<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 63-0860407
------------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Two Perimeter Park South, Birmingham, Alabama 35243
---------------------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(205) 967-7116
---------------------------------------------------
(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
------------------------ -----------------------------
Common Stock, par value 80,349,816 shares
$.01 per share
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART 1 -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -- June 30, 1995 3
(Unaudited) and December 31, 1994
Consolidated Statements of Income (Unaudited) -- Three Months 5
and Six Months Ended June 30, 1995 and 1994
Consolidated Statements of Cash Flows (Unaudited) -- Six Months 6
Ended June 30, 1995 and 1994
Notes to Consolidated Financial Statements (Unaudited) -- Three 8
Months and Six Months Ended June 30, 1995 and 1994
Item 2. Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
Page 2
<PAGE>
PART 1 -- FINANCIAL INFORMATION
HEALTHSOUTH Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
---------- ----------
(Unaudited)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 62,336 $ 68,735
Other marketable securities 13,579 16,628
Accounts receivable 281,283 242,659
Inventories, prepaid expenses, and
other current assets 110,538 97,180
---------- ----------
467,736 425,202
OTHER ASSETS 60,953 43,074
PROPERTY, PLANT AND EQUIPMENT--NET 1,042,444 857,372
INTANGIBLE ASSETS--NET 491,916 410,688
---------- ----------
TOTAL ASSETS $ 2,063,049 $ 1,736,336
========== ==========
</TABLE>
Page 3
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS (continued)
(In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
---------- ----------
(Unaudited)
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable $ 93,094 $ 87,153
Salaries and wages payable 44,496 34,102
Accrued interest payable and other liabilities 28,250 55,922
Current portion of long-term debt 16,750 16,698
---------- ----------
TOTAL CURRENT LIABILITIES 182,590 193,875
LONG-TERM DEBT 1,340,549 1,017,696
DEFERRED INCOME TAXES 6,518 8,595
OTHER LONG-TERM LIABILITIES 4,071 8,398
DEFERRED REVENUE 7,266 7,526
MINORITY INTERESTS--LIMITED PARTNERSHIPS 3,923 10,326
STOCKHOLDERS' EQUITY:
Preferred Stock, $.10 par value--1,500,000
shares authorized; issued and outstanding--
none 0 0
Common Stock, $.01 par value--150,000,000
shares authorized; 80,128,000 and 76,991,000
shares issued at June 30, 1995 and
December 31, 1994, respectively 801 770
Additional paid-in capital 381,743 369,186
Retained earnings 151,797 137,764
Treasury stock (323) (323)
Receivable from Employee Stock Ownership Plan (15,886) (17,477)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 518,132 489,920
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,063,049 $ 1,736,336
========== ==========
</TABLE>
See accompanying notes.
Page 4
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED - In Thousands, Except for Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ------------------------
1995 1994 1995 1994
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Revenues $ 378,871 $ 301,200 $ 716,949 $ 584,183
Operating expenses:
Operating units 272,950 222,837 513,038 437,643
Corporate general and administrative 8,690 9,821 19,645 19,191
Provision for doubtful accounts 6,787 5,123 14,119 10,287
Depreciation and amortization 29,460 19,742 55,663 36,962
Interest expense 23,205 15,605 44,292 26,980
Interest income (1,167) (817) (2,770) (1,598)
Merger costs 29,194 132 29,194 3,397
Loss on impairment of assets 11,192 0 11,192 0
---------- --------- --------- ----------
380,311 272,443 684,373 532,862
Income before income taxes and
minority interests (1,440) 28,757 32,576 51,321
Provision for income taxes (1,394) 11,005 10,895 19,104
---------- --------- --------- ----------
Income before minority interests (46) 17,752 21,681 32,217
Minority interests (2,025) (1,516) (3,904) (2,991)
---------- --------- --------- ----------
Net income $ (2,071) $ 16,236 $ 17,777 $ 29,226
========== ========= ========= ==========
Weighted average common and common
equivalent shares outstanding 87,249 84,459 87,246 83,974
========== ========= ========= ==========
Net income per common and common
equivalent share $ (0.02) $ 0.19 $ 0.20 $ 0.35
========== ========= ========= ==========
</TABLE>
See accompanying notes.
