<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-KA
Amendment No. 4
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report: May 12, 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 February 3, 1995, HEALTHSOUTH Corporation, a Delaware corporation
(the "Company"), entered into a Stock Purchase Agreement with NovaCare, Inc., a
Delaware corporation ("NovaCare"), pursuant to which the Company will purchase
the operations of NovaCare's rehabilitation hospital division. Under the terms
of the Stock Purchase Agreement, the Company will purchase all of the issued and
outstanding capital stock of Rehab Systems Company, a subsidiary of NovaCare,
for $215 million in cash, approximately $20 million in long-term debt for a
total consideration of approximately $235 million. In accordance with the Stock
Purchase Agreement, certain assets will be retained by and certain liabilities
will be transferred to NovaCare. This acquisition is to be funded by an increase
in the Company's existing bank credit facilities. As a result of this
transaction, the Company will acquire 11 rehabilitation hospitals in 7 states,
12 other rehabilitation facilities and two Certificates of Need. The
consummation of the transaction is subject to certain regulatory and
governmental reviews and approvals, including clearance under the
Hart-Scott-Rodino Antitrust Improvements Act. Subject to such approvals, the
transaction is expected to close early in the second quarter of 1995.
While the above-described transaction has not been consummated, this
amendment is being filed by the Company to file certain historical financial
statements of Rehab Systems Company, in order that such 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, Rehab Systems Company, for the fiscal year ended
June 30, 1994, and the unaudited consolidated financial statements for
the six months ended December 31, 1994, listed on the Index to
Financial Statements included in this Current Report on Form 8-K/A,
Amendment No. 4, are herewith filed.
(b) Pro Forma Financial Information.
The required pro forma financial information will be filed within
the required period after consummation of the transaction.
(c) Exhibits
2. Stock Purchase Agreement, dated February 3, 1995, among
HEALTHSOUTH Corporation, NovaCare, Inc., and NC Resources, Inc., filed
as Exhibit (2)-5 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 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: May 12, 1995.
HEALTHSOUTH Corporation
By /s/ ANTHONY J. TANNER
------------------------------
Anthony J. Tanner
Executive Vice President
and Secretary
3
<PAGE>
Rehab Systems Company
(a wholly-owned subsidiary of NovaCare, Inc.)
Consolidated Financial Statements
Index to Financial Statements
Consolidated Balance Sheets at December 31, 1994
(unaudited) and June 30, 1994
Consolidated Statements of Operations for the Six months
ended December 31, 1994 (unaudited) and the
year ended June 30, 1994
Consolidated Statements of Stockholder's Equity for the
six months ended December 31, 1994 (unaudited)
and the year ended June 30, 1994
Consolidated Statements of Cash Flows for the six months
ended December 31, 1994 (unaudited) and the
year ended June 30, 1994
Notes to Consolidated Financial Statements
4
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholder
of Rehab Systems Company
(a wholly-owned subsidiary of NovaCare, Inc.)
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholder's equity and of cash flows
present fairly, in all material respects, the financial position of Rehab
Systems Company (a wholly-owned subsidiary of NovaCare, Inc.) and its
subsidiaries at June 30, 1994, and the results of their operations and their
cash flows in conformity with generally accepted accounting principles. 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 audit. We have conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
As described in Notes 3 and 6, the Company has significant transactions with
affiliated companies.
Price Waterhouse LLP
Philadelphia, PA
March 3, 1995
5
<PAGE>
Rehab Systems Company
(a wholly-owned subsidiary of NovaCare, Inc.)
