fact that they were or are such directors, officers, employees or
agents, against expenses, judgments, fines and amounts paid in settlement
actually and reasonably incurred in any such action, suit or proceeding. Article
XIV of the Restated Certificate of Incorporation of Horizon together with
Article IX of its Bylaws provide for indemnification of each person who is or
was made a party to any actual or threatened civil, criminal, administrative or
investigative action, suit or proceeding because such person is or was an
officer or director of Horizon or is a person who is or was serving at the
request of Horizon as a director, officer, employee or agent of another
corporation or of a partnership, joint venture trust or other enterprise,
including service relating to employee benefit plans, to the fullest extent
permitted by the DGCL as it existed at the time the indemnification provisions
of Horizon's Restated Certificate of Incorporation and the Bylaws were adopted
or as may be thereafter amended. Article IX of Horizon's Bylaws and Article XIV
of its Restated Certificate of Incorporation expressly provide that they are not
the exclusive methods of indemnification.
Article IX of the Bylaws and Article XIV of Horizon's Restated Certificate
of Incorporation also provide that Horizon may maintain insurance, at its own
expense, to protect itself and any director, officer, employee or agent of
Horizon or of another entity against any expense, liability or loss, regardless
of whether Horizon would have the power to indemnify such person against such
expense, liability or loss under the DGCL.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provision shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
liability for unauthorized acquisitions or redemptions of, or dividends on,
capital stock) or (iv) for any transaction from which the director derived an
improper personal benefit. Article XI of Horizon's Restated Certificate of
Incorporation contains such a provision.
The Merger Agreement provides that from the Effective Time (as defined in
the Merger Agreement) through the later of (i) the sixth anniversary of the date
on which the Effective Time occurs and (ii) the expiration of any statute of
limitations applicable to any claim, action, suit, proceeding or investigation
arising out of or pertaining to matters existing or occurring at or prior to the
Effective Time (including, without limitation, the Merger, the preparation,
filing and mailing of the Proxy Statement/Prospectus and the other transactions
and actions contemplated by the Merger Agreement) (individually, a "Claim" and
collectively the "Claims"), whether asserted or claimed prior to, at or after
the Effective Time, Pacific Rehab, as the Surviving Corporation in the Merger
will indemnify and hold harmless each present and former officer and director of
Pacific Rehab and its subsidiaries, determined as of the Effective Time, against
any claims, losses, liabilities, damages, judgments, fines, fees, costs or
expenses, including, without limitation, attorneys' fees and disbursements
incurred in connection with a Claim, to the fullest extent that Pacific Rehab or
such subsidiary would have been permitted, under applicable law, indemnification
agreements existing on the date of the Merger Agreement, the Amended and
Restated Articles or Certificate of Incorporation or Amended and Restated Bylaws
of Pacific Rehab or such subsidiary in effect on the date of the Merger
Agreement, to indemnify such officer or director. Pacific Rehab is also required
to advance expenses as incurred to the fullest extent permitted under applicable
law provided such officer or director to whom expenses
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are advanced provides an undertaking to repay such advances if it is ultimately
determined that such officer or director is not entitled to indemnification. To
the extent Pacific Rehab fails to perform any of its obligations set forth in
the Merger Agreement, Horizon is obligated to assume such obligation.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NUMBER DESCRIPTION OF EXHIBITS
- ---------- --------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger dated as of November 9, 1995 by and among Horizon/CMS
Healthcare Corporation ("Horizon"), Horizon PRSM Corporation and Pacific Rehabilitation &
Sports Medicine, Inc. ("Pacific Rehab") (incorporated by reference to Exhibit 2.1 to
Horizon's Current Report on Form 8-K dated November 9, 1995).
2.2 Stock Option Agreement dated as of November 9, 1995 between Horizon and Pacific Rehab
(incorporated by reference to Exhibit 2.2 to Horizon's Current Report on Form 8-K dated
November 9, 1995).
2.3 Voting Agreement dated as of November 9, 1995 among Horizon and the stockholders of Pacific
Rehab named therein (incorporated by reference to Exhibit 2.3 to Horizon's Current Report
on Form 8-K dated November 9, 1995).
3.1 Restated Certificate of Incorporation of Horizon Healthcare Corporation dated March 6, 1987,
together with Certificate of Amendment of Restated Certificate of Incorporation dated
January 6, 1992 (incorporated by reference to Exhibit 3.1 to Horizon's Annual Report on
Form 10-K for the year ended May 31, 1995).
3.2 Certificate of Amendment of Restated Certificate of Incorporation of Horizon Healthcare
Corporation dated September 12, 1994 (incorporated by reference to Exhibit 4.2 to Horizon's
Registration Statement on Form S-8 (Registration No. 33-84502)).
3.3 Certificate of Amendment of Restated Certificate of Incorporation of Horizon/CMS Healthcare
Corporation dated July 6, 1995 (incorporated by reference to Horizon's Registration
Statement on Form S-8 (Registration No. 33-61697)).
+3.4 Certificate of Amendment of Restated Certificate of Incorporation of Horizon/ CMS Healthcare
Corporation dated September 28, 1995.
3.5 Certificate of Designation of Series A Junior Participating Preferred Stock of Horizon
Healthcare Corporation dated September 16, 1994 (incorporated by reference to Exhibit 4.3
to Horizon's Registration Statement on Form S-8 filed with the Securities and Exchange
Commission on September 29, 1994).
3.6 Amended and Restated Bylaws of Horizon Healthcare Corporation dated as of February 28, 1987,
together with Amendment to Bylaws Section 9. 1.1 dated August 30, 1993 (incorporated by
reference to Exhibit 3.2 to Horizon's Annual Report on Form 10-K for the year ended May 31,
1994).
3.7 Rights Agreement, dated as of September 15, 1994, between Horizon Healthcare Corporation and
Chemical Trust Company of California, as Rights Agent, specifying the terms of the rights
to purchase Horizon's Series A Junior Participating Preferred Stock, and the exhibits
thereto (incorporated by reference to Exhibit 1 to Horizon's Registration Statement on Form
8-A dated September 16, 1994).
+5.1 Opinion of Scot Sauder, Vice President of Legal Affairs and General Counsel of Horizon,
regarding the legality of the securities.
*8.1 Opinion of Garvey, Schubert & Barer regarding tax matters.
10.1 Employment Agreement with Brian M. Bussanich (incorporated by reference to Exhibit 10.1 to
Amendment No. 2 to Pacific Rehab's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on April 13, 1994 (Reg. No. 33-74440)).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NUMBER DESCRIPTION OF EXHIBITS
- ---------- --------------------------------------------------------------------------------------------
<C> <S>
10.2 Employment Agreement with Al Howard (incorporated by reference to Exhibit 10.2 to Amendment
No. 2 to Pacific Rehab's Registration Statement on Form S-1 filed with the Securities and
Exchange Commission on April 13, 1994 (Reg. No. 33-74440)).
