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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934
For the quarterly period ended December 31, 1993
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934
Commission file number 0-15088
CONTINENTAL MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0287965
(State of incorporation) (I.R.S. Employer
Identification No.)
600 Wilson Lane
P.O. Box 715
Mechanicsburg, PA 17055
Telephone Number (717) 790-8300
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and, (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
----- -----
As of January 31, 1994, there were 37,610,967 shares of the Registrant's $.01
par value Common Stock outstanding.
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Continental Medical Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1993 and June 30, 1993
December 31, June 30,
Assets 1993 1993
- --------------------------------------------------------------------------------
(In thousands, except share data)
Current assets:
Cash and cash equivalents $ 75,558 $ 64,444
Accounts receivable, net of allowance
for doubtful accounts
($15,249, December 31, 1993 $17,426,
June 30, 1993) 242,651 220,122
Other receivables 11,916 10,801
Prepaid income taxes 3,412
Deferred income taxes 10,212 5,062
Prepaid expenses 15,170 14,243
-------- --------
355,507 318,084
-------- --------
Property and equipment, net 288,349 289,822
-------- --------
Other:
Goodwill, net 74,222 58,461
Investments 15,958 16,694
Notes receivable 28,947 29,461
Deferred income taxes 2,847
Deferred costs, new facilities, net 25,483 28,634
Other assets 29,638 28,225
-------- --------
174,248 164,322
-------- --------
$818,104 $772,228
======== ========
Liabilities and Stockholders' Equity
- --------------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt $ 3,667 $ 3,809
Current portion of deferred income 875 1,163
Accounts payable 19,785 27,515
Accrued expenses 72,885 64,602
Due to third-party payors 12,280 13,857
Income taxes payable 1,696
-------- --------
111,188 110,946
Long-term debt, net of current portion 412,139 382,602
Deferred income 3,200 3,549
Deferred income taxes 710
Other liabilities 2,695 4,005
-------- --------
529,932 501,102
-------- --------
Minority interests 14,843 13,430
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Commitments and Contingencies (Note 4)
Stockholders' equity:
Preferred stock, $.01 par; authorized
10,000,000 shares; none issued
Common stock, $.01 par; authorized
80,000,000 shares; 37,550,293 shares
issued and outstanding, December 31,
1993 (36,934,546, June 30, 1993) 375 369
Capital in excess of par 184,453 180,187
Retained earnings 88,501 77,140
-------- --------
273,329 257,696
-------- --------
$818,104 $772,228
======== ========
See notes to consolidated financial statements.
Continental Medical Systems, Inc. and Subsidiaries
Consolidated Statements of Income
Three Months Ended Six Months Ended
December 31, December 31,
1993 1992 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Net operating revenues $ 249,041 $ 218,536 $ 498,803 $ 428,425
---------- ---------- ---------- ----------
Costs and expenses:
Cost of services 217,281 184,334 429,463 364,856
General and administrative 5,936 5,066 11,856 9,447
Interest expense 9,751 4,873 19,003 8,292
Depreciation and amortization 9,734 7,206 18,776 13,436
---------- ---------- ---------- ----------
242,702 201,479 479,098 396,031
---------- ---------- ---------- ----------
Income from operations 6,339 17,057 19,705 32,394
Other income, principally interest 890 703 1,762 1,312
---------- ---------- ---------- ----------
Income before minority interests and
income taxes 7,229 17,760 21,467 33,706
Minority interests (863) (1,638) (2,374) (2,908)
---------- ---------- ---------- ----------
Income before income taxes 6,366 16,122 19,093 30,798
Income taxes 2,578 6,126 7,732 11,707
---------- ---------- ---------- ----------
Net income $ 3,788 $ 9,996 $ 11,361 $ 19,091
========== ========== ========== ==========
Net income per common share and common
equivalent share (Note 5):
Primary $ .10 $ .26 $ .30 $ .50
========== ========== ========== ==========
Fully diluted $ .10 $ .26 $ .29 $ .50
========== ========== ========== ==========
Weighted average number of shares outstanding:
Primary 38,364,233 37,866,946 38,146,140 37,778,713
Fully diluted 38,598,379 38,100,591 38,410,534 38,013,357
See notes to consolidated financial statements.
Continental Medical Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Six Months Ended December 31, 1993
- --------------------------------------------------------------------------------
Common Stock
------------------- Capital
Shares in excess Retained
issued Amount of par earnings Total
---------------------------------------------------
(In thousands, except shares issued)
Balance, July 1, 1993 36,934,546 $ 369 $ 180,187 $ 77,140 $ 257,696
Stock issued pursuant to:
Employee benefit plans 123,740 1 722 723
Acquisition agreements 492,007 5 3,544 3,549
Net income for the six
months 11,361 11,361
---------- ------- --------- -------- ---------
Balance, December 31, 1993 37,550,293 $ 375 $ 184,453 $ 88,501 $ 273,329
========== ======= ========= ======== =========
See notes to consolidated financial statements.
