<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-KA
Amendment No. 1
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report: November 9, 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 5. OTHER EVENTS
On October 9, 1995, HEALTHSOUTH Corporation, a Delaware corporation
(the "Company"), entered into a Plan and Agreement of Merger with Surgical Care
Affiliates, Inc., a Delaware corporation ("SCA"), pursuant to which a
wholly-owned subsidiary of the Company (the "Subsidiary") will be merged into
SCA, with SCA to be the surviving corporation. Under the terms of the Plan and
Agreement of Merger, SCA stockholders will be entitled to receive shares of
Company Common Stock for each share of SCA Common Stock held by them. The
estimated value of the transaction, which will be accounted for as a tax-free
pooling of interests, is approximately $1,200,000,000. As a result of the
Merger, the Company will acquire 67 existing surgery centers and an additional
10 surgery centers under development or construction. The consummation of the
transaction is subject to the approval of the stockholders of SCA and the
Company, to the expiration or termination of the waiting period required under
Hart-Scott-Rodino Antitrust Improvements Act, and to certain other regulatory
approvals. Subject to such approvals, the transaction is expected to close in
early 1996, or as soon as practicable after the receipt of such approvals.
While the above-described transaction has not been consummated, this
amendment is being filed by the Company to file certain historical financial
statements of SCA and pro forma financial statements of the combined companies,
in order that such pro forma financial statements will be publicly available.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired.
The required audited consolidated financial statements of the
acquired business, SCA, for the fiscal year ended December 31, 1994,
and the unaudited consolidated financial statements for the nine months
ended September 30, 1995, listed on the Index to Financial Statements
included in this Current Report on Form 8-K/A, Amendment No. 1, are
herewith filed.
(b) Pro Forma Financial Information.
The required pro forma financial information listed on the Index
to Financial Statements included in this Current Report on Form 8-K/A,
Amendment No. 1, is herewith filed.
(c) Exhibits
2. Plan and Agreement of Merger, dated October 9, 1995, among
HEALTHSOUTH Corporation, Cats Acquisition Corporation and Surgical Care
Affiliates, Inc. filed as Exhibit 2 to the Current Report on Form 8-K
filed by Surgical Care Affiliates, Inc. on October 16, 1995, is hereby
incorporated herein by reference.
2
<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: November 9, 1995.
HEALTHSOUTH Corporation
By /s/ ANTHONY J. TANNER
------------------------------
Anthony J. Tanner
Executive Vice President
and Secretary
3
<PAGE>
Index to Financial Statements
Surgical Care Affiliates, Inc. and Subsidiaries
Independent Auditors' Report
Consolidated Statements of Income for the Years Ended December 31,
1994, 1993 and 1992
Consolidated Balance Sheets at December 31, 1994 and 1993
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1993 and 1992
Notes to Consolidated Financial Statements for the Years Ended December
31, 1994, 1993 and 1992
Consolidated Balance Sheets at September 30, 1995 (unaudited) and
December 31, 1994
Consolidated Statements of Income for the Three Months and Nine Months
Ended September 30, 1995 and 1994 (unaudited)
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1995 and 1994 (unaudited)
Notes to Unaudited Consolidated Financial Statements
HEALTHSOUTH Corporation and Subsidiaries Pro Forma
Condensed Financial Information (unaudited)
Pro Forma Condensed Combined Balance Sheet at September 30, 1995
Pro Forma Condensed Combined Income Statement for the Year Ended
December 31, 1994
Pro Forma Condensed Combined Income Statement for the Year Ended
December 31, 1993
Pro Forma Condensed Combined Income Statement for the Year Ended
December 31, 1992
Pro Forma Condensed Combined Income Statement for the Nine Months Ended
September 30, 1995
Pro Forma Condensed Combined Income Statement for the Nine Months Ended
September 30, 1994
Notes to Pro Forma Condensed Financial Information
4
<PAGE>
FINANCIAL REPORTS
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Surgical Care Affiliates, Inc.
Nashville, Tennessee
We have audited the accompanying consolidated balance sheets of
Surgical Care Affiliates, Inc. and subsidiaries as of December 31, 1994 and
1993, and the related consolidated statements of income, shareholders' 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's
management. Our responsibility is to express an opinion on these 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, such consolidated financial statements present fairly,
in all material respects, the financial position of Surgical Care Affiliates,
Inc. and subsidiaries as of December 31, 1994 and 1993, and the 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.
As discussed in Notes 1 and 7 to the consolidated financial statements,
the Company changed its method of accounting for development and pre-opening
costs in 1994.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
February 22, 1995
5
<PAGE>
CONSOLIDATED
STATEMENTS OF INCOME
For the Years Ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Revenue $ 236,719,426 $ 197,976,179 $ 161,873,266
Operating Costs:
Costs of Providing Healthcare Services 123,378,641 103,824,815 83,870,628
Depreciation and Amortization 17,391,605 12,626,397 9,695,104
Provision for Doubtful Accounts 3,060,679 1,067,775 1,441,862
Loss on Disposal of Surgery Centers 13,197,000 -- --
- -----------------------------------------------------------------------------------------------------------
Totals 157,027,925 117,518,987 95,007,594
- -----------------------------------------------------------------------------------------------------------
Operating Income 79,691,501 80,457,192 66,865,672
General, Administrative and Development Expenses 5,463,515 3,880,180 3,803,964
Interest and Other Expenses 7,293,533 3,600,067 3,409,960
Interest and Other Income (4,183,722) (2,513,386) (3,049,258)
Gain on Sale of MCA Stock (7,726,921) -- --
- -----------------------------------------------------------------------------------------------------------
Income Before Minority Interests and Income Taxes 78,845,096 75,490,331 62,701,006
Minority Interests in Earnings of Partnerships (22,420,156) (22,624,464) (21,481,467)
- -----------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Income Taxes
and Cumulative Effect of Change in Accounting Principle 56,424,940 52,865,867 41,219,539
- -----------------------------------------------------------------------------------------------------------
Income Tax Provision (25,039,576) (20,650,172) (15,663,425)
- -----------------------------------------------------------------------------------------------------------
Net Income from Continuing Operations Before
Cumulative Effect of Change in Accounting Principle 31,385,364 32,215,695 25,556,114
Net Income from Discontinued Operations -- 4,451,722 3,282,963
Cumulative effect of Change in Accounting Principle,
net of income tax benefit of $1,403,437 (2,105,155) -- --
- -----------------------------------------------------------------------------------------------------------
Net Income $ 29,280,209 $ 36,667,417 $ 28,839,077
===========================================================================================================
Net Income Per Common & Common Equivalent Share
Continuing Operations Before Cumulative Effect of
Change in Accounting Principle $ .80 $ .85 $ .69
Discontinued Operations -- .11 .09
Cumulative Effect of Change in Accounting Principle (.05) -- --
- -----------------------------------------------------------------------------------------------------------
$ .75 $ .96 $ .78
===========================================================================================================
Weighted Average Number of Common
& Common Equivalent Shares Outstanding 38,891,521 38,116,602 37,191,232
===========================================================================================================
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
6
<PAGE>
CONSOLIDATED
BALANCE SHEETS
December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 31,222,963 $ 23,877,186
Temporary Investments -- 5,285,783
Marketable Securities, at Cost 294,639 13,360,507
Accounts Receivable, Less Allowance for Doubtful Accounts
of $4,160,260 in 1994 and $3,214,296 in 1993 34,801,079 28,133,055
Other Receivables 701,965 5,400,027
Supplies 4,562,518 4,193,379
Prepaid Expenses 742,911 428,817
Deferred Income Taxes 9,260,259 --
- ----------------------------------------------------------------------------------------------------------------
Total Current Assets 81,586,334 80,678,754
- ----------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Land and Improvements 31,972,686 29,789,361
Buildings 66,289,162 49,477,899
Equipment, Furniture and Fixtures 106,690,800 87,272,417
Construction in Progress 1,998,495 8,159,358
- ----------------------------------------------------------------------------------------------------------------
206,951,143 174,699,035
Less Accumulated Depreciation and Amortization (57,969,075) (44,604,904)
- ----------------------------------------------------------------------------------------------------------------
Net Property and Equipment 148,982,068 130,094,131
- ----------------------------------------------------------------------------------------------------------------
OTHER ASSETS:
Excess of Cost Over Fair Value of Net Assets Acquired 109,149,364 83,196,653
Deferred Development Costs and Other Assets 625,828 6,219,185
- ----------------------------------------------------------------------------------------------------------------
$ 340,343,594 $ 300,188,723
================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable - Trade $ 5,889,642 $ 5,517,412
Accrued Liabilities 15,658,612 7,609,790
Accrued Loss on Disposal of Surgery Centers 5,629,000 --
Income Taxes Payable 14,737,873 1,397,293
Current Portion of Long-Term Obligations 10,119,162 10,727,148