10.3 Employment Agreement with Randy Robertson (incorporated by reference to Exhibit 10.3 to
Amendment No. 2 to Pacific Rehab's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on April 13, 1994 (Reg. No. 33-74440)).
10.4 Form of Indemnity Agreement with Officers (incorporated by reference to Exhibit 10.5.1 to
Amendment No. 1 to Pacific Rehab's Registration Statement on Form S-4 filed with the
Securities and Exchange Commission on November 17, 1993 (Reg. No. 33-66816)).
10.5 Form of Indemnity Agreement with Directors (incorporated by reference to Exhibit 10.5.2 to
Amendment No. 1 to Pacific Rehab's Registration Statement on Form S-4 filed with the
Securities and Exchange Commission on November 17, 1993 (Reg. No. 33-66816)).
10.6 Agreement for Sale and Purchase of Business Assets by and among NW Center for Sports
Medicine & Physical Therapy, Inc., Bruce Snell, P.T. A.T.C. and Pacific Rehabilitation &
Sports Medicine, Inc., and Common Stock Purchase Warrant (incorporated by reference to
Exhibit A to Current Report on Form 8-K filed by Pacific Rehab on February 15, 1995).
10.7 Management Agreement for Medical Practice between Pacific Rehabilitation & Sports Medicine,
Inc. and the Centers for Industrial Medicine Medical Group, Inc. (incorporated by reference
to Exhibit B to Current Report on Form 8-K filed by Pacific Rehab on March 22, 1995).
10.8 Stock Purchase Agreement between Edward L. Frye and Pacific Rehabilitation & Sports
Medicine, Inc. (incorporated by reference to Exhibit A to Current Report on Form 8-K filed
by Pacific Rehab on June 21, 1995).
10.9 Stock Purchase Agreement between Longview Physicians' Physical Therapy P.S., Dennis
Pittelko, P.T. and Bruce Peterson, P.T., and Pacific Rehabilitation & Sports Medicine, Inc.
(incorporated by reference to Exhibit A to Current Report on Form 8-K filed by Pacific
Rehab on August 7, 1995).
10.10 Stock Purchase Agreement between Eischen Physical Therapy Inc. and C. George Eischen and
Pacific Rehabilitation & Sports Medicine, Inc. (incorporated by reference to Exhibit N to
Current Report on Form 8-K filed by Pacific Rehab on August 7, 1995).
10.11 Stock Purchase Agreement between Northwest Physical Therapy Clinic, Inc., Robert E. Burles
and Vinton R. Mougey and Pacific Rehabilitation & Sports Medicine, Inc. (incorporated by
reference to Exhibit R to Current Report on Form 8-K filed by Pacific Rehab on August 7,
1995).
10.12 Agreement for Sale and Purchase of Business Assets of John Phillipe and Wayne Crinklaw dba
Hillsboro Physical Therapy Clinic (incorporated by reference to Exhibit GG to Current
Report on Form 8-K filed by Pacific Rehab on August 7, 1995).
+10.13 Pacific Rehab's 1993 Amended and Restated Combination Stock Option Plan.
+10.13.1 Form of Pacific Rehab Incentive Stock Option Agreement.
+10.13.2 Form of Pacific Rehab Nonstatutory Stock Option Agreement.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NUMBER DESCRIPTION OF EXHIBITS
- ---------- --------------------------------------------------------------------------------------------
<C> <S>
10.14 Pacific Rehab's Directors' Stock Option Plan (incorporated by reference to Exhibit 10.14 to
Pacific Rehab's Annual Report on Form 10-K for the year ended December 31, 1994).
10.14.1 Form of Stock Option Agreement under Pacific Rehab's Directors' Stock Option Plan
(incorporated by reference to Exhibit 10.14.1 to Pacific Rehab's Annual Report on Form 10-K
for the year ended December 31, 1994).
10.15 Line of Credit Agreement (Bank of America Oregon) (incorporated by reference to Exhibit
10.15 to Pacific Rehab's Annual Report on Form 10-K for the year ended December 31, 1994).
+10.15.1 Loan Modification No. 1 to Exhibit 10.15.
+10.15.2 Loan Modification No. 2 to Exhibit 10.15.
*10.15.3 Loan Modification No. 3 to Exhibit 10.15.
+11.1 Pacific Rehab Computation of Per Share Earnings for the years ended December 31, 1994, 1993
and 1992.
+11.2 Pacific Rehab Calculations of Net Earnings Per Share for the nine months and three months
ended September 30, 1995 and 1994.
+23.1 Consent of Scot Sauder (set forth in Exhibit 5.1).
*23.2 Consent of Garvey, Schubert & Barer (set forth in Exhibit 8.1).
+23.3 Consent of Arthur Andersen LLP (Horizon).
*23.4 Consent of Price Waterhouse LLP (Pacific Rehab and acquisitions)
+23.5 Consent of Ernst & Young LLP (CMS).
+23.6 Consent of Price Waterhouse LLP (prior CMS).
*23.7 Consent of Grant Thornton, LLP (prior Pacific Rehab and acquisitions).
+24.1 Powers of Attorney.
*99.1 Form of Pacific Rehab Proxy.
</TABLE>
- ------------------------
+ Previously filed.
* Filed herewith.
FINANCIAL STATEMENT SCHEDULES:
The financial statement schedules relating to Horizon have previously been
filed as part of Horizon's Annual Report on Form 10-K for the fiscal year ended
May 31, 1995.
The following financial statement schedule relating to Pacific Rehab is
included herein:
Schedule II -- Valuation and Qualifying Accounts
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required in Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;
II-4
<PAGE>
PROVIDED, HOWEVER, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of 1934 that
is incorporated by reference in the Registration Statement shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof;
(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request;
(6) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form;
(7) That every prospectus (i) that is filed pursuant to paragraph (6)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof; and
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 20 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Albuquerque, State of New
Mexico, on the 26th day of February, 1996.
HORIZON/CMS HEALTHCARE CORPORATION
By /s/ SEAN DAILEY
-----------------------------------
Sean Dailey,
VICE PRESIDENT -- FINANCE
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated all on the 26th day of February, 1996.
