<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1995;
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
_____________.
Commission File Number 1-10315
-------
HEALTHSOUTH Corporation
-------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 63-0860407
---------------- ---------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Two Perimeter Park South, Birmingham, Alabama 35243
---------------------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(205) 967-7116
---------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all Reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such Reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 1, 1995
---------------------- -------------------------------
Common Stock, par value 97,360,497 shares
$.01 per share
1
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HEALTHSOUTH Corporation and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART 1 -- FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Consolidated Balance Sheets -- September 30, 1995
(Unaudited) and December 31, 1994 3
Consolidated Statements of Income (Unaudited) -- Three Months
and Nine Months Ended September 30, 1995 and 1994 5
Consolidated Statements of Cash Flows (Unaudited) -- Nine Months
Ended September 30, 1995 and 1994 6
Notes to Consolidated Financial Statements (Unaudited) -- Three
Months and Nine Months Ended September 30, 1995 and 1994 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
2
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTHSOUTH Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30 December 31,
1995 1994
------------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 86,952 $ 68,735
Other marketable securities 6,217 16,628
Accounts receivable 298,178 242,659
Inventories, prepaid expenses, and
other current assets 102,906 97,180
-------- --------
TOTAL CURRENT ASSETS 494,253 425,202
OTHER ASSETS 58,127 43,074
DEFERRED INCOME TAXES 7,559 0
PROPERTY, PLANT AND
EQUIPMENT--NET 1,049,375 857,372
INTANGIBLE ASSETS--NET 541,366 410,688
--------- --------
TOTAL ASSETS $ 2,150,680 $ 1,736,336
============ ===========
3
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HEALTHSOUTH Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS (continued)
(In Thousands)
September 30 December 31,
1995 1994
------------- ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ $83,246 $ 87,153
Salaries and wages payable 44,668 34,102
Accrued interest payable and other liabilities 49,462 55,922
Current portion of long-term debt 17,720 16,698
----------- ----------
TOTAL CURRENT LIABILITIES 195,096 193,875
LONG-TERM DEBT 1,386,450 1,017,696
DEFERRED INCOME TAXES 0 8,595
OTHER LONG-TERM LIABILITIES 5,470 8,398
DEFERRED REVENUE 7,137 7,526
MINORITY INTERESTS--LIMITED PARTNERSHIPS 8,980 10,326
STOCKHOLDERS' EQUITY:
Preferred Stock, $.10 par value--1,500,000
shares authorized; issued and outstanding--
none 0 0
Common Stock, $.01 par value--150,000,000
shares authorized; 95,391,000 and 76,991,000
shares issued at September 30, 1995 and
December 31, 1994, respectively 954 770
Additional paid-in capital 719,296 369,186
Retained earnings 178,929 137,764
Common Stock subscriptions receivable (335,423) 0
Treasury stock (323) (323)
Receivable from Employee Stock Ownership Plan (15,886) (17,477)
--------- --------
TOTAL STOCKHOLDERS' EQUITY 547,547 489,920
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,150,680 $ 1,736,336
=========== ===========
See accompanying notes.
4
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<TABLE>
<CAPTION>
HEALTHSOUTH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED - In Thousands, Except for Per Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Revenues $ 392,740 $ 318,085 $ 1,109,689 $ 902,268
Operating expenses:
Operating units 275,555 232,964 788,593 670,607
Corporate general and administrative 8,818 10,640 28,463 29,831
Provision for doubtful accounts 6,401 6,404 20,520 16,691
Depreciation and amortization 31,104 22,180 86,767 59,142
Interest expense 24,405 18,652 68,697 45,632
Interest income (1,759) (1,658) (4,529) (3,256)
Merger costs 0 174 29,194 3,571
Loss on impairment of assets 0 0 11,192 0
------- ------- --------- --------
344,524 289,356 1,028,897 822,218
Income before income taxes and
minority interests 48,216 28,729 80,792 80,050
Provision for income taxes 16,630 11,314 27,525 30,418
------ ------ ------- -------
Income before minority interests 31,586 17,415 53,267 49,632
Minority interests (4,453) (1,285) (8,357) (4,276)
-------- ------- -------- --------
Net income $ 27,133 $ 16,130 $ 44,910 $ 45,356
======== ======== ========== ==========
Weighted average common and common
equivalent shares outstanding 88,917 85,348 87,773 84,509
======== ======== ========== ==========
Net income per common and common
equivalent share $ 0.31 $ 0.19 $ 0.51 $ 0.54
======== ======== ========== ==========
Net income per common share --
assuming full dilution $ 0.30 N/A $ 0.51 N/A
======== ======== ========== ==========
See accompanying notes.