Distributable to Minority Interests 4,500,000 4,761,219
- ----------------------------------------------------------------------------------------------------------------
Total Current Liabilities 56,534,289 30,012,862
- ----------------------------------------------------------------------------------------------------------------
LONG-TERM OBLIGATIONS:
Notes Payable and Other Long-Term Debt 42,269,224 52,880,009
Capital Lease Obligations - Related Parties 7,447,761 9,310,591
- ----------------------------------------------------------------------------------------------------------------
Total Long-Term Obligations 49,716,985 62,190,600
- ----------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES 3,845,939 7,971,705
MINORITY INTERESTS 33,623,872 33,430,298
- ----------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Common Stock, Par Value $.25; 100,000,000 Shares Authorized; 39,110,622
and 38,259,336 issued and 38,638,222 and 38,259,336 outstanding in
1994 and 1993, respectively 9,777,656 9,564,834
Treasury Stock at Cost, 472,400 and 0 shares in 1994 and 1993, respectively (6,114,778) --
Additional Paid-In Capital 91,159,880 78,262,327
Retained Earnings 101,799,751 78,756,097
- ----------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 196,622,509 166,583,258
- ----------------------------------------------------------------------------------------------------------------
$ 340,343,594 $ 300,188,723
================================================================================================================
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
7
<PAGE>
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
Additional
Common Stock Treasury Stock Paid-In
Shares Amount Shares Amount Capital
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT
JANUARY 1,1992 35,656,550 $8,914,138 -- -- $41,872,619
Issuance of Common Stock 1,461,223 365,305 -- -- 22,407,129
Tax Benefits of Stock
Options Exercised -- -- -- -- 1,502,181
Dividends Paid ($.147 per share) -- -- -- -- --
Net Income -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1992 37,117,773 9,279,443 -- -- 65,781,929
Issuance of Common Stock 1,141,563 285,391 12,480,398
Dividends Paid ($.16 per share) -- -- -- -- --
Net Income -- -- -- -- --
Distribution of HealthWise of
America, Inc. Common Stock -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1993 38,259,336 9,564,834 78,262,327
Issuance of Common Stock 851,286 212,822 12,897,553
Treasury Stock Acquired -- -- 472,400 (6,114,778) --
Dividends Paid ($.16 per share) -- -- -- -- --
Net Income -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1994 39,110,622 $9,777,656 472,400 $(6,114,778) $91,159,880
=============================================================================================================
<CAPTION>
Retained
Earnings Total
- ---------------------------------------------------------------------------
<S> <C> <C>
BALANCE AT
JANUARY 1, 1992 $ 37,714,774 $ 88,501,531
Issuance of Common Stock -- 22,772,434
Tax Benefits of Stock
Options Exercised -- 1,502,181
Dividends Paid ($.147 per share) (5,347,452) (5,347,452)
Net Income 28,839,077 28,839,077
- ---------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1992 61,206,399 136,267,771
Issuance of Common Stock -- 12,765,789
Dividends Paid ($.16 per share) (6,033,085) (6,033,085)
Net Income 36,667,417 36,667,417
Distribution of HealthWise of
America, Inc. Common Stock (13,084,634) (13,084,634)
- ---------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1993 78,756,097 166,583,258
Issuance of Common Stock -- 13,110,375
Treasury Stock Acquired -- (6,114,778)
Dividends Paid ($.16 per share) (6,236,555) (6,236,555)
Net Income 29,280,209 29,280,209
- ---------------------------------------------------------------------------
BALANCE AT
DECEMBER 31,1994 $101,799,751 $196,622,509
===========================================================================
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements
8
<PAGE>
CONSOLIDATED STATEMENTS
OF CASH FLOWS
For the Years Ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 29,280,209 $ 36,667,417 $ 28,839,077
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Net Income from Discontinued Operations -- (4,451,722) (3,282,963)
Cumulative Effect of Change in Accounting Principle 2,105,155 -- --
Depreciation and Amortization 17,391,605 12,626,397 9,695,104
Provisions for Losses on Accounts Receivable 3,060,679 1,067,775 1,441,862
Minority Interests in Earnings of Partnerships 22,420,156 22,624,464 21,481,467
Loss on Disposal of Surgery Centers 13,197,000 -- --
Deferred Income Taxes (13,386,025) 5,777,179 2,194,526
Changes in Assets and Liabilities
Net of Effect of Acquisitions:
Increase in Accounts Receivable (7,788,110) (5,069,407) (7,405,327)
Decrease (Increase) in Other Receivables 4,698,222 (4,424,541) 82,736
Increase in Supplies (33,098) (445,904) (510,196)
(Increase) Decrease in Prepaid Expenses and Other Assets (282,204) 156,063 (351,275)
Increase in Deferred Development Costs & Other Assets (4,269,428) (2,562,462) (703,830)
Increase in Excess of Cost over Fair Value of Net
Assets Acquired (4,136,343) (5,211,849) (12,547,271)
Increase in Accounts Payable - Trade 158,337 159,735 818,008
Increase (Decrease) in Accrued Liabilities 6,943,302 (671,899) 758,312
Increase (Decrease) in Income Taxes Payable 14,730,916 1,397,293 (2,547,583)
- -----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 84,090,373 57,638,539 37,962,647
- -----------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Decrease (Increase) in Temporary Investments 5,285,783 (3,983,754) 26,771,184
Decrease (Increase) in Marketable Securities 13,065,868 (13,360,507) --
Capital Expenditures (30,061,584) (42,171,282) (21,860,939)
Acquisitions, less Cash Acquired of $550,213 in 1994,
$306,124 in 1993, $208,531 in 1992 (16,568,406) (6,685,491) (11,560,035)
- -----------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (28,278,339) (66,201,034) (6,649,790)
- -----------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net (Payments) Borrowings Under Line-of-Credit Agreement (15,102,662) 8,418,324 5,187,649
Payments on Long-Term Obligations (9,485,194) (6,182,964) (12,201,505)
Proceeds from Long-Term Obligations 8,008,063 24,078,532 4,435,000
Proceeds from Issuance of Common Stock 1,381,244 2,691,311 2,458,680
Acquisition of Common Stock for the Treasury (6,114,778) -- --
Dividends Paid (6,236,555) (6,033,085) (5,347,452)
Distributions to Minority Interests (20,047,393) (20,224,061) (15,373,714)
(Decrease) Increase in Distributable to Minority Interests (261,219) 21,391 2,236,856
(Decrease) Increase in Minority Interests (607,763) 4,511,734 (1,502,504)
- -----------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities (48,466,257) 7,281,182 (20,106,990)
- -----------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash & Cash Equivalents 7,345,777 (1,281,313) 11,205,867
Cash & Cash Equivalents at Beginning of Year 23,877,186 25,158,499 13,952,632
- -----------------------------------------------------------------------------------------------------------------
Cash & Cash Equivalents at End of Year $ 31,222,963 $ 23,877,186 $ 25,158,499
=================================================================================================================
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
9
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
For the Years Ended December 31, 1994, 1993 and 1992
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Surgical Care Affiliates, Inc. (the "Company") was organized in 1982 to
develop, own and operate outpatient health care facilities. Each facility is
operated as a general or limited partnership with a subsidiary of the Company
being a general partner with a controlling interest or a corporation with the
Company being the majority shareholder.
The Company currently owns interests in 65 surgery centers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries and majority-owned or controlled
partnerships. All significant inter-company accounts and transactions have been
eliminated, and minority interests are reflected in consolidation.
NET REVENUE
Net revenue consists of charges by the Company's centers which
generally include all fees for laboratory tests, operating room, supplies,
medication and recovery room. Net revenue also includes anesthesia charges from
certain of the Company's centers and other miscellaneous operating revenues. Net
revenue does not include the charges for the patient's physician as those fees
are billed directly by the physician. Net revenue is net of contractual
adjustments of $216,275,846 in 1994, $82,021,162 in 1993, and $56,383,247 in
1992.
TEMPORARY INVESTMENTS
The Company has a cash management program which provides for the
investment of excess cash balances in short-term investments which include
commercial paper, certificates of deposit and non-equity type investments.
Short-term investments of $5,285,783 in 1993 are stated at cost, which
approximates market.
MARKETABLE SECURITIES
Marketable securities are carried at the lower of aggregate cost or
market value. As of December 31,1994, these securities consisted of $294,639 of
corporate notes, at cost, which approximates market. As of December 31,1993,
these securities consisted of $13,360,507 of common stock, at cost. Unrealized
gains at December 31,1993 were $4,436,243.
The Company adopted the provisions of Financial Accounting Standard No.
115 "Accounting for Certain Investments in Debt and Equity Securities" as of
January 1,1994. Accordingly, marketable securities were reported at fair value
with unrealized gains/losses being reported as a separate component of
shareholders' equity, net of income tax effects at that date. During 1994, the
marketable securities were sold and the resulting gain was recognized in the
statement of income.
SUPPLIES
Supplies (principally medical) are stated at the lower of cost
(first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment obtained through acquisitions are stated at
their fair value determined on the dates of acquisition. Property and equipment
under capital leases are recorded at the lower of the present value of the
minimum lease payments or the fair vaiue of the leased property.