Page 5
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------
1995 1994
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 17,777 $ 29,226
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 55,663 36,962
Provision for doubtful accounts 14,119 10,287
Income applicable to minority interests of
limited partnerships 3,904 2,991
Loss on impairment of assets 11,192 0
Merger costs 29,194 3,397
Provision for deferred income taxes 9,354 13,588
Provision for deferred revenue (260) 0
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable (6,935) (40,149)
Inventories, prepaid expenses and other current
assets (3,316) (6,393)
Accounts payable and accrued expenses (42,916) 10,652
--------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 87,776 60,561
INVESTING ACTIVITIES
Purchases of property, plant and equipment (70,235) (68,320)
Proceeds from sale of property, plant and equipment 14,786 50,867
Additions to intangible assets, net of effects of
acquisitions (26,464) (19,778)
Assets obtained through acquisitions, net of liabilities
assumed (284,090) (34,645)
Changes in other assets (6,895) (15,561)
Proceeds received on sale of other marketable
securities 11,596 2,085
Investments in other marketable securities (10,926) (3,004)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (372,228) (88,356)
</TABLE>
Page 6
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED - In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1995 1994
--------- ---------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from borrowings 650,744 488,536
Principal payments on long-term debt and leases (373,351) (420,206)
Proceeds from exercise of options 5,448 8,797
Reduction in receivable from Employee Stock
Ownership Plan 1,590 1,455
Proceeds from investment by minority interests 0 1,319
Purchase of limited partnership interests 0 (266)
Payment of cash distributions to limited partners (10,873) (4,676)
--------- ---------
NET CASH PROVIDED FROM
FINANCING ACTIVITIES 273,558 74,959
--------- ---------
(DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (10,894) 47,164
Cash and cash equivalents at beginning of period 73,230 81,031
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 62,336 $ 128,195
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 42,298 $ 19,165
Income taxes 32,176 13,127
Non-cash financing activities:
During 1995, the Company declared a two-for-one stock split on its Common Stock,
which was effected in the form of a 100% stock dividend.
</TABLE>
See accompanying notes.
Page 7
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months and Six Months Ended June 30, 1995 and 1994
NOTE 1 -- The accompanying consolidated financial statements include
the accounts of HEALTHSOUTH Corporation (the "Company") and its
subsidiaries. This information should be read in conjunction with
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, as amended. It is management's opinion
that the accompanying consolidated financial statements reflect
all adjustments (which are normal recurring adjustments, except
as otherwise indicated) necessary for a fair presentation of the
results for the interim period and the comparable period
presented.
NOTE 2 -- During 1994, the Company entered into a $550,000,000
revolving line of credit with NationsBank of North Carolina, N.A.
("NationsBank") and other participating banks (the "1994 Credit
Agreement"). On April 11, 1995, the Company amended and restated
the 1994 Credit Agreement with NationsBank to increase the size
of the credit facility to $1,000,000,000. At June 30, 1995, the
Company had drawn $895,000,000 under the restated 1994 Credit
Agreement.
On March 24, 1994, the Company issued $250,000,000 principal
amount of 9.5% Senior Subordinated Notes due 2001 (the "Notes").
Interest is payable on April 1 and October 1. The Notes are
senior subordinated obligations of the Company and, as such, are
subordinated to all existing and future senior indebtedness of
the Company. Also on March 24, 1994, the Company issued
$100,000,000 principal amount of 5% Convertible Subordinated
Debentures due 2001 (the "Convertible Debentures"). An additional
$15,000,000 principal amount of Convertible Debentures was issued
in April 1994 to cover underwriters' overallotments. Interest is
payable on April 1 and October 1. The Convertible Debentures are
convertible into Common Stock of the Company at the option of the
holder at a conversion price of $18.81 per share, subject to
adjustment in certain events. The net proceeds from the issuance
of the Notes and Convertible Debentures were used by the Company
to pay down indebtedness outstanding under its other existing
credit facilities.