Continental Medical Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended
December 31,
1993 1992
- ------------------------------------------------------------------
(In thousands)
Cash flows from operating activities:
Net income $ 11,361 $ 19,091
-------- ---------
Adjustments:
Depreciation and amortization 18,776 13,436
Other (1,049) 2,669
Increase (decrease) in cash from
changes in assets and liabilities,
excluding effects of acquisitions
and dispositions:
Accounts receivable (22,230) (38,877)
Other assets (4,965) (6,247)
Accounts payable and accrued
expenses (540) (1,504)
Other liabilities (3,524) (6,945)
Income taxes 4,451 (6,473)
-------- ---------
Total adjustments (9,081) (43,941)
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Net cash provided by (used in)
operating activities 2,280 (24,850)
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Cash flows from investing activities:
Payments pursuant to acquisition
agreements, net of cash acquired (14,010) (73,578)
Cash proceeds from sale of property
and equipment 13,464
Deferred costs, new facilities (2,654) (4,787)
Acquisition of property and
equipment (17,660) (59,289)
Notes receivable 514 (8,596)
Other investing activities 726 (8,152)
-------- ---------
Net cash used in investing
activities (19,620) (154,402)
-------- ---------
Cash flows from financing activities:
Long-term debt borrowing 88,274 324,989
Long-term debt repayment (59,193) (151,259)
Deferred financing costs (866) (8,145)
Issuance of common stock 723 5,835
Capital contributions by minority
interests 1,408 168
Dividends of pooled company (79)
Distributions to minority interests (1,892) (1,516)
-------- ---------
Net cash provided by financing
activities 28,454 169,993
-------- ---------
Increase (decrease) in cash and cash
equivalents 11,114 (9,259)
Cash and cash equivalents, beginning of
period 64,444 35,426
-------- ---------
Cash and cash equivalents, end of period $ 75,558 $ 26,167
======== =========
Continental Medical Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Cont'd)
Six Months Ended
December 31,
1993 1992
- ----------------------------------------------------------------------------
(In thousands)
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized ($1,227
and $2,808 in fiscal 1994 and 1993,
respectively) $ 19,894 $ 5,234
======= =======
Income taxes $ 3,838 $ 18,919
======= =======
Supplemental schedule of noncash investing and
financing activities:
The company issued stock pursuant to various
acquisition agreements $ 3,549 $ 2,146
======= =======
See notes to consolidated financial statements.
Continental Medical Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
________________________________________________________________________________
1. Basis of presentation:
In the opinion of the Company, the accompanying interim consolidated financial
statements present fairly the Company's financial position at December 31, 1993,
the results of its operations, and its cash flows for the three and six month
periods then ended. All adjustments are of a normal and recurring nature.
These statements are presented in accordance with the rules and regulations of
the United States Securities and Exchange Commission ("SEC"). Accordingly, they
are unaudited, and certain information and footnote disclosures normally
included in the Company's annual consolidated financial statements have been
condensed or omitted, as permitted under the applicable rules and regulations.
Readers of these statements should refer to the Company's audited consolidated
financial statements and notes thereto which were presented in the Company's
1993 Annual Report to Stockholders and incorporated by reference in its Form
10-K for the year ended June 30, 1993. The results of operations presented in
the accompanying financial statements are not necessarily representative of
operations for an entire year due to, among other things, new hospital
development, acquisitions, interest rate changes and fluctuations in effective
tax rates. Comparisons to the prior year might also be affected for similar
reasons. Certain items in the fiscal 1993 financial statements have been
reclassified to conform to the classifications in the fiscal 1994 financial
statements.
2. Long-term debt:
On December 31, 1993, the Company amended its credit facility with Citibank,
N.A., as agent for a group of several banks. The amendment extended the
revolving loan period under the facility to December 31, 1996, increased the
commitments under the credit facility from $225,000,000 to $235,000,000 and
amended certain financial covenants.
3. Income taxes:
Effective July 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 (FAS 109), Accounting for Income Taxes. The adoption of FAS
109 changes the Company's method of accounting for income taxes from the
deferred method (APB 11) to an asset and liability approach. Previously the
Company deferred the past tax effects of timing differences between financial
reporting and taxable income. The asset and liability approach requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of other assets and liabilities. As permitted by this new accounting
standard, the Company has elected not to restate the financial statements of
prior years. The cumulative effect of adopting FAS 109 was not material; in
addition, there was no effect on pre-tax income for this prospective adoption.
