<PAGE>
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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 September 30, 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) Identification Number)
One S.W. Columbia Street, Suite 900, Portland, Oregon 97258
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (503) 222-4191
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $0.01 par value 8,326,660
(Class) (Outstanding at November 11, 1996)
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<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1996
and December 31, 1995. . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Earnings - Three and Nine Months Ended
September 30, 1996 and 1995. . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Shareholders' Equity - Year Ended
December 31, 1995 and Nine Months Ended September 30, 1996 . . . . 3
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1996 and 1995. . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . 14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 25
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC.
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
The following unaudited financial statements of Pacific Rehabilitation and
Sports Medicine, Inc. (the "Company"), have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The results of
operations for the three and nine months ended September 30, 1996 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending December 31, 1996.
FINANCIAL STATEMENTS - CONSOLIDATED BALANCE SHEETS - SEPTEMBER 30, 1996
AND DECEMBER 31, 1995
FINANCIAL STATEMENTS - CONSOLIDATED STATEMENTS OF EARNINGS - THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
FINANCIAL STATEMENTS - CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -
YEAR ENDED DECEMBER 31, 1995 AND NINE MONTHS ENDED
SEPTEMBER 30, 1996
FINANCIAL STATEMENTS - CONSOLIDATED STATEMENTS OF CASH FLOWS - NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
FINANCIAL STATEMENTS - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---------- ----------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 640 $ 272
Patient accounts receivable, net (Note 2) . . . . . . . . . . . . . . . . . . . . . . . 11,289 14,000
Other receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,019 680
Refundable income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 7
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 640 723
Net deferred tax asset (Note 8). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,103 --
---------- ----------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,691 15,682
---------- ----------
Property and equipment, net (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,357 2,774
---------- ----------
Other Assets:
Intangible assets, at cost, less accumulated amortization (Note 4) . . . . . . . . . . . 45,685 49,947
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297 466
---------- ----------
Total other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,982 50,413
---------- ----------
$ 63,030 $ 68,869
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations (Note 5) . . . . . . . . . . . . . . . . . . $ 8,443 $ 2,655
Notes payable and other obligations, current portion . . . . . . . . . . . . . . . . . . 728 438
Line of credit (Note 6). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,675 11,033
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 782 868
Accrued liabilities (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,949 2,515
Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411 996
Net deferred tax liability, current portion (Note 8) . . . . . . . . . . . . . . . . . . -- 1,123
---------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,988 19,628
---------- ----------
Notes payable and other obligations, less current portion. . . . . . . . . . . . . . . . . 334 577
---------- ----------
Net deferred tax liability, less current portion (Note 8) . . . . . . . . . . . . . . . . 1,003 1,383
---------- ----------
Long-term obligations, less current maturities (Note 5). . . . . . . . . . . . . . . . . . 1,136 8,089
---------- ----------
Redeemable common stock, 41,667 shares issued and outstanding
at December 31, 1995, nonredeemable at September 30, 1996. . . . . . . . . . . . . . . . -- 375
---------- ----------
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;
8,311,660 and 8,003,981 shares issued and outstanding. . . . . . . . . . . . . . . . . 83 80
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,270 33,010
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,784) 5,727
---------- ----------
33,569 38,817
---------- ----------
$ 63,030 $ 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 (LOSS)
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues (Note 2). . . . . . . . . . . . . . . . . . . . $ 8,102 $ 10,039 $ 28,867 $ 24,903
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . 6,412 6,313 19,219 13,991
--------- --------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . . . 1,690 3,726 9,648 10,912
--------- --------- --------- ---------
Operating expenses:
Selling, general and administrative expenses . . . . . . 1,815 1,855 5,450 4,960
Bad debt expense (Note 2). . . . . . . . . . . . . . . . 1,835 583 3,082 1,528
Depreciation and amortization. . . . . . . . . . . . . . 511 568 1,592 1,327
Restructuring expenses (Note 10) . . . . . . . . . . . . 1,490 -- 5,000 --
--------- --------- --------- ---------
5,651 3,006 15,124 7,815
--------- --------- --------- ---------
Operating (loss) income. . . . . . . . . . . . . . . . (3,961) 720 (5,476) 3,097
--------- --------- --------- ---------
Nonoperating income (expense):
Interest expense . . . . . . . . . . . . . . . . . . . . (556) (395) (1,470) (728)
Interest income. . . . . . . . . . . . . . . . . . . . . 3 2 11 10
Non-recurring merger termination expenses (Note 9) . . . -- -- (975) --
Provision for loss on sale of Texas clinics (Note 11). . (880) -- (880) --
Settlement of claims (Note 12) . . . . . . . . . . . . . (985) -- (985) --
--------- --------- --------- ---------
(2,418) (393) (4,299) (718)
--------- --------- --------- ---------
(Loss) earnings before income taxes. . . . . . . . . . . (6,379) 327 (9,775) 2,379
--------- --------- --------- ---------
Income taxes (Note 9). . . . . . . . . . . . . . . . . . . . (1,550) 186 (2,264) 997
--------- --------- --------- ---------
Net (loss) earnings. . . . . . . . . . . . . . . . . . $ (4,829) $ 141 $ (7,511) $ 1,382
--------- --------- --------- ---------
--------- --------- --------- ---------
Net (loss) earnings per common share:
Primary. . . . . . . . . . . . . . . . . . . . . . . . . ($.58) $.02 ($.92) $.18
----- ---- ----- ----
----- ---- ----- ----
Fully diluted. . . . . . . . . . . . . . . . . . . . . . ($.58) $.02 ($.92) $.18
----- ---- ----- ----
----- ---- ----- ----
Weighted average number of common and
common equivalent shares outstanding:
Primary. . . . . . . . . . . . . . . . . . . . . . . . . 8,287 8,280 8,181 7,855
----- ----- ----- -----
----- ----- ----- -----
Fully diluted. . . . . . . . . . . . . . . . . . . . . . 8,287 8,872 8,181 8,190
----- ----- ----- -----
----- ----- ----- -----
The accompanying notes are an integral part of these statements.
</TABLE>
2
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Year Ended December 31, 1995
and the Nine Months Ended September 30, 1996 (unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nonredeemable Shareholders' Equity
------------------------------------------------------
Redeemable Additional
Common Stock Common Stock Paid-In Retained
--------------- ----------------
Shares Amount Shares Amount Capital Earnings Total
------ ------ ------ ------ --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Warrants issued in connection with subordinated
notes. . . . . . . . . . . . . . . . . . . . . . . . -- -- -- -- 468 -- 468
Common stock issued in connection with 1995
acquisitions related to settlements (Note 12). . . . -- -- 150 1 609 -- 610
Common stock issued in connection with 1995
acquisition in Washington attributed to an earnout . -- -- 2 1 11 -- 12
Termination of redemption rights (Note 12). . . . . . . (42) (375) 42 -- 375 -- 375
Net loss for the period. . . . . . . . . . . . . . . . -- -- -- -- -- (7,511) (7,511)
------ ------ ------ ------ --------- -------- --------
Balance at September 30, 1996. . . . . . . . . . . . . -- $ -- 8,312 $ 83 $ 35,270 $ (1,784) $ 33,569
------ ------ ------ ------ --------- -------- --------
------ ------ ------ ------ --------- -------- --------
</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 Nine Months Ended
September 30,
------------------------------
1996 1995
---------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (7,511) $ 1,382
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,592 1,327
Write-down of intangible assets and other assets disposed. . . . . . . . . . . . . . . . . 4,407 --
Loss on disposal of assets.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6) 1
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,606) 283
Change in assets and liabilities, net of effects from acquisitions:
Patient accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,258 (2,157)
Other receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (207) 409
Prepaid expenses and other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 231 (371)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (86) 650
Accrued liabilities and income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 1,851 1,768
---------- --------
Net cash (used) provided by operating activities . . . . . . . . . . . . . . . . . . . (77) 3,292
---------- --------
Cash flows from investing activities:
Additions to property and equipment, net of amounts
purchased in acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (199) (260)
Acquisitions, including other direct costs, net of cash acquired . . . . . . . . . . . . . . -- (13,466)
Other transactions, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30) --
---------- --------
Net cash (used in) investing activities. . . . . . . . . . . . . . . . . . . . . . . . (229) (13,726)
---------- -------
Cash flows from financing activities:
Proceeds from line of credit borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,650 10,833
Payments on line of credit borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,008) (150)
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . 1,150 --
Payments on notes payable and long-term obligations. . . . . . . . . . . . . . . . . . . . . (1,261) (740)
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 --
---------- --------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . 674 9,943
---------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . 368 (491)
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . 272 1,085
---------- --------
Cash and cash equivalents at end of the period . . . . . . . . . . . . . . . . . . . . . . . . $ 640 $ 594
---------- --------
---------- --------
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,213 $ 303
---------- --------
---------- --------
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 882 $ 578
---------- --------
---------- --------
Supplemental schedule of noncash and financing activities:
Cost of acquisitions in excess of fair market value of net assets received . . . . . . . . -- 27,466
Liabilities assumed or issued in connection with acquisitions. . . . . . . . . . . . . . . -- 10,117
Common stock issued in connection with acquisitions. . . . . . . . . . . . . . . . . . . . -- 6,911
Warrant values issued in connection with acquisitions and subordinated debt. . . . . . . . 468 160
Tangible assets acquired in connection with acquisitions . . . . . . . . . . . . . . . . . -- 4,512
Common stock issued in connection with conversion of note. . . . . . . . . . . . . . . . . 482 --
Common stock or liabilities issued for contingent consideration. . . . . . . . . . . . . . 646 --
Common stock issued in connection with acquisitions related to settlements . . . . . . . 610 --
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per share amounts)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements for the three
months and nine months ended September 30, 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 and nine months ended September 30,
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.
Certain reclassifications have been made to the 1995 financial
statements to conform to the 1996 presentation. Such reclassifications had no
effect on the results of operations or shareholders' equity.
NOTE 2 -- PATIENT ACCOUNTS RECEIVABLE
Patient accounts receivable consist of:
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
Gross accounts receivable. . . . . . . . . . $ 18,720 $ 20,866
Less allowance for doubtful accounts
and contractual adjustments. . . . . . 7,431 6,866
--------- ---------
Total patient accounts receivable, net. . . $ 11,289 $ 14,000
--------- ---------
--------- ---------
The Company analyzes and estimates allowances for contractual adjustments
and bad debts quarterly on a corporate wide basis. As a result of the third
quarter review of these allowances, the Company recorded additional
provisions for contractual adjustments and bad debts of $2,102 and
$1,262, respectively. (SEE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER
30, 1996 AND 1995, NET REVENUES.)
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 contractual adjustments was $3,319 at September 30,
1996 and $2,674 at December 31, 1995. During the nine months ended September
30, 1996 and 1995, contractual adjustments amounted to approximately $10,734 and
$6,029, respectively, and have been netted against revenues in the accompanying
consolidated statements of earnings. During the nine months ended September 30,
1996 and 1995, bad debt expense amounted to approximately $3,082 and $1,528,
respectively, and is in the accompanying consolidated statements of earnings.
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
September 30, December 31,
1996 1995
-------- --------
(Unaudited)
Autos . . . . . . . . . . . . . . . . . . . . . . . $ 2 $ 32
Office equipment. . . . . . . . . . . . . . . . . . 1,510 1,429
Physical therapy equipment. . . . . . . . . . . . . 2,103 2,173
Leasehold improvements. . . . . . . . . . . . . . . 934 929
-------- --------
4,549 4,563
Less accumulated depreciation and amortization. . . 2,192 1,789
-------- --------
$ 2,357 $ 2,774
-------- --------
-------- --------
5
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per share amounts)
NOTE 4 -- INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Cost of acquisitions in excess of the fair value
of net assets acquired . . . . . . . . . . . . . . $ 47,863 $ 51,453
Lease costs. . . . . . . . . . . . . . . . . . . . . -- 205
Covenant not-to-compete. . . . . . . . . . . . . . . 231 231
Organizational costs . . . . . . . . . . . . . . . . 50 75
------------ ------------
48,144 51,964
Less accumulated amortization. . . . . . . . . . . . 2,459 2,017
------------ ------------
$ 45,685 $ 49,947
------------ ------------
------------ ------------
</TABLE>
The Company's acquisition strategy has been premised on the establishment
of regional networks of clinics in defined geographical markets. Such networks
are focused on establishing relationships with referral sources and third-party
payors. In a market that is primarily built around such relationships, items
with an indeterminate useful life, such as 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. As of June 30,
1996, the Company completed the closure of two clinics and related operations in
Hawaii, thereby generating a write-down for impairment loss in an amount
estimated to be approximately $2,900. (SEE NOTE 10). As of September 30, 1996,
the Company completed additional closures of four clinics and related operations
in California, thereby generating an additional write down of approximately
$1,002. (SEE NOTE 10). The Company also announced its intention to sell its two
Texas clinics, and therefore, additional provisions for write down of
approximately $685 has been accrued. (SEE NOTE 11).
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
Amortization expense for the nine months ended September 30, 1996 and 1995
was $1,008 and $770, respectively.
6
<PAGE>
PACIFIC REHABILITATION & SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 5 -- LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
Long-term debt consists of the following:
September 30, December 31,
1996 1995
------------- -----------
(Unaudited)
<S> <C> <C>
9.5% unsecured note payable to an individual, due in
monthly installments of $7, including interest. . . . . . . . . . . . $ 128 $ 179
8.5% unsecured note payable to an individual, due in
monthly installments of $8, including interest.
Interest increased to 9.0% after August 15, 1996 and
a balloon payment of unpaid principal of $757 is due
March 1, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 767 786
5% unsecured long-term obligation to a corporation, due in two
annual installments of $450, plus interest, which commenced
May 1, 1995. Interest increased 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, was due and paid on May 1, 1996. . . . . . . . . . . . -- 200
4.75% unsecured convertible note payable to an individual,
$40 was due and paid on May 1, 1996. Interest increased to
6.75% after May 1, 1996 and remaining $100, plus interest,
due March 1, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 100 140
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, was due and paid on May 1, 1996. . . . . . . . . . . . -- 100
4.75% unsecured convertible note payable to a corporation,
due in two annual installments of $35, plus interest,
which commenced May 1, 1995 and was due and paid
on May 1, 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 35
7% unsecured convertible note payable to a corporation,
due in two annual installments of $40, plus interest,
which commenced March 1, 1996 . . . . . . . . . . . . . . . . . . . . 40 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, was due and paid on February 28, 1996. . . . . . . . . -- 450
8% unsecured note payable to an individual, due in installments
of $200, plus interest, was due and paid on 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 increased to 9.0% after March 1, 1996. . 850 1,250
9% unsecured note payable to a corporation, plus interest,
due March 1, 1997. Interest increased 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. . . . . . . . . . . . 85 119
8% unsecured note payable to a corporation, plus interest
due January 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . . 175 175
</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)
<TABLE>
<CAPTION>
Long-term debt consists of the following:
September 30, December 31,
1996 1995
------------- -----------
(Unaudited)
<S> <C> <C>
Unsecured note payable to a bank, due in monthly installments
of $3, including interest. Interest is variable, and was 9.25%
at September 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . 99 118
$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%). . . . . . . . . . . . 118 111
$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%). . . . . . . . . . . . 118 111
$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%). . . . . . . . . . . . 283 267
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 which commenced
June 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 132
$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%). . . . . . . . . . . . 284 267
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%). . . . . . . . . . . . 395 372
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. . . . . . . . . . . 56 62
8% unsecured note payable to an individual, due in monthly
installments of $8, including interest, and paid. . . . . . . . . . . -- 63
Subordinated note payable to a corporation (net of $32 discount at
September 30, 1996), with annual interest payments at 9% to
October 1996 with an increase to 15% interest through April
1998 (67.6% effective interest rate after consideration of warrants),
with the note plus interest due May 1, 1998.. . . . . . . . . . . . . 68 --
</TABLE>
8
<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>
September 30, December 31,
1996 1995
-------- --------
(Unaudited)
<S> <C> <C>
Subordinated note payable to an individual (net of $32 discount at
September 30, 1996), with annual interest payments at 9% to
October 1996 with an increase to 15% interest through April 1998
(67.6% effective interest rate after consideration of warrants), with
the note plus interest due May 1, 1998.. . . . . . . . . . . . . . . . . . . . 68 --
Subordinated note payable to an individual (net of $32 discount at
September 30, 1996), with annual interest payments at 9% to October
1996 with an increase to 15% interest through April 1998 (67.6%
effective interest rate after consideration of warrants), with the note
plus interest due May 1, 1998. . . . . . . . . . . . . . . . . . . . . . . . . 68 --
Subordinated note payable to an individual (net of $64 discount at
September 30, 1996), with annual interest payments at 9% to October
1996 with an increase to 15% interest through April 1998 (67.6%
effective interest rate after consideration of warrants), with the note
plus interest due May 1, 1998. . . . . . . . . . . . . . . . . . . . . . . . . 136 --
Subordinated note payable to an individual (net of $193 discount at
September 30, 1996), with annual interest payments at 9% to October
1996 with an increase to 15% interest through April 1998 (63.1%
effective interest rate after consideration of warrants), with the note
plus interest due May 1, 1998. . . . . . . . . . . . . . . . . . . . . . . . . 407 --
Subordinated note payable to an individual (net of $17 discount at
September 30, 1996), with annual interest payments at 9% to October
1996 with an increase to 15% interest through April 1998 (69.6%
effective interest rate after consideration of warrants), with the note
plus interest due May 1, 1998. . . . . . . . . . . . . . . . . . . . . . . . . 33 --
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179 148
-------- --------
9,579 10,744
Less current maturities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,443 2,655
-------- --------
$ 1,136 $ 8,089
-------- --------
-------- --------
</TABLE>
Maturities of long-term debt are as follows:
YEAR ENDING
SEPTEMBER 30,
-------------
1997. . . . . . . . . . . . . . . . . . . . . $ 8,443
1998. . . . . . . . . . . . . . . . . . . . . 969
1999. . . . . . . . . . . . . . . . . . . . . 100
2000. . . . . . . . . . . . . . . . . . . . . 45
2001 and beyond . . . . . . . . . . . . . . . 22
--------
$ 9,579
--------
--------
9
<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, is a floating
rate generally based on a defined prime rate plus 1.0% (9.25% as of September
30, 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
$11,564 at September 30, 1996. The Line of Credit was to expire on July 1,
1996. On June 30, 1996, the Company reached agreement with the Bank to
extend the expiration date to August 1, 1996. On August 1, 1996, the Company
and the Bank reached agreement to extend the expiration date to September 1,
1996. In October 1996, the Company and the Bank reached agreement to extend
the expiration date to December 31, 1996, and attached conditions under which
the Company will pay down the Line of Credit and decrease the borrowing base
percentage to 70% by November 30, 1996. The Company had borrowings under the
Line of Credit of $11,675 at September 30, 1996. A paydown of approximately
$111 will be due upon submission of this Form 10-Q to the Bank.
The Line of Credit previously contained three conditions, each of which
had to be satisfied at all times. The most recent agreement to modify the
Line of Credit eliminated two of these conditions. As a result, the Company
must only comply with the Borrowing Base requirement. As noted above, the
Company will be in compliance with the condition upon payment of the paydown
of $111. The Line of Credit expired on September 1, 1996 and was
subsequently extended to December 31, 1996, with conditions under which the
Company will pay down the Line of Credit and decrease the borrowing base
percentage to 70% by November 30, 1996 with an additional payment of
approximately $2,000. If, however, the bank requires the Company to
recognize the additional provision for contractual adjustments and bad debts,
which total $3,364, in calculating the Borrowing Base, the Company will be
required to make a paydown of $1,400 instead of $111 and an additional
paydown of $1,801 by November 30, 1996, instead of $2,000. (See Management's
Discussion and Analysis of Financial Condition and Results of
Operations -Liquidity and Capital Resources).
NOTE 7 -- ACCRUED LIABILITIES
<TABLE>
<CAPTION>
Accrued liabilities consist of the following:
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
Accrued compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,224 $ 604
Accrued professional fees . . . . . . . . . . . . . . . . . . . . . . . . . 134 311
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 658 402
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 893 1,198
Accrued merger termination costs (Note 9) . . . . . . . . . . . . . . . . . 666 --
Accrued restructuring costs (Note 10) . . . . . . . . . . . . . . . . . . . 494 --
Accrued provision for loss on sale of Texas clinics (Note 11) . . . . . . . 880 --
------------ ----------
$ 4,949 $ 2,515
------------ ----------
------------ ----------
</TABLE>
NOTE 8 -- INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1996 1995 1996 1995
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Current. . . . . . $ 1,056 $ (35) 342 619
Deferred . . . . . (2,606) 221 (2,606) 378
---------- ---------- --------- ---------
$ (1,550) $ 186 $(2,264) $ 997
---------- ---------- --------- ---------
---------- ---------- --------- ---------
</TABLE>
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.