Consolidated Balance Sheet
- --------------------------------------------------------------------------------
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30,
1994 1994
(unaudited)
------------ ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 8,858 $ 7,340
Accounts receivable, net 41,226 39,775
Deferred income taxes 1,239 1,391
Other 5,657 5,648
----- -----
Total current assets 56,980 54,154
Funds held by trustees 4,474 3,013
Investment in affiliated company 38,435 34,643
Property and equipment, net 38,725 39,312
Excess cost of net assets acquired, net of
accumulated amortization of $1,145 at June 30, 1994 62,448 63,020
Other assets 6,935 5,471
----- -----
$ 207,997 $ 199,613
======= =======
Liabilities and Stockholder's Equity
Current liabilities:
Current portion of long-term debt and
capital lease obligations $ 1,732 $ 2,292
Accounts payable and accrued expenses 21,019 18,133
Notes payable and advances - affiliates 67,379 63,901
------ ------
Total current liabilities 90,130 84,326
Long-term debt and capital lease obligations 56,755 54,208
Intercompany borrowings 25,000 25,000
Other noncurrent liabilities 2,106 2,131
----- -----
Total liabilities 173,991 165,665
------- -------
Commitments and contingent liabilities
Stockholder's equity:
Common stock, $.01 par value; 1,000 shares
authorized, issued and outstanding - -
Additional paid-in capital 42,241 38,449
Accumulated deficit (8,235) (4,501)
------ ------
Total stockholder's equity 34,006 33,948
------ ------
$ 207,997 $ 199,613
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Rehab Systems Company
(a wholly-owned subsidiary of NovaCare, Inc.)
Consolidated Statement of Operations
- --------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months
ended
December 31,
1994 Year ended
(unaudited) June 30, 1994
------------- ---------------
<S> <C> <C>
Net patient service revenues $ 71,869 $ 135,356
----- --------
Operating expenses:
Operating units 56,560 106,199
Corporate General and administrative 2,647 3,546
Royalty expense 4,423 9,847
Corporate expense allocation 2,098 5,830
Provision for doubtful accounts 675 1,231
Depreciation and amortization 3,459 6,180
Interest expense - third party 2,618 2,894
Interest expense - affiliates 3,286 4,911
----- --------
75,766 140,638
----- --------
Loss before income taxes and minority interest (3,897) (5,282)
Allocated income tax benefit 395 1,289
----- --------
(3,502) (3,993)
Minority interest 232 393
----- --------
Net loss
$ (3,734) $ (4,386)
===== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Rehab Systems Company
(a wholly-owned Subsidiary of NovaCare, Inc.)
Consolidated Statement of Stockholder's Equity
- --------------------------------------------------------------------------------
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional
------------------ Paid-in- Accumulated
Number Amount capital deficit
------ ------- -------- ------------
<S> <C> <C> <C> <C>
Balance at June 30, 1993 1,000 -- $ 18,191 $ (115)
Contributed in connection with acquisitions:
Business acquisition (RHCA) 10,000
Investment in affiliate (NACC) 10,258
Net loss (4,386)
----- ------ -------- --------
Balance at June 30, 1994 1,000 -- 38,449 (4,501)
Contributed in connection with acquisitions:
Investment in affiliate (NACC) (unaudited) 3,792
Net loss (unaudited) (3,734)
----- ------ -------- --------
Balance at December 31, 1994 (unaudited) 1,000 -- $ 42,241 $ (8,235)
===== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Rehab Systems Company
(a wholly-owned subsidiary of NovaCare, Inc.)
Consolidated Statement of Cash Flows
- --------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months
ended Year ended
December 31, June 30,
1994 1994
(unaudited)
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss
$ (3,734) $ (4,386)
Adjustments to reconcile net income to net cash flows
from operating activitites:
Depreciation and amortization 3,202 5,673
Minority interest 232 393
Provision for uncollectible accounts 675 1,231
Deferred income taxes 152 913
(Increase) decrease in assets, net of effects from acquisition:
Accounts receivable (1,926) (6,198)
Other assets 54 (1,601)
(Decrease) increase in liabilities, net of effects
from acquisition:
Accounts payable and accrued expenses 2,745 (8,502)
----- ------
Net cash flows from operating activities 1,400 (12,477)
----- -------
Cash flows from investing activities:
Payments for business acquired (510) (51,240)
Investment in affiliate (3,792)
Additions to property and equipment (3,376) (4,109)
Disposition of property and equipment 179
--- ---
Net cash flows from investing activities (7,678) (55,170)
------ -------
Cash flows from financing activities:
Notes payable and advances 3,478 50,107
Proceeds from long-term debt and credit agreements 3,361 54,247
Payment of long-term debt and credit agreements (1,374) (42,457)
Capital contributions 3,792 10,000
Funds held by trustee (1,461) (497)
------ ----
Net cash flow from financing activities 7,796 71,400
------ -------
Net change in cash and cash equivalents 1,518 3,753
Cash and cash equivalents, beginning of year 7,340 3,587
----- -----
Cash and cash equivalents, end of year $ 8,858 $ 7,340
===== =====
Supplemental cash flow information:
Cash paid for:
Interest $ 1,491 $ 3,832
===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Rehab Systems Company
(a wholly-owned subsidiary of NovaCare, Inc.)