Continental Medical Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
________________________________________________________________________________
3. Income taxes (continued):
Deferred tax liabilities (assets) were comprised of the following at July 1,
1993 (in thousands):
Deferred tax liabilities:
Depreciation $ 3,939
Other 1,574
-------
Total 5,513
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Deferred tax assets:
Development and pre-opening costs (1,461)
Bad debt reserves (6,448)
Investment valuations (2,353)
Malpractice accrual (1,218)
Health insurance accrual (648)
Deferred revenue (1,691)
Accrued vacation pay (1,564)
Other (2,053)
--------
Total (17,436)
--------
Valuation allowance for deferred tax assets 671
--------
Excess deferred tax assets over liabilities ($11,252)
=========
The valuation allowance is the result of the uncertain state tax benefits
resulting from states requiring separate return filings and with no loss
carryover provisions.
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 increased the
top corporate tax rate from 34% to 35% effective retroactive to January 1,
1993. The effects of this tax law change were not material to the Company's net
deferred tax assets and are included in the operating income tax provision.
4. Contingencies:
The Company has terminated certain contractual arrangements in its contract
therapy business with certain third party providers. As a result, the Company
is potentially subject to increased credit risk with regard to the accounts
receivable related to the former arrangements. The Company is currently
negotiating with these payors to secure payment of these receivables. However,
the Company is unable to estimate the ultimate outcome of these negotiations
and its subsequent collections. The receivable net of allowances related to
these arrangements at December 31, 1993 is $17,000,000.
The Company guarantees payment throughout the term of a bond issue to an
economic development authority of amounts due and payable by the owner of a
long-term care facility previously managed by the Company. The outstanding
bonds totalled approximately $6,177,000 at December 31, 1993.
Continental Medical Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
________________________________________________________________________________
4. Contingencies (continued):
Outstanding letters of credit aggregated approximately $25,355,000 at December
31, 1993.
The Company is subject to legal proceedings and claims which have arisen in the
ordinary course of its business and have not been finally adjudicated, including
without limitation malpractice claims covered under the Company's insurance
policies. In the opinion of management, after consulting with company counsel,
the outcome of these actions will not have a material effect on the financial
position or results of operations of the Company.
5. Earnings per share:
Net income per common and common equivalent share is based upon the weighted
average number of common shares outstanding during the period plus the effect of
common shares contingently issuable, primarily from stock options and
acquisition agreements requiring the issuance of shares contingent on future
earnings.
Fully diluted earnings per share are determined on the assumption that the
7 3/4% convertible subordinated debentures were converted July 1, 1992. Net
income was adjusted for the interest on the debentures, net of the related
income tax benefits.
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q - For the Quarter ended December 31, 1993
________________________________________________________________________________
Overview
The Company's results of operations for the three and six months ended December
31, 1993 and 1992 reflect the growth of the Company's contract therapy
businesses as well as the development of new inpatient hospitals and outpatient
facilities. This discussion should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations
presented in the Company's fiscal 1993 Annual Report to Stockholders and
incorporated by reference in its Form 10-K for the fiscal year ended June 30,
1993.
During the six months ended December 31, 1992, the Company began construction
of three new inpatient rehabilitation hospitals and commenced operations at
two inpatient rehabilitation hospitals adding 107 beds. In addition, the
Company opened 16 outpatient clinics. During the remainder of the fiscal year,
the Company opened four new inpatient rehabilitation hospitals adding 240 beds
and opened 23 outpatient clinics. In February 1993, the Company acquired Kron
Medical Corporation ("Kron"), a physician/locum tenens business. The
acquisition of Kron was accounted for as a pooling of interests, and
accordingly, the Company's financial results have been restated to include the
results of Kron prior to February 1993.
During the six months ended December 31, 1993, the Company opened three new
inpatient rehabilitation hospitals adding 166 beds and opened 23 outpatient
clinics. In addition, construction began on an inpatient rehabilitation
hospital which will be operated by a joint venture controlled by the Company.
The real estate to this project will be financed by third parties and owned by
a partnership in which the Company has a minority interest. At December 31,
1993, there were two rehabilitation hospitals, including the previously
mentioned hospital owned through a partnership, with 108 beds under
construction.
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q - For the Quarter ended December 31, 1993
- --------------------------------------------------------------------------------
Results of Operations
The following table sets forth, for the periods indicated, the relative
percentages of net operating revenues which certain items in the Company's
Consolidated Statements of Income represent.
