<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K/A
Amendment No. 3
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report: August 25, 1995
HEALTHSOUTH Corporation
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 1-10315 63-0860407
----------------------------- ----------- -------------------
(State or Other (Commission (I.R.S. Employer
Jurisdiction of Incorporation) File Number) Identification No.)
Two Perimeter Park South
Birmingham, Alabama 35243
------------------------ -----------------
(Address of Principal (Zip Code)
Executive Offices)
Registrant's Telephone Number,
Including Area Code: (205) 967-7116
<PAGE>
Item 2. ACQUISITION OR DISPOSITION OF ASSETS
Effective June 13, 1995, HEALTHSOUTH Corporation, a Delaware
corporation (the "Company"), and its wholly-owned subsidiary, ASC Atlanta
Acquisition Company, Inc., a Delaware corporation ("ASC"), completed the
acquisition of Surgical Health Corporation, a Delaware corporation ("SHC"),
through a merger of ASC into SHC. As contemplated by the terms of the Amended
and Restated Plan and Agreement of Merger by and among the parties, SHC is the
surviving corporation in the merger, and is wholly-owned by the Company. SHC
stockholders received .2633 shares of the Common Stock, par value $.01 per share
of the Company for each share of the Common Stock, par value $.0025 per share,
Series A Convertible Preferred Stock, par value $.01 per share, Series B
Convertible Preferred Stock, par value $.01 per share, or Series C Convertible
Preferred Stock, par value $.01 per share, of SHC held by them. The exchange
ratio represents a value of $4.60 per share to SHC's stockholders, resulting in
an approximate value of the transaction of $155,000,000.
Prior to consummation of the acquisition, SHC was the nation's second
largest independent outpatient surgery company. It operated 36 outpatient
surgery centers in 11 states.
<PAGE>
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired.
The required audited consolidated financial statements of SHC at
December 31, 1994, and the period then ended were filed with the Company's
Registration Statement on Form S-4 dated March 8, 1995 (Reg. No. 33-57987) and
are hereby incorporated herein by reference. The required unaudited consolidated
financial statements of SHC at March 31, 1995, and the period then ended, were
filed with SHC's Quarterly Report on Form 10-Q dated May 12, 1995, and are
hereby incorporated herein by reference.
(b) Pro Forma Financial Information
The required Pro Forma Consolidated Financial Statements of the Company
at December 31, 1994 and the required Pro Forma Consolidated Financial
Statements for the Company at March 31, 1995, and the period then ended are
filed herewith.
(c) Exhibits.
(2) Amended and Restated Plan and Agreement of Merger, dated as of
January 22, 1995, by and among HEALTHSOUTH Corporation, ASC Atlanta Acquisition
Company, Inc. and Surgical Health Corporation, incorporated herein by reference
to Annex A to the Prospectus forming a part of the Company's Registration
Statement on Form S-4 (Reg. No. 33-57987), as filed with the Commission on March
8, 1995.
The Registrant undertakes to furnish supplementally to the Commission
upon request a copy of any Exhibit to the Amended and Restated Plan and
Agreement of Merger incorporated by reference herein as Exhibit (2).
<PAGE>
INDEX TO FINANCIAL STATEMENTS
HEALTHSOUTH Corporation
Page
----
Pro Forma Condensed Financial Information 5
Pro Forma Consolidated Balance Sheet at March 31, 1995 (unaudited) 6
Pro Forma Consolidated Statements of Income (unaudited) -- Twelve
Months Ended December 31, 1994 7
Pro Forma Consolidated Statements of Income (unaudited) -- Twelve
Months Ended December 31, 1993 8
Pro Forma Consolidated Statements of Income (unaudited) -- Twelve
Months Ended December 31, 1992 9
Pro Forma Consolidated Statements of Income (unaudited) -- Three
Months Ended March 31, 1995 10
Pro Forma Consolidated Statements of Income (unaudited) -- Three
Months Ended March 31, 1994 11
Notes to Pro Forma Condensed Financial Information 12
<PAGE>
PRO FORMA CONDENSED FINANCIAL INFORMATION
The following pro forma condensed financial information and explanatory
notes are presented to reflect the effect of the merger (the "Merger") of
Surgical Health Corporation ("SHC") with a wholly-owned subsidiary of
HEALTHSOUTH Corporation ("HEALTHSOUTH") on the historical financial statements
of HEALTHSOUTH and SHC. The Merger is reflected in the pro forma condensed
financial information as a pooling of interests. The HEALTHSOUTH historical
amounts reflect the combination of HEALTHSOUTH and ReLife, Inc. ("ReLife") for
all periods presented, as HEALTHSOUTH acquired ReLife in December 1994 in a
transaction accounted for as a pooling of interests.
