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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM 1O-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number : 0-23472
PACIFIC REHABILITATION & SPORTS MEDICINE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 93-1072052
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8100 NE PARKWAY DRIVE, SUITE 190
VANCOUVER, WASHINGTON 98662
(Address of principal executive offices and zip code)
(360)-260-8130
(Registrants telephone number including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K, or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant is $32,921,661 as of March 20, 1996, based upon the last sales
price as reported on the Nasdaq Stock Market.
The number of shares outstanding of the Registrant's Common Stock as of
March 20, 1996 was 8,172,812 shares.
The Index to Exhibits appears on page 16 of this document.
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated into Part III of Form 10-K, by reference,
portions of the Proxy Statement for the Registrant's Annual Meeting of
Shareholders to be held June 21, 1996.
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PACIFIC REHABILITATION & SPORTS MEDICINE, INC.
AMENDMENT NO. 1 TO FORM 10-K/A
TABLE OF CONTENTS
PART I
Page
----
Item 1 Business............................................................ 1
Item 2 Properties.......................................................... 5
Item 3 Legal Proceedings................................................... 6
Item 4 Submission of Matters to a Vote of Security Holders................. 6
PART II
Item 5 Market for the Registrant's Common Equity
and Related Stockholder Matters..................................... 6
Item 6 Selected Financial Data............................................. 6
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 7
Item 8 Financial Statements and Supplementary Data.........................15
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..............................15
PART III
Item 10 Directors and Executive Officers of the Registrant..................15
Item 11 Executive Compensation..............................................15
Item 12 Security Ownership of Certain Beneficial Owners
and Management......................................................15
Item 13 Certain Relationships and Related Transactions......................16
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K.................................................16
<PAGE>
PART I
ITEM 1. BUSINESS
INTRODUCTION
Pacific Rehabilitation and Sports Medicine, Inc. (the "Company") provides
physical therapy services to persons suffering from work, sports and accident
related injuries. In March 1994, the Company merged with Pacific Rehab, Inc.,
an Oregon corporation. By way of closings on April 21, 1994 and May 9, 1994, the
Company concluded an initial public offering of 2,760,000 shares of common stock
(of which the Company sold 2,560,000 shares) at $6 per share (the "Offering").
During 1994, the Company acquired 19 additional clinics in 12 transactions
and opened two new clinics. At December 31, 1994, the Company owned and operated
a total of 39 clinics located in eight states.
In the first quarter of 1995, the Company acquired eight clinics in six
different transactions. One of the acquisitions occurred in Tacoma, Washington
and represented a new market for the Company. The remaining five acquisitions
strengthened the Company's presence in the Southern California, Miami, Florida,
and Baltimore, Maryland markets.
In the second quarter of 1995 the Company acquired ten additional clinics
in seven transactions and opened two new clinics. In April, the Company
increased its presence in the Las Vegas, Nevada area when it acquired a practice
with two clinics. In June, the Company 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, the Company owned and operated 59 clinics.
In the third quarter of 1995, the Company acquired fourteen additional
clinics, including thirteen in the new market area of Portland, Oregon. The
Company opened a new clinic in the Baltimore, Maryland area during the same time
period. As of the end of the third quarter, the Company owned and operated a
total of 74 clinics. During the fourth quarter, the Company closed and
consolidated two clinics in Hawaii. At December 31, 1995 the Company owned and
operated a total of 72 clinics located in the states of Oregon, Washington,
California, Nevada, Hawaii, Arizona, Texas, Mississippi, Florida and Maryland.
In November 1995, the Company entered into an agreement with Horizon/CMS
Healthcare Corporation ("Horizon") under which the Company was to be merged into
and with a subsidiary of Horizon, pursuant to a merger agreement unanimously
approved by the Boards of Directors of both the Company and Horizon. Under the
terms of the agreement, the Company's shareholders were to receive .3483 shares
of Horizon common stock for each share of the Company's common stock. On March
12, 1996, the Company announced that the proposed merger could not be
consummated by April 1, 1996 and that the merger agreement allowed either party
to terminate the merger agreement if the merger was not consummated by that
date. The Company also announced that neither party was willing to extend the
termination date under the merger agreement's existing terms and that the
parties were in discussion and considering alternatives. On April 2, 1996, the
Company announced that it had terminated the proposed merger as of that date.
The Company 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.
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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 the Company's services are provided on
an outpatient basis.
The Company 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. The
Company also believes the outpatient rehabilitation market will continue to
consolidate due to the highly fragmented nature of the market, growing
legislative 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 the
Company'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 typically begins with acute pain relief through the use of therapy
modalities such as ice packs, massage, ultrasound, heat, traction and electrical
stimulation, and later includes such components as stretching, cardiovascular,
and neuromuscular 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. The Company 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
The Company 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.
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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.
The Company has at least one full time marketing position for each of eight
of its nine regions, and expects that a marketing position will be added to
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.
The Company 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. The
Company has been able to secure 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
The Company 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, the Company has grown and expects to continue to grow through
a limited number of acquisitions. The timing, number and integration of the
Company's acquisitions may cause financial results of operations to vary on a
quarterly basis.
The Company also may experience decreases in revenues as a result of
inclement weather. For example, in the third quarter of 1995, the Company
experienced a higher than usual summer seasonal decrease in revenue in the
Baltimore market as unusually dry weather resulted in fewer personal injuries
from automobile accidents. Other unusual weather conditions, such as severe
snowfall, which prevent or discourage patients from attending their physical
therapy sessions, also may adversely impact revenues in certain markets.
On April 2, 1996, the Company announced that it had terminated its merger
agreement with Horizon/CMS Healthcare Corporation ("Horizon") on that date.
In connection with that proposed merger, the Company incurred certain
expenses, including those payable to its counsels, accountants, investment
bankers and consultants, which the Company estimates will total, in the
aggregate, approximately $975,000. These expenses will be paid in the
ordinary course of business and will be accounted for as a one-time
non-recurring charge to earnings in the second quarter of 1996.
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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. The Company 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 HEALTHSOUTH Rehabilitation Corp. (including the
former operations of CareMark), 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.).
The Company also competes with other healthcare companies in acquiring
clinics. Several larger national companies with substantially greater financial
resources than the Company, such as those named above, have been actively
acquiring outpatient rehabilitation clinics.
The Company believes that the proposed merger with Horizon may have
affected the Company's competitive position, including the ability, in the short
run, to acquire additional clinics in certain markets. Prior to entering into
the merger agreement with Horizon, the Company was actively negotiating with
potential sellers of clinics. The pendency of the merger prevented the company
from completing these negotiations. Moreover, while the merger process was
progressing, in accordance with the merger agreement, the Company shared certain
information with Horizon, including the identity of certain of these potential
sellers.
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 of 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 interests" of
physicians in the entity providing services and "compensation arrangements"
between physicians and such providers. The statute provides that an "ownership
or 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.
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Aside from federal law, certain states in which the Company 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 the Company can
pursue acquisitions from, market its services to, and contract for services
with, physicians and other health care providers. For example, representatives
of the Office of Inspector General of the Department of Health and Human
Services, 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 the Company'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 the Company otherwise maintains a financial relationship not
specifically permitted by Stark II, do not refer patients to the clinics and,
therefore, management of the Company 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 the Company's total net revenues are derived from
Medicare and Medicaid programs.
The Company complies with state anti-referral laws by attempting to ensure
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 the
Company provides, any parties from whom the clinics were acquired on terms which
establish a "financial relationship", or with whom the Company otherwise
maintains a financial relationship not permitted under state law, 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 payors 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, the Company may be
required to restructure its relationships with certain of its referring
physicians, which may adversely affect the Company's financial condition or
operations.
EMPLOYEES
At February 29, 1996, the Company had 554 employees. None of the Company's
employees are represented by a labor union. Management believes its relations
with its employees are good.
ITEM 2. PROPERTIES
The Company leases all of the properties used for its rehabilitation
clinics and executive offices, with lease terms primarily ranging from month to
month to seven years. The Company believes that replacement premises will be
available on favorable terms in the event one or more of its leases are
terminated. The Company intends to continue to lease the premises in which new
centers are located.
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ITEM 3. LEGAL PROCEEDINGS
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.
The Company 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, the Company maintains a $15,000,000 umbrella
over the general liability insurance. The Company believes its insurance
policies to be sufficient in amount and coverage for its current operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the quarter ended December 31, 1995.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock began trading on the Nasdaq National Market System
under the symbol "PRHB" on April 15, 1994. The following table sets forth the
high and low sales prices per share of the Company's common stock, as quoted on
the Nasdaq National Market System, for the quarters during which the Company's
stock traded in 1994 and 1995.
High Low
---- ---
1994 Second Quarter $ 6.75 $5.38
Third Quarter $ 7.25 $5.25
Fourth Quarter $ 6.50 $4.00
1995 First Quarter $ 9.00 $4.50
Second Quarter $11.00 $8.13
Third Quarter $10.13 $5.88
Fourth Quarter $ 8.38 $4.50
As of December 31, 1995, there were approximately 960 shareholders of record and
beneficial shareholders of the Company's common stock.