Three Months Ended Six Months Ended
December 31, December 31,
1993 1992 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
Net operating revenues 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Costs and expenses:
Cost of services 87.3 84.4 86.1 85.2
General and administrative 2.4 2.3 2.4 2.2
Interest expense 3.9 2.2 3.8 1.9
Depreciation and amortization 3.9 3.3 3.8 3.1
----- ----- ----- -----
97.5 92.2 96.1 92.4
----- ----- ----- -----
Income from operations 2.5 7.8 3.9 7.6
Other income (expenses):
Income, principally interest .4 .3 .4 .3
------ ------ ------ ------
Income before minority interests
and income taxes 2.9 8.1 4.3 7.9
Minority interests (.4) (.8) (.5) (.7)
------ ------ ------ ------
Income before income taxes 2.5 7.3 3.8 7.2
Income taxes 1.0 2.8 1.6 2.7
----- ----- ------ ------
Net income 1.5% 4.5% 2.2% 4.5%
===== ===== ===== =====
The federal government as well as state governments continue to discuss,
propose and implement various measures to control rising healthcare costs,
improve quality and provide funding for those who currently lack health
insurance. Moreover, within the private sector the healthcare delivery system
is experiencing rapidly changing market conditions primarily attributable to
increased competition and the increased influence of managed care on pricing
and utilization. The Company cannot predict how these regulatory and market
changes will affect future operating results.
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q - For the Quarter ended December 31, 1993
- --------------------------------------------------------------------------------
Results of Operations (continued)
Net operating revenues:
Net operating revenues for the second quarter of fiscal 1994 increased by 14% to
$249,041,000 from $218,536,000 for the same period of the prior year. During
the six months ended December 31, 1993, net operating revenues increased 16% to
$498,803,000 from $428,425,000 for the same period in the prior year. The
following table summarizes the net operating revenues for each of the Company's
operating groups (in thousands):
Three Months Ended Six Months Ended
December 31, Increase December 31, Increase
1993 1992 (Decrease) 1993 1992 (Decrease)
- ---------------------------------------------------------------------------------------------------------------------------------
Rehabilitation group:
Hospitals (Fiscal year of opening):
Pre-1993 (28 hospitals) $106,277 $112,207 (5%) $214,430 $224,141 (4%)
1993 Openings (6 hospitals) 17,215 4,397 292% 33,594 8,092 315%
1994 Openings (3 hospitals) 5,467 N/A N/A 8,710 N/A N/A
--------- --------- -------- ----------
128,959 116,603 11% 256,734 232,233 11%
Other rehab related 4,757 2,366 101% 10,001 5,136 95%
--------- --------- --------- ---------
Total 133,716 118,969 12% 266,735 237,369 12%
--------- --------- --------- ---------
Contract services group:
Physician services 22,823 24,739 (8%) 49,370 50,993 (3%)
Contract therapy 88,766 69,295 28% 175,432 130,709 34%
--------- --------- --------- ---------
111,589 94,034 19% 224,802 181,702 24%
--------- --------- --------- ---------
Other 3,736 5,533 (32%) 7,266 9,354 (22%)
--------- --------- --------- --------
$249,041 $218,536 14% $498,803 $428,425 16%
======== ======== ======== ========
"Other rehab related" revenues referred to in the above table include revenues
from unit management and certain outpatient operations. Both the rehabilitation
hospital group and the contract therapy services offer outpatient rehabilitation
services. "Other" revenues referred to in the above table consist principally
of revenues from long-term care operations at two rehabilitation inpatient
hospitals and Medicare reimbursement of certain home office costs which comprise
general and administrative costs.
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q - For the Quarter ended December 31, 1993
- --------------------------------------------------------------------------------
Results of Operations (continued)
Rehabilitation hospital group:
The increases in net operating revenues generated by the rehabilitation hospital
group resulted from new hospital openings. Net operating revenues generated by
the Company's 28 rehabilitation hospitals opened for all of fiscal 1993 and the
six months ended December 31, 1993 (the "Pre-1993 Hospitals") declined 5% and 4%
during the three and six months ended December 31, 1993, respectively, as
compared to the prior year. These declines are principally due to the
under-performance of the Company's six rehabilitation hospitals located in
California (excluding the Company's California facilities, the Pre-1993
Hospitals' net operating revenues declined 3% and 1% during the three and six
months ended December 31, 1993), the impact of the Company's new transitional
units which provide sub-acute rehabilitation services, and decreasing census.
Net operating revenues at the Company's Pre-1993 Hospitals in California
decreased 16% and 17% for the three and six months ended December 31, 1993, as
compared to the same periods in the prior year. The declines in net operating
revenues at the Company's California facilities are due to lower census at the
facilities which the Company generally attributes to changes in the healthcare
delivery system in California. California's market is now dominated by
alliances between physicians and acute care hospitals which have formed in
response to the significant penetration of large payors and other managed care
plans within the state. This penetration has reduced utilization of inpatient
services at the Company's rehabilitation hospitals.
The Company is a provider to managed care payors in many of its markets in
addition to its California facilities. Managed care programs are designed to
encourage more efficient utilization and cost containment of medical services.
