<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
--------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: March 31, 1996
OR
[ ] 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
(Registrant's telephone number including area code)
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 [ ]
COMMON STOCK, PAR VALUE $.01 PER SHARE 8,160,377
(Class) (Shares Outstanding at May 8, 1996)
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<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
- - ------------------------------ ----
Item 1. Financial Statements:
Balance Sheets - March 31, 1996
and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Earnings - Three Months Ended
March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Shareholders' Equity -
Three Months Ended March 31, 1996 and 1995. . . . . . . . . . . . . 3
Statements of Cash Flows - Three Months Ended
March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements. . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . 11
PART II - OTHER INFORMATION
- - ---------------------------
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . 17
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . $ 535 $ 272
Patient accounts receivable, net (Note 2). . . . . . . . . . . . . . . . 14,649 14,000
Other receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . 293 680
Refundable income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 12 7
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 631 723
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 16,120 15,682
-------- --------
Property and equipment, net (Note 3) . . . . . . . . . . . . . . . . . . . 2,612 2,774
-------- --------
Other Assets:
Intangible assets, at cost, less accumulated amortization (Note 4) . . . 49,855 49,947
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 519 466
-------- --------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,374 50,413
-------- --------
$ 69,106 $ 68,869
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations (Note 5) . . . . . . . . . . $ 5,904 $ 2,655
Notes payable and other obligations, current portion . . . . . . . . . . 696 438
Line of credit (Note 6). . . . . . . . . . . . . . . . . . . . . . . . . 11,233 11,033
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 714 868
Accrued liabilities (Note 7) . . . . . . . . . . . . . . . . . . . . . . 2,898 2,515
Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 1,140 996
Deferred income taxes, current portion (Note 8). . . . . . . . . . . . . 1,124 1,123
-------- --------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . 23,709 19,628
-------- --------
Notes payable and other obligations, less current portion. . . . . . . . . 12 577
-------- --------
Deferred income taxes, less current portion (Note 8) . . . . . . . . . . . 1,383 1,383
-------- --------
Long-term obligations, less current maturities (Note 5). . . . . . . . . . 3,644 8,089
-------- --------
Redeemable common stock, 41,667 shares issued and
outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375 375
-------- --------
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;
8,118,710 and 8,003,981 shares issued and outstanding. . . . . . . . . 81 80
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 33,807 33,010
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,095 5,727
-------- --------
39,983 38,817
-------- --------
$ 69,106 $ 68,869
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
1
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
For the Three Months Ended
March 31,
--------------------------
1996 1995
----------- -----------
Net revenues . . . . . . . . . . . . . . . . . . . $ 10,418 $ 6,951
Cost of revenues . . . . . . . . . . . . . . . . . 6,353 3,469
----------- -----------
Gross profit . . . . . . . . . . . . . . . . . . . 4,065 3,482
----------- -----------
Operating expenses:
Selling, general and administrative expenses . . . 2,439 1,906
Depreciation and amortization. . . . . . . . . . . 551 340
----------- -----------
2,990 2,246
----------- -----------
Operating income . . . . . . . . . . . . . . . . . 1,075 1,236
----------- -----------
Nonoperating income (expense):
Interest expense . . . . . . . . . . . . . . . . . (428) (79)
Interest income. . . . . . . . . . . . . . . . . . 3 7
----------- -----------
(425) (72)
----------- -----------
Earnings before income taxes . . . . . . . . . . . 650 1,164
----------- -----------
Income taxes (Note 8). . . . . . . . . . . . . . . 282 460
----------- -----------
Net earnings . . . . . . . . . . . . . . . . . . . $ 368 $ 704
----------- -----------
----------- -----------
Net earnings per common share:
Primary. . . . . . . . . . . . . . . . . . . . . . . $ 0.04 $ 0.10
----------- -----------
----------- -----------
Fully diluted. . . . . . . . . . . . . . . . . . . . $ 0.04 $ 0.09
----------- -----------
----------- -----------
Weighted average number of common and
common equivalent shares outstanding:
Primary. . . . . . . . . . . . . . . . . . . . . . . 8,340 7,336
----------- -----------
----------- -----------