The Company has never paid cash dividends on its common stock. The
Company's line of credit agreement with Bank of America Oregon provides that
the Company may not declare or pay any dividends on any of its shares, except
dividends payable in capital stock of the Company, and may not purchase,
redeem or otherwise acquire for value any of its shares, or create any
sinking fund in relation thereto. The Company intends to retain earnings for
use in its business and, for the reasons stated above, does not anticipate
paying cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the Company presented on page F-1 of this
report is derived from and qualified by the Company's financial statements
included elsewhere in this report, which have been audited, and should be
read in
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conjunction with such financial statements and related notes thereto. In 1995,
the Company acquired several clinics whose operations account for a significant
portion of the fluctuation in amounts between the fiscal years ended December
31, 1995 and December 31, 1994. Selected financial data should be read in light
of these facts and in conjunction with the financial statements, the related
notes thereto and other financial information included herein. Also, see
Management's Discussion and Analysis, Item 7 (commencing on page 7).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read together with the Company's Consolidated
Financial Statements included elsewhere herein.
GENERAL
The Company commenced operations in December 1991 by acquiring three
limited partnerships, each of which owned and operated an outpatient
rehabilitation clinic in Hawaii. As of December 31, 1995, the Company provided
comprehensive outpatient rehabilitation and physical therapy services at 72
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, the Company concluded
an initial public offering of 2,760,000 shares of common stock (of which
2,560,000 were sold by the Company) at $6.00 per share (the "Offering"). The net
proceeds of the Offering to the Company, after deducting estimated issuance
costs and expenses, were $12,515,000.
The following table sets forth, as of December 31, 1995, the number of
clinic acquisitions completed and additional clinics opened by the Company since
1993:
<TABLE>
<CAPTION>
1993 1994 1995
--------------------------- --------------------------- ---------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd 3rd 4th
Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr
--- --- --- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Clinics at beginning of period 5 7 7 18 18 18 37 37 39 47 59 74
Clinics acquired 2 - 11 - - 17 - 2 8 10 14 -
Clinics opened - - - - - 2 - - - 2 1 -
Clinics consolidated - - - - - - - - - - - (2)
---------------------------- ---------------------------- ---------------------------
Clinics at end of period 7 7 18 18 18 37 37 39 47 59 74 72
---------------------------- ---------------------------- ---------------------------
---------------------------- ---------------------------- ---------------------------
</TABLE>
FORWARD LOOKING STATEMENTS
This report contains certain forward looking statements concerning the
Company, including, among others, that the Company intends to continue to
expand its operations through internal growth and through a limited number of
acquisitions, and cash, cash generated from operations, amounts available under
current and future credit facilities and future debt and equity offerings will
be sufficient to meet the Company's short and long term cash needs. Readers are
cautioned that all forward-looking statements involve risks and uncertainties
and several factors could cause actual results to differ materially from these
forward-looking statements.
These forward-looking statements are based upon certain assumptions and are
subject to a number of risks and uncertainties. Actual results could differ
materially from these forward-looking statements. Important factors to
consider, many of which are beyond the Company's control, in evaluating such
forward-looking statements include the assumptions that (i) the Company will not
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experience unanticipated working capital or other cash requirements; (ii) the
outpatient rehabilitation market will continue to grow and consolidate and the
Company will be able to consummate a limited number of strategic acquisitions on
favorable terms; (iii) managed care organizations will continue to grow and
control more patient referrals, such organizations will continue to demand that
providers of outpatient rehabilitation services have a regional presence, and
the Company will continue to be able to retain existing contracts and obtain new
contracts with managed care organizations; (iv) changes in federal and state
legislation will not further adversely impact the ability of physicians to refer
patients to the Company's clinics; (v) reimbursement and utilization rates for
the Company's therapy services will not be significantly reduced; (vi) the
Company's marketing efforts are successful; (vii) the Company will be able to
extend or replace its existing line of credit on favorable terms and conditions;
and (viii) if needed, additional debt or equity capital will be available and on
terms acceptable to the Company.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
consolidated financial information of the Company expressed as a percentage of
net revenues:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 57.7 50.2 49.4
----- ----- -----
Gross profit 42.3 49.8 50.6
Operating expenses:
Selling, general and administrative expenses 25.6 27.4 23.0
Depreciation and amortization 5.5 4.8 6.2
----- ----- -----
31.1 32.2 29.2
----- ----- -----
Operating income 11.2 17.7 21.4
----- ----- -----
Non-operating income (expense):
Interest expense (3.3) (0.8) (0.6)
Interest income 0.0 0.2 0.6
Other-nonrecurring contract termination cost 0.0 0.0 (0.6)
----- ----- -----
(3.3) (0.6) (0.6)
----- ----- -----
Earnings before income taxes 7.9 17.1 20.8
Income taxes 3.4 6.7 8.0
----- ----- -----
Net earnings 4.5% 10.4% 12.8%
----- ----- -----
----- ----- -----
</TABLE>
YEARS ENDED DECEMBER 31, 1995 AND 1994
NET REVENUES. Net revenues increased $14,569,000, from $20,504,000 in 1994
to $35,073,000 in 1995, an increase of 71%. An increase of $16,809,000,
attributable to the clinics acquired and opened in 1995 was offset by a 19%
"same store" decrease of $2,240,000, attributable to the clinics which operated
in 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. The Company believes this decrease in net revenues will be partially
offset by new referral sources generated by marketing programs; however, the
Company 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 and fourth
quarters of 1995, were due primarily to passage of managed care legislation with
reduced reimbursement rates. These reduced reimbursement rates decreased the
Company'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
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clinics. The Company 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. The new managed care 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.
Regulations issued under the legislation also reduce the number of approved
patient visits, which further reduces the Company's net revenues. The Company
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. The Company has obtained managed care contracts in the past and
will continue to pursue this type of business in the future. The Company 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, the Company, 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. The Company cannot predict with
certainty the time period required to achieve revenue improvements, but believes
it will be at least six months or longer. The Company 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. The Company 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 the Company's larger presence in the San
Diego market area, which is presently comprised of seven clinics as compared to
only two in 1994.
Provisions for contractual adjustments increased from $3,900,000 in 1994 to
$8,605,000 in 1995. This increase was primarily due to a 78% increase in gross
revenues from $24,404,000 in 1994 to $43,678,000 in 1995. These increased
revenues were derived primarily from acquisitions in 1995 in new markets that
experience higher provisions for discounts than the Company's previously
existing business. There were no material contractual adjustments recorded
against 1995 revenues which relate to 1994 revenues.
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 $9,933,000, from $10,290,000 in 1994
to $20,223,000 in 1995, an increase of 97%. Of this increase, $9,747,000 was
attributable to the clinics acquired and opened by the Company in 1995 and
$186,000 was attributable to increased cost of revenues at the clinics which
operated in both 1995 and 1994. Cost of revenues as a percentage of net revenues
was 58% and 50% for 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).
GROSS PROFIT. Gross profit increased $4,636,000, from $10,214,000 in 1994
to $14,850,000 in 1995, an increase of 45%. Gross profit represented 42% and 50%
of net revenues for 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 in both 1995 and
1994 decreased from 45% for 1994 to 31% for 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 in 1995, in the
aggregate, was 47% for 1995. As a result of changes such as those in Hawaii
discussed above, the Company 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 $3,375,000,
from $5,618,000 for 1994 to $8,993,000 for 1995, an increase of 60%. Of this
increase, $2,298,000 was due to the clinics acquired and opened by the Company
in 1995 and $1,077,000 resulted from clinics which operated for both 1995 and
1994. Selling, general and administrative expenses represented
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approximately 26% and 27% of net revenues in 1995 and 1994, respectively.
Selling, general and administrative expenses, as a percentage of net revenues
decreased slightly 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 at December
31, 1994.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $944,000, from $979,000 in 1994 to $1,923,000 in 1995. The increase in
depreciation and amortization expense is the result of tangible and intangible
assets acquired in connection with acquisitions made by the Company in 1994 and
1995 as outlined under the caption "General" above.
NON-OPERATING INCOME (EXPENSE). Interest expense increased $983,000, from
$170,000 in 1994 to $1,153,000 in 1995. The increase was due primarily to
interest expense associated with debt incurred in connection with acquisitions
made by the Company in 1994 and 1995.
INCOME TAXES. The Company's effective tax rate increased to 43% in 1995
from 39% in 1994. The increase in the 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 earnings before income taxes.
SEE NOTE 10 OF NOTES TO 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%. Of this increase, $8,626,000 was
attributable to the 19 clinics acquired and the two clinics opened by the
Company 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.
SEE NOTE 1 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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 the Company in 1994, $2,112,000 was attributable to the 13
clinics which operated for a full year in 1994 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 the Company 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 the Company 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.
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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 the
Company in 1994 and 1993 as outlined under the caption "General" above. SEE
NOTES 1, 2, 4 AND 5 OF NOTES TO 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. The Company'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 CONSOLIDATED FINANCIAL
STATEMENTS.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations and acquisitions of clinics have been financed
primarily by a private placement of common stock in 1992, the Company's initial
public offering of common stock in 1994 (see "General" above), increased bank
borrowings, additional debt to sellers and cash generated from operations.
