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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
|X| Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required] For the fiscal year ended December
31, 1995; or
| | Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] For the transition period from
______ to ______
Commission File Number 1-10315
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HEALTHSOUTH Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware 63-0860407
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(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
Two Perimeter Park South
Birmingham, Alabama 35243
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(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, Including Area Code: (205) 967-7116
--------------
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
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Common Stock, par value New York Stock Exchange
$.01 per share
9.5% Senior Subordinated New York Stock Exchange
Notes due 2001
5% Convertible Subordinated New York Stock Exchange
Debentures due 2001
Securities Registered Pursuant to Section 12(g) of the Act: NONE
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 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. | |
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant as of March 15, 1996:
Common Stock, par value $.01 per share -- $5,339,826,576
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 15, 1996
----- -----------------------------
Common Stock, par value
$.01 per share 152,483,607 shares
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Annual Report on Form 10-K.
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Index to Exhibits Page _____
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HEALTHSOUTH Corporation ("HEALTHSOUTH" or the "Company") files this
Amendment No. 1 to its Annual Report on Form 10-K for the year ended December
31, 1995 to amend Items 7, 8 and 14 thereof to reflect the restatement of its
audited consolidated financial statements at December 31, 1994 and 1995, and for
the years ended December 31, 1993, 1994 and 1995, and the resulting revisions to
Management's Discussion and Analysis of Financial Condition and Results of
Operations, to reflect the effects of HEALTHSOUTH'S acquisitions of Surgical
Care Affiliates, Inc. ("SCA") and Advantage Health Corporation ("Advantage
Health"). HEALTHSOUTH acquired both SCA and Advantage Health during the first
quarter of 1996, in transactions that were accounted for as poolings of
interests.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
The following discussion is intended to facilitate the understanding
and assessment of significant changes and trends related to the results of
operations and financial condition of the Company, including certain factors
related to recent acquisitions by the Company, the timing and nature of which
have significantly affected the Company's results of operations. This discussion
and analysis should be read in conjunction with the Company's consolidated
financial statements and notes thereto included elsewhere in this Annual Report
on Form 10-K.
The Company completed the following acquisitions over the last two
years:
* On December 31, 1993, HEALTHSOUTH acquired substantially all
of the assets of the rehabilitation services division of
National Medical Enterprises, Inc. (the "NME Selected
Hospitals Acquisition"). The purchase price was approximately
$315,000,000, plus net working capital. The Company acquired
28 inpatient rehabilitation facilities, with an aggregate of
2,296 licensed beds, and 45 outpatient rehabilitation centers.
* On December 29, 1994, HEALTHSOUTH acquired ReLife, Inc. (the
"ReLife Acquisition"). A total of 11,025,290 shares of
HEALTHSOUTH Common Stock were issued in the transaction,
representing a value of $180,000,000 at the time of the
acquisition. At that time, ReLife operated 31 inpatient
facilities with an aggregate of 1,102 licensed beds, including
nine freestanding rehabilitation hospitals, nine acute
rehabilitation units, five sub-acute rehabilitation units,
seven transitional living units and one residential facility,
and also provided outpatient rehabilitation services at 12
centers.
* Effective April 1, 1995, HEALTHSOUTH purchased the
operations of the rehabilitation hospital division of
NovaCare, Inc. (the "NovaCare Rehabilitation Hospitals
Acquisition"). The purchase price was approximately
$235,000,000. The NovaCare Rehabilitation Hospitals consisted
of 11 rehabilitation hospitals in seven states, 12 other
facilities and two Certificates of Need.
* On June 13, 1995, HEALTHSOUTH acquired Surgical Health
Corporation (the "SHC Acquisition"). A total of 8,531,480
shares of HEALTHSOUTH Common Stock were issued in the
transaction, representing a value of $155,000,000 at the time
of the acquisition. The Company also purchased SHC's
$75,000,000 aggregate principal amount of 11.5% Senior
Subordinated Notes due 2004 for an aggregate consideration of
approximately $86,000,000. At that time, SHC operated a
network of 36 freestanding surgery centers in 11 states, and
five mobile lithotripsy units.
* On October 26, 1995, HEALTHSOUTH acquired Sutter Surgery
Centers, Inc. (the "SSCI Acquisition"). A total of 1,776,001
shares of HEALTHSOUTH Common Stock were issued in the
transaction, representing a value of $44,444,000 at the time
of the acquisition. At that time, SSCI operated a network of
12 freestanding surgery centers in three states, with an
aggregate of 54 operating and procedure rooms.
* December 1, 1995, HEALTHSOUTH acquired Caremark Orthopedic
Services Inc. (the "Caremark Acquisition"). The purchase price
was approximately $127,500,000. At that time Caremark owned
and operated approximately 120 outpatient rehabilitation
centers in thirteen states.
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* On January 17, 1996, HEALTHSOUTH acquired Surgical Care
Affiliates, Inc. (the "SCA Acquisition"). A total of
45,928,339 shares of HEALTHSOUTH Common Stock were issued in
the transaction, representing a value of approximately
$1,400,000,000. At that time, SCA operated a network of 67
freestanding surgery centers in 24 states.
* On March 14, 1996, HEALTHSOUTH acquired Advantage Health
Corporation (the "Advantage Health Acquisition"). A total of
9,101,989 shares of HEALTHSOUTH Common Stock were issued in
the transaction, representing a value of approximately
$315,000,000. At that time, Advantage Health operated a
network of 136 sites of service, including four freestanding
rehabilitation hospitals, one freestanding multi-use hospital,
one nursing home, 68 outpatient rehabilitation facilities, 14
inpatient managed rehabilitation units, 24 rehabilitation
services management contracts and six managed sub-acute
rehabilitation units, primarily located in the northeastern
United States.
The NME Selected Hospitals Acquisition, the NovaCare Rehabilitation
Hospitals Acquisition and the Caremark Acquisition each were accounted for under
the purchase method of accounting and, accordingly, such operations are included
in the Company's consolidated financial information from their respective dates
of acquisition. The ReLife Acquisition, the SHC Acquisition, the SSCI
Acquisition, the SCA Acquisition and the Advantage Health Acquisition were each
accounted for as a pooling of interests and, with the exception of data set
forth relating to revenues derived from Medicare and Medicaid, all amounts shown
in the following discussion have been restated to reflect such acquisitions.
ReLife, SHC, SSCI, SCA and Advantage Health did not separately track such
revenues. The results of operations of SHC in turn reflect SHC's 1994
acquisition of Heritage Surgical Corporation (the "Heritage Acquisition"), which
also was accounted for as a pooling of interests.
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
regulators, 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, an impairment loss is
calculated based on the excess of the carrying value of the asset over the
asset's fair value.
Governmental, commercial and private payors have increasingly
recognized the need to contain their costs for healthcare services. These
payors, accordingly, are turning to closer monitoring of services, prior
authorization requirements, utilization review and increased utilization of
outpatient services. During the periods discussed below, the Company has
experienced an increased effort by these payors to contain costs through
negotiated discount pricing. The Company views these efforts as an opportunity
to demonstrate the effectiveness of its clinical programs and its ability to
provide its rehabilitative healthcare services efficiently. The Company has
entered into a number of contracts with payors to provide services and has
realized an increased volume of patients as a result.
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
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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, 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.
Results of Operations of the Company
Twelve-Month Periods Ended December 31, 1993 and 1994
The Company operated 283 outpatient rehabilitation locations at
December 31, 1994, compared to 203 outpatient rehabilitation locations at
December 31, 1993. In addition, the Company operated 82 inpatient facilities,
112 surgery centers and five medical centers at December 31, 1994, compared to
51 inpatient facilities, 95 surgery centers and four medical centers at December
31, 1993.
The Company's operations generated revenues of $1,649,199,000 in 1994,
an increase of $669,993,000, or 68.4%, as compared to 1993 revenues. Same store
revenues for the twelve months ended December 31, 1994 were $1,118,743,000, an
increase of $139,537,000, or 14.3%, as compared to the same period in 1993. New
store revenues for 1994 were $530,456,000. New store revenues primarily reflect
the 28 inpatient rehabilitation facilities and 45 associated outpatient
rehabilitation locations associated with the NME Selected Hospitals Acquisition.
The increase in revenues is primarily attributable to the addition of these
operations and increases in patient volume. Revenues generated from patients
under Medicare and Medicaid plans respectively accounted for 41.0% and 3.2% of
revenues for 1994, compared to 30.6% and 1.0% of revenues for 1993. The increase
in Medicare revenues is primarily attributable to the NME Selected Hospitals
Acquisition, since the acquired facilities had a greater proportion of Medicare
patients than the Company's historical experience in its existing facilities.