</TABLE>
5
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HEALTHSOUTH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995 1994
-------- --------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 44,910 $ 45,356
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 86,767 59,142
Provision for doubtful accounts 20,520 16,691
Income applicable to minority interests of
limited partnerships 8,357 4,276
Loss on impairment of assets 11,192 0
Merger costs 29,194 3,571
Provision (benefit) for deferred income taxes (15,347) 20,617
Provision for deferred revenue (389) (34)
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable (26,796) (62,050)
Inventories, prepaid expenses and other current
assets 4,422 (964)
Accounts payable and accrued expenses (35,517) 20,876
-------- -------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 127,313 107,481
INVESTING ACTIVITIES
Purchases of property, plant and equipment (98,658) (113,386)
Proceeds from sale of property, plant and equipment 14,786 58,265
Additions to intangible assets, net of effects of
acquisitions (53,898) (35,289)
Assets obtained through acquisitions, net of liabilities
assumed (304,499) (58,910)
Changes in other assets (4,070) (22,388)
Proceeds received on sale of other marketable
securities 21,057 520
Investments in other marketable securities (13,026) (1,000)
------- --------
NET CASH USED IN INVESTING ACTIVITIES (438,308) (172,188)
</TABLE>
6
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HEALTHSOUTH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED - In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995 1994
----- ------
FINANCING ACTIVITIES
<S> <C> <C>
Proceeds from borrowings 722,264 550,921
Principal payments on long-term debt and leases (396,601) (505,760)
Proceeds from exercise of options 7,731 12,537
Proceeds from issuance of common stock 0 9
Reduction in receivable from Employee Stock
Ownership Plan 1,591 1,455
Proceeds from investment by minority interests 0 1,546
Purchase of limited partnership interests 0 (1,512)
Payment of cash distributions to limited partners (10,268) (8,425)
-------- --------
NET CASH PROVIDED FROM
FINANCING ACTIVITIES 324,717 50,771
-------- --------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 13,722 (13,936)
Cash and cash equivalents at beginning of period 73,230 81,031
-------- --------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 86,952 $ 67,095
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 60,238 $ 28,220
======== ========
Income taxes 44,355 26,917
======== ========
Non-cash financing activities:
During 1995, the Company declared a two-for-one stock split on its Common
Stock, which was effected in the form of a 100% stock dividend.
The Company consummated the issuance of 14,950,000 shares of its Common Stock
effective September 27, 1995. The net proceeds of $335,423,000 were not
received until after the balance sheet date (see Note 12).
See accompanying notes.
</TABLE>
7
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HEALTHSOUTH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months and Nine Months Ended September 30, 1995 and 1994
NOTE 1 -- The accompanying consolidated financial statements include
the accounts of HEALTHSOUTH Corporation (the "Company") and its
subsidiaries. This information should be read in conjunction
with the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994, as amended. It is management's
opinion that the accompanying consolidated financial statements
reflect all adjustments (which are normal recurring adjustments,
except as otherwise indicated) necessary for a fair presentation
of the results for the interim period and the comparable period
presented.
NOTE 2 -- During 1994, the Company entered into a $550,000,000 revolving
line of credit with NationsBank, N.A. (Carolinas)
("NationsBank") and other participating banks (the "1994 Credit
Agreement"). On April 11, 1995, the Company amended and restated
the 1994 Credit Agreement with NationsBank to increase the size
of the credit facility to $1,000,000,000. At September 30, 1995,
the Company had drawn $935,000,000 under the restated 1994
Credit Agreement.
On March 24, 1994, the Company issued $250,000,000 principal
amount of 9.5% Senior Subordinated Notes due 2001 (the "Notes").
Interest is payable on April 1 and October 1. The Notes are
senior subordinated obligations of the Company and, as such, are
subordinated to all existing and future senior indebtedness of
the Company. Also on March 24, 1994, the Company issued
$100,000,000 principal amount of 5% Convertible Subordinated
Debentures due 2001 (the "Convertible Debentures"). An
additional $15,000,000 principal amount of Convertible
Debentures was issued in April 1994 to cover underwriters'
overallotments. Interest is payable on April 1 and October 1.
The Convertible Debentures are convertible into Common Stock of
the Company at the option of the holder at a conversion price of
$18.81 per share, subject to adjustment in certain events. The
net proceeds from the issuance of the Notes and Convertible
Debentures were used by the Company to pay down indebtedness
outstanding under its other existing credit facilities.