Depreciation is computed using the straight-line method over the
estimated useful lives or the terms of the leases of the related assets. The
general range of estimated useful lives is as follows:
<TABLE>
<S> <C>
Buildings ................................... 25 to 30 years
Equipment, Furniture and Fixtures ........... 8 to 10 years
</TABLE>
10
<PAGE>
When assets are sold or retired, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
included in the statement of income.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
Excess of cost over fair value of net assets acquired is amortized over
40 years using the straight-line method.
The Company periodically assesses the recoverability of intangibles and
other long-lived assets using undiscounted cash flows anticipated to be received
over the estimated life of the related assets.
DEVELOPMENT AND PRE-OPENING COSTS
As discussed in Note 7, effective at the beginning of fiscal 1994 the
Company changed its accounting policy for development and pre-opening costs
associated with preparing facilities for operations. Such costs are now expensed
as incurred. Prior to the change, such costs were capitalized and amortized over
an estimated useful life.
PER SHARE DATA
Per share data has been computed on the basis of the weighted average
number of shares outstanding, including common stock equivalents. Common stock
equivalents consist of stock options and warrants. In determining the number of
dilutive common stock equivalents, the Company includes average common shares
attributable to dilutive stock options and warrants using the treasury stock
method. Fully diluted earnings per share is not presented since it approximates
earnings per common and common equivalent share.
CASH FLOW REPORTING
For purposes of the statements of cash flows, the Company considers all
certificates of deposits and highly liquid marketable securities with an
original maturity of three months or less to be cash equivalents.
ACCOUNTING ESTIMATES
Accounting estimates are an integral part of the consolidated financial
statements prepared by management and are based on management's current
judgments. These judgments are based on knowledge and experience about past and
current events and on assumptions about future events. During 1993 management
determined, based on subsequent experience, that estimates of certain reserves
provided in previous years were in excess of amounts actually required which
resulted in an increase to net income from continuing operations of
approximately $1,900,000 or $.05 per share for the year ending December 31,1993.
MANAGEMENT FEES
The Company charges the operating centers a management fee based on
gross or net revenues of the centers. These fees are to cover administrative,
accounting, purchasing, marketing and other support costs incurred by the
Company. These management fees are eliminated in the consolidated financial
statements except for the share allocated to minority interests.
11
<PAGE>
INCOME TAXES
In fiscal 1992, income taxes were accounted for in accordance with
Financial Accounting Standard No. 96. Effective the first day of fiscal 1993,
the Company implemented Statement of Financial Accounting Standard ("SFAS") No.
109, "Accounting for Income Taxes." Under SFAS 109, the asset and liability
method is used for computing future tax consequences of events which have been
recognized in the Company's financial statements or tax returns. Deferred tax
expense or benefit is the change during the year in the Company's deferred tax
assets and liabilities. The effect of adoption of SFAS 109 in 1993 was not
material to the Company's financial statements.
RECLASSIFICATIONS:
Reclassifications of certain prior year amounts have been made to
conform to the 1994 presentation of accounts.
(2) SHAREHOLDERS' EQUITY:
STOCK OPTIONS
The Company has stock option plans which provide for the issuance of
common stock to key employees of the Company. Under the plans, the option price
per share for incentive stock options must be equal to or greater than the fair
value of the common stock at the date of grant. Options granted under the plans
are not exercisable until two years after the date of the grant and become
exercisable to the extent of 33% per year thereafter. The options expire five
years from the date of the grant.
A summary of transactions during 1994, 1993 and 1992 under the option
plans is as follows:
<TABLE>
<CAPTION>
Number Option Price
of Shares Per Share
- --------------------------------------------------------------------------
<S> <C> <C>
Outstanding at January 1, 1992 1,781,153 $ 1.00 to $37.75
Granted 301,500 $21.38 to $40.50
Exercised (577,554) $ 1.00 to $12.33
Cancelled (197,549) $ 2.28 to $37.00
- --------------------------------------------------------------------------
Outstanding at December 31, 1992 1,307,550 $ 2.28 to $40.50
Granted 589,128 $11.70 to $22.05
Exercised (408,125) $ 2.28 to $18.00
Cancelled (207,500) $ 5.92 to $37.00
- --------------------------------------------------------------------------
Outstanding at December 31, 1993 1,281,053 $ 1.94 to $31.53
Granted 397,700 $12.38 to $19.00
Exercised (194,505) $ 1.94 to $10.50
Cancelled (62,437) $10.50 to $31.53
- --------------------------------------------------------------------------
Outstanding at December 31, 1994 1,421,811 $ 5.04 to $31.50
==========================================================================
</TABLE>
At December 31,1994, options for 242,711 shares were exercisable.
WARRANTS
The Board of Directors has authorized the Company to issue warrants for
the purchase of common stock. The warrants expire from 3 to 10 years after
issuance and may be exercised at purchase prices not less than the fair market
value of the Company's common stock on the date the warrants are issued.
Warrants for 229,192 shares of common stock at prices ranging from $2.91 to
$38.31 have been issued through December 31, 1994.
At December 31, 1994, warrants for 59,601 shares were exercisable.
12
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN
The Company has reserved common stock for the Employee Stock Purchase
Plan which allows participating employees to contribute up to 10% of their
compensation for the purchase of stock. At the end of each Plan Year, the
Company will issue the stock to participating employees at an issue price equal
to 85% of the lower of the stock price at the beginning of the Plan Year or the
stock price at the end of the Plan Year, as defined. Employee contributions
totaling $576,323 were made to the Plan during 1994, which resulted in the
issuance in January 1995 of 43,985 shares of stock for the 1994 Plan Year.
COMMON STOCK
As of December 31,1994, the Company had reserved common shares as
follows:
<TABLE>
<S> <C>
Stock Option Plans 1,819,825
Warrants 677,449
Employee Stock Purchase Plan 239,586
- ------------------------------------------------------------------------
Total Reserved Common Shares 2,736,860
========================================================================
</TABLE>
During 1993, the limited partners of one of the Company's limited
partnerships exchanged one-fourth of their partnership units for 124,444 shares
of the Company's common stock under terms set forth in the partnership
agreement. At December 31, 1994 and 1993, there were no shares of common stock
subject to exchange for partnership units.
During 1992, certain employees of the Company exercised nonqualified
stock options which entitles the Company to a deduction for income tax purposes
of the difference between the market price and exercise price at the date of
exercise of the option by an employee. The Company recorded $1,502,181 in 1992
of additional paid-in capital to reflect the tax benefit obtained by the Company
as a result of the exercise of the options.
(3) LONG-TERM DEBT AND LEASE COMMITMENTS:
NOTES PAYABLE AND OTHER LONG-TERM DEBT
The Company has unsecured revolving credit loan agreements with two
banks which total $36,000,000. The revolving credit loan agreements expire on
various dates over the next two years. At December 31,1994 and 1993 the Company
had $6,000,OO0 and $21,102,662, respectively, in borrowings outstanding under
the loan agreements. The credit facilities bear interest at the Company's choice
of (1) the institutions' base rate, as defined by the agreement or (2) the
London Interbank Offered Rate (LIBOR).
The Company and certain of its operating partnerships have notes
payable to lending institutions totalling $44,788,466 and $41,123,701 as of
December 31,1994 and 1993, respectively. The notes are primarily at variable
rates ranging from 5.95% to 11.75% at December 31,1994. At December 31,1994 and
1993, approximately $62,246,000 and $51,721,O00, respectively, of the Company's
property and equipment is pledged as security on these notes.
Certain of the debt agreements require the Company to (a) maintain
certain net worth, debt to net worth ratio, debt service coverage ratio, and
current ratio requirements, (b) meet certain profitability requirements and (c)
limit the payments of cash dividends and the terms of additional borrowings. At
December 31, 1994, all such requirements and covenants were met.
13
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
LEASES
The Company leases its principal executive offices, operating
facilities and various equipment under both capital and operating leases.
As of December 31, 1994, $23,863,454 of the Company's property and
equipment is under capital lease obligations with related limited partnerships.
The related accumulated amortization for these assets is $11,543,295 at December
31, 1994. Interest rates on the capital lease obligations range from 4.20% to
10.35%.
Substantially all related property and equipment is pledged as security
under the noncancelable lease agreements with the limited partnerships.
Rent expense under the operating leases for the three years ended
December 31, 1994, 1993 and 1992, was $5,269,478, $4,382,581 and $3,257,426,
respectively.
