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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
(Mark One)
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1995; 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 1-10315
HEALTHSOUTH Corporation
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(Exact Name of Registrant as Specified in its Charter)
Delaware 63-0860407
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Two Perimeter Park South, Birmingham, Alabama 35243
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(Address of Principal Executive Offices)
(Zip Code)
(205) 967-7116
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all Reports
required to be filed by Section 13 or 15(d) of the Securities and 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.
Class Outstanding at August 8, 1995
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Common Stock, par value 80,349,816 shares
$.01 per share
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HEALTHSOUTH Corporation and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART 1 -- FINANCIAL INFORMATION
Page
Item 2. Management's Discussion and Analysis of Financial 3
Condition and Results of Operations
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
The Company provides outpatient and rehabilitative healthcare services
through its inpatient and outpatient rehabilitation facilities, surgery centers
and medical centers. The Company has expanded its operations through the
acquisition or opening of new facilities and satellite locations and by
enhancing its existing operations. As of June 30, 1995, the Company had 485
locations in 35 states, the District of Columbia, and Ontario, Canada, including
318 outpatient rehabilitation locations, 77 inpatient rehabilitation facilities,
five medical centers, 43 surgery centers and 42 locations providing other
patient care services.
The Company's revenues include net patient service revenues and other
operating revenues. Net patient service revenues are reported at estimated net
realizable amounts from patients, insurance companies, third-party payors
(primarily Medicare and Medicaid) and others for services rendered. Revenues
from third-party payors also include estimated retroactive adjustments under
reimbursement agreements which are subject to final review and settlement by
appropriate authorities. Management determines allowances for doubtful accounts
and contractual adjustments based on historical experience and the terms of
payor contracts. Net accounts receivable include only those amounts estimated by
management to be collectible.
The Company determines the amortization period of the cost in excess of
net asset value of purchased facilities based on an evaluation of the facts and
circumstances of each individual purchase transaction. The evaluation includes
an analysis of historic and projected financial performance, an evaluation of
the estimated useful life of the buildings and fixed assets acquired, the
indefinite useful life of Certificates of Need and licenses acquired, the
competition within local markets, lease terms where applicable, and the legal
terms of partnerships where applicable. The Company utilizes independent
appraisers and relies on its own management expertise in evaluating each of the
factors noted above. With respect to the carrying value of the excess of cost
over net asset value of purchased facilities and other intangible assets, the
Company determines on a quarterly basis whether an impairment event has occurred
by considering factors such as the market value of the asset, a significant
adverse change in legal factors or in the business climate, adverse action by a
regulator, a history of operating losses or cash flow losses, or a projection of
continuing losses associated with an operating entity. The carrying value of
excess cost over net asset value of purchased facilities and other intangible
assets will be evaluated if the facts and circumstances suggest that it has been
impaired. If this evaluation indicates that the value of the asset will not be
recoverable, as determined based on the undiscounted cash flows of the entity
acquired over the remaining amortization period, the Company's carrying value of
the asset will be reduced by the estimated shortfall of cash flows.
The Company, in many cases, operates more than one site within a
market. In such markets, there is customarily an outpatient center or inpatient
facility with associated satellite outpatient locations. For purposes of the
following discussion and analysis, same store operations are measured on
locations within markets in which similar operations existed at the end of the
period and include the operations of additional locations opened within the same
market. New store operations are measured on locations within new markets.
Effective December 29, 1994, the Company consummated the acquisition of
ReLife, Inc. (the "ReLife Acquisition") as a merger accounted for as a pooling
of interests. In connection with the ReLife Acquisition, the Company acquired 31
inpatient rehabilitation facilities and 12 outpatient rehabilitation centers.
The results of HEALTHSOUTH described below for the quarter ended June 30, 1994
are based on a combination of both HEALTHSOUTH's results for its quarter ended
June 30, 1994 and ReLife's results for its quarter ended March 31, 1994 (see
Note 3 of "Notes to Consolidated Financial Statements" for further discussion).
Effective June 13, 1995, the Company consummated the acquisition of Surgical
Health Corporation ("SHC") also as a merger accounted for as a pooling of
interests. Accordingly, the Company's financial statements have been restated to
include the results of SHC for all periods presented (see Note 4 of "Notes to
Consolidated Financial Statements"
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for further discussion). All data set forth for periods prior to December 31,
1994 relating to revenues derived from Medicare and Medicaid do not take into
account revenues of the ReLife facilities or the SHC facilities, because ReLife
and SHC did not separately track such revenues prior to consummation of the
acquisitions described above.
Results of Operations -- Three Months Ended June 30, 1995
The Company operated 318 outpatient locations (which includes base
facilities and satellites) at June 30, 1995, compared to 199 outpatient
locations at June 30, 1994. In addition, the Company operated 77 inpatient
rehabilitation facilities, five medical centers and 43 surgery centers at June
30, 1995, compared with 61 inpatient facilities, five medical centers and 32
surgery centers at June 30, 1994.