In addition, the pro forma condensed financial information reflects the
impact of the acquisition from NovaCare, Inc. ("NovaCare") by HEALTHSOUTH of 11
rehabilitation hospitals, 12 other facilities and two Certificates of Need (the
"NovaCare Rehabilitation Hospitals Acquisition") on the results of operations
and financial position for the year ended December 31, 1994, and the quarters
ended March 31, 1995 and 1994. Prior to the NovaCare Rehabilitation Hospitals
Acquisition, which was consummated in the second quarter of 1995, these
facilities were operated by a wholly-owned subsidiary of NovaCare, Rehab Systems
Company ("RSC").
The pro forma condensed balance sheet assumes that the Merger was
consummated on March 31, 1995, and the pro forma condensed income statements
assume that the SHC Merger was consummated on January 1, 1992. The assumptions
are described in the accompanying Notes to Pro Forma Condensed Financial
Information.
All HEALTHSOUTH shares outstanding and per share amounts have been
adjusted to reflect a two-for-one stock split effected in the form of a 100
percent stock dividend payable on April 17, 1995.
The pro forma information should be read in conjunction with the
historical financial statements of HEALTHSOUTH, SHC and RSC and the related
notes thereto included in documents incorporated in HEALTHSOUTH's Registration
Statement on Form S-4 (Registration No. 33-57987) by reference. The pro forma
financial information is presented for informational purposes only and is not
necessarily indicative of the results of operations or combined financial
position that would have resulted had the Merger and other acquisitions
described above been consummated at the dates indicated, nor is it necessarily
indicative of the results of operations of future periods or future combined
financial position.
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Balance Sheet (Unaudited)
March 31, 1995
<TABLE>
<CAPTION>
Acquisition
-----------------------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
HEALTHSOUTH NovaCare Adjustments Combined SHC Adjustments Combined
----------- -------- ----------- -------- ------- -------------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 59,522 $ 5,530 $ 0 $ 65,052 $ 5,862 $ 0 $ 70,914
Other marketable securities 16,529 0 0 16,529 0 0 16,529
Accounts receivable 231,751 40,572 0 272,323 20,898 0 293,221
Inventories, prepaid expenses
and other current assets 90,610 3,906 0 94,516 6,344 0 100,860
---------- ------ --------- ------- ------- -------- ----------
Total current assets 398,412 50,008 0 448,420 33,104 0 481,524
Other assets 57,058 1,820 0 58,878 1,166 0 60,044
Property, plant and equipment, net 779,912 33,005 128,333 (2) 941,250 71,569 0 1,012,819
Intangible assets, net 357,366 6,126 44,365 (2) 407,857 84,730 0 492,587
--------- -------- ------- --------- ------- ------- ----------
Total assets $ 1,592,748 $ 90,959 $ 172,698 $ 1,856,405 $ 190,569 $ 0 $ 2,046,974
========== ======== ======== ========== ========= ======== ==========
LIABILITIES AND STOCKHOLDER'S
EQUITY
Current liabilities:
Accounts payable $ 63,135 $ 2,858 $ 0 $ 65,993 $ 3,846 $ 4,000 (1)$ 73,839
Salaries and wages payable 35,538 4,674 0 40,212 0 0 40,212
Accrued interest payable and
other liabilities 45,070 2,078 0 47,148 8,160 (1,560)(1) 53,748
Current portion of long-term
debt 15,221 0 0 15,221 2,065 0 17,286
------- -------- ------ --------- ------- --------- --------
Total current liabilities 158,964 9,610 0 168,574 14,071 2,440 185,085