SIGNATURE TITLE
- -------------------------------- -------------------------
President, Chief
*/s/ NEAL M. ELLIOTT Executive Officer and
- -------------------------------- Chairman of the Board of
Neal M. Elliott Directors (Principal
Executive Officer)
*/s/ FRANK M. MCCORD
- -------------------------------- Director
Frank M. McCord
*/s/ RAYMOND N. NOVECK
- -------------------------------- Director
Raymond N. Noveck
*/s/ MICHAEL A. JEFFRIES
- -------------------------------- Director
Michael A. Jeffries
*/s/ CHARLES H. GONZALES
- -------------------------------- Director
Charles H. Gonzales
*/s/ GERARD M. MARTIN
- -------------------------------- Director
Gerard M. Martin
II-6
<PAGE>
SIGNATURE TITLE
- -------------------------------- -------------------------
*/s/ BARRY M. PORTNOY
- -------------------------------- Director
Barry M. Portnoy
*/s/ ROBERT A. ORTENZIO
- -------------------------------- Director
Robert A. Ortenzio
*/s/ LEROY ZIMMERMAN
- -------------------------------- Director
LeRoy Zimmerman
Senior Vice President,
Chief Financial Officer,
*/s/ ERNEST A. SCHOFIELD Treasurer and Chief
- -------------------------------- Accounting Officer
Ernest A. Schofield (Principal Financial and
Accounting Officer)
*By: /s/ SEAN DAILEY
- --------------------------------
Sean Dailey
ATTORNEY-IN-FACT
II-7
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
<TABLE>
<CAPTION>
ADDITIONS
--------------------------
BALANCE AT CHARGED TO ACQUIRED IN RESERVE AND BALANCE AT
BEGINNING OF COSTS AND CLINIC BAD DEBT END OF
DESCRIPTION PERIOD EXPENSES PURCHASES DEDUCTIONS PERIOD
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts and
contractual adjustments
Year ended December 31, 1992 $ -- $ 39,600 $ 54,500 $ -- $ 94,100
Year ended December 31, 1993 94,100 269,407 1,356,688 210,197 1,509,998
Year ended December 31, 1994 1,509,998 5,196,795 5,532,756 5,676,226 6,563,323
</TABLE>
<PAGE>
INDEX TO EXHIBITS
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger dated as of November 9, 1995 by and among Horizon/CMS Healthcare
Corporation ("Horizon"), Horizon PRSM Corporation and Pacific Rehabilitation & Sports Medicine, Inc.
("Pacific Rehab") (incorporated by reference to Exhibit 2.1 to Horizon's Current Report on Form 8-K
dated November 9, 1995).
2.2 Stock Option Agreement dated as of November 9, 1995 between Horizon and Pacific Rehab (incorporated by
reference to Exhibit 2.2 to Horizon's Current Report on Form 8-K dated November 9, 1995).
2.3 Voting Agreement dated as of November 9, 1995 among Horizon and the stockholders of Pacific Rehab
named therein (incorporated by reference to Exhibit 2.3 to Horizon's Current Report on Form 8-K dated
November 9, 1995).
3.1 Restated Certificate of Incorporation of Horizon Healthcare Corporation dated March 6, 1987, together
with Certificate of Amendment of Restated Certificate of Incorporation dated January 6, 1992
(incorporated by reference to Exhibit 3.1 to Horizon's Annual Report on Form 10-K for the year ended
May 31, 1995).
3.2 Certificate of Amendment of Restated Certificate of Incorporation of Horizon Healthcare Corporation
dated September 12, 1994 (incorporated by reference to Exhibit 4.2 to Horizon's Registration
Statement on Form S-8 (Registration No. 33-84502)).
3.3 Certificate of Amendment of Restated Certificate of Incorporation of Horizon/CMS Healthcare
Corporation dated July 6, 1995 (incorporated by reference to Horizon's Registration Statement on Form
S-8 (Registration No. 33-61697)).
+3.4 Certificate of Amendment of Restated Certificate of Incorporation of Horizon/CMS Healthcare
Corporation dated September 28, 1995.
3.5 Certificate of Designation of Series A Junior Participating Preferred Stock of Horizon Healthcare
Corporation dated September 16, 1994 (incorporated by reference to Exhibit 4.3 to Horizon's
Registration Statement on Form S-8 filed with the Securities and Exchange Commission on September 29,
1994).
3.6 Amended and Restated Bylaws of Horizon Healthcare Corporation dated as of February 28, 1987, together
with Amendment to Bylaws Section 9. 1.1 dated August 30, 1993 (incorporated by reference to Exhibit
3.2 to Horizon's Annual Report on Form 10-K for the year ended May 31, 1994).
3.7 Rights Agreement, dated as of September 15, 1994, between Horizon Healthcare Corporation and Chemical
Trust Company of California, as Rights Agent, specifying the terms of the rights to purchase
Horizon's Series A Junior Participating Preferred Stock, and the exhibits thereto (incorporated by
reference to Exhibit 1 to Horizon's Registration Statement on Form 8-A dated September 16, 1994).
+5.1 Opinion of Scot Sauder, Vice President of Legal Affairs and General Counsel of Horizon, regarding the
legality of the securities.
*8.1 Opinion of Garvey, Schubert & Barer regarding tax matters.
10.1 Employment Agreement with Brian M. Bussanich (incorporated by reference to Exhibit 10.1 to Amendment
No. 2 to Pacific Rehab's Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on April 13, 1994 (Reg. No. 33-74440)).
10.2 Employment Agreement with Al Howard (incorporated by reference to Exhibit 10.2 to Amendment No. 2 to
Pacific Rehab's Registration Statement on Form S-1 filed with the Securities and Exchange Commission
on April 13, 1994 (Reg. No. 33-74440)).
10.3 Employment Agreement with Randy Robertson (incorporated by reference to Exhibit 10.3 to Amendment No.
2 to Pacific Rehab's Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on April 13, 1994 (Reg. No. 33-74440)).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
10.4 Form of Indemnity Agreement with Officers (incorporated by reference to Exhibit 10.5.1 to Amendment
No. 1 to Pacific Rehab's Registration Statement on Form S-4 filed with the Securities and Exchange
Commission on November 17, 1993 (Reg. No. 33-66816)).
10.5 Form of Indemnity Agreement with Directors (incorporated by reference to Exhibit 10.5.2 to Amendment
No. 1 to Pacific Rehab's Registration Statement on Form S-4 filed with the Securities and Exchange
Commission on November 17, 1993 (Reg. No. 33-66816)).
10.6 Agreement for Sale and Purchase of Business Assets by and among NW Center for Sports Medicine &
Physical Therapy, Inc., Bruce Snell, P.T. A.T.C. and Pacific Rehabilitation & Sports Medicine, Inc.,
and Common Stock Purchase Warrant (incorporated by reference to Exhibit A to Current Report on Form
8-K filed by Pacific Rehab on February 15, 1995).