As of December 31, 1995, current liabilities exceeded current assets,
resulting in negative working capital of $3,946,000, including $272,000 in cash
and cash equivalents. The principal reason for this negative working capital was
the Company's acquisition activity in 1994 and 1995. During this period, the
Company acquired a total of 51 clinics. Portions of the purchase price were paid
in the form of term debt which was payable in 1995, 1996 and 1997. The decrease
in cash and cash equivalents from $1,085,000 at December 31, 1994 to $272,000 at
December 31, 1995 was primarily the net result of $13,114,000 of cash used in
acquisitions, $1,027,000 for payments on the line of credit, notes payable and
long-term debt, $378,000 in additions to property and equipment, offset by
$2,523,000 of cash provided by operations and $11,183,000 of proceeds from line
of credit borrowings.
Net patient accounts receivable increased $5,084,000 to $14,000,000 during
1995, primarily as a result of receivables acquired and generated in connection
with acquisitions. The number of clinics operated by the Company increased from
five at December 31, 1992 to 72 at December 31, 1995. The number of days of
average net revenues in ending net patient accounts receivable was 122 at
December 31, 1995 compared to 125 at December 31, 1994. The 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 the Company collects accounts receivable is sufficient to satisfy the
Company's operating cash needs. Additionally, effective July 1, 1995, the
Company began operating a practice that was formerly under a management
agreement with the Company. As a result, the Company acquired direct ownership
of net patient accounts receivable of $1,088,000. Consequently, the nature of
the Company's receivable changed from a management fee receivable, included in
other receivables, to net patient accounts receivable. The Company does not
believe it has any material unsettled claims or other contingencies with respect
to third- party payors and historically has not experienced any material
disputes with respect to third-party payors.
The total reserves for patient accounts receivables remained relatively
unchanged during 1995 due to an exchange of lower quality receivables for higher
quality receivables. A significant amount of uncollectible accounts receivables
acquired in previous periods were written off in 1995. These were accounts
against which a full reserve existed. New receivables added during the period,
primarily in connection with acquisitions, had, as a result of their historical
performance, lower reserves than the reserves related to existing receivables.
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For federal and state income tax purposes, the Company reported on the cash
basis through December 31, 1994. As of January 1, 1995, the Company was required
to adopt the accrual basis for tax purposes. The net tax liability resulting
from this change in method, in accordance with the Internal Revenue Code, is
being recognized over three tax years beginning in 1995. Under the accrual
method deferred tax assets were created by reserves and allowances associated
with patient accounts receivable, which are not currently deductible for tax
purposes. These asset balances were, however, offset by liabilities resulting
from the method change, accelerated depreciation of fixed assets and
acceleration of goodwill amortization. The long-term deferred income tax
liability decreased to $1,383,000 at December 31, 1995 from $2,167,000 at
December 31, 1994, due primarily to recognition of one-third of the tax
liability created by the change in method.
Long-term obligations, line of credit and notes payable and other
obligations increased $19,219,000 to $22,792,000 during 1995. This increase was
primarily due to notes and other obligations issued in connection with the
acquisitions of clinics in 1995, offset by payment (in cash or conversion into
common stock) of the current portion of obligations. At December 31, 1995, notes
payable with aggregate principal amounts of $4,630,000 may be converted into
approximately 612,000 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 CONSOLIDATED FINANCIAL STATEMENTS. During December 1995, the Company
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, the Company 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.
In June 1995, the Company acquired a physical therapy practice for a
combination of cash and 41,700 shares of the Company's stock. The shares of
stock were subject to redemption at the request of the shareholder upon written
notice, if such shares of stock were not registered under the Securities Act of
1933 within 180 days from the closing date of the acquisition of the practice.
In December 1995, the Company received written notice of a shareholders request
to redeem 20,833 shares of stock at $7.00 per share. SEE NOTE 11 OF NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS.
The Company had, with Bank of America Oregon, a $5,000,000 credit
facility (the "Line of Credit") secured by the assets of the Company. 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, the Company
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 amendments
to the corresponding covenant conditions. In addition, the amendment provides
for a $50,000 fee payable to Bank of America. The Line of Credit expires on
July 1, 1996. Although there is no assurance that the Company will be
successful in obtaining a renewal or replacement for the Line of Credit, in
which case the Company may be unable to pay its debts and obligations as they
come due, for the following reasons the Company believes it will be
successful in doing so: (i) preliminary discussions with Bank of America
indicate an interest by the bank to enter into an extended or renewed line of
credit with the Company; (ii) preliminary discussions with other lenders also
indicate a willingness of such lenders to enter into a replacement credit
facility with the Company on acceptable terms and conditions; and (iii) the
Company has approximately $14.7 million in net accounts receivables and
approximately an additional $2.8 million in net property and equipment,
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which the Company believes provide a basis upon which a lender will extend
credit to the Company. SEE NOTE 7 OF NOTES TO 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 the
Company being declared in default by Bank of America Oregon under the Line of
Credit. As of September 30, 1995, the Company was not in compliance with the
condition that the Company's fixed charges maintain a certain ratio relative to
its earnings before interest, taxes, depreciation and amortization ("EBITDA").
The Company'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. The Company and
the bank have entered into an agreement that retroactively revised the covenants
for the Line of Credit. The Company was in compliance with these covenants as of
December 31, 1995. Based on the revised covenant requirements and the Company's
analysis of its cash flow needs and sources, existing liabilities, and
expectations regarding future operations, the Company believes that it will be
able to continue to comply with the amended covenants.
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 need to
negotiate revised terms for the Line of Credit, in addition to those discussed
above, and to restructure the repayment of acquisition debt, was principally a
result of the Company'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.
The Company 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 1995, the Company purchased 32 clinics for
approximately $27,803,000, plus an additional $2,565,000 if certain pre-tax
profit levels are achieved by certain clinics. Of the $27,803,000, $11,371,000
was paid in cash at closing, $100,000 was paid in cash in January 1996, $337,500
was 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 the Company's Common Stock. Up to an additional $2,190,000 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 CONSOLIDATED
FINANCIAL STATEMENTS.
On April 2, 1996, the Company announced that it had terminated its merger
agreement with Horizon/CMS Healthcare Corporation on that date. In
connection with that proposed merger, the Company incurred certain expenses,
including those payable to its counsels, accountants, investment bankers and
consultants, which the Company estimates will total, in the aggregate,
approximately $975,000. These expenses will be paid in the ordinary course
of business and will be accounted for as a one-time non-recurring charge to
earnings in the second quarter of 1996.
As a result of the restructuring of the Acquisition Debt and the revisions
in the Line of Credit, the Company's cash requirements for the next 12 months
and long-term cash needs are expected to be met from existing cash, cash flow
from operations, amounts available under the Line of Credit, and future equity
and debt financings. No assurance can be given that the Company will be able to
obtain such capital on favorable terms or at all. Borrowings under the Line of
Credit or other debt source or equity financings may adversely affect the
Company's earnings or result in dilution to holders of the Company's Common
Stock.
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The Company's growth strategy will require expanded patient services and
support, increased personnel throughout the Company and expanded operational,
financial and information systems to better produce, collect, analyze and report
statistical data used to monitor and manage the Company's patient care delivery
activities. These factors will affect future results of operations and
liquidity. The Company's strategy is to continue to expand its operations
through internal growth and a limited number of acquisitions. While the Company
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 the Company in the future, that suitable financing for any such
acquisitions can be obtained by the Company, 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 the Company 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. The Company expects that legislation limiting the reimbursement of
fees for various outpatient services, including physical therapy services, will
become more prevalent.
Reimbursement for the Company'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. The Company 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 the
Company's rehabilitation services will remain at current levels. The reduction
of, or limits upon, reimbursement levels for the Company's services may
adversely affect the profitability of or demand for the Company's services and
could have an adverse impact on the Company'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, some of which may
adversely affect the profitability of or demand for the Company's services.
The Company 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, the Company 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, the Company recognizes an impairment loss in the amount
necessary to write down the intangible asset acquired to a value as determined
from expected discounted 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 the Company's acquisition of more than 50 clinics from December 1993
through September 1995. The Company 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, the Company's policy is to lease
its facilities. As of December 31, 1995, the Company had no material commitments
to purchase capital assets.
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
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negotiation, inflation and costs incurred in providing services, but may have
little relationship to the actual cost of doing business.
The Company 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
The Company's Consolidated Financial Statements and the reports of the
independent accountants appear in this Report, as listed in Part IV, Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 3, 1994, the Company dismissed its former auditors, Grant Thornton LLP,
and authorized the engagement of Price Waterhouse LLP to audit the Company's
consolidated financial statements for 1994. The decision to change accountants
was approved by the Audit Committee of the Company's Board of Directors on June
3, 1994.