Long-term debt 964,233 18,909 234,807 (2) 1,217,949 95,875 0 1,313,824
Deferred income taxes 7,079 0 0 7,079 713 0 7,792
Other long-term liabilities 5,805 331 0 6,136 2,292 0 8,428
Deferred revenue 7,396 0 0 7,396 0 0 7,396
Minority interests (3,911) 0 0 (3,911) 13,059 0 9,148
Redeemable common stock and
warrants 0 0 0 0 3,034 (3,034)(2) 0
Redeemable convertible preferred
stock 0 0 0 0 26,569 (26,569)(2) 0
Stockholders' equity:
Preferred Stock, $.10 par 0 0 0 0 0 0 0
Common Stock, $.01 par 714 103 (103)(2) 714 54 (40)(2) 728
Additional paid-in capital 316,252 34,442 (34,442)(2) 316,252 33,449 29,643 (2) 379,344
Retained earnings 152,425 27,564 (27,564)(2) 152,425 1,453 (2,440)(1) 151,438
Treasury stock (323) 0 0 (323) 0 0 (323)
Receivable from Employee Stock
Ownership Plan (15,886) 0 0 (15,886) 0 0 (15,886)
--------- ------ ----- --------- ------ ------ ---------
Total stockholders' equity 453,182 62,109 (62,109) 453,182 34,956 27,163 515,301
--------- ------- -------- --------- ------- ------- ---------
Total liabilities and
stockholders' equity $1,592,748 $ 90,959 $ 172,698 $ 1,856,405 $ 190,569 $ 0 $ 2,046,974
=========== ========== ========== ============ ========= ========= ============
</TABLE>
See accompanying notes
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Income Statement (Unaudited)
Year Ended December 31, 1994
<TABLE>
<CAPTION>
Acquisition
-----------------------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
HEALTHSOUTH NovaCare Adjustments Combined SHC Adjustments Combined
----------- -------- ----------- --------- ------ ------------ ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 1,127,441 $ 142,548 $ 6,605 (6)$1,276,594 $ 108,749 $ 0 $ 1,385,343
Operating expenses:
Operating units 835,888 128,233 (12,406)(3) 951,715 70,824 0 1,022,539
Corporate general and
administrative 37,139 0 0 37,139 8,756 0 45,895
Provision for doubtful accounts 20,583 1,269 0 21,852 3,156 0 25,008
Depreciation and amortization 75,588 7,041 (3,994)(1) 86,161 11,090 0 97,251
7,526 (4)
Interest expense 57,255 11,096 10,100 (5) 78,451 8,031 0 86,482
Interest income (4,224) 0 0 (4,224) (84) 0 (4,308)
Merger expenses 2,949 0 0 2,949 3,571 0 6,520
Loss on impairment of assets 10,500 0 0 10,500 0 0 10,500
Loss on abandonment of computer
project 4,500 0 0 4,500 0 0 4,500
----------- ---------- -------- ---------- -------- ------- ---------
1,040,178 147,639 1,226 1,189,043 105,344 0 1,294,387
Income before income taxes and
minority interests 87,263 (5,091) 5,379 87,551 3,405 0 90,956
Provision for income taxes 33,835 (1,084) 1,023 (7) 33,774 470 0 34,244
----------- ----------- -------- ---------- -------- ------- ---------
53,428 (4,007) 4,356 53,777 2,935 0 56,712
Minority interests 203 445 0 648 6,199 0 6,847
----------- ---------- -------- --------- -------- ------- ----------
Net income $ 53,225 $ (4,452) $ 4,356 $ 53,129 $ (3,264) $ 0 $ 49,865
=========== =========== ======== ========== ========== ======= ==========
Weighted average common and
common equivalent shares
outstanding 75,876 N/A N/A 75,876 21,814 (13,003)(2) 84,687
========== ========== ======= ========== ========= ======== ==========
Net income per common and
common equivalent share $ 0.70 $ N/A $ N/A $ 0.70 $ (0.15) $ N/A $ 0.59
============ ========== ======== ========== ========== ======= =========
Net income per common share
--assuming full dilution $ 0.70 $ N/A $ N/A $ 0.69 $ N/A $ N/A $ 0.59
============ ========== ======== ========== ========= ======= =========
</TABLE>
See accompanying notes.