10.7 Management Agreement for Medical Practice between Pacific Rehabilitation & Sports Medicine, Inc. and
the Centers for Industrial Medicine Medical Group, Inc. (incorporated by reference to Exhibit B to
Current Report on Form 8-K filed by Pacific Rehab on March 22, 1995).
10.8 Stock Purchase Agreement between Edward L. Frye and Pacific Rehabilitation & Sports Medicine, Inc.
(incorporated by reference to Exhibit A to Current Report on Form 8-K filed by Pacific Rehab on June
21, 1995).
10.9 Stock Purchase Agreement between Longview Physicians' Physical Therapy P.S., Dennis Pittelko, P.T. and
Bruce Peterson, P.T., and Pacific Rehabilitation & Sports Medicine, Inc. (incorporated by reference
to Exhibit A to Current Report on Form 8-K filed by Pacific Rehab on August 7, 1995).
10.10 Stock Purchase Agreement between Eischen Physical Therapy Inc. and C. George Eischen and Pacific
Rehabilitation & Sports Medicine, Inc. (incorporated by reference to Exhibit N to Current Report on
Form 8-K filed by Pacific Rehab on August 7, 1995).
10.11 Stock Purchase Agreement between Northwest Physical Therapy Clinic, Inc., Robert E. Burles and Vinton
R. Mougey and Pacific Rehabilitation & Sports Medicine, Inc. (incorporated by reference to Exhibit R
to Current Report on Form 8-K filed by Pacific Rehab on August 7, 1995).
10.12 Agreement for Sale and Purchase of Business Assets of John Phillipe and Wayne Crinklaw dba Hillsboro
Physical Therapy Clinic (incorporated by reference to Exhibit GG to Current Report on Form 8-K filed
by Pacific Rehab on August 7, 1995).
+10.13 Pacific Rehab's 1993 Amended and Restated Combination Stock Option Plan.
+10.13.1 Form of Pacific Rehab Incentive Stock Option Agreement.
+10.13.2 Form of Pacific Rehab Nonstatutory Stock Option Agreement.
10.14 Pacific Rehab's Directors' Stock Option Plan (incorporated by reference to Exhibit 10.14 to Pacific
Rehab's Annual Report on Form 10-K for the year ended December 31, 1994).
10.14.1 Form of Stock Option Agreement under Pacific Rehab's Directors' Stock Option Plan (incorporated by
reference to Exhibit 10.14.1 to Pacific Rehab's Annual Report on Form 10-K for the year ended
December 31, 1994).
10.15 Line of Credit Agreement (Bank of America Oregon) (incorporated by reference to Exhibit 10.15 to
Pacific Rehab's Annual Report on Form 10-K for the year ended December 31, 1994).
+10.15.1 Loan Modification No. 1 to Exhibit 10.15.
+10.15.2 Loan Modification No. 2 to Exhibit 10.15.
*10.15.3 Loan Modification No. 3 to Exhibit 10.15.
+11.1 Pacific Rehab Computation of Per Share Earnings for the years ended December 31, 1994, 1993 and 1992.
+11.2 Pacific Rehab Calculations of Net Earnings Per Share for the nine months and three months ended
September 30, 1995 and 1994.
+23.1 Consent of Scot Sauder (set forth in Exhibit 5.1).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
*23.2 Consent of Garvey, Schubert & Barer (set forth in Exhibit 8.1).
+23.3 Consent of Arthur Andersen LLP (Horizon).
*23.4 Consent of Price Waterhouse LLP (Pacific Rehab and acquisitions)
+23.5 Consent of Ernst & Young LLP (CMS).
+23.6 Consent of Price Waterhouse LLP (prior CMS).
*23.7 Consent of Grant Thornton, LLP (prior Pacific Rehab and acquisitions).
+24.1 Powers of Attorney.
*99.1 Form of Pacific Rehab Proxy.
</TABLE>
- ------------------------
+ Previously filed.
* Filed herewith.
<PAGE>
[LETTERHEAD OF GARVEY, SCHUBERT & BARER]
February 26, 1996
Pacific Rehabilitation & Sports Medicine, Inc.
8100 NE Parkway Drive, Suite 190
Vancouver, Washington 98662
RE: AGREEMENT AND PLAN OF MERGER BY AND AMONG PACIFIC REHABILITATION &
SPORTS MEDICINE, INC., HORIZON/CMS HEALTHCARE CORPORATION AND
HORIZON PRSM CORPORATION
Ladies and Gentlemen:
We have served as special tax counsel to Pacific Rehabilitation & Sports
Medicine, Inc. (the "Company") in connection with the Merger of Horizon PRSM
Corporation ("PRSM") into the Company (the "Merger") pursuant to that certain
Agreement and Plan of Merger dated as of November 9, 1995, by and among the
Company, Horizon/CMS Healthcare Corporation ("Horizon) and PRSM (the
"Agreement"). This opinion is furnished to you pursuant to Section 5.2(c) of
the Agreement.
In rendering this opinion, we have examined originals or copies
(certified or otherwise identified to our satisfaction as being true) of the
Agreement and the various documents attached thereto or referred to therein
(collectively, the "Transaction Documents"), written factual representations
by representatives of the Company, Horizon and PRSM dated February 26, 1996,
and such other records and documents as we have deemed necessary for the
purpose of this opinion.
With your consent, we have also assumed that the shareholders of the
Company, as a group, do not currently have, and will not have as of the date
of the Merger, a plan or intention to sell, exchange, or otherwise dispose of
a number of shares of Horizon stock received in the Merger that would reduce
the Company shareholders' ownership of Horizon stock to a number of shares
having a value, as of the date of the Merger, of less than 50 percent of the
value of all of the formerly outstanding stock of the Company as of that date.
We have also assumed that the merger will occur and be consummated, in all
material respects, in the manner described in the Agreement.
With your permission, we have not performed any independent
investigation to verify the accuracy of any such assumptions,
representations, or other matters disclosed by our examination. We have
assumed the genuineness of all signatures on documents, records and
certificates coming to our attention, the authenticity of all documents,
records and certificates
<PAGE>
Pacific Rehabilitation & Sports Medicine, Inc.
February 26, 1996
Page 2
submitted to us as originals, the conformity to original documents, records
and certificates of all documents, records and certificates submitted to us
as copies, and the validity, truthfulness and reliability, as of the date of
this opinion, of all statements of fact contained in such documents, records
and certificates and of all representations made to us in connection with our
examination.
Based upon the foregoing, and in reliance thereon and upon our
consideration of such matters of law as we deem relevant in the
circumstances, subject to the qualifications and assumptions stated herein,
we are of the opinion that:
(1) The Merger will constitute a reorganization within the meaning of
Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the
"Code"). Sections 368(a)(1)(A) and 368(a)(2)(E). Horizon, PRSM and the
Company will each be "a party to a reorganization" within the meaning of
Section 368(b).