10
<PAGE>
PACIFIC REHABILITATION AND SPORTS MEDICINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 9 -- MERGER TERMINATION
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, of approximately $975 in the
aggregate. These expenses will be paid in the ordinary course of business and
were accounted for as a one-time 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).
NOTE 10 -- RESTRUCTURING OF HAWAII AND CALIFORNIA OPERATIONS
As of June 30, 1996, the Company completed the closure of two clinics
and related operations and terminated 11 persons in Hawaii. The actions
resulted in a one-time charge of $3,510, ($2,588, or $0.32 per share, after
taxes) in the second quarter. These actions were taken by the Company in
response to reduced revenues in the Hawaii market resulting from legislation
enacted in Hawaii in 1995. That legislation has reduced reimbursement rates
by approximately 19% and led to a reduction in referrals of approximately
50%. Of the total charge taken in the second quarter, approximately $130
represents expenses and charges associated with the closure of facilities,
including the termination of clinic leases and disposal of fixed assets,
approximately $30 represents employee severance payments, benefits and
associated taxes, approximately $450 represents a write-off of net accounts
receivable which the Company believes may be uncollectable as a result of the
closure of the clinics and other related operations, and approximately
$2,900 represents a reduction in goodwill and other intangibles associated
with the closure of the clinics and other related operations. All the
accrued costs are reported as current liabilities. As a result of the
closure of these clinics and related operations, the Company now has five
clinics in Hawaii. (SEE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.)
As of September 30, 1996, the Company completed the closure or
consolidation of four clinics and related operations, terminated 9 persons
in California, and transferred its California billing and collections
operation to Nevada. The actions resulted in a one-time charge of $1,490,
($966, or $0.12 per share, after taxes) in the third quarter. These
actions were taken by the Company in response to reduced revenues in the
California market resulting from the decrease in the referral base and the
Company's assessment that this base could not be rebuilt within a reasonable
time frame. Of the total charge taken in the third quarter, approximately
$453 represents expenses and charges associated with the closure of
facilities, including the termination of clinic leases and disposal of fixed
assets, approximately $35 represents employee severance payments, benefits
and associated taxes, and approximately $1,002 represents a reduction in
goodwill and other intangibles associated with the closure of the clinics and
other related operations. All the accrued costs are reported as current
liabilities. As a result of the closure of these clinics and related
operations, the Company now has eight clinics in California. (SEE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.)
11
<PAGE>
NOTE 11 -- PROPOSED SALE OF TEXAS CLINICS
The Company had previously announced its intentions to close or sell its
Texas clinics and related operations and is currently negotiating the sale.
The Company estimates a sale price for the two clinics of $200. The impact
of the sale of the Texas clinics at this price is a one-time charge to
expense in the third quarter of 1996 of $880, ($805, or $0.10 per share,
after taxes). Costs totaling $69, including operating losses up to the point
of sale, are included in the $880 loss on sale. Net assets to be sold include
goodwill and other intangibles of $685, receivables of $228 and fixed assets
of $62. (SEE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.)
NOTE 12 -- SHAREHOLDERS' EQUITY AND SETTLEMENT OF CLAIMS
During the quarter, the Company issued 150 shares of its common stock with
a then fair market value of $610 and agreed to issue in the fourth quarter 47
shares of its common stock with a then fair market value of $187, all as
partial payment in settlement of claims being asserted by certain
shareholders. The Company had originally issued shares of its common stock to
these shareholders as part of the purchase price for the acquisition of their
respective clinics. The Company agreed to register the original shares under
applicable federal and state securities laws within certain time frames,
which it was unable to do because of the previous pending merger with
Horizon/CMS Healthcare Corporation, which was terminated on April 2, 1996.
The Company also paid a total of $150 in cash in the aggregate to these
shareholders, including $47 as direct cash payments to certain shareholders,
$10 for legal fees of certain shareholders, and $93 as payment of the
Company's guarantee that the original and additional shares, when sold by two
of the shareholders, would have a stated value of $287. The Company also
agreed to pay costs and legal fees estimated at $38, payable after September
30, 1996. The stock, cash payments and other obligations resulted in a charge
to expense in the third quarter of $985, ($924, or $0.10 per share, after
taxes). Included within the claims settled were those asserted by a
shareholder with the right to require the Company to redeem his original
shares of the Company's common stock if the Company failed to register his
original shares within specified time frames. These redemption rights were
terminated upon payment of all amounts owed under the settlement agreement
with this shareholder.
NOTE 13 -- SUBSEQUENT EVENTS
On October 30, 1996 the Company announced that it is in discussion
concerning the possibility of a merger of the Company with Horizon/CMS
Healthcare Corporation at a price of $6.50 per share in cash. No definitive
agreement has been reached with respect to any terms of a transaction.
On October 30, 1996, the Company reached agreement to acquire two
additional clinics in Oregon for a purchase price of between $1,200 and
$1,500, depending on satisfaction of certain earnout conditions. The closing
of the acquisition is not expected to occur until the first quarter of 1997
and is subject to the satisfaction of a number of conditions on the part of
the seller and the Company.
12
<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 September 30, 1996, the Company provided
comprehensive outpatient rehabilitation and physical therapy services at 66
outpatient rehabilitation clinics in Hawaii, Washington, Oregon, California,
Nevada, Arizona, Mississippi, Florida and Maryland.
The following table sets forth, as of September 30, 1996, the number of
clinic acquisitions completed, additional clinics opened and clinics
consolidated or closed by the Company since 1994:
<TABLE>
<CAPTION>
1994 1995 1996
-------------------------- --------------------------- -----------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd 3rd
Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr
--- --- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Clinics at beginning of period 18 18 37 37 39 47 59 74 72 72 70
Clinics acquired - 17 - 2 8 10 14 - - - -
Clinics opened - 2 - - - 2 1 - - - 2
Clinics consolidated - - - - - - - (2) - - (1)
Clinics closed - - - - - - - - - (2) (5)
-------------------------- --------------------------- -----------------------
Clinics at end of period 18 37 37 39 47 59 74 72 72 70 66
-------------------------- --------------------------- ----------------------
-------------------------- --------------------------- ----------------------
</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 be acquired by Horizon/CMS Healthcare Corporation; (ii) the Company will
be able 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; and (iii) additional debt or equity capital, as needed, will be
available and on terms acceptable to the Company; (iv) the Company will not
experience unanticipated working capital or other cash requirements; (v) no
further extraordinary charges and adjustments will need to be reflected in
the Company's financial statements and results of operations; (vi) 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; (vii) 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;
(viii) 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; (ix) reimbursement and utilization rates for the Company's
therapy services will not be significantly reduced; and (x) the Company's
marketing efforts will continue to be successful. 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.
13
<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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1996 1995 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 79.2 62.9 66.6 56.2
----- ----- ----- -----
Gross profit 20.8 37.1 33.4 43.8
Operating expenses:
Selling, general and administrative expenses 22.4 18.5 18.9 19.9
Bad debt expense 22.6 5.8 10.7 6.1
Depreciation and amortization 6.3 5.8 5.5 5.4
Restructuring expenses 18.4 - 17.3 -
----- ----- ----- -----
69.7 29.9 52.4 31.4
----- ----- ----- -----
Operating income (loss) (48.9) 7.2 (19.0) 12.4
----- ----- ----- -----
Non-operating income (expense):
Interest expense (6.8) (3.9) (5.1) (2.9)
Interest income - - - -
Non-recurring merger termination expenses - - (3.4) -
Provision for loss on sale of Texas clinics (10.9) - (3.0) -
Settlement of claims (12.2) - (3.4) -
----- ----- ----- -----
(29.9) (3.9) (14.9) (2.9)
----- ----- ----- -----
Earnings (loss) before income taxes (78.8) 3.3 (33.9) 9.5
Income taxes (19.2) 1.9 (7.9) 3.9
----- ----- ----- -----
Net earnings (loss) (59.6)% 1.4 % (26.0)% 5.6 %
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
As of September 30, the Company closed four clinics in Southern
California and announced the future sale of its two clinics in Texas.
Operations for these clinics were phasing down during the period.
Accordingly, the results of operations for these clinics are not included in
the same store analysis as management believes including them would not be
helpful to understanding the Company's ongoing operations.
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
NET REVENUES. The Company analyzes and estimates allowances for
contractual adjustments and bad debts quarterly on a corporate wide basis. As
a result of the third quarter review of these allowances, the Company
recorded additional provisions for contractual adjustments and bad debts of
$2,102,000 and $1,262,000, respectively. During the period the Company
increased its efforts to more aggressively collect accounts receivable and to
write-off uncollectible accounts, and implemented an additional analytical
tool that allowed it to review by type-of-payor its receivable agings. As a
result of this new analytical approach, applied over the course of the
quarter's activity, the Company determined that the allowances for
contractual adjustments and bad debts should be increased as of September 30,
1996. The contractual allowance adjustment resulted in a $2,102,000 charge to
revenue as of September 30, 1996. Net revenues decreased $1,937,000 from
$10,039,000 in the third quarter of 1995 to $8,102,000 in the third quarter
of 1996, primarily as a result of this contractual allowance adjustment.
Excluding the effect of the contractual allowance adjustment, net revenues
increased $165,000, from $10,039,000 in the third quarter of 1995 to
$10,204,000 in the third quarter of 1996, an increase of 1.6%. The increase
was due to a 2.7% same store net increase of $243,000, attributable to
clinics which operated in the third quarter of both 1996 and 1995, offset in
part, by net revenue decreases due primarily to the closed clinics in Hawaii,
California and Texas. These closed clinics account for revenue decreases of
$300,000. Such decreases were offset by revenues of $221,000 attributable to
clinics opened since the beginning of the third quarter of 1995. Future
revenues are expected to decrease by approximately one percent as a result of
increased accrual rates for contractual adjustments. Based on the Company's
assumption of approximately $10,000,000 in net revenue for the fourth quarter
of 1996, the effect of the increased accrual rate will be an approximate
$100,000 decrease in quarterly revenues and pretax earnings. SEE NOTES 2, 10
AND 11 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
14
<PAGE>
With regard to clinics closed, as of June 30, 1996, in Hawaii, the
Company completed the closure of two clinics and related operations and
terminated the employment of 11 persons. These actions resulted in a one-time
charge in the second quarter of 1996. These actions were taken by the
Company in response to reduced revenues in the Hawaii market resulting from
the legislation enacted in 1995, as discussed below, which reduced
reimbursement rates and led to a reduction in patient visits. As a result of
these actions and increased marketing emphasis, the Hawaii clinics were
profitable in August and September, 1996. SEE NOTE 10 OF NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
As of September 30, 1996, the Company completed the closure or
consolidation of four clinics and related operations and terminated 9 persons
in California. The actions resulted in a one-time charge of $1,490,000
($966,000, or $0.12 per share, after taxes) in the third quarter. These
actions were taken by the Company in response to reduced revenues in the
California market resulting from the decrease in the referral base and a
belief by the Company that the referral base for these clinics could not be
rebuilt in a reasonable time frame. Of the total charge taken in the third
quarter, approximately $453,000 represents expenses and charges associated
with the closure of facilities, including the termination of clinic leases
and disposal of fixed assets, approximately $35,000 represents employee
severance payments, benefits and associated taxes, and approximately
$1,002,000 represents a reduction in goodwill and other intangibles
associated with the closure of the clinics and other related operations. All
the accrued costs are reported as current liabilities. SEE NOTE 10 OF NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS.
As previously announced, the Company intends to close or sell its Texas
operations and is currently negotiating to complete a sale. The Company
estimates a sale price for the two clinics of $200,000. The impact of the
sale of the Texas clinics at this price is a one-time charge to expense in
the third quarter of $880,000 ($805,000, or $0.10 per share, after taxes).
Costs totaling $69,000, including operating losses up to the point of sale,
are included in the $880,000 loss on sale. Net assets to be sold include
goodwill and other intangibles of $685,000, receivables of $228,000 and fixed
assets of $62,000. SEE NOTE 11 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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 $100,000, from
$6,313,000 in the third quarter of 1995 to $6,413,000 in the third quarter of
1996, an increase of 1.6%. Of this increase, a decrease of $162,000,
attributable primarily to clinics closed, partially offsets an increase of
$262,000 attributable to clinics which operated in the third quarter of both
1996 and 1995. Cost of revenues as a percentage of net revenues was 79.2% and
62.9% for the third quarter of 1996 and 1995, respectively. The increase was
primarily a result of decreased net revenues as discussed above.
15
<PAGE>
GROSS PROFIT. Gross profit decreased $2,038,000, from $3,726,000 in the
third quarter of 1995 to $1,690,000 in the third quarter of 1996.
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 decreased
$40,000, from $1,855,000 in the third quarter of 1995 to $1,815,000 in the
third quarter of 1996, a decrease of 2.2%. This decrease was comprised of a
$260,000 decrease attributable to same store clinics, offset in part by a net
increase of $220,000 resulting from clinics opened since the beginning of the
third quarter of 1995. Selling, general and administrative expenses increased
to 22.4% as compared to 18.5% of net revenues in the third quarter of 1996
and 1995, respectively. Selling, general and administrative expenses, as a
percentage of net revenues increased primarily due to the decrease in net
revenues as described above.
BAD DEBT. Bad debt expense increased $1,252,000 from $583,000 in the third
quarter of 1995 to $1,835,000 in the third quarter of 1996. The increase in
bad debt expense is the result of the additional provision for bad debts of
$1,262,000 as described above.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
decreased $57,000, from $568,000 in the third quarter of 1995 to $511,000 in the
third quarter of 1996. The decrease in depreciation and amortization expense is
the result of the write off in June 1996 of approximately $2,900,000 of goodwill
and other intangibles associated with the closure of clinics and related
operations in Hawaii. SEE DISCUSSION BELOW AND NOTE 10 OF NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
RESTRUCTURING EXPENSES. As of September 30, 1996, the Company completed
the closure or consolidation of four clinics and related operations and
terminated 9 persons in California. The actions resulted in a one-time
charge of $1,490,000, ($966,000, or $0.12 per share, after taxes) in the
third quarter. These actions were taken by the Company in response to
reduced revenues in the California market resulting from the decrease in the
referral base and a belief by the Company that the referral base for these
clinics could not be rebuilt in a reasonable time frame. Of the total charge
taken in the third quarter, approximately $453,000 represents expenses and
charges associated with the closure of facilities, including the termination
of clinic leases and disposal of fixed assets, approximately $35,000
represents employee severance payments, benefits and associated taxes, and
approximately $1,002,000 represents a reduction in goodwill and other
intangibles associated with the closure of the clinics and other related
operations. All the accrued costs are reported as current liabilities. As a
result of the closure of these clinics and related operations, the Company
now has eight clinics in California. SEE NOTE 10 OF NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
NON-OPERATING INCOME (EXPENSE). Interest expense increased $161,000, from
$395,000 in the third quarter of 1995 to $556,000 in the third 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 and a private
placement of $1,150,000 of subordinated debt issued during the second quarter
of 1996.
PROVISION FOR LOSS ON SALE OF TEXAS CLINICS. As previously announced, the
Company intends to close or sell its Texas operations and is currently
negotiating to complete a sale. The Company estimates a sale price for the
two clinics of $200,000. The impact of the sale of the Texas clinics at this
price is a one-time charge to expense in the third quarter of $880,000,
($805,000, or $0.10 per share, after taxes). Costs totaling $69,000,
including operating losses up to the point of sale, are included in the
$880,000 loss on sale. Net assets to be sold include goodwill and other
intangibles of $685,000, receivables of $228,000 and fixed assets of $62,000.
SETTLEMENT OF CLAIMS. During the quarter, the Company issued 150,000
shares of its common stock with a then fair market value of $610,000 and
agreed to issue in the fourth quarter 47,000 shares of its common stock with
a then fair market value of $187,000, all as partial payment in settlement of
claims being asserted by certain shareholders. The Company had originally
issued shares of its common stock to these shareholders as part of the
purchase price for the acquisition of their respective clinics. The Company
agreed to register the original shares under applicable federal and state
securities laws within certain time frames, which it was unable to do because
of the previous pending merger with Horizon/CMS Healthcare Corporation, which
was terminated on April 2, 1996. The Company also paid a total of $150,000 in
cash in the aggregate to these shareholders, including $47,000 as direct cash
payments to certain shareholders, $10,000 for legal fees of certain
shareholders, and $93,000 as payment of the Company's guarantee that the
original and additional shares, when sold by two of the shareholders, would
have a stated value of $287,000. The Company also agreed to pay costs and
legal fees estimated at $38,000, payable after September 30,1996. The stock,
cash payments and other obligations resulted in a charge to expense in the
third quarter of $985,000, ($924,000, or $0.10 per share, after taxes).
Included within the claims settled were those asserted by a shareholder with
the right to require the Company to redeem his original shares of the
Company's common stock if the Company failed to register his original shares
within specified time frames.
16
<PAGE>
INCOME TAXES. The Company's effective tax rate decreased to 24.3% in
the third quarter of 1996 from 57.9 % in the third quarter of 1995. The
decrease in the effective tax rate is primarily due to the net loss recorded
in the third quarter of 1996 resulting from the recording of additional
provisions for contractual adjustments and bad debts, the restructuring of
the Company's California operations, the provision for loss on sale of the
Texas operations and the settlement of claims.
IMPACT ON EARNINGS OF ADDITIONAL PROVISIONS, RESTRUCTURING EXPENSES,
PROVISION FOR LOSS ON SALE AND SETTLEMENT OF CLAIMS. The Company earned
approximately $0.03 per share after taxes without consideration of the impact
of the recording of additional provisions for contractual adjustments and bad
debts, the restructuring of the Company's California operations, the
provision for loss on sale of the Texas operations and the settlement of
claims. In the third quarter of 1996 the Company recorded additional
provisions for contractual adjustments and bad debts totaling $3,364,000
($2,375,000, or $0.29 per share, after taxes), expenses totaling $2,370,000
($1,771,000, or $0.22 per share, after taxes) in connection with
restructuring of the Company's California operations and the planned
disposition of its Texas operations and $985,000 ($924,000, or $0.10 per
share, after taxes) for the settlement of claims. SEE NOTES 2, 10, 11 and 12
OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Future revenues are expected
to decrease by approximately one percent as a result of increased accrual
rates for contractual adjustments. Based on the Company's assumption of
approximately $10,000,000 in net revenue for the fourth quarter of 1996, the
effect of the increased accrual rate will be an approximate $100,000 decrease
in quarterly revenues and pretax earnings. The Company's California
operations lost approximately $118,000 in the third quarter (approximately
$187,000 for the nine months ended September 30, 1996). The Company believes
that, as a result of the restructuring of its California operations, results
in California will improve in the fourth quarter of 1996 and its operations
will be at a break-even or profitable level by the first quarter of 1997.
The Company's Texas operations lost approximately $34,000 in the third
quarter (approximately $128,000 for the nine months ended September 30,
1996). The sale or closing of the Texas operations will eliminate these
recurring losses from operations.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
NET REVENUES. The Company analyzes and estimates allowances for
contractual adjustments and bad debts quarterly on a corporate wide basis. As
a result of the third quarter review of these allowances, the Company
recorded additional provisions for contractual adjustments and bad debts of
$2,102,000 and $1,262,000, respectively. During the period the Company
increased its efforts to more aggressively collect accounts receivable and to
write-off uncollectible accounts, and implemented an additional analytical
tool that allowed it to review by type-of-payor its receivable agings. As a
result of this new analytical approach, applied over the course of the
quarter's activity, the Company determined that the allowances for
contractual adjustments and bad debts should be increased as of September 30,
1996. The contractual allowance adjustment resulted in a $2,102,000 charge to
revenue as of September 30, 1996. Net revenues increased $3,964,000, from
$24,903,000 in the first nine months of 1995 to $28,867,000 in the first nine
months of 1996. Excluding the effect of the contractual allowance adjustment,
net revenues increased $6,066,000, from $24,903,000 in the first nine months
of 1995 to $30,969,000 in the first nine months of 1996, an increase of
24.4%. Net revenues increased $8,162,000 from clinics opened since the
beginning of 1995. This increase from clinics opened was partially offset by
decreases of $1,115,000 in closed clinics in Hawaii, California and Texas and
same store decreases of $981,000 attributable to clinics which operated in
the first nine months of both 1996 and 1995. The same store decrease was
primarily due to decreased net revenues in Hawaii. A small portion of the
decrease was due to decreased net revenue in Southern California and
decreased net revenue due to inclement winter weather in Baltimore during the
first quarter of 1996. Future revenues are expected to decrease by
approximately one percent as a result of increased accrual rates for
contractual adjustments. Based on the Company's assumption of approximately
$10,000,000 in net revenue for the fourth quarter of 1996, the effect of the
increased accrual rate will be an approximate $100,000 decrease in quarterly
revenues and pretax earnings. SEE NOTES 2, 10 AND 11 OF NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
The decrease in net revenues in Hawaii between 1995 and 1996 is
attributable primarily to passage in July 1995 of managed care legislation. The
legislation and accompanying regulations 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. These reduced reimbursement rates decreased the Company's revenue per
visit. Regulations issued under the legislation also reduce the number of
approved patient visits, which further reduced the Company's net revenues. The
Company believes that the revenue decreases already experienced and those that
result from this legislation have been and will continue to 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 through the end of 1996.