The reports of Grant Thornton LLP on the Company's consolidated financial
statements for 1993 did not contain an adverse opinion or a disclaimer of
opinion, and were not qualified or modified as to uncertainty, audit scope or
accounting principles. During the period from January 1, 1994 through June 3,
1994, there were no disagreements with Grant Thornton LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure. During the period from January 1, 1994 through June 3, 1994,
there were no "reportable events" with respect to the Company as that term is
defined in Item 304 of Regulation S-K promulgated by the Securities and Exchange
Commission.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is included in the Company's Proxy Statement
for its 1996 Annual Meeting of Shareholders and is incorporated herein by
reference and is supplemented as follows: (i) since 1987, John A. Elorriaga, a
nominee for director, has been retired. Since that time, Mr. Elorriaga has been
a consultant and served as a director for certain private companies; (ii)
HEALTHSOUTH Rehabilitation Corp. is a provider of a wide spectrum of healthcare
services, including outpatient physical therapy services. Until its acquisition
by NovaCare, Inc., RehabClinics, Inc. provided outpatient physical therapy
services. Neither HEALTHSOUTH not RehabClinics has been or is affiliated with
the Company.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included in the Company's Proxy
Statement for its 1996 Annual Meeting of Shareholders and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is included in the Company's Proxy
Statement for its 1996 Annual Meeting of Shareholders and is incorporated herein
by reference.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is in the Company's Proxy Statement for
its 1996 Annual Meeting of Shareholders and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The Consolidated Financial Statements, together with the reports thereon of
Price Waterhouse LLP and Grant Thornton LLP are filed as part of the Report:
Page
----
Report of Price Waterhouse LLP F-2
Report of Grant Thornton LLP F-3
Consolidated Balance Sheets, December 31, 1995 and 1994 F-4
Consolidated Statements of Earnings for the years ended F-5
December 31, 1995, 1994 and 1993
Consolidated Statements of Redeemable Common Stock and F-6
Nonredeemable Shareholders' Equity for the years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended F-7
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements F-8
(a) (2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts S-1
Schedules not listed above have been omitted because the information required to
be set forth therein is not applicable or is included in the Consolidated
Financial Statements or notes thereto.
(a) (3) Exhibits:
Exhibit No. Description of Exhibits
- ----------- ------------------------
3.1 Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to Amendment No. 2 to the Company's
Registration Statement filed on Form S-1 with the Securities and
Exchange Commission on April 13, 1994 (Reg. No. 33-74440)).
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2
to Amendment No. 2 to the Company's Registration Statement filed on
Form S-1 with the Securities and Exchange Commission on April 13, 1994
(Reg. No. 33-74440)).
3.2.1 Amendment No. 1 to Amended and Restated Bylaws
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Exhibit No. Description of Exhibits
- ----------- ------------------------
3.2.2 Amendment No. 2 to Amended and Restated Bylaws
10.1 Employment Agreement with Brian M. Bussanich (incorporated by
reference to Exhibit 10.1 to Amendment No. 2 to the Company's
Registration Statement filed on Form S-1 with the Securities and
Exchange Commission on April 13, 1994 (Reg. No. 33-74440)).
10.2 Employment Agreement with Alfred Howard (incorporated by
reference to Exhibit 10.2 to Amendment No. 2 to the Company's
Registration Statement filed on Form S-1 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 the Company's
Registration Statement filed on Form S-1 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 the Company's
Registration Statement filed on Form S-4 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 the Company's
Registration Statement filed on Form S-4 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 the Company, and Common Stock Purchase
Warrant (incorporated by reference to Exhibit A to Current Report
on Form 8-K filed by the Company on February 15, 1995).
10.7 Management Agreement for Medical Practice between the Company and
the Centers for Industrial Medicine Medical Group, Inc.
(incorporated by reference to Exhibit B to Current Report on Form
8-K filed by the Company on March 22, 1995).
10.8 Stock Purchase Agreement between Edward L. Frye and the Company
(incorporated by reference to Exhibit A to Current Report on Form
8-K filed by the Company 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
the Company (incorporated by reference to Exhibit A to Current
Report on Form 8-K filed by the Company on August 7, 1995).
10.10 Stock Purchase Agreement between Eischen Physical Therapy Inc.
and C. George Eischen and the Company (incorporated by reference
to Exhibit N to Current Report on Form 8-K filed by the Company
on August 7, 1995).
10.11 Stock Purchase Agreement between Northwest Physical Therapy
Clinic, Inc. and Robert E. Burles and Vinton R. Mougey and the
Company (incorporated by reference to Exhibit R to Current
Report on Form 8-K filed by the Company 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 the Company on August 7, 1995).
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Exhibit No. Description of Exhibits
- ----------- ------------------------
10.13 1993 Amended and Restated Combination Stock (incorporated by
reference to Exhibit 10.13 to the Registration Statement on Form
S-4 filed by Horizon/CMS Healthcare Corporation with the
Securities and Exchange Commission on December 26, 1995
(Reg. No. 33-65397)).
10.13.1 Form of Incentive Stock Option Agreement (incorporated by
reference to Exhibit 10.13.1 to the Registration Statement on
Form S-4 filed by Horizon/CMS Healthcare Corporation with the
Securities and Exchange Commission on December 26, 1995
(Reg. No. 33-65397)).
10.13.2 Form of Nonstatutory Stock Option Agreement (incorporated by
reference to Exhibit 10.13.2 to the Registration Statement on
Form S-4 filed by Horizon/CMS Healthcare Corporation with the
Securities and Exchange Commission on December 26, 1995
(Reg. No. 33-65397)).
10.14 Directors' Stock Option Plan (incorporated by reference to
Exhibit 10.14 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994).
10.14.1 Form of Stock Option Agreement under the Directors' Stock Option
Plan (incorporated by reference to Exhibit 10.14.1 to the
Company'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 the Company'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 (incorporated by
reference to Exhibit 10.15.1 to the Registration Statement on
Form S-4 filed by Horizon/CMS Healthcare Corporation with the
Securities and Exchange Commission on December 26, 1995
(Reg. No. 33-65397)).
10.15.2 Loan Modification No. 2 to Exhibit 10.15 (incorporated by
reference to Exhibit 10.15.2 to the Registration Statement
on Form S-4 filed by Horizon/CMS Healthcare Corporation with
the Securities and Exchange Commission on December 26, 1995
(Reg. No. 33-65397)).
10.15.3 Loan Modification No. 3 to Exhibit 10.15 (incorporated by
reference to Exhibit 10.15.3 to Amendment No. 1 to the
Registration Statement on Form S-4 filed by Horizon/CMS
Healthcare Corporation with the Securities and Exchange
Commission on February 27, 1996 (Reg. No. 33-65397)).
10.15.4 Loan Modification No. 4 to Exhibit 10.15
11.1 Computation of Per Share Earnings for the years ended
December 31, 1995, 1994, and 1993
21 Subsidiaries of the Registrant
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Grant Thornton, LLP
18
<PAGE>
(b) Reports on Form 8-K
Current Report on Form 8-K dated October 1, 1995, and filed with the
Commission on October 6, 1995.
Current Report on Form 8-K/A Amendment No. 1 to Current Report dated July
21, 1995, and filed with the Commission on October 6, 1995.
Current Report on Form 8-K dated October 6, 1995, and filed with the
Commission on October 23, 1995.
Current Report on Form 8-K dated November 9, 1995, and filed with the
Commission on November 11, 1995.
Current Report on Form 8-K dated December 26, 1995, and filed with the
Commission on December 29, 1995.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: June 12, 1996
PACIFIC REHABILITATION &
SPORTS MEDICINE, INC.
By /s/ Bill Barancik
-------------------------------------
Bill Barancik
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Signature Title
- --------- -----
/s/ William A. Norris
- ------------------------- Executive Vice President, Finance & Administration
William A. Norris (Principal Financial and Accounting Officer)
Date: June 12, 1996
/s/ Bill Barancik
- ------------------------- Director
Bill Barancik Date: June 12, 1996
/s/ Brian M. Bussanich
- ------------------------- Director
Brian M. Bussanich Date: June 12, 1996
/s/ John A. Elorriaga
- ------------------------- Director
John A. Elorriaga Date: June 12, 1996
- ------------------------- Director
Frank Jungers Date: June __, 1996
20
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------------
1995 1994 1993 1992
--------- --------- --------- --------
<S> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA
Net revenue . . . . . . . . . . . . $35,073 $20,504 $8,162 $4,396
Earnings before income taxes. . . . $ 2,795 $ 3,501 $1,696 $1,524
Net earnings. . . . . . . . . . . . $ 1,593 $ 2,126 $1,047 $ 961
Net earnings per common share:
Primary. . . . . . . . . . . . $ 0.20 $ 0.35 $ 0.26 $ 0.26
Fully diluted. . . . . . . . . $ 0.20 $ 0.35 $ 0.26 $ 0.26
Weighted average number of common
and common equivalent shares
outstanding:
Primary. . . . . . . . . . . . 7,973 6,115 3,996 3,738
Fully diluted. . . . . . . . . 8,369 6,115 3,996 3,738
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
BALANCE SHEET DATA
Working capital . . . . . . . . . . $(3,946) $ 8,247 $ 2,300
Total assets . . . . . . . . . . . $68,869 $36,191 $17,665
Long-term obligations, less
current maturities . . . . . . . . $ 8,089 $ 2,029 $ 1,074
Redeemable common stock . . . . . . $ 375 $ -- $ --
Nonredeemable shareholders'
equity . . . . . . . . . . . . . . $38,817 $28,441 $10,801
</TABLE>
The Company commenced operations on December 31, 1991.