Revenues from any other single third-party payor were not significant in
relation to the Company's revenues. During 1994, same store outpatient visits,
inpatient days and surgery center cases increased 21.9%, 18.8% and 4.4%,
respectively. Revenue per outpatient visit, inpatient day and surgery case for
the same store operations decreased by 8.1%, 6.2% and 0.4%, respectively.
Operating expenses, at the operating unit level, were $1,161,758,000,
or 70.4% of revenues, for 1994, compared to 68.2% of revenues for 1993. Same
store operating expenses for 1994 were $796,343,000, or 71.2% of related
revenues. New store operating expenses were $365,415,000, or 68.9% of related
revenues. Corporate general and administrative expenses increased from
$37,043,000 in 1993 to $61,640,000 in 1994. As a percentage of revenues,
corporate general and administrative expense decreased from 3.8% in 1993 to 3.7%
in 1994. Total operating expenses were $1,223,398,000, or 74.2% of revenues, for
1994, compared to $705,244,000, or 72.0% of revenues, for 1993. The provision
for doubtful accounts was $32,904,000, or 2.0% of revenues, for 1994, compared
to $20,026,000, or 2.0% of revenues, for 1993.
Depreciation and amortization expense was $113,977,000 for 1994,
compared to $63,572,000 for 1993. The increase represents the investment in
additional assets by the Company. Interest expense increased to $73,644,000 in
1994, compared to $24,200,000 for 1993, primarily because of the increased
borrowings during the year under the Company's revolving line of credit, the
issuance of $250,000,000 principal amount of 9.5% Senior Subordinated Notes due
2001 and the issuance of $115,000,000 principal amount of 5% Convertible
Subordinated Debentures due 2001. For 1994, interest income was $6,387,000,
compared to $5,903,000 for 1993.
As a result of the NME Selected Hospitals Acquisition, the Company
recognized an expense of approximately $49,742,000 during the year ended
December 31, 1993. By recognizing this expense, the Company accrued
approximately $3,000,000 for costs related to certain employee separations and
relocations. In addition,
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the Company provided approximately $39,000,000 for the write-down of certain
assets to net realizable value as the result of planned facility consolidations,
and approximately $7,700,000 for the write-off of certain capitalized
development projects. The consolidations are applicable in selected markets
where the Company's services overlap with those of the acquired facilities. The
costs of development projects in certain target markets that were previously
capitalized were written off due to the acquisition of NME facilities in or near
those markets. For further discussion, see Note 10 of "Notes to Consolidated
Financial Statements".
During 1994 and 1995, the Company completed the implementation of the
plan of consolidation related to the NME Selected Hospitals Acquisition. The
accrual for costs related to employee separations was increased by $338,000 due
to a change in estimate. This adjustment was charged to operations in 1994. The
total accrual was then reduced by approximately $758,000 and $2,580,000 in
actual employee separation costs during 1994 and 1995, respectively. In
addition, assets with a net book value of $17,911,000 and $21,089,000 were
written off against the $39,000,000 provided for in the plan during 1994 and
1995, respectively. Finally, the Company wrote off all of the $7,700,000 in
capitalized development projects provided for in the plan during 1994.
Merger and acquisition related expenses in 1994 of $6,520,000 represent
costs incurred or accrued in connection with completing the ReLife Acquisition
($2,949,000) and the Heritage Acquisition ($3,571,000). For further discussion,
see Note 2 of "Notes to Consolidated Financial Statements".
During 1994, the Company recognized a $10,500,000 loss on impairment of
assets. This amount relates to the termination of a ReLife management contract
and a permanently damaged ReLife facility. The Company determined not to attempt
to reopen such damaged facility because, under its existing licensure, the
facility was not consistent with the Company's plans. Also during 1994, the
Company recognized a $4,500,000 loss on abandonment of a ReLife computer
project. For further discussion, see Note 17 of "Notes to Consolidated Financial
Statements".
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 closings of the three
surgery centers was completed by December 31, 1995. For further discussion, see
Note 15 of "Notes to Consolidated Financial Statements".
Income before minority interests and income taxes for 1994 was
$184,673,000, compared to $123,392,000 for 1993. Minority interests reduced
income before income taxes by $31,469,000 in 1994, compared to $29,377,000 in
1993. The provision for income taxes for 1994 was $65,121,000, compared to
$37,993,000 for 1993, resulting in effective tax rates of 42.5% for 1994 and
40.4% for 1993. Net income for 1994 was $88,083,000.
Twelve-Month Periods Ended December 31, 1994 and 1995
The Company operated 537 outpatient rehabilitation locations at
December 31, 1995, compared to 283 outpatient rehabilitation locations at
December 31, 1994. In addition, the Company operated 95 inpatient facilities,
122 surgery centers and five medical centers at December 31, 1995, compared to
82 inpatient facilities, 112 surgery centers and five medical centers at
December 31, 1994.
The Company's operations generated revenues of $2,003,146,000 in 1995,
an increase of $353,947,000, or 21.5%, as compared to 1994 revenues. Same store
revenues for the twelve months ended December 31, 1995 were $1,817,359,000, an
increase of $168,160,000, or 10.2%, as compared to the same period in 1994. New
store revenues for 1995 were $185,787,000. New store revenues reflect (1) the 11
rehabilitation hospitals and 12 other facilities associated with the Novacare
Rehabilitation Hospitals Acquisition, (2) the 120 outpatient rehabilitation
centers associated with the Caremark Acquisition, (3) the acquisition of five
surgery centers and one outpatient diagnostic imaging operation, and (4) the
acquisition of outpatient rehabilitation operations in 34 new markets. See
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Note 10 of "Notes to Consolidated Financial Statements". The increase in
revenues is primarily attributable to the addition of these operations and
increases in patient volume. Revenues generated from patients under Medicare and
Medicaid plans respectively accounted for 40.0% and 2.5% of total revenues for
1995, compared to 41.0% and 3.2% of total revenues for 1994. Revenues from any
other single third-party payor were not significant in relation to the Company's
total revenues. During 1995, same store outpatient visits, inpatient days and
surgery center cases increased 21.7%, 10.8% and 4.8%, respectively. Revenue per
outpatient visit, inpatient day and surgery case for same store operations
increased (decreased) by 0.8%, 2.5% and (0.9)%, respectively.
Operating expenses, at the operating unit level, were $1,371,740,000,
or 68.5% of revenues, for 1995, compared to 70.4% of revenues for 1994. Same
store operating expenses for 1995 were $1,243,508,000, or 68.4% of related
revenues. New store operating expenses were $128,232,000, or 69.0% of related
revenues. Corporate general and administrative expenses decreased from
$61,640,000 in 1994 to $56,920,000 in 1995. As a percentage of revenues,
corporate general and administrative expenses decreased from 3.7% in 1994 to
2.8% in 1995. Total operating expenses were $1,428,660,000, or 71.3% of
revenues, for 1995, compared to $1,223,398,000, or 74.2% of revenues, for 1994.
The provision for doubtful accounts was $37,659,000, or 1.9% of revenues, for
1995, compared to $32,904,000, or 2.0% of revenues, for 1994.
Depreciation and amortization expense was $143,322,000 for 1995,
compared to $113,977,000 for 1994. The increase resulted from the investment in
additional assets by the Company. Interest expense increased to $101,790,000 in
1995, compared to $73,644,000 for 1994, primarily because of the increased
average borrowings during 1995 under the Company's revolving line of credit. For
1995, interest income was $7,882,000 compared to $6,387,000 for 1994.
As a result of the NovaCare and SHC acquisitions, the Company
recognized $29,194,000 in merger and acquisition related expenses 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 purchase of the SHC Notes (see " -- Liquidity and Capital Resources" and
Note 7 of "Notes to Consolidated Financial Statements") totaled $14,606,000.
Accruals for employee separations were approximately $1,188,000. In addition,
the Company 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. The planned
employee separations and facility consolidation were completed by the end of
1995.
In the fourth quarter of 1995, the Company incurred direct costs and
expenses of $4,965,000 in connection with the SSCI Acquisition. These expenses
consist primarily of fees related to legal, accounting and financial advisory
services and are included in merger and acquisition related expenses for the
year ended December 31, 1995.