As of June 30, 1996, in Hawaii, the Company completed the closure of two
clinics and related operations and terminated the employment of 11 persons.
These actions resulted in a one-time charge to expense of $3,510,000
($2,588,000, or $0.32 per share, after taxes) in the second quarter of 1996.
These actions were taken by the Company in response to reduced revenues in the
Hawaii market resulting from legislation enacted in 1995, as discussed above,
which reduced reimbursement rates and led to a reduction in patient visits of
approximately 50%. The one-time charge includes approximately $2,900,000 for a
reduction in goodwill and other intangibles associated with the closure of the
clinics and related operations, approximately $160,000 of related expenses and
approximately $450,000 related to the write-off of accounts receivable which the
Company believes may be uncollectible as a result of the closure of the clinics
and related operations. As a result of these actions and increased marketing
emphasis, the Hawaii clinics were profitable in August and September, 1996.
SEE NOTE 10 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
17
<PAGE>
As of September 30, 1996, the Company completed the closure or
consolidation of four clinics and related operations and terminated 9 persons
in California. The actions resulted in a one-time charge of $1,490,000
($966,000, or $0.12 per share, after taxes) in the third quarter. These
actions were taken by the Company in response to reduced revenues in the
California market resulting from the decrease in the referral base and a
belief by the Company that the referral base for these clinics could not be
rebuilt in a reasonable time frame. Of the total charge taken in the third
quarter, approximately $453,000 represents expenses and charges associated
with the closure of facilities, including the termination of clinic leases
and disposal of fixed assets, approximately $35,000 represents employee
severance payments, benefits and associated taxes, and approximately
$1,002,000 represents a reduction in goodwill and other intangibles
associated with the closure of the clinics and other related operations. All
the accrued costs are reported as current liabilities. SEE NOTE 10 OF NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS.
As previously announced, the Company intends to close or sell its Texas
operations and is currently negotiating to complete a sale. The Company
estimates a sale price for the two clinics of $200,000. The impact of the
sale of the Texas clinics at this price is a one-time charge to expense in
the third quarter of 1996 of $880,000 ($805,000, or $0.10 per share, after
taxes). SEE NOTE 11 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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 $5,228,000, from
$13,991,000 in the first nine months of 1995 to $19,219,000 in the first nine
months of 1996, an increase of 37.4%. Of this increase, $4,403,000 was
attributable to clinics opened since the beginning of 1995 and $825,000 was
attributable to clinics which operated in the first nine months of both 1996
and 1995. Cost of revenues as a percentage of net revenues was 66.6% and
56.2% for the first nine months of 1996 and 1995, respectively. The increase
was primarily a result of decreased net revenues as discussed above.
GROSS PROFIT. Gross profit decreased $1,264,000, from $10,912,000 in
the first nine months of 1995 to $9,648,000 in the first nine months of 1996.
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
$490,000, from $4,960,000 in the first nine months of 1995 to $5,450,000 in
the first nine months of 1996, an increase of 9.9%. Of this increase,
$1,027,000 was due to clinics opened by the Company since the beginning of
1995 offset by $537,000 reduction in same store expenses. Selling, general
and administrative expenses decreased to 18.9% as compared to 19.9% of net
revenues in the first nine months of 1996 and 1995, respectively.
18
<PAGE>
BAD DEBT. Bad debt expense increased $1,554,000 from $1,528,000 in the
first nine months of 1995 to $3,082,000 in the first nine months of 1996. The
increase in bad debt expense is primarily the result of the additional
provision for bad debts of $1,262,000 as described above and bad debt
expense associated with clinics acquired and opened by the Company since
the beginning of 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $265,000, from $1,327,000 in the first nine months of 1995 to
$1,592,000 in the first nine months 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. In June 1996 the Company wrote off approximately
$2,900,000 of goodwill and other intangibles associated with the closure of two
clinics and related operations in Hawaii. SEE THE DISCUSSION BELOW AND NOTE 10
OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
RESTRUCTURING EXPENSES. As of June 30, 1996, the Company completed the
closure of clinics and related operations in Hawaii and the termination of the
employment of 11 persons. In connection with these actions, the Company recorded
a one-time charge to expense of $3,510,000 ($2,588,000, or $0.32 per share,
after taxes) in the second quarter of 1996. These actions were taken by the
Company in response to reduced revenues in the Hawaii market resulting from
legislation enacted in 1995, as discussed above, which reduced reimbursement
rates and led to a reduction in patient visits of approximately 50%. The one-
time charge includes approximately $2,900,000 for a reduction in goodwill and
other intangibles associated with the closure of the clinics and related
operations, approximately $160,000 of related expenses, and approximately
$450,000 related to the write-off of accounts receivable which the Company
believes may be uncollectible as a result of the closure of the clinics and
related operations. SEE NOTE 10 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
As of September 30, 1996, the Company completed the closure or
consolidation of four clinics and related operations and terminated 9 persons
in California. The actions resulted in a one-time charge in the third
quarter of 1996 of $1,490,000 ($966,000, or $0.12 per share, after taxes).
These actions were taken by the Company in response to reduced revenues in
the California market resulting from the decrease in the referral base and a
belief by the Company that the referral base for these clinics could not be
rebuilt in a reasonable time frame. Of the total charge taken in the third
quarter, approximately $453,000 represents expenses and charges associated
with the closure of facilities, including the termination of clinic leases
and disposal of fixed assets, approximately $35,000 represents employee
severance payments, benefits and associated taxes, and approximately
$1,002,000 represents a reduction in goodwill and other intangibles
associated with the closure of the clinics and other related operations. All
the accrued costs are reported as current liabilities. As a result of the
closure of these clinics and related operations, the Company now has eight
clinics in California. SEE NOTE 10 OF NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
NON-OPERATING INCOME (EXPENSE). Interest expense increased $742,000,
from $728,000 in the first nine months of 1995 to $1,470,000 in the first
nine months of 1996. The increase was due primarily to interest expense
associated with debt incurred in connection with acquisitions made by the
Company in 1995 and a private placement of $1,150,000 of subordinated debt
issued during the second quarter of 1996.
NON-RECURRING MERGER TERMINATION EXPENSES. 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 counsel, accountants, investment bankers and
consultants, which totaled in the aggregate $975,000 ($615,000, or $0.08 per
share, after taxes). These expenses are accounted for as a one-time charge to
earnings in the second quarter of 1996. SEE NOTE 9 OF NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
PROVISION FOR LOSS ON SALE OF TEXAS CLINICS. As previously announced,
the Company intends to close or sell its Texas operations and is currently
negotiating to complete a sale. The Company estimates a sale price for the
two clinics of $200,000. The impact of the sale of the Texas clinics at this
price is a one-time charge to expense in the third quarter of $880,000,
($805,000, or $0.10 per share, after taxes). Costs totaling $69,000,
including operating losses up to the point of sale, are included in the
$880,000 loss on sale. Net assets to be sold include goodwill and other
intangibles of $685,000, receivables of $228,000 and fixed assets of $62,000.
SETTLEMENT OF CLAIMS. During the quarter, the Company issued 150,000
shares of its common stock with a then fair market value of $610,000 and
agreed to issue in the fourth quarter 47,000 shares of its common stock with
a then fair market value of $187,000, all as partial payment in settlement of
claims being asserted by certain shareholders. The Company had originally
issued shares of its common stock to these shareholders as part of the
purchase price for the acquisition of their respective clinics. The Company
agreed to register the original shares under applicable federal and state
securities laws within certain time frames, which it was unable to do because
of the previous pending merger with Horizon/CMS Healthcare Corporation, which
was terminated on April 2, 1996. The Company also paid a total of $150,000 in
cash in the aggregate to these shareholders, including $47,000 as direct cash
payments to certain shareholders, $10,000 for legal fees of certain
shareholders, and $93,000 as payment of the Company's guarantee that the
original and additional shares, when sold by two of the shareholders, would
have a stated value of $287,000. The Company also agreed to pay costs and
legal fees estimated at $38,000, payable after September 30, 1996. The stock,
cash payments and other obligations resulted in a charge to expense in the
third quarter of $985,000, ($924,000, or $0.10 per share, after taxes).
Included within the claims settled were those asserted by a shareholder with
the right to require the Company to redeem his original shares of the
Company's common stock if the Company failed to register his original shares
within specified time frames.
INCOME TAXES. The Company's effective tax rate decreased to 23.2% in
the first nine months of 1996 from 41.9% in the first nine months of 1995.
The decrease in the effective tax rate is primarily due to the net loss
recorded in the period resulting from the recording of
additional provisions for contractual adjustments and bad debts, the
restructuring of the Company's California and Hawaii operations, the
non-recurring merger termination expenses, the provision for loss
on sale of the Texas operations and the settlement of claims.
19
<PAGE>
IMPACT ON EARNINGS OF ADDITIONAL PROVISIONS, RESTRUCTURING EXPENSES,
PROVISION FOR LOSS ON SALE AND SETTLEMENT OF CLAIMS. The Company earned
approximately $0.09 per share after taxes without consideration of the impact
of the recording of additional provisions for contractual adjustments and bad
debts, the restructuring of the Company's Hawaii and California operations,
the non-recurring merger termination expenses, the provision for loss on
sale of the Texas operations and the settlement of claims. In the third
quarter of 1996 the Company recorded additional provisions for contractual
adjustments and bad debts totaling $3,364,000 ($2,375,000, or $0.29 per
share, after taxes), expenses totaling $2,370,000 ($1,771,000 or $0.22 per
share, after taxes) in connection with restructuring of the Company's
California operations and the planned disposition of its Texas operations and
$985,000 ($924,000, or $0.10 per share, after taxes) for the settlement of
claims. (SEE NOTES 2, 10, 11 AND 12 OF NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.) In the second quarter of 1996 the Company incurred expenses of
approximately $975,000 ($615,000, or $0.08 per share, after taxes) in
connection with the termination of the proposed merger with Horizon (SEE NOTE
9 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS) and approximately $3,510,000
($2,588,000, or $0.32 per share, after taxes) in connection with the
restructuring of the Company's Hawaii operations (SEE NOTE 10 TO NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS). Future revenues are expected to decrease
by approximately one percent as a result of increased accrual rates for
contractual adjustments. Based on the Company's assumption of approximately
$10,000,000 in net revenue for the fourth quarter of 1996, the effect of the
increased accrual rate will be an approximate $100,000 decrease in quarterly
revenues and pretax earnings. The Company's California operations lost
approximately $187,000 for the nine months ended September 30, 1996. The
Company believes that, as a result of the restructuring of its California
operations, results in California will improve in the fourth quarter of 1996
and its operations will be at a break-even or profitable level by the first
quarter of 1997. The Company's Texas operations lost approximately $128,000
for the nine months ended September 30, 1996. The sale or closing of the
Texas operations will eliminate these recurring losses from operations. The
Company's Hawaii operations lost approximately $348,000 for the nine months
ended September 30, 1996. As a result of the restructuring of its Hawaii
operations, the Company projected that Hawaii's operations would be at a
break-even or profitable level by the first quarter of 1997. Hawaii actually
began producing a slight profit in the second month of the third quarter.
20
<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 (see "General" above), bank
borrowings, additional debt and equity financing and cash generated from
operations.
As of September 30, 1996, current liabilities exceeded current assets,
resulting in negative working capital of $12,297,000, including $640,000 in
cash and cash equivalents. The principal reason for this negative working
capital was the Company's acquisition activity in 1994 and 1995. During 1994
and 1995, 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 September 30, 1997, these obligations are
included in current liabilities. The negative working capital was further
increased by the accruals for merger termination, restructuring and
settlement costs and the provision for loss on the sale of the Texas clinics.
Net patient accounts receivable decreased $2,711,000 to $11,289,000
during the first nine months of 1996, primarily as a result of the additional
provisions for contractual adjustments and bad debts. The number of days of
average net revenues in ending net patient accounts receivable was 101 at
September 30, 1996 compared to 122 at December 31, 1995. However, the 101 is
not directly comparable to the 122 at December 31, 1995 due to the additional
provisions recorded. As a result of these adjustments, the calculation at
September 30, 1996, has been based on the ending net receivable balance after
the adjustments, rather than the average receivables. This ending balance of
$11,289,000 has been related to normalized revenues (rather than the
$8,102,000 post-adjustment revenue figure) in order to produce a result that
the Company believes will be more comparable to expected future results. The
Company continues to focus its cash collection policies, systems and efforts
to minimize collection time. Accounts payable decreased and accrued
liabilities increased $86,000 and $2,434,000, respectively, in the first nine
months of 1996. The increase in accrued liabilities was primarily
attributable to expenses related to the termination of the merger previously
proposed with Horizon, the provisions for expenses related to the
closure or sale of clinics and related operations in Hawaii, California and
Texas and the accrual for settlement costs.
Long-term obligations, line of credit and notes payable and other
obligations decreased $476,000 to $22,316,000 during the first nine months of
1996. This decrease was primarily due to the conversion of a $450,000
acquisition note into shares of common stock in the first quarter of 1996,
net of an increase of $1,150,000 resulting from a private placement of
subordinated debt issued during the second quarter. The subordinated debt
includes warrants, which expire in May 2000, to purchase up to 230,000 shares
of the Company's common stock at $5.00 per share.
At September 30, 1996, notes payable with aggregate principal amounts of
$3,242,000 may be converted into approximately 420,000 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. In exchange
for deferring payment of principal until 1997, the Company agreed to pay the
holders of such debt 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.
The Company has a credit facility with Bank of America Oregon (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
September 30, 1996 the Borrowing Base was approximately $11,564,000 and
borrowings under the Line of Credit facility were approximately $11,675,000.
Under the terms of the Line of Credit, the Company is obligated to reduce the
borrowings under the Line of Credit to $11,564,000 upon submission of this
Form 10-Q to the bank. The Line of Credit previously contained three
conditions, each of which had to be satisfied at all times. The most recent
agreement to modify the Line of Credit eliminated two of these conditions. As
a result, the Company must only comply with the Borrowing Base requirement.
The Company will be in compliance with the condition upon payment of the
paydown of $111,000. The Line of Credit expired on September 1, 1996, and was
subsequently extended to December 31, 1996, with conditions under which the
Company will pay down the Line of Credit and decrease the borrowing base
percentage to 70% by November 30, 1996 with an additional payment of
approximately $2,000,000. If, however, the bank requires the Company to
recognize the additional provision for contractual adjustments and bad debts,
which total $3,364,000, in calculating the Borrowing Base, the Company will
be required to make a paydown of $1,400,000 by mid November instead of
$111,000 and a paydown of $1,801,000 by November 30, 1996, instead of
$2,000,000. At present, the Company does not have the resources to make any
of these payments, other than the $111,000 payment noted above. As of
September 30, 1996, the Company was in negotiations with alternative lenders
to provide the funds to satisfy these conditions and to provide a replacement
line of credit for working capital. As of November 11, 1996, no agreements
had been reached with these lenders. Although there is no assurance that
21
<PAGE>
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) ongoing discussions with lenders
indicate a willingness of such lenders to enter into a replacement credit
facility with the Company on acceptable terms and conditions; (ii) ongoing
discussions with institutional investors indicate a willingness of such
investors to provide equity or debt capital to the Company on acceptable
terms; and (iii) the Company has approximately $12,308,000 in net accounts
receivable and approximately an additional $2,357,000 in net property
and equipment, which the Company believes provide a basis upon which a lender
will extend credit to the Company. SEE NOTE 6 OF NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS. Upon announcement of the current discussion with
Horizon concerning a possible acquisition of the Company, the lenders with
which the Company was negotiating to provide a replacement line of credit
suspended further negotiations pending the outcome of the Horizon
discussions. The institutional investors with which the Company was
negotiating to provide subordinated debt also suspended negotiations pending
the outcome of the Horizon discussions. A third type of investor with whom the
Company is negotiating to provide approximately $3,000,000 in convertible
notes or preferred stock financing remains interested in effecting the
investment.
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 $2,190,150 in cash
will be paid on dates through the year 2000 if certain pre-tax profits are met
at certain of the acquired clinics.
22
<PAGE>
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 a line of credit, and future equity and
debt financings. Although no assurance can be given that the Company will be
able to obtain capital on favorable terms or at all, the Company has retained
an investment banking firm to pursue an infusion of capital and negotiations
with lenders and investors are proceeding as described above. 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 has recently reached a definitive agreement to acquire two additional
clinics in the first quarter of 1997, 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.
23
<PAGE>
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 the second quarter of 1996,
the Company recorded a $2,900,000 reduction in goodwill and other intangibles
associated with the closure of clinics and related operations in Hawaii. In
the third quarter of 1996, the Company recorded a $1,002,000 reduction in
goodwill and other intangibles associated with the closure of clinics and
related operations in California and accrued a provision for write down of
goodwill and other intangibles of approximately $685,000 in connection with
its intention to sell its operations in Texas. SEE NOTES 10 AND 11 OF NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS.
In order to conserve capital resources, the Company's policy is to lease
its facilities. As of September 30, 1996 the Company had no material commitments
to purchase capital assets.
INFLATION. Although inflation has abated during the last few years, the
rate of inflation in healthcare services has exceeded the rate experienced by
the economy as a whole. Generally speaking, increases in costs due to inflation
have either been offset by increases in patient charges or improvements in
operating efficiency. A substantial portion of net revenues are subject to
reimbursement rates which are regulated by governmental agencies or subject to
third-party payor contracts and do not automatically adjust for inflation. These
reimbursement rates may be adjusted periodically based on certain factors,
including legislation, contract negotiation, inflation and costs incurred in
providing services, but may have little relationship to the actual cost of doing
business.
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.
24
<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.
------------
10 Settlement Agreements
11 Statement regarding computation of per share earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed Current Reports on Form 8-K during the quarter as
follows:
Date of Report Date Filed Items Reported
-------------- ---------- --------------
July 1, 1996 July 5, 1996 Item 6
July 17, 1996 July 19, 1996 Item 5
No financial statements were filed in connection with the foregoing
reports.
25
<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: November , 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)
26
<PAGE>
EXHIBIT 10.1
SETTLEMENT AND RELEASE AGREEMENT
This Settlement and Release Agreement (the "Agreement") is entered into
effective the 18th day of July, 1996 by and among Pacific Rehabilitation &
Sports Medicine, Inc. ("Pacific") and Vinton R. Mougey ("Seller").
RECITALS
A. In July 1995, Pacific entered into a Stock Purchase Agreement
(including all agreements attached thereto) (collectively, the "Purchase
Agreement") with Seller pursuant to which Pacific issued to Seller a total of
17,143 shares in the aggregate of Pacific's common stock (the "Original
Shares"). The Original Shares were issued pursuant to one or more exemptions
from registration under federal and applicable state securities laws.
B. Pursuant to Section 9.3 of the Purchase Agreement, in the event the
Original Shares were not registered by June 30, 1996, Seller could require
Pacific to redeem his Original Shares.
C. Seller has also alleged that Pacific misrepresented the effects on
Pacific of legislation in Hawaii, which became effective in July 1995. Pacific
denies such allegations.
D. The parties desire to resolve Seller's claims according to the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other valuable consideration, the parties agree as follows:
SECTION 1. ISSUANCE OF ADDITIONAL SHARES; REPRESENTATIONS OF SELLER.
1.1 Pacific hereby agrees to deliver to Seller a total of 4,286
additional shares of Pacific's common stock (the "Additional Shares"). The
Additional Shares shall not be registered under the Securities Act of 1933, as
amended (the "1933 Act") or any state securities laws but shall be issued
pursuant to one or more exemptions from registration under the 1933 Act and such
state securities laws. The Additional Shares shall be registered subsequently
by Pacific at its sole expense within the time frames set forth below in Section
1.2. Until such time as the Additional Shares are registered, they shall be
restricted securities under the 1933 Act and such state securities laws and may
not be transferred absent an exemption from registration under the 1933 Act and
such state securities laws.
1.2 Pacific agrees to register the Additional Shares and the
Original Shares not later than January 2, 1997; PROVIDED, HOWEVER, if Pacific is
unable to effect such registration by January 2, 1997 because it is involved in
a merger or other corporate transaction which, because
PAGE 1-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
of the need to register that transaction with the SEC, effectively precludes
such registration statement from being declared effective by the SEC, the
deadline for registering the Additional Shares and the Original Shares shall be
extended for 60 days following the consummation or termination of such
transaction. If the Original or Additional Shares are not registered by January
2, 1997 (as such date may be extended as set forth above in this Section 1.2)
and Seller shall not have previously sold, transferred or otherwise disposed of
such shares, Pacific shall pay to Seller an amount equal to the last sale price
of Pacific's common stock on the NASDAQ Stock Market on January 2, 1997 less the
gross proceeds received by Seller upon the subsequent sale of the Original
Shares and Additional Shares under a registration statement, a merger, buy-out
or similar transaction, or otherwise. If the per share gross proceeds received
upon such sale are greater than or equal to the last sale price of Pacific's
common stock on the NASDAQ Stock market on January 2, 1997, Pacific shall not
have any liability to Seller under this Section 1.2. For purposes of this
Section 1.2, if Seller does not sell the Original and Additional Shares
notwithstanding the opportunity to do so, Seller shall be deemed to have sold
the Original Shares and Additional Shares on the first business day such sale
could have occurred and shall be deemed to have received an amount equal to the
last sale price of Pacific's common stock on the NASDAQ Stock Market on such
date multiplied by the number of Original or Additional Shares then held by
Seller.