At September 30, 1995 and December 31, 1994, long-term debt
consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
----------------- -----------------
(in thousands)
Advances under the $1,000,000,000
<S> <C> <C>
1994 Credit Agreement $ 935,000 510,000
9.5% Senior Subordinated Notes due 2001 250,000 250,000
5% Convertible Subordinated Debentures due 2001 115,000 115,000
Other long-term debt 104,170 159,394
----------- ------------
1,404,170 1,034,394
Less amounts due within one year 17,720 16,698
----------- ------------
$ 1,386,450 $ 1,017,696
=========== ============
</TABLE>
8
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NOTE 3 -- Effective December 29, 1994, the Company merged with ReLife,
Inc. ("ReLife") in a transaction that was accounted for as a
pooling of interests. Accordingly, the Company's historical
financial statements for all periods prior to the effective date
of the merger have been restated to include the results of
ReLife. Prior to the merger, ReLife reported on a fiscal year
ending on September 30. The restated financial statements for
all periods prior to and including December 31, 1994 are based
on a combination of the Company's results for its December 31
fiscal year and ReLife's results for its September 30 fiscal
year. Beginning January 1, 1995, all facilities acquired in the
ReLife merger adopted a December 31 fiscal year end;
accordingly, all consolidated financial statements for periods
after December 31, 1994 are based on a consolidation of all of
the Company's subsidiaries on a December 31 year end. ReLife's
historical results of operations for the three months ended
December 31, 1994 are not included in the Company's consolidated
statements of income or cash flows. An adjustment has been made
to stockholders' equity as of January 1, 1995 to adjust for the
effect of excluding ReLife's results of operations for the three
months ended December 31, 1994. The following is a summary of
ReLife's results of operations and cash flows for the three
months ended December 31, 1994 (in thousands):
Statement of Income Data:
Revenues $ 38,174
Operating expenses:
Operating units 31,797
Corporate general and administrative 2,395
Provision for doubtful accounts 541
Depreciation and amortization 1,385
Interest expense 858
Interest Income (91)
HEALTHSOUTH merger expense 3,050
Loss on disposal of fixed assets 1,000
Loss on abandonment of computer project 973
------
41,908
------
Income before income taxes and
minority interests (3,734)
Provision for income taxes -
------
(3,734)
Minority interests -
------
Net income $ (3,734)
========
Statement of Cash Flow Data:
Net cash provided by operating activities $ 38,077
Net cash used by investing activities (9,632)
Net cash used in financing activities (23,950)
---------
Net increase in cash $ 4,495
=========
9
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NOTE 4 -- Effective June 13, 1995, the Company merged with Surgical Health
Corporation ("SHC") and in connection therewith issued 8,531,480
shares of its Common Stock for all of SHC's outstanding common
and preferred stock. SHC operated a network of 41 freestanding
surgery centers (including four mobile lithotripters) in eleven
states, with an aggregate of 156 operating and procedure rooms.
The merger was accounted for as a pooling of interests and,
accordingly, the Company's financial statements have been
restated to include the results of SHC for all periods
presented. Costs and expenses of $29,194,000 incurred by the
Company in connection with the merger have been recorded in
operations during the quarter ending June 30, 1995 and reported
as Merger Costs in the accompanying consolidated statements of
income (see Note 8).
There were no material transactions between the Company and SHC
prior to the merger. The effects of conforming the accounting
policies of the two companies are not material.
NOTE 5 -- Effective April 1, 1995, the Company completed the acquisition
of the rehabilitation hospitals division of NovaCare, Inc.
("NovaCare"), consisting of 11 rehabilitation hospitals, 12
other facilities, and certificates of need to build two other
facilities. The total purchase price for the NovaCare facilities
was approximately $235,000,000. The cost in excess of net asset
value was approximately $173,000,000. Of this excess,
approximately $129,000,000 has been allocated to leasehold value
and the remaining $44,000,000 to goodwill.
During the first nine months of 1995, the Company acquired 44
outpatient facilities and one outpatient surgery center. The
total purchase price of the acquired facilities was
approximately $75,619,000. The Company also entered into
non-compete agreements totaling approximately $8,172,000 in
connection with these transactions. The cost in excess of the
acquired facilities' net asset value was approximately
$55,716,000. The results of operations (not material
individually or in the aggregate) of these acquisitions are
included in the consolidated financial statements from their
respective acquisition dates.
NOTE 6 -- During the first nine months of 1995, the Company granted
incentive and nonqualified stock options to certain Directors,
employees and others for 2,904,000 shares of Common Stock at
exercise prices ranging from $17.00 to $19.25 per share.