<PAGE>
HEALTHSOUTH Rehabilitation Corporation and Subsidiaries
Pro Forma Condensed Combined Income Statement (Unaudited)
Year Ended December 31, 1993
Pro Forma Pro Forma
HEALTHSOUTH SHC Adjustments Combined
----------- ----- ------------ ---------
(In thousands, except per share amounts)
Revenues $ 575,346 $ 80,983 $ 0 $ 656,329
Operating expenses:
Operating units 418,981 52,797 0 471,778
Corporate general and
administrative 20,018 4,311 0 24,329
Provision for doubtful
accounts 13,875 2,306 0 16,181
Depreciation and amortization 39,376 6,848 0 46,224
Interest expense 14,261 4,234 0 18,495
Interest income (3,698) (226) 0 (3,924)
Merger expense 333 0 333
NME Selected Hospitals
Acquisition related expense 49,742 0 0 49,742
Loss on sale of partnership
interest 0 (1,400) 0 (1,400)
---------- ------- ------- ---------
552,555 69,203 0 621,758
Income before income taxes
and minority interests 22,791 11,780 0 34,571
Provision for income taxes 9,009 2,921 0 11,930
--------- ------- ------- ---------
13,782 8,859 0 22,641
Minority interests 190 5,254 0 5,444
------- ------ ------ ---------
Net income $ 13,592 $ 3,605 $ 0 $ 17,197
========== ======== ======== =========
Weighted average common and
common equivalent shares
outstanding 69,434 31,428 (23,153)(2) 77,709
=========== ====== ======= ======
Net income per common and
common equivalent share $ 0.20 $ 0.11 $ N/A $ 0.22
========== ======== ======== ========
See accompanying notes.
<PAGE>
HEALTHSOUTH Rehabilitation Corporation and Subsidiaries
Pro Forma Condensed Combined Income Statement (Unaudited)
Year Ended December 31, 1992
Pro Forma Pro Forma
HEALTHSOUTH SHC Adjustments Combined
----------- ----- ------------ ---------
(In thousands, except per share amounts)
Revenues $ 464,288 $ 36,758 $ 0 $ 501,046
Operating expenses:
Operating units 347,073 25,096 0 372,169
Corporate general and
administrative 14,418 2,460 0 16,878
Provision for doubtful
accounts 11,842 1,412 0 13,254
Depreciation and amortization 26,737 3,097 0 29,834
Interest expense 11,295 1,328 0 12,623
Interest income (5,121) (294) 0 (5,415)
Terminated merger expense 3,665 0 0 3,665
---------- --------- -------- ----------
409,909 33,099 0 443,008
Income before income taxes
and minority interests 54,379 3,659 0 58,038
Provision for income taxes 18,383 481 0 18,864
------- ------ -------- ----------
35,996 3,178 0 39,174
Minority interests 1,402 2,843 0 4,245
------- ------ -------- ----------
Net income $ 34,594 $ 335 $ 0 $ 34,929
========== ========= ======== ==========
Weighted average common and
common equivalent shares
outstanding 68,836 20,425 (15,047)(2) 74,214
========== ========= ======== =========
Net income per common and
common equivalent share $ 0.50 $ 0.02 $ N/A $ $0.47
========== ========= ========= ==========
See accompanying notes.