1.3 A certificate representing the Additional Shares delivered under
Section 1.1 shall be delivered to Seller as soon as possible following the
expiration of the notice period required by the NASDAQ Stock Market, which
notice period shall expire (absent action taken by the NASDAQ Stock Market)
fifteen days after receipt by NASDAQ of the notice of this transaction. Pacific
agrees to deliver such notice promptly after execution of this Agreement and,
upon expiration of such notice period, to promptly advise its transfer agent to
issue one or more certificates representing the Additional Shares to Seller.
1.4 (a) Seller represents that Seller is an accredited investor as
defined under the Securities Act of 1933, as amended, and rules and regulations
promulgated thereunder, including, without limitation, Regulation D, and
applicable state securities laws by virtue of the fact that
(i) Seller has an individual net worth (or joint net worth with
that Seller's spouse) of more than $1,000,000; or
(ii) Seller had an individual income in excess of $200,000 in
each of the two most recent years or joint income with Seller's spouse in excess
of $300,000 in each of those years and has a reasonable expectation of reaching
the same income level in the current year.
PAGE 2-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
(b) Seller acknowledges, represents and warrants that:
(i) The Additional Shares have not been registered under federal
and state securities laws on the grounds that Pacific believes the issuance
thereof is exempt from registration;
(ii) The Additional Shares are being acquired for investment
purposes and not for distribution;
(iii) The Additional Shares (and any interest therein), may not be
sold, assigned or transferred without compliance with such laws;
(iv) Seller is a sophisticated individual and is able to accept
the risks associated with holding the Additional Shares indefinitely;
(v) Seller has received and had the opportunity to review
Pacific's Annual Report on Form 10-K for the year ended December 31, 1995 (as
amended by Amendment No. 2 to Form 10-K/A, filed July 11, 1996); the Current
Reports on Form 8-K dated April 2, April 15, July 1, and July 17 1996, Pacific's
proxy statement dated April 26, 1996; and Amendment No. 2 to Registration
Statement on Form S-3 filed June 17, 1996; and
(vi) Seller has had the opportunity to direct questions to Buyer
and has received from Pacific all answers thereto and all other information
requested prior to execution of this Agreement.
SECTION 2. GUARANTEE OF EARNOUT; PAYMENT OF ATTORNEYS' FEES. As further
consideration for the settlement and agreements set forth herein, Pacific hereby
guarantees the payment of the amounts due under Section 3.6 of the Purchase
Agreement relating to additional payments of the purchase price if Seller were
to achieve certain financial targets. With respect to the earnout payments for
the second, third and fourth years, such earnout payments shall be paid within
thirty days of the end of each respective earnout period. The earnout payment
for the first year shall be paid as provided in the Purchase Agreement. Pacific
also shall pay Seller's reasonable attorneys' fees incurred in connection with
the negotiation of this Agreement in an amount not to exceed $1000. Such
payment shall be made within 30 days of receipt of a statement showing such
fees.
SECTION 3. SETTLEMENT AND RELEASE OF CLAIMS. As further consideration for
the agreements set forth herein, in full satisfaction of any and all amounts
Seller may have against Pacific and Pacific may have against Seller under the
Purchase Agreement, the parties do hereby release, acquit, and forever discharge
each other of and from any and all actions, causes of action, claims, demands,
damages, costs, loss of services, expenses, and compensation, known and unknown,
PAGE 3-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
whether or not on account of, or in any way growing out of, any and all damages
resulting from the failure of the Original Shares from being registered as
provided in the Purchase Agreement, the value of the Original Shares or
Additional Shares when issued, any entitlement to receive a specified amount of
funds upon the sale thereof, and from any and all allegations regarding the
effects on Pacific from the Hawaii legislation. The parties acknowledge and
agree that this settlement is in compromise of a doubtful and disputed claim and
that the payment is not to be construed as an admission of liability on the part
of either party, by whom liability is expressly denied. This release expresses
a full and complete settlement of the liability claimed and denied, regardless
of the adequacy of the above consideration, and the acceptance of this release
shall not operate as an admission of liability on the part of anyone. This
release contains the entire agreement between the parties hereto, and the terms
of this release are contractual, not a mere recital.
SECTION 4. MISCELLANEOUS.
4.1 ENTIRE AGREEMENT. This document is the entire, final and complete
Agreement and understanding of the parties with respect to the transaction
contemplated hereby, and supersedes and replaces all written and oral agreements
and understandings heretofore made or existing by and between the parties or
their representatives with respect thereto.
4.2 WAIVER. No waiver of any provision of this Agreement shall be deemed,
or shall constitute, a waiver of any other provision, whether or not similar,
nor shall any waiver constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the party making the waiver.
4.3 BINDING EFFECT. All rights, remedies and liabilities herein given to
or imposed upon the parties shall extend to, inure to the benefit of and bind,
as the circumstances may require, the parties and their respective heirs,
personal representatives, administrators, successors and permitted assigns.
4.4 NOTICES. Any notice or other communication required or permitted
under this Agreement shall be in writing and shall be deemed given on the date
of transmission when sent by telex or facsimile transmission, on the third
business day after the date of mailing when mailed by certified mail, postage
prepaid, return receipt requested, from within the United States, or on the date
of actual delivery, whichever is the earliest, and shall be sent to the parties
at the addresses shown on the first page of this Agreement, or at such other
address as any party may hereafter designate by written notice to the others.
On the same day any such notice is given to Pacific, a copy shall be sent to:
PAGE 4-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
Michael McArthur-Phillips
Garvey, Schubert & Barer
11th Floor
121 S.W. Morrison St.
Portland, OR 97204
Telephone: (503) 228-3939
Facsimile: (503) 226-0259
4.5 AMENDMENT. No supplement, modification or amendment of this Agreement
shall be valid, unless the same is in writing and signed by all parties hereto.
4.6 SEVERABILITY. In the event any provision or portion of this Agreement
is held to be unenforceable or invalid by any court of competent jurisdiction,
the remainder of this Agreement shall remain in full force and effect and shall
in no way be affected or invalidated thereby.
4.7 ATTORNEY'S FEES. In the event any suit, action or other legal
proceeding shall be instituted to declare or enforce any right created by this
Agreement, or by reason of any breach of this Agreement, the prevailing party
shall be entitled to recover reasonable attorney fees as fixed by the trial
court and all appellate courts.
4.8 PUBLICITY; CONFIDENTIALITY. Seller represents and warrants that he
has not previously disclosed the terms and conditions of this Agreement to any
shareholder of Pacific. No publicity release or announcement concerning this
Agreement or the transactions contemplated hereby shall be made without advance
approval thereof by Seller and Pacific; PROVIDED, HOWEVER, Pacific shall not be
prohibited from disclosing the terms and conditions of this Agreement if
required to do so under applicable financial reporting or securities laws, rules
and regulations. Without limiting the foregoing, Seller agrees to keep the
existence and the terms and conditions of this Agreement strictly confidential
and shall not disclose the existence and terms and conditions of this Agreement
to any third party without the written consent of Pacific, which consent may be
withheld for any reason in Pacific's sole discretion. Because of the difficulty
in calculating Pacific's damages in the event of a Seller's breach of this
Section 4.8, Seller agrees to pay Pacific an amount equal to $1 multiplied by
the number of Additional Shares issued hereunder and agrees that Pacific shall
be released from its obligation to register Seller's Original Shares and/or
Additional Shares and such payment and release shall be deemed liquidated
damages hereunder.
4.9 GOVERNING LAW AND VENUE; ARBITRATION. This Agreement shall be
governed, construed and enforced in accordance with the laws of the State of
Oregon. Controversies or claims arising out of, or relating to, this Agreement,
or the making, performance, or interpretation of it, shall be settled by
arbitration in the City of Portland under the commercial arbitration rules of
the American Arbitration Association then existing, and judgment on the
arbitration award may be entered in any court having jurisdiction over the
subject matter of the
PAGE 5-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
controversy. Arbitrators shall be persons experienced in negotiating, making
and consummating acquisition agreements.
4.10 NO THIRD-PARTY BENEFICIARIES. Nothing in this Agreement, express or
implied, is intended to confer on any person, other than the parties to this
Agreement, any right or remedy of any nature whatsoever.
4.11 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original instrument and all
of which together shall constitute a single agreement.
4.12 CAPTIONS. The caption headings of the sections and subsections of
this Agreement are for convenience of reference only and are not intended to be,
and should not be construed as, a part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement effective on
July 18, 1996.
SELLER PACIFIC
Pacific Rehabilitation & Sports
Medicine, Inc.
By
- ----------------------------- ----------------------------
Vinton R. Mougey Bill Barancik, President and
Chief Executive Officer
PAGE 6-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
EXHIBIT 10.2
SETTLEMENT AND RELEASE AGREEMENT
This Settlement and Release Agreement (the "Agreement") is entered into
effective the ___ day of July, 1996 by and among Pacific Rehabilitation & Sports
Medicine, Inc. ("Pacific") and Robert E. Burles ("Seller").
RECITALS
A. In July 1995, Pacific entered into a Stock Purchase Agreement (the
"Purchase Agreement") with Seller pursuant to which Pacific issued to Seller a
total of 17,143 shares in the aggregate of Pacific's common stock (the "Original
Shares"). The Original Shares were issued pursuant to one or more exemptions
from registration under federal and applicable state securities laws.
B. Pursuant to Section 9.3 of the Purchase Agreement, in the event the
Original Shares were not registered by June 30, 1996, Seller could require
Pacific to redeem his Original Shares.
C. Seller has also alleged that Pacific misrepresented the effects on
Pacific of legislation in Hawaii, which became effective in July 1995. Pacific
denies such allegations.
D. The parties desire to resolve Seller's claims according to the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other valuable consideration, the parties agree as follows:
SECTION 1. ISSUANCE OF ADDITIONAL SHARES; REPRESENTATIONS OF SELLER.
1.1 Pacific hereby agrees to deliver to Seller a total of 4,286
additional shares of Pacific's common stock (the "Additional Shares"). The
Additional Shares shall not be registered under the Securities Act of 1933, as
amended (the "1933 Act") or any state securities laws but shall be issued
pursuant to one or more exemptions from registration under the 1933 Act and such
state securities laws. The Additional Shares shall be registered subsequently
by Pacific at its sole expense within the time frames set forth below in Section
1.2. Until such time as the Additional Shares are registered, they shall be
restricted securities under the 1933 Act and such state securities laws and may
not be transferred absent an exemption from registration under the 1933 Act and
such state securities laws.
1.2 Pacific agrees to register the Additional Shares and the
Original Shares not later than September 30, 1996; PROVIDED, HOWEVER, if Pacific
is unable to effect such registration
PAGE 1-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
by September 30, 1996 because it is involved in a merger or other corporate
transaction which, because of the need to register that transaction with the
SEC, effectively precludes such registration statement from being declared
effective by the SEC, the deadline for registering the Additional Shares and the
Original Shares shall be extended for 60 days following the consummation or
termination of such transaction.
1.3 A certificate representing the Additional Shares delivered under
Section 1.1 shall be delivered to Seller as soon as possible following the
expiration of the notice period required by the NASDAQ Stock Exchange, which
notice period shall expire (absent action taken by the NASDAQ Stock Market)
fifteen days after receipt by NASDAQ of the notice of this transaction. Pacific
agrees to deliver such notice promptly after execution of this Agreement and,
upon expiration of such notice period, to promptly advise its transfer agent to
issue one or more certificates representing the Additional Shares to Seller.
1.4 (a) Seller represents that Seller is an accredited investor as
defined under the Securities Act of 1933, as amended, and rules and regulations
promulgated thereunder, including, without limitation, Regulation D, and
applicable state securities laws by virtue of the fact that
(i) Seller has an individual net worth (or joint net worth with
that Seller's spouse) of more than $1,000,000; or
(ii) Seller had an individual income in excess of $200,000 in
each of the two most recent years or joint income with Seller's spouse in excess
of $300,000 in each of those years and has a reasonable expectation of reaching
the same income level in the current year.
(b) Seller acknowledges, represents and warrants that:
(i) The Additional Shares have not been registered under
federal and state securities laws on the grounds that Pacific believes the
issuance thereof is exempt from registration;
(ii) The Additional Shares are being acquired for investment
purposes and not for distribution;
(iii) The Additional Shares (and any interest therein), may not
be sold, assigned or transferred without compliance with such laws;
(iv) Seller is a sophisticated individual and is able to accept
the risks associated with holding the Additional Shares indefinitely;
PAGE 2-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
(v) Seller has received and had the opportunity to review
Pacific's Annual Report on Form 10-K for the year ended December 31, 1995 (as
amended by Amendment No. 1 to Form 10-K/A, filed June 13, 1996); the Current
Reports on Form 8-K dated April 2 and 15, 1996 and July 1, 1996, Pacific's
proxy statement dated April 26, 1996; and Amendment No. 2 to Registration
Statement on Form S-3 filed June 17, 1996; and
(vi) Seller has had the opportunity to direct questions to Buyer
and has received from Pacific all answers thereto and all other information
requested prior to execution of this Agreement.
SECTION 2. SETTLEMENT AND RELEASE OF CLAIMS. As further consideration for
the agreements set forth herein, in full satisfaction of any and all amounts
Seller may have against Pacific and Pacific may have against Seller under the
Purchase Agreement, the parties do hereby release, acquit, and forever discharge
each other of and from any and all actions, causes of action, claims, demands,
damages, costs, loss of services, expenses, and compensation, known and unknown,
whether or not on account of, or in any way growing out of, any and all damages
resulting from the failure of the Original Shares from being registered as
provided in the Purchase Agreement, the value of the Original Shares or
Additional Shares when issued, any entitlement to receive a specified amount of
funds upon the sale thereof, and from any and all allegations regarding the
effects on Pacific from the Hawaii legislation. The parties acknowledge and
agree that this settlement is in compromise of a doubtful and disputed claim and
that the payment is not to be construed as an admission of liability on the part
of either party, by whom liability is expressly denied. This release expresses
a full and complete settlement of the liability claimed and denied, regardless
of the adequacy of the above consideration, and the acceptance of this release
shall not operate as an admission of liability on the part of anyone. This
release contains the entire agreement between the parties hereto, and the terms
of this release are contractual, not a mere recital.
SECTION 3. MISCELLANEOUS.
3.1 ENTIRE AGREEMENT. This document is the entire, final and complete
Agreement and understanding of the parties with respect to the transaction
contemplated hereby, and supersedes and replaces all written and oral agreements
and understandings heretofore made or existing by and between the parties or
their representatives with respect thereto.
3.2 WAIVER. No waiver of any provision of this Agreement shall be deemed,
or shall constitute, a waiver of any other provision, whether or not similar,
nor shall any waiver constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the party making the waiver.
3.3 BINDING EFFECT. All rights, remedies and liabilities herein given to
or imposed upon the parties shall extend to, inure to the benefit of and bind,
as the circumstances may require,
PAGE 3-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
the parties and their respective heirs, personal representatives,
administrators, successors and permitted assigns.
3.4 NOTICES. Any notice or other communication required or permitted
under this Agreement shall be in writing and shall be deemed given on the date
of transmission when sent by telex or facsimile transmission, on the third
business day after the date of mailing when mailed by certified mail, postage
prepaid, return receipt requested, from within the United States, or on the date
of actual delivery, whichever is the earliest, and shall be sent to the parties
at the addresses shown on the first page of this Agreement, or at such other
address as any party may hereafter designate by written notice to the others.
On the same day any such notice is given to Pacific, a copy shall be sent to:
Michael McArthur-Phillips
Garvey, Schubert & Barer
11th Floor
121 S.W. Morrison St.
Portland, OR 97204
Telephone: (503) 228-3939
Facsimile: (503) 226-0259
3.5 AMENDMENT. No supplement, modification or amendment of this Agreement
shall be valid, unless the same is in writing and signed by all parties hereto.
3.6 SEVERABILITY. In the event any provision or portion of this Agreement
is held to be unenforceable or invalid by any court of competent jurisdiction,
the remainder of this Agreement shall remain in full force and effect and shall
in no way be affected or invalidated thereby.
3.7 ATTORNEY'S FEES. In the event any suit, action or other legal
proceeding shall be instituted to declare or enforce any right created by this
Agreement, or by reason of any breach of this Agreement, the prevailing party
shall be entitled to recover reasonable attorney fees as fixed by the trial
court and all appellate courts.
3.8 PUBLICITY; CONFIDENTIALITY. Seller represents and warrants that he
has not previously disclosed the terms and conditions of this Agreement to any
shareholder of Pacific. No publicity release or announcement concerning this
Agreement or the transactions contemplated hereby shall be made without advance
approval thereof by Seller and Pacific; PROVIDED, HOWEVER, Pacific shall not be
prohibited from disclosing the terms and conditions of this Agreement if it
required to do so under applicable financial reporting and securities laws,
rules and regulations. Without limiting the foregoing, Seller agrees to keep
the existence and the terms and conditions of this Agreement strictly
confidential and shall not disclose the existence and terms and conditions of
this Agreement to any third party without the written consent of Pacific, which
consent may be withheld for any reason in Pacific's sole discretion. Because of
the difficulty in calculating
PAGE 4-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
Pacific's damages in the event of a Seller's breach of this Section 3.8, Seller
agrees to pay Pacific an amount equal to $1 multiplied by the number of
Additional Shares issued hereunder and agrees that Pacific shall be released
from its obligation to register Seller's Original Shares and/or Additional
Shares and such payment and release shall be deemed liquidated damages
hereunder.
3.9 GOVERNING LAW AND VENUE; ARBITRATION. This Agreement shall be
governed, construed and enforced in accordance with the laws of the State of
Oregon. Controversies or claims arising out of, or relating to, this Agreement,
or the making, performance, or interpretation of it, shall be settled by
arbitration in the City of Portland under the commercial arbitration rules of
the American Arbitration Association then existing, and judgment on the
arbitration award may be entered in any court having jurisdiction over the
subject matter of the controversy. Arbitrators shall be persons experienced in
negotiating, making and consummating acquisition agreements.
3.10 NO THIRD-PARTY BENEFICIARIES. Nothing in this Agreement, express or
implied, is intended to confer on any person, other than the parties to this
Agreement, any right or remedy of any nature whatsoever.
3.11 CAPTIONS. The caption headings of the sections and subsections of
this Agreement are for convenience of reference only and are not intended to be,
and should not be construed as, a part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement effective on
July __, 1996.
SELLER PACIFIC
Pacific Rehabilitation & Sports Medicine,
Inc.
By
- -------------------------- -------------------------------------
Robert E. Burles Bill Barancik, President and
Chief Executive Officer
PAGE 5-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
EXHIBIT 10.3
SETTLEMENT AND RELEASE AGREEMENT
This Settlement and Release Agreement (the "Agreement") is entered into
effective the 18th day of July, 1996 by and among Pacific Rehabilitation &
Sports Medicine, Inc. ("Pacific") and C. George Eischen ("Seller").
RECITALS
A. In July 1995, Pacific entered into a Stock Purchase Agreement (and
other agreements attached thereto) (collectively, the "Purchase Agreement") with
Seller pursuant to which Pacific issued to Seller a total of 100,403 shares in
the aggregate of Pacific's common stock (the "Original Shares"). The Original
Shares were issued pursuant to one or more exemptions from registration under
federal and applicable state securities laws.
B. Pursuant to Section 9.3 of the Purchase Agreement, in the event the
Original Shares were not registered by June 30, 1996, Seller could require
Pacific to redeem his Original Shares.
C. Seller has also alleged that Pacific misrepresented the effects on
Pacific of legislation in Hawaii, which became effective in July 1995. Pacific
denies such allegations.
D. The parties desire to resolve Seller's claims according to the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other valuable consideration, the parties agree as follows:
SECTION 1. ISSUANCE OF ADDITIONAL SHARES; REPRESENTATIONS OF SELLER.
1.1 Pacific hereby agrees to deliver to Seller a total of 25,101
additional shares of Pacific's common stock (the "Additional Shares"). The
Additional Shares shall not be registered under the Securities Act of 1933, as
amended (the "1933 Act") or any state securities laws but shall be issued
pursuant to one or more exemptions from registration under the 1933 Act and such
state securities laws. The Additional Shares shall be registered subsequently
by Pacific at its sole expense within the time frames set forth below in Section
1.2. Until such time as the Additional Shares are registered, they shall be
restricted securities under the 1933 Act and such state securities laws and may
not be transferred absent an exemption from registration under the 1933 Act and
such state securities laws.
