<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K/A
Amendment No. 2
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report: June 13, 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.)
or Organization)
Two Perimeter Park South
Birmingham, Alabama 35243
---------------------------- -------------
(Address of Principal (Zip Code)
Executive Offices)
Registrant's Telephone Number, (205) 967-7116
Including Area Code:
<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.
Item 5. OTHER EVENTS
At the Annual Meeting of Stockholders of the Company held June 6, 1995,
the stockholders of the Company approved a proposal to increase the number of
authorized shares of Common Stock, par value $.01 per share, to 150,000,000
shares. On June 8, 1995, the Company filed a Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware to effect
such amendment.
On June 20, 1995, SHC, as successor to ASC, completed a tender offer
(the "Tender Offer") to purchase all of the outstanding 11 1/2% Senior
Subordinated Notes due 2004 (the "Notes") of SHC at a cash price of $1,150 per
$1,000 principal amount, plus accrued and unpaid interest up to, but not
including, such date. The total principal amount of the Notes was $75,000,000,
$67,500,000 of which was tendered in the offer. In connection with the Tender
Offer, ASC solicited and received the requisite consents from the holders of the
Notes to the adoption of proposed amendments to the Indenture pursuant to which
the Notes were originally issued.
- 2 -
<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 were filed with Amendment No. 5 to the Company's Current
Report on Form 8-K/A dated May 19, 1995, and are hereby incorporated herein by
reference. It is impracticable to provide the required Pro Forma Consolidated
Financial Statements for the Company at March 31, 1995, and the period then
ended. Such required Pro Forma Consolidated Financial Statements will be filed
under cover of Form 8-K/A as soon as practicable, but not later than 60 days
after June 28, 1995.
(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.
(3) Restated Certificate of Incorporation of
HEALTHSOUTH Corporation, as filed on June 8,
1995, with the Secretary of State of the
State of Delaware.
(99)-1 Audited consolidated financial statements of
SHC at December 31, 1994, and the period
then ended, as filed with the Company's
Registration Statement on Form S-4 dated
March 8, 1995 (Reg. No. 33-57987).
- 3 -
<PAGE>
(99)-2 Pro Forma Consolidated Financial Statements
of the Company at December 31, 1994, as
filed with Amendment No. 5 to the Company
Current Report on Form 8-K/A dated May 19,
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).
- 4 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page No.
HEALTHSOUTH CORPORATION
Pro Forma Consolidated Balance Sheet at March 31, 1995
(Unaudited)
Pro Forma Consolidated Statement of Operations for
the Three Months Ended March 31, 1995
(Unaudited)
Pro Forma Consolidated Statement of Stockholders' Equity
For the Three Months Ended March 31, 1995
(Unaudited)
Pro Forma Consolidated Statement of Cash Flows
For the Three Months Ended March 31, 1995
(Unaudited)
Notes to Pro Forma Consolidated Financial Statements
- 5 -
<PAGE>
SURGICAL HEALTH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's omitted, except per share data)
<TABLE>
<CAPTION>
December 31, 1994 March 31, 1995
----------------- --------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................... $ 2,786 $ 5,862
Accounts receivable, net................................................ 19,939 20,898
Other receivables....................................................... 854 691
Supplies .............................................................. 3,889 4,188
Prepaid expenses and other.............................................. 1,175 1,245
Income taxes refundable................................................. 599 220
--- ---
Total current assets.......................................... 29,242 33,104
Property and equipment, net................................................ 67,834 71,569
Other assets:
Intangible assets, net.................................................. 75,988 75,439
Deferred costs.......................................................... 9,796 9,291
Deposits and other...................................................... 1,142 1,166
----- -----
.............................................................. 86,926 85,896
------ ------
Total assets.................................................. $ 184,002 $ 190,569
= ======= = =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 3,974 $ 3,846
Accrued expenses........................................................ 10,638 8,160
Current portion of long-term debt and capital lease obligations......... 1,985 2,065
----- -----
Total current liabilities..................................... 16,597 14,071
Long-term debt and capital lease obligations, less current portion......... 12,635 20,875
Senior subordinated notes.................................................. 75,000 75,000
Other long-term liabilities................................................ 2,743 2,292
Deferred income taxes...................................................... 713 713
Minority interests......................................................... 12,528 13,059
Commitments and contingencies..............................................
Redeemable common stock and warrants....................................... 3,034 3,034
Redeemable convertible preferred stock in series, $.01 par value:
Authorized shares -- 15,022,053
Issued and outstanding shares -- 9,313,007 in 1995 and 1994; liquidation
value of $32,948,000 in 1995 and $32,144,000
in 1994.............................................................. 93 93
Additional paid-in capital on redeemable convertible
preferred stock...................................................... 26,476 26,476
</TABLE>
1
<PAGE>
SURGICAL HEALTH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's omitted, except per share data)
<TABLE>
<CAPTION>
December 31, 1994 March 31, 1995
----------------- --------------
(Unaudited)
<S> <C> <C>
Shareholders' equity:
Preferred Stock, $.01 par value:
Authorized shares -- 10,000,000
Issued and outstanding shares-- none................................. --- ---
Non-voting common stock, $.0025 par value:
Authorized shares -- 700,000
Issued and outstanding shares-- none................................. -- --
Common stock, $.0025 par value:
Authorized shares -- 60,000,000
Issued and outstanding shares -- 21,680,917 in 1994 and
21,960,718 in 1995................................................ 54 54
Additional paid-in capital on common stock.............................. 33,392 33,449
Retained earnings....................................................... 737 1,453
--- -----
Total shareholders' equity.................................... 34,183 34,956
------ ------
Total liabilities and shareholders' equity.................... $ 184,002 $ 190,569
= ======= = =======
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
SURGICAL HEALTH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(000's omitted, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1994 1995
<S> <C> <C>
Net revenues.................................................................. $ 23,478 $ 31,058
Facility operating costs...................................................... 17,268 23,497
General, administrative and development expenses.............................. 1,437 1,385
Provision for doubtful accounts............................................... 609 854
Interest expense.............................................................. 1,329 2,747
Merger costs.................................................................. 3,265 ---
Interest and other income..................................................... (236) (468)
---- ----
Income (loss) before minority interests and income taxes...................... (194) 3,043
Minority interests in net earnings of partnerships............................ 1,341 1,809
----- -----
Income (loss) before income taxes............................................. (1,535) 1,234
Income tax expense (benefit).................................................. (816) 518
---- ---
Net income (loss)............................................................. $ (719) $ 716
= ==== = ===
Net income (loss) per common share............................................ $ (.03) $ .02
= ==== = ===
Weighted average common and common equivalent shares
outstanding................................................................ 21,804 33,082
====== ======
See notes to condensed consolidated financial statements.
3
<PAGE>
SURGICAL HEALTH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK, COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY (Unaudited)
(000's omitted)
</TABLE>
<TABLE>
<CAPTION>
Redeemable Convertible Preferred Stock Shareholders' Equity
Additional Additional
Series A Series B Series C Paid-In Paid-In
Convertible Convertible Convertible Capital on Capital on
Preferred Preferred Preferred Preferred Common Common Retained
Stock Stock Stock Stock Stock Stock Earnings
-------- --------- -------- ---------- - -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994...... $ 19 $ 40 $ 34 $26,476 $ 54 $33,392 $ 737
Issuance of common stock from
exercise of stock options and
warrants....................... -- -- -- -- -- 57 --
Net income........................ -- -- -- -- -- -- 716
-- -- -- -- -- -- ---
Balance at March 31, 1995......... $ 19 $ 40 $ 34 $26,476 $ 54 $33,449 $ 1,453
= == = == = == ======= = == ======= = =====
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
SURGICAL HEALTH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(000's omitted)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1994 1995
Operating activities:
<S> <C> <C>
Net income (loss)............................................................. $ (719) $ 716
Adjustment to reconcile net income (loss) to net cash provided
by operating activities:
Provision for doubtful accounts......................................... 609 854
Depreciation and amortization........................................... 2,333 3,541
Minority interests in net earnings of partnership....................... 1,341 1,809
Changes in operating assets and liabilities (net of acquired operating
assets and liabilities):
Accounts receivable................................................ (782) (1,813)
Supplies........................................................... (94) (299)
Prepaid expenses................................................... 516 (70)
Other current assets............................................... 199 163
Accounts payable................................................... (687) (128)
Accrued expenses................................................... 90 (2,478)
Income taxes refundable............................................ (950) 379
---- ---
Net cash provided by operating activities..................................... 1,856 2,674
Investing activities:
Purchase of property and equipment............................................ (8,515) (5,941)
Increase in deferred costs, deposits and other................................ (229) (305)
---- ----
Net cash used in investing activities......................................... (8,744) (6,246)
Financing activities:
Proceeds from issuance of common stock........................................ --- 57
Contributions from limited partners........................................... 391 431
Distributions to limited partners............................................. (2,246) (1,710)
Proceeds from issuance of long-term debt...................................... 10,323 8,800
Payments of capital lease obligations and long-term debt...................... (4,545) (480)
Increase (decrease) in other liabilities...................................... 605 (450)
--- ----
Net cash provided by financing activities..................................... 4,528 6,648
Net increase (decrease) in cash and cash equivalents.......................... (2,360) 3,076
Cash and cash equivalents at beginning of period.............................. 12,700 2,786
------ -----
Cash and cash equivalents at end of period.................................... $ 10,340 $ 5,862
= ====== = =====
Supplemental information:
Cash payments of interest..................................................... $ 1,351 $ 5,159
= ===== = =====
Cash payments of income taxes................................................. $ 683 $ 80
= === = ==
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
SURGICAL HEALTH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 1995
A. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. In the opinion of management, all adjustments,
consisting only of normal recurring accruals, which the Company considers
necessary for a fair presentation of the financial position of the Company as of
March 31, 1995 and the results of operations for the three months ended March
31, 1994 and 1995 have been included. These statements do not include certain
disclosures required under generally accepted accounting principles and,
therefore, should be read in conjunction with the financial statements and notes
thereto for the three-year period ended December 31, 1994.
The results of operations for the three-month period ended March 31,
1995 are not necessarily indicative of trends or results of operations to be
expected for the year ending December 31, 1995.
B. Description of Business
As of March 31, 1995, the Company, through its wholly-owned
subsidiaries, owned a majority or controlling interest in and managed 36
outpatient surgery centers, and had three additional outpatient surgery centers
under development.
C. Mergers
Net revenues and net income (loss) for the merged companies as
described in Note 1 "Description of Business" and "Basis of Presentation" to the
1994 Consolidated Financial Statements for 1994 follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1994
Net Net Income
Revenues (Loss)
(in 000's)
<S> <C> <C>
The Company................................................... $ 21,501 $ (790)
Merged companies.............................................. 1,977 71
----- --
Combined...................................................... $ 23,478 $ (719)
= ====== = ====
</TABLE>
During the three months ended March 31, 1994, the Company expensed
approximately $3,265,000 in costs incurred in connection with the Heritage
merger. These costs include $2,490,000 of advisory fees, legal and accounting
costs as well as other merger related expenses incurred in
6
<PAGE>
SURGICAL HEALTH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(continued)
investigating, negotiating and closing the merger. Additionally, the Company
expensed approximately $775,000 for severance and other costs associated with
merger-related operations adjustments.
D. Long-Term Debt and Capital Lease Obligations
At March 31, 1995, long-term debt consisted of the following (in
thousands):
<TABLE>
<S> <C>
Long-term debt under Amended Loan and Security Agreement..................... $ 17,800
Capital lease obligations.................................................... 5,140
-----
22,940
Current portion.............................................................. (2,065)
------
$ 20,875
======
</TABLE>
Effective June 28, 1994, the Company amended and restated its existing
Loan and Security Agreement (the "Amended Agreement") with its primary lender.
The Amended Agreement provides for a revolving credit facility of up to $50
million which expires on December 31, 1999. Borrowings outstanding under the
Amended Agreement bear interest, at the Company's option, at either the bank's
prime rate plus 1/4% or LIBOR plus 2 1/4%. As of May 1, 1995, the Company had
approximately $30.4 million available for future borrowings under this
agreement.
E. Senior Subordinated Notes
On June 29, 1994, the Company issued $75 million of 11.5% Senior
Subordinated Notes due July 15, 2004 (the "Notes"). The Notes may not be
redeemed by the Company prior to July 15, 1999, except that prior to July 15,
1997, the Company may redeem up to $18.75 million in aggregate principal amount
of the notes at 110% of the principal amount plus accrued interest with the
proceeds of an initial public offering of common stock. The terms of the Notes
provide for limitations on the Company's ability to incur additional
indebtedness (excluding borrowings under the Company's senior credit facility);
to repurchase outstanding capital stock; to declare any dividends on any class
of capital stock or to make certain investments.