The Company's operations generated revenues of $378,871,000 for the
quarter ended June 30, 1995, an increase of $77,671,000, or 25.8%, as compared
to the same period in 1994. The increase in revenues is primarily attributable
to increases in patient volume, the completion of the acquisition of the
NovaCare rehabilitation hospitals division (See Note 5 of "Notes to Consolidated
Financial Statements") and the addition of new outpatient centers. Same store
revenues for the quarter ended June 30, 1995 were $321,142,000, an increase of
$19,942,000, or 6.6%, as compared to the same period in 1994. New store revenues
were $57,729,000. Revenues generated from patients under Medicare and Medicaid
plans respectively accounted for 40.1% and 2.1% of revenue for the second
quarter of 1995, compared to 41.2% and 3.6% for the same period in 1994.
Revenues from any other single third-party payor were not significant in
relation to the Company's revenues. During the second quarter of 1995, same
store outpatient visits, inpatient days and surgical cases increased 16.9%, 6.1%
and 12.4%, respectively. Revenue per outpatient visit for the same store
operations increased by 0.4% while revenue per inpatient day and revenue per
surgical case for the same store operations decreased by 1.6% and 0.8%,
respectively.
Operating expenses, at the operating unit level, were $272,950,000, or
72.0% of revenues, for the quarter ended June 30, 1995, compared to 74.0% of
revenues for the second quarter of 1994. Same store operating expenses were
$228,759,000, or 71.2% of comparable revenue. New store operating expenses were
$44,191,000, or 76.5% of comparable revenue. Corporate general and
administrative expenses decreased from $9,821,000 during the 1994 quarter to
$8,690,000 during the 1995 quarter. As a percent of revenue, corporate general
and administrative expenses decreased from 3.3% in the 1994 quarter to 2.3% in
the 1995 quarter. The provision for doubtful accounts was $6,787,000, or 1.8% of
revenues, for the second quarter of 1995, compared to $5,123,000, or 1.7% of
revenues, for the same period in 1994. Management believes that this provision
is adequate to cover any uncollectible revenues.
Depreciation and amortization expense was $29,460,000 for the quarter
ended June 30, 1995, compared to $19,742,000 for the same period in 1994. The
increase represents the investment in additional assets by the Company. Interest
expense was $23,205,000 for the quarter ended June 30, 1995, compared to
$15,605,000 for the quarter ended June 30,1994. The increase in interest expense
corresponds to the increase in long-term debt by the Company. For the second
quarter of 1995, interest income was $1,167,000, compared to $817,000 for the
second quarter of 1994.
As a result of the NovaCare and SHC acquisitions, the Company
recognized $29,194,000 in merger costs during the 1995 quarter. Fees related to
legal, accounting and financial advisory services accounted for $3,400,000 of
the expense. Costs and expenses related to the SHC Bond Tender Offer (see
"Liquidity and Capital Resources") totaled $14,606,000. Accruals for employee
separations were approximately $1,188,000. In addition, the Company has provided
approximately $10,000,000 for the write-down of certain assets to net realizable
value as the result of a planned facility consolidation. The
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consolidation is applicable in a market where the Company's existing services
overlap with those of an acquired facility.
During the 1995 quarter, the Company recognized an $11,192,000 loss on
impairment of assets. The impaired assets relate to six SHC facilities in which
the projected undiscounted cash flows did not support the book value of the
long-lived assets of such facilities.
Income before minority interests and income taxes and non-recurring
expenses for the second quarter of 1995 was $38,946,000, compared to $28,889,000
for the same period in 1994. Income (loss) before minority interests and income
taxes for the second quarter of 1995 was ($1,440,000). Minority interests
decreased income before income taxes by $2,025,000 for the quarter ended June
30, 1995, compared to decreasing income before income taxes by $1,516,000 for
the second quarter of 1994. The provision for income taxes (excluding
non-recurring expenses) for the second quarter of 1995 was $13,953,000, compared
to $11,057,000 for the same period in 1994, resulting in effective tax rates of
37.8% and 40.4% respectively. The provision (benefit) for income taxes
(including non-recurring expenses) for the second quarter of 1995 was
($1,394,000), resulting in an effective tax rate of 40.2%. Net income (excluding
non-recurring expenses and related income tax benefits) for the second quarter
of 1995 was $22,968,000, compared to $16,316,000 for the second quarter of 1994.
Net income (loss) (including non-recurring expenses) for the second quarter of
1995 was ($2,071,000).
Results of Operations -- Six Months Ended June 30, 1995
Revenues for the six months ended June 30, 1995 were $716,949,000, an
increase of $132,766,000, or 22.7%, over the six months ended June 30, 1994.