1.2 Pacific agrees to register the Additional Shares and the
Original Shares not later than January 2, 1997; PROVIDED, HOWEVER, if Pacific is
unable to effect such registration by January 2, 1997 because it is involved in
a merger or other corporate transaction which, because
PAGE 1-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
of the need to register that transaction with the SEC, effectively precludes
such registration statement from being declared effective by the SEC, the
deadline for registering the Additional Shares and the Original Shares shall be
extended for 60 days following the consummation or termination of such
transaction. If the Original or Additional Shares are not registered by January
2, 1997 (as such date may be extended as set forth above in this Section 1.2)
and Seller shall not have previously sold, transferred or otherwise disposed of
such shares, Pacific shall pay to Seller an amount equal to the last sale price
of Pacific's common stock on the NASDAQ Stock Market on January 2, 1997 less the
gross proceeds received by Seller upon the subsequent sale of the Original
Shares and Additional Shares under a registration statement, a merger, buy-out
or similar transaction, or otherwise. If the per share gross proceeds received
upon such sale are greater than or equal to the last sale price of Pacific's
common stock on the NASDAQ Stock market on January 2, 1997, Pacific shall not
have any liability to Seller under this Section 1.2. For purposes of this
Section 1.2, if Seller does not sell the Original and Additional Shares
notwithstanding the opportunity to do so, Seller shall be deemed to have sold
the Original Shares and Additional Shares on the first business day such sale
could have occurred and shall be deemed to have received an amount equal to the
last sale price of Pacific's common stock on the NASDAQ Stock Market on such
date multiplied by the number of Original or Additional Shares then held by
Seller.
1.3 A certificate representing the Additional Shares delivered under
Section 1.1 shall be delivered to Seller as soon as possible following the
expiration of the notice period required by the NASDAQ Stock Market, which
notice period shall expire (absent action taken by the NASDAQ Stock Market)
fifteen days after receipt by NASDAQ of the notice of this transaction. Pacific
agrees to deliver such notice promptly after execution of this Agreement and,
upon expiration of such notice period, to promptly advise its transfer agent to
issue one or more certificates representing the Additional Shares to Seller.
1.4 (a) Seller represents that Seller is an accredited investor as
defined under the Securities Act of 1933, as amended, and rules and regulations
promulgated thereunder, including, without limitation, Regulation D, and
applicable state securities laws by virtue of the fact that
(i) Seller has an individual net worth (or joint net worth with
that Seller's spouse) of more than $1,000,000; or
(ii) Seller had an individual income in excess of $200,000 in
each of the two most recent years or joint income with Seller's spouse in excess
of $300,000 in each of those years and has a reasonable expectation of reaching
the same income level in the current year.
PAGE 2-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
(b) Seller acknowledges, represents and warrants that:
(i) The Additional Shares have not been registered under federal
and state securities laws on the grounds that Pacific believes the issuance
thereof is exempt from registration;
(ii) The Additional Shares are being acquired for investment
purposes and not for distribution;
(iii) The Additional Shares (and any interest therein), may not be
sold, assigned or transferred without compliance with such laws;
(iv) Seller is a sophisticated individual and is able to accept
the risks associated with holding the Additional Shares indefinitely;
(v) Seller has received and had the opportunity to review
Pacific's Annual Report on Form 10-K for the year ended December 31, 1995 (as
amended by Amendment No. 2 to Form 10-K/A, filed July 11, 1996); the Current
Reports on Form 8-K dated April 2, April 15, July 1, and July 17, 1996,
Pacific's proxy statement dated April 26, 1996; and Amendment No. 2 to
Registration Statement on Form S-3 filed June 17, 1996; and
(vi) Seller has had the opportunity to direct questions to Buyer
and has received from Pacific all answers thereto and all other information
requested prior to execution of this Agreement.
SECTION 2. GUARANTEE OF EARNOUT; PAYMENT OF ATTORNEYS' FEES. As further
consideration for the settlement and agreements set forth herein, Pacific hereby
guarantees the payment of the amounts due under Section 3.5 of the Purchase
Agreement relating to additional payments of the purchase price if Seller were
to achieve certain financial targets. Such earnout payments shall be paid
within thirty days of the end of each respective earnout period. Pacific also
shall pay Seller's reasonable attorneys' fees incurred in connection with the
negotiation of this Agreement in an amount not to exceed $1000. Such payment
shall be made within 30 days of receipt of a statement showing such fees.
SECTION 3. SETTLEMENT AND RELEASE OF CLAIMS. As further consideration for
the agreements set forth herein, in full satisfaction of any and all amounts
Seller may have against Pacific and Pacific may have against Seller under the
Purchase Agreement, the parties do hereby release, acquit, and forever discharge
each other of and from any and all actions, causes of action, claims, demands,
damages, costs, loss of services, expenses, and compensation, known and unknown,
whether or not on account of, or in any way growing out of, any and all damages
resulting from the failure of the Original Shares from being registered as
provided in the Purchase Agreement,
PAGE 3-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
the value of the Original Shares or Additional Shares when issued, any
entitlement to receive a specified amount of funds upon the sale thereof, and
from any and all allegations regarding the effects on Pacific from the Hawaii
legislation. The parties acknowledge and agree that this settlement is in
compromise of a doubtful and disputed claim and that the payment is not to be
construed as an admission of liability on the part of either party, by whom
liability is expressly denied. This release expresses a full and complete
settlement of the liability claimed and denied, regardless of the adequacy of
the above consideration, and the acceptance of this release shall not operate as
an admission of liability on the part of anyone. This release contains the
entire agreement between the parties hereto, and the terms of this release are
contractual, not a mere recital.
SECTION 4. MISCELLANEOUS.
4.1 ENTIRE AGREEMENT. This document is the entire, final and complete
Agreement and understanding of the parties with respect to the transaction
contemplated hereby, and supersedes and replaces all written and oral agreements
and understandings heretofore made or existing by and between the parties or
their representatives with respect thereto.
4.2 WAIVER. No waiver of any provision of this Agreement shall be deemed,
or shall constitute, a waiver of any other provision, whether or not similar,
nor shall any waiver constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the party making the waiver.
4.3 BINDING EFFECT. All rights, remedies and liabilities herein given to
or imposed upon the parties shall extend to, inure to the benefit of and bind,
as the circumstances may require, the parties and their respective heirs,
personal representatives, administrators, successors and permitted assigns.
4.4 NOTICES. Any notice or other communication required or permitted
under this Agreement shall be in writing and shall be deemed given on the date
of transmission when sent by telex or facsimile transmission, on the third
business day after the date of mailing when mailed by certified mail, postage
prepaid, return receipt requested, from within the United States, or on the date
of actual delivery, whichever is the earliest, and shall be sent to the parties
at the addresses shown on the first page of this Agreement, or at such other
address as any party may hereafter designate by written notice to the others.
On the same day any such notice is given to Pacific, a copy shall be sent to:
PAGE 4-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
Michael McArthur-Phillips
Garvey, Schubert & Barer
11th Floor
121 S.W. Morrison St.
Portland, OR 97204
Telephone: (503) 228-3939
Facsimile: (503) 226-0259
4.5 AMENDMENT. No supplement, modification or amendment of this Agreement
shall be valid, unless the same is in writing and signed by all parties hereto.
4.6 SEVERABILITY. In the event any provision or portion of this Agreement
is held to be unenforceable or invalid by any court of competent jurisdiction,
the remainder of this Agreement shall remain in full force and effect and shall
in no way be affected or invalidated thereby.
4.7 ATTORNEY'S FEES. In the event any suit, action or other legal
proceeding shall be instituted to declare or enforce any right created by this
Agreement, or by reason of any breach of this Agreement, the prevailing party
shall be entitled to recover reasonable attorney fees as fixed by the trial
court and all appellate courts.
4.8 PUBLICITY; CONFIDENTIALITY. Seller represents and warrants that he
has not previously disclosed the terms and conditions of this Agreement to any
shareholder of Pacific. No publicity release or announcement concerning this
Agreement or the transactions contemplated hereby shall be made without advance
approval thereof by Seller and Pacific; PROVIDED, HOWEVER, Pacific shall not be
prohibited from disclosing the terms and conditions of this Agreement if
required to do so under applicable financial reporting or securities laws, rules
and regulations. Without limiting the foregoing, Seller agrees to keep the
existence and the terms and conditions of this Agreement strictly confidential
and shall not disclose the existence and terms and conditions of this Agreement
to any third party without the written consent of Pacific, which consent may be
withheld for any reason in Pacific's sole discretion. Because of the difficulty
in calculating Pacific's damages in the event of a Seller's breach of this
Section 4.8, Seller agrees to pay Pacific an amount equal to $1 multiplied by
the number of Additional Shares issued hereunder and agrees that Pacific shall
be released from its obligation to register Seller's Original Shares and/or
Additional Shares and such payment and release shall be deemed liquidated
damages hereunder.
4.9 GOVERNING LAW AND VENUE; ARBITRATION. This Agreement shall be
governed, construed and enforced in accordance with the laws of the State of
Oregon. Controversies or claims arising out of, or relating to, this Agreement,
or the making, performance, or interpretation of it, shall be settled by
arbitration in the City of Portland under the commercial arbitration rules of
the American Arbitration Association then existing, and judgment on the
arbitration award may be entered in any court having jurisdiction over the
subject matter of the
PAGE 5-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
controversy. Arbitrators shall be persons experienced in negotiating, making
and consummating acquisition agreements.
4.10 NO THIRD-PARTY BENEFICIARIES. Nothing in this Agreement, express or
implied, is intended to confer on any person, other than the parties to this
Agreement, any right or remedy of any nature whatsoever.
4.11 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original instrument and all
of which together shall constitute a single agreement.
4.11 CAPTIONS. The caption headings of the sections and subsections of
this Agreement are for convenience of reference only and are not intended to be,
and should not be construed as, a part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement effective on
July 18, 1996.
SELLER PACIFIC
Pacific Rehabilitation & Sports Medicine,
Inc.
By
- ---------------------------- --------------------------------------
C. George Eischen Bill Barancik, President and
Chief Executive Officer
PAGE 6-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
EXHIBIT 10.4
SETTLEMENT AND RELEASE AGREEMENT
This Settlement and Release Agreement (the "Agreement") is entered into
effective the ___ day of July, 1996 by and among Pacific Rehabilitation & Sports
Medicine, Inc. ("Pacific") and Michael C. Gibbons ("Seller").
RECITALS
A. In July 1995, Pacific entered into an Asset Purchase Agreement (the
"Purchase Agreement") with Seller pursuant to which Pacific issued to Seller a
total of 250,000 shares in the aggregate of Pacific's common stock (the
"Original Shares"). The Original Shares were issued pursuant to one or more
exemptions from registration under federal and applicable state securities laws.
B. Pursuant to Section 9.3 of the Purchase Agreement, in the event the
Original Shares were not registered by June 30, 1996, Seller could require
Pacific to redeem his Original Shares.
C. The parties desire to resolve Seller's claims according to the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other valuable consideration, the parties agree as follows:
SECTION 1. ISSUANCE OF ADDITIONAL SHARES; REPRESENTATIONS OF SELLER.
1.1 Pacific hereby agrees to deliver to Seller a total of 35,714
additional shares of Pacific's common stock (the "Additional Shares"). The
Additional Shares shall not be registered under the Securities Act of 1933, as
amended (the "1933 Act") or any state securities laws but shall be issued
pursuant to one or more exemptions from registration under the 1933 Act and such
state securities laws. The Additional Shares shall be registered subsequently
by Pacific at its sole expense within the time frames set forth below in Section
1.2. Until such time as the Additional Shares are registered, they shall be
restricted securities under the 1933 Act and such state securities laws and may
not be transferred absent an exemption from registration under the 1933 Act and
such state securities laws.
1.2 Pacific agrees to register the Additional Shares and the
Original Shares not later than September 30, 1996; PROVIDED, HOWEVER, if Pacific
is unable to effect such registration by September 30, 1996 because it is
involved in a merger or other corporate transaction which, because of the need
to register that transaction with the SEC, effectively precludes such
registration statement from being declared effective by the SEC, the deadline
for registering the Additional Shares and the Original Shares shall be extended
for 60 days following the consummation or termination of such transaction.
PAGE 1-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
1.3 A certificate representing the Additional Shares delivered under
Section 1.1 shall be delivered to Seller as soon as possible following the
expiration of the notice period required by the NASDAQ Stock Exchange, which
notice period shall expire (absent action taken by the NASDAQ Stock Market)
fifteen days after receipt by NASDAQ of the notice of this transaction. Pacific
agrees to deliver such notice promptly after execution of this Agreement and,
upon expiration of such notice period, to promptly advise its transfer agent to
issue one or more certificates representing the Additional Shares to Seller.
1.4 (a) Seller represents that Seller is an accredited investor as
defined under the Securities Act of 1933, as amended, and rules and regulations
promulgated thereunder, including, without limitation, Regulation D, and
applicable state securities laws by virtue of the fact that
(i) Seller has an individual net worth (or joint net worth with
that Seller's spouse) of more than $1,000,000; or
(ii) Seller had an individual income in excess of $200,000 in
each of the two most recent years or joint income with Seller's spouse in excess
of $300,000 in each of those years and has a reasonable expectation of reaching
the same income level in the current year.
(b) Seller acknowledges, represents and warrants that:
(i) The Additional Shares have not been registered under federal
and state securities laws on the grounds that Pacific believes the issuance
thereof is exempt from registration;
(ii) The Additional Shares are being acquired for investment
purposes and not for distribution;
(iii) The Additional Shares (and any interest therein), may not be
sold, assigned or transferred without compliance with such laws;
(iv) Seller is a sophisticated individual and is able to accept
the risks associated with holding the Additional Shares indefinitely;
PAGE 2-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
(v) Seller has received and had the opportunity to review
Pacific's Annual Report on Form 10-K for the year ended December 31, 1995 (as
amended by Amendment No. 1 to Form 10-K/A, filed June 13, 1996); the Current
Reports on Form 8-K dated April 2 and 15, 1996 and July 1, 1996, Pacific's
proxy statement dated April 26, 1996; and Amendment No. 2 to Registration
Statement on Form S-3 filed June 17, 1996; and
(vi) Seller has had the opportunity to direct questions to Buyer
and has received from Pacific all answers thereto and all other information
requested prior to execution of this Agreement.
SECTION 2. SETTLEMENT AND RELEASE OF CLAIMS. As further consideration for
the agreements set forth herein, in full satisfaction of any and all amounts
Seller may have against Pacific and Pacific may have against Seller under the
Purchase Agreement, the parties do hereby release, acquit, and forever discharge
each other of and from any and all actions, causes of action, claims, demands,
damages, costs, loss of services, expenses, and compensation, known and unknown,
whether or not on account of, or in any way growing out of, any and all damages
resulting from the failure of the Original Shares from being registered as
provided in the Purchase Agreement, the value of the Original Shares or
Additional Shares when issued, any entitlement to receive a specified amount of
funds upon the sale thereof, and from any and all allegations regarding the
effects on Pacific from the Hawaii legislation. The parties acknowledge and
agree that this settlement is in compromise of a doubtful and disputed claim and
that the payment is not to be construed as an admission of liability on the part
of either party, by whom liability is expressly denied. This release expresses
a full and complete settlement of the liability claimed and denied, regardless
of the adequacy of the above consideration, and the acceptance of this release
shall not operate as an admission of liability on the part of anyone. This
release contains the entire agreement between the parties hereto, and the terms
of this release are contractual, not a mere recital.
SECTION 3. MISCELLANEOUS.
3.1 ENTIRE AGREEMENT. This document is the entire, final and complete
Agreement and understanding of the parties with respect to the transaction
contemplated hereby, and supersedes and replaces all written and oral agreements
and understandings heretofore made or existing by and between the parties or
their representatives with respect thereto.
3.2 WAIVER. No waiver of any provision of this Agreement shall be deemed,
or shall constitute, a waiver of any other provision, whether or not similar,
nor shall any waiver constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the party making the waiver.
PAGE 3-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
3.3 BINDING EFFECT. All rights, remedies and liabilities herein given to
or imposed upon the parties shall extend to, inure to the benefit of and bind,
as the circumstances may require, the parties and their respective heirs,
personal representatives, administrators, successors and permitted assigns.
3.4 NOTICES. Any notice or other communication required or permitted
under this Agreement shall be in writing and shall be deemed given on the date
of transmission when sent by telex or facsimile transmission, on the third
business day after the date of mailing when mailed by certified mail, postage
prepaid, return receipt requested, from within the United States, or on the date
of actual delivery, whichever is the earliest, and shall be sent to the parties
at the addresses shown on the first page of this Agreement, or at such other
address as any party may hereafter designate by written notice to the others.
On the same day any such notice is given to Pacific, a copy shall be sent to:
Michael McArthur-Phillips
Garvey, Schubert & Barer
11th Floor
121 S.W. Morrison St.
Portland, OR 97204
Telephone: (503) 228-3939
Facsimile: (503) 226-0259
3.5 AMENDMENT. No supplement, modification or amendment of this Agreement
shall be valid, unless the same is in writing and signed by all parties hereto.
3.6 SEVERABILITY. In the event any provision or portion of this Agreement
is held to be unenforceable or invalid by any court of competent jurisdiction,
the remainder of this Agreement shall remain in full force and effect and shall
in no way be affected or invalidated thereby.
3.7 ATTORNEY'S FEES. In the event any suit, action or other legal
proceeding shall be instituted to declare or enforce any right created by this
Agreement, or by reason of any breach of this Agreement, the prevailing party
shall be entitled to recover reasonable attorney fees as fixed by the trial
court and all appellate courts.
3.8 PUBLICITY; CONFIDENTIALITY. Seller represents and warrants that he
has not previously disclosed the terms and conditions of this Agreement to any
shareholder of Pacific. No publicity release or announcement concerning this
Agreement or the transactions contemplated hereby shall be made without advance
approval thereof by Seller and Pacific; PROVIDED, HOWEVER, Pacific shall not be
prohibited from disclosing the terms and conditions of
PAGE 4-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
this Agreement if it required to do so under applicable financial reporting and
securities laws, rules and regulations. Without limiting the foregoing, Seller
agrees to keep the existence and the terms and conditions of this Agreement
strictly confidential and shall not disclose the existence and terms and
conditions of this Agreement to any third party without the written consent of
Pacific, which consent may be withheld for any reason in Pacific's sole
discretion. Because of the difficulty in calculating Pacific's damages in the
event of a Seller's breach of this Section 3.8, Seller agrees to pay Pacific an
amount equal to $1 multiplied by the number of Additional Shares issued
hereunder and agrees that Pacific shall be released from its obligation to
register Seller's Original Shares and/or Additional Shares and such payment and
release shall be deemed liquidated damages hereunder.
3.9 GOVERNING LAW AND VENUE; ARBITRATION. This Agreement shall be
governed, construed and enforced in accordance with the laws of the State of
Oregon. Controversies or claims arising out of, or relating to, this Agreement,
or the making, performance, or interpretation of it, shall be settled by
arbitration in the City of Portland under the commercial arbitration rules of
the American Arbitration Association then existing, and judgment on the
arbitration award may be entered in any court having jurisdiction over the
subject matter of the controversy. Arbitrators shall be persons experienced in
negotiating, making and consummating acquisition agreements.
3.10 NO THIRD-PARTY BENEFICIARIES. Nothing in this Agreement, express or
implied, is intended to confer on any person, other than the parties to this
Agreement, any right or remedy of any nature whatsoever.
3.11 CAPTIONS. The caption headings of the sections and subsections of
this Agreement are for convenience of reference only and are not intended to be,
and should not be construed as, a part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement effective on
July __, 1996.
SELLER PACIFIC
Pacific Rehabilitation & Sports Medicine,
Inc.
By
- ---------------------------- --------------------------------------
Michael C. Gibbons Bill Barancik, President and
Chief Executive Officer
PAGE 5-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
EXHIBIT 10.5
SETTLEMENT AND RELEASE AGREEMENT
This Settlement and Release Agreement (the "Agreement") is entered into
effective the 22nd day of July, 1996 by and among Pacific Rehabilitation &
Sports Medicine, Inc. ("Pacific") and Robert Giles and Diane Giles ("Seller").
RECITALS
A. In July 1995, Pacific entered into a Stock Purchase Agreement
(including all agreements attached thereto) (collectively, the "Purchase
Agreement") with Seller pursuant to which Pacific issued to Seller a total of
52,800 shares in the aggregate of Pacific's common stock (the "Original
Shares"). The Original Shares were issued pursuant to one or more exemptions
from registration under federal and applicable state securities laws.
B. Pursuant to Section 9.3 of the Purchase Agreement, in the event the
Original Shares were not registered by June 30, 1996, Seller could require
Pacific to redeem his Original Shares.