At June 30, 1995 and December 31, 1994, long-term debt
consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
-------- --------
(in thousands)
<S> <C> <C>
Advances under the $1,000,000,000
1994 Credit Agreement $895,000 $510,000
9.5% Senior Subordinated Notes due 2001
250,000 250,000
5% Convertible Subordinated Debentures due 2001
115,000 115,000
Other long-term debt
97,299 159,394
---------- ---------
1,357,299 1,034,394
Less amounts due within one year
16,750 16,698
---------- ---------
$1,340,549 $1,017,696
</TABLE>
Page 8
<PAGE>
NOTE 3 -- Effective December 29, 1994, the Company merged with
ReLife, Inc. ("ReLife") in a transaction that was accounted for
as a pooling of interests. Accordingly, the Company's historical
financial statements for all periods prior to the effective date
of the merger have been restated to include the results of
ReLife. Prior to the merger, ReLife reported on a fiscal year
ending on September 30. The restated financial statements for all
periods prior to and including December 31, 1994 are based on a
combination of the Company's results for its December 31 fiscal
year and ReLife's results for its September 30 fiscal year.
Beginning January 1, 1995, all facilities acquired in the ReLife
merger adopted a December 31 fiscal year end; accordingly, all
consolidated financial statements for periods after December 31,
1994 are based on a consolidation of all of the Company's
subsidiaries on a December 31 year end. ReLife's historical
results of operations for the three months ended December 31,
1994 are not included in the Company's consolidated statements of
income or cash flows. An adjustment has been made to
stockholders' equity as of January 1, 1995 to adjust for the
effect of excluding ReLife's results of operations for the three
months ended December 31, 1994. The following is a summary of
ReLife's results of operations and cash flows for the three
months ended December 31, 1994 (in thousands):
Statement of Income Data:
Revenues $ 38,174
Operating expenses:
Operating units 31,797
Corporate general and administrative 2,395
Provision for doubtful accounts 541
Depreciation and amortization 1,385
Interest expense 858
Interest income (91)
HEALTHSOUTH merger expense 3,050
Loss on disposal of fixed assets 1,000
Loss on abandom-nent of computer prqiect 973
-------
41,908
-------
Income before income taxes and
minority interests (3,734)
Provision for income taxes --
-------
(3,734)
Minority interests --
-------
Net income (3.734)
=======
Statement of Cash Flow Data:
Net cash provided by operating activities $ 38,077
Net cash used by investing activities (9,632)
Net cash used in financing activities (23,950)
-------
Net increase in cash $ 4,495
=======
Page 9
<PAGE>
NOTE 4 -- Effective June 13, 1995, the Company merged with Surgical
Health Corporation ("SHC") and in connection therewith issued
8,531,480 shares of its Common Stock for all of SHC's outstanding
common and preferred stock. SHC operates a network of 41
freestanding surgery centers (including four mobile
lithotripters) in eleven states, with an aggregate of 156
operating and procedure rooms.
The merger was accounted for as a pooling of interests and,
accordingly, the Company's financial statements have been
restated to include the results of SHC for all periods presented.
Costs and expenses of $29,194,000 incurred by the Company in
connection with the merger have been recorded in operations
during the quarter ending June 30, 1995 and reported as Merger
Costs in the accompanying consolidated statements of income (see
Note 8).
There were no material transactions between the Company and SHC
prior to the merger. The effects of conforming the accounting
policies of the two companies are not material.
NOTE 5 -- Effective April 1, 1995, the Company 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 other
facilities. The total purchase price for the NovaCare facilities
was approximately $235,000,000. The cost in excess of net asset
value was approximately $173,000,000. Of this excess,
approximately $129,000,000 has been allocated to leasehold value
and the remaining $44,000,000 to goodwill.