NOTE 7 -- Effective April 17, 1995, the Company declared a two-for-one
stock split paid in the form of a 100% stock dividend.
Accordingly, all share and per share information have been
restated to give effect to this transaction for all periods
presented.
NOTE 8 -- As a result of the NovaCare and SHC acquisitions, the Company
recognized $29,194,000 in merger costs during 1995. Fees related
to legal, accounting and financial advisory services accounted
for $3,400,000 of the expense. Costs and expenses related to the
SHC Bond Tender Offer (see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity
and Capital Resources") totaled $14,606,000. Accruals for
employee separations were approximately $1,188,000. In addition,
the Company has provided approximately $10,000,000 for the
write-down of certain assets to net realizable value as the
result of a planned facility consolidation. The consolidation is
applicable in a market where the Company's existing services
overlap with those of an acquired facility.
During the second quarter of 1995, the Company recognized an
$11,192,000 loss on impairment of assets. The impaired assets
relate to six SHC facilities in which
10
<PAGE>
the projected undiscounted cash flows did not support the book
value of the long-lived assets of such facilities.
NOTE 9 -- On August 24, 1995, the Company signed an agreement to merge
with Sutter Surgery Centers, Inc. ("Sutter") in a transaction to
be accounted for as a pooling of interests. Sutter operates 12
surgery centers located in three states. Under the terms of the
agreement, all shares of common stock of Sutter were to be
exchanged for shares of the Company's Common Stock pursuant to
an exchange ratio that, at the time of the agreement, was
projected to yield an aggregate value of approximately
$38,000,000 to Sutter stockholders. The transaction was
completed in the fourth quarter of 1995.
NOTE 10 -- On October 9, 1995, the Company signed an agreement to acquire
Surgical Care Affiliates, Inc. ("SCA") in a transaction to be
accounted for as a pooling of interests. SCA operates 67 surgery
centers (with an additional 10 under development or
construction) in 24 states. Under the terms of the agreement,
all shares of common stock of SCA will be exchanged for shares
of the Company's Common Stock pursuant to an exchange ratio that
will yield an aggregate value of approximately $1,200,000,000 to
SCA stockholders. The transaction is subject to certain
regulatory and governmental reviews, and to approval by the
stockholders of both companies. The transaction is expected to
be completed in early 1996.
NOTE 11 -- On October 16, 1995, the Company entered into a definitive
agreement to purchase Caremark Orthopedic Services Inc.,
consisting of approximately 120 outpatient rehabilitation
centers in 13 states. The purchase price will be approximately
$127,500,000 in cash. The transaction is currently expected to
be completed by year-end 1995.
NOTE 12 -- The Company filed a Registration Statement on Form S-3 with the
Securities and Exchange Commission in connection with a public
offering which became effective on September 27, 1995. The
Company consummated the issue of Common Stock for 14,950,000
shares on October 3, 1995. Net proceeds of the stock issue,
after deducting underwriting discounts, commissions and offering
costs were approximately $335,423,000, of which $319,000,000 was
used to reduce outstanding indebtedness under the Company's
existing credit facilities. The net proceeds of the issuance and
sale of the 14,950,000 shares are included in the accompanying
September 30, 1995 balance sheet as Common Stock and additional
paid-in capital, with the Common Stock subscription receivable
as a corresponding reduction in Stockholders' Equity.
11
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
The Company provides outpatient and rehabilitative healthcare services
through its inpatient and outpatient rehabilitation facilities, surgery centers
and medical centers. The Company has expanded its operations through the
acquisition or opening of new facilities and satellite locations and by
enhancing its existing operations. As of September 30, 1995, the Company had 509
locations in 39 states, the District of Columbia, and Ontario, Canada, including
340 outpatient rehabilitation locations, 77 inpatient rehabilitation facilities,
five medical centers, 43 surgery centers and 44 locations providing other
patient care services.
The Company's revenues include net patient service revenues and other
operating revenues. Net patient service revenues are reported at estimated net
realizable amounts from patients, insurance companies, third-party payors
(primarily Medicare and Medicaid) and others for services rendered. Revenues
from third-party payors also include estimated retroactive adjustments under
reimbursement agreements which are subject to final review and settlement by
appropriate authorities. Management determines allowances for doubtful accounts
and contractual adjustments based on historical experience and the terms of
payor contracts. Net accounts receivable include only those amounts estimated by
management to be collectible.