7
<PAGE>
SURGICAL HEALTH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(continued)
F. Income Taxes
A reconciliation of the recorded income tax rate to the federal
statutory rate of 34% is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31
(in 000's)
1994 1995
<S> <C> <C>
Statutory federal income tax expense (benefit)................ $ (522) $ 420
State income taxes, net of federal benefit.................... (76) 69
Non-deductible amortization of intangible assets.............. (92) 92
Non-deductible merger costs................................... (107) --
Other......................................................... (19) (63)
--- ---
Income tax expense (benefit).................................. $ (816) $ 518
= ==== = ===
</TABLE>
In 1995, income taxes are being provided for based on projected year
end earnings and projected tax expense. Based on these projections, an effective
tax rate of 42% was provided for the first quarter of 1995.
G. Redeemable Convertible Preferred Stock and Shareholders' Equity
At March 31, 1995, the Company had authorized 5,450,624; 6,000,000; and
3,571,429 shares of series A, series B and series C redeemable convertible
preferred stock, respectively. The following is a summary of the issued and
outstanding shares and liquidation value by series as of March 31, 1995.
<TABLE>
<CAPTION>
Issued and
Outstanding Liquidation
Shares Values
<S> <C> <C>
Series A .................................................................. 1,911,902 $ 3,676,000
Series B .................................................................. 3,961,413 15,142,000
Series C .................................................................. 3,439,692 14,130,000
--------- ----------
Total............................................................. 9,313,007 $ 32,948,000
========= = ==========
</TABLE>
Since December 31, 1994 options to purchase 5,000 shares of the
Company's common stock at $3.67 per share have been issued to a consultant of
the Company.
In June 1994, the holders of the outstanding convertible preferred
stock agreed to amend the Company's Certificate of Incorporation to provide that
the outstanding preferred stock cannot be redeemed prior to July 15, 2004.
8
<PAGE>
H. Commitments and Contingencies
As of March 31, 1995, the Company had under construction three surgery
centers. The Company estimates that it will cost approximately $6.0 million to
complete the construction and equip these centers.
The Company is a party in two related state court proceedings commenced
in November 1992 and January 1993 challenging the determination by the Georgia
State Health Planning Agency that no Certificate of Need (CON) was required for
the relocation of the Company's Northlake Center for Outpatient Surgery in
Atlanta, Georgia (the Northlake Center). The Company received favorable rulings
on these matters by the state court; however, these rulings were appealed to the
Georgia Supreme Court.
No decision on such appeal has been rendered.
The Company believes that it has meritorious defenses; however, if the
Company does not receive a favorable decision in the Supreme Court, it may be
required to discontinue operation of the Northlake Center. The Company intends
to apply for a CON in such event.
Although the likelihood of an unfavorable outcome of the appeal process
or the possibility of obtaining a CON cannot be assessed at this time, the
Company believes that the resolution of this matter will not have a material
adverse effect on the Company's financial position or results of operations.
Total assets of the Northlake Center at March 31, 1995 are $1,796,000,
including cash and accounts receivable of $244,000. In addition, the Company's
noncancellable lease on this facility requires annual lease payments of $243,600
(with annual increases of at least 2%) through 2008. Net revenues of the
Northlake Center in the first quarter of 1994 and 1995 were $157,000 and
$227,000, respectively.
In January 1995, the Company entered into a merger agreement with
HEALTHSOUTH Corporation under which all of the Company's outstanding shares of
common stock and redeemable convertible preferred stock would be exchanged for
common stock of HEALTHSOUTH Corporation. The Company must obtain the consent of
the Lender under the Amended Agreement prior to consummation of the merger. In
addition, should this merger be consummated, the Company would be required to
offer to purchase all outstanding Senior Subordinated Notes at a purchase price
equal to 101% of the aggregate principal amount of the notes, plus accrued and
unpaid interest.
I. Subsequent Events
On May 3, 1995, the Company acquired substantially all of the assets of
an outpatient surgery center in Washington, Missouri. The aggregate purchase
price was approximately $1,835,000.
9
<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 hereunto duly authorized.
Date: June 28, 1995.
HEALTHSOUTH Corporation
By /s/ RICHARD M. SCRUSHY
----------------------------------------
Richard M. Scrushy,
Chairman of the Board
and Chief Executive Officer
- 6 -
<PAGE>
EXHIBIT (3)
RESTATED
CERTIFICATE OF INCORPORATION
OF
HEALTHSOUTH REHABILITATION CORPORATION
HEALTHSOUTH Rehabilitation Corporation, a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"), hereby
certifies as follows:
1. The name of the Corporation, prior to the amendments made herein, is
HEALTHSOUTH Rehabilitation Corporation.
The Corporation was originally incorporated under the name AMCARE, Inc.
The date of filing its original Certificate of Incorporation with the Secretary
of State was February 22, 1984.
2. This Restated Certificate of Incorporation further amends and
restates the Restated Certificate of Incorporation of the Corporation by
inserting therein a new Article FIRST and a new first paragraph in Article
FOURTH.
3. The text of the Certificate of Incorporation, as amended or
supplemented heretofore, is further amended hereby to read as herein set forth
in full:
"FIRST: The name of the Corporation is HEALTHSOUTH Corporation.
1
<PAGE>
EXHIBIT (3)
SECOND: The address of its registered office in the State of Delaware
is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name
of its registered agent at such address is The Corporation Trust Company.
THIRD: The nature of the business or purposes to be conducted or
promoted are:
(a) To engage in the business of providing comprehensive
rehabilitation and clinical healthcare services on an ambulatory and
inpatient basis in rehabilitation clinics and hospitals to the general
public through the provision of physician services, physical therapy,
social and/or psychological, respiratory therapy, cardiac
rehabilitation, pulmonary rehabilitation, occupational therapy, speech
pathology, prosthetic and orthotic devices, nursing care, drugs and
biologicals, supplies, appliances and equipment and other services and
to do any and all things necessary and appropriate to carry out such
business effectively, including, without limitation, the owning,
leasing, management and operation of medical facilities and other
physical properties, either directly or indirectly, or in concert with
others.
(b) To engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the
State of Delaware.
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is One Hundred One Million Five Hundred Thousand
(101,500,000) shares, consisting of One Hundred Million (100,000,000) shares of
Common Stock, par value One Cent ($.01) per share, and One Million Five Hundred
Thousand (1,500,000) shares of Preferred Stock, par value Ten Cents ($.10) per
share.
Shares of Preferred Stock may be issued from time-to-time in one or
more series, each such series to have such distinctive designation or title as
may be stated and expressed in this Article FOURTH or as may be fixed by the
Board of Directors
2
<PAGE>
EXHIBIT (3)
prior to the issuance of any shares thereof. Each such series of Preferred Stock
shall have such voting powers, full or limited, or no voting powers, and such
preferences and such relative, participating, optional or other special rights
(including, without limitation, the right to convert the shares of such
Preferred Stock into shares of the Corporation's Common Stock at such rate and
upon such terms and conditions as may be fixed by the Corporation's Board of
Directors), with such qualifications, limitations or restrictions of such
preferences or rights as shall be stated and expressed in this Article FOURTH or
in the resolution or resolutions providing for the issue of such series of
Preferred Stock as may be adopted from time-to-time by the Board of Directors
prior to the issuance of any shares thereof, in accordance with the laws of the
State of Delaware.
Except as may be otherwise provided in this Article FOURTH or in the
resolution or resolutions providing for the issue of a particular series, the
Board of Directors may from time-to-time increase the number of shares of any
series already created by providing that any unissued shares of Preferred Stock
shall constitute part of such series, or may decrease (but not below the number
of shares thereof then outstanding) the number of shares of any series already
created by providing that any unissued shares previously assigned to such series
shall no longer constitute part thereof.
FIFTH: The Board of Directors shall have the power to make, alter or
repeal the Bylaws of the Corporation at any meeting at which a quorum is present
by the affirmative vote of a majority of the whole Board of Directors. Election
of Directors need not be by written ballot.
3
<PAGE>
EXHIBIT (3)
SIXTH: Special Meetings of the stockholders of the Corporation may be
called only by the Board of Directors of the Corporation by resolution adopted
by a majority of the whole Board of Directors or in writing by the holders of at
least 20% of the outstanding shares of the Corporation entitled to vote in
elections of Directors.
SEVENTH: (a) Unless the conditions set forth in clauses (1) through (4)
of this Article SEVENTH, Section (a) are satisfied, the affirmative vote of the
holders of Sixty-Six and Two-Thirds Percent (66-2/3%) of all shares of the
Corporation entitled to vote in elections of Directors, considered for the
purposes of this Article SEVENTH as one class, shall be required for the
adoption or authorization of a business combination (as hereinafter defined)
with any other entity (as hereinafter defined) if, as of the record date for the
determination of stockholders entitled to notice thereof and to vote thereon,
the other entity is the beneficial owner, directly or indirectly, of more than
Twenty Percent (20%) of the outstanding shares of the Corporation entitled to
vote in elections of Directors, considered for the purposes of this Article
SEVENTH as one class. The Sixty-Six and Two-Thirds Percent (66-2/3%) voting
requirement set forth in the foregoing sentence shall not be applicable if:
(1) The cash, or fair market value of other consideration, to
be received per share by holders of the Corporation's Common Stock in
the business combination is at least an amount equal to (A) the highest
per share price paid by the other entity in acquiring any of its
holdings of the Corporation's Common Stock plus (B) the aggregate
amount, if any, by which Five Percent (5%) per annum of that per share
price exceeds the aggregate amount of all dividends paid in cash, in
each case since the date on which the other entity acquired the Twenty
Percent (20%) interest;
(2) After the other entity has acquired a Twenty Percent
(20%) interest and prior to the consummation of the business combina-
tion: (A) the other entity shall have taken steps to ensure that the
4
<PAGE>
EXHIBIT (3)
Corporation's Board of Directors included at all times representation
by continuing Director(s) (as hereinafter defined) proportionate to the
stockholders of the public holders of the Corporation's Common Stock
not affiliated with the other entity (with a continuing Director to
occupy any resulting fractional board position); (B) the other entity
shall not have acquired any newly issued shares, directly or
indirectly, from the Corporation (except upon conversion of convertible
securities acquired by it prior to obtaining a Twenty Percent (20%)
interest or as a result of a pro rata share dividend or share split);
and (C) the other entity shall not have acquired any additional
outstanding shares of the Corporation's Common Stock or securities
convertible into shares of the Corporation's Common Stock except as a
part of the transaction that resulted in the other entity's acquiring
its Twenty Percent (20%) interest;
(3) The other entity shall not have (A) received the benefit,
directly or indirectly (except proportionately as a stockholder), of
any loans, advances, guarantees, pledges or other financial assistance
or tax credits provided by the Corporation or (B) made any major change
in the Corporation's business or equity capital structure without in
either case the approval of at least a majority of all the Directors
and at least two-thirds of the continuing Directors prior to the
consummation of the business combination; and
(4) A proxy statement responsive to the requirements of the
Securities Exchange Act of 1934 shall have been mailed to public
stockholders of the Corporation for the purpose of soliciting
stockholder approval of the business combination and shall have
contained at the front thereof, in a prominent place, any
recommendations as to the advisability (or inadvisability) of the
business combination that the continuing Directors, or any of them, may
choose to state and, if deemed advisable by a majority of the
continuing Directors, an opinion of a reputable investment banking firm
as to the fairness of the terms of the business combination, from the
point of view of the remaining public stockholders of the Corporation
(the investment banking firm to be selected by a majority of the
continuing Directors and to be paid a reasonable fee for its services
by the Corporation upon receipt of the opinion).
The provisions of this Article SEVENTH shall also apply to a business
combination with any other entity that at any time has been the beneficial
owner, directly or indirectly, of more than Twenty Percent (20%) of the
outstanding shares of the Corporation entitled to vote in elections of
Directors, considered for the purposes of this Article SEVENTH as one class,
notwithstanding the fact that the other entity has
5
<PAGE>
EXHIBIT (3)
reduced its shareholders below Twenty Percent (20%) if, as of the record date
for the determination of stockholders entitled to notice of and to vote on the
business combination, the other entity is an "affiliate" (as hereinafter
defined) of the Corporation.