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Income Statement (Unaudited)
Quarter Ended March 31, 1995
<TABLE>
<CAPTION>
Acquisition
-----------------------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
HEALTHSOUTH NovaCare Adjustments Combined SHC Adjustments Combined
----------- -------- ----------- --------- ----- ----------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 307,020 $ 37,942 $ 1,860 (6) $ 346,822 $ 31,480 $ 0 $ 378,302
Operating expenses:
Operating units 219,902 33,065 (910)(3) 252,057 20,186 0 272,243
Corporate general and
administrative 9,570 0 0 9,570 1,408 0 10,978
Provision for doubtful accounts 6,478 322 0 6,800 854 0 7,654
Depreciation and amortization 22,892 1,996 (999)(1) 25,771 3,311 0 29,082
1,882 (4)
Interest expense 18,340 2,595 2,684 (5) 23,619 2,747 0 26,366
Interest income (1,135) 0 0 (1,135) (69) 0 (1,204)
---------- -------- -------- --------- ------- -------- ---------
276,047 37,978 2,657 316,682 28,437 0 345,119
Income before income taxes and
minority interests 30,973 (36) (797) 30,140 3,043 0 33,183
Provision for income taxes 11,771 (101) (259) 11,411 518 0 11,929
---------- -------- -------- --------- -------- ------- ---------
19,202 65 (538) 18,729 2,525 0 21,254
Minority interests 70 89 0 159 1,809 0 1,968
---------- -------- -------- --------- -------- ------- ---------
Net income $ 19,132 $ (24) $ (538) $ 18,570 $ 716 $ 0 $ 19,286
========== ========= ======== ========= ======= ======= =========
Weighted average common and
common equivalent shares
outstanding 78,286 N/A N/A 78,286 33,082 (24,372)(2) 86,994
========== ========= ======= ========= ======== ======= =========
Net income per common and
common equivalent share $ 0.24 $ N/A $ N/A $ 0.24 $ 0.02 $ N/A $ 0.22
========== ======== ======== ========= ======== ========= =========
Net income per common share
assuming full dilution $ 0.24 $ N/A $ N/A $ 0.24 $ N/A $ N/A $ 0.22
========== ======== ======== ========= ======== ========= =========
</TABLE>
See accompanying notes.
<PAGE>
HEALTHSOUTH Rehabilitation Corporation and Subsidiaries
Pro Forma Condensed Combined Income Statement (Unaudited)
Quarter Ended March 31, 1994
<TABLE>
<CAPTION>
Acquisition
-----------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
HEALTHSOUTH NovaCare Adjustments Combined SHC Adjustments Combined
----------- -------- ----------- ---------- ------- ----------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 259,289 $ 35,992 $ 1,868 (6) $297,149 $23,694 $ 0 $ 320,843
Operating expenses:
Operating units 199,871 32,762 (3,120)(3) 229,513 14,935 0 244,448
Corporate general and
administrative 7,933 0 0 7,933 1,437 0 9,370
Provision for doubtful
accounts 4,555 317 0 4,872 609 0 5,481
Depreciation and amortization 14,887 1,570 (999)(1) 17,340 2,333 0 19,673
1,882 (4)
Interest expense 10,046 2,416 2,836 (5) 15,298 1,329 0 16,627
Interest income (761) 0 0 (761) (20) 0 (781)
Merger costs 0 0 0 0 3,265 0 3,265
---------- -------- -------- ------- -------- -------- ----------
236,531 37,065 599 274,195 23,888 0 298,083
Income before income taxes and
minority interests 22,758 (1,073) 1,269 22,954 (194) 0 22,760
Provision for income taxes 8,915 (270) 305 8,950 (816) 0 8,134
----------- -------- -------- --------- -------- -------- ----------
13,843 (803) 964 14,004 622 0 14,626
Minority interests 134 105 0 239 1,341 0 1,580
=========== ========== ======== ========= ======== ======== ==========
Net income $ 13,709 $ (908) $ 964 $ 13,765 $ (719) $ 0 $ 13,046
Weighted average common and
common equivalent shares
outstanding 74,334 N/A N/A 74,334 33,709 (24,833)(2) 83,210
========== ======== ======== ======== ======== ======== =========
Net income per common and
common equivalent share $ 0.18 $ N/A $ N/A $ 0.19 $ (0.02) $ N/A $ 0.16
========== ========= ========= ======== ======== ========= =========
Net income per common share
assuming full dilution $ N/A $ N/A $ N/A $ N/A $ N/A $ N/A $ N/A
========== ========== ======== ========= ======= ========= =========
</TABLE>
See accompanying notes.