The Company determines the amortization period of the cost in excess of
net asset value of purchased facilities based on an evaluation of the facts and
circumstances of each individual purchase transaction. The evaluation includes
an analysis of historic and projected financial performance, an evaluation of
the estimated useful life of the buildings and fixed assets acquired, the
indefinite useful life of Certificates of Need and licenses acquired, the
competition within local markets, lease terms where applicable, and the legal
terms of partnerships where applicable. The Company utilizes independent
appraisers and relies on its own management expertise in evaluating each of the
factors noted above. With respect to the carrying value of the excess of cost
over net asset value of purchased facilities and other intangible assets, the
Company determines on a quarterly basis whether an impairment event has occurred
by considering factors such as the market value of the asset, a significant
adverse change in legal factors or in the business climate, adverse action by a
regulator, a history of operating losses or cash flow losses, or a projection of
continuing losses associated with an operating entity. The carrying value of
excess cost over net asset value of purchased facilities and other intangible
assets will be evaluated if the facts and circumstances suggest that it has been
impaired. If this evaluation indicates that the value of the asset will not be
recoverable, as determined based on the undiscounted cash flows of the entity
acquired over the remaining amortization period, the Company's carrying value of
the asset will be reduced by the estimated shortfall of cash flows.
The Company, in many cases, operates more than one site within a
market. In such markets, there is customarily an outpatient center or inpatient
facility with associated satellite outpatient locations. For purposes of the
following discussion and analysis, same store operations are measured on
locations within markets in which similar operations existed at the end of the
period and include the operations of additional locations opened within the same
market. New store operations are measured on locations within new markets.
Effective December 29, 1994, the Company consummated the acquisition of
ReLife, Inc. (the "ReLife Acquisition") as a merger accounted for as a pooling
of interests. In connection with the ReLife Acquisition, the Company acquired 31
inpatient rehabilitation facilities and 12 outpatient rehabilitation centers.
The results of HEALTHSOUTH described below for the quarter ended September 30,
1994 are based on a combination of both HEALTHSOUTH's results for its quarter
ended September 30, 1994 and ReLife's results for its quarter ended June 30,
1994 (see Note 3 of "Notes to Consolidated Financial
12
<PAGE>
Statements" for further discussion). Effective June 13, 1995, the Company
consummated the acquisition of Surgical Health Corporation ("SHC"), also as a
merger accounted for as a pooling of interests. Accordingly, the Company's
financial statements have been restated to include the results of SHC for all
periods presented (see Note 4 of "Notes to Consolidated Financial Statements"
for further discussion). All data set forth for periods prior to December 31,
1994 relating to revenues derived from Medicare and Medicaid do not take into
account revenues of the ReLife facilities or the SHC facilities, because ReLife
and SHC did not separately track such revenues prior to consummation of the
acquisitions described above.
Results of Operations -- Three Months Ended September 30, 1995
The Company operated 340 outpatient locations (which includes base
facilities and satellites) at September 30, 1995, compared to 253 outpatient
locations at September 30, 1994. In addition, the Company operated 77 inpatient
rehabilitation facilities, five medical centers and 43 surgery centers at
September 30, 1995, compared with 67 inpatient facilities, five medical centers
and 36 surgery centers at September 30, 1994.
The Company's operations generated revenues of $392,740,000 for the
quarter ended September 30, 1995, an increase of $74,655,000, or 23.5%, as
compared to the same period in 1994. The increase in revenues is primarily
attributable to increases in patient volume, the completion of the acquisition
of the NovaCare rehabilitation hospitals division (See Note 5 of "Notes to
Consolidated Financial Statements") and the addition of new outpatient centers.
Same store revenues for the quarter ended September 30, 1995 were $347,508,000,
an increase of $29,423,000, or 9.3%, as compared to the same period in 1994. New
store revenues were $45,232,000. Revenues generated from patients under Medicare
and Medicaid plans respectively accounted for 39.4% and 3.3% of revenue for the
third quarter of 1995, compared to 40.9% and 3.2% for the same period in 1994.
Revenues from any other single third-party payor were not significant in
relation to the Company's revenues. During the third quarter of 1995, same store
outpatient visits, inpatient days and surgical cases increased 15.0%, 9.4% and
14.2%, respectively. Revenue per outpatient visit, revenue per inpatient day and
revenue per surgical case for same store operations increased (decreased) by
0.3%, (0.8)% and 3.2%, respectively.