Fully diluted. . . . . . . . . . . . . . . . . . . . 8,411 7,701
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
2
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Year Ended December 31, 1995
and the Three Months Ended March 31, 1996 (unaudited)
(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, 1994 . . . . . . . . . . . . -- $ -- 7,000 $ 70 $ 24,237 $ 4,134 $ 28,441
Common stock issued in connection with clinic
acquisition. . . . . . . . . . . . . . . . . . . . 42 375 -- -- -- -- --
Common stock issued in connection with clinic
acquisitions (including 536 shares 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
Common stock issued in connection with
exercise of options. . . . . . . . . . . . . . . . -- -- 27 -- 143 -- 143
Common stock issued in connection with 1993
acquisition in Nevada attributed to an earnout . . -- -- 21 -- 173 -- 173
Common stock issued in connection with a
promissory note conversion related to a
1995 acquisition in California . . . . . . . . . . -- -- 66 1 481 -- 482
Net earnings for the period. . . . . . . . . . . . . -- -- -- -- -- 368 368
------ ------ ------ ------ ---------- -------- --------
Balance at March 31, 1996. . . . . . . . . . . . . . 42 $ 375 8,118 $ 81 $ 33,807 $ 6,095 $ 39,983
------ ------ ------ ------ ---------- -------- --------
------ ------ ------ ------ ---------- -------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 368 $ 704
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 551 340
Loss on disposal of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) 1
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 306
Change in assets and liabilities, net of effects from acquisitions:
Patient accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . (649) (489)
Other receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383 187
Prepaid expenses and other assets. . . . . . . . . . . . . . . . . . . . . . . . . . 39 (47)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (154) 76
Accrued liabilities and income taxes . . . . . . . . . . . . . . . . . . . . . . . . 527 363
---------- ----------
Net cash provided by operating activities. . . . . . . . . . . . . . . . . . . . . 1,060 1,441
---------- ----------
Cash flows from investing activities:
Additions to property and equipment, net of amounts
purchased in acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (37) (127)
Acquisitions, including other direct costs, net of cash acquired . . . . . . . . . . . . -- (4,790)
Other transactions, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 --
---------- ----------
Net cash provided by (used in) investing activities. . . . . . . . . . . . . . . . 7 (4,917)
---------- ----------
Cash flows from financing activities:
Net proceeds from short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . 200 3,212
Payments on notes payable and long-term obligations. . . . . . . . . . . . . . . . . . . (1,147) (37)
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . 143 --
---------- ----------
Net cash (used in) provided by financing activities. . . . . . . . . . . . . . . . (804) 3,175
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . 263 (301)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . 272 1,085
---------- ----------
Cash and cash equivalents at end of the period . . . . . . . . . . . . . . . . . . . . . . $ 535 $ 784
---------- ----------
---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 409 $ 49
---------- ----------
---------- ----------
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 138 $ --
---------- ----------
---------- ----------
Supplemental schedule of noncash and financing activities:
Acquisition of clinics:
Cost of acquisitions in excess of fair market value of net assets received . . . . . . $ -- $ 8,152
Liabilities assumed or issued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 3,206
Common stock issued in connection with acquisitions. . . . . . . . . . . . . . . . . . 173 506
Warrant value issued in connection with acquisitions . . . . . . . . . . . . . . . . . -- 160
Tangible assets acquired in connection with acquisitions . . . . . . . . . . . . . . . -- 791
Common stock issued in connection with conversion of note. . . . . . . . . . . . . . . 482 --
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements for the three
months ended March 31, 1996 and 1995, have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission. They do not
include all of the information and footnotes required by generally accepted
accounting principles and should be read in conjunction with the Company's
audited financial statements and notes thereto for the year ended December 31,
1995, included in its Form 10-K as filed with the Securities and Exchange
Commission. In the opinion of Company management, the unaudited consolidated
financial statements for the interim periods presented include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the results for such interim periods.
Operating results for the three months ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the entire fiscal
year ending December 31, 1996 or any portion thereof.