Additionally, managed care payors are negotiating discounted or per diem rates
directly with the Company's rehabilitation hospitals which may adversely affect
the revenue growth and operating margins of the rehabilitation hospital group.
The Company is establishing cost accounting systems as well as outcomes
documentation and resource consumption information in order to demonstrate the
cost effectiveness of rehabilitation services. The Company believes this data
will be instrumental in its ability to negotiate with managed care payors.
The Company has opened 14 transitional units, with a total of 196 beds, within
its Pre-1993 Hospitals since December 31, 1992. Transitional units provide a
lower level of care and consequently generate significantly lower revenues per
occupied bed than an acute rehabilitation bed. However, the Company believes
that its transitional units will increase its overall inpatient utilization at
its hospitals and expand its continuum of services at various levels of care
and cost. The Company believes the transitional units enable it to more
effectively compete with other rehabilitation providers, including general
acute care hospital based rehabilitation units, sub-acute units, skilled
nursing facilities and other providers. The Company plans to open transitional
units in all of its hospitals.
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q - For the Quarter ended December 31, 1993
- --------------------------------------------------------------------------------
Results of Operations (continued)
Rehabilitation hospital group (continued):
Following are selected statistics for the Pre-1993 Hospitals (excluding the
Company's California facilities):
Three Months Six Months
Ended Ended
December 31, December 31,
1993 1992 % Change 1993 1992 % Change
- ------------------------------------------------------------------------------------------------------------------
Occupancy percentage 68.0% 70.4% (3%) 69.0% 70.5% (2%)
Admissions 4,302 3,953 9% 8,478 7,919 7%
Average length of stay (days) 21.9 23.3 (6%) 22.3 23.8 (6%)
Patient days 93,543 94,400 (1%) 188,917 188,878 0%
Outpatient treatments 586,405 514,190 14% 1,178,203 1,029,522 14%
Outpatient % of net revenue 19.1% 18.4% 4% 20.0% 19.0% 5%
Excluding the California facilities, occupancy percentage for the Pre-1993
Hospitals for the three months ended December 31, 1993 was 68% as compared to
70.4% during the same period in the prior year. These same facilities'
occupancy for the six months ended December 31, 1993 was 69% as compared to
70.5% during the same period in the prior year. These declines in occupancy
percentage from fiscal 1993 were due to a lower patient average length of stay
in fiscal 1994 -21.9 days and 22.3 days for the three and six months ended
December 31, 1993, respectively, as compared to 23.3 days and 23.8 days for
the three and six months ended December 31, 1992, respectively. Average length
of stay declined, in part, due to cost control and case management review by
private payors and efficiencies in treatments as the Company's hospitals
mature. However, due to changes in reimbursement methods, such as the Tax
Equity and Fiscal Responsibility Act ("TEFRA") regulations, the number of
admissions in addition to occupancy percentages and average length of stay are
important in monitoring the results of these hospitals as revenue growth
becomes increasingly dependent upon patient volume. The lower patient average
length of stay in both the three and six month periods was partially offset by
increases in admissions of 9% and 7% in the three and six months ended
December 31, 1993, respectively, as compared to the prior period.
The timing of new hospital openings during fiscal 1993 makes a comparison of
occupancy percentages for the three and six month periods ended December 31,
1993 with the comparable periods in the prior fiscal year for these hospitals
not meaningful. The rehabilitation hospitals opened in fiscal 1993 (the "1993
Hospitals") increased their patient days to 22,162 for the three months ended
December 31, 1993 from 5,547 for the three months ended December 31, 1992. The
1993 Hospitals increased their patient days to 41,358 for the six months ended
December 31, 1993 from 9,743 for the same period of the prior year. The
occupancy percentages for the 1993 Hospitals for the three and six months ended
December 31, 1993 were 69% and 65%, respectively. The occupancy percentage for
rehabilitation hospitals opened in fiscal 1994 (the "1994 Hospitals") was 33%
for both the three and six months ended December 31, 1993. The 1994 Hospitals'
patient days were 4,893 and 7,997 for the three and six months ended December
31, 1993, respectively.
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q - For the Quarter ended December 31, 1993
- --------------------------------------------------------------------------------
Results of Operations (continued)
Rehabilitation hospital group (continued):
Total outpatient treatments for the rehabilitation hospital group for the three
months ended December 31, 1993 rose to 756,733, a 32% increase over 573,829
provided in the same period of the prior year. For the six months ended December
31, 1993, outpatient treatments were 1,492,775, a 31% increase over the same
period of the prior year. Outpatient services represented approximately 16% and
15% of the rehabilitation group's net operating revenues for the comparative
three month periods ended December 31, 1993 and 1992, respectively, and 17% and
16% for the six months ended December 31, 1993 and 1992, respectively.