Operating expenses, at the operating unit level, were $275,555,000, or
70.2% of revenues, for the quarter ended September 30, 1995, compared to 73.2%
of revenues for the third quarter of 1994. Same store operating expenses were
$241,918,000, or 69.6% of comparable revenue. New store operating expenses were
$33,637,000, or 74.4% of comparable revenue. Corporate general and
administrative expenses decreased from $10,640,000 during the 1994 quarter to
$8,818,000 during the 1995 quarter. As a percentage of revenue, corporate
general and administrative expenses decreased from 3.3% in the 1994 quarter to
2.2% in the 1995 quarter. The provision for doubtful accounts was $6,401,000, or
1.6% of revenues, for the third quarter of 1995, compared to $6,404,000, or 2.0%
of revenues, for the same period in 1994. Management believes that this
provision is adequate to cover any uncollectible revenues.
Depreciation and amortization expense was $31,104,000 for the quarter
ended September 30, 1995, compared to $22,180,000 for the same period in 1994.
The increase represents the investment in additional assets by the Company.
Interest expense was $24,405,000 for the quarter ended September 30, 1995,
compared to $18,652,000 for the quarter ended September 30,1994. The increase in
interest expense corresponds to the increase in the average outstanding balance
in long-term debt by the Company. For the third quarter of 1995, interest income
was $1,759,000, compared to $1,658,000 for the third quarter of 1994.
Income before minority interests and income taxes for the third quarter
of 1995 was $48,216,000, compared to $28,729,000 for the same period in 1994.
Minority interests decreased income before income taxes by $4,453,000 for the
quarter ended September 30, 1995, compared to decreasing income before income
taxes by $1,285,000 for the third quarter of 1994. The provision for income
taxes for the third quarter of 1995 was $16,630,000, compared to $11,314,000 for
the same period in 1994, resulting in
13
<PAGE>
effective tax rates of 38.0% and 41.2%, respectively. Net income for the third
quarter of 1995 was $27,133,000, compared to $16,130,000 for the third quarter
of 1994.
Results of Operations -- Nine Months Ended September 30, 1995
Revenues for the nine months ended September 30, 1995 were
$1,109,689,000, an increase of $207,421,000, or 23.0%, over the nine months
ended September 30, 1994. Same store revenues were $1,010,519,000, an increase
of $108,251,000, or 12.0%, as compared to the same period in 1994. New store
revenues were $99,170,000. The increase in revenues is primarily attributable to
the acquisition of the NovaCare rehabilitation hospitals division, increases in
patient volume, and the addition of new outpatient centers. Revenues generated
from patients under Medicare and Medicaid plans respectively accounted for 40.7%
and 2.7% of revenue for the first nine months of 1995, compared to 41.2% and
3.3% for the same period in 1994. Revenues from any other single third-party
payor were not significant in relation to the Company's revenues. During the
first nine months of 1995, same store outpatient visits, inpatient days and
surgical cases increased 26.0%, 7.9% and 12.3%, respectively. Revenue per
outpatient visit, revenue per inpatient day and revenue per surgical case for
same store operations increased (decreased) by (1.4)%, 1.1% and 1.6%,
respectively.
Operating expenses, at the operating unit level, were $788,593,000, or
71.1% of revenues, for the nine months ended September 30, 1995, as compared to
$670,607,000, or 74.3% of revenues, for the first nine months of 1994. Same
store operating expenses were $714,644,000, or 70.7% of comparable revenue. New
store operating expenses were $73,949,000, or 74.6% of comparable revenue.
As a result of the NovaCare and SHC acquisitions, the Company
recognized $29,194,000 in merger costs during the second quarter of 1995. Fees
related to legal, accounting and financial advisory services accounted for
$3,400,000 of the expense. Costs and expenses related to the SHC Bond Tender
Offer (see "Liquidity and Capital Resources") totaled $14,606,000. Accruals for
employee separations were approximately $1,188,000. In addition, the Company has
provided approximately $10,000,000 for the write-down of certain assets to net
realizable value as the result of a planned facility consolidation. The
consolidation is applicable in a market where the Company's existing services
overlap with those of an acquired facility.
Also, during the second quarter of 1995, the Company recognized an
$11,192,000 loss on impairment of assets. The impaired assets relate to six SHC
facilities in which the projected undiscounted cash flows did not support the
book value of the long-lived assets of such facilities.
Net income for the nine months ended September 30, 1995 (including
non-recurring expenses) was $44,910,000, compared to $45,356,000 for the same
period in 1994.