(b) As used in this Article SEVENTH, (1) the term "other entity" shall
include any corporation, person or other entity and any other entity with which
it or its "affiliate" or "associate" (as defined below) has any agreement,
arrangement, or understanding, directly or indirectly, for the purpose of
acquiring, holding, voting, or disposing of shares of the Corporation, or that
is its "affiliate" or "associate" as those terms are defined in Rule 12b-2 of
the General Rules and Regulations under the Securities Exchange Act of 1934 as
in effect on September 1, 1986, together with the successors and assigns of
those persons in any transaction or series of transactions not involving a
public offering of the Corporation's shares within the meaning of the Securities
Act of 1933; (2) an other entity shall be deemed to be the beneficial owner of
any shares of the Corporation that the other entity (as defined above) has the
right to acquire pursuant to any agreement or upon exercise of conversion
rights, warrants or options, or otherwise; (3) the outstanding shares of any
class of the Corporation shall include shares deemed owned through application
of clause (2) above but shall not include any other shares that may be issuable
pursuant to any agreement or upon exercise of conversion rights, warrants or
options, or otherwise; (4) the term "business combination" shall include (A) the
sale, exchange, lease, transfer or other disposition by the Corporation of all,
or substantially all, of its assets or business to any other entity, (B) the
consolidation of the Corporation with or its merger into any other entity, (C)
the merger into the Corporation of any other entity, or (D) a combination or
major-
6
<PAGE>
EXHIBIT (3)
ity share acquisition in which the Corporation is the acquiring corporation and
its voting shares are issued or transferred to any other entity or to
stockholders of any other entity, and the term "business combination" shall also
include any agreement, contract or other arrangement with an other entity
providing for any of the transactions described in (A) through (D) of this
clause (4); (5) the term "continuing Director" shall mean either a person who
was a member of the Corporation's Board of Directors on August 15, 1986, or a
person who was elected to the Corporation's Board of Directors by the public
stockholders of the Corporation prior to the time when the other entity acquired
in excess of five percent (5%) of the shares of the Corporation entitled to vote
in the election of Directors, considered for the purposes of this Article
SEVENTH as one class, or a person recommended to succeed a continuing Director
by a majority of the continuing Directors; and (6) for the purposes of Article
SEVENTH, Section (a), clause (1), the term "other consideration to be received"
shall mean shares of the Corporation's Common Stock retained by its existing
public stockholders in the event of a business combination with the other entity
in which the Corporation is the surviving corporation.
(c) A majority of the continuing Directors shall have the power and
duty to determine for the purposes of this Article SEVENTH, on the basis of
information known to them, whether (1) the other entity beneficially owns more
than Twenty Percent (20%) of the outstanding shares of the Corporation entitled
to vote in elections of Directors, (2) an other entity is an "affiliate" or
"associate" (as defined above) of another, or (3) an other entity has an
agreement, arrangement or understanding with another.
<PAGE>
EXHIBIT (3)
(d) Nothing contained in this Article SEVENTH shall be construed to
relieve any other entity from any fiduciary obligation imposed by law.
EIGHTH: Subject to the last sentence of this Article EIGHTH, the
Corporation reserves the right to amend and repeal any provision contained in
this Certificate of Incorporation including, without limiting the generality of
the foregoing, the addition of a provision requiring a supermajority vote of
stockholders to remove Directors. The provisions set forth in Articles SIXTH,
SEVENTH and this Article EIGHTH of this Certificate of Incorporation may not be
repealed or amended in any respect, unless such action is approved by the
affirmative vote of the holders of Sixty-Six and TwoThirds Percent (66-2/3%) of
all shares of the Corporation entitled to vote in elections of Directors,
considered for purposes of this Article EIGHTH as one class.
NINTH: No Director of this Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director; provided, however, that this Article NINTH shall not
eliminate the liability of a Director (a) for any breach of the Director's duty
of loyalty to the Corporation or its stockholders, (b) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (c) under Section 174 of the General Corporation Law of Delaware, or (d)
for any transaction from which the Director derived an improper personal
benefit.
(4) In accordance with the applicable provisions of Sections 242 and
245 of the General Corporation Law of the State of Delaware, this Restated
Certificate of
8
<PAGE>
EXHIBIT (3)
Incorporation has been duly adopted by the Directors of the Corporation and by
vote of the stockholders.
IN WITNESS WHEREOF, said HEALTHSOUTH Rehabilitation Corporation has
caused its corporate seal to be hereunto affixed and this Certificate to be
signed by Anthony J. Tanner, its Executive Vice President, and attested by
William W. Horton, its Assistant Secretary, this 29th day of December, 1994.
HEALTHSOUTH Rehabilitation Corporation
By /s/ Anthony J. Tanner
__________________________________
Anthony J. Tanner
Executive Vice President
[ CORPORATE SEAL ]
ATTEST:
By /s/ William W. Horton
_______________________________
William W. Horton
Assistant Secretary
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Surgical Health Corporation
We have audited the accompanying consolidated balance sheets of Surgical Health
Corporation and subsidiaries as of December 31, 1993 and 1994, and the related
consolidated statements of operations redeemable convertible preferred stock and
common stock and other shareholders|Al equity and cash flows for each of the
three years in the period ended December 31, 1994. These financial statements
are the responsibility of the Company|Als management. Our responsibility is to
express an opinion on these financial statements based on our audits. We did not
audit the 1992 and 1993 consolidated financial statements of Heritage Surgical
Corporation, a wholly-owned subsidiary, which statements reflect total assets
constituting 53% in 1992 and 42% in 1993, total revenues constituting 44% in
1992 and 46% in 1993 and total net income constituting 57% in 1992 and 54% in
1993, of the related consolidated totals. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to data included for Heritage Surgical Corporation, is based solely on
the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referredto above present fairly, in all material respects,
the consolidated financial position of Surgical Health Corporation and
subsidiaries at December 31, 1993 and 1994, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Atlanta, Georgia
March 1, 1995
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Heritage Surgical Corporation:
We have audited the accompanying consolidated balance sheets of Heritage
Surgical Corporation (a Tennessee corporation) as of December 31, 1992 and 1993,
and the related consolidated statements of income, shareholders' equity and cash
flows for the years then ended (not presented separately herein). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements (not presented separately
herein) referred to above present fairly, in all material respects, the
financial position of Heritage Surgical Corporation as of December 31, 1992 and
1993, and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, the Company
adopted SFAS 109 on January 1, 1993, and did not restate prior periods.
Implementation of SFAS 109 required conversion to the liability method of
accounting for deferred income taxes. As a result of the implementation of the
standard, the classification of certain items on the balance sheet changed with
no material effect on the Company's financial condition.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 11, 1994
<PAGE>
SURGICAL HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1993 1994
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 12,699,961 $ 2,786,123
Accounts receivable, net of allowance for bad debts of $2,064,000 in 1993
and $2,568,000 in 1994..................................................... 14,175,377 19,939,089
Other receivables............................................................ 542,309 854,006
Supplies..................................................................... 2,938,599 3,888,752
Prepaid expenses and other................................................... 2,317,728 1,174,454
Income taxes refundable...................................................... -- 599,169
Total current assets....................................................... 32,673,974 29,241,593
Property and equipment:
Land and land improvements................................................... 4,034,911 3,261,308
Buildings.................................................................... 3,058,319 14,752,210
Leaseholds and leasehold improvements........................................ 9,608,439 15,058,251
Equipment, furniture and fixtures............................................ 30,775,496 47,892,201
Construction in progress..................................................... 8,110,991 2,334,801
55,588,156 83,298,771
Less accumulated depreciation and amortization............................... (8,574,744) (15,464,348)
47,013,412 67,834,423
Other assets:
Intangible assets............................................................ 73,769,563 75,988,135
Deferred costs............................................................... 7,406,067 9,795,828
Deposits and other........................................................... 1,564,338 1,142,476
Investments in unconsolidated entities....................................... 468,742 -
83,208,710 86,926,439
Total assets............................................................... $ 162,896,096 $ 184,002,455
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 4,694,700 $ 3,973,548
Accrued expenses............................................................. 3,431,204 9,207,661
Accrued compensation......................................................... 1,352,156 1,430,569
Income taxes payable......................................................... 326,083 --
Current portion of long-term debt and capital lease obligations ............. 10,158,598 1,984,712
Total current liabilities.................................................. 19,962,741 16,596,490
Long-term debt and capital lease obligations, less current portion ............ 59,672,637 87,635,174
Other long-term liabilities.................................................... 2,827,109 2,743,273
Deferred income taxes.......................................................... 1,205,892 712,827
Minority interests............................................................. 13,324,759 12,528,466
Commitments and contingencies
Redeemable common stock and warrants........................................... 2,713,407 3,034,339
Redeemable convertible preferred stock in series, $.01 par value:
Authorized shares--15,022,053 .............................................
Issued and outstanding shares--9,523,400 in 1993 and 9,313,007 in 1994;
liquidation value of $30,032,000 in 1993 and $32,144,000 in 1994 ........ 95,234 93,130
Additional paid-in capital on redeemable convertible preferred stock ...... 26,954,050 26,475,558
Shareholders' equity:
Preferred stock, $.01 par value: ............................................
Authorized shares--10,000,000 .............................................
Issued and outstanding shares--none in 1993 and 1994....................... -- --
Non-voting common stock, $.0025 par value: ..................................
Authorized shares--700,000 ................................................
Issued and outstanding shares--none in 1993 and 1994....................... -- --
Common stock. $.0025 par value: .............................................
Authorized shares-- 60,000,000 ............................................
Issued and outstanding shares--21,373,680 in 1993 and 21,680,917 in 1994 .. 53,434 54,202
Additional paid-in capital on common stock................................. 32,085,944 33,391,713
Retained earnings.......................................................... 4,000,889 737,283
Total shareholders' equity............................................... 36,140,267 34,183,198
Total liabilities and shareholders|Al equity.............................. .$ 162,896,096 $ 184,002,455
</TABLE>
See accompanying notes.
<PAGE>
SURGICAL HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
Net revenues...................................... $ 36,561,415 $ 80,882,690 $ 108,257,719
Operating costs................................... 29,605,875 61,950,476 84,547,790
Operating income.................................. 6,955,540 18,932,214 23,709,929
General, administrative and development expenses . 2,460,340 4,311,128 8,756,375
Interest expense.................................. 1,327,987 4,233,979 8,030,938
Merger costs...................................... -- 332,523 3,570,961
Gain on sale of partnership interest.............. -- (1,400,137) --
Interest and other income......................... (491,119) (325,718) (575,262)
Income before minority interests, income taxes
and extraordinary item ......................... 3,658,332 11,780,439 3,926,917
Minority interests in net earnings of
partnerships.................................... (2,842,677) (5,254,400) (6,198,714)
Income (loss) before income taxes and
extraordinary item.............................. 815,655 6,526,039 (2,271,797)
Income taxes...................................... 628,075 2,616,693 469,755
Income (loss) before extraordinary item........... 187,580 3,909,346 (2,741,552)
Extraordinary loss from early extinguishment of
debt, net of income tax benefit of $226,000..... -- -- 201,122
Net income (loss)................................. 187,580 3,909,346 (2,942,674)
Warrant accretion................................. -- -- 320,932
Net income (loss) attributable to common shares .. $ 187,580 $ 3,909,346 $ (3,263,606)
Pro forma net income data:
Net income as reported ........................... $ 187,580 $ 3,909,346
Pro forma income taxes (benefit).................. (147,400) 304,000
Pro forma net income ............................. $ 334,980 $ 3,605,346
before extraordinary item per common share
(pro forma for 1992 and 1993) ................. $ .02 $ .11 $ (.14)
Extraordinary loss per common share............... -- -- (.01)
Net income (loss) attributable to common shares
per common share (pro forma for 1992 and 1993) .. $ .02 $ .11 $ (.15)
Weighted average common and common equivalent
shares outstanding................................ 20,424,825 31,428,040 21,814,316
</TABLE>
See accompanying notes.