During the first six months of 1995, the Company acquired or
opened 28 outpatient facilities and one outpatient surgery
center. The total purchase price of the acquired facilities was
approximately $54,385,000. The Company also entered into
non-compete agreements totaling approximately $5,020,000 in
connection with these transactions. The cost in excess of the
acquired facilities' net asset value was approximately
$39,463,000. The results of operations (not material individually
or in the aggregate) of these acquisitions are included in the
consolidated financial statements from their respective
acquisition dates.
NOTE 6 -- During the first six months of 1995, the Company granted
incentive and nonqualified stock options to certain Directors,
employees and others for 2,947,500 shares of Common Stock at an
exercise price of $16.75 per share.
NOTE 7 -- Effective April 17, 1995, the Company declared a
two-for-one stock split paid in the form of a 100% stock
dividend. Accordingly, all share and per share information have
been restated to give effect to this transaction for all periods
presented.
NOTE 8 -- As a result of the NovaCare and SHC acquisitions, the
Company recognized $29,194,000 in merger costs during 1995. 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 "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- 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 consolidation is applicable in a market where
the Company's existing services overlap with those of an acquired
facility.
Page 10
<PAGE>
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.
Page 11
<PAGE>
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"
Page 12
<PAGE>
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" 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 $311,674,000, an increase of
$10,474,000, or 3.5%, as compared to the same period in 1994. New store revenues
were $67,197,000. 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
$221,659,000, or 71.1% of comparable revenue. New store operating expenses were
$51,291,000, or 76.3% 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
Page 13
<PAGE>
consolidation is applicable in an 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 $621,022,000, an increase of $36,839,000, or 6.3%, as
compared to the same period in 1994. New store revenues were $95,927,000. 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 $442,622,000, or 71.3% of comparable revenue. New store
operating expenses were $70,416,000, or 73.4% 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
Page 14
<PAGE>
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.
Interests 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 11.25% 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.
Page 15
<PAGE>
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
On June 6, 1995, the Annual Meeting of Stockholders of HEALTHSOUTH
Corporation was held, at which the following actions were taken:
1. The shares of Common Stock represented at the Annual Meeting
were voted for the election of Directors as follows:
<TABLE>
<CAPTION>
NUMBER
VOTING FOR WITHHOLD
---------- ---------- --------
<S> <C> <C> <C>
Richard M. Scrushy 55,099,249 54,813,813 285,436
Phillip C. Watkins, M.D. 55,099,249 55,029,422 69,287
George H. Strong 55,099,249 55,028,944 70,305
C. Sage Givens 55,099,249 55,025,274 73,975
Charles W. Newhall III 55,099,249 55,029,444 69,805
John S. Chamberlin 55,099,249 55,024,322 74,927
Aaron Beam, Jr. 55,099,249 54,816,444 282,805
James P. Bennett 55,099,249 54,816,743 282,506
Larry R. House 55,099,249 54,816,744 282,505
Anthony J. Tanner 55,099,249 54,810,824 288,425
Richard F. Celeste 55,099,249 55,016,944 82,305
P. Daryl Brown 55,099,249 54,816,644 282,605
</TABLE>
2. The shares of Common Stock represented at the Annual Meeting
were voted for the approval of the 1995 Stock Option Plan of