Notes to Consolidated Financial Statements
(Dollars in thousands)
- --------------------------------------------------------------------------------
1. Basis of Presentation
Rehab Systems Company (the "Company"), a wholly-owned subsidiary of
NovaCare, Inc. ("NovaCare"), provides acute rehabilitation care on a
multi-disciplinary, physician-directed basis to severely disabled patients
through 11 medical rehabilitation hospitals. Minority shareholders
maintain a 20% ownership interest in one of the hospitals. The Company
also operates four community re-entry programs to help patients return to
their community through a multi-disciplinary program of medical and social
services.
NovaCare provides certain services to and incurs costs on behalf of the
Company. All of the allocations and estimates in the financial statements
are based on assumptions that the Company and NovaCare believe are
reasonable. However, these allocations and estimates are not necessarily
indicative of the costs and expenses that would have resulted if the
Company had been operated as a separate entity.
The unaudited financial statements as of December 31, 1994 and for the
six-month period then ended include all adjustments (consisting only of
normal, recurring adjustments) which, in the opinion of management, are
necessary to properly reflect the results for the period.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents. The Company considers investments to be cash
equivalents if the securities mature within 90 days from the date of
acquisition. Throughout the period covered by these financial statements,
the Company participated in NovaCare's cash management program and, as
such, its cash funding requirements were met principally by, and generally
all cash generated was transferred to, NovaCare.
Funds Held by Trustees. Under terms of trust indentures related to
outstanding bond obligations, two hospitals are required to maintain funds
with bank trustees whose use is limited to purposes specified by the bond
documents, principally debt service. The fair value of these funds
approximates carrying value.
Property and Equipment. Property and equipment are stated at cost less
accumulated depreciation. Depreciation is provided on a straight-line
basis over the estimated useful lives of assets, which principally range
from three to seven years for property and equipment and 30 to 40 years
for buildings. Assets under capital leases and leasehold improvements are
amortized over the lesser of the lease term or the asset's estimated
useful life.
Excess Cost of Net Assets Acquired. Assets and liabilities acquired in
connection with business combinations accounted for under the purchase
method are recorded at their respective fair values. The excess of the
purchase price over the fair value of net assets acquired is amortized on
a straight-line basis over a 40-year period. The carrying value of
goodwill will be evaluated whenever events or changes in circumstances
indicate that it may not be recoverable.
Such evalution will be based on the estimated future cash flows
(undiscounted and without interest charges) of the acquired business. If
those cash flows are less than the underlying assets' carrying value, an
impairment loss arises, and will be measured as the difference between the
asset carrying values and the fair value of those assets, determined on
the basis of discounted cash flows.
Income Taxes. The taxable income of the Company is included in the
consolidated tax return of NovaCare. As such, separate income tax returns
were not prepared or filed by the Company. Current and deferred income tax
expense has been allocated to the Company by applying the asset and
liability approach set forth in Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes.
Net Revenue. Net revenue is reported at the estimated net realizable
amounts from patients, third-party payors and others for services
rendered, including estimated retroactive adjustments under reimbursement
agreements with third-party payors. Retroactive adjustments are accrued on
an estimated basis in the period related services are rendered and
adjusted in future periods as final settlements are determined. (See Note
5).
10
<PAGE>
3. Related Party Transactions
Royalty Agreements. The Company has entered into license arrangements with
a related entity for its use of the "NovaCare" name and associated
trademarks. Under those arrangements, royalties are payable annually based
upon the value of the trademarks as established by independent appraisal.
Notes Payable and Advances. The Company's cash requirements are met by
funds generated from operations and by bank borrowings, supplemented as
necessary by advances or borrowings from affiliates. During 1994, the
Company financed a portion of the acquisition of Rehabilitation Hospital
Corporation of America ("RHCA") from affiliates. (See Note 4.)
Borrowings from affiliates are made pursuant to either formal borrowing
agreements ("notes payable") or less formal arrangements ("advances").