<PAGE>
SURGICAL HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
THIS TABLE SPLITS ONTO NEXT PAGE
REDEEMABLE CONVERTIBLE PREFERRED STOCK
---------------------------------------------------------------
ADDITIONAL
SERIES A SERIES B SERIES C PAID-IN
CONVERTIBLE CONVERTIBLE CONVERTIBLE CAPITAL ON PREFERRED
PREFERRED PREFERRED PREFERRED PREFERRED STOCK COMMON
STOCK STOCK STOCK STOCK SUBSCRIBED STOCK
---------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991...................... $ 11,908 $ - $ - $1,653,933 $6,191,897 $ 20,786
Issuance of 4,259,840 shares of series A
convertible preferred stock previously
subscribed........................................ 42,598 - - 6,149,299 (6,191,897) -
Issuance of 5,653,263 shares of series B
convertible preferred stock, less offering costs
of $85,388........................................ - 56,533 - 16,817,868 - -
Issuance of 2,834,478 shares of common stock ..... - - - - - 7,086
Issuance of 4,487,919 shares of common stock in
connection with acquisitions...................... - - - - - 11,220
Issuance of 20,000 shares of common stock upon
exercise of stock options.......................... - - - - - 50
Common stock subscribed............................. - - - - - -
Net income.......................................... - - - - - -
Dividends paid...................................... - - - - - -
Balance at December 31, 1992.......................... 54,506 56,533 - 24,621,100 - 39,142
Issuance of 470,208 shares of common stock in
connection with Ballas and MWA acquisitions ...... - - - - - 1,175
Conversion of 3,427,885 shares of series A
convertible preferred stock and
1,638,317 shares of series B convertible
preferred stock into 5,066,202 shares of
common stock.................................... (34,279) (16,383) - (9,779,387) - 12,666
Issuance of 123,000 shares of common stock ........ - - - - - 308
Issuance of 5,437 shares of common stock in
connection with acquisitions..................... - - - - - 13
Issuance of stock purchase warrant................. - - - - - -
Issuance of 52,000 shares of common stock upon
exercise of stock options........................ - - - - - 130
Issuance of 3,485,715 shares of series C
convertible preferred stock, less offering costs
of $52,808....................................... - - 34,857 12,112,337 - -
Net income......................................... - - - - - -
Dividends paid....................................... - - - - - -
Balance at December 31, 1993......................... 20,227 40,150 34,857 26,954,050 - 53,434
Accretion of redeemable warrants..................... - - - - - -
Conversion of 110,837 shares of series A convertible
preferred stock, 53,533 shares of series B
convertible preferred stock and 46,023 of
series C convertible preferred stock into
210,393 shares of common stock..................... (1,109) (535) (460) (478,492) - 526
Issuance of 54,320 shares of common stock upon
exercise of stock options............................ - - - - - 136
Stock option compensation............................ - - - - - -
Issuance of 42,524 shares of common stock upon
exercise of stock warrants........................... - - - - - 106
Net loss............................................. - - - - - -
Balance at December 31, 1994......................... $ 19,118 $ 39,615 $ 34,397 $26,475,558 $ - $ 54,202
</TABLE>
See accompanying notes.
<PAGE>
SURGICAL HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY
(CONTINUED...SPLIT TABLE)
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY
-------------------------------------
ADDITIONAL
PAID-IN
CAPITAL ON COMMON
COMMON STOCK RETAINED
STOCK SUBSCRIBED EARNINGS
---------- ---------- --------
<S> <C> <C> <C>
Balance at December 31, 1991.......................... $1,094,974 $ - $ 1,688,961
Issuance of 4,259,840 shares of series A
convertible preferred stock previously
subscribed........................................ - - -
Issuance of 5,653,263 shares of series B
convertible preferred stock, less offering costs
of $85,388........................................ - - -
Issuance of 2,834,478 shares of common stock ..... 4,220,523 - -
Issuance of 4,487,919 shares of common stock in
connection with acquisitions...................... 14,718,833 - -
Issuance of 20,000 shares of common stock upon
exercise of stock options.......................... 7,950 - -
Common stock subscribed............................. - 213,000 -
Net income.......................................... - - 187,580
Dividends paid...................................... - - (1,124,998)
Balance at December 31, 1992.......................... 20,042,280 213,000 751,543
Issuance of 470,208 shares of common stock in
connection with Ballas and MWA acquisitions ...... 1,498,764 - -
Conversion of 3,427,885 shares of series A
convertible preferred stock and
1,638,317 shares of series B convertible
preferred stock into 5,066,202 shares of
common stock.................................... 9,817,383 - -
Issuance of 123,000 shares of common stock ........ 544,152 (213,000) -
Issuance of 5,437 shares of common stock in
connection with acquisitions..................... 18,487 - -
Issuance of stock purchase warrant................. 144,208 - -
Issuance of 52,000 shares of common stock upon
exercise of stock options........................ 20,670 - -
Issuance of 3,485,715 shares of series C
convertible preferred stock, less offering costs
of $52,808....................................... - - -
Net income......................................... - - 3,909,346
Dividends paid....................................... - - (660,000)
Balance at December 31, 1993......................... 32,085,944 - 4,000,889
Accretion of redeemable warrants..................... - - (320,932)
Conversion of 110,837 shares of series A convertible
preferred stock, 53,533 shares of series B
convertible preferred stock and 46,023 of
series C convertible preferred stock into
210,393 shares of common stock..................... 480,070 - -
Issuance of 54,320 shares of common stock upon
exercise of stock options............................ 20,638 - -
Stock option compensation............................ 804,685 - -
Issuance of 42,524 shares of common stock upon
exercise of stock warrants........................... 376 - -
Net loss............................................. - - (2,942,674)
Balance at December 31, 1994......................... $33,391,713 $ - $ 737,283
</TABLE>
See accompanying notes.
<PAGE>
SURGICAL HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1992 1993 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Operating activities
Net income (loss) ............................................ $ 187,580 $ 3,909,346 $ (2,942,674)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization .............................. 3,097,202 6,848,027 11,089,967
Amortization of loan origination costs ..................... -- 337,950 638,042
Minority interests in earnings of partnerships ............. 2,842,677 5,254,400 6,198,714
Loss on early extinguishment of debt ....................... -- -- 427,122
Stock option compensation .................................. -- -- 804,685
Gain on sale of partnership interests ...................... -- (1,400,137) --
Deferred income taxes ...................................... 94,573 868,612 (341,801)
Changes in operating assets and liabilities (net of
acquired operating assets and liabilities):
Accounts receivable .................................. (4,195,775) (2,801,468) (5,763,712)
Other receivables .................................... 62,997 (193,752) (184,517)
Supplies ............................................. (689,018) (573,315) (950,153)
Prepaid expenses and other ........................... (78,637) (1,647,978) 1,143,274
Income taxes refundable .............................. -- -- (599,169)
Accounts payable ..................................... 2,119,570 270,148 (721,152)
Accrued expenses and compensation .................... 519,717 2,269,790 5,771,034
Income taxes payable ................................. 498,802 32,738 (477,347)
Net cash provided by operating activities ...................... 4,459,688 13,174,361 14,092,313
Investing activities
Payments for purchase of majority interests in surgery
centers, net of cash acquired .............................. (21,525,462) (25,706,471) (3,831,868)
Purchase of property and equipment ........................... (8,075,378) (17,652,446) (37,210,354)
Purchase of medical assets ................................... (1,764,644) (408,116) --
Proceeds from sale of property and equipment ................. -- -- 9,291,939
Proceeds from sale of partnership interest ................... -- 3,163,225 423,085
Increase in other assets ..................................... (1,642,052) (4,735,835) (5,493,853)
Net cash used in investing activities ........................ (33,007,536) (45,339,643) (36,821,051)
Financing activities
Proceeds from issuance of redeemable convertible
preferred stock ............................................ 23,066,298 12,147,194 --
Proceeds from issuance of common stock ....................... 4,448,606 1,852,198 21,256
Contributions from limited partners .......................... 1,915,000 2,698,712 1,784,250
Distributions to limited partners ............................ (1,914,743) (4,356,045) (8,779,257)
Proceeds from issuance of long-term debt ..................... 11,275,925 40,547,822 105,179,305
Payments on long-term debt and capital lease
obligations ................................................ (3,908,400) (14,507,525) (85,390,654)
Dividends paid ............................................... (1,124,998) (660,000) --
Net cash provided by financing activities .................... 33,757,688 37,722,356 12,814,900
Net increase (decrease) in cash and cash equivalents ......... 5,209,840 5,557,074 (9,913,838)
Cash and cash equivalents at beginning of year ............... 1,933,047 7,142,887 12,699,961
Cash and cash equivalents at end of year ..................... $ 7,142,887 $ 12,699,961 $ 2,786,123
</TABLE>
See accompanying notes.
<PAGE>
SURGICAL HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Description of Business
Surgical Health Corporation (the "Company") was incorporated on April 24,
1991 to develop, acquire and manage outpatient surgery centers. The Company
merged with Ballas Outpatient Management, Inc. ("Ballas") and Midwest
Anesthesia, Inc. ("MWA") on February 11, 1993 in a transaction accounted for as
a pooling of interests. Ballas (formerly Outpatient Surgery Center, Inc.) was
incorporated in December 1984 and MWA was incorporated in July 1985. On January
18, 1994, the Company merged with Heritage Surgical Corporation ("Heritage") in
a transaction accounted for as a pooling of interests. Heritage was incorporated
in November 1991. All financial data for periods prior to the mergers have been
restated to include the accounts and results of operations of the merged
companies. See "Basis of Presentation" below.
As of December 31, 1994, the Company, through its wholly-owned subsidiaries,
owned and managed 36 outpatient surgery centers.
Basis of Presentation
On February 11, 1993, the Company acquired all the outstanding stock of
Ballas, an outpatient surgery center in St. Louis, Missouri, in exchange for
1,882,336 shares of the Company's common stock and also acquired all the
outstanding stock of MWA, a provider of anesthesia services to patients of
Ballas, in exchange for 823,500 shares of the Company's common stock. On January
18, 1994, the Company acquired all the outstanding common stock of Heritage, an
operator of eleven outpatient surgery centers, in exchange for 12,079,186 shares
of the Company's common stock. The Company agreed to allow the holders of
Heritage common stock options and stock purchase warrants to convert such
options and warrants into shares of the Company's common stock upon exercise of
the related option and warrant by the holder in accordance with its original
terms. Common stock in the aggregate number of 1,464,960 shares would be issued
if all such options and warrants were exercised.
These acquisitions have been accounted for as poolings of interests; and
accordingly, all financial data for periods prior to the acquisitions have been
restated to include the results of the merged companies.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Certain of the Company's wholly-owned
subsidiaries are general partners in limited partnerships which own and operate
outpatient surgery centers. In each instance where the subsidiary owns at least
a 50% interest in the partnership and also controls the operations of the
partnership, the accounts and operations of such partnerships are included in
the consolidated financial statements. Where the subsidiary owns less than a 50%
interest in the partnership, the Company's investment in such partnership is
accounted for using the equity method. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Supplies
Supplies include medical supplies and drugs and are stated at the lower of
cost (first-in, first-out method) or market.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Significant Accounting Policies--Continued
Property and Equipment
Property and equipment purchased directly is stated at cost; property and
equipment obtained through a purchase business combination is stated at
estimated fair value as of the date of acquisition. Property and equipment under
capital leases is recorded at the lower of the present value of the future
minimum lease payments or the fair value of the related equipment.
Depreciation (which includes the amortization of assets under capital leases)
is computed using the straight line method over the related asset's estimated
useful life (or the term of the related lease, if less), ranging from seven to
thirty years.
Intangible Assets
Intangible assets principally represent the amount by which the cost of
acquired net assets exceeds their related fair value (goodwill). This amount is
being amortized on a straight-line basis over a forty-year period. Medical
licenses represent the value of Certificates of Need obtained in connection with
certain acquisitions and are being amortized on a straight-line basis over a
forty-year period. Management contracts represent the amount assigned to acquire
management service contracts and are amortized over the contractual term of the
related agreement. The carrying value of goodwill will be evaluated if the facts
and circumstances suggest that it has been impaired. If this evaluation
indicates that goodwill 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 goodwill will be reduced by the
estimated short fall of cash flows.
Deferred Costs
Organization costs incurred in connection with the formation of partnerships
are deferred and amortized over a five-year period commencing when the center
opens. Deferred costs also include pre-opening costs incurred in preparing a
constructed facility for operations which are deferred and amortized over a
twelve-month period from the date of opening. Costs incurred with respect to
pending acquisitions or development projects (direct out-of-pocket costs as well
as deposits or option payments) are deferred until completed or abandoned. The
costs associated with completed projects are capitalized and costs associated
with abandoned projects are expensed. During the fourth quarter of 1994, the
Company reevaluated its continuing involvement in certain development projects.
As a result of this analysis, the Company made a determination to abandon
certain projects and charged approximately $503,000 of related deferred costs to
expense in 1994.
The costs incurred in connection with the negotiating and closing of
financing agreements, principally the fair market value of stock purchase
warrants and legal fees, are capitalized and amortized over the term of the
related agreement.
At December 31, 1993 and 1994, accumulated amortization of deferred costs was
approximately $1,560,000 and $4,165,000, respectively.
Net Revenues
Net revenues are reported at the estimated net realizable amount from
patients, third-party payors and others. Such revenues are recognized as the
related services are performed. Contractual adjustments resulting from
agreements with various organizations to provide services for amounts which
differ from standard charges are recorded as deductions from revenues. Amounts
which are determined to be uncollectible are charged to operating expenses.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Significant Accounting Policies--Continued
Concentration of Credit Risk
The Company's principal financial instrument subject to potential
concentration of credit risk is trade accounts receivable. The concentration of
credit risk with respect to trade accounts receivable is limited due to the
large number of payors and their dispersion across many different insurance
companies, individuals and geographic locations.