the Corporation as follows:
<TABLE>
<CAPTION>
NUMBER
VOTING FOR AGAINST ABSTAIN
------ --- ------- -------
<S> <C> <C> <C>
54,258,417 43,539,526 10,443,049 275,842
</TABLE>
3. The shares of Common Stock represented at the Annual Meeting
were voted for the approval of an Amendment to the Restated
Certificate of Incorporation of the Corporation to increase the
authorized shares of Common Stock to 150,000,000 shares as
follows:
<TABLE>
<CAPTION>
NUMBER
VOTING FOR AGAINST ABSTAIN
------ --- ------- -------
<S> <C> <C> <C>
52,321,686 50,311,305 1,745,910 264,471
</TABLE>
On June 13, 1995, a Special Meeting of Stockholders of HEALTHSOUTH
Corporation was held, at which the following action was taken:
1. The shares of Common Stock represented at the Special Meeting
were voted for the approval of the merger of a wholly-owned
subsidiary of the Corporation with and into Surgical Health
Corporation, a Delaware corporation, as follows:
<TABLE>
<CAPTION>
NUMBER
VOTING FOR AGAINST ABSTAIN
------ --- ------- -------
<S> <C> <C> <C>
57,538,381 57,040,678 119,941 377,762
Page 16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
11. Computation of Income Per Share (unaudited)
27. Financial Data Schedule
(b) Reports on Form 8-K
During the three months ended June 30, 1995, the Company filed
(i) Amendments on Form 8-K/A on April 21, May 10, May 12 and May
19, 1995, each amending a Current Report on Form 8-K originally
filed on February 21, 1995 relating to the acquisition of
certain rehabilitation facilities from NovaCare, Inc. (in each
case amending Items 5 and 7), and (ii) Amendments on Form 8-K/A
on May 22 and June 28, 1995, each amending a Current Report on
Form 8-K originally filed on February 1, 1995 relating to the
acquisition of Surgical Health Corporation (in each case amend-
ing Items 5 and 7).
No other items of Part II are applicable to the Registrant for the
period covered by this Quarterly Report on Form 10-Q.
Page 17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHSOUTH Corporation
(Registrant)
Date: August 11, 1995 /s/ RICHARD M. SCRUSHY
-------------------------------
Richard M. Scrushy
Chairman of the Board and
Chief Executive Officer
Date: August 11, 1995 /s/ AARON BEAM, JR.
-------------------------------
Aaron Beam, Jr.
Executive Vice President and
Chief Financial Officer
Page 18
<PAGE>
</TABLE>
EXHIBIT 11
HEALTHSOUTH Corporation and Subsidiaries
COMPUTATION OF INCOME PER SHARE (UNAUDITED)
(In Thousands, Except for Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -------------------
1995 1994 1995 1994
-------- -------- -------- -------
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average common shares outstanding 80,045 75,088 79,849 74,779
Net effect of dilutive stock options 7,204 9,371 7,397 9,195
-------- -------- -------- -------
Total Common and Common Equivalent Shares 87,249 84,459 87,246 83,974
======== ======== ======== =======
Net income/(loss) $ (2,071) $16,236 $17,777 $29,226
======== ======== ======== =======
Net income/(loss) per common and common
equivalent share $ 0.02) $ 0.19 $ 0.20 $ 0.35
======== ======== ======== =======
</TABLE>
Page 19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<EXCHANGE-RATE> 1
<CASH> 62,336
<SECURITIES> 13,579
<RECEIVABLES> 496,642
<ALLOWANCES> (215,359)
<INVENTORY> 29,862
<CURRENT-ASSETS> 467,736
<PP&E> 1,189,655
<DEPRECIATION> (147,211)
<TOTAL-ASSETS> 2,063,049
<CURRENT-LIABILITIES> 182,590
<BONDS> 1,340,549
<COMMON> 801
0
0
<OTHER-SE> 517,331
<TOTAL-LIABILITY-AND-EQUITY> 2,063,049
<SALES> 0
<TOTAL-REVENUES> 716,949
<CGS> 0
<TOTAL-COSTS> 532,683
<OTHER-EXPENSES> 55,663
<LOSS-PROVISION> 14,119
<INTEREST-EXPENSE> 44,292
<INCOME-PRETAX> 32,576
<INCOME-TAX> 10,895
<INCOME-CONTINUING> 17,777
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,777
<EPS-PRIMARY> .20
<EPS-DILUTED> 0
</TABLE>