(2) No gain or loss will be recognized by the Company shareholders
upon the exchange of their Company common stock solely for Horizon common
stock. Section 354(a)(1).
(3) The aggregate basis of the Horizon common stock to be received by
the Company shareholders will be the same, in each instance, as the aggregate
basis of the Company common stock surrendered in exchange therefor (reduced by
any amount allocable to fractional shares for which cash is received).
Section 358(a)(1).
(4) The holding period of the Horizon common stock will include the
holding period of the Company common stock surrendered in exchange therefor,
provided the Company common stock was held as a capital asset on the date of
the exchange. Section 1223(1).
(5) Any cash received by a Company shareholder in lieu of a fractional
share will be treated as received in exchange for the fractional share and not
as a dividend, and any gain or loss recognized as a result of the receipt of
such cash will be capital gain or loss, provided that such share was held as a
capital asset.
__________________
(1) Except as otherwise indicated, all Section references herein are to the
Code.
<PAGE>
Pacific Rehabilitation & Sports Medicine, Inc.
February 26, 1996
Page 3
LIMITATIONS AND DISCLAIMERS
No opinion has been requested, and none is expressed, as to the federal
income tax consequences to the holders of warrants or options for Company
common stock of exchanging, pursuant to the Agreement, those warrants and
options for warrants or options for Horizon common stock.
The Company has not sought a ruling from the Internal Revenue Service
with respect to the federal income tax consequences of the Merger. The
opinions of the Special Tax Counsel to the Company will not be binding on the
Internal Revenue Service nor preclude it from taking a contrary position on
the matters addressed herein.
The opinions expressed herein are based upon legal authority and
precedent in effect on the date hereof, which authority and precedent are
subject to change, both prospectively and retroactively. Moreover, future
administrative or judicial rulings or legislative changes may have an adverse
effect on the legal and tax consequences described herein. We further note
that we are opining herein only as to the effect on the subject transactions
of the laws of the United States of America, and we express no opinion
concerning the applicability of any
<PAGE>
Pacific Rehabilitation & Sports Medicine, Inc.
February 26, 1996
Page 4
other laws to the subject transactions. Our opinion is expressly limited to
the matters set forth above, and we render no opinion, whether by implication
or otherwise, as to any other matters relating to the Company, Horizon or
PRSM, Horizon or PRSM shareholders or any transactions between the Horizon,
PRSM and/or the Company.
The opinions expressed in this letter are based upon the laws in effect
on the date hereof, and we assume no obligation to revise or supplement this
opinion should such laws be changed by legislative action, judicial decision,
or otherwise.
This opinion is being furnished only to the Company and is solely for
its benefit and the benefit of its shareholders. Accordingly, this opinion
may not be used, circulated, quoted, or relied upon by any other person or
entity without, in each instance, our prior written consent.
Very truly yours,
/s/ Garvey, Schubert & Barer
<PAGE>
February 26, 1996
Garvey, Schubert & Barer
121 S.W. Morrison Street
Eleventh Floor
Portland, Oregon 97204-3141
RE: MERGER OF HORIZON PRSM CORPORATION INTO PACIFIC REHABILITATION
& SPORTS MEDICINE, INC.
Dear Sirs:
In connection with your opinion as to certain federal income tax
consequences from the merger of Horizon PRSM Corporation ("PRSM") into Pacific
Rehabilitation & Sports Medicine, Inc. (the "Company") pursuant to an
Agreement and Plan of Merger dated as of November 9, 1995, by and among the
Company, Horizon/CMS Healthcare Corporation ("Horizon") and PRSM (the "Plan
of Merger"), each of the undersigned hereby makes the representations
attributed to them hereinafter. The actions described in the Plan of Merger
are collectively referred to as the "Transaction". The date and time of the
Transaction mean the date and time defined as the "Effective Time" in the
Plan of Merger.
I. REPRESENTATIONS OF THE COMPANY
(a) The Company is a corporation duly incorporated and validly existing
under the laws of the state of Delaware.
(b) The Plan of Merger has been duly adopted and approved by the Board
of Directors of the Company.
(c) The shareholders of the Company will receive no consideration other
than Horizon Stock (other than cash in lieu of fractional shares of Horizon
stock) in exchange for their the Company stock.
(d) The fair market value of the Horizon stock received by a Company
shareholder (plus any cash issued to the shareholder in lieu of a fractional
interest of Company stock) will be approximately equal to the fair market
value of the Company stock surrendered by the shareholder in the exchange.
(e) To the best of the knowledge of the management of the Company,
there is no plan or intention on the part of the shareholders of the Company,
to sell, exchange, or otherwise dispose of a number of shares of Horizon
stock received in the Transaction that would reduce the Company shareholders'
ownership of Horizon stock to a number of shares
<PAGE>
Garvey, Schubert & Barer
February 26, 1996
Page 2
having a value, as of the date of the Transaction, of less than 50 percent of
the value of all of the formerly outstanding stock of the Company as of the
same date. For purposes of this representation, shares of Company stock
exchanged for cash in lieu of fractional shares of Horizon stock will be
treated as outstanding Company stock on the date of the Transaction.
Moreover, shares of Company stock and shares of Horizon stock held by the
Company shareholders and otherwise sold, redeemed, or disposed of prior or
subsequent to the Transaction will be considered in making representation.
(f) The Company has no plan or intention to issue additional shares of
its stock that would result in Horizon losing control of the Company within
the meaning of Section 368(c) of the Internal Revenue Code of 1986, as
amended (the "Code").
(g) The payment of cash in lieu of fractional shares of Horizon stock
is solely for the purpose of avoiding the expense and inconvenience of
issuing fractional shares and does not represent separately bargained for
consideration. The total cash consideration that will be paid in the
Transaction to the Company shareholders instead of issuing fractional shares
of Horizon stock will not exceed one percent of the total consideration that
will be issued in the Transaction to the Company shareholders in exchange for
their Company stock. The fractional share interests of each Company
shareholder will be aggregated, and no Company shareholder will receive cash
in an amount equal to or greater than the value of one full share of Horizon
stock.
(h) Following the Transaction, the Company will continue its historic
business or use a significant portion of its historic business assets in a
business.
(i) At the time of the Transaction, the Company will not have
outstanding any warrants, options, convertible securities, or any other type
of right pursuant to which any person could acquire stock in the Company
that, if exercised or converted, would affect Horizon's acquisition or
retention of control of the Company, as defined in Section 368(c) of the Code.
(j) On the date of the Transaction, the fair market value of the assets
of the Company will exceed the sum of its liabilities, plus the amount of
liabilities, if any, to which the assets are subject.