Future minimum payments under capital leases, other long-term debt and
noncancelable operating leases are as follows as of December 31, 1994:
<TABLE>
<CAPTION>
Capital Other Long- Operating
Leases Term Debt Leases
- -----------------------------------------------------------------
<S> <C> <C> <C>
Year Ending December 31:
1995 $ 2,242,237 $12,148,347 $ 4,472,201
1996 3,176,786 16,059,606 4,378,453
1997 2,317,545 6,144,607 3,913,502
1998 843,562 11,784,890 3,249,362
1999 753,645 10,551,337 3,013,853
Thereafter 2,262,112 5,794,261 18,058,494
- -----------------------------------------------------------------
Total Minimum Payments 11,595,887 62,483,048 $37,085,865
Less Amount
Representing Interest 2,548,206 11,694,582
- -----------------------------------------------------------------
Present Value of
Obligations 9,047,681 50,788,466
Less Current Portion 1,599,920 8,519,242
- -----------------------------------------------------------------
Long-Term Obligations $ 7,447,761 $42,269,224
=================================================================
</TABLE>
(4) RELATED PARTY TRANSACTIONS:
The Company leases certain of its operating facilities and various
equipment and land under long-term noncancelable lease arrangements from
partnerships, of which the Company is a general partner, and from other related
parties. As of December 31, 1994, all $11,595,887 of total minimum lease
payments under capital leases are payable to these related parties. In addition
$13,677,725 of total minimum payments for operating leases is payable to these
related parties. Capital and operating lease payments made to these related
parties during the years ended December 31, 1994, 1993 and 1992 were $5,145,967,
$5,071,129 and $4,860,528, respectively.
14
<PAGE>
(5) INCOME TAXES:
The Company adopted SFAS 109, "Accounting for Income Taxes," effective
the first day of fiscal 1993. The effect of this change was not material to the
Company's financial statements. There was also no material impact to the
deferred tax liability resulting from the statutory federal income tax rate
increase enacted by the Omnibus Budget Reconciliation Act of 1993.
The provision for income taxes net of the $1,403,437 benefit from
cumulative effect of change in accounting principle consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable $31,520,464 $14,872,993 $13,468,899
- ----------------------------------------------------------------------------
Deferred (7,884,325) 5,777,179 2,194,526
- ----------------------------------------------------------------------------
Total $23,636,139 $20,650,172 $15,663,425
============================================================================
</TABLE>
Deferred tax assets (liabilities) at December 31, 1994 are comprised of the
following:
<TABLE>
<CAPTION>
1994 1993
- ----------------------------------------------------------------------
<S> <C> <C>
Financial accruals without
economic performance $ 9,260,259 $ 708,911
- ----------------------------------------------------------------------
Depreciation and amortization (3,845,939) (8,680,616)
- ----------------------------------------------------------------------
Net deferred tax asset (liability) $ 5,414,320 $(7,971,705)
======================================================================
</TABLE>
A reconciliation of the provision for income taxes on income from
continuing operations to the federal statutory rate (35% in 1994 and 1993 and
34% in 1992) is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Federal Statutory Rate 35% 35% 34%
- ---------------------------------------------------------------------
State Income Taxes, net
of Federal Tax Benefit 4% 4% 4%
- ---------------------------------------------------------------------
Non-Deductible Expenses
and Other 5% -- --
- ---------------------------------------------------------------------
Effective Tax Rate 44% 39% 38%
=====================================================================
</TABLE>
15
<PAGE>
(6) ACQUISITIONS:
During 1994, the Company acquired a majority equity interest in five
outpatient surgery centers. The acquisitions were accounted for as purchases,
and the accompanying financial statements include the results of the surgical
centers' operations from the dates of their respective acquisitions.
The purchase price allocated to the assets and liabilities acquired was
based on their fair value. Allocation of the purchase price for the acquisitions
is summarized below:
<TABLE>
<CAPTION>
1994
- ----------------------------------------------------------------------
<S> <C>
Working Capital $ 1,526,385
Property and Equipment 6,996,524
Other Assets 64,796
Excess of Cost Over Fair Value
of Net Assets Acquired 22,296,063
Minority Interests (876,808)
Long-Term Debt and Capital Lease Obligations (3,498,191)
- ----------------------------------------------------------------------
Total Purchase Price, Net $ 26,508,769
======================================================================
</TABLE>
The total net purchase price of $26,508,769 is comprised of net cash
paid of $17,118,619 and issuance of common stock of $9,390,150.
The unaudited consolidated pro forma results of operations assuming all
purchase acquisitions had been consummated as of January 1, 1993, are as
follows:
<TABLE>
<CAPTION>
1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C>
Net Revenue $238,888,356 $ 209,602,064
Net Income $ 29,588,922 $ 34,096,206
Earnings Per Common and
Common Equivalent Share $ .76 $ .89
</TABLE>
(7) CHANGE IN ACCOUNTING FOR DEVELOPMENT AND PRE-OPENING COSTS:
Prior to 1994, deferred development costs included costs associated
with obtaining certificates of need and costs associated with preparing
facilities for operations. Once a facility became operational, the costs of
obtaining a certificate of need were amortized on a straight-line basis over the
life of the building, if owned, or the term of the building lease. Other
pre-opening costs were amortized on a straight-line basis over two years.
During the year ended December 31, 1994, the Company changed its
accounting policy for development and pre-opening costs. As a result of the
change, which has been recorded as if it occurred at the beginning of 1994, the
Company will expense deferred development and pre-opening costs as incurred
rather than continue to capitalize such costs and amortize them over an
estimated useful life. Management believes the change is preferable as the new
policy will more accurately match the benefits received from opening a new
facility with the related costs.
16
<PAGE>
The change in accounting for deferred development and pre-opening costs
did not have a material impact on the Company's net income from continuing
operations for the year ended December 31, 1994. The Company's net income was
decreased by $2,105,155 ($.05 per share) by the cumulative effect of the change
in accounting principle related to years prior to 1994.
(8) LIABILITY INSURANCE:
The Company carries professional malpractice and general liability
insurance for all of its facilities. The policy is carried on a claims made
basis. The Company has policies and procedures in place to track and monitor
incidents of significance. Additionally, the Company maintains an umbrella
liability insurance policy.
(9) SELECTED QUARTERLY DATA (UNAUDITED):
Summarized quarterly financial data for 1994 and 1993 is shown below.
<TABLE>
<CAPTION>
1ST OUARTER 2ND QUARTER 3RD OUARTER 4TH OUARTER
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Net Revenue $ 52,148,320 $ 58,522,606 $ 59,302,163 $66,746,337
Operating Income $ 19,125,632 $ 23,393,230 $ 24,074,613 $13,098,026
Net Income:
Before Cumulative
Effect of Change
in Accounting
Principle $ 8,079,175 $ 9,633,105 $ 11,148,068 $ 2,525,016
Cumulative Effect
of Change
Accounting
Principle $ (2,105,155) -- -- --
Net Income: $ 5,974,020 $ 9,633,105 $ 11,148,068 $ 2,525,016
Income Per Share:
Before Cumulative
Effect of Change
in Accounting
Principle $ .21 $ .25 $ .29 $ .06
Cumulative Effect
of Change
Accounting
Principle $ (.05) -- -- --
Net Income: $ .16 $ .25 $ .29 $ .06
<CAPTION>
1ST OUARTER 2ND OUARTER 3RD OUARTER 4TH OUARTER
- -------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1993
<S> <C> <C> <C> <C>
Net Revenue $45,678,153 $48,644,456 $48,921,974 $54,731,596
Operating Income $18,305,462 $19,938,564 $20,068,487 $22,144,679
Net Income:
Continuing
Operations $ 7,631,902 $ 7,749,536 $ 8,166,849 $ 8,667,408
Discontinued
Operations $ 895,970 $ 1,408,514 $ 1,303,082 $ 844,156
Net Income: $ 8,527,872 $ 9,158,050 $ 9,469,931 $ 9,511,564
Income Per Share:
Continuing
Operations $ .20 $ .20 $ .22 $ .23
Discontinued
Operations $ .03 $ .04 $ .03 $ .01
Net Income: $ .23 $ .24 $ .25 $ 24
</TABLE>
17
<PAGE>
The above quarterly financial data for the year ended December 31,1994
has been restated to reflect the cumulative effect of the change in accounting
for deferred development and pre-opening costs as of January 1,1994. The effect
of this change on net income was not material for the year ended December
31,1994.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following disclosure of estimated fair value of financial
instruments as of December 31,1994 is made in accordance with the Statement of
Financial Accounting Standard No. 107, "Disclosures about Fair Value of
Financial Instruments". The estimates presented are not necessarily indicative
of amounts the Company could realize in a current market exchange.
<TABLE>
<CAPTION>
DECEMBER 31, 1994
- ----------------------------------------------------------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
- ----------------------------------------------------------------------
<S> <C> <C>
Assets:
Marketable Securities $ 294,639 $ 294,639
Liabilities:
Notes Payable and
other Long-Term Debt $ 50,788,466 $ 50,788,466
<CAPTION>
DECEMBER 31, 1993
- ----------------------------------------------------------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
- ----------------------------------------------------------------------
<S> <C> <C>
Assets:
Temporary Investments $ 5,285,783 $ 5,285,783
Marketable Securities $ 13,360,507 $ 17,796,750
Liabilities:
Notes Payable and
other Long-Term Debt $ 62,226,363 $ 62,226,363
</TABLE>
Temporary Investments:
The carrying amounts of the temporary investments are a reasonable
estimate of their fair value due to their short-term maturity.
Marketable Securities:
Fair value of marketable securities was determined based on quoted
market prices listed on the New York Stock Exchange.
Notes Payable and Other Long-Term Debt:
The carrying amounts of the Company's debt instruments approximate fair
value due to these instruments being substantially of a variable rate nature.