QUARTERLY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1995
Net revenue . . . . . . . . . . . . . $6,951 $7,913 $10,039 $10,170
Gross profit. . . . . . . . . . . . . $3,482 $3,703 $ 3,726 $ 3,939
Net earnings. . . . . . . . . . . . . $ 704 $ 537 $ 141 $ 211
Net earnings per common share:
Primary. . . . . . . . . . . . . . $ 0.10 $ 0.07 $ 0.02 $ 0.03
Fully diluted. . . . . . . . . . . $ 0.09 $ 0.07 $ 0.02 $ 0.03
Weighted average number of common
and common equivalent shares
outstanding:
Primary. . . . . . . . . . . . . . 7,336 7,773 8,280 8,269
Fully diluted. . . . . . . . . . . 7,701 8,049 8,872 8,939
1994
Net revenue . . . . . . . . . . . . . $1,057 $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
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Pacific Rehabilitation & Sports Medicine, Inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Pacific
Rehabilitation & Sports Medicine, Inc. at December 31, 1995 and 1994, and the
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and the 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.
PRICE WATERHOUSE LLP
/s/ Price Waterhouse LLP
Portland, Oregon
March 14, 1996
F-2
<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 statements of earnings, redeemable
common stock and nonredeemable shareholders' equity and cash flows of Pacific
Rehabilitation & Sports Medicine, Inc. and Subsidiaries (a Delaware corporation)
for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Pacific Rehabilitation & Sports Medicine, Inc. and Subsidiaries for the year
ended December 31, 1993, in conformity with generally accepted accounting
principles.
We have also audited Schedule II for the year ended December 31, 1993. In our
opinion, this schedule represents fairly, in all material respects, the
information required to be set forth therein.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Portland, Oregon
February 4, 1994
F-3
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . $ 272 $ 1,085
Patient accounts receivable,
net (Note 3). . . . . . . . . . . . . . . . 14,000 8,916
Other receivables. . . . . . . . . . . . . . 680 1,042
Refundable income taxes. . . . . . . . . . . 7 391
Prepaid expenses . . . . . . . . . . . . . . 723 367
------- -------
Total current assets. . . . . . . . . . 15,682 11,801
------- -------
Property and equipment, net (Note 4). . . . . . 2,774 1,757
------- -------
Other Assets:
Intangible assets, at cost, less
accumulated amortization (Note 5) . . . . . 49,947 22,448
Other. . . . . . . . . . . . . . . . . . . . 466 185
------- -------
Total other assets . . . . . . . . . . 50,413 22,633
------- -------
$68,869 $36,191
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term
obligations (Note 6). . . . . . . . . . . . $ 2,655 $ 1,544
Notes payable and other obligations,
current portion . . . . . . . . . . . . . . 438 --
Line of credit (Note 7). . . . . . . . . . . 11,033 --
Accounts payable . . . . . . . . . . . . . . 868 207
Accrued liabilities (Note 9) . . . . . . . . 2,515 1,217
Accrued income taxes . . . . . . . . . . . . 996 --
Deferred income taxes, current
portion (Note 10) . . . . . . . . . . . . . 1,123 586
------- -------
Total current liabilities . . . . . . 19,628 3,554
------- -------
Notes payable and other obligations,
less current portion . . . . . . . . . . . . . 577 --
------- -------
Deferred income taxes, less current
portion (Note 10). . . . . . . . . . . . . . . 1,383 2,167
-------- -------
Long-term obligations, less current
maturities (Note 6). . . . . . . . . . . . . . 8,089 2,029
-------- -------
Commitments and contingent liabilities
(Notes 1, 7 and 8) . . . . . . . . . . . . . . -- --
-------- -------
Redeemable common stock, 41,667 shares
issued and outstanding (Note 11) . . . . . . . 375 --
-------- -------
Nonredeemable 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; 8,003,981 (including
536,097 shares to be released in January
1996) and 6,999,786 shares issued and
outstanding (Notes 2 and 11). . . . . . . . 80 70
Additional paid-in capital . . . . . . . . . 33,010 24,237
Retained earnings. . . . . . . . . . . . . . 5,727 4,134
------- -------
Total nonredeemable shareholders'
equity. . . . . . . . . . . . . . . 38,817 28,441
------- -------
$68,869 $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)
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------
1995 1994 1993
----------- ----------- ---------
<S> <C> <C> <C>
Net revenues . . . . . . . . . . . . . . . $ 35,073 $ 20,504 $ 8,162
Cost of revenues . . . . . . . . . . . . . 20,223 10,290 4,028
---------- ---------- --------
Gross profit . . . . . . . . . . . . 14,850 10,214 4,134
---------- ---------- --------
Operating expenses:
Selling, general and
administrative expenses . . . . . . . 8,993 5,618 1,878
Depreciation and amortization . . . . 1,923 979 505
---------- ---------- --------
10,916 6,597 2,383
---------- ---------- --------
Operating income . . . . . . . . . . 3,934 3,617 1,751
---------- ---------- --------
Nonoperating income (expense):
Interest expense . . . . . . . . . . . (1,153) (170) (47)
Interest income . . . . . . . . . . . 14 54 45
Other . . . . . . . . . . . . . . . . -- -- (53)
---------- ---------- --------
(1,139) (116) (55)
---------- ---------- --------
Earnings before income taxes . . . . 2,795 3,501 1,696
---------- ---------- --------
Income taxes (Note 10) . . . . . . . . . . 1,202 1,375 649
---------- ---------- --------
Net earnings . . . . . . . . . . . . $ 1,593 $ 2,126 $ 1,047
---------- ---------- --------
---------- ---------- --------
Net earnings per common share:
Primary . . . . . . . . . . . . . . . $ 0.20 $ 0.35 $ 0.26
---------- ---------- --------
---------- ---------- --------
Fully diluted . . . . . . . . . . . . $ 0.20 $ 0.35 $ 0.26
---------- ---------- --------
---------- ---------- --------
Weighted average number of common and
common equivalent shares outstanding:
Primary . . . . . . . . . . . . . . . 7,973 6,115 3,996
---------- ---------- --------
---------- ---------- --------
Fully diluted . . . . . . . . . . . . 8,369 6,115 3,996
---------- ---------- --------
---------- ---------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE COMMON STOCK
AND NONREDEEMABLE SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Nonredeemable Shareholders' Equity
--------------------------------------------------
Redeemable
Common Stock Common Stock Additional
----------------- ----------------- Paid-In Retained
Shares Amount Shares Amount Capital Earnings Total
------- ------- ------- ------ ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Common stock issued in connection with
clinic acquisition (Note 11) . . . . . . . . . . . . 42 375 -- -- -- -- --
Common stock issued in connection with clinic
acquisitions (including 536 shares to be released
in January 1996) . . . . . . . . . . . . . . . . . . -- -- 781 8 6,527 -- 6,535
Warrants 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
Common stock options issued in exchange for
commissions related to acquisitions . . . . . . . . -- -- -- -- 300 -- 300
Net earnings for the year . . . . . . . . . . . . . . -- -- -- -- -- 1,593 1,593
------- ------- ------- ------ ------- -------- -------
Balance at December 31, 1995 . . . . . . . . . . . . . 42 $ 375 8,004 $ 80 $33,010 $ 5,727 $38,817
------- ------- ------- ------ ------- -------- -------
------- ------- ------- ------ ------- -------- -------
</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)
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,593 $ 2,126 $ 1,047
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 1,923 979 505
Loss on disposal of assets . . . . . . . . . . . . . . . . . . . . 5 -- --
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . (247) 1,389 182
Common stock issued in lieu of cash compensation . . . . . . . . . -- -- 14
Change in assets and liabilities, net of amounts purchased in
acquisitions:
Patient accounts receivable, net . . . . . . . . . . . . . . . . . (2,876) (2,390) 66
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . 779 (949) 295
Prepaid expenses and other assets . . . . . . . . . . . . . . . . (387) (450) (244)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . 548 (122) (295)
Accrued liabilities and income taxes . . . . . . . . . . . . . . . 1,123 (425) 670
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 62 (361) --
--------- --------- ---------
Net cash provided by (used in) operating activities . . . . . . . 2,523 (203) 2,240
--------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment, net of amounts
purchased in acquisitions . . . . . . . . . . . . . . . . . . . . . (378) (495) (234)
Acquisition and organizational costs incurred . . . . . . . . . . . . -- -- (101)
Cash paid for acquisitions, including other direct costs,
net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . (13,114) (11,950) (2,180)
--------- --------- ---------
Net cash (used in) provided by investing activities . . . . . . . (13,492) (12,445) (2,515)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from line of credit borrowings . . . . . . . . . . . . . . . 11,183 -- --
Payments on line of credit borrowings . . . . . . . . . . . . . . . . (150) -- --
(Payments) proceeds from short-term borrowings . . . . . . . . . . . -- (100) 100
Payments on notes payable and long-term obligations . . . . . . . . . (877) (259) (486)
Costs incurred in connection with stock issuance . . . . . . . . . . -- (824) (868)
Proceeds from issuance of common stock . . . . . . . . . . . . . . . -- 14,207 1
--------- --------- ---------
Net cash provided by (used in) financing activities . . . . . . . 10,156 13,024 (1,253)
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . (813) 376 (1,528)
Cash and cash equivalents at beginning of year . . . . . . . . . . . . 1,085 709 2,237
--------- --------- ---------
Cash and cash equivalents at end of the year . . . . . . . . . . . . . $ 272 $ 1,085 $ 709
--------- --------- ---------
--------- --------- ---------
Supplemental disclosures of cash flow information:
Cash paid during year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 818 $ 107 $ 78
--------- --------- ---------
--------- --------- ---------
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 529 $ 799 $ 119
--------- --------- ---------
--------- --------- ---------
Supplemental schedule of noncash investing and financing activities:
Acquisition of clinics:
Cost of acquisitions in excess of fair market value
of net assets received . . . . . . . . . . . . . . . . . . . . . . $ 27,589 $ 14,452 $ 7,249
Liabilities assumed or issued . . . . . . . . . . . . . . . . . . . 10,117 2,927 5,986
Common stock issued in connection with acquisitions . . . . . . . . 7,886 2,622 3,106
Warrants and options issued in connection with acquisitions . . . . 460 -- --
Tangible assets acquired in connection with acquisitions . . . . . 3,988 3,047 4,023
Common stock issued in connection with conversion of note . . . . . 813 -- --
</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 -- 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, 1995, the Company's operations
consist of 72 outpatient rehabilitation clinics located in Hawaii, Washington,
Oregon, 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 is contractually obligated
to pay the Company. The Company bills the majority of its patients and third-
party payors on a per visit basis. The Company's bills are subject, in many
cases, to reimbursement restrictions due to agreed upon contractual or
regulatory fee schedules. The Company's Medicare billings are reduced according
to interim reimbursement rates. These rates are reviewed periodically and
settled annually through a Title XVIII Medicare cost report. To date, the
Company has not experienced any material adjustments to its interim
reimbursement rates. The Company derived less than 5% of its net revenues from
government programs for the years presented.