Also during 1995, the Company recognized a $53,549,000 loss on
impairment of assets. The impaired assets relate to six SHC facilities and eight
SCA facilities in which the projected undiscounted cash flows did not support
the book value of the long-lived assets of such facilities. See Note 17 of
"Notes to Consolidated Financial Statements".
Income before minority interests and income taxes for 1995 was
$211,889,000, compared to $184,673,000 for 1994. Minority interests reduced
income before income taxes by $43,147,000, compared to $31,469,000 for 1994. The
provision for income taxes for 1995 was $76,221,000, compared to $65,121,000 for
1994, resulting in effective tax rates of 45.2% for 1995 and 42.5% for 1994. Net
income for 1995 was $92,521,000.
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Liquidity and Capital Resources
At December 31, 1995, the Company had working capital of $406,125,000,
including cash and marketable securities of $156,321,000. Working capital at
December 31, 1994 was $282,667,000, including cash and marketable securities of
$129,971,000. For 1995, cash provided by operations was $306,157,000, compared
to $258,272,000 for 1994. The Company used $764,825,000 for investing activities
during 1995, compared to $324,876,000 for 1994. Additions to property, plant and
equipment and acquisitions accounted for $172,172,000 and $493,914,000,
respectively, during 1995. Those same investing activities accounted for
$195,297,000 and $116,650,000, respectively, in 1994. Financing activities
provided $494,100,000 and $58,975,000 during 1995 and 1994, respectively. Net
borrowing proceeds (borrowings less principal reductions) for 1995 and 1994 were
$213,155,000 and $88,017,000, respectively.
Net accounts receivable were $409,150,000 at December 31, 1995,
compared to $307,950,000 at December 31, 1994. The number of days of average
revenues in average receivables was 63.2 at December 31, 1995, compared to 59.3
at December 31, 1994. The increase is primarily attributable to approximately
$68,300,000 in net accounts receivable obtained through acquisitions during
1995, since the days' revenues in net accounts receivable of the acquired
facilities was generally greater than the Company's historical experience in its
existing facilities.
The Company has 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, a base rate or competitively bid
rates from the participating banks. This credit facility has a maturity date of
October 1, 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 7.01% for the twelve months ended December 31, 1995, compared
to the average prime rate of 8.83% during the same period. At December 31, 1995,
the Company had drawn $790,000,000 under its revolving line of credit. On April
18, 1996, the credit facility was amended and restated to increase the maximum
amount available thereunder to $1,250,000,000 and to eliminate the security
interests thereunder. See Note 7 of "Notes to Consolidated Financial
Statements".
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
for 115% of the face value of the Notes. In July 1995, the remaining $7,500,000
balance was purchased on the open market. See Note 7 of "Notes to Consolidated
Financial Statements".
The Company intends to pursue the acquisition or development of
additional healthcare operations, including comprehensive outpatient
rehabilitation facilities, inpatient rehabilitation facilities, ambulatory
surgery centers and companies engaged in the provision of rehabilitation-related
services, and to expand certain of its existing facilities. While it is not
possible to estimate precisely the amounts which will actually be expended in
the foregoing areas, the Company anticipates that over the next twelve months,
it will spend approximately $30,000,000 on maintenance and expansion of its
existing facilities and approximately $150,000,000 on development of the
Integrated Service Model. See Item 1, "Business -- Company Strategy".
Although the Company is continually considering and evaluating
acquisitions and opportunities for future growth, the Company has not entered
into any agreements with respect to material future acquisitions. The Company
believes that existing cash, cash flow from operations, and borrowings under the
revolving line of credit will be sufficient to satisfy the Company's estimated
cash requirements for the next twelve months, and for the reasonably foreseeable
future.
Inflation in recent years has not had a significant effect of the
Company's business, and is not expected to adversely affect the Company in the
future unless it increases significantly.
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Statements contained in this Annual Report on Form 10-K which are not
historical facts are forward-looking statements. In addition, the Company,
through its senior management, from time to time makes forward-looking public
statements concerning its expected future operations and performance and other
developments. Such forward- looking statements are necessarily estimates
reflecting the Company's best judgment based upon current information and
involve a number of risks and uncertainties, and there can be no assurance that
other factors will not affect the accuracy of such forward-looking statements.
While it is impossible to identify all such factors, factors which could cause
actual results to differ materially from those estimated by the Company include,
but are not limited to, changes in the regulation of the healthcare industry at
either or both of the federal and state levels, changes in reimbursement for the
Company's services by governmental or private payors, competitive pressures in
the healthcare industry and the Company's response thereto, the Company's
ability to obtain and retain favorable arrangements with third-party payors,
unanticipated delays in the Company's implementation of its Integrated Service
Model, general conditions in the economy and capital markets, and other factors
which may be identified from time to time in the Company's Securities and
Exchange Commission filings and other public announcements.
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Item 8. Financial Statements and Supplementary Data.
Consolidated financial statements of the Company meeting the
requirements of Regulation S-X are filed on the succeeding pages of this Item 8
of this Amendment No. 1 to Annual Report on Form 10-K/A, as listed below:
Page
----
Report of Independent Auditors............................................. 11
Audited Consolidated Financial Statements
Consolidated Balance Sheets................................................ 12
Consolidated Statements of Income.......................................... 14
Consolidated Statements of Stockholders' Equity............................ 15
Consolidated Statements of Cash Flows...................................... 17
Notes to Consolidated Financial Statements................................. 19
Other financial statements and schedules required under Regulation S-X
are listed in Item 14(a)2, and filed under Item 14(d), of this Amendment No. 1
to Annual Report on Form 10-K/A.
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Report of Ernst & Young LLP, Independent Auditors
The Board of Directors
HEALTHSOUTH Corporation
We have audited the accompanying consolidated balance sheets of HEALTHSOUTH
Corporation and Subsidiaries as of December 31, 1994 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1995. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
HEALTHSOUTH Corporation and Subsidiaries at December 31, 1994 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Birmingham, Alabama
May 23, 1996
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<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
---------------------------------------------
1994 1995
---------------------------------------------
(In thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (Note 3) $ 112,317 $ 152,244
Other marketable securities (Note 3) 17,654 4,077
Accounts receivable, net of allowances for doubtful
accounts and contractual adjustments of $163,151,000
in 1994 and $235,175,000 in 1995 307,950 409,150
Inventories 32,661 39,239
Prepaid expenses and other current assets 73,879 76,844
Deferred income taxes (Note 11) 14,748 21,977
---------------------------------------------
Total current assets 559,209 703,531
Other assets:
Loans to officers 1,340 1,625
Other (Note 4) 49,771 68,868
---------------------------------------------
51,111 70,493
Property, plant and equipment, net (Note 5) 1,048,112 1,283,560
Intangible assets, net (Note 6) 571,661 873,911
---------------------------------------------
Total assets $ 2,230,093 $ 2,931,495
=============================================
</TABLE>
- 12 -
<PAGE>
<TABLE>
<CAPTION>
December 31
---------------------------------------------
1994 1995
---------------------------------------------
(In thousands)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 103,798 $ 107,018
Salaries and wages payable 41,996 67,905
Accrued interest payable and other liabilities 94,464 87,308
Current portion of long-term debt (Note 7) 36,284 35,175
---------------------------------------------
Total current liabilities 276,542 297,406
Long-term debt (Note 7) 1,102,803 1,356,489
Deferred income taxes (Note 11) 20,914 23,733
Other long-term liabilities (Note 17) 10,642 8,459
Deferred revenue (Note 14) 7,526 1,525
Minority interests-limited partnerships (Note 9) 54,083 57,985
Commitments and contingent liabilities (Note 12)
Stockholders' equity:
Preferred stock, $.10 par value-1,500,000 shares
authorized; issued and outstanding-none - -
Common stock, $.01 par value-150,000,000 shares
authorized; issued-133,128,000 in 1994 and
152,193,000 in 1995 (Note 8) 1,331 1,522
Additional paid-in capital 529,697 888,216
Retained earnings 257,987 334,582
Treasury stock, at cost (919,000 shares in 1994 and (8,715) (16,065)
1,324,000 shares in 1995)
Receivable from Employee Stock Ownership
Plan (17,477) (15,886)
Notes receivable from stockholders (5,240) (6,471)
---------------------------------------------
Total stockholders' equity 757,583 1,185,898
---------------------------------------------
Total liabilities and stockholders' equity $ 2,230,093 $ 2,931,495
=============================================
</TABLE>
See accompanying notes.