Minority Interests
Minority interests represent the equity interests of the minority investors
in the Company's majority-owned partnerships. The amount of the minority
interests is adjusted for the minority investors' share of the partnerships'
income or loss and is decreased by distributions paid to minority investors.
Minority interests in net earnings of partnerships reflect the minority
investors respective share of the income or loss of the related partnership.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
Net Income (Loss) Per Common Share
Net income (loss) per common share is based upon the weighted average number
of common and common equivalent shares outstanding. Common equivalent shares,
when dilutive, include the effects of outstanding stock options and warrants as
well as the assumed conversion of outstanding redeemable convertible preferred
stock. In addition, pro forma net income per common share for 1992 and 1993
reflects a pro forma tax provision relating to certain acquisitions of S
corporations accounted for as poolings of interests. In 1994, the net loss
attributable to common shares includes accretion for the increase in redemption
value of redeemable warrants.
2. Mergers
Net revenues and net income (loss) for the merged companies (as described in
Note 1, "Description of Business" and "Basis of Presentation") for 1992, 1993
and 1994 follows (in thousands):
NET NET INCOME
REVENUES (LOSS)
---------- ------------
Year ended December 31, 1992
The Company................. $ 6,341 $ (852)
Heritage.................... 16,057 765
Ballas and MWA.............. 14,283 271
Conforming adjustments ..... (120) 4
Combined.................... $ 36,561$ 188
Year ended December 31, 1993
The Company................. $ 41,318 $ 1,819
Heritage.................... 37,527 2,107
Ballas and MWA.............. 2,038 (17)
Combined.................... $ 80,883 $ 3,909
Year ended December 31, 1994
The Company................. $ 106,281 $ (3,014)
Heritage.................... 1,977 71
Combined.................... $ 108,258 $ (2,943)
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Mergers--Continued
Conforming adjustments relate principally to amounts necessary to conform the
depreciation policies used by Ballas and MWA.
3. Acquisitions
In February 1992, the Company, through a majority-owned limited partnership,
acquired certain medical equipment and a license to operate an outpatient
surgery center from Multi-Care Surgery Center, Inc. ("Multi-Care"), a provider
of ambulatory healthcare services in Atlanta, Georgia, for cash consideration of
approximately $1,810,000 and a 10% note payable for $400,000. In connection with
the Multi-Care asset purchase, the Company entered into a consulting agreement
with an individual related to Multi-Care under the terms of which the Company
agreed to make annual payments of $100,000 for five years and to issue warrants
to this individual to purchase 25,000 shares of the Company's common stock at a
price per share equal to any future initial public offering price per share of
the Company's common stock. The warrants expire at a date three years subsequent
to an initial public offering.
In April 1992, the Company, through a wholly-owned subsidiary, acquired a 51%
interest in Indian River Surgery Center, an outpatient surgery center located in
Vero Beach, Florida, for cash consideration of $207,000 and the issuance of
555,484 shares of the Company's common stock. The common stock was recorded at
its estimated fair value of $630,000.
Interests in three outpatient surgery centers were acquired in April 1992 for
$546,437 in cash consideration and the issuance of 1,099,147 shares of the
Company|Als common stock. The common stock was recorded at its estimated fair
value of $1,246,594. The Company acquired a 41% interest in Gulf Coast
Lithotripsy Associates, L.P., located in Houston, Texas, a 28% interest in
Coastal Lithotripsy Associates, L.P., located in Atlanta, Georgia and a 31%
interest in Chesapeake Lithotripsy Associates, L.P., located in Baltimore,
Maryland.
In June 1992, the Company, through a wholly-owned subsidiary, acquired all of
the outstanding common stock of Surgicenter of San Antonio, Inc., an outpatient
surgery center in San Antonio, Texas, for cash consideration of approximately
$3,400,000 and a 9% note payable for $200,000.
In August 1992, the Company, through a majority-owned limited partnership,
acquired all the outstanding common stock of Collier Surgi-Center, Inc., an
outpatient surgery center in Naples, Florida, for cash consideration of
approximately $1,082,000 and the issuance of a 10% interest in the partnership.
Additionally, an earnout payment of $237,000 was paid in 1994 and was recorded
as additional purchase price.
In September 1992, the Company, through a majority-owned limited partnership,
acquired all the assets of Surgical Partners Joint Venture, an outpatient
surgery center in Evanston, Illinois, for cash consideration of approximately
$3,900,000, an 8% note payable for $1,665,000 and the issuance of a 21% interest
in the partnership. Additionally, an earnout payment of $404,000 was paid in
1993 and was recorded as additional purchase price.
In September 1992, the Company, through a majority-owned limited partnership,
acquired all assets of North Dade Specialists, Inc., a development stage
outpatient surgery center in North Miami Beach, Florida, for cash consideration
of approximately $350,000 and the issuance of a 49% interest in the partnership.
In September 1992, the Company, through a majority-owned limited partnership,
acquired substantially all the assets of the Center for Outpatient Surgery,
Inc., an outpatient surgery center in Phoenix, Arizona, for cash consideration
of approximately $2,220,000 and a 9% note payable for $2,110,000.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions--Continued
In September 1992, the Company acquired, in a single transaction, partnership
interests in three operating outpatient surgery centers. The facilities acquired
were South Bay Ambulatory Surgery Center, a 50% partnership interest, UTC
Surgicenter, a 50% partnership interest and Center for Surgery of Encinitas, a
50% partnership interest, all of which are located in San Diego, California. In
addition to the three operating centers, the Company acquired partnership
interests in two outpatient surgery centers under development, Newport Beach
Surgery Center (a 50% partnership interest), located in Newport Beach,
California, and The Surgery Center of The Woodlands (a 30% partnership
interest), located in The Woodlands, Texas. The Company issued 2,833,288 shares
of common stock as consideration, which was recorded at its estimated fair value
of $12,853,459.
In October 1992, the Company, through a wholly-owned subsidiary, acquired a
60% partnership interest in Boca Raton Outpatient Surgery and Laser Center, an
outpatient surgery center located in Boca Raton, Florida, for cash consideration
of $5,000,000. Additionally, earnout payments, based upon a multiple of the
partnership|Als net income for the twelve-month periods ending February 28,
1993, l994, 1995 and 1996 are due and payable by April 30 of each year. The
Company paid $1,500,000 and $2,714,000 in 1993 and 1994, respectively. These
amounts were recorded as additional purchase price.
In October 1992, the Company, through a majority-owned limited partnership,
acquired substantially all the assets of Surgery Center, Inc., an outpatient
surgery center located in Bradenton, Florida for cash consideration of
approximately $750,000.
In October 1992, the Company, through a majority-owned limited partnership,
acquired substantially all the assets of Gwinnett Ambulatory Surgical Unit,
L.P., an outpatient surgery center in Snellville, Georgia, for cash
consideration of approximately $3,300,000 and the issuance of a 20% interest in
the partnership. Additionally, an earnout payment of $759,000 was paid in 1993
and was recorded as additional purchase price.
In December 1992, the Company, through a majority-owned limited partnership,
acquired all the assets of Palms Wellington Surgical Partners Limited, a
development stage outpatient surgery center in Royal Palm Beach, Florida, for
cash consideration of approximately $285,000, a 12% note payable for $415,000
and the issuance of a 49% interest in the partnership. Additionally, an earnout
payment based upon a multiple of the partnership's calendar year 1995 net
income, to the extent such amount exceeds a base amount, is due in April 1996.
In December 1992, the Company, through a majority-owned limited partnership,
acquired all the assets of Oklahoma Ambulatory Surgery Center, Inc., an
outpatient surgery center in Midwest City, Oklahoma, for cash consideration of
approximately $100,000, a 10% note payable of $1,400,000 and the issuance of a
10% interest in the partnership. Additionally, an earnout payment of $530,000
was paid in March 1993 and was recorded as additional purchase price.
In January 1993, the Company acquired all the outstanding common stock of
Heritage Medical Services of Maryland, Inc.; Heritage Medical Services of Texas,
Inc. and Heritage Medical Services of Georgia, Inc. The sole asset of these
three companies was a general partnership interest in the three outpatient
surgery centers in which the Company originally acquired a partnership interest
in April 1992. As a result, the Company increased its ownership interest in each
of these three partnerships to 51%. The common stock was purchased with
subordinated promissory notes in the principal amount of $3,546,621. Certain of
the Company's shareholders (including several who are also officers and/or
directors) were the principal shareholders of these three companies.
Additionally, the Company purchased the management service contracts for these
three partnerships from Heritage Group, Inc., a company owned by certain
shareholders of the Company for subordinated promissory notes in the principal
amount of $1,316,817.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions--Continued
In March 1993, the Company, through a majority-owned limited partnership,
acquired substantially all the assets of Podiatry Associates of Oklahoma, Inc.,
an outpatient surgery center in Oklahoma City, Oklahoma, for cash consideration
of approximately $7,320,000 and the issuance of an 11% interest in the
partnership.
In April 1993, the Company, through a majority-owned limited partnership,
acquired certain medical equipment and a license to operate an outpatient
surgery center in Tucker, Georgia from Northlake Tucker Ambulatory Surgery
Center, Inc. for cash consideration of approximately $350,000.
In July 1993, the Company, through two majority-owned limited partnerships,
acquired substantially all the assets of Central Florida Surgical Centers, Inc.
("Central Florida") and Oakwater Surgical Center, Inc. ("Oakwater"). Central
Florida and Oakwater each owned and operated an outpatient surgery center in
Orlando, Florida and were majority-controlled by the same shareholders. The
purchase price consisted of approximately $8,640,000 in cash and issuance of a
30% interest in each of the newly formed limited partnerships.
In August 1993, the Company, through a wholly-owned subsidiary, acquired all
of the common stock of Tesson Ferry Medical Management, Inc. and South County
Outpatient Management, Inc. for consideration of approximately $225,000. The
sole asset of these two companies were general partner interests in two newly
formed limited partnerships. The Company, through these two partnerships,
constructed a medical office building and outpatient surgery center in St.
Louis, Missouri. Additionally, the Company acquired the rights to the related
management service contracts for the two partnerships from a company which is
majority-owned by one of the Company's officers and directors for $200,000.
In September 1993, the Company, through a wholly-owned subsidiary, purchased
a 60% interest in an outpatient surgery center in Cincinnati, Ohio for a total
purchase price of approximately $3,323,000. The purchase price consisted of
$1,594,000 in cash, notes payable of approximately $775,000 and the issuance of
219,752 shares of the Company's common stock which was recorded at its estimated
fair value of approximately $810,000. In addition, the Company granted to an
individual warrants for the purchase of 42,525 shares of common stock at an
exercise price of $.01 per share for payment of brokerage fees on this
transaction. The warrant was recorded at its estimated fair value of
approximately $144,000.
In September 1993, the Company purchased an additional 20% interest in The
Surgery Center of The Woodlands for a purchase price of $300,000 in cash. This
purchase increased the Company|Als ownership interest to 50%.
In November 1993, the Company, through a majority-owned limited partnership,
purchased substantially all the assets of Surgery Center Associates, Inc., an
outpatient surgery center located in St. Louis, Missouri for cash consideration
of $4,154,000. Additionally, the Company granted to the seller a warrant to
purchase 25,000 shares of the Company|Als common stock at a price per share
equal to any future initial public offering price per share. This warrant
expires three years subsequent to an initial public offering.
In December 1993, the Company, through a majority-owned limited partnership,
purchased all the assets of Hawthorn Place Joint Venture, an outpatient surgery
center located in Libertyville, Illinois for consideration of $3,000,000.
Additionally, an earnout payment of $1,118,000 was paid in 1994 and was recorded
as additional purchase price.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions--Continued
In March 1994, the Company, through a wholly-owned subsidiary, acquired all
the outstanding capital stock of Tesson Ferry Anesthesia, Inc. ("TFA") from an
individual who is also an officer and director of the Company. The purchase
price for the stock is to be paid based upon a multiple of TFA|Als adjusted net
income for the first three twelve-month periods following the start of business
operations by TFA. TFA was formed to provide anesthesia services to patients of
an outpatient surgery center acquired by the Company in the development stage in
August 1993. Up to 30% of the capital stock of TFA may be issued by the Company
to anesthesiologists providing services at such center. TFA commenced operations
in May 1994.