Liquidity and Capital Resources
As of September 30, 1995, the Company had working capital of
$299,157,000, including cash and marketable securities of $93,169,000. Working
capital at December 31, 1994 was $231,327,000, including cash and marketable
securities of $85,363,000. For the first nine months of 1995, cash provided by
operations was $127,313,000 compared to $107,481,000 for the same period in
1994. Additions to property, plant, and equipment and acquisitions accounted for
$98,658,000 and $304,499,000, respectively, during the first nine months of
1995. Those same investing activities accounted for $113,386,000 and
$58,910,000, respectively, in the same period in 1994. Financing activities
provided $324,717,000 and $50,771,000 during the first nine months of 1995 and
1994, respectively. Net borrowing proceeds (borrowing less principal reductions)
for the first nine months of 1995 and 1994 were $325,663,000 and $45,161,000,
respectively.
Accounts receivable were $298,178,000 at September 30, 1995, compared
to $242,659,000 at December 31, 1994. The number of days of average revenues in
average receivables was 66.5 at
14
<PAGE>
September 30, 1995, compared to 62.4 at December 31, 1994. The concentration of
net accounts receivable from patients, third-party payors, insurance companies
and others at September 30, 1995 is consistent with the related concentration of
revenues for the period then ended.
At September 30, 1995, the Company had a $1,000,000,000 revolving line
of credit with NationsBank, N.A. (Carolinas) and 28 other participating banks.
Interest is paid based on LIBOR plus a predetermined margin, prime, or
competitively bid rates from the participating banks. This credit facility has
an initial maturity date of June 1, 1998, with two one-year renewals. The
Company is currently seeking an amendment to the credit facility which would
extend the maturity to October 2000. The Company provided a negative pledge on
all assets and granted the banks a first priority security interest in all
shares of stock of its subsidiaries and rights and interests in its controlled
partnerships. The effective interest rate on the average outstanding balance
under the revolving line of credit was 7.14% for the nine months ended September
30, 1995, compared to the average prime rate of 8.86% during the same period. At
September 30, 1995, the Company had drawn $935,000,000 under its revolving line
of credit.
On June 20, 1995, the Company purchased $67,500,000 of the $75,000,000
outstanding principal amount of 11.5% Senior Subordinated Notes due 2004 of SHC
(the "SHC Bond Tender Offer") for 115% of the face value of the Notes. In July
1995, the remaining $7,500,000 balance was purchased on the open market.
The Company intends to pursue the acquisition or development of
additional healthcare operations, including comprehensive outpatient
rehabilitation facilities, ambulatory surgery centers, inpatient rehabilitation
facilities and companies engaged in the provision of outpatient surgery and
rehabilitation-related services, and to expand certain of its existing
facilities. While it is not possible to estimate precisely the amounts which
will actually be expended in the foregoing areas, the Company anticipates that
over the next twelve months, it will spend approximately $80,000,000 for the
acquisition and/or development of new outpatient facilities and approximately
$70,000,000 for inpatient facility projects and the construction and equipping
of additions to existing inpatient facilities.
On October 3, 1995, the Company consummated the issue of 14,950,000
shares of its Common Stock in a secondary public offering. The net proceeds to
the Company, after deducting underwriting discounts, commissions and offering
costs were approximately $335,000,000, of which $319,000,000 was used to reduce
outstanding indebtedness under the Company's existing credit facility.
On October 9, 1995, the Company entered into a Plan and Agreement of
Merger with Surgical Care Affiliates, Inc. ("SCA"), pursuant to which the
Company has agreed to acquire SCA through a stock-for-stock merger to be
accounted for as a pooling of interests. SCA operates 67 surgery centers (with
an additional 10 under development or construction) in 24 states. Under the
terms of the Plan and Agreement of Merger, the Company will issue 1.22 shares of
its Common Stock for each share of SCA's common stock, subject to adjustment in
certain circumstances. The transaction is subject to the satisfaction of various
conditions, including receipt of all required regulatory approvals. The Company
currently expects the transaction to be consummated in early 1996.
In addition, on October 15, 1995, the Company entered into a Stock
Purchase Agreement with Caremark International Inc. ("Caremark"), pursuant to
which the Company has agreed to acquire Caremark's wholly-owned subsidiary
Caremark Orthopedic Services Inc. ("COS") in a transaction to be accounted for
as an asset purchase. COS operates approximately 120 outpatient rehabilitation
centers in 13 states. In connection with the acquisition, the Company will pay a
cash purchase price of approximately $127,500,000. The transaction is subject to
the satisfaction of various conditions. The Company currently expects the
transaction to be completed by year-end 1995.
The Company believes that existing cash, cash flow from operations,
and borrowings under the revolving line of credit will be sufficient to satisfy
the Company's estimated cash requirements for the next twelve months and
thereafter.