C. Seller has also alleged that Pacific misrepresented the effects on
Pacific of legislation in Hawaii, which became effective in July 1995. Pacific
denies such allegations.
D. The parties desire to resolve Seller's claims according to the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other valuable consideration, the parties agree as follows:
SECTION 1. INCREASE IN SALARY; ISSUANCE OF ADDITIONAL SHARES;
REPRESENTATIONS OF SELLER.
1.1 Pacific hereby agrees to increase the salary of Roger Giles
to $90,000 (subject to satisfaction of the goals and criteria set forth on
Schedule 1) and deliver to Seller a total of 13,200 additional shares of
Pacific's common stock (the "Additional Shares"). The Additional Shares shall
not be registered under the Securities Act of 1933, as amended (the "1933 Act")
or any state securities laws but shall be issued pursuant to one or more
exemptions from registration under the 1933 Act and such state securities laws.
The Additional Shares shall be registered subsequently by Pacific at its sole
expense within the time frames set forth below in Section 1.2. Until such time
as the Additional Shares are registered, they shall be restricted securities
under the 1933 Act and such state securities laws and may not be transferred
absent an exemption from registration under the 1933 Act and such state
securities laws. Pacific also shall pay Seller's reasonable attorneys' fees
incurred in connection with the negotiation of this Agreement in an amount not
to exceed $1000. Such payment shall be made within 30 days of receipt of a
statement showing such fees.
PAGE 1-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
1.2 (a) Pacific agrees to register the Additional Shares and the
Original Shares not later than January 2, 1997; PROVIDED, HOWEVER, if Pacific is
unable to effect such registration by January 2, 1997 because it is involved in
a merger or other corporate transaction which, because of the need to register
that transaction with the SEC, effectively precludes such registration statement
from being declared effective by the SEC, the deadline for registering the
Additional Shares and the Original Shares shall be extended for 60 days
following the consummation or termination of such transaction.
(b) If the Original or Additional Shares are not registered by
January 2, 1997 (as such date may be extended as set forth above in this Section
1.2) and Seller shall not have previously sold, transferred or otherwise
disposed of such shares, Pacific shall pay to Seller an amount equal to the last
sale price of Pacific's common stock on the NASDAQ Stock Market on January 2,
1997 less the gross proceeds received by Seller upon the subsequent sale of the
Original Shares and Additional Shares under a registration statement, a merger,
buy-out or similar transaction, or otherwise. If the per share gross proceeds
received upon such sale are greater than or equal to the last sale price of
Pacific's common stock on the NASDAQ Stock market on January 2, 1997, Pacific
shall not have any liability to Seller under this Section 1.2(b). For purposes
of this Section 1.2(b), if Seller does not sell the Original and Additional
Shares notwithstanding the opportunity to do so, Seller shall be deemed to have
sold the Original Shares and Additional Shares on the first business day such
sale could have occurred and shall be deemed to have received an amount equal to
the last sale price of Pacific's common stock on the NASDAQ Stock Market on such
date multiplied by the number of Original or Additional Shares then held by
Seller.
(c) If, between the earliest date Seller could have sold his
Original and Additional Shares and July 31, 1997, the highest sale price of
Pacific's common stock on the NASDAQ Stock Market (or, the sale or equivalent
value received by Seller in any merger, buy-out or similar transaction)
(collectively, such highest sale price or value paid or received shall be
referred to herein as the "Highest Sale Price") shall not be equal to or greater
than $7.00, Pacific shall pay to Seller an amount equal to $35,000 multiplied by
a fraction, the numerator of which shall be the difference between the Highest
Sale Price and $7.00 and the denominator shall be $3.00. If the Highest Sale
Price shall be equal to or greater than $7.00, Pacific shall not have any
liability to Seller under this Section 1.2(c). As an example of how the formula
will work, (i) if the Highest Sale Price during the period is $4.00, Seller
shall be paid $35,000 multiplied by a fraction, the numerator of which shall be
$7.00 - $4.00 = $3.00, and the denominator of which shall be $3.00, or $35,000
times $3.00/$3.00 or $35,000; (ii) if the Highest Sale Price is $7.00, Seller
will be paid $35,000 multiplied by $7.00 - $7.00 = 0, which equals $0; and (iii)
if the Highest Sale Price is $5.50, Seller will be paid $35,000 multiplied by
$7.00 - $5.50 = $1.50, divided by $3.00 equals $0.50, which, when multiplied by
$35,000 equals $17,500.
PAGE 2-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
1.3 A certificate representing the Additional Shares delivered under
Section 1.1 shall be delivered to Seller as soon as possible following the
expiration of the notice period required by the NASDAQ Stock Exchange, which
notice period shall expire (absent action taken by the NASDAQ Stock Market)
fifteen days after receipt by NASDAQ of the notice of this transaction. Pacific
agrees to deliver such notice promptly after execution of this Agreement and,
upon expiration of such notice period, to promptly advise its transfer agent to
issue one or more certificates representing the Additional Shares to Seller.
1.4 (a) Seller represents that Seller is an accredited investor as
defined under the Securities Act of 1933, as amended, and rules and regulations
promulgated thereunder, including, without limitation, Regulation D, and
applicable state securities laws by virtue of the fact that
(i) Seller has an individual net worth (or joint net worth with
that Seller's spouse) of more than $1,000,000; or
(ii) Seller had an individual income in excess of $200,000 in
each of the two most recent years or joint income with Seller's spouse in excess
of $300,000 in each of those years and has a reasonable expectation of reaching
the same income level in the current year.
(b) Seller acknowledges, represents and warrants that:
(i) The Additional Shares have not been registered under federal
and state securities laws on the grounds that Pacific believes the issuance
thereof is exempt from registration;
(ii) The Additional Shares are being acquired for investment
purposes and not for distribution;
(iii) The Additional Shares (and any interest therein), may not be
sold, assigned or transferred without compliance with such laws;
(iv) Seller is a sophisticated individual and is able to accept
the risks associated with holding the Additional Shares indefinitely;
PAGE 3-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
(v) Seller has received and had the opportunity to review
Pacific's Annual Report on Form 10-K for the year ended December 31, 1995 (as
amended by Amendment No. 2 to Form 10-K/A, filed July 11, 1996); the Current
Reports on Form 8-K dated April 2, April 15, July 1, and July 17, 1996,
Pacific's proxy statement dated April 26, 1996; and Amendment No. 2 to
Registration Statement on Form S-3 filed June 17, 1996; and
(vi) Seller has had the opportunity to direct questions to Buyer
and has received from Pacific all answers thereto and all other information
requested prior to execution of this Agreement.
SECTION 2. SETTLEMENT AND RELEASE OF CLAIMS. As further consideration for
the agreements set forth herein, in full satisfaction of any and all amounts
Seller may have against Pacific and Pacific may have against Seller under the
Purchase Agreement, the parties do hereby release, acquit, and forever discharge
each other of and from any and all actions, causes of action, claims, demands,
damages, costs, loss of services, expenses, and compensation, known and unknown,
whether or not on account of, or in any way growing out of, any and all damages
resulting from the failure of the Original Shares from being registered as
provided in the Purchase Agreement, the value of the Original Shares or
Additional Shares when issued, any entitlement to receive a specified amount of
funds upon the sale thereof, and from any and all allegations regarding the
effects on Pacific from the Hawaii legislation. The parties acknowledge and
agree that this settlement is in compromise of a doubtful and disputed claim and
that the payment is not to be construed as an admission of liability on the part
of either party, by whom liability is expressly denied. This release expresses
a full and complete settlement of the liability claimed and denied, regardless
of the adequacy of the above consideration, and the acceptance of this release
shall not operate as an admission of liability on the part of anyone. This
release contains the entire agreement between the parties hereto, and the terms
of this release are contractual, not a mere recital. Seller also will withdraw
Seller's notice of redemption dated July 17, 1996.
SECTION 3. MISCELLANEOUS.
3.1 ENTIRE AGREEMENT. This document is the entire, final and complete
Agreement and understanding of the parties with respect to the transaction
contemplated hereby, and supersedes and replaces all written and oral agreements
and understandings heretofore made or existing by and between the parties or
their representatives with respect thereto.
3.2 WAIVER. No waiver of any provision of this Agreement shall be deemed,
or shall constitute, a waiver of any other provision, whether or not similar,
nor shall any waiver constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the party making the waiver.
PAGE 4-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
3.3 BINDING EFFECT. All rights, remedies and liabilities herein given to
or imposed upon the parties shall extend to, inure to the benefit of and bind,
as the circumstances may require, the parties and their respective heirs,
personal representatives, administrators, successors and permitted assigns.
3.4 NOTICES. Any notice or other communication required or permitted
under this Agreement shall be in writing and shall be deemed given on the date
of transmission when sent by telex or facsimile transmission, on the third
business day after the date of mailing when mailed by certified mail, postage
prepaid, return receipt requested, from within the United States, or on the date
of actual delivery, whichever is the earliest, and shall be sent to the parties
at the addresses shown on the first page of this Agreement, or at such other
address as any party may hereafter designate by written notice to the others.
On the same day any such notice is given to Pacific, a copy shall be sent to:
Michael McArthur-Phillips
Garvey, Schubert & Barer
11th Floor
121 S.W. Morrison St.
Portland, OR 97204
Telephone: (503) 228-3939
Facsimile: (503) 226-0259
3.5 AMENDMENT. No supplement, modification or amendment of this Agreement
shall be valid, unless the same is in writing and signed by all parties hereto.
3.6 SEVERABILITY. In the event any provision or portion of this Agreement
is held to be unenforceable or invalid by any court of competent jurisdiction,
the remainder of this Agreement shall remain in full force and effect and shall
in no way be affected or invalidated thereby.
3.7 ATTORNEY'S FEES. In the event any suit, action or other legal
proceeding shall be instituted to declare or enforce any right created by this
Agreement, or by reason of any breach of this Agreement, the prevailing party
shall be entitled to recover reasonable attorney fees as fixed by the trial
court and all appellate courts.
3.8 PUBLICITY; CONFIDENTIALITY. Seller represents and warrants that he
has not previously disclosed the terms and conditions of this Agreement to any
shareholder of Pacific. No publicity release or announcement concerning this
Agreement or the transactions contemplated hereby shall be made without advance
approval thereof by Seller and Pacific; PROVIDED, HOWEVER, Pacific shall not be
prohibited from disclosing the terms and conditions of
PAGE 5-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
this Agreement if required to do so under applicable financial reporting or
securities laws, rules and regulations. Without limiting the foregoing, Seller
agrees to keep the existence and the terms and conditions of this Agreement
strictly confidential and shall not disclose the existence and terms and
conditions of this Agreement to any third party without the written consent of
Pacific, which consent may be withheld for any reason in Pacific's sole
discretion. Because of the difficulty in calculating Pacific's damages in the
event of a Seller's breach of this Section 3.8, Seller agrees to pay Pacific an
amount equal to $1 multiplied by the number of Additional Shares issued
hereunder and agrees that Pacific shall be released from its obligation to
register Seller's Original Shares and/or Additional Shares and such payment and
release shall be deemed liquidated damages hereunder.
3.9 GOVERNING LAW AND VENUE; ARBITRATION. This Agreement shall be
governed, construed and enforced in accordance with the laws of the State of
Oregon. Controversies or claims arising out of, or relating to, this Agreement,
or the making, performance, or interpretation of it, shall be settled by
arbitration in the City of Portland under the commercial arbitration rules of
the American Arbitration Association then existing, and judgment on the
arbitration award may be entered in any court having jurisdiction over the
subject matter of the controversy. Arbitrators shall be persons experienced in
negotiating, making and consummating acquisition agreements.
3.10 NO THIRD-PARTY BENEFICIARIES. Nothing in this Agreement, express or
implied, is intended to confer on any person, other than the parties to this
Agreement, any right or remedy of any nature whatsoever.
3.11 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original instrument and all
of which together shall constitute a single agreement.
3.12 CAPTIONS. The caption headings of the sections and subsections of
this Agreement are for convenience of reference only and are not intended to be,
and should not be construed as, a part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement effective on
July 22, 1996.
SELLER PACIFIC
Pacific Rehabilitation & Sports Medicine,
Inc.
By
- --------------------------- -------------------------------------
Robert Giles Bill Barancik, President and
Chief Executive Officer
- ---------------------------
Diane Giles
PAGE 6-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
Schedule 1
Performance Criteria for Roger Giles
1) Productivity - Roger will be expected to work within productivity numbers
established by regional management.
Roger will be expected to increase visits/clinical FTE to a minimum of 8 in
next 6 months, increasing to 9 within one year.
2) Marketing - Roger will be expected to implement a program that ensures a
minimum of 10 physician contacts per month by he or his staff.
3) As is currently done by Roger and other managers of the Oregon clinics,
Roger will review quarterly surveys distributed to his patients and referral
sources and distributed by the Company to third-party payors as such surveys
relate to his clinics. Following such review, Roger will forward the surveys to
regional management within one week of receipt of such surveys. Regional
management will then review the surveys and, after consulting with Roger, will
recommend that an action plan be developed by Roger with respect to areas
identified by respondents as needing improvement. Roger will then formulate an
action plan and return the plan to regional management within one week of
receipt of regional management's recommendation.
4) Roger will be expected to participate, directly or through a designated
representative of his clinics, in the Company's ongoing CQI program. Such
program will consist of representatives from the Oregon clinics. Roger agrees
to implement recommendations adopted by the CQI team to the extent such
recommendations pertain to his clinics.
5) Roger will review with regional management the proper procedure, adopted by
the Company, for the review of employees working at his clinic. Such procedures
are intended to standardize the Company's review procedures so as to allow
management to better evaluate all employees on a consistent basis. In addition,
such procedures are intended to reduce the exposure the Company faces if such
reviews are not conducted in accordance with applicable state and federal laws.
The foregoing terms and conditions shall be added to and made a part of the
duties of Roger Giles as set forth in the Employment Agreement between Pacific
and Roger Giles dated July 1, 1995 and shall constitute a material provision of
such agreement.
PAGE 7-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
EXHIBIT 10.6
SETTLEMENT AND RELEASE AGREEMENT
This Settlement and Release Agreement (the "Agreement") is entered into
effective the 21th day of June, 1996 by and among Pacific Rehabilitation &
Sports Medicine, Inc. ("Pacific") and Dennis Pittelko, P.T., and Bruce Peterson,
P.T. (collectively "Sellers").
RECITALS
A. On July 25, 1995, Pacific and Sellers entered into a Stock Purchase
Agreement pursuant to which Pacific issued to Sellers 33,750 shares of Pacific's
common stock (the "Original Shares"). The Original Shares were issued pursuant
to one or more exemptions from registration under federal and applicable state
securities laws. Pacific agreed to register the Original Shares under such laws
within 180 days of closing, which occurred on or about July 25, 1995.
B. Sellers represent that they would have sold their respective Original
Shares as soon as the registration statement covering such shares would have
been declared effective by the U.S. Securities and Exchange Commission.
C. Sellers have given notice to Pacific of their intention to seek
damages from the failure of the registration statement to be declared effective.
D. The parties desire to resolve Sellers' claims for damages according to
the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other valuable consideration, the parties agree as follows:
SECTION 1. ISSUANCE OF ADDITIONAL SHARES; REPRESENTATIONS OF SELLERS
1.1 Pacific hereby agrees to deliver to Sellers a total of
23,625 additional shares of Pacific's common stock (the "Additional Shares").
The Additional Shares shall be divided between Sellers pursuant to their written
instructions to Pacific and shall not be registered under the Securities Act of
1933, as amended (the "1933 Act") or any state securities laws but shall be
issued pursuant to one or more exemptions from registration under the 1933 Act.
The Additional Shares shall be registered subsequently by Pacific at its sole
expense within the time frames set forth below in Section 1.2. Until such time
as the Additional Shares are registered, they shall be restricted securities
under the 1933 Act and may not be transferred absent an exemption from
registration under the 1933 Act.
PAGE 1-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
1.2 (a) Pacific agrees to register the Additional Shares and the
Original Shares not later than October 15, 1996.
(b)(i) If Pacific does not register the Original Shares or the
Additional Shares by the deadlines set forth above, Pacific shall pay to Sellers
$286,875 and at Pacific's option, Sellers shall tender such Original and
Additional shares to Pacific in full satisfaction of any claims; PROVIDED,
HOWEVER, if despite the lack of registration of the Original Shares and/or the
Additional Shares, Sellers sell their respective Original Shares and/or
Additional Shares in a transaction where registration is not required, Pacific
shall pay to Sellers $286,875 minus the gross proceeds (without deduction for
commissions or fees) received by Sellers in such transaction; and if, upon the
disposition of the Original and/or Additional Shares, the gross proceeds
(without deduction for commissions or fees) to Sellers is more than $286,875,
Sellers shall pay to Pacific an amount equal to such gross proceeds minus
$286,875.
(ii) If Pacific registers the Original Shares by the deadlines
set forth above but is unable to register the Additional Shares within such
deadlines, Pacific shall pay to Sellers an amount equal to $286,875 minus the
amount realized by Sellers upon sale of any Original Shares and minus the
remaining number of Original Shares multiplied by the last sale price of
Pacific's common stock on the NASDAQ Stock Market on the second full business
day following delivery of the prospectus upon which they could sell such
Original Shares and, at Pacific's option, Sellers shall tender such Additional
shares to Pacific in full satisfaction of any claims.
(iii) If Pacific registers the Original and Additional Shares by
the deadlines set forth above, Pacific shall not be obligated to pay Sellers any
additional funds, except as set forth in Section 1.3
1.3 It is the parties' intention that Sellers receive or have the
opportunity to receive, in the aggregate, $286,875 upon the sale of the Original
and Additional Shares. Accordingly:
(a) if, upon the disposition of the Original and Additional
Shares the gross proceeds (without deduction for commissions or fees) to Sellers
is less than $286,875, Pacific shall pay to Sellers, in the aggregate, an amount
equal to $286,875 minus such gross proceeds; and if, upon the disposition of the
Original and Additional Shares, the gross proceeds (without deduction for
commissions or fees) to Sellers is more than $286,875, Sellers shall pay to
Pacific an amount equal to such gross proceeds minus $286,875;
PAGE 2-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
(b) for purposes of calculating the amounts owing under Section
1.3(a), if, by the end of the trading session on the second business day
following delivery by Pacific of the prospectus under which Sellers may sell
their Original and/or Additional Shares, Sellers have not sold all of their
Original and/or Additional Shares, such shares will be deemed to have been sold
at the last sale price of Pacific's common stock on the NASDAQ Stock Market on
that day; and
(c) any payments due under this Section 1.3 shall be paid within
30 days following written notice from the party entitled to receive such
payment.
1.4 A certificate representing the Additional Shares delivered under
Section 1.1 shall be delivered to Sellers as soon as possible following the
expiration of the notice period required by the NASDAQ Stock Exchange, which
notice period shall expire (absent action taken by the NASDAQ Stock Market)
fifteen days after receipt by Pacific of the notice of this transaction.
Pacific agrees to deliver such notice promptly after execution of this Agreement
and, upon expiration of such notice period, to promptly advise its transfer
agent to issue one or more certificates representing the Additional Shares to
Sellers.
1.5 Upon delivery of the certificate representing the Additional
Shares to be delivered hereunder, Pacific shall deliver funds to Sellers in an
amount equal to the reasonable attorneys' fees of Seller's counsel. Such fees
shall not exceed $1,500.
1.6 Sellers, and each of them, represent and warrant that they each
are accredited investors as defined in Section 6.18 of the Stock Purchase
Agreement, and make the representations and warranties set forth in Section
6.18.2 of such agreement with respect to the Additional Shares.
SECTION 2. SETTLEMENT AND RELEASE OF CLAIMS
As further consideration for the agreements set forth herein, in full
satisfaction of any and all amounts Sellers may have against Pacific under the
Stock Purchase Agreement and Pacific may have against Sellers under the Stock
Purchase Agreement, the parties do hereby release, acquit, and forever discharge
the other parties of and from any and all actions, causes of action, claims,
demands, damages, costs, loss of services, expenses, and compensation, known and
unknown, whether or not on account of, or in any way growing out of, any and all
damage resulting from the failure of the Original Shares from being registered
as provided in the Stock Purchase Agreement, the value of the Original Shares
and Additional Shares when issued, or the entitlement to receive funds upon the
sale thereof. The parties acknowledge and agree that this settlement is in
compromise of a doubtful and disputed claim and that the payment is not to be
construed as an admission of liability on the part of either party, by whom
liability is expressly denied. This release expresses a full and complete
settlement of the liability claimed and denied, regardless of the adequacy of
the above consideration, and the acceptance of this release shall not
PAGE 3-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
operate as an admission of liability on the part of anyone. Notwithstanding
anything to the contrary herein, this Settlement and Release of Claims shall not
apply to any claims arising under any other provision of the Stock Purchase
Agreement or under any provision of any of the other agreements executed and
entered into by the parties in connection with the Stock Purchase Agreement.