NOTE 2 -- PATIENT ACCOUNTS RECEIVABLE
Patient accounts receivable consist of:
March 31, December 31,
1996 1995
----------- ------------
(Unaudited)
Gross accounts receivable. . . . . . . . . . . . . $ 20,947 $ 20,866
Less allowance for doubtful accounts
and contractual adjustments. . . . . . . . . . 6,298 6,866
---------- ----------
Total patient accounts receivable, net . . . . . $ 14,649 $ 14,000
---------- ----------
---------- ----------
The allowance for contractual adjustments represents an estimate of the
difference between the amount billed by the Company and the amount which the
patient, third-party payor or other party is contractually obligated to pay the
Company. The allowance for revenue adjustments was $2,483 at March 31, 1996 and
$2,674 at December 31, 1995. During the three months ended March 31, 1996 and
1995, revenue adjustments amounted to approximately $2,747 and $1,622,
respectively, and have been netted against revenues in the accompanying
consolidated statements of earnings. During the three months ended March 31,
1996 and 1995, bad debt expense amounted to approximately $611 and $461,
respectively, and is included in selling, general and administrative expenses in
the accompanying consolidated statements of earnings.
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
March 31, December 31,
1996 1995
----------- ------------
(Unaudited)
Autos. . . . . . . . . . . . . . . . . . . . . . . $ 2 $ 32
Office equipment . . . . . . . . . . . . . . . . . 1,441 1,429
Physical therapy equipment . . . . . . . . . . . . 2,173 2,173
Leasehold improvements . . . . . . . . . . . . . . 969 929
---------- ----------
4,585 4,563
Less accumulated depreciation and amortization . . 1,973 1,789
---------- ----------
$ 2,612 $ 2,774
---------- ----------
---------- ----------
5
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 4 -- INTANGIBLE ASSETS
Intangible assets consist of the following:
March 31, December 31,
1996 1995
----------- ------------
(Unaudited)
Cost of acquisitions in excess of the fair value
of net assets acquired . . . . . . . . . . . . . $ 51,678 $ 51,453
Lease costs. . . . . . . . . . . . . . . . . . . . 205 205
Covenant not-to-compete. . . . . . . . . . . . . . 231 231
Organizational costs . . . . . . . . . . . . . . . 75 75
---------- ----------
52,189 51,964
Less accumulated amortization. . . . . . . . . . . 2,334 2,017
---------- ----------
$ 49,855 $ 49,947
---------- ----------
---------- ----------
The Company uses a forty-year estimate of the useful life of the cost of
acquisitions in excess of the fair value of net assets acquired. This life is
based on an analysis of industry practice and the factors influencing the
acquisition decision. These factors include clinic location, referral sources,
profitability and general industry outlook. The Company reviews for asset
impairment at the end of each quarter or more frequently when events or changes
in circumstances indicate that the carrying amount of the cost of acquisition in
excess of the fair value of net assets acquired may not be recoverable. To
perform that review, the Company estimates the sum of expected future
undiscounted net cash flows from operating activity of each acquired business.
If these estimated net cash flows are less than the carrying amount of the cost
of acquisition in excess of the fair value of net assets acquired, the Company
recognizes an impairment loss in an amount necessary to write down the cost of
acquisition in excess of the fair value of net assets acquired to a fair value
as determined from expected future cash flows. To date, no write-down for
impairment loss has been recorded.
The assets acquired and liabilities assumed in connection with acquisitions
are recorded at their respective fair values as of the related dates of
acquisition. Deferred taxes have been recorded to give effect to the
differences between the fair values and tax bases of the assets acquired and
liabilities assumed.
Amortization expense for the three months ended March 31, 1996 and 1995 was
$347 and $187, respectively.
NOTE 5 -- LONG-TERM OBLIGATIONS
Long-term debt consists of the following:
March 31, December 31,
1996 1995
----------- ------------
(Unaudited)
9.5% unsecured note payable to an individual,
due in monthly installments of $7, including
interest . . . . . . . . . . . . . . . . . . . . $ 162 $ 179
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. . . 780 786
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 . . . . . . . . . 450 450
5% unsecured convertible note payable to an
individual, plus interest, due May 1, 1996 . . . . 200 200
6
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 5 -- LONG-TERM OBLIGATIONS (CONTINUED)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
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 93
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 35
7% unsecured convertible note payable to a corporation,
due in two annual installments of $40, plus interest,
which commenced March 1, 1996. . . . . . . . . . . . . . . . . . . . 80 80
7% unsecured convertible note payable to an individual,
due in two annual installments of $522, plus interest,
which commenced March 1, 1996. . . . . . . . . . . . . . . . . . . . 522 1,045
7% unsecured convertible note payable to an individual, plus
interest, due March 1, 1997. . . . . . . . . . . . . . . . . . . . . 175 175
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 December 1996, $625, plus interest, due
February 28, 1997 and $225, plus interest, due March 1, 1997.