(k) The Company has never made an election to be treated, for federal
income tax purposes, as an "S" corporation under Subchapter S of the Code.
<PAGE>
Garvey, Schubert & Barer
February 26, 1996
Page 3
II. REPRESENTATIONS OF HORIZON AND PRSM
(a) Horizon is a corporation duly incorporated and validly existing
under the laws of the state of Delaware.
(b) PRSM is a corporation duly incorporated and validly existing under
the laws of the state of Delaware.
(c) Horizon incorporated PRSM for the sole purpose of consummating the
Transaction. The stock of PRSM is wholly owned by Horizon.
(d) PRSM has engaged in no business to date and will engage in no
activities prior to its merger into the Company except as set forth in the
Plan of Merger.
(e) The Plan of Merger has been duly adopted and approved by the Boards
of Directors of Horizon and PRSM.
(f) Horizon has no plan or intention to reacquire any of its stock
issued in the Transaction.
(g) Horizon does not own, directly or indirectly, nor has it owned
during the past five years, directly or indirectly, any stock of the Company.
(h) Prior to the Transaction, Horizon will be in control of PRSM within
the meaning of Section 368(c) of the Code.
(i) Horizon has no plan or intention to liquidate the Company; to merge
the Company with or into another corporation (other than the merger of PRSM
into the Company pursuant to the Plan of Merger); to sell or otherwise
dispose of the stock of the Company except for transfers of stock to
corporations controlled by Horizon; or to cause the Company to sell or
otherwise dispose of any of its assets or of any of the assets acquired from
PRSM, except for dispositions made in the ordinary course of business or
transfers of assets to a corporation controlled by the Company.
(j) PRSM will have no liabilities assumed by the Company, and will not
transfer to the Company any assets subject to liabilities, in the Transaction.
(k) Neither Horizon nor PRSM has ever made an election to be treated,
for federal income tax purposes, as an "S" corporation under Subchapter S of
the Code.
<PAGE>
Garvey, Schubert & Barer
February 26, 1996
Page 4
III. REPRESENTATIONS OF THE COMPANY, HORIZON AND PRSM
(a) There are valid corporate business reasons for the Transaction.
(b) None of the parties to the Transaction is under the jurisdiction of
a court in a Title 11 or similar case within meaning of Section 368(a)(3)(A)
of the Code.
(c) None of the parties to the Transaction is an investment company as
defined in Section 368(a)(2)(F)(iii) and (iv) of the Code.
(d) There is no intercorporate indebtedness existing between Horizon
and the Company or between PRSM and the Company that was issued, acquired, or
will be settled at a discount.
(e) In the Transaction, shares of the Company stock representing
control of the Company, as defined in Code Section 368(c), will be exchanged
solely for voting stock of Horizon. For purposes of this representation,
shares of Company stock exchanged for cash or other property originating with
Horizon will be treated as outstanding Company stock on the date of the
Transaction.
(f) Following the Transaction, the Company will hold at least 90
percent of the fair market value of its net assets and at least 70 percent of
the fair market value of its gross assets and at least 90 percent of the fair
market value of PRSM's net assets and at least 70 percent of the fair market
value of PRSM's gross assets held immediately prior to the Transaction. For
purposes of this representation, amounts used by the Company or PRSM to pay
reorganizational expenses, and all redemptions and distributions (except for
regular, normal dividends) made by the Company will be included as assets of
the Company or PRSM, respectively, immediately prior to the Transaction.
(g) None of the compensation received by any shareholder of Company
will be separate consideration for, or allocable to, any of their shares of
Company stock; none of the shares of Horizon Stock received by any such
shareholder-employees will be separate consideration for, or allocable to,
any employment agreement; none of the shares of Horizon Stock received by any
Company shareholder will be separate consideration for, or allocable to, any
covenant not to compete; and the compensation paid to any
shareholder-employees will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's-length
for similar services.
<PAGE>
Garvey, Schubert & Barer
February 26, 1996
Page 5
(h) Horizon, PRSM, the Company, and the shareholders of the Company
will pay their respective expenses, if any, incurred in connection with the
Transaction. Horizon will pay or assume only those expenses of the Company
that are solely and directly related to the Transaction in accordance with
the guidelines established in Rev. Rul. 73-54, 1973-1 C.B. 187.
This letter may be executed in counterparts.
Executed this 26th day of February, 1996 at Portland, Oregon.
PACIFIC REHABILITATION & SPORTS MEDICINE, INC.
By /s/ William A. Norris
-----------------------------------------
Title Executive Vice President-Finance &
Administrative
-----------------------------------------
Executed this 26th day of February, 1996 at Albuquerque, New Mexico.
HORIZON/CMS HEALTHCARE CORPORATION
By /s/ Scot Sauder
-----------------------------------------
Title Vice President of Legal Affairs,
Secretary and General Counsel
-----------------------------------------
Executed this 26th day of February, 1996 at ___________________________,
_________.
HORIZON PRSM CORPORATION
By /s/ Scot Sauder
-----------------------------------------
Title Vice President of Legal Affairs
and Secretary
-----------------------------------------
<PAGE>
LOAN MODIFICATION NO. 3
AMONG: Pacific Rehabilitation & Sports
Medicine, Inc. ("Borrower")
AND: Bank of America Oregon (the "Bank")
EFFECTIVE DATE: January , 1996
-----
This Loan Modification No. 3 (the "Modification") is entered into on
the above date by the Borrower and the Bank.
1. BACKGROUND. The Borrower entered into a Business Loan Agreement
(Receivables) with the Bank dated as of December 23, 1994. The parties modified
the Business Loan Agreement pursuant to Loan Modification No. 1, effective as of
April 19, 1995 ("Loan Modification No. 1") and pursuant to Loan Modification No.
2, effective as of June 30, 1995 ("Loan Modification No. 2"). The Business Loan
Agreement, Loan Modification No. 1 and Loan Modification No. 2 shall hereinafter
be referred to collectively as the "Agreement." The Borrower is entering into
this Modification to state the terms and conditions of certain modifications to
the Agreement. Capitalized terms used in this Modification shall, unless
otherwise defined in this Modification, have the meaning given to such terms in
the Agreement.