This release contains the entire agreement between the parties hereto, and the
terms of this release are contractual, not a mere recital.
SECTION 3. MISCELLANEOUS
3.1 ENTIRE AGREEMENT. This document is the entire, final and complete
Agreement and understanding of the parties with respect to the transaction
contemplated hereby, and supersedes and replaces all written and oral agreements
and understandings heretofore made or existing by and between the parties or
their representatives with respect thereto.
3.2 WAIVER. No waiver of any provision of this Agreement shall be deemed,
or shall constitute, a waiver of any other provision, whether or not similar,
nor shall any waiver constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the party making the waiver.
3.3 BINDING EFFECT. All rights, remedies and liabilities herein given to
or imposed upon the parties shall extend to, inure to the benefit of and bind,
as the circumstances may require, the parties and their respective heirs,
personal representatives, administrators, successors and permitted assigns.
3.4 NOTICES. Any notice or other communication required or permitted
under this Agreement shall be in writing and shall be deemed given on the date
of transmission when sent by telex or facsimile transmission, on the third
business day after the date of mailing when mailed by certified mail, postage
prepaid, return receipt requested, from within the United States, or on the date
of actual delivery, whichever is the earliest, and shall be sent to the parties
at the addresses shown on the first page of this Agreement, or at such other
address as any party may hereafter designate by written notice to the others.
On the same day any such notice is given to Pacific, a copy shall be sent to:
Michael McArthur-Phillips
Garvey, Schubert & Barer
11th Floor
121 S.W. Morrison St.
Portland, OR 97204
Telephone: (503) 228-3939
Facsimile: (503) 226-0259
PAGE 4-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
On the same day any such notice is given to Sellers, a copy shall be sent to :
Stephen L. Wanderer
Walstead, Mertsching Husemoen, Donaldson & Barlow P.S.
1000 Twelfth Avenue
Suite 2
P.O. Box 1549
Longview, Washington 98632-7934
3.5 AMENDMENT. No supplement, modification or amendment of this Agreement
shall be valid, unless the same is in writing and signed by all parties hereto.
3.6 SEVERABILITY. In the event any provision or portion of this Agreement
is held to be unenforceable or invalid by any court of competent jurisdiction,
the remainder of this Agreement shall remain in full force and effect and shall
in no way be affected or invalidated thereby.
3.7 ATTORNEY'S FEES. In the event any suit, action or other legal
proceeding shall be instituted to declare or enforce any right created by this
Agreement, or by reason of any breach of this Agreement, the prevailing party
shall be entitled to recover reasonable attorney fees as fixed by the trial
court and all appellate courts.
3.8 PUBLICITY; CONFIDENTIALITY. No publicity release or announcement
concerning this Agreement or the transactions contemplated hereby shall be made
without advance approval thereof by Sellers and Pacific; PROVIDED, HOWEVER,
Pacific shall not be prohibited from disclosing the terms and conditions of this
Agreement if required to do so under applicable financial reporting or
securities laws, rules or regulations. Sellers represent that they have not
previously disclosed the terms and conditions of this Agreement to any
shareholder of Pacific (other than senior management of Pacific). Without
limiting any of the foregoing, Sellers agree from the effective date of this
Agreement to keep the existence and the terms and conditions of this Agreement
strictly confidential and shall not disclose the existence and terms and
conditions of this Agreement to any third party without the written consent of
Pacific, which consent may be withheld for any reason in Pacific's sole
discretion. Because of the difficulty in calculating Pacific's damages in the
event of a Seller's breach of this Section 3.8, the breaching Seller agrees to
pay Pacific as liquidated damages an amount equal to $1 times the number of
Additional Shares issued to such Seller hereunder.
3.9 GOVERNING LAW AND VENUE; ARBITRATION. This Agreement shall be
governed, construed and enforced in accordance with the laws of the State of
Washington. Any controversy or claim arising out of, or relating to, this
Agreement, or the making, performance, or interpretation of it, shall be settled
by arbitration in the City of Vancouver under the commercial arbitration rules
of the American Arbitration Association then existing, and
PAGE 5-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
judgment on the arbitration award may be entered in any court having
jurisdiction over the subject matter of the controversy. Arbitrators shall be
persons experienced in negotiating, making and consummating acquisition
agreements.
3.10 NO THIRD-PARTY BENEFICIARIES. Nothing in this Agreement, express or
implied, is intended to confer on any person, other than the parties to this
Agreement, any right or remedy of any nature whatsoever.
3.11 CAPTIONS. The caption headings of the sections and subsections of
this Agreement are for convenience of reference only and are not intended to be,
and should not be construed as, a part of this Agreement.
3.12 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original instrument and all
of which together shall constitute a single agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement effective on
June 18, 1996.
SELLERS PACIFIC
Pacific Rehabilitation & Sports
Medicine, Inc.
By
- ---------------------------- ------------------------------
Dennis Pittelko, P.T. Bill Barancik
President and Chief Executive
Officer
- ----------------------------
Bruce Peterson, P.T.
PAGE 6-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
EXHIBIT 10.7
SETTLEMENT AND RELEASE AGREEMENT
This Settlement and Release Agreement (the "Agreement") is entered into
effective the 23rd day of July, 1996 by and among Pacific Rehabilitation &
Sports Medicine, Inc. ("Pacific") and Stephen B. Tollefson ("Seller").
RECITALS
A. In June 1995, Pacific entered into a Stock Purchase Agreement
(including all agreements attached thereto) (collectively, the "Purchase
Agreement") with Seller pursuant to which Pacific issued to Seller a total of
20,834 shares in the aggregate of Pacific's common stock (the "Original
Shares"). The Original Shares were issued pursuant to one or more exemptions
from registration under federal and applicable state securities laws.
B. Pursuant to Section 3.2 of the Purchase Agreement, in the event the
Original Shares were not registered within 180 days of the Closing Date (as such
term is defined in the Purchase Agreement), Seller could require Pacific to
redeem his Original Shares. On November 30, 1995, Seller gave Pacific notice of
Seller's intention to exercise his redemption right.
C. The parties desire to resolve Seller's claims according to the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other valuable consideration, the parties agree as follows:
SECTION 1. MODIFICATION OF NONCOMPETITION COVENANTS; TERMINATION OF
EMPLOYMENT; ISSUANCE OF ADDITIONAL SHARES; REPRESENTATIONS OF SELLER.
1.1 Pacific hereby agrees to deliver to Seller a total of 19,428
additional shares of Pacific's common stock (the "Additional Shares"). The
Additional Shares shall not be registered under the Securities Act of 1933, as
amended (the "1933 Act") or any state securities laws but shall be issued
pursuant to one or more exemptions from registration under the 1933 Act and such
state securities laws. The Additional Shares shall be registered subsequently
by Pacific at its sole expense within the time frames set forth below in
Section 1.2. Until such time as the Additional Shares are registered, they
shall be restricted securities under the 1933 Act and such state securities laws
and may not be transferred absent an exemption from registration under the 1933
Act and such state securities laws. Pacific also shall pay Seller's reasonable
attorneys' fees incurred in connection with the negotiation of this Agreement in
an amount not to exceed $2,000. Such payment shall be made within 30 days of
receipt of a statement showing such fees.
1.2 Pacific agrees to register the Additional Shares and the Original
Shares not later than January 2, 1997; PROVIDED, HOWEVER, if Pacific is unable
to effect such registration by
PAGE 1-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
January 2, 1997 because it is involved in a merger or other corporate
transaction which, because of the need to register that transaction with the
SEC, effectively precludes such registration statement from being declared
effective by the SEC, the deadline for registering the Additional Shares and the
Original Shares shall be extended for 60 days following the consummation or
termination of such transaction.
1.3 A certificate representing the Additional Shares delivered under
Section 1.1 shall be delivered to Seller as soon as possible following the
expiration of the notice period required by the NASDAQ Stock Exchange, which
notice period shall expire (absent action taken by the NASDAQ Stock Market)
fifteen days after receipt by NASDAQ of the notice of this transaction. Pacific
agrees to deliver such notice within five (5) business days after execution of
this Agreement and, within five (5) business days after expiration of such
notice period, to advise its transfer agent to issue one or more certificates
representing the Additional Shares to Seller.
1.4 (a) Seller represents that Seller is an accredited investor as
defined under the Securities Act of 1933, as amended, and rules and regulations
promulgated thereunder, including, without limitation, Regulation D, and
applicable state securities laws by virtue of the fact that
(i) Seller has an individual net worth (or joint net worth with
that Seller's spouse) of more than $1,000,000; or
(ii) Seller had an individual income in excess of $200,000 in
each of the two most recent years or joint income with Seller's spouse in excess
of $300,000 in each of those years and has a reasonable expectation of reaching
the same income level in the current year.
(b) Seller acknowledges, represents and warrants that:
(i) The Additional Shares have not been registered under federal
and state securities laws on the grounds that Pacific believes the issuance
thereof is exempt from registration;
(ii) The Additional Shares are being acquired for investment
purposes and not for distribution;
(iii) The Additional Shares (and any interest therein), may not be
sold, assigned or transferred without compliance with such laws;
(iv) Seller is a sophisticated individual and is able to accept
the risks associated with holding the Additional Shares indefinitely;
PAGE 2-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
(v) Seller has received and had the opportunity to review
Pacific's Annual Report on Form 10-K for the year ended December 31, 1995 (as
amended by Amendment No. 2 to Form 10-K/A, filed July 11, 1996); the Current
Reports on Form 8-K dated April 2, April 15, July 1 and July 17, 1996, Pacific's
proxy statement dated April 26, 1996; and Amendment No. 3 to Registration
Statement on Form S-3 filed July 24, 1996; and
(vi) Seller has had the opportunity to direct questions to
Pacific and has received from Pacific all answers thereto and all other
information requested prior to execution of this Agreement.
1.5 As further consideration for the agreements set forth herein,
Pacific and Seller hereby voluntarily terminate Seller's employment under that
certain Employment Agreement dated June 1, 1995 between Pacific and Seller
effective July 31, 1996. Pacific and Seller further agree to modify the
noncompetition covenant set forth in Section 10.2 of such Employment Agreement
to exclude Seller's employment with an outpatient physical therapy and
rehabilitation clinic located in Woodinville, Washington from the territorial
restrictions set forth therein. Except as set forth herein, the terms and
conditions of the Employment Agreement remain unaffected and in full force and
effect. Without limiting the foregoing, nothing herein shall be deemed to
modify or effect a release of any rights to accrued vacation or other benefits
which Seller may be entitled to under his Employment Agreement or Pacific's
policies and procedures regarding such benefits upon voluntary termination of
employment with Pacific.
SECTION 2. SETTLEMENT AND RELEASE OF CLAIMS. As further consideration for
the agreements set forth herein, in full satisfaction of any and all amounts
Seller may have against Pacific and Pacific may have against Seller under the
Purchase Agreement, the parties do hereby release, acquit, and forever discharge
each other of and from any and all actions, causes of action, claims, demands,
damages, costs, loss of services, expenses, and compensation, known and unknown,
whether or not on account of, or in any way growing out of, any and all damages
resulting from the failure of the Original Shares from being registered as
provided in the Purchase Agreement, the value of the Original Shares or
Additional Shares when issued, and any entitlement to receive a specified amount
of funds upon the sale thereof. The parties acknowledge and agree that this
settlement is in compromise of a doubtful and disputed claim and that the
payment is not to be construed as an admission of liability on the part of
either party, by whom liability is expressly denied. This release expresses a
full and complete settlement of the liability claimed and denied, the parties
acknowledging and
PAGE 3-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
agreeing to the adequacy of the above consideration, and the acceptance of this
release shall not operate as an admission of liability on the part of anyone.
This release contains the entire agreement between the parties hereto, and the
terms of this release are contractual, not a mere recital. Seller also will
withdraw his notice of redemption dated November 30, 1995.
SECTION 3. MISCELLANEOUS.
3.1 ENTIRE AGREEMENT. This document is the entire, final and complete
Agreement and understanding of the parties with respect to the transaction
contemplated hereby, and, except as expressly provided herein, supersedes and
replaces all prior or contemporaneous written and oral agreements and
understandings heretofore made or existing by and between the parties or their
representatives with respect thereto.
3.2 WAIVER. No waiver of any provision of this Agreement shall be deemed,
or shall constitute, a waiver of any other provision, whether or not similar,
nor shall any waiver constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the party making the waiver.
3.3 BINDING EFFECT. All rights, remedies and liabilities herein given to
or imposed upon the parties shall extend to, inure to the benefit of and bind,
as the circumstances may require, the parties and their respective heirs,
personal representatives, administrators, successors and permitted assigns.
3.4 NOTICES. Any notice or other communication required or permitted
under this Agreement shall be in writing and shall be deemed given on the date
of transmission when sent by telex or facsimile transmission, on the third
business day after the date of mailing when mailed by certified mail, postage
prepaid, return receipt requested, from within the United States, or on the date
of actual delivery, whichever is the earliest, and shall be sent to the parties
at the following addresses, or at such other address as any party may hereafter
designate by written notice to the others:
PACIFIC
Pacific Rehabilitation & Sports Medicine, Inc.
8100 N.E. Parkway Drive, Suite 190
Vancouver, WA 98662
Telephone: 360-260-8130
Facsimile: 360-260-8131
PAGE 4-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
WITH A COPY TO
Michael McArthur-Phillips
Garvey, Schubert & Barer
11th Floor
121 S.W. Morrison St.
Portland, OR 97204
Telephone: (503) 228-3939
Facsimile: (503) 226-0259
SELLER
Stephen B. Tollefson
14511 183rd Ave., N.E.
Woodinville, WA 98072
WITH A COPY TO
James F. Biagi
Monahan & Biagi,
a Professional Limited Liability Company
Suite 5701
701 Fifth Avenue
Seattle, WA 98104
3.5 AMENDMENT. No supplement, modification or amendment of this Agreement
shall be valid, unless the same is in writing and signed by all parties hereto.
3.6 SEVERABILITY. In the event any provision or portion of this Agreement
is held to be unenforceable or invalid by any court of competent jurisdiction,
the remainder of this Agreement shall remain in full force and effect and shall
in no way be affected or invalidated thereby.
3.7 ATTORNEY'S FEES. In the event any suit, action or other legal
proceeding shall be instituted to declare or enforce any right created by this
Agreement, or by reason of any breach of this Agreement, the prevailing party
shall be entitled to recover reasonable attorney fees as fixed by arbitrator as
provided in Section 3.9 below.
3.8 PUBLICITY; CONFIDENTIALITY. Seller represents and warrants that he
has not previously disclosed the terms and conditions of this Agreement to any
shareholder of Pacific. No publicity release or announcement concerning this
Agreement or the transactions contemplated hereby shall be made without advance
approval thereof by Seller and Pacific; PROVIDED, HOWEVER, Pacific shall not be
prohibited from disclosing the terms and conditions of this Agreement if
required to
PAGE 5-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
do so under applicable financial reporting or securities laws, rules and
regulations. Without limiting the foregoing, Seller agrees to keep the
existence and the terms and conditions of this Agreement strictly confidential
and shall not disclose the existence and terms and conditions of this Agreement
to any third party without the written consent of Pacific, which consent may be
withheld for any reason in Pacific's sole discretion. Because of the difficulty
in calculating Pacific's damages in the event of a Seller's breach of this
Section 3.8, Seller agrees to pay Pacific an amount equal to $1 multiplied by
the number of Additional Shares issued hereunder and agrees that Pacific shall
be released from its obligation to register Seller's Original Shares and/or
Additional Shares and such payment and release shall be deemed liquidated
damages hereunder.
3.9 GOVERNING LAW AND VENUE; ARBITRATION. This Agreement shall be
governed, construed and enforced in accordance with the laws of the State of
Washington. Controversies or claims arising out of, or relating to, this
Agreement, or the making, performance, or interpretation of it, shall be settled
exclusively by arbitration in the City of Seattle under the commercial
arbitration rules of the American Arbitration Association then existing, and
judgment on the arbitration award may be entered in any court having
jurisdiction over the subject matter of the controversy. Arbitrators shall be
persons experienced in negotiating, making and consummating acquisition
agreements.
3.10 NO THIRD-PARTY BENEFICIARIES. Nothing in this Agreement, express or
implied, is intended to confer on any person, other than the parties to this
Agreement, any right or remedy of any nature whatsoever.
3.11 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original instrument and all
of which together shall constitute a single agreement.
3.11 CAPTIONS. The caption headings of the sections and subsections of
this Agreement are for convenience of reference only and are not intended to be,
and should not be construed as, a part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement effective on
July 23, 1996.
SELLER PACIFIC
Pacific Rehabilitation & Sports Medicine,
Inc.
By
- ---------------------------- --------------------------------------
Stephen B. Tollefson Bill Barancik, President and
Chief Executive Officer
PAGE 6-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
EXHIBIT 10.8
SETTLEMENT AND RELEASE AGREEMENT
This Settlement and Release Agreement (the "Agreement") is entered into
effective the 22nd day of July, 1996 by and among Pacific Rehabilitation &
Sports Medicine, Inc. ("Pacific") and James R. Weggenman ("Seller").
RECITALS
A. In July 1995, Pacific entered into an Asset Purchase Agreement
(including all agreements attached thereto) (collectively, the "Purchase
Agreement") with Seller pursuant to which Pacific issued to Seller a total of
20,572 shares in the aggregate of Pacific's common stock (the "Original
Shares"). The Original Shares were issued pursuant to one or more exemptions
from registration under federal and applicable state securities laws.
B. Pursuant to Section 9.3 of the Purchase Agreement, in the event the
Original Shares were not registered by June 30, 1996, Seller could require
Pacific to redeem his Original Shares.
C. Seller has also alleged that Pacific misrepresented the effects on
Pacific of legislation in Hawaii, which became effective in July 1995. Pacific
denies such allegations.
D. The parties desire to resolve Seller's claims according to the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other valuable consideration, the parties agree as follows:
SECTION 1. PAYMENT OF CASH; ISSUANCE OF ADDITIONAL SHARES; REPRESENTATIONS
OF SELLER.
1.1 Pacific hereby agrees to pay to Seller $25,000 in
immediately available funds and deliver to Seller a total of 5,143 additional
shares of Pacific's common stock (the "Additional Shares"). The Additional
Shares shall not be registered under the Securities Act of 1933, as amended (the
"1933 Act") or any state securities laws but shall be issued pursuant to one or
more exemptions from registration under the 1933 Act and such state securities
laws. The Additional Shares shall be registered subsequently by Pacific at its
sole expense within the time frames set forth below in Section 1.2. Until such
time as the Additional Shares are registered, they shall be restricted
securities under the 1933 Act and such state securities laws and may not be
transferred absent an exemption from registration under the 1933 Act and such
state securities laws. Pacific also shall pay Seller's reasonable attorneys'
fees incurred in connection with the negotiation of this Agreement in an amount
not to exceed $1000. Such payment shall be made within 30 days of receipt of a
statement showing such fees.
PAGE 1-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
1.2 (a) Pacific agrees to register the Additional Shares and the
Original Shares not later than January 2, 1997; PROVIDED, HOWEVER, if Pacific is
unable to effect such registration by January 2, 1997 because it is involved in
a merger or other corporate transaction which, because of the need to register
that transaction with the SEC, effectively precludes such registration statement
from being declared effective by the SEC, the deadline for registering the
Additional Shares and the Original Shares shall be extended for 60 days
following the consummation or termination of such transaction.
(b) If the Original or Additional Shares are not registered by
January 2, 1997 (as such date may be extended as set forth above in this Section
1.2) and Seller shall not have previously sold, transferred or otherwise
disposed of such shares, Pacific shall pay to Seller an amount equal to the last
sale price of Pacific's common stock on the NASDAQ Stock Market on January 2,
1997 less the gross proceeds received by Seller upon the subsequent sale of the
Original Shares and Additional Shares under a registration statement, a merger,
buy-out or similar transaction, or otherwise. If the per share gross proceeds
received upon such sale are greater than or equal to the last sale price of
Pacific's common stock on the NASDAQ Stock market on January 2, 1997, Pacific
shall not have any liability to Seller under this Section 1.2(b). For purposes
of this Section 1.2(b), if Seller does not sell the Original and Additional
Shares notwithstanding the opportunity to do so, Seller shall be deemed to have
sold the Original Shares and Additional Shares on the first business day such
sale could have occurred and shall be deemed to have received an amount equal to
the last sale price of Pacific's common stock on the NASDAQ Stock Market on such
date multiplied by the number of Original or Additional Shares then held by
Seller.