Interest increases to 9.0% after March 1, 1996 . . . . . . . . . . . 1,050 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 1,000
6.25% unsecured note payable to an individual, due in
monthly installments of $4, including interest . . . . . . . . . . . 108 119
8% unsecured note payable to a corporation, plus interest
due January 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . 175 175
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 . . . . . . . . . . . . . . . . . . . . . . . . 112 118
$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%) . . . . . . . . . . . 114 111
$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%) . . . . . . . . . . . 114 111
$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%) . . . . . . . . . . . 272 267
</TABLE>
7
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 5 -- LONG-TERM OBLIGATIONS (CONTINUED)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
8% unsecured note payable to a corporation, plus interest
due June 30, 1997. . . . . . . . . . . . . . . . . . . . . . . 150 150
8% unsecured note payable to an individual, plus interest,
due June 30, 1997. . . . . . . . . . . . . . . . . . . . . . . 143 143
8% unsecured note payable to an individual, plus interest,
due June 30, 1997. . . . . . . . . . . . . . . . . . . . . . . 285 285
8% unsecured note payable to an individual, plus interest,
due June 30, 1997. . . . . . . . . . . . . . . . . . . . . . . 143 143
8% unsecured note payable to an individual, plus interest,
due in two annual installments commencing June 30, 1996. . . . 132 132
$300 face amount, noninterest bearing convertible note, payable
to an individual, due June 30, 1997 (less unamortized
discount based on imputed interest rate of 8%) . . . . . . . . 272 267
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. . . . . . . . . . . . 575 575
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. . . . . . . . . . . . 575 575
$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%) . . . . . . . . 380 372
8% unsecured note payable to an individual, plus interest,
due in two installments commencing December 15, 1996 . . . . . 945 945
Obligation in connection with non-compete agreement,
due in monthly installments of $1, plus interest . . . . . . . 60 62
8% unsecured note payable to an individual, due in monthly
installments of $8, including interest . . . . . . . . . . . . 40 63
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 148
--------- ----------
9,548 10,744
Less current maturities. . . . . . . . . . . . . . . . . . . . . 5,904 2,655
--------- ----------
$ 3,644 $ 8,089
--------- ----------
--------- ----------
</TABLE>
Maturities of long-term debt are as follows:
Year Ending
March 31,
-----------
1997. . . . . . . . . . . . . . . . . . . $ 5,904
1998. . . . . . . . . . . . . . . . . . . 3,431
1999. . . . . . . . . . . . . . . . . . . 116
2000. . . . . . . . . . . . . . . . . . . 65
2001 and beyond . . . . . . . . . . . . . 32
--------
$ 9,548
--------
--------
8
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 6 -- LINE OF CREDIT
The Company has with Bank of America Oregon a $12,500 credit facility (the
"Line of Credit"). 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%
(9.25% as of March 31, 1996) or a fixed rate related to an offshore rate plus
2.5% (7.9063% as of March 31, 1996). 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 Base. The Borrowing Base was
approximately $11,700 at March 31, 1996. The Line of Credit expires on July 1,
1996. The Company had borrowings under the Line of Credit of $11,233 at
March 31, 1996, $11,000 of which was locked up at 30 day off shore rates ranging
from 7.9063% 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 March 31, 1996, the Company was in compliance with the conditions
as set forth in the agreement with the Bank. (See Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources).