2. MODIFICATIONS TO THE AGREEMENT.
a. SECTION 1.1. Section 1.1 of the Agreement is deleted and in
its place is inserted the following:
1.1 "Borrowing Base" means:
(a) The lesser of:
(i) Twelve Million Five Hundred Thousand Dollars
($12,500,000); or
(ii) 85% of the balance due on Acceptable Receivables minus
the sum of (A) the bad debt allowance for accounts
receivable contained in the Borrower's most recent
Form 10-K Annual Report ("10-K") or Form 10-Q
Quarterly Report ("10-Q") provided to the Bank and (B)
contractual allowances provided by the Borrower or any
Subsidiary as set forth in the Borrower's most recent
10-K or 10-Q provided to the Bank; or
Page 1 - LOAN MODIFICATION NO. 3
<PAGE>
(iii) 85% of the amount resulting from the following
computation:
(A) 100% of the sum of the Borrower's net revenue for
the previous three months as established by
generally accepted accounting principles
consistently applied ("Net Revenue");
(B) Multiplied by 120 for calculations of the
Borrowing Base on or after January 1, 1996;
(C) Divided by 91.
For the purposes of this Agreement, the Borrower's Net Revenue
and Acceptable Receivables (as defined below) include the Net Revenues and
accounts receivable of the Borrower's subsidiaries, and any subsidiary of a
subsidiary, including, but not limited to, Leeward Back and Neck, Inc., PR
Acquisition Corporation, Dade Physical Therapy Rehab, Inc., Pacific Rehab of
Maryland, Inc., Longview Physician's Physical Therapy, Inc. and St. Paul &
Biddle Medical Associates, LLC, (hereinafter referred to individually and
collectively as the "Subsidiary")."
b. INTEREST RATE. Section 2.3(a) is hereby deleted in its
entirety and replaced with the following:
"(a) Unless the Borrower elects an optional interest rate as described
below, the interest rate is the Reference Rate plus 1.0
percentage point."
c. OFFSHORE RATE. Section 2.7 of the Agreement is hereby
amended to provide that Borrower may elect to have all or portions of the
principal balance of the line of credit bear interest at the Offshore Rate plus
2.5 percentage points.
d. FACILITY NO. 2. Sections 3.1 to 3.6 of the Agreement,
regarding the equipment line of credit (referred to in the Agreement as
"Facility No. 2"), are hereby deleted in their entirety.
e. DEFAULT RATE. Section 6.10 of the Agreement is hereby
amended by adding the following:
"Upon the occurrence and during the continuation of any default
resulting from a breach of Section 9.3 (Funded Debt to EBITDA Ratio)
or Section 9.4 (Fixed Charge Coverage Ratio) of this Agreement,
advances under this
Page 2 - LOAN MODIFICATION NO. 3
<PAGE>
Agreement will at the option of the Bank bear interest at a
rate per annum which is 1 percent higher than the rate of
interest otherwise provided under this Agreement. Upon the
occurrence and during the continuation of any default
resulting from a breach of one or more of the Covenants
(other than Sections 9.3 or 9.4) contained in this
Agreement, advances under this Agreement will at the option
of the Bank bear interest at a rate per annum which is 3
percentage points higher than the rate of interest otherwise
provided under this Agreement. This will not constitute a
waiver of any event of default."
3. WAIVER OF BREACH OF COVENANTS.
a. OVER ADVANCE OF BORROWING BASE. Borrower has breached the
covenants contained in Section 2.1(c) of the Agreement by allowing an over
advance of the Borrowing Base for Facility No. 1 to exist since November 1,
1995. Bank hereby waives the breach of covenant and forgoes its right to
demand immediate payment of the over advance as of the date of this
Modification.
b. FUNDED DEBT TO EBITDA RATIO. It is anticipated that Borrower
will breach the covenants contained in Section 9.3 of the Agreement relating to
the Funded Debt to EBITDA Ratio (the "EBITDA Ratio") for the quarter ending
December 31, 1995. Bank hereby waives any breach of the EBITDA Ratio for the
quarter ending December 31, 1995.
c. FIXED CHARGE COVERAGE RATIO. Borrower has breached the
covenants contained in Section 9.4 of the Agreement relating to the Fixed Charge
Coverage Ratio (the "FCCR Covenant") for the quarter ending September 30, 1995,
and is anticipated to breach the FCCR Covenant for the quarter ending December
31, 1995. Bank hereby waives the breach of the FCCR Covenant for the quarter
ending September 30, 1995 and any breach of the FCCR Covenant for the quarter
ending December 31, 1995.
d. FUTURE WAIVERS. The waivers of breaches of specific covenants
of the Agreement contained in this Modification shall not be considered to be a
waiver of that covenant or any other term, condition, covenant, obligation or
undertaking or any subsequent breach of the same term, condition, covenant or
undertaking.
4. FEES. In consideration of Bank's consent to modify the Agreement,
Borrower agrees to pay Bank a fee of Fifty Thousand Dollars ($50,000) (the
"Fee"). The Fee shall be payable as follows:
Page 3 -- LOAN MODIFICATION NO. 3
<PAGE>
(i) Twenty Thousand Dollars ($20,000) shall be paid
upon execution of this Modification;
(ii) Thirty Thousand Dollars ($30,000) shall be due and
payable on April 1, 1996 if Borrower's anticipated
stock merger with Horizon/CMS has not been completed;
if the stock merger is completed on or before April 1,
1996, and all of Borrower's indebtedness under the
Agreement has been repaid in full to Bank, the Thirty
Thousand Dollar ($30,000) balance of the Fee shall not
be due or payable.
5. NO OTHER MODIFICATIONS. Except as expressly modified by this
Modification, the terms of the Agreement shall remain unchanged and in full
force and effect. The Bank's agreement to modify the Agreement pursuant to this
Modification shall not obligate Bank to make any further modifications to the
Agreement, or Modification, or any other loan document. Nothing in this
Modification shall constitute a satisfaction of any indebtedness of Borrower to
Bank. It is the intention of Bank and the Borrower to retain as liable parties
all makers and endorsers of the Agreement and Modification or any other loan
document. No maker, endorser, or guarantor shall be released by virtue of this
Modification. The terms of this paragraph shall apply not only to this
Modification, but also to all subsequent loan modification agreements.
6. REPRESENTATIONS AND WARRANTIES.
a. Borrower represents and warrants to Bank that the execution,
delivery and performance of this Modification are within Borrower's corporate
powers, and have been duly authorized and are not in contravention of law or the
terms of Borrower's charter, bylaws, or other incorporation papers, or of any
undertaking of Borrower of which either Borrower is a party or by which it is
bound.
b. Borrower understands and agrees that in entering into this
Modification, Bank is relying upon Borrower's representations, warranties, and
agreements as set forth in the Agreement, and other loan documents. Borrower
hereby reaffirms all representations and warranties in the Agreement, all of
which
Page 4 -- LOAN MODIFICATION NO. 3
<PAGE>
are true with respect to each such corporation as of the date of this
Modification.
BORROWER: PACIFIC REHABILITATION
SPORTS MEDICINE, INC.