The percentage of net operating revenues generated by Medicare/Medicaid patients
at the rehabilitation hospitals was 64% for the three months ended December 31,
1993 and 1992, and 62% and 63% for the six months ended December 31, 1993 and
1992, respectively.
The Company's neurological center in Maryland has also had a negative impact on
results due to certain limitations placed on its charges by the state of
Maryland. The Company has obtained a temporary rate increase which will become
permanent upon the resolution of the Company's negotiations with the state of
Maryland to expand the levels of treatment at its neurological center. The
Company is unable at this time to predict the final outcome of these actions
or their impact on its results.
Contract services group:
Contract therapy services:
The increases in net operating revenues generated by the contract therapy
companies resulted from same company growth through the addition of new
contracts with both existing and new providers. The number of facilities served
increased by 3% over the same period in the prior year. The contract therapy
companies now serve over 2,400 facilities.
Approximately 77% and 78% of the net operating revenues in the three and six
months ended December 31, 1993, respectively, and 73% of the net operating
revenues in both the three and six months ended December 31, 1992 were generated
through the provision of therapist services to skilled nursing facilities, while
the remainder was generated by therapy services to hospitals, schools, clinics
and other institutions.
The percentage of net operating revenues generated from direct services to
Medicare/Medicaid patients was 20% for both the three and six months ended
December 31, 1993. This represents an increase from 16% for both the three and
six months ended December 31, 1992. The principal reason for the increases in
fiscal 1994 is the Company's decision to terminate its contractual
arrangements with certain third party providers. Under these arrangements, the
Company provided therapy services to Medicare patients through a certified
intermediary. As a result of terminating these arrangements, the Company, in
many instances, now provides the same services directly to Medicare patients;
therefore, the Company expects this percentage to increase.
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q - For the Quarter ended December 31, 1993
- --------------------------------------------------------------------------------
Results of Operations (continued)
Contract services group (continued):
Contract therapy services (continued):
During the six months ended December 31, 1993, productivity per therapist has
declined which negatively impacted results. The Company is in the process of
consolidating homogeneous contract therapy product lines to gain efficiency and
consistency in delivery of care. Additionally, the group's contract respiratory
services' revenues have declined because of changes in reimbursement in the
state of Indiana.
Physician/locum tenens services:
The declines in the Company's physician/locum tenens services net operating
revenues were a result of reduced demand and pricing pressures in the specialist
product line of the Company's physician/locum tenens services. Net operating
revenues for the specialist product line for the three months ended December 31,
1993 declined 20% as compared to the same quarter of the prior year and declined
14% for the six months ended December 31, 1993 as compared to the same period of
the prior year. This decline was partially offset by the 30% and 26% increase in
revenues for the primary care product line during the three and six months ended
December 31, 1993, respectively.
The following tables set forth filled days by discipline:
Three Months Ended
December 31,
1993 1992
- -------------------------------------------------------------------------------
Number Number Increase
of days % of days % (decrease)
Physicians:
Primary care 11,962 42.0 9,705 30.5 23.3%
Specialty care 12,586 44.2 15,586 49.0 (19.2%)
Allied professionals 3,926 13.8 6,510 20.5 (39.7%)
------ ----- ------ -----
28,474 100.0 31,801 100.0 (10.5%)
====== ===== ====== =====
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q - For the Quarter ended December 31, 1993
- --------------------------------------------------------------------------------
Results of Operations (continued)
Contract services group (continued):
Physician/locum tenens services (continued):
Six Months Ended
December 31,
1993 1992
- ------------------------------------------------------------------------------
Number Number Increase
of days % of days % (decrease)
Physicians:
Primary care 23,262 38.1 19,167 29.3 21.4%
Specialty care 27,809 45.4 32,167 49.2 (13.6%)
Allied professionals 10,064 16.5 14,013 21.5 (28.2%)
------ ----- ------ -----
61,135 100.0 65,347 100.0 (6.4%)
====== ===== ====== =====
The decline in specialty care and allied professional days is due to reduced
demand as a result of the uncertainty regarding healthcare reform and additional
competition in local markets. Allied professionals represent approximately 10%
of physician/locum tenens services net operating revenues for the three months
ended December 31, 1993 and 11% for the six months ended December 31, 1993. The
increase in primary care filled days and its relative increase as a percentage
of total filled days reflects the increased demand for primary care physicians
and the Company's increased emphasis on this product line. The Company believes
the primary care physician product line has greater growth prospects than its
specialist product line.