- 13 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------------------------------
1993 1994 1995
-------------------------------------------------------------------
(In thousands, except for per share amounts)
<S> <C> <C> <C>
Revenues $ 979,206 $ 1,649,199 $ 2,003,146
Operating expenses:
Operating units 668,201 1,161,758 1,371,740
Corporate general and administrative 37,043 61,640 56,920
Provision for doubtful accounts 20,026 32,904 37,659
Depreciation and amortization 63,572 113,977 143,322
Interest expense 24,200 73,644 101,790
Interest income (5,903) (6,387) (7,882)
Merger and acquisition related
expenses (Notes 2 and 10) 333 6,520 34,159
Loss on impairment of assets (Note 17) - 10,500 53,549
Loss on abandonment of computer
project (Note 17) - 4,500 -
Loss on disposal of surgery centers
(Note 15) - 13,197 -
NME Selected Hospitals Acquisition
related expense (Note 10) 49,742 - -
Gain on sale of MCA stock (Note 1) - (7,727) -
Gain on sale of partnership interest (1,400) - -
-------------------------------------------------------------------
855,814 1,464,526 1,791,257
-------------------------------------------------------------------
Income from continuing operations
before income taxes and minority
interests 123,392 184,673 211,889
Provision for income taxes (Note 11) 37,993 65,121 76,221
-------------------------------------------------------------------
85,399 119,552 135,668
Minority interests 29,377 31,469 43,147
-------------------------------------------------------------------
Income from continuing operations 56,022 88,083 92,521
Income from discontinued operations
(Note 16) 4,452 - -
-------------------------------------------------------------------
Net income $ 60,474 $ 88,083 $ 92,521
===================================================================
Weighted average common and common
equivalent shares outstanding 132,479 140,427 148,730
===================================================================
Net income per common and common
equivalent share
Continuing operations $ 0.43 $ 0.63 $ 0.62
Discontinued operations 0.03 - -
-------------------------------------------------------------------
$ 0.46 $ 0.63 $ 0.62
===================================================================
Net income per common share-assuming
full dilution $ N/A $ 0.63 $ 0.62
===================================================================
</TABLE>
See accompanying notes.
- 14 -
<PAGE>
<TABLE>
<CAPTION>
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings
----------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Balance at December 31, 1992 126,666.0 $ 1,266.7 $ 464,595.2 $ 141,714.1
Proceeds from exercise of options (Note 8) 1,326.7 13.3 2,953.9 -
Proceeds from issuance of common shares 1,953.7 19.5 25,530.3 -
Income tax benefits related to incentive stock options
(Note 8) - - 584.7 -
Reduction in receivable from ESOP - - - -
Payments received on stockholders' notes receivable - - - -
Purchase of limited partnership units - - - (5,091.7)
Purchases of treasury stock - - - -
Net income - - - 60,474.0
Dividends paid - - - (6,033.0)
Distribution of HealthWise common stock (Note 16) - - - (13,085.0)
----------------------------------------------------------------------
Balance at December 31, 1993 129,946.4 1,299.5 493,664.1 177,978.4
Proceeds from exercise of options (Note 8) 2,296.3 23.0 16,341.0 -
Common shares exchanged in the exercise of options (22.0) (.2) (321.2) -
Proceeds from issuance of common shares 907.5 9.1 13,543.2 -
Income tax benefits related to incentive stock options (Note 8) - - 6,469.6 -
Reduction in receivable from ESOP - - - -
Payments received on stockholders' notes receivable - - - -
Purchase of limited partnership units - - - (1,838.0)
Purchase of treasury stock - - - -
Net income - - - 88,083.0
Dividends paid - - - (6,236.6)
----------------------------------------------------------------------
Balance at December 31, 1994 133,128.2 1,331.4 529,696.7 257,986.8
Adjustment for ReLife Merger (Note 2) 2,732.0 27.3 7,113.7 (3,734.0)
Proceeds from exercise of options (Note 8) 1,100.7 11.0 9,857.0 -
Proceeds from issuance of common shares 15,232.4 152.3 334,895.8 -
Income tax benefits related to incentive stock options (Note 8) - - 6,653.3 -
Reduction in receivable from ESOP - - - -
Loans made to stockholders - - - -
Purchase of limited partnership units - - - (4,767.3)
Purchases of treasury stock - - - -
Net income - - - 92,521.0
Dividends paid - - - (7,424.9)
======================================================================
Balance at December 31, 1995 152,193.3 $ 1,522.0 $ 888,216.5 $ 334,581.6
======================================================================
- 15 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity (continued)
Notes
Receivable Total
Treasury Stock Receivable from Stockholders'
Shares Amount from ESOP Stockholders Equity
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 71.0 $ (60.0) $ (19,642.0) $ (5,919.7) $ 581,954.3
Proceeds from exercise of options (Note 8) - - - - 2,967.2
Proceeds from issuance of common shares - - - - 25,549.8
Income tax benefits related to incentive stock
options (Note 8) - - - - 584.7
Reduction in receivable from ESOP - - 710.1 - 710.1
Payments received on stockholders' notes
receivable - - - 429.7 429.7
Purchase of limited partnership units - - - - (5,091.7)
Purchases of treasury stock 247.2 (2,063.0) - - (2,063.0)
Net income - - - - 60,474.0
Dividends paid - - - - (6,033.0)
Distribution of HealthWise common stock
(Note 16) - - - - (13,085.0)
-----------------------------------------------------------------------------
Balance at December 31, 1993 318.2 (2,123.0) (18,931.9) (5,490.0) 646,397.1
Proceeds from exercise of options (Note 8) - - - - 16,364.0
Common shares exchanged in the exercise of
options - - - - (321.4)
Proceeds from issuance of common shares - - - - 13,552.3
Income tax benefits related to incentive stock
options (Note 8) - - - - 6,469.6
Reduction in receivable from ESOP - - 1,455.0 - 1,455.0
Payments received on stockholders' notes
receivable - - - 250.0 250.0
Purchase of limited partnership units - - - - (1,838.0)
Purchase of treasury stock 600.7 (6,591.8) - - (6,591.8)
Net income - - - - 88,083.0
Dividends paid - - - - (6,236.6)
-----------------------------------------------------------------------------
Balance at December 31, 1994 918.9 (8,714.8) (17,476.9) (5,240.0) 757,583.2
Adjustment for ReLife Merger (Note 2) - - - - 3,407.0
Proceeds from exercise of options (Note 8) - - - - 9,868.0
Proceeds from issuance of common shares - - - - 335,048.1
Income tax benefits related to incentive stock
options (Note 8) - - - - 6,653.3
Reduction in receivable from ESOP - - 1,590.9 - 1,590.9
Loans made to stockholders - - - (1,231.0) (1,231.0)
Purchase of limited partnership units - - - - (4,767.3)
Purchases of treasury stock 404.8 (7,350.0) - - (7,350.0)
Net income - - - - 92,521.0
Dividends paid - - - - (7,424.9)
===============================================================================
Balance at December 31, 1995 1,323.7 $ (16,064.8) $ (15,886.0) $ (6,471.0) $ 1,185,898.3
===============================================================================
See accompanying notes.