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.
F-8
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 geographical location and presence,
represent value to the Company. 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 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 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 discounted future cash flows. No write-down
for impairment loss was recorded for the years ended December 31, 1995, 1994 and
1993.
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 through
the date of the initial public offering (using the treasury stock method and the
initial public offering price).
F-9
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
h. RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 and 1993 financial
statements to conform to the 1995 presentation. Such reclassifications had no
effect on the results of operations or shareholders' equity.
i. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
NOTE 2 -- ACQUISITIONS
The Company's acquisitions described below 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. (See Note 5)
The value of the Company's common stock and the conversion price for
convertible promissory notes issued in connection with acquisitions were set
equal to the last sale price of the Company'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 contingent considerations included in the various acquisition
agreements to date have been based on negotiations among the parties during the
acquisition process. During the negotiations, the Company, as a matter of
corporate policy, has committed in the purchase agreement to acquire the clinics
at their base valuations, subject to contingent consideration if actual results
exceed the base estimates. As a result, the contingent considerations represent
negotiated compromises among the parties based upon the base and maximum
valuations for the clinics. The contingent considerations to date have not
related directly or indirectly to management incentives for future employment or
services. Instead, they represented the culmination of negotiations among the
parties relating to the inherent valuations of the clinics to be purchased.
Accordingly, these contingent considerations will be recorded as adjustments to
the purchase price of the acquired practices if and when determinable.
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 installments if certain annual pre-tax profit levels
are achieved within 36 months of the closing date of the acquisition, and will
be paid to the former shareholder based on the shareholder's prior ownership of
the acquired clinics. 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.
F-10
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 2 -- ACQUISITIONS (CONTINUED)
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, 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. The
promissory note, including interest, is due as follows: $200 due March 1, 1996,
$200 due May 1, 1996, $625 due February 28, 1997, and $225 due March 1, 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 1997.
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.
F-11
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 2 -- ACQUISITIONS (CONTINUED)
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 annual pre-tax
profit levels are achieved within 60 months of the closing date of the
acquisition, and will be paid to the former shareholder based on the
shareholder's prior ownership of the acquired clinics.
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 release 250
shares of the Company's common stock valued at $2,000.
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 convertible promissory note,
and on January 2, 1996 the Company will release 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 annual
pre-tax profits are achieved within 24 months beginning January 1, 1996, and
will be paid to the former shareholder based on the shareholder's prior
ownership of the acquired clinics.
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 $87 to be paid in cash on March 1, 1996 and $87 to be
paid in cash on March 1, 1997, $250 in the form of convertible promissory notes
and on January 2, 1996, the Company will release 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 annual
pre-tax profits are achieved within 48 months of the closing date of the
acquisition, and will be paid to the former shareholder based on the
shareholder's prior ownership of the acquired clinics.
F-12
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 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, 1997, $300 in the
form of a convertible promissory note and on January 2, 1996, the Company will
release 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 release 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 annual pre-tax profits are achieved within 48
months beginning July 1, 1996, and will be paid to the former shareholder based
on the shareholder's prior ownership of the acquired clinics.
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 annual
pre-tax profits are achieved within 36 months beginning January 1, 1996, and
will be paid to the former shareholder based on the shareholder's prior
ownership of the acquired clinics.
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 release approximately 53 shares of the
Company's common stock valued at $462.
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 March 1, 1997, and on January 2, 1996 the Company will release
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 annual pre-tax profits are achieved within 36 months of the closing date
of the acquisition, and will be paid to the former shareholder based on the
shareholder's prior ownership of the acquired clinics.
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
F-13
<PAGE>
NOTE 2 -- ACQUISITIONS (CONTINUED)
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 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. Five of the note agreements were non-interest bearing notes
which were recorded at their discounted rate (see Note 6). 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.
During December 1995, the Company restructured the repayment terms with the
holders of approximately $3,200 of its debt and obligations previously incurred
in connection with acquisitions (the "Acquisition Debt"). In exchange for
deferring payment of principal until 1997, the Company 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; second quarter 1996, $500;
and third quarter 1996, $800. (see Note 6).
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 Contingent
Region Date Clinics and Notes Value Common Stock Amounts Purchase Price Consideration
- ------ -------- ------- --------- ------- ------------ ------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Washington 2-1-95 3 $ 950 $ 160 -- $ -- $ 1,110 $ 300
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 3,495 750
Florida 6-1-95 1 325 -- -- -- 325 --
Oregon 7-1-95 12 4,693 -- 532 4,470 9,163 1,150
Washington 7-1-95 1 2,384 -- 34 270 2,654 365
Oregon 8-1-95 1 1,500 -- -- -- 1,500 --
-- ------- ------ --- ------- -------- -------
32 $20,732 $ 160 823 $ 6,911 $ 27,803 $ 2,565
-- ------- ------ --- ------- -------- -------
-- ------- ------ --- ------- -------- -------
</TABLE>
F-14
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 2 -- ACQUISITIONS (CONTINUED)
Pursuant to acquisition agreements, 532 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.
In 1995, the Company paid $975 in contingent "earn-out payments" related to
the 1994 Maryland acquisition. The total amount paid was recorded as an
increase in the excess of the total acquisition cost over the fair value of the
net assets acquired and will be amortized over the remaining goodwill life of
the acquired clinics.
During 1994, 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 Value
Effective of Cash Shares of Stock Assigned to Contingent
Region Date Clinics and Notes Common Stock Amounts Purchase Price Consideration
- ------ -------- ------- --------- ------------ --------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Maryland 4-16-94 6 $ 6,000 231 $1,385 $ 7,385 $ 975
California 5-1-94 7 2,124 125 750 2,874 100
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 -
Mississipi 11-1-94 2 487 81 487 974 -
-- ------- ---- ------ ------- ------
19 $14,091 437 $2,622 $16,713 $1,075
-- ------- ---- ------ ------- ------
-- ------- ---- ------ ------- ------
</TABLE>
F-15
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 Value
Effective of Cash Shares of Stock Assigned to Contingent
Region Date Clinics and Notes Common Stock Amounts Purchase Price Consideration
- ------ -------- ------- --------- ------------ --------- -------------- --------------
<S> <C> <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 1,963 305
Texas 9-1-93 2 500 62 616 1,116 -
-- ------ --- ------ ------ ----
13 $2,285 373 $3,094 $5,379 $305
-- ------ --- ------ ------ ----
-- ------ --- ------ ------ ----
</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 expired December 31, 1995.