In April 1994, the Company issued 8% subordinated promissory notes in the
aggregate principal amount of $245,000 in connection with finalizing the earnout
provision of the purchase of the common stock of Heritage Medical Services of
Maryland, Inc. Certain of the Company|Als shareholders (including several who
are officers or directors) were the principal shareholders of this company.
Each of the above acquisitions was accounted for as a purchase transaction
and accordingly the various assets acquired have been recorded at their
respective fair value as of the date of acquisition. The Company records amounts
paid, if any, under the earnout provisions described above as additional
purchase consideration in the period the amount is determinable. The excess of
the total acquisition costs (consisting of the related purchase price, assumed
liabilities and associated acquisition costs) over the fair value of the net
assets acquired was approximately $33,640,000 in 1993 and $3,832,000 in 1994.
The results of operations of the acquired businesses have been included in the
consolidated statement of income since their respective purchase dates.
The following unaudited pro forma summary of consolidated results of
operations has been prepared as if each of the above acquisitions had been
acquired on the later of January 1, 1992 or the respective acquired entities'
start of business.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1992 1993
-------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Net revenues.......................... $66,227 $88,990
Net income............................ 2,019 4,128
Net income per common share........... .08 .13
</TABLE>
These pro forma results do not purport to be indicative of the results that
would have actually been obtained if the respective businesses had been acquired
as of January 1, 1992 or of results which may occur in the future.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Intangible Assets
Intangible assets consist of the following amounts:
DECEMBER 31,
1993 1994
--------- ---------
Excess of cost over net assets
acquired ................................. $69,273,072 $ 73,624,971
Medical licenses ......................... 4,924,315 4,975,260
Management contracts ..................... 1,217,277 1,417,277
Other .................................... 238,920 238,920
75,653,584 80,256,428
Accumulated amortization ................. (1,884,021) (4,268,293)
$73,769,563 $ 75,988,135
5. Long-Term Debt and Capital Lease Obligations
At December 31, 1993 and 1994, long-term debt and capital lease obligations
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1993 1994
----------- ------------
<S> <C> <C>
Senior subordinated notes, interest at 11.5%, due July 15,
2004.......................................................... $ -- $ 75,000,000
Revolving credit facility..................................... 31,617,260 9,000,000
Various notes repaid in 1994.................................. 30,798,641 --
Capital lease obligations..................................... 7,268,993 5,484,251
Other......................................................... 146,341 135,635
69,831,235 89,619,886
Current portion............................................... (10,158,598) (1,984,712)
$ 59,672,637 $ 87,635,174
</TABLE>
In June 1994, the Company issued $75 million of 11.5% Senior Subordinated
Notes due July 15, 1999 (the "Notes"). The Notes may not be redeemed by the
Company prior to July 15, 1999, except that prior to July 15, 1997, the Company
may redeem up to $18.75 million in aggregate principal amount of the notes at
110% of the principal amount plus accrued interest with the proceeds of an
initial public offering of common stock. The terms of the Notes provide for
limitations on the Company's ability to incur additional indebtedness (excluding
borrowings under the senior credit facility); to repurchase outstanding capital
stock; to declare any dividends on capital stock; to make certain investments or
to merge the Company.
The proceeds of these Notes were used to repay all of the Company's
outstanding long-term debt with the exception of its capital lease obligations.
The aggregate principal balance of such indebtedness was approximately
$74,544,000. In connection with this repayment, the Company recognized an
extraordinary loss resulting from the write-off of the unamortized balance of
deferred loan fees in the amount of $427,122 (before deduction of related income
tax benefit of $226,000).
In June 1994, the Company amended and restated its existing Loan and Security
Agreement (the "Amended Agreement") with its primary lender. The Amended
Agreement provides for a revolving credit facility of up to $50 million which
expires on December 31, 1999. Borrowings outstanding under the Amended Agreement
bear interest, at the Company|Als option, at either the bank's prime rate (8.5%
at December 31, 1994) plus 1/4% or LIBOR (5.9% at December 31, 1994) plus 2 1/4
%. Commitment fees of 1/2 % are payable quarterly on the unused portion. As of
December 31, 1994, the Company had approximately $41,000,000 available under
this Amended Agreement for future borrowings.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Long-Term Debt and Capital Lease Obligations--Continued
In connection with the revolving credit facility, the Company issued to the
bank a stock purchase warrant to purchase 596,679 shares of its common stock or
a similar number of shares of non-voting common stock at an exercise price of
$.01 per share. The warrant expires in February 2003 and may be exercised at any
time at the option of the warrant holder. Under the terms of the warrant
agreement, the warrant holder has certain registration rights and antidilution
protection from future equity securities issued at below fair market value, and
can restrict the payment of dividends to any class of capital stock. The warrant
agreement also requires the Company to repurchase the warrant, at the option of
the warrant holder, at any time during the period February 2000 to February
2003. The purchase price is to be based upon a multiple of the Company|Als then
operating cash flows, as defined in the warrant agreement. This put right
expires upon the successful completion of an initial public offering of the
Company's common stock in which the proceeds to the Company and any selling
stockholders are not less than $12,000,000.
The Company recorded the warrants issued at their estimated fair value of
$1,903,406 and has included the amount in loan origination costs and treated the
item as a non-cash financing transaction for purposes of the Statement of Cash
Flows. The loan origination costs are being amortized over the term of the
Amended Agreement. The excess of the redemption value over the carrying value
has been accreted by periodic charges to common stock additional paid-in-capital
over the life of the issue.
The Amended Agreement contains numerous restrictive covenants, which limit,
among other things, future borrowings; payment of dividends on any class of the
Company|Als capital stock; distributions by the Company|Als majority-owned
partnerships; loans to subsidiaries, affiliates or third parties and certain
investments. The Amended Agreement also requires the maintenance of specified
levels of cash flows, interest coverage and net worth.
Through March 1, 1995, the Company had borrowed an additional $8,300,000
under the Amended Agreement.
Borrowings under the Amended Agreement are secured by all the assets of the
majority-owned partnerships to which such borrowings are advanced as well as a
pledge of the related partnership interest and stock of the Company|Als
wholly-owned subsidiaries which serve as the partnerships|Al general partner.
Substantially all the assets of the Company and the Company's majority-owned
partnerships are pledged to secure the Company|Als indebtedness.
The Company leases certain medical equipment under long-term lease
arrangements which have been recorded as capital leases. During 1993 and 1994,
the Company entered into capital lease obligations in the original principal
amounts of approximately $3,100,000 and $200,000, respectively. The aggregate
future minimum payments of these capital lease obligations as of December 31,
1994 are as follows:
1995............................. $ 2,492,827
1996............................. 2,324,502
1997............................. 1,183,595
1998............................. 346,514
1999............................. 20,967
Thereafter....................... 45,558
6,413,963
Less amount representing
interest....................... (929,712)
$ 5,484,251
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Long-Term Debt and Capital Lease Obligations--Continued
Assets recorded under capital leases consist of the following:
DECEMBER 31,
-----------------------
1993 1994
---- -----
Equipment, furniture and
fixtures......................... $ 9,682,023 $ 9,877,810
Accumulated amortization......... (2,654,841) (4,548,462)
$ 7,027,182 $ 5,329,348
The Company paid interest on its long-term debt and capital lease obligations
during 1992, 1993, and 1994 of approximately $1,275,000, $3,897,000 and
$3,110,000 (including interest of $42,000 in 1992, $280,000 in 1993 and $635,000
in 1994 capitalized in connection with construction projects), respectively. The
carrying amount of long-term debt and capital lease obligations approximates
fair value.
6. Redeemable Convertible Preferred Stock
At December 31, 1994, the Company had authorized 5,450,624; 6,000,000; and
3,571,429 shares of series A, series B and series C redeemable convertible
preferred stock, respectively. The following is a summary of the issued and
outstanding shares and liquidation value by series as of December 31, 1993 and
1994:
<TABLE>
<CAPTION>
1993 1994
------------------------------- -----------------------------
ISSUED AND LIQUIDATION ISSUED AND LIQUIDATION
OUTSTANDING SHARES VALUES OUTSTANDING SHARES VALUES
------------------ ------------ ----------------- -----------
<S> <C> <C> <C> <C>
Series A ........ 2,022,739 $ 3,502,000 1,911,902 $ 3,586,000
Series B ........ 4,014,946 13,775,000 3,961,413 14,773,000
Series C ........ 3,485,715 12,755,000 3,439,692 13,785,000
Total ........... 9,523,400 $ 30,032,000 9,313,007 $ 32,144,000
</TABLE>
The holders of the series A, series B, and series C convertible preferred
stock (collectively, the "preferred stock"), are entitled to receive dividends,
if declared by the Board of Directors and affirmed by a majority of the
directors elected by the holders of the preferred stock. No dividends will be
paid to holders of series A convertible preferred stock until dividends have
first been paid to holders of series B and series C convertible preferred stock.
The holders of the preferred stock have the right to require the Company to
redeem all of the outstanding preferred stock on or after July 1, 1997 (the
"redemption date") following a majority vote by the holders of preferred stock
and the consent of the Company|Als lender under the Amended Agreement (see Note
5). However, the preferred stock may not be redeemed as long as the Company has
outstanding debt on the revolving credit agreement or the senior subordinated
notes. In the event the preferred stock is redeemed, the redemption price of
approximately $26,567,000 is equal to the original issue price plus any declared
but unpaid dividends at December 31, 1994. The Company has no funding
requirements prior to the redemption date.
Each share of preferred stock is also convertible into one share of common
stock at the option of the holder at any time prior to July 1, 1997. If not
redeemed prior to July 1, 1997, the conversion ratio shall reduce to 90% of the
immediately preceding conversion ratio, and for each 90 day period thereafter
until redeemed, the conversion ratio would reduce to 90% of the immediately
preceding adjusted conversion ratio. The conversion ratio will be adjusted for
dilution in the event of future issuances of capital stock for a per share
consideration less than that paid by the preferred shareholders, except for
issuance of up to an aggregate of 3,725,000 shares to employees or to principal
owners of facilities which may be acquired. The preferred shareholders waived
this right with respect to the stock purchase warrants issued to the bank (see
Note 5) and also with respect to the shares, options and warrants issued in the
Heritage acquisition (see Note 1).
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Redeemable Convertible Preferred Stock--Continued
In the event of any liquidation, dissolution, or winding up of the business,
the holders of the preferred stock would be entitled to receive a liquidation
payment, prior to any distribution to common shareholders. The liquidation
payment would be equal to the greater of either (i) $1.45 per share for series
A, $3 per share for series B and $3.50 per share for series C, plus an amount
equal to a dividend of 10% per annum less cash dividends paid, or (ii) an amount
per share that would have been payable had each share been converted to common
stock immediately prior to liquidation. For the purposes of the liquidation
payment, the rights of holders of series A are considered junior to the rights
of holders of series B and series C. In the accompanying balance sheet, the
liquidation values of the preferred stock have been calculated as $1.45 per
share for series A, $3 per share for series B and $3.50 per share for series C,
plus an amount equal to a dividend of 10% per annum. No dividends have been
paid. The preferred stock has restrictive rights which require approval by the
preferred shareholders, as defined in the amended certificate of incorporation,
to enact any subsequent changes in capital structure, any consent to
liquidation, an amendment to the certificate of incorporation or bylaws, and any
distribution of shares of the Company|Als capital stock, or a redemption of the
preferred stock. No dividends on preferred stock were declared in 1992, 1993 or
1994.
On February 10, 1993, the holders of 3,427,885 shares of series A convertible
preferred stock and 1,638,317 shares of series B convertible preferred stock
converted such shares into 5,066,202 shares of common stock. As a result,
approximately $9,830,000 was transferred from preferred stock to common stock.
Assuming this conversion had occurred effective with the respective date of
issuance of the converted preferred shares, the net income per common share for
the years ended December 31, 1992 and 1993 would not have been materially
different.
On January 18, 1994, the holders of 110,837 shares of series A convertible
preferred stock, 53,533 shares of series B convertible preferred stock and
46,023 shares of series C convertible preferred stock converted such shares into
210,393 shares of common stock. As a result, approximately $480,000 was
transferred from preferred stock to common stock.
7. Shareholders' Equity
The Company's Certificate of Incorporation authorizes the issuance of up to
700,000 shares of non-voting common stock. Shares of nonvoting common stock, if
issued, would be convertible at the option of the holder on a one for one basis
into common stock. Such shares would also have certain antidilution provisions
but would have no preferences to those of the common shareholders in dividends
or in the event of liquidation.
In June 1993, the Company amended its Certificate of Incorporation to
increase the number of authorized shares of common stock to 30,000,000 shares.
Additionally, in January 1994, the Company amended its Certificate of
Incorporation to increase the number of authorized shares of common stock to
60,000,000 shares and also to increase the authorized number of preferred shares
to 25,022,053 shares of which 10,000,000 shares are undesignated.