</TABLE>
- 16 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------------------
1993 1994 1995
------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Operating activities
Net income $ 60,474 $ 88,083 $ 92,521
Adjustments to reconcile net income to net cash
provided by operating activities:
Net income from discontinued operations (4,452) - -
Depreciation and amortization 63,572 113,977 143,322
Provision for doubtful accounts 20,026 32,904 37,659
Provision for losses on impairment of assets - 10,500 53,549
Provision for losses on abandonment of
computer project - 4,500 -
Merger and acquisition related expenses - - 34,159
NME Selected Hospitals Acquisition related
expense 49,742 - -
Loss on disposal of surgery center - 13,197 -
Income applicable to minority interests of
limited partnerships 29,377 31,469 43,147
(Benefit) provision for deferred income taxes (1,859) (15,882) 380
Provision for deferred revenue (49) (164) (1,990)
Gain on sale of property, plant and equipment - (623) -
Gain on sale of partnership interests (1,400) - -
Changes in operating assets and
liabilities, net of effects of acquisitions:
Accounts receivable (41,594) (97,167) (65,382)
Inventories, prepaid expenses and other
current assets (21,821) (15,251) 732
Accounts payable and accrued expenses (1,856) 92,729 (31,940)
------------------------------------------------------
Net cash provided by operating activities 150,160 258,272 306,157
Investing activities
Purchases of property, plant and equipment (176,220) (195,297) (172,172)
Proceeds from sale of property, plant and equipment - 68,330 14,541
Additions to intangible assets, net of effects of
acquisitions (47,107) (69,119) (117,552)
Assets obtained through acquisitions, net of
liabilities assumed (471,200) (116,650) (493,914)
Changes in other assets (6,463) (21,962) (6,963)
Proceeds received on sale of other marketable
securities 20,554 18,948 22,161
Investments in other marketable securities (23,344) (9,126) (10,926)
------------------------------------------------------
Net cash used in investing activities (703,780) (324,876) (764,825)
</TABLE>
- 17 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------------------
1993 1994 1995
------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Financing activities
Proceeds from borrowings $ 590,444 $ 1,058,479 $ 685,816
Principal payments on long-term debt and leases (42,435) (970,462) (472,661)
Proceeds from exercise of options 2,950 14,727 9,868
Proceeds from issuance of common stock 15,476 1,136 330,954
Purchase of treasury stock (2,063) (6,592) (7,350)
Reduction in Receivable from ESOP 710 1,455 1,591
Payments received on (loans made to) stockholders 429 250 (1,231)
Dividends paid (6,033) (6,237) (7,425)
Proceeds from investment by minority interests 10,988 2,268 1,103
Purchase of limited partnership interests (3,784) (1,698) (10,076)
Payment of cash distributions to limited partners (27,722) (34,351) (36,489)
------------------------------------------------------
Net cash provided by financing activities 538,960 58,975 494,100
------------------------------------------------------
(Decrease) increase in cash and cash equivalents (14,660) (7,629) 35,432
Cash and cash equivalents at beginning of year
(Note 2) 134,606 119,946 116,812
------------------------------------------------------
Cash and cash equivalents at end of year $ 119,946 $ 112,317 $ 152,244
======================================================
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 22,080 $ 59,833 $ 100,189
Income taxes 42,418 60,166 83,059
</TABLE>
Non-cash investing activities:
The Company assumed liabilities of $94,074,000, $32,027,000 and $55,828,000
during the years ended December 31, 1993, 1994 and 1995, respectively, in
conjunction with its acquisitions. During the years ended December 31, 1993 and
1994, the Company issued 812,000 and 624,000 common shares, respectively, with a
market value of $8,988,000 and $9,923,000, respectively, as consideration for
acquisitions.
Non-cash financing activities:
During 1995, the Company had a two-for-one stock split on its common stock,
which was effected in the form of a one hundred percent stock dividend.
The Company received a tax benefit from the disqualifying disposition of
incentive stock options of $585,000, $6,470,000 and $6,653,000 for the years
ended December 31, 1993, 1994 and 1995, respectively.
During the year ended December 31, 1994, 11,000 common shares were exchanged in
the exercise of options. The shares exchanged had a market value on the date of
exchange of $321,000.
See accompanying notes.
- 18 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1995
1. Significant Accounting Policies
The significant accounting policies followed by HEALTHSOUTH Corporation and its
subsidiaries (the Company) are presented as an integral part of the consolidated
financial statements.
Basis of Presentation
The accompanying financial statements have been restated for all periods to
account for the mergers with Surgical Care Affiliates, Inc. and Advantage Health
Corporation effective January 17, 1996 and March 14, 1996, respectively (see
Note 2).
Principles of Consolidation
The consolidated financial statements include the accounts of HEALTHSOUTH
Corporation ("HEALTHSOUTH") and its wholly-owned subsidiaries, as well as its
limited partnerships (see Note 9). All significant intercompany accounts and
transactions have been eliminated in consolidation.
HEALTHSOUTH Corporation is engaged in the business of providing comprehensive
rehabilitative, clinical and surgical healthcare services on an inpatient and
outpatient basis.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the accompanying consolidated financial
statements and notes. Actual results could differ from those estimates.
Marketable Securities
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, if material, reported as a separate
component of stockholders' equity, net of tax. During 1994, marketable
securities consisting of $13,360,507 of common stock were sold and the resulting
gain was recognized in the consolidated statement of income. The adjusted cost
of the specific security sold method is used to compute gain or loss on the sale
of securities. Interest and dividends on securities classified as
available-for-sale are included in investment income. Marketable equity
securities and debt securities of the Company have maturities of less than one
year.
- 19 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Accounts Receivable and Third-Party Reimbursement Activities
Receivables from patients, insurance companies and third-party contractual
insured accounts (Medicare and Medicaid) are based on payment agreements which
generally result in the Company collecting an amount different from the
established rates. Final determination of the settlement is subject to review by
appropriate authorities. Adequate allowances are provided for doubtful accounts
and contractual adjustments. Uncollectible accounts are written off against the
allowance for doubtful accounts after adequate collection efforts are made. Net
accounts receivable include only those amounts estimated by management to be
collectible.
The concentration of net accounts receivable from third-party contractual payors
and others, as a percentage of total net accounts receivable, was as follows:
December 31
--------------------------------------------
1994 1995
--------------------------------------------
Medicare 34% 24%
Medicaid 6 6
Other 60 70
--------------------------------------------
100% 100%
============================================
Inventories
Inventories are stated at the lower of cost or market using the specific
identification method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Upon sale or retirement of
property, plant or equipment, the cost and related accumulated depreciation are
eliminated from the respective account and the resulting gain or loss is
included in the results of operations.
- 20 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Property, Plant and Equipment (continued)
Interest cost incurred during the construction of a facility is capitalized. The
Company incurred interest of $26,864,000, $76,038,000 and $103,731,000, of which
$2,664,000, $2,394,000 and $1,941,000 was capitalized, during 1993, 1994 and
1995, respectively.
Depreciation and amortization is computed using the straight-line method over
the estimated useful lives of the assets or the term of the lease, as
appropriate. The estimated useful life of buildings is 30-40 years and the
general range of useful lives for leasehold improvements, furniture, fixtures
and equipment is 10-15 years.
Intangible Assets
Cost in excess of net asset value of purchased facilities is amortized over 20
to 40 years using the straight-line method. Organization and start-up costs
incurred prior to opening a new facility and partnership formation costs are
deferred and amortized on a straight-line basis over a period of 36 months.
Organization, partnership formation and start-up costs for a project that is
subsequently abandoned are charged to operations in that period. Debt issue
costs are amortized over the term of the debt. Noncompete agreements are
amortized using the straight-line method over the term of the agreements.
Minority Interests
The equity of minority investors in limited partnerships of the Company is
reported on the balance sheet as minority interests. Minority interests reported
in the consolidated income statement reflect the respective interests in the
income or loss of the limited partnerships attributable to the minority
investors, the effect of which is removed from the results of operations of the
Company.
Revenues
Revenues include net patient service revenues and other operating revenues. Net
patient service revenues are 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.
- 21 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Income per Common and Common Equivalent Share
Income per common and common equivalent share is computed based on the weighted
average number of common shares and common equivalent shares outstanding during
the periods, as adjusted for the two-for-one stock split declared in April 1995.
Common equivalent shares include dilutive employees' stock options, less the
number of treasury shares assumed to be purchased from the proceeds using the
average market price of the Company's common stock. Fully diluted earnings per
share (based on 145,149,000 shares in 1994 and 154,843,000 shares in 1995)
assumes conversion of the 5% Convertible Subordinated Debentures due 2001 (see
Note 7).
Impairment of Assets
In accordance with FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of", the Company records
impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amounts of those assets. Effective January 1, 1995, the company adopted FASB 121
to account for long-lived assets.
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 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, an impairment loss is calculated based on the excess of the
carrying amount of the asset over the asset's fair value.
- 22 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Stock Option Plan
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided for under FASB Statement No. 123 "Accounting for Stock-Based
Compensation," requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
2. Mergers
Effective December 29, 1994, the Company merged with ReLife, Inc. ("ReLife") and
in connection therewith issued 11,025,290 shares of its common stock for all of
ReLife's outstanding common stock. Prior to the merger, ReLife provided a system
of rehabilitation services and operated 31 inpatient facilities with an
aggregate of approximately 1,100 licensed beds, including nine freestanding
rehabilitation hospitals, nine acute rehabilitation units, five sub-acute
rehabilitation units, seven transitional living units and one residential
facility, and provided outpatient rehabilitation services at twelve outpatient
centers. Costs and expenses of $2,949,000, primarily legal, accounting and
financial advisory fees, incurred by HEALTHSOUTH in connection with the ReLife
merger have been recorded in operations in 1994 and reported as merger expenses
in the accompanying consolidated statements of income.