18
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(11) SUPPLEMENTAL CASH FLOW INFORMATION:
The Company paid interest on Long-Term Debt Obligations of $5,097,399,
$3,923,751 and $3,388,640 for the three years ended December 31, 1994, 1993 and
1992, respectively.
The Company paid federal and state income taxes of approximately
$23,395,000, $15,752,000 and $13,016,000 for the three years ended December 31,
1994, 1993 and 1992, respectively.
(12) LOSS ON DISPOSAL OF SURGERY CENTERS
During the fourth quarter of 1994, the Company adopted a formal plan to
dispose of three surgery centers and certain other properties during fiscal
1995. Accordingly, a charge of $13,197,000 was made to reflect the expected
losses resulting from the disposal of these centers. The charge is comprised
primarily of losses on the sale of owned facilities and equipment, write-off of
intangible and other assets, and accrual of future operating lease obligations
and estimated operating losses through the anticipated date of disposal.
The following are the major components of the restructuring charge:
<TABLE>
<S> <C>
Write down of land, buildings
and equipment .................................... $ 4,806,000
Write off of goodwill and other assels ............ 2,762,000
Estimated operating losses through
anticipated date of disposal...................... 1,750,000
Accrual of future lease commitments
and other obligations resulting from disposal .... 3,879,000
- -----------------------------------------------------------------
$13,197,000
=================================================================
</TABLE>
Management anticipates the disposal of these operations will be
completed by June 30, 1995. An accrual of $5,629,000 is reflected on the
December 31, 1994 consolidated balance sheet for the remaining costs to be
incurred relative to this disposal.
(13) SPIN-OFF OF HMO SUBSIDIARY
Effective December 1, 1993, the Company spun off the net assets of its
HMO subsidiary, HealthWise of America, Inc. The spin-off was accomplished by a
tax-free distribution of one HealthWise common share for every ten shares of the
Company's common stock. The distribution is reflected as a charge to retained
earnings of the Company for the year ended December 31, 1993. The operating
results of HealthWise have been classified as discontinued operations on the
accompanying consolidated statements of income. The net assets of the entity at
December 31, 1992, have also been reported separately in the consolidated
balance sheet.
Included in other receivables on the accompanying December 31, 1993
balance sheet is approximately $3,700,000 which represents amounts due the
Company from HealthWise primarily for partnership distributions and income
taxes. This amount was repaid to the Company during 1994. In connection with the
spin-off, the Company has entered into the following agreements with HealthWise:
1) a tax matters agreement that specifies the responsibility of the Company and
HealthWise for the tax liabilities before and after the spin-off and 2) a shared
service and employee benefit agreement whereby HealthWise may acquire certain
administrative and employee services and employee benefit services from the
Company subsequent to the spin-off.
Operating results of discontinued operations are summarized as follows
(1993 information is for the eleven months ended November 30, 1993):
<TABLE>
<CAPTION>
1993 1992
- ---------------------------------------------------------------------
<S> <C> <C>
Net revenues $ 110,275,961 $ 64,842,932
- ---------------------------------------------------------------------
Income before
income taxes $ 7,295,639 $ 5,295,101
Income taxes (2,843,917) (2,012,138)
- ---------------------------------------------------------------------
Net income $ 4,451,722 $ 3,282,963
=====================================================================
</TABLE>
19
<PAGE>
SURGICAL CARE AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $39,046,955 $31,222,963
Marketable securities 294,639 294,639
Accounts receivable, less allowance
for doubtful accounts of
$4,543,380 in 1995 and $4,160,260
in 1994 30,763,766 34,801,079
Other receivables 586,482 701,965
Supplies 5,159,252 4,562,518
Prepaid expenses and other current assets 1,277,301 742,911
Deferred income taxes 9,260,259 9,260,259
----------- -----------
Total current assets 86,388,654 81,586,334
----------- -----------
Property & equipment, including leased properties:
Land & improvements 33,524,724 31,972,686
Building 71,424,899 66,289,162
Equipment, furniture and fixtures 116,851,338 106,690,800
Construction in progress 4,884,351 1,998,495
----------- -----------
226,685,312 206,951,143
Less: accumulated depreciation
and amortization (68,184,276) (57,969,075)
----------- -----------
Net property & equipment 158,501,036 148,982,068
Other assets:
Excess of cost over fair value of
net assets acquired 124,270,083 109,149,364
Other assets 2,262,218 625,828
----------- -----------
$371,421,991 $340,343,594
=========== ===========
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
20
<PAGE>
SURGICAL CARE AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------ -----------
<S> <C> <C>
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $4,441,146 $5,889,642
Accrued liabilities 10,529,175 15,658,612
Accrued loss on disposal of
surgery centers 741,203 5,629,000
Current portion of long-term obligations
and notes payable 728,944 10,119,162
Income taxes payable 20,381,893 14,737,873
Distributable to minority interests 7,000,000 4,500,000
----------- -----------
Total current liabilities 43,822,361 56,534,289
Long-term obligations:
Notes payable & other long-term debt 61,062,400 42,269,224
Capital lease obligations - related parties 4,056,891 7,447,761
----------- -----------
Total long-term obligations 65,119,291 49,716,985
----------- -----------
Deferred income taxes 3,845,939 3,845,939
----------- -----------
Minority interests 29,404,481 33,623,872
----------- -----------
Shareholders' equity:
Common stock, par value $.25, 100,000,000
shares authorized, 39,466,292 and 39,110,622
shares issued, and 38,993,892 and 38,638,222
shares outstanding in 1995 and 1994,
respectively 9,866,573 9,777,656
Treasury stock at cost,472,400 shares
in 1995 and 1994, respectively (6,051,243) (6,114,778)
Additional paid in capital 96,126,266 91,159,880
Retained earnings 129,288,323 101,799,751
----------- -----------
Total shareholders' equity 229,229,919 196,622,509
----------- -----------
$371,421,991 $340,343,594
=========== ===========
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
21
<PAGE>
SURGICAL CARE AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenue $65,469,990 $59,302,163 $196,258,237 $169,973,089
Operating costs:
Costs of providing healthcare services (34,754,319) (29,986,803) (102,383,545) (88,794,012)
Depreciation and amortization (3,972,284) (4,446,112) (12,639,940) (12,506,181)
Provision for doubtful accounts (704,207) (794,635) (2,381,398) (2,079,421)
------------ ------------ ------------ ------------
Operating income 26,039,180 24,074,613 78,853,354 66,593,475
General, administrative and development expenses (1,168,457) (1,376,797) (4,235,644) (4,060,867)
Interest and other expenses (1,108,596) (1,514,514) (3,413,039) (6,025,157)
Interest and other income 950,932 1,168,559 2,411,483 2,698,957
Gain on sale of MCA stock 0 1,720,058 0 6,881,869
------------ ------------ ------------ ------------
Income before minority interests and income taxes 24,713,059 24,071,919 73,616,154 66,088,277
Minority interests in (earnings) of partnerships (6,562,206) (5,491,805) (19,216,667) (15,144,364)
------------ ------------ ------------ ------------
Income before income taxes and cumulative effect
of change in accounting principle 18,150,853 18,580,114 54,399,487 50,943,913
Income tax provision (6,897,324) (7,432,046) (21,396,778) (22,083,565)
------------ ------------ ------------ ------------
Income before cumulative effect of change in
accounting principle 11,253,529 11,148,068 33,002,709 28,860,348
Cumulative effect of change in accounting principle 0 0 0 (2,105,155)
------------ ------------ ------------ ------------
Net income $11,253,529 $11,148,068 $33,002,709 $26,755,193
============ ============ ============ ============
Net Income Per Common & Common Equivalent Share
Before cumulative effect of change in
accounting principle $0.29 $0.29 $0.84 $0.74
Cumulative effect of change in accounting principle 0.00 0.00 0.00 (0.05)
------------ ------------ ------------ ------------
$0.29 $0.29 $0.84 $0.69
============ ============ ============ ============
Weighted average number of common and common
equivalent shares outstanding 39,251,597 38,758,751 39,189,129 38,858,864
============ ============ ============ ============
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
22
<PAGE>
SURGICAL CARE AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $33,002,709 $26,755,193
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Cumulative Effect of Change in Accounting Principle 0 2,105,155
Depreciation and Amortization 12,639,940 12,506,181
Provisions for Losses on Accounts Receivable 2,381,398 2,079,421
Minority Interests in Earnings of Partnerships 19,216,667 15,144,364
Deferred Income Taxes 0 858,127
Changes in Assets and Liabilities
Net of Effect of Acquisitions:
Decrease (Increase) in Accounts Receivable 3,817,873 (168,868)
Decrease in Other Receivables 276,537 3,927,226
Increase in Supplies (13,974) (143.331)
Decrease (Increase) in Prepaid Expenses and Other
Current Assets 78,058 (524,308)
Increase in Other Assets (1,636,390) (259,219)
Increase in Excess of Cost over Fair Value of
Net Assets Acquired (2,128,031) (4,446,279)
(Decrease) Increase in Accounts Payable - Trade (1,561.001) 515,943
Decrease in Accrued Liabilities (7,830,821) (668,556)
Decrease in Accrued Loss on Disposal of Surgery Centers(4,887,797) 0
Increase in Income Taxes Payable 5,644,020 5,702,657
------------ ------------
Net Cash Provided by Operating Activities 58,999,188 63,383,706
Cash Flows From Investing Activities:
Decrease in Temporary Investments 0 31,108
Decrease in Marketable Securities 0 12,277,975
Capital Expenditures (13,181,880) (24,628,654)
Acquisitions less Cash Acquired of $450,000 in 1995,
$550,213 in 1994 (16,981,251) (16,568,406)
------------ ------------
Net Cash Used in Investing Activities (30,163,131) (28,887,977)
------------ ------------
Cash Flows From Financing Activities:
Net Borrowings Under Line-of-Credit Agreement 59,398,986 (4,302,662)
Payments on Long-Term Obligations (54,606,753) (5,402,249)
Proceeds From Long-Term Obligations 0 5,446,163
Proceeds From Issuance of Common Stock 961,775 1,327,141
Dividends on (Acquisition of) Common Stock for the
Treasury 63,535 (6,134,753)
Dividends Paid (5,514,138) (4,674,014)
Distributions to Minority Interests (20,990,773) (14,183,515)
Increase (Decrease) in Distributable to Minority
Interests 2,500,000 (261,219)
Decrease in Minority Interests (2,824,697) (3,044,298)
------------ ------------
Net Cash Used in Financing Activities (21,012,065) (31,299,406)
------------ ------------
Net Increase in Cash & Cash Equivalents 7,823,992 3,266,323
Cash & Cash Equivalents at Beginning of Period 31,222,963 23,877,186
------------ ------------
Cash & Cash Equivalents at End of Period $39,046,955 $27,143,509
------------ ------------
For purposes of the statements of cash flows, the Company considers
all certificates of deposits and highly liquid marketable securities with a
maturity of three months or less to be cash equivalents.