NOTE 7 -- ACCRUED LIABILITIES
Accrued liabilities consist of the following:
March 31, December 31,
1996 1995
----------- ------------
(Unaudited)
Accrued compensation . . . . . . . . . . . $ 1,142 $ 604
Accrued professional fees. . . . . . . . . 327 311
Accrued interest . . . . . . . . . . . . . 421 402
Other accrued liabilities. . . . . . . . . 1,008 1,198
-------- --------
$ 2,898 $ 2,515
-------- --------
-------- --------
9
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 8 -- INCOME TAXES
The income tax provision consists of the following:
(Unaudited)
For the Three Months Ended
March 31,
--------------------------
1996 1995
----------- -----------
Current . . . . . . . . . . . . . . . . $ 282 $ 154
Deferred. . . . . . . . . . . . . . . . -- 306
---------- ----------
$ 282 $ 460
---------- ----------
---------- ----------
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.
NOTE 9 -- SUBSEQUENT EVENTS
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. 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. On April 2, 1996, the Company announced that it had terminated the merger
agreement on that date. In connection with the proposed merger with Horizon,
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. (See
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources).
10
<PAGE>
ITEM 2. 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 March 31, 1996, 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.
The following table sets forth, as of March 31, 1996, the number of clinic
acquisitions completed and additional clinics opened by the Company since 1993:
<TABLE>
<CAPTION>
1993 1994 1995 1996
------------------ ------------------ ------------------ ----
1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st
Qtr 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> <C>
Clinics at beginning of period 5 7 7 18 18 18 37 37 39 47 59 74 72
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 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. Investors
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
experience unanticipated working capital or other cash requirements and will be
able to continue to comply with the terms and conditions of its credit facility
and be able to renew or replace its credit facility upon expiration on favorable
terms; (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 and regulations 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;
and (vii) additional debt or equity capital, if needed, will be available and on
terms acceptable to the Company. Investors are directed to the Company's filings
with the Securities and Exchange Commission, which are available from the
Company without charge, for a more complete description of the risks and
uncertainties relating to the Company.
11
<PAGE>
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:
Three months ended
March 31,
------------------
1996 1995
------ ------
Net revenues 100.0 % 100.0 %
Cost of revenues 61.0 49.9
----- -----
Gross profit 39.0 50.1
Operating expenses:
Selling, general and administrative expenses 23.4 27.4
Depreciation and amortization 5.3 4.9
----- -----
28.7 32.3
----- -----
Operating income 10.3 17.8
----- -----
Non-operating income (expense):
Interest expense (4.1) (1.1)
----- -----
(4.1) (1.1)
----- -----
Earnings before income taxes 6.2 16.7
Income taxes 2.7 6.6
----- -----
Net earnings 3.5 % 10.1 %
----- -----
----- -----
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
NET REVENUES. Net revenues increased $3,467,000, from $6,951,000 in the
first quarter of 1995 to $10,418,000 in the first quarter of 1996, an increase
of 50%. An increase of $4,648,000 attributable to clinics acquired and opened
since March 31, 1995 was offset by a 20% same store decrease of $1,181,000,
attributable to clinics which operated in the first quarter of both 1996 and
1995. The same store decrease was primarily due to decreases in net revenues in
Hawaii and Baltimore, with Hawaii accounting for approximately two thirds of the
decrease. A small portion of the decrease was due to decreased net revenue in
Southern California.
The decrease in Hawaii continues to be attributable primarily to passage in
July 1995 of managed care legislation and slow economic conditions. 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
some new managed care contracts recently 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 through the end
of 1996. The Company has also taken and continues to take steps to reduce
operating expenses in its Hawaii clinics. Proposals to reform Hawaii's existing
no-fault insurance law were introduced in both houses of the legislature in the
legislative session which ended in April. Because no agreement was reached with
respect to these proposals, the legislature may be called into special session
to reconsider them. If passed, these proposals could adversely impact the
Company's revenue. In addition, regulations may be proposed in the near future
which may further reduce reimbursement rates for personal injuries incurred in
12
<PAGE>
automobile and other non-work related accidents. If enacted, such regulations
could reduce revenues and adversely impact the Company's earnings.
The decrease in Baltimore was due primarily to inclement weather. Severe
cold weather conditions prevented or discouraged patients from attending their
physical therapy sessions and forced the closure of most of the Company's
Maryland clinics for a total of seven days during the quarter. The decrease in
Southern California was principally due to continuing reduced revenues resulting
from the loss of a significant referral source and the loss of a contract.