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 common and preferred stock. Prior to the merger, SHC operated a
network of 36 freestanding surgery centers and five mobile lithotripters in
eleven states, with an aggregate of 156 operating and procedure rooms. Costs and
expenses of approximately $19,194,000 incurred by the Company in connection with
the SHC merger have been recorded in operations during 1995 and reported as
merger expenses in the accompanying consolidated statements of income. Fees
related to legal, accounting and financial advisory services accounted for
$3,400,000 of the expense. Costs and expense related to the retirement of the
SHC Notes (see Note 7) totaled $14,606,000. Costs related to employee
separations were approximately $1,188,000.
- 23 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Mergers (continued)
SHC merged with Ballas Outpatient Management, Inc. and Midwest Anesthesia, Inc.
on February 11, 1993 in a transaction accounted for as a pooling of interests.
SHC recorded merger costs of $333,000 in connection with this transaction in
1993. SHC merged with Heritage Surgical Corporation on January 18, 1994 in a
transaction accounted for as a pooling of interests. SHC recorded merger costs
of $3,571,000 in connection with this transaction in 1994. SHC's historical
financial statements for the periods prior to the two mergers described above
have been restated to include the results of the acquired companies for all
periods presented.
Effective October 26, 1995, the Company merged with Sutter Surgery Centers, Inc.
("SSCI") and in connection therewith issued 1,776,001 shares of its common stock
in exchange for all of SSCI's outstanding common stock. Prior to the merger,
SSCI operated a network of 12 freestanding surgery centers in three states, with
an aggregate of 54 operating and procedure rooms. Costs and expenses of
approximately $4,965,000, primarily legal, accounting and financial advisory
fees, incurred by the Company in connection with the SSCI merger have been
recorded in operations and reported as merger expenses in the accompanying
consolidated statements of income.
Effective January 17, 1996, the Company merged with Surgical Care Affiliates,
Inc. ("SCA") and in connection therewith issued 45,928,339 shares of its common
stock in exchange for all of SCA's outstanding common stock. Prior to the
merger, SCA operated 67 surgery centers in 24 states. Costs and expenses of
approximately $19,727,000 primarily legal, accounting and financial advisory
fees, incurred by the Company in connection with the SCA merger have been
recorded in operations as merger costs during the quarter ended March 31, 1996
(see Note 18).
Effective March 14, 1996, the Company merged with Advantage Health Corporation
("Advantage Health") and in connection therewith issued 9,101,989 shares of its
common stock in exchange for all of Advantage Health's outstanding common stock.
Prior to the merger, Advantage Health operated a network of 136 sites of
service, including four freestanding rehabilitation hospitals, one freestanding
multi-use hospital, one nursing home, 68 outpatient rehabilitation facilities,
14 inpatient managed rehabilitation units, 24 rehabilitation services management
contracts and six managed sub-acute rehabilitation units. Costs and expenses of
approximately $9,212,000, primarily legal, accounting and financial advisory
fees, incurred by the Company in connection with the Advantage
- 24 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Mergers (continued)
Health merger have been recorded in operations as merger costs during the
quarter ended March 31, 1996 (see Note 18). Prior to the merger, Advantage
Health reported on a fiscal year ending on August 31; accordingly, the
historical financial statements of Advantage Health have been recast to a
November 30 fiscal-year end to more closely conform to the Company's calendar
fiscal-year end. The accompanying consolidated financial statements are based on
a combination of the Company's results for a December 31 fiscal year and
Advantage Health's results for its recasted November 30 year-end for all periods
presented.
The mergers of the Company with ReLife, SHC, SSCI, SCA and Advantage Health were
accounted for as poolings of interests and, accordingly, the Company's
consolidated financial statements have been restated to include the results of
the acquired companies for all periods presented.
Combined and separate results of the Company and its 1995 mergers, SHC and SSCI,
and 1996 mergers, SCA and Advantage Health, are as follows (in thousands):
<TABLE>
<CAPTION>
Advantage
HEALTHSOUTH SHC SSCI SCA Health Combined
--------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Year ended
December 31, 1993
Revenues $ 575,346 $ 80,983 $ 22,096 $ 199,270 $ 101,511 $ 979,206
Net income 13,592 3,605 139 36,668 6,470 60,474
Year ended
December 31, 1994
Revenues 1,127,441 108,749 38,175 239,272 135,562 1,649,199
Net income
(loss) 53,225 (3,264) 532 29,280 8,310 88,083
Year ended
December 31, 1995
Revenues 1,475,884 50,935 29,868 263,866 182,593 2,003,146
Net income 76,819 1,090 1,040 3,322 10,250 92,521
</TABLE>
- 25 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Mergers (continued)
There were no material transactions between the Company, ReLife, SHC, SSCI, SCA
and Advantage Health prior to the mergers. The effects of conforming the
accounting policies of the combined companies are not material.
Prior to its merger with the Company, 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
the Company and the former ReLife 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
--------------------
Net loss before income taxes and minority interests $ (3,734)
====================
- 26 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Mergers (continued)
Statement of Cash Flow Data:
Net cash provided by operating activities $ 38,077
Net cash used in investing activities (9,632)
Net cash used in financing activities (23,950)
---------------------
Net increase in cash $ 4,495
=====================
During the three months ended December 31, 1994, ReLife received $7,141,000 in
proceeds from the exercise of stock options.
3. Cash, Cash Equivalents and Other Marketable Securities
Cash, cash equivalents and other marketable securities consisted of the
following:
<TABLE>
<CAPTION>
December 31
------------------- ---------------------
1994 1995
------------------- ---------------------
(In thousands)
<S> <C> <C>
Cash $ 99,959 $ 140,476
Municipal put bonds 2,100 2,095
Tax advantaged auction preferred stocks 7,000 7,200
U.S. Government and Agency obligations 3,258 2,473
------------------- ---------------------
Total cash and cash equivalents 112,317 152,244
United States Treasury notes 1,004 -
Certificates of deposit 2,135 1,962
Municipal put bonds 3,975 615
Municipal put bond mutual funds 8,514 500
Collateralized mortgage obligations 1,000 1,000
Common stocks 1,026 -
------------------- ---------------------
Total other marketable securities 17,654 4,077
------------------- ---------------------
Total cash, cash equivalents and other
marketable securities (approximates
market value) $ 129,971 $ 156,321
=================== =====================
</TABLE>
For purposes of the consolidated balance sheets and statements of cash flows,
marketable securities purchased with an original maturity of ninety days or less
are considered cash equivalents.
- 27 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Other Assets
Other assets consisted of the following:
<TABLE>
<CAPTION>
December 31
-------------------------------------------
1994 1995
--------------------- ---------------------
(In thousands)
<S> <C> <C>
Notes and accounts receivable $ 15,104 $ 24,628
Investment in Caretenders Health Corp. 7,370 7,417
Prepaid long-term lease - 8,888
Investments in other unconsolidated
subsidiaries 8,566 6,754
Real estate investments 12,529 14,324
Trusteed funds - 1,879
Other 6,202 4,978
------------------- ---------------------
$ 49,771 $ 68,868
=================== =====================
</TABLE>
The Company has a 19% ownership interest in Caretenders Health Corp.
("Caretenders"); accordingly, the Company's investment is being accounted for
using the equity method of accounting. The investment was initially valued at
$7,250,000. The Company's equity in earnings of Caretenders for the years ended
December 31, 1993, 1994 and 1995 was not material to the Company's results of
operations.
It was not practicable to estimate the fair value of the Company's various
investments in other unconsolidated subsidiaries (involved in operations similar
to those of the Company) because of the lack of a quoted market price and the
inability to estimate fair value without incurring excessive costs. The carrying
amount at December 31, 1995 represents the original cost of the investments,
which management believes is not impaired.