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Pro Forma Condensed Financial Information
A. The NovaCare Rehabilitation Hospitals Acquisition
Effective April 1, 1995 HEALTHSOUTH completed the acquisition of the
rehabilitation hospitals division of NovaCare, Inc. ("NovaCare"), consisting of
11 rehabilitation hospitals, 12 other facilities, and certificates of need to
build two additional facilities (the "NovaCare Rehabilitation Hospitals
Acquisition"). The purchase price was approximately $234,807,000. The
transaction was accounted for as a purchase. HEALTHSOUTH financed the cost of
the NovaCare Rehabilitation Hospitals Acquisition through additional borrowings
under its existing credit facilities, as amended.
NovaCare has historically reported on a June 30 fiscal year end.
NovaCare's results of operations have been recast to a December 31 fiscal year
end in the accompanying pro forma condensed income statement for the year ended
December 31, 1994. This was accomplished by excluding the results of operations
for the six months ending December 31, 1993 from their historical June 30, 1994
income statement and then adding to it their results of operations for the six
months ending December 31, 1994.
The accompanying pro forma balance sheet assumes that the NovaCare
Rehabilitation Hospitals Acquisition was consummated on March 31, 1995 and the
accompanying pro forma income statements for the year ending December 31, 1994
and the three months ended March 31, 1995 and 1994 assume that the transaction
was consummated at the beginning of the periods presented.
Certain assets and liabilities of Rehab Systems Company (a wholly owned
subsidiary of NovaCare, Inc.) were excluded from the NovaCare Rehabilitation
Hospitals Acquisition and are not included in the accompanying March 31, 1995
NovaCare balance sheet. The excluded assets and liabilities are as follows (in
thousands):
Cash and cash equivalents $ 4,973
Accounts receivable 259
Other current assets 42
Equipment, net 4,719
Intangible assets, net 56,321
Other assets (primarily
investments in subsidiaries) 40,637
Accounts payable (454)
Other current liabilities (275)
Current portion of long term debt (146)
Long term debt (38,620)
Payable to affiliates (92,377)
--------
Net excluded asset (liability) $(24,921)
========
The following pro forma adjustments are necessary for the NovaCare
Rehabilitation Hospitals Acquisition:
1. To exclude historical depreciation and amortization expense related
to the excluded assets described above. The total expense excluded amounts to
$3,994,000 for the year ended December 31, 1994 and $999,000 for the three
months ended March 31, 1995 and 1994.
2. To allocate the excess of the $234,807,000 cash purchase price over
the net asset value of the acquired NovaCare facilities, which is approximately
$172,698,000. Of this excess, $128,333,000 has been allocated to leasehold value
and the remaining $44,365,000 has been allocated to goodwill. This adjustment
also reflects the increase in long-term debt necessary to finance the
transaction. The $128,333,000 allocated to leasehold value was based on total
lease payments for the remaining lease terms capitalized at an 8.33%
capitalization rate. There are seven leases involved. Total lease payments
approximate $10,700,000 annually. Six of the leases have remaining terms ranging
from 19 to 29 years. The seventh lease has a remaining term of six years.