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 $2,884,000, from $3,469,000 in the
first quarter of 1995 to $6,353,000 in the first quarter of 1996, an increase of
83%. Of this increase $2,709,000 was attributable to clinics acquired and opened
since March 31, 1995 and $175,000 was attributable to clinics which operated in
the first quarter of both 1996 and 1995. Cost of revenues as a percentage of net
revenues was 61.0% and 49.9% for the first quarter of 1996 and 1995,
respectively. The increase was primarily a result of decreased net revenues in
Hawaii and Baltimore (while costs were not similarly decreased).
GROSS PROFIT. Gross profit increased $583,000, from $3,482,000 in the
first quarter of 1995 to $4,065,000 in the first quarter of 1996, an increase of
17%. Gross profit for clinics which operated in the first quarter of both 1996
and 1995 decreased from 49% to 32%, primarily as a result of the decrease in net
revenues for same store clinics as discussed above. Gross margin for clinics
opened or acquired since March 31, 1995, in the aggregate, was 44% in the first
quarter of 1996. Gross profit represented 39.0% and 50.1% of net revenues for
the first quarters of 1996 and 1995, respectively. The decrease in the gross
profit margin was due primarily to the decreases in net revenues in Hawaii,
Baltimore and Southern California. As a result of changes such as those
discussed above regarding Hawaii, which historically had gross profit margins in
excess of industry averages, 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 $533,000,
from $1,906,000 in the first quarter of 1995 to $2,439,000 in the first quarter
of 1996, an increase of 28%. Of this increase, $524,000 was due to clinics
acquired and opened by the Company since March 31, 1995 and $9,000 resulted from
clinics which operated in the first quarter of both 1996 and 1995. Selling,
general and administrative expenses represented approximately 23.4% and 27.4% of
net revenues in the first quarter of 1996 and 1995, 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, offset primarily by acquisition of clinics with lower average costs as a
percentage of net revenues than the clinics owned at March 31, 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $211,000, from $340,000 in the first quarter of 1995 to $551,000 in
the first quarter of 1996. 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 1995 as outlined under the caption "General"
above.
NON-OPERATING INCOME (EXPENSE). Interest expense increased $349,000, from
$79,000 in the first quarter of 1995 to $428,000 in the first quarter of 1996.
The increase was due primarily to interest expense associated with debt incurred
in connection with acquisitions made by the Company in 1995.
INCOME TAXES. The Company's effective tax rate increased to 43% in the
first quarter of 1996 from 40% in the first quarter of 1995. 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.
13
<PAGE>
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, increased bank borrowings, additional
debt and stock to sellers and cash generated from operations.
As of March 31, 1996, current liabilities exceeded current assets,
resulting in negative working capital of $7,589,000, including $535,000 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 payable in 1996 and 1997; to the extent due on or
before March 31, 1997, these obligations are included in current liabilities.
The increase in cash and cash equivalents from $272,000 at December 31, 1995 to
$535,000 at March 31, 1996 was primarily the result of $200,000 of proceeds from
short-term borrowings and $143,000 of proceeds from issuance of common stock in
connection with the exercise of stock options.
Net patient accounts receivable increased $649,000 to $14,649,000 during
the first quarter of 1996, primarily as a result of an increase in the number of
days of average net revenues in ending net patient accounts receivable. The
number of days of average net revenues in ending net patient accounts receivable
was 125 at March 31, 1996 compared to 122 at December 31, 1995. The Company
continues to focus its cash collection policies, systems and efforts to minimize
collection time. The rate at which the Company collects accounts receivable is
sufficient to satisfy the Company's operating cash needs. 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.
Long-term obligations, line of credit and notes payable and other
obligations decreased $1,303,000 to $21,489,000 during the first quarter of
1996. This decrease was primarily due to the conversion of a $450,000
acquisition note into shares of common stock and payment of other acquisition
related debt and obligations. At March 31, 1996, notes payable with aggregate
principal amounts of $3,658,000 may be converted into approximately 465,000
shares of common stock, including an additional amount representing unpaid
interest, at $7.00 to $8.75 per share. 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 increased to 12% per annum
from 9% per annum on March 31, 1996. 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. SEE NOTE 5 OF
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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 shareholder's request
to redeem 20,833 shares of stock at $7.875 per share.