- 28 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
-------------------------------------------
1994 1995
--------------------- ---------------------
(In thousands)
<S> <C> <C>
Land $ 71,729 $ 76,686
Buildings 578,643 767,038
Leasehold improvements 67,742 87,216
Furniture, fixtures and equipment 468,016 603,985
Construction-in-progress 47,873 33,407
--------------------- ---------------------
1,234,003 1,568,332
Less accumulated depreciation and amortization 185,891 284,772
--------------------- ---------------------
$ 1,048,112 $ 1,283,560
===================== =====================
</TABLE>
6. Intangible Assets
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
December 31
-------------------------------------------
1994 1995
--------------------- ---------------------
(In thousands)
<S> <C> <C>
Organizational, partnership formation and
start-up costs $ 99,714 $ 163,820
Debt issue costs 19,808 34,973
Noncompete agreements 36,089 70,636
Cost in excess of net asset value of purchased facilities 495,380 736,195
--------------------- ---------------------
650,991 1,005,624
Less accumulated amortization 79,330 131,713
--------------------- ---------------------
$ 571,661 $ 873,911
===================== =====================
</TABLE>
- 29 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
-------------------------------------------
1994 1995
--------------------- ---------------------
(In thousands)
<S> <C> <C>
Notes and bonds payable:
Advances under a $550,000,000 credit agreement with
banks $ 510,000 $ -
Advances under a $1,000,000,000 credit agreement
with banks - 790,000
11.5% Senior Subordinated Notes due 2004 75,000 -
9.5% Senior Subordinated Notes due 2001 250,000 250,000
5.0% Convertible Subordinated Debentures due 2001 115,000 115,000
Notes payable to banks and various other notes
payable, at interest rates from 5.5% to 9.75% 138,853 180,166
Hospital revenue bonds payable 24,763 32,337
Noncompete agreements payable with payments due at
ranging intervals through December 2004 17,610 24,161
Other 7,861 -
--------------------- ---------------------
1,139,087 1,391,664
Less amounts due within one year 36,284 35,175
===================== =====================
$ 1,102,803 $ 1,356,489
===================== =====================
</TABLE>
The fair value of total long-term debt approximates book value at December 31,
1994 and 1995. The fair values of the Company's long-term debt are estimated
using discounted cash flow analysis, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
- 30 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Long-Term Debt (continued)
During 1994, the Company entered into a Credit Agreement with NationsBank, N.A.
("NationsBank") and other participating banks (the "1994 Credit Agreement")
which consisted of a $550,000,000 revolving facility and term loan. On April 11,
1995, the Company amended and restated the 1994 Credit Agreement with
NationsBank to increase the size of the revolving credit facility to
$1,000,000,000. Interest is paid based on LIBOR plus a predetermined margin, a
base rate, or competitively bid rates from the participating banks. The Company
is required to pay a fee on the unused portion of the 1994 revolving credit
facility ranging from 0.1875% to 0.375%, depending on certain defined ratios.
The principal amount is payable in full on October 1, 2000. The Company provided
a negative pledge of all its assets and has granted a first priority security
interest in and lien on all shares of stock of its subsidiaries and rights and
interests in its partnerships. At December 31, 1995, the effective interest rate
associated with the 1994 Credit Agreement was approximately 6.56%.
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 will be subordinated to all existing and future senior indebtedness of
the Company, and also will be effectively subordinated to all existing and
future liabilities of the Company's subsidiaries and partnerships. The Notes
rank senior to all subordinated indebtedness of the Company, including the 5%
Convertible Subordinated Debentures due 2001 described below. The Notes mature
on April 1, 2001.
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 of Convertible Debentures was issued in April 1994 to
cover underwriters' over allotments. 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 $18.8125 per share, subject
to adjustment in the occurrence of 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.
- 31 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Long-Term Debt (continued)
In June 1994, SHC (see Note 2) issued $75 million of 11.5% Senior Subordinated
Notes due July 15, 2004 (the "SHC Notes"). The proceeds of the SHC Notes were
used to pay down indebtedness outstanding under other existing credit
facilities. During 1995, the Company purchased $67,500,000 of the $75,000,000
outstanding principal amount of the SHC Notes for 115% of the face value of the
Notes and the remaining $7,500,000 balance was purchased on the open market,
using proceeds from the Company's other long-term credit facilities. The loss on
retirement of the SHC Notes totaled approximately $14,606,000. The loss consists
of the premium, write-off of unamortized bond issue costs and other fees and is
included in merger and acquisition related expenses in the accompanying
consolidated statement of income (see Note 2).
Principal maturities of long-term debt are as follows:
Year ending December 31 (In thousands)
- ----------------------------------- ---------------------
1996 $ 35,175
1997 91,604
1998 27,003
1999 21,181
2000 807,777
After 2000 408,924
=====================
$ 1,391,664
=====================
8. Stock Options
The Company has various stockholder-approved stock option plans which provide
for the grant of options to directors, officers and other key employees to
purchase Common Stock at 100% of the fair market value as of the date of grant.
The Board of Directors administers the stock option plans. Options may be
granted as incentive stock options or as non-qualified stock options. Incentive
stock options vest 25% annually, commencing upon completion of one year of
employment subsequent to the date of grant. Non-qualified stock options
generally are not subject to any vesting provisions. The options expire at dates
ranging from five to ten years from the date of grant.
- 32 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stock Options (continued)
The following table summarizes activity in the stock option plans:
<TABLE>
<CAPTION>
1993 1994 1995
---------------- ----------------- -----------------
<S> <C> <C> <C>
Options outstanding January 1: 12,984,118 16,403,058 15,051,161
Granted 4,635,063 1,719,537 3,418,206
Exercised 853,169 2,205,639 1,447,821
Canceled 362,954 865,795 494,203
---------------- ----------------- -----------------
Options outstanding at December 31 16,403,058 15,051,161 16,527,343
================ ================= =================
Option price range for options
granted during the period $6.75 - $22.07 $10.56 - $18.25 $13.43 - $30.75
Option price range for options
exercised during the period $1.50 - $15.35 $1.50 - $8.95 $1.52 - $26.86
Options exercisable at December 31 10,964,105 11,233,043 13,134,988
Options available for grant at
December 31 3,051,016 3,237,061 4,516,978
</TABLE>
9. Limited Partnerships
HEALTHSOUTH operates a number of rehabilitation and surgery centers as limited
partnerships in which HEALTHSOUTH serves as the general partner. These limited
partnerships are included in the consolidated financial statements (as more
fully described in Note 1 under "Minority Interests"). The limited partners
share in the profit or loss of the partnerships based on their respective
ownership percentage (ranging from 1% to 50% at December 31, 1995) during their
ownership period.
Beginning in 1992, due to federal and state regulatory requirements, the Company
began the process of buying back selected partnership interests of its physician
limited partners. The buyback prices for the interests were in general based on
a predetermined multiple of projected cash flows of the partnerships. The excess
of the buyback price over the book value of the limited partners' capital
amounts was charged to the Company's retained earnings.
- 33 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Acquisitions
Effective April 1, 1995, the Company acquired 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 in cash. The cost in excess of net asset value was
approximately $173,000,000. Of this excess, approximately $129,000,000 was
allocated to leasehold value and the remaining $44,000,000 to cost in excess of
net asset value of purchased facilities. As part of the acquisition, the Company
acquired approximately $4,790,000 in deferred tax assets. The Company also
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. The planned employee separations and
facility consolidation were completed by the end of 1995.
The Company's proforma 1995 revenues, net income and net income per common and
common equivalent share giving effect to the NovaCare acquisition were
$2,042,948,000, $91,959,000 and $.62, respectively. The Company's proforma 1994
revenues, net income and net income per common and common equivalent share
giving effect to the NovaCare acquisition were $1,799,805,000, $87,607,000 and
$.62, respectively.
Effective December 1, 1995, the Company acquired Caremark Orthopedic Services
Inc. ("Caremark"). Caremark owns and operates approximately 120 outpatient
rehabilitation centers in 13 states. The total purchase price was approximately
$127,500,000 in cash.
Also at various dates during 1995, the Company acquired 70 separate outpatient
rehabilitation operations located throughout the United States, three physical
therapy practices, one home health agency, one nursing home, 75 licensed
subacute beds, five outpatient surgery centers and one outpatient diagnostic
imaging operation. The combined purchase prices of these acquisitions was
approximately $136,724,000. The form of consideration comprising the combined
purchase prices was approximately $117,405,000 in cash and $19,319,000 in notes
payable.
In connection with these transactions, the Company entered into non-compete
agreements with former owners totaling $16,222,000. In general, these
non-compete agreements are payable in monthly or quarterly installments over
periods ranging from five to ten years.
- 34 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Acquisitions (continued)
The fair value of the total net assets relating to the 1995 acquisitions
described above, excluding the NovaCare acquisition, was approximately
$72,844,000. The total cost of these acquisitions exceeded the fair value of the
net assets acquired by approximately $191,380,000. The Company evaluated each
acquisition independently to determine the appropriate amortization period for
the cost in excess of net asset value of purchased facilities. Each evaluation
included an analysis of historic and projected financial performance, evaluation
of the estimated useful lives of buildings and fixed assets acquired, the
indefinite lives of certificates of need and licenses acquired, the competition
within local markets, lease terms where applicable, and the legal term of
partnerships where applicable. Based on these evaluations, the Company
determined that the cost in excess of net asset value of purchased facilities
relating to the 1995 acquisitions should be amortized over periods ranging from
25 to 40 years on a straight-line basis. No other identifiable intangible assets
were recorded in the acquisitions described above.