Notes payable, which approximated $48,500 at June 30, 1994, are limited to
$75,000 and bear interest at prime plus 1.5% (8.75% at June 30, 1994).
Interest charged for the year ended June 30, 1994 was $3,931. Advances are
non-interest bearing. The average advance amount outstanding for the year
ended June 30, 1994 was $8,385. At June 30, 1994 the outstanding balance
principally comprised outstanding royalties and corporate expense
allocations.
Other Expenses. For the period January 1, 1994 to June 30, 1994, NovaCare
changed its risk management program to a self insurance program and
allocated the cost of workers compensation and group/health insurance to
its other NovaCare units, including the Company, on the basis of actual
claims experience. Prior to that date, NovaCare or the Company obtained
insurance coverage from outside carriers and allocated these expenses on
the basis of premiums incurred. Charges allocated to the Company and
included under the caption operating units expenses were $2,005 for the
year ended June 30, 1994.
Corporate Expenses. The results of operations include significant
transactions with NovaCare business units that are outside of the
Company's operations. These transactions involve functions and services
(such as executive management, cash management, tax administration and
legal services) that were provided to the Company by these other NovaCare
units. The cost of these functions and services have been allocated to the
Company based on the cost allocation methodology used for filing cost
reports for Medicare reimbursement purposes. NovaCare management believes
this allocation methodology is reasonable. Such charges and allocations
are not necessarily indicative of the costs that would have been incurred
by the Company as a separate entity.
4. Business Acquisition
Effective October 1, 1993, the Company purchased all of the outstanding
common stock of Rehabilitation Hospital Corporation of America ("RHCA")
for approximately $30,300 in cash. Funding for this acquisition was
provided by NACC and through an additional capital contribution by
NovaCare of $10 million. RHCA owned five medical rehabilitation hospitals
and six outpatient facilities. The Company sold one of these hospitals in
March 1994 which had no effect on the results of operations of the
Company.
11
<PAGE>
The principal stockholders of RHCA were limited partnerships in which
NovaCare's Chairman of the Board and Chief Executive Officer is a general
partner of the general partner. In addition to the purchase price, the
Company paid the limited partnerships approximately $21,000 for existing
advances from the partnerships, accrued interest on the advances,
redemption of preferred stock and accumulated and unpaid dividends.
The results of operations of RHCA have been included in the consolidated
results of the Company from October 1, 1993. The acquisition was accounted
for as a purchase and, accordingly, the aggregate purchase price was
allocated to assets and liabilities acquired based on their fair values at
the date of acquisition.
The following unaudited pro forma results of operations give effect to the
acquisition of RHCA as if it had occurred on July 1, 1993:
Net revenues $ 144,066
Net loss $ (5,027)
The above pro forma information is not necessarily indicative of the
results of operations that would have occurred had the acquisition been
made as of July 1, 1993, or the results which may occur in the future.
Information with respect to the RHCA acquisition was as follows:
Cash paid (net of cash acquired)
$ 51,240
Liabilities assumed 55,520
-------
106,760
Fair value of assets acquired 43,739
-------
Cost in excess of fair value of net assets
acquired $ 63,021
=======
5. Receivables and Third-Party Reimbursements
Accounts receivable consisted of the following:
December
31, 1994
(unaudited) June 30, 1994
------------ -------------
Accounts receivable $ 32,641 $ 31,734
Due from Medicare 10,357 10,298
Less: Allowance for
uncollectible accounts (1,772) (2,257)
------ ------
$41,226 $ 39,775
====== ======
12
<PAGE>
Certain of the Company's services are reimbursed by third-party
programs, such as Medicare or Medicaid, under which reimbursement for
services is subject to federal and state regulations. With regard to
approximately 65% of net revenues in 1994, the Company directly billed
Medicare or Medicaid for services provided to patients.
Although reimbursement for services billed directly to Medicare is
ultimately received under cost-based reimbursement regulations, Medicare
is initially billed using NovaCare's standard pricing schedules. Charges
are consistent for Medicare and non-Medicare patients. Aggregate billings
are adjusted to allowable cost on the basis of cost reports prepared and
subject to audit and retroactive adjustment.
The cost reports for fiscal 1990 and prior years have been settled by
Medicare audit. Certain Medicare cost reports for fiscal 1991 through
1993, and all Medicare cost reports for fiscal 1994 remain subject to
audit and retroactive adjustment. In the opinion of management, the
results of these audits will not have a material effect on the financial
position or results of operations for the Company.