At December 31, 1994, the Company had reserved 20,723,009 shares of common
stock for possible future issuance in the event the outstanding shares of series
A, series B, and series C convertible preferred stock are converted and the
outstanding stock options and stock purchase warrants are exercised.
As of December 31, 1994, the Company had stock option plans which provide for
the issuance of up to 4,883,360 shares of common stock to key employees,
directors and consultants of the Company. Under these plans, the Company may
issue incentive or nonqualified options and all options granted expire ten years
from the date of grant. Options granted under the plans generally vest 20% per
year.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Shareholder's Equity--Continued
In connection with the termination of an officer of the Company during the
fourth quarter of 1994, the Company agreed to accelerate the vesting of certain
options and to extend the exercise period of vested options from 90 days to 3
years. These changes in option terms resulted in a compensation charge of
$804,685 during the fourth quarter.
A summary of transactions during 1992, 1993 and 1994 under these option plans
follows:
NUMBER OF OPTION PRICE
SHARES PER SHARE
------------- --------------
1992
Granted............................. 2,595,033 $.40-4.54
Exercised........................... (20,000) .40
Outstanding at December 31, 1992.... 2,575,033 .40-4.54
1993
Granted............................. 1,535,327 2.27-3.50
Exercised........................... (52,000) .40
Canceled............................ (48,000) .40
Outstanding at December 31, 1993.... 4,010,360 .40-4.54
1994
Granted............................. 1,079,551 3.67
Exercised........................... (54,320) .40
Canceled............................ (1,287,686) .40-3.67
Outstanding at December 31, 1994.... 3,747,905 .40-4.54
At December 31, 1994, options covering 1,931,979 shares of common stock were
exercisable.
In 1993, the Board of Directors of the Company authorized the Company to
issue warrants for the purchase of the Company's common stock. The warrants
generally expire five years from the date of issuance. Warrants to purchase
251,292 shares of common stock at prices ranging from $.57 to $4.54 per share
are outstanding and exercisable at December 31, 1994.
In 1993, in connection with the formation of a new majority-owned
partnership, the Company issued a warrant to purchase 12,785 shares of common
stock to the partnerships. This warrant expires in February 1998 and has an
exercise price of $4.54 per share.
In conjunction with a $1,000,000 note payable paid in 1994, the Company
granted to an investor a warrant to purchase 33,162 shares of common stock at
$3.50 per share. This warrant expires in December 1997.
In 1993, the Company granted in connection with an acquisition and the
related issuance of 219,752 shares of common stock the right for the holder, at
its sole option, to require the Company to repurchase such shares at $3.69 per
share in September 1996. These shares are classified as redeemable common stock
in the consolidated balance sheet.
Dividends paid by Ballas and MWA to their pre-merger shareholders aggregated
$1,124,998 and $660,000 in 1992 and 1993, respectively.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Operating Leases
The Company leases space for its corporate office as well as its outpatient
surgery centers under the terms of operating lease agreements that expire at
various dates through 2009. Certain of these leases contain renewal options for
additional periods of five to fifteen years at the then fair market rental
rates. These leases generally provide for the payment of minimum annual rents
(increasing at various rates over the lease term) in addition to insurance,
operating costs and property taxes. Rent expense approximated $1,875,000 in
1992, $5,956,000 in 1993 and $7,527,000 in 1994.
At December 31, 1994, the future minimum lease payments under non-cancelable
operating leases were as follows:
1995........... $ 7,486,200
1996........... 7,452,774
1997........... 7,259,343
1998........... 7,108,871
1999........... 6,820,077
Thereafter..... 32,660,114
$ 68,787,379
9. Income Taxes
Prior to the merger with the Company, Ballas and MWA were S corporations
under the Internal Revenue Code and consequently their earnings were not subject
to federal or state income taxes. The shareholders of Ballas and MWA included
their respective share of the acquired companies' earnings or losses in their
individual income tax returns. Their portion of the Company's income during 1992
and for the period January 1, 1993 to February 11, 1993 was not included in the
Company's income tax provision (see Note 10).
The provision for income taxes includes the following components:
YEARS ENDED DECEMBER 31,
1992 1993 1994
------ ------ ------
Current:
Federal .................... $ 397,196 $1,334,256 $ 392,584
State ...................... 136,306 413,825 192,972
Deferred ..................... 94,573 868,612 (341,801)
$ 628,075 $2,616,693 $ 243,755
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Income Taxes--Continued
A reconciliation of the provision for income taxes to the federal statutory
rate of 34% is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1992 1993 1994
-------- ------ --------
<S> <C> <C> <C>
Statutory federal income tax expense (benefit) ......... $ 277,300 $ 2,219,200 $ (917,600)
State income taxes, net of federal benefit ............. 102,700 365,700 127,400
Tax effect of S corporation (income) loss .............. (93,500) 5,700 --
Non-deductible merger costs ............................ -- 58,200 617,700
Increase (decrease) in valuation allowance for
deferred tax assets .................................. 224,900 (318,600) --
Non-deductible amortization of intangible
assets ................................................. 106,100 229,400 397,400
Other .................................................. 10,575 57,093 18,855
Income tax expense ..................................... $ 628,075 $ 2,616,693 $ 243,755
</TABLE>
A deferred tax asset is required to be recognized for the tax benefit of
deductible temporary differences and net operating loss carryforwards. A
valuation allowance is recognized if it is more likely than not that some or all
of the deferred tax asset will not be realized. A valuation allowance of
$318,600 at December 31, 1992 was established for the net deferred tax assets of
the Company. During 1993, the valuation allowance was reduced as it became more
likely than not that the deferred tax assets would be realized. The valuation
allowance was not changed for 1994. During 1994, the Company utilized net
operating loss carryforwards of $123,000.
Deferred income taxes reflect the tax effects of differences between the
carrying amounts of assets and liabilities for financial reporting and income
tax purposes. The significant components of the Company's deferred tax assets
and liabilities at December 31, 1993 and 1994 are as follows:
DECEMBER 31,
1993 1994
------ ------
Deferred tax assets:
Net operating loss
carryforwards................. $ 88,900 $ 42,200
Accrued liabilities............. 103,400 709,500
Asset valuation allowances ..... 503,300 761,300
Alternative minimum tax......... -- 424,000
Other........................... 23,378 10,087
Total......................... 718,978 1,947,087
Deferred tax liabilities:
Depreciation and amortization .. 1,669,700 2,275,200
Cash basis reporting............ 156,100 104,000
Other........................... 99,070 280,714
Total......................... 1,924,870 2,659,914
Net deferred tax balance........ $ 1,205,892 $ 712,827
At December 31, 1994, the Company and its subsidiaries had available net
operating loss carryforwards of approximately $111,000. These net operating loss
carryforwards expire beginning in 2001 through 2007. Because of changes in
ownership of the Company, the utilization of these losses in the future may be
limited.
The Company made federal and state income tax payments of approximately
$1,818,000 in 1993 and $1,100,000 in 1994. No federal and state income tax
payments were made in 1992.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Pro Forma Income Taxes
As described in Note 9, Ballas and MWA were previously taxed as S
corporations. Effective with the completion of the merger in February 1993, the
acquired companies became subject to federal and state income taxes.
The following pro forma information reflects the historical provision for
income taxes adjusted for the increase or decrease in income taxes that would
have resulted if Ballas and MWA had been subject to federal and state income
taxes and had been consolidated subsidiaries for 1992 and 1993.
YEARS ENDED DECEMBER 31,
` 1992 1993
-------- --------
Pro forma income taxes:
Current:
Federal................. $ 301,196 $ 1,739,856
State................... 144,406 414,225
Deferred................ 35,073 766,612
$ 480,675 $ 2,920,693
The pro forma provision for income taxes differs from the amount computed by
applying the federal statutory rate of 34% to income before income taxes as
follows:
YEARS ENDED DECEMBER 31,
------------------------
1992 1993
------- --------
Statutory federal income tax expense............ $ 277,300 $ 2,219,200
State income taxes, net of federal benefit ..... 108,000 365,700
Non-deductible amortization of intangible
assets..................................... 106,100 229,400
Ballas and MWA non-deductible merger costs ..... -- 101,200
Other........................................... (10,725) 5,193
$ 480,675 $ 2,920,693
11. Commitments and Contingencies
As of December 31, 1994, the Company is constructing three outpatient surgery
centers and is expanding an existing facility. The Company estimates that it
will cost approximately $9.3 million to complete these projects.
Additionally, since December 31, 1994, the Company has signed long-term lease
agreements in connection with the development of two outpatient surgery centers.
These leases require payments of $49,500 per month over their term.
The Company's majority-owned partnerships carry malpractice and general
liability insurance on a claims-made basis. Should these claims-made policies
not be renewed or replaced with equivalent insurance, claims based on
occurrences during the term of the respective policies, but asserted
subsequently, would be uninsured. To date, the partnerships have obtained
equivalent insurance at the expiration of the current coverage periods.
At December 31, 1994, the Company's majority-owned partnerships have several
malpractice claims outstanding which have arisen in the normal course of
business. In addition, it is possible that certain incidents may have occurred
which have not been reported as of this date. The Company has policies and
procedures in place to track and monitor incidents of significance. Based on the
Company's knowledge of the facts to date, consultation with its legal advisors
and extent of existing insurance coverages, management believes the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or the results of operations.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Other Receivables
The Company had made advances of approximately $784,000 to Surgical Care
Foundation ("SCF"), a not for profit entity which provides recovery bed service
to one of the Company's surgery centers. Of these advances, $275,000 had been
made through a company in which an officer and director of the Company is the
majority shareholder. During the fourth quarter of 1994, the Company concluded
the advances to SCF are not collectible and fully reserved for the advances.
The Company entered into an agreement to provide advances to an
anesthesiologist who provides services at one of its facilities. During the
fourth quarter of 1994, the Company established a reserve of $216,000 for
advances that may not be collectible.
In connection with the development of a surgery facility, the Company
received approximately $100,000 of subscription receivables from the limited
partners and advanced approximately $338,000 to an entity which is owned by
certain of the limited partners. During the fourth quarter of 1994, the Company
concluded these receivables are not collectible and fully reserved for the
receivables.
13. Related Party Transactions
In connection with the development of a medical office building and an
outpatient surgery center in St. Louis, Missouri, the Company paid development
fees of $300,000 to a Company in which an officer and director of the Company is
a majority shareholder.
The Company leases one of its outpatient surgery centers from a limited
partnership whose general partner is wholly-owned by an officer and director of
the Company. Rent expense under this lease was approximately $494,000, $592,000,
and $954,000 in 1992, 1993, and 1994, respectively.
During 1992, certain partnerships paid a management fee to a Company whose
majority shareholders are also shareholders of the Company. The related expense
of approximately $300,000 is included in operating costs in the consolidated
statement of income for the year ended December 31, 1992. The Company paid this
company certain fees in connection with the development, organization and
syndication of certain of the Company's outpatient surgery centers. These fees
aggregated $325,000 and $505,000 in 1992 and 1993, respectively.
The Company had a net receivable of $143,119 at December 31, 1993 due from a
corporation which is also a shareholder of the Company. The net payable and net
receivable were included in payables to affiliates and other receivables and
arose in connection with the acquisition of several outpatient surgery centers
previously owned by this corporation.
At December 31, 1994, the Company had a net receivable of $103,000 from a
company in which an officer and director of the Company is a shareholder.
14. Defined Contribution Plans
Effective April 1, 1994, the Company amended the 401(k) Profit-sharing Plan
of Heritage Surgical Corporation (the "401(k) plan") established January 1,
1993. The amended 401(k) plan allows participation of all eligible Company
employees at its centers and the corporate office. Employer contributions are
made at the discretion of the Company. The Company made no contributions in 1993
and 1994.
A defined contribution profit sharing plan co-sponsered by two wholly-owned
subsidiaries of the Company with certain other companies was terminated in 1993.
Profit sharing contributions charged to operations were approximately $175,000
in 1992 and $210,000 in 1993.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Merger Costs
In connection with the February 1993 merger between the Company, Ballas and
MWA, the Company incurred legal, accounting and other out-of-pocket costs of
$332,532. These costs were expensed in 1993.
In connection with the January 1994 merger between the Company and Heritage,
the Company incurred advisory fees, legal and accounting costs and other direct
costs of $3,570,961 for investigating, negotiating, and closing this
transaction. These costs were expensed in 1994.
16. Gain on Sale of Partnership Interest
In May 1993, the Company sold its 51% partnership interest in Coastal
Lithotripsy Associates, L.P. and the associated management services contract for
net proceeds of approximately $3,163,000. The Company recognized a gain of
$1,400,137 from this sale.