Same store revenues were $639,443,000, an increase of $55,260,000, or 9.5%, as
compared to the same period in 1994. New store revenues were $77,506,000. The
increase in revenues is primarily attributable to the acquisition of the
NovaCare rehabilitation hospitals division, increases in patient volume, and the
addition of new outpatient centers. Revenues generated from patients under
Medicare and Medicaid plans respectively accounted for 41.1% and 2.3% of revenue
for the first six months of 1995, compared to 41.3% and 3.4% for the same period
in 1994. Revenues from any other single third-party payor were not significant
in relation to the Company's revenues. During the first six months of 1995, same
store outpatient visits, inpatient days and surgical cases increased 24.1%, 6.4%
and 14.1%, respectively. Revenue per outpatient visit for same store operations
decreased by 1.5%, while revenue per inpatient day and revenue per surgical case
for same store operations increased by 0.3% and 0.7%, respectively.
Operating expenses, at the operating unit level, were $513,038,000, or
71.6% of revenues, for the six months ended June 30, 1995, as compared to
$437,643,000, or 74.9% of revenues for the first six months of 1994. Same store
operating expenses were $456,608,000, or 71.4% of comparable revenue. New store
operating expenses were $56,430,000, or 72.8% of comparable revenue. As a result
of the NovaCare and SHC acquisitions, the Company recognized merger costs of
$29,194,000 and a loss on impairment of assets of $11,192,000 during the second
quarter of 1995 (see "Results of Operations -- Three Months Ended June 30, 1995"
for further discussion). Net income for the six months ended June 30, 1995
(including non-recurring expenses) was $17,777,000, compared to $29,226,000 for
the same period in 1994.
Liquidity and Capital Resources
As of June 30, 1995, the Company had working capital of $285,146,000,
including cash and marketable securities of $75,915,000. Working capital at
December 31, 1994 was $231,327,000, including cash and marketable securities of
$85,363,000. For the first six months of 1995, cash provided by operations was
$87,776,000 compared to $60,561,000 for the same period in 1994. Additions to
property, plant, and equipment and acquisitions accounted for $79,590,000 and
$258,653,000, respectively, during the first six months of 1995. Those same
investing activities accounted for $68,320,000 and $34,645,000, respectively, in
the same period in 1994. Financing activities provided $273,558,000 and
$74,959,000
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during the first six months of 1995 and 1994, respectively. Net borrowing
proceeds (borrowing less principal reductions) for the first six months of 1995
and 1994 were $277,393,000 and $68,330,000, respectively.
Accounts receivable were $281,283,000 at June 30, 1995, compared to
$242,659,000 at December 31, 1994. The number of days of average revenues in
ending receivables was 64.5 at June 30, 1995 (excluding accounts receivable and
revenue from the facilities acquired from NovaCare during the second quarter of
1995), compared to 71.6 at December 31, 1994. The concentration of net accounts
receivable from patients, third-party payors, insurance companies and others at
June 30, 1995 is consistent with the related concentration of revenues for the
period then ended.
At June 30, 1995, the Company had a $1,000,000,000 revolving line of
credit with NationsBank of North Carolina and 28 other participating banks.
Interest is paid based on LIBOR plus a predetermined margin, prime, or
competitively bid rates from the participating banks. This credit facility has
an initial maturity date of June 1, 1998, with two one-year renewals. The
Company provided a negative pledge on all assets and granted the banks a first
priority security interest in all shares of stock of its subsidiaries and rights
and interests in its controlled partnerships. The effective interest rate on the
average outstanding balance under the revolving line of credit was 7.27% for the
six months ended June 30, 1995, compared to the average prime rate of 8.91%
during the same period. At June 30, 1995, the Company had drawn $895,000,000
under its revolving line of credit.
On June 20, 1995, the Company purchased $67,500,000 of the $75,000,000
outstanding principal amount of 11.5% Senior Subordinated Notes due 2004 of SHC
(the "SHC Bond Tender Offer") for 115% of the face value of the Notes.
Subsequent to June 30, 1995, the remaining $7,500,000 balance was purchased on
the open market.
The Company intends to pursue the acquisition or development of
additional healthcare operations, including comprehensive outpatient
rehabilitation facilities, ambulatory surgery centers, inpatient rehabilitation
facilities and companies engaged in the provision of rehabilitation-related
services, and to expand certain of its existing facilities. While it is not
possible to estimate precisely the amounts which will actually be expended in
the foregoing areas, the Company anticipates that over the next twelve months,
it will spend approximately $50,000,000 for the acquisition and/or development
of new outpatient facilities and approximately $70,000,000 for inpatient
facility projects and the construction and equipping of additions to existing
inpatient facilities.
Although the Company is continually considering and evaluating
acquisitions and opportunities for future growth, the Company has not entered
into any agreements with respect to material future acquisitions. The Company
believes that existing cash, cash flow from operations, and borrowings under the
revolving line of credit will be sufficient to satisfy the Company's estimated
cash requirements for the next twelve months and thereafter.
Inflation in recent years has not had a significant effect on the
Company's business, and is not expected to adversely affect the Company in the
future unless it increases significantly.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Amendment No. 1 to be signed on its behalf
by the undersigned thereunto duly authorized.
HEALTHSOUTH Corporation
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(Registrant)
Date: September 5, 1995 /s/ RICHARD M. SCRUSHY
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Richard M. Scrushy
Chairman of the Board and
Chief Executive Officer
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