6. Investment in Affiliated Company
The Company holds a 14% interest in an affiliated entity, Ninth Avenue
Capital Corporation ("NACC"), a Delaware Corporation. NACC, which is
wholly owned by the Company and other NovaCare subsidiaries, principally
acts as an investment and financing vehicle for NovaCare. The Company
accounts for its investment in NACC using the cost method of accounting.
During 1994 the common stock of NACC was contributed by NovaCare to the
Company. In consideration for the common stock of NACC the Company assumed
$25,000 in borrowings from NovaCare and $10,258 was credited to additional
paid in capital. This transaction was recorded at NovaCare's historical
cost. Those borrowings, which bear interest at 5.5%, are due in 2000 and
are classified as long term intercompany borrowings in the accompanying
Consolidated Balance Sheet. Interest charged for the year ended June 30,
1994 was $980. During the six months ended December 31, 1994, NovaCare
made additional capital contributions of $3792 to the Company and the
Company made additional capital contributions of $3,792 to NACC.
7. Property and Equipment
The components of property and equipment are as follows:
December 31, 1994
(unaudited) June 30, 1994
----------------- -------------
Land and buildings $ 28,261 $ 27,979
Property, equipment and furniture 22,404 21,409
Leasehold improvements 1,580 1,334
-------- --------
52,245 50,722
Less: Accumulated depreciation
and amortization (13,520) (11,410)
-------- --------
$ 38,725 $ 39,312
======== ========
13
<PAGE>
Included in property, equipment and furniture are the following assets
held under capital leases:
December 31, 1994
(unaudited) June 30, 1994
----------------- -------------
Property, equipment and furniture $ 7,133 $ 9,882
Less: Accumulated amortization (5,406) (7,490)
------- -------
$ 1,727 $ 2,392
======= =======
Depreciation expense and amortization of capital leases aggregated $3,969 for
fiscal 1994.
8. Long-Term Debt and Capital Lease Obligations
Long-term debt consisted of the following:
December 31, 1994
(unaudited) June 30, 1994
----------------- -------------
Revolving credit facility
(prime rate plus .5% or
LIBOR plus .88%) expiring
May 27, 1997 $ 38,125 $ 34,765
West Virginia commercial development
revenue bonds (9.5% and 12%), payable
through 2015 17,715 17,715
Capital lease obligations 1,955 2,751
Other 692 1,269
--------- ---------
58,487 56,500
Less: Current portion 1,732 2,292
--------- ---------
$ 56,755 $ 54,208
========= =========
In May 1994, NovaCare entered into a revolving credit facility in the
amount of $115,000 with a syndicate of banks. This facility was increased
to $175,000 effective November 28, 1994. The Company is able to borrow
under that agreement. At June 30, 1994, the interest rate on amounts
borrowed was 5.25%. The revolving credit facility agreement requires
maintenance by NovaCare of minimum working capital and net worth amounts
as well as certain financial ratios. At June 30, 1994, NovaCare was in
compliance with these requirements. A commitment fee of .25% per annum on
the average daily available balance is paid quarterly.
The West Virginia commercial development revenue bonds were issued by two
subsidiaries of the Company to construct rehabilitation facilities in the
state. Proceeds were restricted to permitted construction expenditures.
Sinking fund requirements are reflected in the table below. The
obligations are guaranteed by NovaCare, require maintenance of certain
financial ratios and restrict the payment of dividends by the
subsidiaries. At June 30, 1994, the Company was in compliance with these
requirements.
14
<PAGE>
Aggregate annual maturities of long-term debt for each of the next five
years at June 30, 1994 are as follows:
1995 $ 572
1996 621
1997 35,377
1998 430
1999 434
The fair value of the Company's long-term debt, based upon the quoted
market prices for the same or similar issues or on the current rates
offered to the Company for debt at the same remaining maturities, was
estimated to be $61,309 at June 30, 1994.
9. Leases
The Company is obligated under capital leases for office and hospital
equipment. All capital leases expire over the next five years.