BY: /s/ John A. Elorriaga
--------------------------------
John A. Elorriaga
Its: President and
Chief Executive Officer
LENDER: BANK OF AMERICA OREGON
By:
--------------------------------
Robert E. McCall
Its: Vice President
The undersigned guarantors consent to the modifications to the
Agreement contained in this Modification, and ratify the provisions of the
Continuing Guaranty executed by each guarantor for the benefit of Bank and
confirm that all provisions of its Continuing Guaranty are in full force and
effect.
LEEWARD BACK AND NECK, INC.
By:/s/ John A. Elorriaga
--------------------------------
John A. Elorriaga
Its: President
P.R. ACQUISITION CORPORATION
By:/s/ Randy Robertson
--------------------------------
Randy Robertson
Its: President
Page 5 - LOAN MODIFICATION NO. 3
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in the Proxy Statement/Prospectus constituting
part of this Amendment No. 1 to Registration Statement on Form S-4 of
Horizon/CMS Healthcare Corporation of our report dated February 11, 1995, except
as to the March 1995 acquisitions described in the last four paragraphs of Note
15, which is as of March 21, 1995, and as to subsequent financing activities and
merger agreement described in Note 16, which is as of December 21, 1995,
relating to the financial statements of Pacific Rehabilitation & Sports
Medicine, Inc. which appears in such Proxy Statement/ Prospectus. We also
consent to the application of such report to the Financial Statement Schedule
for the year ended December 31, 1994 of Pacific Rehabilitation & Sports
Medicine, Inc. listed under Schedule II of this Registration Statement when such
schedule is read in conjunction with the financial statements referred to in our
report. The audit referred to in such report also included this schedule. We
also consent to the use of our report dated September 29, 1995 relating to the
combined financial statements of Physical Therapy Clinic of Tualatin, Inc.;
Roger J. Miller Enterprises, Inc. dba Lake Oswego Physical Therapy; John
Phillipe and Wayne Crinklaw dba Hillsboro Physical Therapy Clinic; Northwest
Physical Therapy Clinic, Inc.; Eischen Physical Therapy, Inc.; Longview
Physicians' Physical Therapy Services, P.S.; and Oregon City Physical Therapy,
Inc. which appears in such Proxy Statement/Prospectus. We also consent to the
use of our report dated September 15, 1995 relating to the financial statements
of Samuel H. Esterson, P.T.; our report dated September 1, 1995 relating to the
financial statements of Michael C. Gibbons, P.T. dba Tigard Physical Therapy;
our report dated June 30, 1995 relating to the financial statements of
Arthritis, Trauma & Sports Physical Therapy, Inc.; our report dated May 12, 1995
relating to the financial statements of Center for Industrial Medicine, Inc.;
our report dated April 7, 1995 relating to the financial statements of NW Center
for Sports Medicine and Physical Therapy, Inc.; our report dated August 19, 1994
relating to the financial statements of Advanced Rehabilitation Technologies,
Inc.; our report dated July 19, 1994 relating to the financial statements of
Michael D. Mericle, P.T.; our report dated July 9, 1994 relating to the
financial statements of Care Concepts, Inc. dba Pacific Physical Therapy; and
our report dated July 1, 1994 relating to the financial statements of
Professional Athletic Rehabilitation, Inc., all of which appear in such Proxy
Statement/Prospectus. We also consent to the references to us under the headings
"Experts" and "Selected Historical and Unaudited Pro Forma Financial
Information" in such Proxy Statement/Prospectus. However, it should be noted
that Price Waterhouse LLP has not prepared or certified such "Selected
Historical and Unaudited Pro Forma Financial Information."
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Portland, Oregon,
February 26, 1996
<PAGE>
EXHIBIT 23.7
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the inclusion in this Proxy Statement/Prospectus of
Horizon/CMS Healthcare Corporation and Pacific Rehabilitation & Sports Medicine,
Inc. constituting part of this Registration Statement on Amendment No. 1 to Form
S-4 of Horizon/CMS Healthcare Corporation of our reports dated February 4, 1994,
with respect to the consolidated financial statements of Pacific Rehabilitation
& Sports Medicine, Inc. and January 27, 1994, with respect to the financial
statements of Dr. Judman and Dr. Gober St. Paul and Biddle Medical Associates,
P.A., for the respective periods as indicated in our reports included herein. We
also consent to the references to us under the headings "Experts" and "Selected
Historical and Unaudited Pro Forma Financial Information."
/s/ GRANT THORNTON LLP
Grant Thornton LLP
Portland, Oregon
February 26, 1996
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC.
Proxy for Special Meeting of Shareholders
to be Held on , 1996
-------------
THIS PROXY IS BEING SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Shareholders and Prospectus/Proxy Statement, each dated
________________, 1996, and hereby names, constitutes and appoints John A.
Elorriaga and William A. Norris, or either of them acting in absence of the
other, with full power of substitution, my true and lawful attorneys and Proxies
for me and in my place and stead to attend the Special Meeting of the
Shareholders of Pacific Rehabilitation & Sports Medicine, Inc. (the "Company")
to be held at ______ a.m. on _________, _______________, 1996, and at any
adjournment thereof, and to vote all the shares of Common Stock held of record
in the name of the undersigned on ____________, 1996, with all the powers that
the undersigned would possess if he/she were personally present.
1. PROPOSAL 1--Adoption of Agreement and Plan of Merger and Approval of Merger
of a wholly-owned subsidiary of Horizon/CMS Healthcare Corporation into the
Company.
FOR PROPOSAL 1 AGAINST PROPOSAL 1 ABSTAIN ON PROPOSAL 1
--- --- ---
The Board of Directors unanimously recommends a vote FOR the approval of
PROPOSAL 1.
2. Upon such other matters as may properly come before, or incident to the
conduct of the Special Meeting, the Proxy holders shall vote in such manner
as they determine to be in the best interests of the Company. The Company
is not presently aware of any such matters to be presented for action at
the meeting.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY. IF NO
SPECIFIC DIRECTION IS GIVEN AS TO ANY OF THE ABOVE ITEMS, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1.
Dated
-------------------------------
------------------------------------
Shareholder (print name)
------------------------------------
Shareholder (sign name)
I do ( ) do not ( ) plan to attend the
meeting. (Please check)
The shareholder signed above reserves the
right to revoke this Proxy at any time prior
to its exercise by written notice delivered
to the Company's Secretary at the Company's
corporate offices at 8100 N.E. Parkway Drive,
Suite 190, Vancouver, Washington 98662, prior
to the Special Meeting. The power of the
Proxy holders shall also be suspended if the
shareholder signed above appears at the
Special Meeting and elects in writing to vote
in person.