The Company has, with Bank of America Oregon, a credit facility (the "Line
of Credit") secured by the assets of the Company, under which the maximum
borrowing is $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 March 31, 1996
the Borrowing Base was approximately $11,700,000 as compared to borrowings under
the line of credit facility which were approximately $11,233,000. The Line of
Credit expires on July 1, 1996. The Company believes it can obtain a renewal or
replacement of the Line of Credit; there can be no assurance, however, that the
Company will be successful in obtaining such renewal or replacement. SEE NOTE 6
OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
14
<PAGE>
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. The Company was in compliance with these covenants as of March 31, 1996.
As a result of a one-time non-recurring charge for expenses, estimated at
$975,000, arising from the termination of the proposed merger with Horizon/CMS
Healthcare Corporation and earnings projected now to be lower than those upon
which the bank covenants are based, the Company anticipates not being in
compliance with at least one of these covenants as of the June 30, 1996
measurement date. The Company has notified the bank of this possibility and the
bank and the Company are in negotiations regarding revisions to the convenants.
If the Company is unable to comply with these covenants and is unable to reach
agreement with the bank, the bank may declare the Company in default under the
Line of Credit agreement, in which case the bank could demand immediate payment
of all amounts outstanding under the Line of Credit agreement or, in light of
the expiration of the Line of Credit agreement on July 1, 1996, could decline to
renew the Line of Credit agreement on terms acceptable to the bank and the
Company.
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.
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 the proposed merger with Horizon, 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.
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, Line
of Credit borrowings, and future equity and debt financings. Although the
Company is currently negotiating with certain private parties for an infusion of
capital, no assurance can be given that the Company will be able to obtain
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.
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
15
<PAGE>
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 March 31, 1996 the Company had no material commitments to
purchase capital assets.
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.
16
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- - ------- --------------------------------
(a) The exhibits filed as part of this report are listed below:
Exhibit No.
-----------
11 Statement regarding computation of per share earnings
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1996.
17
<PAGE>
Pursuant to the requirements 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.
Dated: May 9, 1996
PACIFIC REHABILITATION & SPORTS MEDICINE, INC.
By: /s/ BILL BARANCIK
-----------------
Bill Barancik
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ WILLIAM A. NORRIS
---------------------
William A. Norris
Executive Vice President-Finance and
Administration
(Principal Financial Officer)
18
<PAGE>
EXHIBIT 11.1
PACIFIC REHABILITATION & SPORTS MEDICINE, INC.
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------
1996 1995
---------------------- ---------------------
FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income as reported $368,000 $368,000 $704,000 $704,000
Reduction in interest as a
result of conversion of
convertible notes payable,
net of tax 3,000 3,000 3,000 3,000
----- ----- ----- -----
Net income $371,000 $371,000 $707,000 $707,000
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per share $.04 $.04 $.10 $.09
---- ---- ---- ----
---- ---- ---- ----
Weighted average shares
outstanding:
Common Stock 8,090,000 8,090,000 7,049,000 7,049,000
Dilutive stock options and
warrants, using the treasury
stock method 186,000 187,000 165,000 284,000
Conversion of convertible
notes payable and contingent
issuances of common stock 64,000 134,000 122,000 368,000
------- ------- ------- -------
Shares used in calculations 8,340,000 8,411,000 7,336,000 7,701,000
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS FOUND ON
PAGES 1 AND 2 OF THE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 535
<SECURITIES> 0
<RECEIVABLES> 21,240
<ALLOWANCES> 6,298
<INVENTORY> 0
<CURRENT-ASSETS> 16,120
<PP&E> 4,585
<DEPRECIATION> 1,973
<TOTAL-ASSETS> 69,106
<CURRENT-LIABILITIES> 23,709
<BONDS> 0
0
0
<COMMON> 81
<OTHER-SE> 39,902
<TOTAL-LIABILITY-AND-EQUITY> 69,106
<SALES> 0
<TOTAL-REVENUES> 10,418
<CGS> 0
<TOTAL-COSTS> 6,353
<OTHER-EXPENSES> 2,990
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 428
<INCOME-PRETAX> 650
<INCOME-TAX> 282
<INCOME-CONTINUING> 368
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 368
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