Cash & Cash Equivalents at End of Period $39,046,955 $27,143,509
Temporary Investments 0 5,254,675
------------ ------------
Cash and Temporary Investments $39,046,955 $32,398,184
============ ============
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
23
<PAGE>
SURGICAL CARE AFFILIATES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Financial Statements
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Rule 10-01 of Regulation S-X, "Interim Financial
Statements," and do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. The
financial statements have been prepared in conformity with accounting principles
and practices (including consolidation practices) reflected in the Company's
Annual Report on Form 10-K for the year ended December 31, 1994, and in the
opinion of management, include all adjustments (consisting only of normal
recurring adjustments), necessary for a fair presentation of the Company's
financial position as of September 30, 1995, and results of its operations and
cash flows for the three months and nine months ended September 30, 1995 and
1994. The results of operations for the nine months ended September 30, 1995 are
not necessarily indicative of the results that can be expected for the year
ending December 31, 1995. All significant intercompany balances and transactions
have been eliminated in the consolidated financial statements. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
Note 2 - Reclassifications
Reclassifications of certain amounts in the 1994 consolidated financial
statements have been made to conform to the 1995 presentation of accounts.
Note 3 - Subsequent Event
On October 9, 1995, the Company entered into a definitive agreement to
be acquired by HEALTHSOUTH Corporation in a stock-for- stock exchange. Under the
terms of the merger agreement, each share of the Company's stock will be
exchanged for 1.22 shares of HEALTHSOUTH. If HEALTHSOUTH's stock price during a
20 trading day period ending 2 days prior to closing rises above $28 or declines
to below $22, the exchange ratio is subject to change. The transaction will be
accounted for as a pooling of interests and is expected to be tax-free to the
Company's shareholders. The merger is subject to approval by both Company's
shareholders and certain regulatory authorities and is expected to close in
early 1996.
24
<PAGE>
PRO FORMA CONDENSED FINANCIAL INFORMATION
The following pro forma condensed financial information and explanatory
notes are presented to reflect the effect of the Merger of SCA with the
Subsidiary on the historical financial statements of HEALTHSOUTH and SCA. 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, ReLife, Inc. ("ReLife") and Surgical Health Corporation ("SHC")
for all periods presented, as HEALTHSOUTH acquired ReLife in December 1994 and
SHC in June 1995 in transactions accounted for as poolings of interests.
The pro forma condensed financial information also reflects the
acquisition by HEALTHSOUTH of Sutter Surgery Centers, Inc. ("SSCI") for all
periods presented. HEALTHSOUTH acquired SSCI in October 1995 in a transaction
that will be accounted for as a pooling of interests. SSCI operates 12 surgery
centers.
In addition, the pro forma condensed financial information reflects the
impact of HEALTHSOUTH's acquisition, effective April 1, 1995, from NovaCare,
Inc. ("NovaCare") of 11 rehabilitation hospitals, 12 other facilities and two
Certificates of Need (the "NovaCare Rehabilitation Hospitals Acquisition") on
the results of operations for the year ended December 31, 1994 and the nine
months ended September 30, 1995.
The pro forma condensed balance sheet assumes that the Merger was
consummated on September 30, 1995, and the pro forma condensed income statements
assume that the 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 and SCA and the related notes
thereto appearing elsewhere in this Prospectus-Joint Proxy Statement. 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 been consummated at the date
indicated, nor is it necessarily indicative of the results of operations of
future periods or future combined financial position.
25
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Balance Sheet (Unaudited)
September 30, 1995
<TABLE>
<CAPTION>
Pro Forma Pro Forma Pro Forma
HEALTHSOUTH SSCI Adjustments SCA Adjustments Combined
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets: ................................
Cash and cash equivalents..................... $ 86,952 $ 5,024 $ 0 $ 39,047 $ 0 $ 131,023
Other marketable securities .................. 6,217 0 0 295 0 6,512
Accounts receivable........................... 298,178 4,047 0 30,764 0 332,989
Other receivables ............................ 0 0 0 587 (587)(3) 0
Supplies ..................................... 0 0 0 5,159 (5,159)(3) 0
Inventories, prepaid expenses and other
current assets............................... 102,906 2,714 0 1,277 15,006 (3) 121,903
Deferred income taxes......................... 0 0 0 9,260 (9,260)(3) 0
Total current assets............................ 494,253 11,785 0 86,389 0 592,427
Other assets.................................... 58,127 0 0 2,262 0 60,389
Deferred income taxes .......................... 7,559 0 (509)(3) 0 (3,846)(4) 3,204
Property, plant and equipment, net.............. 1,049,375 14,630 0 158,501 0 1,222,506
Intangible assets, net.......................... 541,366 15,230 0 124,270 0 680,866
Total assets.................................... $ 2,150,680 $ 41,645 $ (509) $371,422 $ (3,846) $2,559,392
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 83,246 $ 1,391 $ 3,000 (1)i8u7 $ 4,441 $15,000 (1) $107,078
Salaries and wages payable.................... 44,668 947 0 0 963 (3) 46,578
Accrued interest payable and other
liabilities.................................. 49,462 361 (1,170)(1) 10,530 (5,850)(1) 73,493
20,160 (3)
Accrued loss on disposal of surgery centers . 0 0 0 741 (741)(3) 0
Current portion of long-term debt............ 17,720 2,799 0 729 21,248
Income taxes payable......................... 0 0 0 20,382 (20,382)(3) 0
Distributable to minority interests ........ 0 0 0 7,000 (7,000)(3) 0
Total current liabilities...................... 195,096 5,498 1,830 43,823 2,150 248,397
Long-term debt................................. 1,386,450 14,955 0 65,119 0 1,466,524
Deferred income taxes.......................... 0 509 (509)(3) 3,846 (3,846)(4) 0
Other long-term liabilities.................... 5,470 0 0 0 0 5,470
Deferred revenue............................... 7,137 0 0 0 0 7,137
Minority interests............................. 8,980 5,375 0 29,404 7,000(3) 50,759
Stockholders' equity:
Preferred Stock, $.10 par value.............. 0 0 0 0 0 0
Common Stock, $.01 par value ................ 954 196 (178)(2) 9,867 (9,385)(2) 1,454
Additional paid-in capital................... 719,296 18,905 178 (2) 96,126 9,385 (2) 843,890
Retained earnings............................ 178,929 1,481 (1,830)(1) 129,288 (9,150)(1) 298,718
Common stock subscription receivable ........ (335,423) 0 0 0 0 (335,423)
Treasury stock............................... (323) 0 0 (6,051) 0 (6,374)
Receivable from Employee Stock Ownership
Plan........................................ (15,886) 0 0 0 0 (15,886)
Notes receivable from stockholders............ 0 (5,274) 0 0 0 (5,274)
Total stockholders' equity..................... 547,547 15,308 (1,830) 229,230 (9,150) 781,105
Total liabilities and stockholders' equity .... $ 2,150,680 $41,645 $ (509) $371,422 $ (3,846) $2,559,392
</TABLE>
See accompanying notes.