15
<PAGE>
Inflation in recent years has not had a significant effect on the
Company's business, and is not expected to adversely affect the Company in the
future unless it increases significantly.
16
<PAGE>
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
11. Computation of Income Per Share (unaudited)
27. Financial Data Schedule
(b) Reports on Form 8-K
During the three months ended September 30, 1995, the Company
filed (i) a Current Report on Form 8-K dated August 15, 1995,
reporting under Item 5 the combined results of operations of the
Company and Surgical Health Corporation for the month of July
1995, (ii) a Current Report on Form 8-K dated August 23, 1995,
reporting under Item 5 the pending acquisition of Sutter Surgery
Centers, Inc., and (iii) an Amendment on Form 8-K/A, dated
September 8, 1995, amending its previously-filed Current Report
on Form 8-K relating to the acquisition of Rehab Systems Company
from NovaCare, Inc., reporting under Items 5 and 7 the
historical financial statements of Rehab Systems Company as
audited by Ernst & Young LLP, the Company's independent
auditors.
No other items of Part II are applicable to the Registrant for the
period covered by this Quarterly Report on Form 10-Q.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHSOUTH Corporation
(Registrant)
Date: November 3, 1995 RICHARD M. SCRUSHY
------------------------
Richard M. Scrushy
Chairman of the Board and
Chief Executive Officer
Date: November 3, 1995 AARON BEAM, JR.
------------------------
Aaron Beam, Jr.
Executive Vice President and
Chief Financial Officer
18
<PAGE>
EXHIBIT 11
HEALTHSOUTH Corporation and Subsidiaries
COMPUTATION OF INCOME PER SHARE (UNAUDITED)
(In Thousands, Except for Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
------ ------ ------ ------
PRIMARY:
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 80,644 75,993 80,118 75,410
Net effect of dilutive stock options 8,273 9,355 7,655 9,099
------ ------ ------ ------
Total Common and Common Equivalent Shares 88,917 85,348 87,773 84,509
====== ====== ====== ======
Net income / (loss) $ 27,133 $ 16,130 $ 44,910 $ 45,356
====== ====== ====== ======
Net income / (loss) per common and common
equivalent share $ 0.31 $ 0.19 $ 0.51 $ 0.54
====== ====== ====== ======
FULLY DILUTED:
Weighted average common shares outstanding 80,644 75,993 80,118 75,410
Net effect of dilutive stock options 8,273 9,355 7,655 9,099
------ ------ ------ ------
88,917 85,348 87,773 84,509
Assumed conversion of 5% Convertible Subordinated
Debentures due 2001 6,113 - (1) 6,113 - (1)
------ ------ ------ ------
Total Common and Common Equivalent Shares,
Fully Diluted 95,030 - 93,886 -
====== ====== ====== ======
Net income $ 27,133 $ 16,130 $ 44,910 $ 45,356
Elimination of interest and amortization on 5%
Convertible Subordinated Debentures due 2001, less
the related effect on the provision for income taxes 963 - (1) 2,857 - (1)
------ ------ ------ ------
Net income, fully diluted $ 28,096 - $ 47,767 -
====== ====== ====== ======
Net income per common and common equivalent share $ 0.30 N/A $ 0.51 N/A
====== ====== ====== ======
(1) There were no other potentially dilutive securities outstanding for this period.
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-END> Sep-30-1995
<CASH> $86,952
<SECURITIES> $6,217
<RECEIVABLES> $508,813
<ALLOWANCES> ($210,635)
<INVENTORY> $30,428
<CURRENT-ASSETS> $494,253
<PP&E> $1,214,079
<DEPRECIATION> ($164,704)
<TOTAL-ASSETS> $2,150,680
<CURRENT-LIABILITIES> $195,096
<BONDS> $1,386,450
$0
$0
<COMMON> $954
<OTHER-SE> $546,593
<TOTAL-LIABILITY-AND-EQUITY> $2,150,680
<SALES> $0
<TOTAL-REVENUES> $1,109,689
<CGS> $0
<TOTAL-COSTS> $817,056
<OTHER-EXPENSES> $86,767
<LOSS-PROVISION> $20,520
<INTEREST-EXPENSE> $68,697
<INCOME-PRETAX> $80,792
<INCOME-TAX> $27,525
<INCOME-CONTINUING> $44,910
<DISCONTINUED> $0
<EXTRAORDINARY> $0
<CHANGES> $0
<NET-INCOME> $44,910
<EPS-PRIMARY> $.51
<EPS-DILUTED> $.51
</TABLE>