Hospital facility land and buildings are leased under operating leases
having initial terms ranging between 10 and 13 years with renewal options
of five years. Rent during the renewal periods will be market-based rates
as defined in the lease agreements. The agreements contain contingent
rental provisions based on revenue levels at the respective facilities.
Payment of certain leases is collateralized by letters of credit totaling
$1,653 which expire on various dates through May 1995. Under the terms of
the lease agreements, these letters of credit must be renewed but may be
reduced or eliminated if certain lease coverage ratios are attained. With
regard to a significant portion of these operating leases, the Company
initially purchased and developed the land, constructed the hospital
facility and sold the land and buildings to unrelated third parties from
which the Company subsequently leased back the land and buildings.
The Company also rents office space and office, transportation and therapy
equipment under non-cancelable operating leases.
Future minimum lease commitments for all non-cancelable leases at June 30,
1994 are as follows:
Capital Operating
Fiscal Year Leases Leases
----------- ----------- ----------
1995 $ 1,799 9,253
1996 483 9,131
1997 245 9,085
1998 228 8,883
1999 92 8,769
2000 and thereafter 24,432
------ ------
Total minimum lease payments 2,847 $ 69,553
====== ======
Less: Amount representing interest 96
Present value of minimum payments
under capital lease obligations 2,751
Current amount 1,720
Long-term amount $ 1,031
======
Total rent expense charged to operations for the year ended June 30, 1994
was $11,360, including contingent rent of $1,386.
15
<PAGE>
10. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses include the following:
December 31, 1994
(unaudited) June 30, 1994
----------------- --------------
Accounts payable $ 3,582 $ 4,293
Accrued compensation and benefits 6,268 4,920
Due to Medicare 5,509 3,123
Other 5,660 5,797
------ ------
$ 21,019 $ 18,133
====== ======
11. Income Taxes
The components of income tax benefit are as follows:
Year ended
June 30,1994
------------
Current:
Federal $(2,362)
State 160
-------
(2,202)
-------
Deferred:
Federal 876
State 37
-------
913
-------
$(1,289)
=======
The components of the net deferred tax asset are as follows:
June 30, 1994
-------------
Accruals and reserves not currently deductible
for tax purposes $ 1,391
Acquired operating loss carryforward 3,464
Other 978
------
Gross deferred tax assets 5,833
------
Expenses capitalized for financial statement
purposes (320)
Depreciation and capital leases (324)
------
Gross deferred tax liabilities (644)
------
Valuation allowance on acquired operating loss
carryforward (3,464)
------
Net deferred tax asset $ 1,725
======
16
<PAGE>
The reconciliation of the expected tax benefit (computed by applying the
federal statutory rate to income before income taxes) to actual tax
benefit was as follows:
Year end
June 30, 1994
-------------
Expected tax benefit $ (1,986)
Non-deductible amortization of excess cost of
net assets acquired 393
Minority interest 137
Other, net 167
---
$ (1,289)
=========
In accordance with the Company's tax sharing agreement with NovaCare, the
benefit of net operating losses which were utilized in the consolidated tax
returns of NovaCare have been recognized. On a separate return basis, the
benefit would not have been recognized. The acquired operating loss
carryforwards are subject to restrictions under Section 382 of the Internal
Revenue Service Code and separate tax return limitations.
12. Benefit Plans
NovaCare has in place defined contribution 401(k) plans in which
substantially all employees of the Company may participate. Under those
plans, employees may make voluntary contributions of their compensation,
which are partially matched by the Company. Company contributions for 1994
were $487.
13. Contingencies
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount
of ultimate liability, if any, with respect to these actions will not have
a material adverse effect on the financial position or results of
operations of the Company.
14. Concentrations of Credit Risk
The Company operates facilities located in various cities across the
United States. It grants credit without collateral to its patients, most
of whom are local residents with insured third-party payor agreements. The
mix of receivables from patients and third-party payors was as follows:
June 30, 1994
-------------
Medicare 42%
Medicaid 12
Other third party payors 44
Patients 2
----
100%
====
15. Subsequent Event
On February 3, 1995, NovaCare reached an agreement for the sale of the
Company to HEALTHSOUTH Corporation. The sale is contingent upon regulatory
approval. In accordance with the agreement, certain assets will be
retained by and certain liabilities will be transferred to NovaCare. The
effects of this transaction have not been reflected in these financial
statements.
17