26
<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 Pro Forma
HEALTHSOUTH NovaCare Adjustments Combined SSCI Adjustments SCA Adjustments Combined
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........... $1,236,190 $ 142,548 $ 8,058 (5) $1,386,796 $38,175 $ 0 $236,720 $ 2,552 (3) $1,664,243
Operating expenses:
Operating units.. 906,712 128,233 (12,406)(2) 1,022,539 24,133 0 123,379 5,658 (3) 1,175,709
Corporate general and
administrative. 45,895 0 0 45,895 2,711 0 5,464 0 54,070
Provision for doubtful
accounts.......... 23,739 1,269 0 25,008 3,907 0 3,061 0 31,976
Depreciation and
amortization .... 86,678 7,041 (1,918)(1) 99,327 2,627 0 17,392 0 119,346
7,526 (3)
Interest expense... 65,286 11,096 10,100 (4) 86,482 1,588 0 7,294 (2,150)(3) 93,214
Interest income.... (4,308) 0 0 (4,308) (258) 0 (4,184) 2,552 (3) (6,198)
Merger expenses.... 6,520 0 0 6,520 0 0 0 0 6,520
Gain on sale of MCA
Stock ........... 0 0 0 0 0 0 (7,727) 0 (7,727)
Loss on impairment of
assets .. 10,500 0 0 10,500 0 0 0 0 10,500
Loss on abandonment of
computer project... 4,500 0 0 4,500 0 0 0 0 4,500
Loss on disposal of
Surgery Centers.... 0 0 0 0 0 0 13,197 0 13,197
1,145,522 147,639 3,302 1,296,463 34,708 0 157,876 6,060 1,495,107
Income before income
taxes and minority
interests......... 90,668 (5,091) 4,756 90,333 3,467 0 78,844 (3,508) 169,136
Provision for income
taxes ............ 34,305 (1,084) 780(6) 34,001 473 0 25,039 (1,403)(3) 58,110
56,363 (4,007) 3,976 56,332 2,994 0 53,805 (2,105) 111,026
Minority interests. 6,402 445 0 6,847 2,462 0 22,420 0 31,729
Income before
cumulative effect of
change in accounting
principle......... 49,961 (4,452) 3,976 49,485 532 0 31,385 (2,105) 79,297
Cumulative effect of
change in accounting
principle, net of
income tax benefit
of $1,403......... 0 0 0 0 0 0 2,105 (2,105)(3) 0
Net income......... $ 49,961 $ (4,452) $ 3,976 $ 49,485 $ 532 $ 0 $ 29,280 $ 0 $ 79,297
Weighted average common
and common equivalent
shares outstanding. 84,687 N/A N/A 84,687 19,612 (17,837)(2) 38,892 8,556 (2) 133,910
Net income per common
and common equivalent
share............ $ 0.59 N/A N/A $ 0.58 $ 0.03 N/A $ 0.75 N/A $ 0.59
Net income per common
share -- assuming full
dilution......... $ 0.59 N/A N/A $ 0.58 N/A N/A N/A N/A $ 0.59
</TABLE>
See accompanying notes.
27
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Income Statement (Unaudited)
Year Ended December 31, 1993
<TABLE>
<CAPTION>
Pro Forma Pro Forma Pro Forma
HEALTHSOUTH SSCI Adjustments SCA Adjustments Combined
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Revenues............................................... $656,329 $22,096 $ 0 $197,976 $1,294(3) $877,695
Operating expenses:
Operating units........................................ 471,778 14,768 0 103,825 0 590,371
Corporate general and administrative................... 24,329 2,264 0 3,880 0 30,473
Provision for doubtful accounts........................ 16,181 1,766 0 1,068 0 19,015
Depreciation and amortization.......................... 46,224 1,603 0 12,626 0 60,453
Interest expense....................................... 18,495 612 0 3,600 0 22,707
Interest income........................................ (3,924) (428) 0 (2,513) 1,294(3) (5,571)
Merger expense......................................... 333 0 0 0 0 333
NME Selected Hospitals Acquisition related expense .... 49,742 0 0 0 0 49,742
Gain on sale of partnership interest................... (1,400) 0 0 0 0 (1,400)
621,758 20,585 0 122,486 1,294 766,123
Income before income taxes and minority interests ..... 34,571 1,511 0 75,490 0 111,572
Provision for income taxes............................. 11,930 132 0 20,650 0 32,712
22,641 1,379 0 54,840 0 78,860
Minority interests..................................... 5,444 1,240 0 22,624 0 29,308
Income from continuing operations...................... 17,197 139 0 32,216 0 49,552
Income from discontinued operations.................... 0 0 0 4,452 0 4,452
Net income............................................. $ 17,197 $ 139 $ 0 $ 36,668 $ 0 $ 54,004
Weighted average common and common equivalent shares
outstanding............................................ 77,709 19,608 (17,833)(2) 38,117 8,386(2) 125,987
Net income per common and common equivalent share ..... $ 0.22 $ 0.01 N/A $ 0.96 N/A $ 0.43
</TABLE>
See accompanying notes.
28
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Income Statement (Unaudited)
Year Ended December 31, 1992
<TABLE>
<CAPTION>
Pro Forma Pro Forma Pro Forma
HEALTHSOUTH SSCI Adjustments SCA Adjustments Combined
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Revenues............................................ $501,046 $ 2,611 $ 0 $161,873 $ 306(3) $ 665,836
Operating expenses:
Operating units................................... 372,169 1,815 0 83,871 0 457,855
Corporate general and administrative.............. 16,878 476 0 3,804 0 21,158
Provision for doubtful accounts..................... 13,254 177 0 1,442 0 14,873
Depreciation and amortization....................... 29,834 185 0 9,695 0 39,714
Interest expense.................................... 12,623 44 0 3,410 0 16,077
Interest income..................................... (5,415) (19) 0 (3,049) 306(3) (8,177)
Terminated merger expense........................... 3,665 0 0 0 0 3,665
443,008 2,678 0 99,173 306 545,165
Income (loss) before income taxes and minority
interests......................................... 58,038 (67) 0 62,700 0 120,671
Provision for income taxes.......................... 18,864 (22) 0 15,663 0 34,505
39,174 (45) 0 47,037 0 86,166
Minority interests.................................. 4,245 185 0 21,481 0 25,911
Income from continuing operations................... 34,929 (230) 0 25,556 0 60,255
Income from discontinued operations................. 0 0 0 3,283 0 3,283
Net income.......................................... $ 34,929 $ (230) $ 0 $ 28,839 $ 0 $ 63,538
Weighted average common and common equivalent
shares outstanding................................ 74,214 19,608 (17,833)(2) 37,191 8,182(2) 121,362
Net income (loss) per common and common equivalent
share............................................... $ 0.47 $ (0.01) N/A $ 0.78 N/A $ 0.52
</TABLE>
See accompanying notes.
29
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Income Statement (Unaudited)
Nine Months Ended September 30, 1995
<TABLE>
<CAPTION>
Acquisition Pro
Pro Forma Pro Forma Forma Pro Forma Pro Forma
HEALTHSOUTH NovaCare Adjustments Combined SSCI Adjustments SCA Adjustments Combined
In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $1,109,689 $37,942 $1,860 (5) $1,149,491 $29,868 $ 0 $196,258 $1,155(3) $1,376,772
Operating expenses:
Operating units............. 788,593 33,065 (910)(2) 820,748 17,661 0 102,383 0 940,792
Corporate general
and administrative......... 28,463 0 0 28,463 1,820 0 4,236 0 34,519
Provision for doubtful
accounts.................... 20,520 322 0 20,842 3,125 0 2,381 0 26,348
Depreciation and amortization. 86,767 1,996 (999)(1) 89,646 2,026 0 12,640 0 104,312
1,882 (3)
Interest expense.............. 68,697 2,595 2,684 (4) 73,976 1,258 0 3,413 0 78,647
Interest income............... (4,529) 0 0 (4,529) (274) 0 (2,412) 1,155(3) (6,060)
Merger cost................... 29,194 0 0 29,194 0 0 0 0 29,194
Loss on impairment of assets . 11,192 0 0 11,192 0 0 0 0 11,192
1,028,897 37,978 2,657 1,069,532 25,616 0 122,641 1,155 1,218,944
Income before income taxes and
minority interests.......... 80,792 (36) (797) 79,959 4,252 0 73,617 0 157,828
Provision for income taxes ... 27,525 (101) (259)(6) 27,165 848 0 21,397 0 49,410
53,267 65 (538) 52,794 3,404 0 52,220 0 108,418
Minority interests............ 8,357 89 0 8,446 2,364 0 19,217 0 30,027
Net income.................... $ 44,910 $ (24) $ (538) $ 44,348 $ 1,040 $ 0 $ 33,003 $ 0 $ 78,391
Weighted average common and
common equivalent shares
outstanding................. 87,773 N/A N/A 87,773 19,615 (17,840)(2) 39,189 8,622(2) 137,359
Net income per common and common
equivalent share............ $ 0.51 N/A N/A $ 0.51 $ 0.05 N/A $ 0.84 N/A $ 0.57
Net income per common share --
assuming full dilution...... $ 0.51 N/A N/A $ 0.51 N/A N/A N/A N/A $ 0.57
</TABLE>
See accompanying notes.