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 Year Ended
December 31,
---------------------
1995 1994
--------- ---------
<S> <C> <C>
Net revenues $42,676 $44,283
------- -------
------- -------
Net earnings $ 2,339 $ 3,311
------- -------
------- -------
Earnings per share $ 0.27 $ 0.44
------- -------
------- -------
</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-16
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 3 -- PATIENT ACCOUNTS RECEIVABLE
Patient accounts receivable consist of:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Gross accounts receivable . . . . . . . . . . $20,866 $15,479
Less allowance for doubtful accounts
and contractual adjustments . . . . . . . 6,866 6,563
------- -------
Total patient accounts receivable, net . . $14,000 $ 8,916
------- -------
------- -------
</TABLE>
The allowance for contractual adjustments was $2,674 at December 31, 1995
and $1,701 at December 31, 1994. During the year ended December 31, 1995 and
1994, contractual adjustments amounted to approximately $8,605 and $3,900,
respectively, and have been netted against revenues in the accompanying
consolidated statements of earnings. During the year ended December 31, 1995
and 1994, bad debt expense amounted to approximately $2,175 and $1,297,
respectively, and is included in selling, general and administrative expenses in
the accompanying consolidated statements of earnings. The Company does not
believe it has any material unsettled claims or other contingencies with respect
to third-party payors and historically has not experienced any material disputes
with respect to third-party payors.
During the year ended December 31, 1995, in conjunction with acquisitions,
the Company purchased patient accounts receivable, net totaling $2,208.
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Autos . . . . . . . . . . . . . . . . . . . . . . . . $ 32 $ 34
Office equipment . . . . . . . . . . . . . . . . . . 1,429 811
Physical therapy equipment . . . . . . . . . . . . . 2,173 1,395
Leasehold improvements . . . . . . . . . . . . . . . 929 519
------- -------
4,563 2,759
Less accumulated depreciation and amortization . . . 1,789 1,002
------- -------
$ 2,774 $ 1,757
------- -------
------- -------
</TABLE>
During the year ended December 31, 1995, in conjunction with acquisitions,
the Company purchased fixed assets with an estimated fair market value of
$1,435.
F-17
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 5 -- INTANGIBLE ASSETS
The Company acquired 24 therapy practices that included 32 physical therapy
clinics during the year ended December 31, 1995 with a combination of cash,
notes payable, warrant and common stock. The aggregate purchase price of
$29,065, including both direct and indirect costs, exceeded the fair value of
net assets acquired by $27,589.
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Cost of acquisitions in excess of the fair value
of net assets acquired . . . . . . . . . . . . . . $ 51,453 $ 22,857
Lease costs . . . . . . . . . . . . . . . . . . . . . 205 205
Covenant not-to-compete . . . . . . . . . . . . . . . 231 240
Organizational costs . . . . . . . . . . . . . . . . 75 75
--------- ---------
51,964 23,377
Less accumulated amortization . . . . . . . . . . . . 2,017 929
--------- ---------
$ 49,947 $ 22,448
--------- ---------
--------- ---------
</TABLE>
NOTE 6 -- LONG-TERM OBLIGATIONS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
9.5% unsecured note payable to an individual, due in
monthly installments of $7, including interest . . . . . . . . $179 $240
8.5% unsecured note payable to an individual, due in
monthly installments of $8, including interest.
Interest increases to 9.0% after August 15, 1996 and
a balloon payment of unpaid principal of $757 is due
March 1, 1997 . . . . . . . . . . . . . . . . . . . . . . . . 786 810
5% unsecured long-term obligation to a corporation, due in two
annual installments of $450, plus interest, which commenced
May 1, 1995. Interest increases to 8.0% after May 1, 1996
and the final installment is due March 1, 1997 . . . . . . . . 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,
$40 due on May 1, 1996. Interest increases to 6.75% after
May 1, 1996 and remaining $100, plus interest, due
March 1, 1997 . . . . . . . . . . . . . . . . . . . . . . . . 140 140
Obligation in connection with non-compete agreement,
due in three annual installments of $47,
which commenced June 1, 1995 . . . . . . . . . . . . . . . . . 93 140
</TABLE>
F-18
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 6 -- LONG-TERM OBLIGATIONS (CONTINUED)
<TABLE>
<S> <C> <C>
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 installments
of $200, plus interest, March 1, 1996 and May 1, 1996, quarterly
interest payments through the remainder of 1996, $625, plus
interest, February 28, 1997 and $225, plus interest, due
March 1, 1997. Interest increases to 9.0% after March 1, 1996 . 1,250 --
9% unsecured note payable to a corporation, plus interest,
due March 1, 1997. Interest increases to 12.0% after
March 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 --
6.25% unsecured note payable to an individual, due in
monthly installments of $4, including interest . . . . . . . . . . 119 --
8% unsecured note payable to a corporation, plus interest
due January 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . 175 --
Unsecured note payable to a bank, due in monthly installments
of $3, including interest. Interest is variable, and was 9.5%
at December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . 118 --
$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%) . . . . . . . . . . 111 --
$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%) . . . . . . . . . . 111 --
$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%) . . . . . . . . . . 267 --
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 --
</TABLE>
F-19
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 6 -- LONG-TERM OBLIGATIONS (CONTINUED)
<TABLE>
<S> <C> <C>
$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%). . . . . . . . . . . . 267 --
7% unsecured convertible note payable to an individual,
plus interest, due June 30, 1997. If note is converted, no
interest will be deemed to have accrued . . . . . . . . . . . . . . . 575 --
7% unsecured convertible note payable to an individual,
plus interest, due June 30, 1997. If note is converted, no
interest will be deemed to have accrued . . . . . . . . . . . . . . . 575 --
$405 face amount, noninterest bearing convertible note, payable
to an individual, due June 30, 1997 (less unamortized
discount based on imputed interest rate of 8%). . . . . . . . . . . . 372 --
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, plus interest . . . . . . . . . . 62 --
8% unsecured note payable to an individual, due in monthly
installments of $8, including interest . . . . . . . . . . . . . . . 63 --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 73
------- ------
10,744 3,573
Less current maturities . . . . . . . . . . . . . . . . . . . . . . . . 2,655 1,544
------- ------
$ 8,089 $2,029
------- ------
------- ------
</TABLE>
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
-------------
<S> <C>
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,655
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 7,846
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 137
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . 73
2000 and beyond . . . . . . . . . . . . . . . . . . . . 33
-------
$10,744
-------
-------
</TABLE>
NOTE 7 -- LINE OF CREDIT
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, was a floating rate generally based on a
defined prime rate plus 0.5% or a fixed rate related to an offshore rate plus
2.0%. The non-revolving credit facility interest rate, at the option of the
Company, was a floating rate based on a defined prime rate plus 0.75%, or a
defined long term fixed rate. In April 1995, the maximum amount that could be
borrowed under the Line of Credit was increased to $12,000. On December 20,
1995, the Company 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, and the $1,000 non-revolving credit facility
was terminated. The Line of Credit interest rate, at the option of the Company,
is a floating rate generally based on a defined prime rate plus 1.0% (8.5% as of
December 31, 1995) or a fixed rate related to an offshore rate plus 2.5%
(7.6875% as of December 31, 1995). To the extent that the Borrowing Base
(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 maximum,
the Line of Credit is limited to the Borrowing
F-20
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 7 -- LINE OF CREDIT (CONTINUED)
Base. The Borrowing Base was approximately $11,400 at December 31, 1995. The
Line of Credit expires on July 1, 1996. The Company had borrowings under the
Line of Credit of $11,033 at December 31, 1995, $11,000 of which was locked up
at 30-day offshore rates ranging from 7.75% to 7.9375%.
The Line of Credit contains three conditions, each of which must be
satisfied at all times. Failure to satisfy these conditions could result in the
Company being declared in default by Bank of America Oregon under the Line of
Credit. As of September 30, 1995, the Company was not in compliance with the
condition that the Company's fixed charges maintain a certain ratio relative to
its earnings before interest, taxes, depreciation and amortization ("EBITDA").
The Company'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. The Company and
the bank have entered into an agreement that retroactively revised the covenants
for the Line of Credit. The Company was in compliance with these covenants as of
December 31, 1995. Based on the revised covenant requirements and the Company's
analysis of its cash flow needs and sources, existing liabilities, and
expectations regarding future operations, the Company believes that it will be
able to continue to comply with these amended covenants.
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>
1996 . . . . . . . . . . . . . $ 3,444
1997 . . . . . . . . . . . . . 2,859
1998 . . . . . . . . . . . . . 2,317
1999 . . . . . . . . . . . . . 1,541
2000 . . . . . . . . . . . . . 596
Thereafter . . . . . . . . . . . 1,887
-------
$12,644
-------
-------
</TABLE>
Rent expense for the years ended December 31, 1995, 1994, and 1993 amounted
to $3,744, $1,938, and $623, 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.