For the four months ended April 30, 1993, this partnership had net revenues
of $642,000 and the Company's interest in its net income was $109,000.
17. Sale of Real Estate
On June 29, 1994, the Company completed the sale of the real estate and
associated improvements relative to two of its outpatient surgery centers. The
aggregate proceeds were approximately $2 million. The Company also entered into
agreements to lease the two facilities for initial lease terms of 13 to 15
years. The aggregate annual lease payments with respect to these two properties
are approximately $370,000.
Additionally, in July 1994, a majority-owned partnership sold an uncompleted
medical office building for aggregate proceeds of $7.4 million. The Company also
entered into an agreement to lease this medical office building for an initial
lease term of 15 years. The aggregate annual lease payments with respect to this
building are approximately $830,000. The Company also agreed to complete
construction of the facility including the related tenant improvements.
The Company deferred an insignificant gain resulting from the sale of these
three facilities. The Company is accounting for each of the new leases as an
operating lease.
18. Fair Value of Financial Instruments
The following methods were used by the Company in estimating its fair value
disclosures for financial instruments.
Cash and Cash Equivalents
The carrying amount reported in the consolidated balance sheet for cash and
cash equivalents approximate its fair value.
Long-Term Debt
The fair values of the Company|Als long-term debt are estimated using quoted
market prices and discounted cash flow analyses, based on the Company|Als
current incremental borrowing rates for similar types of borrowing arrangements.
The carrying amounts and fair values of the Company's financial instruments
are as follows:
DECEMBER 31, 1994
----------------------------
CARRYING
AMOUNT FAIR VALUE
--------------- ------------
Cash and cash equivalents................. $ 2,786,123 $ 2,786,123
Long-term debt (including current
portion)................................ 89,619,886 88,617,613
The carrying amounts of cash and long-term debt approximated fair value at
December 31, 1993.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Subsequent Event
In January 1995, the Company entered into a merger agreement with HealthSouth
Corporation under which all of the Company|Als outstanding shares of common
stock and redeemable convertible preferred stock would be exchanged for common
stock of HealthSouth Corporation. The Company must obtain the approval of the
holders of a majority of the aggregate principal amount of the outstanding
Senior Subordinated Notes and the consent of the Lender under the Amended
Agreement prior to consummation of the merger. In addition, should this merger
be consummated, the Company would be required to offer to purchase all
outstanding Senior Subordinated Notes at a purchase price equal to 101% of the
aggregate principal amount of the notes, plus accrued and unpaid interest.
On January 20, 1995, the Company entered into a non-binding letter of intent
to acquire substantially all of the assets of an outpatient surgery center in
Washington, Missouri. The aggregate purchase price contemplated in the letter of
intent is $1,835,000. The parties are currently negotiating a definitive
purchase agreement.
<PAGE>
PRO FORMA CONDENSED FINANCIAL INFORMATION
The following pro forma condensed financial information and explanatory
notes are presented to reflect the effect of the proposed 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. Prior to the
NovaCare Rehabilitation Hospitals Acquisition, which was consummated in the
second quarter of 1995, these facilities were operated by a wholly-owned
second-tier subsidiary of NovaCare, Rehab Systems Company ("RSC").
The pro forma condensed balance sheet assumes that the Merger was
consummated on December 31, 1994, 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.
5
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Balance Sheet (Unaudited)
December 31, 1994
<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 $ 65,949 $ 8,858 $ (4,973) (1) $ 69,834 $ 2,786 $ 0 $ 72,620
Other marketable securities 16,628 0 0 16,628 0 0 16,628
Accounts receivable 222,720 42,608 (259) (1) 265,069 19,939 0 285,008
Inventories, prepaid expenses
and other current assets 90,663 5,515 (42) (1) 96,136 6,517 0 102,653
------ ----- ------ ------ ----- ------ -------
Total current assets 395,960 56,981 (5,274) 447,667 29,242 0 476,909
Other assets 41,932 49,844 (40,637) (1) 51,139 1,142 0 52,281
Property, plant and equipment, net 789,538 38,724 (1,719) (1) 946,543 67,834 0 1,014,377
120,000 (2)
Intangible assets, net 324,904 62,447 (1,242) (1) 364,103 85,784 (2,856) (1) 447,031
(22,006) (2)
------ ----- ------ ------ ----- ------ -------
Total assets $1,552,334 $ 207,997 $ 49,122 $1,809,452 $ 184,002 $ (2,856) $1,990,598
========== ======= ====== ========= ======= ====== =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 83,180 $ 20,347 $ (454) (1) $ 103,073 $ 3,973 $ 4,000 (2) $ 111,046
Salaries and wages payable 32,672 0 0 32,672 1,430 0 34,102
Accrued interest payable and
other liabilities 46,714 672 (275) 47,111 9,208 (1,560) (2) 47,698
(7,061) (1)
Current portion of long-term debt 14,713 1,732 (146) (1) 16,299 1,985 0 18,284
------ ----- ------ ------ ----- ------ -------
Total current liabilities 177,279 22,751 (875) 199,155 16,596 (4,621) 211,130
Long-term debt 930,061 56,756 (38,620) (1) 1,163,197 87,635 11,250 (1) 1,262,082
215,000 (2)
Deferred income taxes 7,882 0 0 7,882 713 0 8,595
Other long-term liabilities 5,655 0 0 5,655 2,743 0 8,398
Payable to affiliates 0 92,377 (92,377) (1) 0 0 0 0
Deferred revenue 7,526 736 0 8,262 0 0 8,262
Minority interests (2,203) 1,370 0 0 3,034 (3,034) (3) 0
Redeemable common stock and warrants 0 0 0 0 26,569 (26,569) (3) 0
Redeemable convertible preferred
stock 0
Stockholders' equity:
Preferred Stock, $.10 par 0 0 0 0 0 0
Common Stock, $.01 par 342 0 0 342 54 (15) (3) 381
Additional paid-in capital 306,565 34,006 83,000 (1) 306,565 33,392 29,618 (3) 369,575
(117,006) (2)
Retained earnings 137,027 0 0 137,027 737 (2,440) (2) 128,279
Treasury stock (323) 0 0 (323) 0 0 (323)
Receivable from Employee Stock
Ownership Plan (17,477) 0 0 (17,477) 0 0 (17,477)
------- ------ ------- ------- ------ ------ -------
Total stockholders' equity 426,134 34,006 (34,006) 426,134 34,183 20,118 480,435
------- ------ ------- ------- ------ ------ -------
Total liabilities and stock-
holders' equity $1,552,334 $ 207,996 $ 49,122 $1,809,452 $ 184,002 $ (2,856) $1,990,598
========== ========= ======== ========= ======== ======== =========
</TABLE>
See accompanying notes.
6
<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 $ 5,455 (6) $1,275,444 $ 108,749 $ 0 $1,384,193
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 (1,918) (1) 86,161 11,090 0 97,251
5,450 (4)
Interest expense 57,255 11,096 8,457 (5) 76,808 8,031 (728) (1) 84,111
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 extinguishment of debt 0 0 0 0 0 14,106 (1) 14,106
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 (417) 1,187,400 105,344 13,378 1,306,122
Income before income taxes and
minority interests 87,263 (5,091) 5,872 88,044 3,405 (13,378) 78,071
Provision for income taxes 33,835 (1,084) 1,215 (7) 33,966 470 (6,777) (1) 27,659
------ ------ ----- ------ --- ------ ------
53,428 (4,007) 4,657 54,078 2,935 (6,601) 50,412
Minority interests 203 445 0 648 6,199 0 6,847
------ ------ ----- ------ --- ------ ------
Net income $ 53,225 $ (4,452) $ 4,657 $ 53,430 $ (3,264) $ (6,601) $ 43,565
======= ======= ====== ======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding 75,876 N/A N/A 75,876 21,814 (13,493) 84,197
======= ======= ====== ======= ======= ======= =======
Net income per common and common
equivalent share $ 0.70 $ N/A $ N/A $ 0.70 $ (0.15) $ N/A $ 0.52
======= ======= ====== ======= ======= ======= =======
Net income per common share--
assuming full dilution $ 0.70 $ N/A $ N/A $ 0.70 $ N/A $ N/A $ 0.52
======= ======= ====== ======= ======= ======= =======
</TABLE>
See accompanying notes.
7
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Pro Forma Condensed Financial Information
A. The NovaCare Rehabilitation Hospitals Acquisition
In February 1995 HEALTHSOUTH entered into a definitive agreement to
purchase 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 will be approximately $215,000,000
in cash and the assumption of approximately $20,000,000 in long-term debt. The
transaction will be accounted for as a purchase and is expected to be completed
in the second quarter of 1995. HEALTHSOUTH intends to finance 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 1994 pro forma condensed income statement. 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 adjustments are necessary for the NovaCare
Rehabilitation Hospitals Acquisition:
1. To eliminate assets (including associated depreciation and
amortization expenses) and liabilities of Rehab Systems Company (a wholly owned
subsidiary of NovaCare, Inc.) which are excluded from the NovaCare
Rehabilitation Hospitals Acquisition. The excluded assets and liabilities are as
follows (in thousands):
<TABLE>
<S> <C>
Cash and cash equivalents $ 4,973
Accounts receivable 259
Other current assets 42
Equipment, net 1,719
Intangible assets, net 1,242
Other assets (primary 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) $ (83,000)
=======
</TABLE>
Also being excluded is depreciation and amortization expense of
$1,918,000 related to the excluded assets.
2. To allocate the excess of the $215,000,000 cash purchase price over
the net tangible asset value of the acquired NovaCare facilities, which is
approximately $159,199,000. Of this excess, $120,000,000 has been allocated to
leasehold value and the remaining $39,199,000 has been allocated to
10
<PAGE>
goodwill. This allocation serves to decrease historical goodwill of the NovaCare
facilities by $22,006,000. This adjustment also reflects the increase in
long-term debt necessary to finance the transaction. The $120,000,000 allocated
to leasehold value was based on total lease payments for the remaining lease
terms capitalized at 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.
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 1 above as follows (in thousands):
<TABLE>
<CAPTION>
Purchase Price
Allocation Useful Annual
Adjustment Life Amortization
--------------- -------- ------------
<S> <C> <C> <C>
Leasehold value.................... $ 120,000 20 years $ 6,000
Goodwill........................... (22,006) 40 years (550)
----
$ 5,450
=====
</TABLE>
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 $17,916,000 to reflect pro forma
borrowings of $215,000,000, described above, at an 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 pro forma interest expense by
approximately $269,000.
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):
<TABLE>
<S> <C>
Depreciation and amortization (item 1) $ (1,918)
Intercompany management fees (item 3) (4,196)
Depreciation and amortization (item 4) 5,450
Interest expense (item 5) 8,457
-----
7,793
Assumed Medicare utilization 70%
---
Increased reimbursement $ 5,455
=====
</TABLE>
11
<PAGE>
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 December 31, 1994.
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.
The following pro forma adjustments are necessary for the SHC Merger:
1. To adjust pro forma long-term debt by $11,250,000, assuming the
$75,000,000 of 11.5% Senior Subordinated Notes due 2004 (issued on June 28,
1994) are purchased by HEALTHSOUTH at 115% of their face value. The resulting
$2,856,000 loss from the write-off of unamortized balance of deferred loan costs
and $11,250,000 loss on early extinguishment of debt has been charged to
retained earnings, net of taxes of $(7,061,000). The $728,000 decrease in
interest expense represents the $3,632,000 increase in interest expense for the
pro forma borrowings of $86,250,000, described above, at a 8.33% variable rate,
which represents HEALTHSOUTH's weighted average cost of debt, as if they were
outstanding for six months and two days, and to decrease interest expense by
$4,360,000, which represents SHC's $75,000,000 Senior Subordinated Notes due
2004 at a 11.5% rate over a period of 6 months and 2 days.
2. 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.
3. To adjust pro forma share amounts based on historical share amounts,
converting each outstanding share of SHC Common Stock and redeemable preferred
stock into .2486 shares of HEALTHSOUTH Common Stock. The conversion ratio is
based upon an assumed Base Period Trading Price for HEALTHSOUTH's Common Stock
equal to or in excess of $18.50 per share.
SHC's weighted average common and common equivalent shares outstanding
have also been adjusted using the .2486 exchange ratio. Assuming the exchange
ratio was .2788 (which is the maximum Exchange Ratio), then pro forma earnings
per share data would be as follows:
12
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Net income per common and
common equivalent share $.51 $.22 $.47
==== ==== ====
Net income per common and
common equivalent share--
assuming full dilution $.51 $N/A $N/A
==== ==== ====
</TABLE>
13