(c) If, between the earliest date Seller could have sold his
Original and Additional Shares and July 31, 1997, the highest sale price of
Pacific's common stock on the NASDAQ Stock Market (or, the sale or equivalent
value received by Seller in any merger, buy-out or similar transaction)
(collectively, such highest sale price or value paid or received shall be
referred to herein as the "Highest Sale Price") shall not be equal to or greater
than $7.00, Pacific shall pay to Seller an amount equal to $35,000 multiplied by
a fraction, the numerator of which shall be the difference between the Highest
Sale Price and $7.00 and the denominator shall be $3.00. If the Highest Sale
Price shall be equal to or greater than $7.00, Pacific shall not have any
liability to Seller under this Section 1.2(c). As an example of how the formula
will work, (i) if the Highest Sale Price during the period is $4.00, Seller
shall be paid $35,000 multiplied by a fraction, the numerator of which shall be
$7.00 - $4.00 = $3.00, and the denominator of which shall be $3.00, or $35,000
times $3.00/$3.00 or $35,000; (ii) if the Highest Sale Price is $7.00, Seller
will be paid $35,000 multiplied by $7.00 - $7.00 = 0, which equals $0; and (iii)
if the Highest Sale Price is $5.50, Seller will be paid $35,000 multiplied by
$7.00 - $5.50 = $1.50, divided by $3.00 equals $0.50, which, when multiplied by
$35,000 equals $17,500.
PAGE 2-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
1.3 A certificate representing the Additional Shares delivered under
Section 1.1 shall be delivered to Seller as soon as possible following the
expiration of the notice period required by the NASDAQ Stock Exchange, which
notice period shall expire (absent action taken by the NASDAQ Stock Market)
fifteen days after receipt by NASDAQ of the notice of this transaction. Pacific
agrees to deliver such notice promptly after execution of this Agreement and,
upon expiration of such notice period, to promptly advise its transfer agent to
issue one or more certificates representing the Additional Shares to Seller.
1.4 (a) Seller represents that Seller is an accredited investor as
defined under the Securities Act of 1933, as amended, and rules and regulations
promulgated thereunder, including, without limitation, Regulation D, and
applicable state securities laws by virtue of the fact that
(i) Seller has an individual net worth (or joint net worth with
that Seller's spouse) of more than $1,000,000; or
(ii) Seller had an individual income in excess of $200,000 in
each of the two most recent years or joint income with Seller's spouse in excess
of $300,000 in each of those years and has a reasonable expectation of reaching
the same income level in the current year.
(b) Seller acknowledges, represents and warrants that:
(i) The Additional Shares have not been registered under federal
and state securities laws on the grounds that Pacific believes the issuance
thereof is exempt from registration;
(ii) The Additional Shares are being acquired for investment
purposes and not for distribution;
(iii) The Additional Shares (and any interest therein), may not be
sold, assigned or transferred without compliance with such laws;
(iv) Seller is a sophisticated individual and is able to accept
the risks associated with holding the Additional Shares indefinitely;
PAGE 3-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
(v) Seller has received and had the opportunity to review
Pacific's Annual Report on Form 10-K for the year ended December 31, 1995 (as
amended by Amendment No. 2 to Form 10-K/A, filed July 11, 1996); the Current
Reports on Form 8-K dated April 2, April 15, July 1 and July 17, 1996, Pacific's
proxy statement dated April 26, 1996; and Amendment No. 2 to Registration
Statement on Form S-3 filed June 17, 1996; and
(vi) Seller has had the opportunity to direct questions to Buyer
and has received from Pacific all answers thereto and all other information
requested prior to execution of this Agreement.
SECTION 2. SETTLEMENT AND RELEASE OF CLAIMS. As further consideration for
the agreements set forth herein, in full satisfaction of any and all amounts
Seller may have against Pacific and Pacific may have against Seller under the
Purchase Agreement, the parties do hereby release, acquit, and forever discharge
each other of and from any and all actions, causes of action, claims, demands,
damages, costs, loss of services, expenses, and compensation, known and unknown,
whether or not on account of, or in any way growing out of, any and all damages
resulting from the failure of the Original Shares from being registered as
provided in the Purchase Agreement, the value of the Original Shares or
Additional Shares when issued, any entitlement to receive a specified amount of
funds upon the sale thereof, and from any and all allegations regarding the
effects on Pacific from the Hawaii legislation. The parties acknowledge and
agree that this settlement is in compromise of a doubtful and disputed claim and
that the payment is not to be construed as an admission of liability on the part
of either party, by whom liability is expressly denied. This release expresses
a full and complete settlement of the liability claimed and denied, regardless
of the adequacy of the above consideration, and the acceptance of this release
shall not operate as an admission of liability on the part of anyone. This
release contains the entire agreement between the parties hereto, and the terms
of this release are contractual, not a mere recital. Seller also will withdraw
his notice of redemption dated July 17, 1996.
SECTION 3. MISCELLANEOUS.
3.1 ENTIRE AGREEMENT. This document is the entire, final and complete
Agreement and understanding of the parties with respect to the transaction
contemplated hereby, and supersedes and replaces all written and oral agreements
and understandings heretofore made or existing by and between the parties or
their representatives with respect thereto.
3.2 WAIVER. No waiver of any provision of this Agreement shall be deemed,
or shall constitute, a waiver of any other provision, whether or not similar,
nor shall any waiver constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the party making the waiver.
PAGE 4-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
3.3 BINDING EFFECT. All rights, remedies and liabilities herein given to
or imposed upon the parties shall extend to, inure to the benefit of and bind,
as the circumstances may require, the parties and their respective heirs,
personal representatives, administrators, successors and permitted assigns.
3.4 NOTICES. Any notice or other communication required or permitted
under this Agreement shall be in writing and shall be deemed given on the date
of transmission when sent by telex or facsimile transmission, on the third
business day after the date of mailing when mailed by certified mail, postage
prepaid, return receipt requested, from within the United States, or on the date
of actual delivery, whichever is the earliest, and shall be sent to the parties
at the addresses shown on the first page of this Agreement, or at such other
address as any party may hereafter designate by written notice to the others.
On the same day any such notice is given to Pacific, a copy shall be sent to:
Michael McArthur-Phillips
Garvey, Schubert & Barer
11th Floor
121 S.W. Morrison St.
Portland, OR 97204
Telephone: (503) 228-3939
Facsimile: (503) 226-0259
3.5 AMENDMENT. No supplement, modification or amendment of this Agreement
shall be valid, unless the same is in writing and signed by all parties hereto.
3.6 SEVERABILITY. In the event any provision or portion of this Agreement
is held to be unenforceable or invalid by any court of competent jurisdiction,
the remainder of this Agreement shall remain in full force and effect and shall
in no way be affected or invalidated thereby.
3.7 ATTORNEY'S FEES. In the event any suit, action or other legal
proceeding shall be instituted to declare or enforce any right created by this
Agreement, or by reason of any breach of this Agreement, the prevailing party
shall be entitled to recover reasonable attorney fees as fixed by the trial
court and all appellate courts.
3.8 PUBLICITY; CONFIDENTIALITY. Seller represents and warrants that he
has not previously disclosed the terms and conditions of this Agreement to any
shareholder of Pacific. No publicity release or announcement concerning this
Agreement or the transactions contemplated hereby shall be made without advance
approval thereof by Seller and Pacific; PROVIDED, HOWEVER, Pacific shall not be
prohibited from disclosing the terms and conditions of
PAGE 5-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
this Agreement if required to do so under applicable financial reporting or
securities laws, rules and regulations. Without limiting the foregoing, Seller
agrees to keep the existence and the terms and conditions of this Agreement
strictly confidential and shall not disclose the existence and terms and
conditions of this Agreement to any third party without the written consent of
Pacific, which consent may be withheld for any reason in Pacific's sole
discretion. Because of the difficulty in calculating Pacific's damages in the
event of a Seller's breach of this Section 3.8, Seller agrees to pay Pacific an
amount equal to $1 multiplied by the number of Additional Shares issued
hereunder and agrees that Pacific shall be released from its obligation to
register Seller's Original Shares and/or Additional Shares and such payment and
release shall be deemed liquidated damages hereunder.
3.9 GOVERNING LAW AND VENUE; ARBITRATION. This Agreement shall be
governed, construed and enforced in accordance with the laws of the State of
Oregon. Controversies or claims arising out of, or relating to, this Agreement,
or the making, performance, or interpretation of it, shall be settled by
arbitration in the City of Portland under the commercial arbitration rules of
the American Arbitration Association then existing, and judgment on the
arbitration award may be entered in any court having jurisdiction over the
subject matter of the controversy. Arbitrators shall be persons experienced in
negotiating, making and consummating acquisition agreements.
3.10 NO THIRD-PARTY BENEFICIARIES. Nothing in this Agreement, express or
implied, is intended to confer on any person, other than the parties to this
Agreement, any right or remedy of any nature whatsoever.
3.11 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original instrument and all
of which together shall constitute a single agreement.
3.11 CAPTIONS. The caption headings of the sections and subsections of
this Agreement are for convenience of reference only and are not intended to be,
and should not be construed as, a part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement effective on
July 22, 1996.
SELLER PACIFIC
Pacific Rehabilitation & Sports Medicine,
Inc.
By
- --------------------------- --------------------------------------
James R. Weggenman Bill Barancik, President and
Chief Executive Officer
PAGE 6-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
EXHIBIT 10.9
SETTLEMENT AND RELEASE AGREEMENT
This Settlement and Release Agreement (the "Agreement") is entered into
effective the ___ day of July, 1996, by and among Pacific Rehabilitation &
Sports Medicine, Inc. ("Pacific"), Paul and Nancy Winklesky, and The Paul and
Nancy Winklesky Charitable Remainder Trust, U/A/D June __, 1995 ("Sellers").
RECITALS
A. In July 1995, Pacific entered into a Stock Purchase Agreement (the
"Purchase Agreement") with Sellers pursuant to which Pacific issued to Sellers a
total of 22,857 shares in the aggregate of Pacific's common stock (the "Original
Shares"). The Original Shares were issued pursuant to one or more exemptions
from registration under federal and applicable state securities laws.
B. Pursuant to Section 9.3 of the Purchase Agreement, in the event the
Original Shares were not registered by June 30, 1996, Sellers could require
Pacific to redeem his Original Shares.
C. Sellers have also alleged that Pacific misrepresented the effects on
Pacific of legislation in Hawaii, which became effective in July 1995. Pacific
denies such allegations.
D. The parties desire to resolve Sellers' claims according to the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other valuable consideration, the parties agree as follows:
SECTION 1. ISSUANCE OF ADDITIONAL SHARES; REPRESENTATIONS OF SELLERS.
1.1 Pacific hereby agrees to deliver to Sellers a total of 5,714
additional shares of Pacific's common stock (the "Additional Shares"). The
Additional Shares shall not be registered under the Securities Act of 1933, as
amended (the "1933 Act"), or any state securities laws but shall be issued
pursuant to one or more exemptions from registration under the 1933 Act and such
state securities laws. The Additional Shares shall be registered subsequently
by Pacific at its sole expense within the time frames set forth below in
Section 1.2. Until such time as the Additional Shares are registered, they
shall be restricted securities under the 1933 Act and such state securities laws
and may not be transferred absent an exemption from registration under the 1933
Act and such state securities laws.
PAGE 1-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
1.2 Pacific agrees to register the Additional Shares and the Original
Shares not later than September 30, 1996; PROVIDED, HOWEVER, if Pacific is
unable to effect such registration by September 30, 1996 because it is involved
in a merger or other corporate transaction which, because of the need to
register that transaction with the SEC, effectively precludes such registration
statement from being declared effective by the SEC, the deadline for registering
the Additional Shares and the Original Shares shall be extended for 60 days
following the consummation or termination of such transaction.
1.3 A certificate representing the Additional Shares delivered under
Section 1.1 shall be delivered to Sellers as soon as possible following the
expiration of the notice period required by the NASDAQ Stock Exchange, which
notice period shall expire (absent action taken by the NASDAQ Stock Market) 15
days after receipt by NASDAQ of the notice of this transaction. Pacific agrees
to deliver such notice promptly after execution of this Agreement and, upon
expiration of such notice period, to promptly advise its transfer agent to issue
one or more certificates representing the Additional Shares to Sellers.
Sellers acknowledge, represent and warrant that:
(i) The Additional Shares have not been registered under federal
and state securities laws on the grounds that Pacific believes the issuance
thereof is exempt from registration;
(ii) The Additional Shares are being acquired for investment
purposes and not for distribution;
(iii) The Additional Shares (and any interest therein), may not be
sold, assigned, or transferred without compliance with such laws;
(iv) Sellers are sophisticated individuals and entities and are
able to accept the risks associated with holding the Additional Shares
indefinitely;
(v) Sellers have received and had the opportunity to review
Pacific's Annual Report on Form 10-K for the year ended December 31, 1995 (as
amended by Amendment No. 2 to Form 10-K/A, filed July 13, 1996); the Current
Reports on Form 8-K dated April 2 and 15, 1996, and July 1, 1996 and July 17,
1996; Pacific's proxy statement dated April 26, 1996; and Amendment No. 2 to
Registration Statement on Form S-3 filed June 17, 1996; and
(vi) Sellers have had the opportunity to direct questions to
Buyer and have received from Pacific all answers thereto and all other
information requested prior to execution of this Agreement.
PAGE 2-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
SECTION 2. SETTLEMENT AND RELEASE OF CLAIMS. As further consideration for
the agreements set forth herein, in full satisfaction of any and all amounts
Sellers may have against Pacific and Pacific may have against Sellers under the
Purchase Agreement, the parties do hereby release, acquit, and forever discharge
each other of and from any and all actions, causes of action, claims, demands,
damages, costs, loss of services, expenses, and compensation, known and unknown,
whether or not on account of, or in any way growing out of, any and all damages
resulting from the failure of the Original Shares from being registered as
provided in the Purchase Agreement, the value of the Original Shares or
Additional Shares when issued, any entitlement to receive a specified amount of
funds upon the sale thereof, and from any and all allegations regarding the
effects on Pacific from the Hawaii legislation. The parties acknowledge and
agree that this settlement is in compromise of a doubtful and disputed claim and
that the payment is not to be construed as an admission of liability on the part
of either party, by whom liability is expressly denied. This release expresses
a full and complete settlement of the liability claimed and denied, regardless
of the adequacy of the above consideration, and the acceptance of this release
shall not operate as an admission of liability on the part of anyone. This
release contains the entire agreement between the parties hereto, and the terms
of this release are contractual, not a mere recital.
SECTION 3. MISCELLANEOUS.
3.1 ENTIRE AGREEMENT. This document is the entire, final, and complete
Agreement and understanding of the parties with respect to the transaction
contemplated hereby, and supersedes and replaces all written and oral agreements
and understandings heretofore made or existing by and between the parties or
their representatives with respect thereto.
3.2 WAIVER. No waiver of any provision of this Agreement shall be deemed,
or shall constitute, a waiver of any other provision, whether or not similar,
nor shall any waiver constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the party making the waiver.
3.3 BINDING EFFECT. All rights, remedies and liabilities herein given to
or imposed upon the parties shall extend to, inure to the benefit of and bind,
as the circumstances may require, the parties and their respective heirs,
personal representatives, administrators, successors and permitted assigns.
3.4 NOTICES. Any notice or other communication required or permitted
under this Agreement shall be in writing and shall be deemed given on the date
of transmission when sent by telex or facsimile transmission, on the third
business day after the date of mailing when mailed by certified mail, postage
prepaid, return receipt requested, from within the United States, or on the date
of actual delivery, whichever is the earliest, and shall be sent to the parties
at the addresses shown on the first page of this Agreement, or at such other
address as any party may
PAGE 3-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
hereafter designate by written notice to the others. On the same day any such
notice is given to Pacific, a copy shall be sent to:
Michael McArthur-Phillips
Garvey, Schubert & Barer
11th Floor
121 S.W. Morrison St.
Portland, OR 97204
Telephone: (503) 228-3939
Facsimile: (503) 226-0259
3.5 AMENDMENT. No supplement, modification, or amendment of this
Agreement shall be valid, unless the same is in writing and signed by all
parties hereto.
3.6 SEVERABILITY. In the event any provision or portion of this Agreement
is held to be unenforceable or invalid by any court of competent jurisdiction,
the remainder of this Agreement shall remain in full force and effect and shall
in no way be affected or invalidated thereby.
3.7 ATTORNEY'S FEES. In the event any suit, action or other legal
proceeding shall be instituted to declare or enforce any right created by this
Agreement, or by reason of any breach of this Agreement, the prevailing party
shall be entitled to recover reasonable attorneys' fees as fixed by the trial
court and all appellate courts.
3.8 PUBLICITY; CONFIDENTIALITY. Sellers represent and warrant that they
have not previously disclosed the terms and conditions of this Agreement to any
shareholder of Pacific. No publicity release or announcement concerning this
Agreement or the transactions contemplated hereby shall be made without advance
approval thereof by Sellers and Pacific; PROVIDED, HOWEVER, Pacific shall not be
prohibited from disclosing the terms and conditions of this Agreement if it
required to do so under applicable financial reporting and securities laws,
rules and regulations. Without limiting the foregoing, Sellers agree to keep
the existence and the terms and conditions of this Agreement strictly
confidential and shall not disclose the existence and terms and conditions of
this Agreement to any third party without the written consent of Pacific, which
consent may be withheld for any reason in Pacific's sole discretion. Because of
the difficulty in calculating Pacific's damages in the event of a Sellers'
breach of this Section 3.8, Sellers agree to pay Pacific an amount equal to $1
multiplied by the number of Additional Shares issued hereunder and agrees that
Pacific shall be released from its obligation to register Sellers' Original
Shares and/or Additional Shares and such payment and release shall be deemed
liquidated damages hereunder.
3.9 GOVERNING LAW AND VENUE; ARBITRATION. This Agreement shall be
governed, construed and enforced in accordance with the laws of the State of
Oregon. Controversies or claims arising out of, or relating to, this Agreement,
or the making, performance, or
PAGE 4-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
interpretation of it, shall be settled by arbitration in the City of Portland
under the commercial arbitration rules of the American Arbitration Association
when existing, and judgment on the
PAGE 5-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
arbitration award may be entered in any court having jurisdiction over the
subject matter of the controversy. Arbitrators shall be persons experienced in
negotiating, making, and consummating acquisition agreements.
3.10 NO THIRD-PARTY BENEFICIARIES. Nothing in this Agreement, express or
implied, is intended to confer on any person, other than the parties to this
Agreement, any right or remedy of any nature whatsoever.
3.11 CAPTIONS. The caption headings of the sections and subsections of
this Agreement are for convenience of reference only and are not intended to be,
and should not be construed as, a part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement effective on
July __, 1996.
SELLERS: PACIFIC:
Pacific Rehabilitation & Sports
- --------------------------- Medicine, Inc.
Paul Winklesky
By
- --------------------------- ----------------------------------------
Nancy Winklesky Bill Barancik
President and Chief Executive Officer
The Paul and Nancy Winklesky Charitable
Remainder Trust, U/A/D 6/__/95
By
------------------------
Paul Winklesky, Trustee
PAGE 6-SETTLEMENT AND RELEASE AGREEMENT
<PAGE>
EXHIBIT 11.1
PACIFIC REHABILITATION & SPORTS MEDICINE, INC.
COMPUTATION OF PER SHARE (LOSS) EARNINGS
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- ---------------------------------
1996 1995 1995 1996 1995 1995
-------- --------- --------- -------- --------- ---------
Fully Fully
Primary Diluted Primary Diluted
-------- --------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Actual weighted average
shares outstanding for the
period 8,287 8,003 8,003 8,181 7,548 7,548
Dilutive common stock
options and warrants using
the treasury stock method - 218 218 - 248 248
Contingent issuances of
common stock in connection
with acquisitions - - 71 - - 51
Common stock issuable
pursuant to convertible notes -
payable 59 580 - 59 343
-------- --------- --------- -------- --------- ---------
Total shares used in per
share calculations 8,287 8,280 8,872 8,181 7,855 8,190
----- ----- ----- -----
----- ----- ----- -----
Net earnings (loss) (4,829) $141 $141 (7,511) $1,382 $1,382
---- ---- ------ ------
---- ---- ------ ------
Net earnings (loss) per share ($.58) $.02 $.02 ($ .92) $0.18 $0.18
---- ---- ----- -----
---- ---- ----- -----
</TABLE>
<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 NINE MONTHS ENDED SEPTEMBER 30,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 640
<SECURITIES> 0
<RECEIVABLES> 18,720
<ALLOWANCES> 7,431
<INVENTORY> 0
<CURRENT-ASSETS> 14,691
<PP&E> 4,549
<DEPRECIATION> 2,192
<TOTAL-ASSETS> 63,030
<CURRENT-LIABILITIES> 26,998
<BONDS> 0
0
0
<COMMON> 83
<OTHER-SE> 33,486
<TOTAL-LIABILITY-AND-EQUITY> 63,030
<SALES> 0
<TOTAL-REVENUES> 28,867
<CGS> 0
<TOTAL-COSTS> 19,219
<OTHER-EXPENSES> 16,004
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,470
<INCOME-PRETAX> (9,775)
<INCOME-TAX> (2,264)
<INCOME-CONTINUING> (7,511)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,511)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