F-21
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 9 -- ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Accrued compensation. . . . . . . . . . . . . . . $ 604 $ 274
Accrued professional fees . . . . . . . . . . . . 311 141
Accrued interest. . . . . . . . . . . . . . . . . 402 --
Other accrued liabilities . . . . . . . . . . . . 1,198 802
------ ------
$2,515 $1,217
------ ------
------ ------
</TABLE>
NOTE 10 -- INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Current tax expense (benefit):
Federal . . . . . . . . . . . . . . . $ 1,225 $ (9) $ 390
State . . . . . . . . . . . . . . . . 224 (5) 77
-------- -------- --------
1,449 (14) 467
-------- -------- --------
Deferred tax expense:
Federal . . . . . . . . . . . . . . . (256) 1,263 165
State . . . . . . . . . . . . . . . . 9 126 17
-------- -------- --------
(247) 1,389 182
-------- -------- --------
$ 1,202 $ 1,375 $ 649
-------- -------- --------
-------- -------- --------
</TABLE>
The Company's effective tax rate is reconciled to the tax computed at the
statutory federal rate as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- ------
<S> <C> <C> <C>
Tax expense at federal statutory rate . . . . 34.00% 34.00% 34.00%
State income taxes, net of federal benefit . 3.92 3.40 3.90
Non-deductible goodwill and other permanent
differences . . . . . . . . . . . . . . . . 5.09 1.90 .40
----- ------ ------
43.01% 39.30% 38.30%
----- ------ ------
----- ------ ------
</TABLE>
The deferred tax (assets) liabilities are comprised of the following
components:
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1994
------- ------
<S> <C> <C>
Property and equipment. . . . . . . . . . . . . . . . . $ -- $ --
Nonrecognizable reserves. . . . . . . . . . . . . . . . 244 --
Cost of acquisition in excess of the fair value of
net assets acquired and other intangibles . . . . . . 507 157
Cash versus accrual reporting for tax
purposes. . . . . . . . . . . . . . . . . . . . . . . 1,772 2,687
------- -------
Gross deferred tax liabilities . . . . . . . . 2,523 2,844
------- -------
</TABLE>
F-22
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 10 -- INCOME TAXES (CONTINUED)
<TABLE>
<S> <C> <C>
Property and equipment. . . . . . . . . . . . . . (11) (5)
Net operating losses. . . . . . . . . . . . . . . (6) (86)
------- -------
Gross deferred tax assets . . . . . . . . . . . (17) (91)
------- -------
Net deferred tax liabilities. . . . . . . . . . . $ 2,506 $ 2,753
------- -------
------- -------
</TABLE>
NOTE 11 -- REDEEMABLE COMMON STOCK AND NONREDEEMABLE 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.
In June 1995 the Company acquired a physical therapy practice for $375 in
cash and 41.7 shares of the Company's common stock, valued at the market price
on June 6, 1995, the closing date of the agreement. The market price was $9.00
per share on June 6, 1995. Under the terms of the acquisition agreement, the
Company agreed to register the 41.7 shares under the Securities Act of 1933
within 180 days from the closing date of the acquisition. The agreement further
specified that if such shares were not registered within the 180 day period, the
shares of common stock would be redeemable at the request of the shareholder,
upon 30 days written notice, at a price equal to the last sale price of the
Company's common stock as reported on the Nasdaq National Market System. The
Company has received written notice of a shareholder's request to redeem one-
half of such shares of common stock. The redemption value of such shares at
December 4, 1995 was $7.875 per share, or $164 in the aggregate. The total 41.7
shares of common stock is shown as redeemable common stock in the accompanying
consolidated balance sheet at its recorded value of $375.
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 1,250
shares of common stock. As of December 31, 1995, options to purchase 870 shares
of common stock were outstanding, no shares of common stock had been issued upon
exercise of options, and 380 shares of common stock were available for future
grants under the Option Plan. These 870 options were granted at various
exercise prices ranging from $4.00 to $10.00 per share and began vesting on
January 1, 1994, and expire between June 3, 1997 through October 3, 2005. A
total of 558
F-23
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 12 -- STOCK OPTION PLANS (CONTINUED)
of the incentive and nonqualified stock options were exercisable at December 31,
1995. As of December 31, 1995, non-plan options to purchase 15 shares of common
stock were outstanding at an average exercise price of $7.21 per share and no
shares of common stock had been issued upon exercise of these options. These
options expire between four and five years from date of grant. All of the non-
plan options were exercisable at December 31, 1995.
The Directors' Stock Option Plan (the "Directors' Plan") provides for the
grant of nonqualified stock options to directors who are not officers or
employees of the Company to purchase up to 100 shares of common stock. As of
December 31, 1995, options to purchase 41 shares of common stock were
outstanding, no shares of common stock had been issued upon exercise of options,
and 59 shares of common stock were available for future grants under the
Directors' Plan. These 41 options were granted at various exercise prices
ranging from $6.38 to $8.50 per share and began vesting on October 1, 1995 and
expire between October 1, 2004 through October 3, 2005. A total of 4 options
were exercisable at December 31, 1995.
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
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, 1995. 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 estimated
fair value of the long-term obligations is judged to be materially the same as
that reflected in the financial statements.
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, 1995,
uninsured amounts held at these financial institutions totaled approximately
$144. 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
$136 and $35 for the years ended December 31, 1995 and 1994, respectively.
NOTE 15 -- SUBSEQUENT EVENTS
On November 9, 1995, the Company entered into an agreement with Horizon/CMS
Healthcare Corporation ("Horizon") pursuant to which the Company would be merged
with a wholly-owned subsidiary of Horizon. On March 12, 1996, the Company
announced that the merger could not be consummated by April 1, 1996 and that the
merger agreement could be terminated by either party if the merger was not
consummated by that date. The Company also announced that neither party was
willing to extend the termination date under the merger agreement's existing
terms and that the parties were in discussion and considering alternatives. SEE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES.
F-24
<PAGE>
SCHEDULE II
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Acquired in Reserves and Balance
Beginning Costs and Clinic Bad Debt at End
Description of Period Expenses Purchases Deductions of Period
- ----------- ---------- ---------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Allowance for contractual adjustments
and doubtful accounts
Year ended December 31, 1993 $ 94,100 $ 269,407 $1,356,688 $ 210,197 $1,509,998
Allowance for contractual adjustments
Year ended December 31, 1994 1,114,366 3,899,777 - 3,312,630 1,701,513
Allowance for doubtful accounts
Year ended December 31, 1994 395,632 1,297,018 5,532,756 2,363,596 4,861,810
Allowance for Contractual Adjustments
and doubtful accounts
Year ended December 31, 1994 1,509,998 5,196,794 5,532,756 5,676,226 6,563,323
Allowance for contractual adjustments
Year ended December 31, 1995 1,701,513 8,603,655 1,414,499 9,045,891 2,673,776
Allowance for doubtful accounts
Year ended December 31, 1995 4,861,810 2,176,944 658,197 3,504,932 4,192,019
Allowance for contractual adjustments
and doubtful accounts
Year ended December 31, 1995 6,563,323 10,780,599 2,072,696 12,550,822 6,865,795
</TABLE>
S-1
<PAGE>
EXHIBIT 11.1
PACIFIC REHABILITATION & SPORTS MEDICINE, INC.
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1995
---------------------------
Fully
Primary Diluted 1994 1993
------- ------- ---------- -----------
<S> <C> <C> <C> <C>
Net income as reported $1,593,000 $1,593,000 $2,126,000 $1,047,000
Reduction in interest as
a result of conversion of
convertible notes payable,
net of tax 15,000 117,000 23,000 --
---------- ---------- ---------- ----------
Net income $1,608,000 $1,710,000 $2,149,000 $1,047,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per share (1) $.20 $.20 $.35 $.26
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding:
Common Stock 7,669,000 7,669,000 6,000,000 3,702,000
Dilutive stock options and warrants,
using the treasury stock method 225,000 259,000 87,000 294,000
Conversion of convertible notes payable 79,000 441,000 28,000 --
---------- ---------- ---------- ----------
Shares used in calculations (2) 7,973,000 8,369,000 6,115,000 3,996,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(1) Fully diluted earnings per share is not disclosed on the consolidated
statements of earnings as it is not more than three percent different from
primary earnings per share.
(2) The number of shares used in calculations for primary and fully diluted
earnings per share for 1994 and 1993 are the same.
<PAGE>
EXHIBIT 21
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
Pacific Rehab of Alabama, Inc. *
PR Acquisition Corporation (a California corporation)
Assumed Business Name:
Pacific Southwest Therapy (AZ and NV)
Pacific Southwest Rehab (CA)
Arthritis Trauma & Sports Physical Therapy (NV)
Southwest Therapy Services (NV)
Pacific Southwest Hand Rehab (NV)
Leeward Back and Neck, Inc. (a Hawaii Corporation) *
Dade Physical Therapy Rehab, Inc. (a Florida corporation)
Assumed Business Name:
Dade Prosthetic-Orthotic and Physical Therapy Rehabilitation (FL)
Hampton and Schultz (FL)
Pacific Prosthetic & Orthotic (FL)
Longview Physicians Physical Therapy Service, Inc. (a Washington corporation) *
Pacific Rehab of Maryland, Inc. (a Maryland corporation)
Assumed Business Name:
Samuel H. Esterson, P.T.
St. Paul and Biddle Medical Associates, LLC
_______________________________
* No Assumed Business Names