30
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Income Statement (Unaudited)
Nine Months Ended September 30, 1994
<TABLE>
<CAPTION>
Pro Forma Pro Forma Pro Forma
HEALTHSOUTH SSCI Adjustments SCA Adjustments Combined
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Revenues................................................ $902,268 $28,357 $ 0 $169,973 $ 1,468 (3)$1,102,066
Operating expenses:
Operating units......................................... 670,607 17,637 0 88,794 5,658 (3) 782,696
Corporate general and administrative.................... 29,831 2,132 0 4,061 0 36,024
Provision for doubtful accounts......................... 16,691 2,950 0 2,079 0 21,720
Depreciation and amortization........................... 59,142 1,911 0 12,506 0 73,559
Interest expense........................................ 45,632 1,146 0 6,025 (2,150)(3) 50,653
Interest income......................................... (3,256) (359) 0 (2,699) 1,468 (3) (4,846)
Merger costs............................................ 3,571 0 0 0 0 3,571
Gain on sale of MCA stock............................... 0 0 0 (6,882) 0 (6,882)
822,218 25,417 0 103,884 4,976 956,495
Income before income taxes and minority interests ...... 80,050 2,940 0 66,089 (3,508) 145,571
Provision for income taxes.............................. 30,418 540 0 22,084 (1,403)(3) 51,639
49,632 2,400 0 44,005 (2,105) 93,932
Minority interests...................................... 4,276 1,887 0 15,144 0 21,307
Net income before cumulative effect of change in
accounting principle.................................... 45,356 513 0 28,861 (2,105) 72,625
Cumulative effect of change in accounting principle,
net of income tax benefit of $1,403..................... 0 0 0 2,105 (2,105)(3) 0
Net income.............................................. $45,356 $ 513 $ 0 $ 26,756 $ 0 $ 72,625
Weighted average common and common equivalent shares
outstanding............................................. 84,509 19,610 (17,835)(2) 38,859 8,549 (2) 133,692
Net income per common and common equivalent share ...... $ 0.54 $ 0.03 N/A $ 0.69 N/A $ 0.54
</TABLE>
See accompanying notes.
31
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Pro Forma Condensed Financial Information
A. The NovaCare Rehabilitation Hospitals Acquisition
Effective April 1, 1995 HEALTHSOUTH completed the acquisition of the
rehabilitation hospitals division of NovaCare, Inc. ("NovaCare"), consisting of
11 rehabilitation hospitals, 12 other facilities, and certificates of need to
build two additional facilities (the "NovaCare Rehabilitation Hospitals
Acquisition"). The purchase price was approximately $234,807,000. The
transaction was accounted for as a purchase and, accordingly, the results of the
acquired NovaCare facilities are included in HEALTHSOUTH'S historical financial
statements from the effective date of the acquisition. HEALTHSOUTH financed the
cost of the NovaCare Rehabilitation Hospitals Acquisition through additional
borrowings under its existing credit facilities, as amended.
The accompanying pro forma income statements for the year ended
December 31, 1994 and the nine months ended September 30, 1995 assume that the
transaction was consummated at the beginning of the periods presented.
Certain assets and liabilities of Rehab Systems Company (a wholly owned
subsidiary of NovaCare, Inc.) were excluded from the NovaCare Rehabilitation
Hospitals Acquisition. The excluded assets and liabilities are as follows (in
thousands):
Cash and cash equivalents........................... 4,973
Accounts receivable................................. 259
Other current assets................................ 42
Equipment, net...................................... 4,719
Intangible assets, net.............................. 56,321
Other assets (primarily investments in
subsidiaries)...................................... 40,637
Accounts payable.................................... (454)
Other current liabilities........................... (275)
Current portion of long term debt................... (146)
Long term debt...................................... (38,620)
Payable to affiliates............................... (92,377)
Net excluded (liability)....................... $(24,921)
The following pro forma adjustments are necessary for the NovaCare
Rehabilitation Hospitals Acquisition:
1. To exclude historical depreciation and amortization expense related
to the excluded assets described above. The total expense excluded amounts to
$1,918,000 for the year ended December 31, 1994 and $999,000 for the nine months
ended September 30, 1995.
2. To eliminate intercompany management fees and royalty fees totaling
$12,406,000 for the year ended December 31, 1994 and $910,000 for the nine
months ended September 30, 1995 of the acquired NovaCare facilities.
3. To adjust depreciation and amortization expense to reflect the
allocation of the excess purchase price over the net tangible asset value as
follows (in thousands):
Purchase Price
Allocation Useful Annual Quarterly
Adjustment Life Amortization Amortization
Leasehold
value........ 128,333 20 years 6,417 1,605
Goodwill....... 44,365 40 years 1,109 277
$7,526 $1,882
No additional adjustments to NovaCare's historical depreciation and
amortization are necessary. The remaining net assets acquired approximate their
fair value.
32
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Pro Forma Condensed Financial Information - Continued
Because NovaCare's results of operations before intercompany items
(described in Note 2 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.
4. To increase interest expense by $19,559,000 for the year ended
December 31, 1994 and $4,889,000 for the nine months ended September 30, 1995 to
reflect pro forma borrowings of $234,807,000, described above, at a 8.33%
variable interest rate, which represents HEALTHSOUTH's weighted average cost of
debt, as if they were outstanding for the entire period, and to decrease
interest expense by $9,459,000 for the year ended December 31, 1994 and
$2,205,000 for the nine months ended September 30, 1995, which represents
interest on NovaCare debt not assumed by HEALTHSOUTH. A .125% variance in the
assumed interest rate would change annual pro forma interest expense by
approximately $294,000.
5. To adjust estimated Medicare reimbursement for the changes in
reimbursable expenses described in items 1, 2, 3 and 4 above. These changes are
as follows (in thousands);
Year Ended
December 31, Nine months ended
1994 September 30, 1995
Depreciation and amortization (Note 1)..... $(1,918) $ (999)
Intercompany management fees (Note 2)...... (4,196) (910)
Depreciation and amortization (Note 3)..... 7,526 1,882
Interest expense (Note 4).................. 10,100 2,684
11,512 2,657
Assumed Medicare utilization............... 70% 70%
Increased reimbursement.................... $8,058 $1,860
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.
6. To adjust the NovaCare provision for income taxes to an effective
rate of 39% (net of minority interests).
B. The SSCI Merger
The SSCI Merger was completed in October, 1995 and will be accounted
for as a pooling of interests. The pro forma condensed income statements assume
that the SSCI Merger was consummated on January 1, 1992. The pro forma condensed
balance sheet assumes that the SSCI Merger was consummated on September 30,
1995.
The pro forma condensed financial information contains no adjustments
to conform the accounting policies of the two companies because any such
adjustments have been determined to be immaterial by the management of
HEALTHSOUTH.
The following pro forma adjustments are necessary for the SSCI Merger:
1. The pro forma condensed income statements do not reflect
non-recurring costs resulting directly from the SSCI Merger. The management of
HEALTHSOUTH estimates that these costs will approximate $3,000,000 and will be
charged to operations in the quarter the SSCI Merger is consummated. The amount
includes costs to merge the two companies and professional fees. However, this
estimated expense, net of taxes of $1,170,000, has been charged to retained
earnings in the accompanying pro forma balance sheet.
2. To adjust pro forma share amounts based on historical share amounts,
converting each outstanding SSCI Share into .0905 shares of HEALTHSOUTH Common
Stock.
3. To net SSCI's net deferred tax liability against HEALTHSOUTH's net
deferred tax asset.
33
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Pro Forma Condensed Financial Information - Continued
C. The SCA Merger
The proposed SCA Merger is intended to be accounted for as a pooling of
interests. The pro forma condensed income statements assume that the SCA Merger
was consummated on January 1, 1992. The pro forma condensed balance sheet
assumes that the SCA Merger was consummated on September 30, 1995.
The pro forma condensed financial information contains no adjustments
to conform the accounting policies of the two companies because any such
adjustments have been determined to be immaterial by the management of
HEALTHSOUTH.
The following pro forma adjustments are necessary for the SCA Merger:
1. The pro forma income statements do not reflect non-recurring costs
resulting directly from the SCA Merger. The management of HEALTHSOUTH estimates
that these costs will approximate $15,000,000 and will be charged to operations
in the quarter the SCA Merger is consummated. The amount includes costs to merge
the two companies and professional fees. However, this estimated expense, net of
taxes of $5,850,000, has been charged to retained earnings in the accompanying
pro forma balance sheet.
2. To adjust pro forma share amounts based on historical share amounts,
converting each outstanding SCA Share, par value $.25, into 1.22 shares of
HEALTHSOUTH Common Stock, par value $.01. The conversion ratio is based upon an
assumed Base Period Trading Price for HEALTHSOUTH's Common Stock ranging from
$22 to $28 per share.
3. To reclassify certain balance sheet and income statement amounts
from the SCA historical financial statements in order to conform to the
HEALTHSOUTH method of presentation.
4. To net SCA's net deferred tax liability against HEALTHSOUTH's net
deferred tax asset.
34