Costs and expenses:
Cost of services increased to $217,281,000 for the three months ended December
31, 1993, an 18% increase over the cost of services for the three months ended
December 31, 1992 of $184,334,000. For the six months ended December 31, 1993,
cost of services was $429,463,000, an increase of 18% over $364,856,000 for the
same period of the prior year. This increase is attributable to the opening of
new rehabilitation hospitals and outpatient clinics, and expansion of businesses
within the contract services group. Cost of services as a percentage of net
operating revenues increased from 84.4% for the three months ended December 31,
1992 to 87.3% for the three months ended December 31, 1993. For the six months
ended December 31, 1993, the percentage was 86.1%, an increase from 85.2% for
the comparable period in the prior year. The increases in cost of services as a
percentage of net operating revenues are due to the under-performance of the
California hospitals; within contract therapy business, the decline in per
therapist productivity, pricing pressures principally within the Company's
respiratory therapy services, and the elimination of certain contractual
arrangements with third party providers; and the declines in the physician
services/locum tenens specialist line revenues and filled days. In addition,
increased development costs have contributed to the increase in cost of services
as a percentage of net operating revenues as a result of the Company's change in
accounting policy at June 30, 1993 regarding the deferral of such costs.
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q - For the Quarter ended December 31, 1993
- --------------------------------------------------------------------------------
Results of operations (continued)
Costs and expenses (continued):
General and administrative expenses increased in the second quarter of fiscal
1994 and the six months then ended as compared to the comparable periods in
fiscal 1993 in total dollars and as a percentage of net operating revenues. This
is due to increased staffing to support the operating groups and a redeployment
of the Company's resources formerly involved with the development of hospitals
as a result of changes in the Company's development strategy.
Interest expense for the three months ended December 31, 1993 totalled
$9,751,000 compared to $4,873,000 for the three months ended December 31, 1992,
an increase of $4,878,000. For the six months ended December 31, 1993, interest
expense totalled $19,003,000, an increase of $10,711,000 from the six months
ended December 31, 1992. The increases in fiscal 1994 are due to a higher
average outstanding debt balance and a higher average interest rate resulting
from the issuance of $150,000,000 of senior subordinated notes in March 1993.
In addition, interest expense was impacted by a reduction in the amount of
interest capitalized related to new hospital construction, as the Company has
fewer hospitals under construction in fiscal 1994. For the three and six month
periods ended December 31, 1993, interest costs of $360,000 and $1,227,000,
respectively, related to the rehabilitation hospitals under construction were
capitalized. For both the three and six months ending December 31, 1992,
interest costs of $1,796,000 and $2,808,000 were capitalized, respectively.
Depreciation and amortization as a percentage of net operating revenues
increased in both the three and six months ended December 31, 1993. This
increase resulted from the depreciation on the new rehabilitation hospitals
which are owned rather than leased by the Company and an increase in goodwill
amortization resulting from acquisitions.
Minority Interests:
Minority interests in net income decreased for both the three and six months
ended December 31, 1993. This decline is primarily due to declining earnings at
the Company's joint ventured California rehabilitation hospitals.
Income Taxes:
Effective July 1, 1993, the Company adopted Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes." See note 3 of the Notes to
Consolidated Financial Statements for a description of the Statement and its
implementation.
Income taxes as a percentage of income before income taxes were 40.5% for both
the three and six months ended December 31, 1993 and 38% for both the three and
six months ended December 31, 1992. The rate for fiscal 1993 reflects the
restatement for Kron, which as an S-Corporation prior to its acquisition made no
provision for income taxes. The pro forma effective rate excluding Kron prior
to its acquisition was 39.1% for the three and six months ended December 31,
1992. The increase in the effective rate was due to an increase in
non-deductible goodwill costs, the mix of state income which was not as
favorable as in the prior fiscal years and the impact of the Omnibus Budget
Reconciliation Act of 1993.
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q - For the Quarter ended December 31, 1993
- --------------------------------------------------------------------------------
Capital Resources and Liquidity
For the six months ended December 31, 1993, operating activities provided
$2,280,000 of cash. The primary uses of cash for operating activities were to
fund the increase in accounts receivable, repay accrued cost reimbursement
adjustments due to Medicare and the semi-annual payments of interest for the
Company's Senior Subordinated debentures. The increase in accounts receivable
was caused primarily by the Company's increased revenue from the new
rehabilitation hospitals opened in fiscal 1994 and 1993. Growth in consolidated
days sales outstanding at December 31, 1993 to 94 days over 89 days at June 30,
1993, also, contributed to the increase in accounts receivable. The increase in
consolidated days sales outstanding is primarily due to an increase in amounts
due from the federal government's Medicare program under interim payment plans.
Investing activities, primarily development, construction and acquisition
activities, resulted in uses of cash of $19,620,000 during the six months ended
December 31, 1993. Real estate and other assets were sold resulting in cash
inflows of $13,464,000. In addition to available cash, net long-term borrowings
of $29,081,000 were used to fund these cash requirements. See the Consolidated
Statements of Cash Flows for a detailed analysis of the components of cash flow.