3. To eliminate intercompany management fees of $4,196,000 and royalty
fees of $8,210,000 of the acquired NovaCare facilities. These fees totaling
$12,406,000 are included in operating unit expenses in the accompanying income
statement for the year ended December 31, 1994. These same fees amount to
$910,000 and $3,120,000 for the three months ended March 31, 1995 and 1994,
respectively.
<PAGE>
4. To adjust depreciation and amortization expense to reflect the
allocation of the excess purchase price over the net tangible asset value
described in Item 2 above as follows (in thousands):
Purchase Price
Allocation Useful Annual
Adjustment Life Amortization
-------------- ------ ------------
Leasehold value ............. $128,333 20 years $6,417
Goodwill .................... 44,365 40 years 1,109
-----
$7,526
=====
No additional adjustments to NovaCare's historical depreciation and amortization
are necessary. The remaining net assets acquired approximate their fair value.
Because NovaCare's results of operations before intercompany items (described in
item 3 above) are profitable, both on a historical and pro forma basis, the
40-year amortization period for goodwill is appropriate and consistent with
HEALTHSOUTH policy. Leasehold value is being amortized over the weighted average
remaining terms of the leases, which is 20 years.
5. To increase interest expense by $19,559,000 to reflect pro forma
borrowings of $234,807,000, described above, at a 8.33% variable interest rate,
which represents HEALTHSOUTH's weighted average cost of debt, as if they were
outstanding for the entire year, and to decrease interest expense by $9,459,000,
which represents interest on NovaCare debt not assumed by HEALTHSOUTH. A 1/8%
variance in the assumed interest rate would change annual pro forma interest
expense by approximately $294,000. The net increases to pro forma interest
expense for the three month periods ended March 31, 1995 and 1994 are $2,684,000
and $2,836,000, respectively.
6. To adjust estimated Medicare reimbursement for the changes in
reimbursable expenses described in items 1,3, 4 and 5 above. These changes are
as follows (in thousands):
Three months ended
Year ended March 31,
December 31, 1994 1995 1994
----------------- ---- ----
Depreciation and amortization
(item 1) $ (3,994) $ (999) $ (999)
Intercompany management fees
(item 3) (4,196) (910) (1,050)
Depreciation and amortization
(item 4) 7,526 1,882 1,882
Interest expense (item 5) 10,100 2,684 2,836
----------- ------ -------
9,436 2,657 2,669
Assumed Medicare utilization 70% 70% 70%
----------- ------ -------
Increased reimbursement $ 6,605 $1,860 $ 1,868
=========== ====== =======
The Medicare utilization rate of 70% assumes a slight improvement in NovaCare's
historical Medicare percentage of 78% as a result of bringing these facilities
into the HEALTHSOUTH network.
7. To adjust the NovaCare provision for income taxes to an effective
rate of 39% (net of minority interests).
B. The SHC Merger
The proposed SHC Merger is intended to be accounted for as a pooling of
interests. The pro forma condensed income statements assume that the SHC Merger
was consummated on January 1, 1992. The pro forma condensed balance sheet
assumes that the SHC Merger was consummated on March 31, 1995.
The pro forma condensed financial information contains no adjustments
to conform the accounting policies of the two companies because any such
adjustments have been determined to be immaterial by the management of
HEALTHSOUTH.
<PAGE>
The following pro forma adjustments are necessary for the SHC Merger:
1. The pro forma condensed income statements do not reflect
non-recurring costs resulting directly from the Merger. The management of
HEALTHSOUTH estimates that these costs will approximate $4,000,000 and will be
charged to operations in the quarter the Merger is consummated. The amount
includes costs to merge the two companies and professional fees. However, this
estimated expense, net of taxes of $1,560,000, has been charged to retained
earnings in the accompanying pro forma balance sheet.
2. To adjust pro forma share amounts based on historical share amounts,
converting each outstanding share of SHC Common Stock and redeemable preferred
stock into .2633 shares of HEALTHSOUTH Common Stock.