Long-term debt outstanding at December 31, 1993 totalled $415,806,000 including
$3,667,000 which represents the current portion of long-term debt. The
Company's Credit Facility was amended on December 31, 1993, to provide up to
$235,000,000 in a revolving line of credit, of which up to $35,000,000 is
available in the form of letters of credit. At December 31, 1993, approximately
$57,000,000 of working capital borrowing, and $25,355,000 of letters of credit
were outstanding under the Credit Facility. The amendment also extended the
revolving loan period to December 31, 1996 and amended certain financial
covenants. See footnote 6 to the Notes to the Consolidated Financial Statements
for the year ended June 30, 1993 for further explanation of long-term debt.
The Company has terminated certain contractual arrangements in its contract
therapy business with certain third party providers. As a result, the Company
is potentially subject to increased credit risk with regard to the accounts
receivable related to the former arrangements. The Company is currently
negotiating with these payors to secure payment of these receivables. However,
the Company is unable to estimate the ultimate outcome of these negotiations
and its subsequent collection. The receivable net of allowances related to
these arrangements at December 31, 1993 is $17,000,000.
The Company's ongoing capital requirements relate principally to routine capital
expenditures, costs associated with its rehabilitation hospitals under
construction, future development projects (including outpatient clinics),
potential acquisitions and growth of its contract services companies. The
Company's commitments under various construction agreements approximated
$1,137,000 at December 31, 1993. The Company presently expects to construct
fewer freestanding rehabilitation hospitals during fiscal 1994 than in prior
years. In addition, capital may be required to make contingent payments
required in connection with the Company's previous acquisitions and for working
capital needs.
Continental Medical Systems, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q - For the Quarter ended December 31, 1993
- --------------------------------------------------------------------------------
Capital Resources and Liquidity (continued)
The Company has historically expanded its business, in part, through selective
acquisitions and intends to pursue additional acquisition opportunities from
time to time. It is anticipated that future acquisitions will be funded through
the issuance of capital stock and payment of cash and other considerations.
Management believes that current sources of liquidity are sufficient to meet the
needs of the Company's business for fiscal 1994. Liquidity on a short-term
basis will be provided internally from the Company's operating cash flow and
externally from its Credit Facility. At December 31, 1993 the Company had
$152,645,000 of unused borrowing capacity (subject to applicable covenants
which may limit borrowing capacity) under its Credit Facility, of which
$9,645,000 is available in the form of letters of credit. Additionally, the
Company believes it has the capacity to obtain additional debt and equity
financing to supplement its operating cash flow in order to meet the Company's
needs beyond those anticipated in fiscal 1994.
The Company announced on February 1, 1994, that it is currently refining its
business plan, which could include a restructuring of certain elements of its
business. The Company is unable at the present time to predict the impact this
will have, if any, on its operating results and its liquidity.
Continental Medical Systems, Inc. and Subsidiaries
Form 10-Q - For the Quarter ended December 31, 1993
- --------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Registrant's Annual Meeting of Stockholders was held on November 10,
1993.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation 14
under the Securities Exchange Act of 1934. There was no solicitation in
opposition to management's nominees to elect two Class II directors for a
term expiring in 1996 as listed in the proxy statement, and all such
nominees were elected.
(c) The matters voted on at the meeting and the results of the votes were as
follows:
(1) To elect two Class II directors for a term expiring in 1996.
The vote on the proposal was as follows:
For Withheld
--- --------
Frank DeFazio 28,565,290 5,264,419
Robert A. Ortenzio 28,566,490 5,263,219
(2) To approve the adoption of the 1994 Stock Option Plan.
The vote on the proposal was as follows:
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
15,326,867 13,567,677 494,906 4,440,259
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(4) Seventh Amendment dated December 31, 1993 to the Amended and
Restated Credit Agreement.
(11) Computation of earnings per share
(b) Reports on Form 8-K
(1) Report dated January 25, 1994 (subsequently amended by Form 8-K/A
dated January 28, 1994) reporting the dismissal of Price Waterhouse
and the engagement of Ernst & Young as the Registrant's principal
accountants.
Continental Medical Systems, Inc. and Subsidiaries
Signature
Form 10-Q - For the Quarter ended December 31, 1993
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONTINENTAL MEDICAL SYSTEMS, INC.
Date: February 14, 1994 By: /S/ Dennis L. Lehman
-----------------------------
Dennis L. Lehman
Senior Vice-President - Finance
and Chief Financial Officer
Signing on the behalf of the registrant
and as principal financial officer.
EXHIBIT INDEX
Exhibit
Number Document Page
- ------ -------- ----
4. Seventh Amendment dated December 31, 1993 to the Amended and Restated
Credit Agreement
11. Computation of earnings per share