All of the 1995 acquisitions described above were accounted for as purchases
and, accordingly, the results of operations of the acquired businesses are
included in the accompanying consolidated financial statements from their
respective dates of acquisition. With the exception of NovaCare, none of the
above acquisitions were material individually or in the aggregate.
At various dates during 1994, the Company acquired 53 separate outpatient
operations and a majority equity interest in five outpatient surgery centers
located throughout the United States. The combined purchase price of these
acquired outpatient operations was approximately $80,456,000. The Company also
acquired a specialty medical center in Dallas, Texas, a contract therapist
provider, a diagnostic imaging company, four physical therapy practices and two
home health agencies. The combined purchase price of these operations was
approximately $32,044,000. The form of consideration constituting the total
purchase prices of $112,500,000 was approximately $88,455,000 in cash,
$14,122,000 in notes payable and approximately 624,000 shares of common stock
valued at $9,923,000.
In connection with these transactions, the Company entered into non-compete
agreements with former owners totaling $10,814,000. In general, these
non-compete agreements are payable in monthly or quarterly installments over
periods ranging from five to ten years.
- 35 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Acquisitions (continued)
The fair value of the total net assets relating to the 1994 acquisitions
described above was approximately $17,958
,000. The total cost for 1994
acquisitions exceeded the fair value of the net assets acquired by approximately
$94,542,000. Based on the evaluation of each acquisition utilizing the criteria
described above, the Company determined that the cost in excess of net asset
value of purchased facilities relating to the 1994 acquisitions should be
amortized over periods ranging from 25 to 40 years on a straight-line basis. No
other identifiable assets were recorded in the acquisitions described above.
All of the 1994 acquisitions described above were accounted for as purchases
and, accordingly, the results of operations of the acquired businesses (not
material individually or in the aggregate) are included in the accompanying
consolidated financial statements from their respective dates of acquisition.
Effective December 31, 1993, the Company completed an acquisition from National
Medical Enterprises, Inc. (NME) of 28 inpatient rehabilitation facilities and 45
outpatient rehabilitation centers, which constituted substantially all of NME's
rehabilitation services division (the NME Selected Hospitals Acquisition). The
purchase price was approximately $296,661,000 cash, plus net working capital of
$64,503,000, subject to certain adjustments, the assumption of approximately
$16,313,000 of current liabilities and the assumption of approximately
$17,111,000 in long-term debt.
As a result of the NME Selected Hospitals Acquisition, HEALTHSOUTH recognized an
expense of approximately $49,742,000 during the year ended December 31, 1993.
This expense represents management's estimate of the cost to consolidate
operations of thirteen existing HEALTHSOUTH facilities (three inpatient
facilities and ten outpatient facilities) into the operations of certain
facilities acquired from NME. This plan was formulated by HEALTHSOUTH's
management in order to more efficiently provide services in markets where
multiple locations now exist as a result of the acquisition. The plan of
consolidation calls for the affected operations to be merged into the operations
of the acquired facilities over a period of 12 to 24 months from the date of the
NME Selected Hospitals Acquisition. Due to the single-use nature of these
properties, the consolidation plan does not provide for the sale of these
facilities.
The total expense of $49,742,000 consists of several components. First,
approximately $39,000,000 relates to the writedown of the assets of the affected
HEALTHSOUTH facilities to their estimated net realizable value. Of this
$39,000,000, approximately
- 36 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Acquisitions (continued)
$31,500,000 relates to the assets of the three inpatient facilities and
approximately $7,500,000 relates to the assets of the ten outpatient facilities.
The $39,000,000 is broken down into the following asset categories (net of any
related accumulated depreciation or amortization):
<TABLE>
<CAPTION>
Inpatient Outpatient
Facilities Facilities Total
--------------------- --------------------- --------------------
(In thousands)
<S> <C> <C> <C>
Land $ 2,898 $ - $ 2,898
Buildings 16,168 - 16,168
Equipment 4,326 2,920 7,246
Intangible assets 6,111 3,455 9,566
Other assets 1,997 1,125 3,122
--------------------- --------------------- --------------------
$ 31,500 $ 7,500 $ 39,000
===================== ===================== ====================
</TABLE>
During the year ended December 31, 1994, management discontinued operations in
two of the inpatient facilities and three of the outpatient facilities affected
by the plan and merged them into the operations of the acquired facilities.
Accordingly, assets with a net book value of approximately $17,911,000 were
written off in 1994 against the reserves established at December 31, 1993.
Operations at the remaining inpatient facility and the remaining seven
outpatient facilities identified in the plan were discontinued during 1995 and
charged against the remaining reserve.
Second, $7,700,000 relates to the write-off of certain capitalized development
projects. These projects relate to the planned facilities that, if completed,
would be in direct competition with certain of the acquired NME facilities.
These development projects were written off in 1994 against the reserves
established at December 31, 1993.
Finally, approximately $3,000,000 was accrued for costs of employee separations,
relocations and other direct costs related to the planned consolidation of the
affected operations. During the second quarter of 1994, management revised its
estimate of the cost of the employee separations and relocations. The revised
estimate calls for approximately 150 employees to be affected by separations and
approximately 400 to be affected by relocations. Separation benefits under the
revised plan range from one month's to one year's compensation and totals
approximately $2,188,000. Relocation benefits are estimated to be $2,000 per
employee and total $800,000. An additional
- 37 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Acquisitions (continued)
$350,000 has been provided for additional direct administrative costs associated
with the implementation of the plan, including outplacement services, travel and
legal fees. Accordingly, the total revised estimated cost of employee
separations and relocations is $3,338,000. The difference between the initial
estimate and the revised estimate was treated as a change in accounting estimate
and charged to operations in the second quarter of 1994.
The total costs relating to terminations and relocations incurred by the Company
and charged against the reserve were $758,000 and $2,580,000 for the years ended
December 31, 1994 and 1995, respectively. This cost is the only cash expense
included in the acquisition related expense.
Also at various dates during 1993, the Company acquired 27 separate outpatient
rehabilitation operations and three physical therapy practices located
throughout the United States. The total consideration paid for these acquired
outpatient rehabilitation operations was approximately $30,033,000, consisting
of $24,485,000 in cash and $5,548,000 in notes payable. The fair value of the
net assets acquired was approximately $8,813,000. The total cost of the 1993
outpatient rehabilitation acquisitions exceeded the fair value of the net assets
acquired by approximately $21,220,000. The Company also acquired 15 outpatient
surgery center operations during 1993. The total consideration paid for these
acquired outpatient surgery center operations was approximately $66,418,000,
consisting of $51,791,000 in cash, $5,639,000 in notes payable and approximately
812,000 shares of common stock valued at $8,988,000. The total cost of the 1993
outpatient surgery acquisitions exceeded the fair value of the net assets
acquired by approximately $25,847,000. Based on the evaluation of each
acquisition, utilizing the criteria described above, the Company determined that
the cost in excess of net asset value of purchased facilities relating to the
1993 acquisitions should be amortized over a 40 year period on a straight line
basis. No other identifiable intangible assets were recorded in the acquisitions
described above.
Also during 1993, the Company acquired 100% of the stock of Rebound, Inc.
("Rebound") for net consideration of approximately $14,000,000 in cash. Rebound
operated 293 beds in thirteen facilities. The purchase price exceeded the fair
value of the net assets acquired by approximately $11,200,000, which was
allocated to excess of cost over net asset value of purchased facilities.
- 38 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Acquisitions (continued)
All of the 1993 acquisitions described above were accounted for as purchases
and, accordingly, the results of operations of the acquired businesses are
included in the accompanying consolidated financial statements from their
respective dates of acquisition.
11. Income Taxes
HEALTHSOUTH and its subsidiaries file a consolidated federal income tax return.
The limited partnerships file separate income tax returns. HEALTHSOUTH's
allocable portion of each partnership's income or loss is included in the
taxable income of the Company. The remaining income or loss of each partnership
is allocated to the limited partners.
The Company utilizes the liability method of accounting for income taxes, as
required by Financial Accounting Standards Board (FASB) Statement No. 109,
"Accounting for Income Taxes".
At December 31, 1995, the Company has net operating loss carryforwards of
approximately $41,736,000 for income tax purposes expiring through the year
2010. Those carryforwards resulted from the Company's acquisitions of Diagnostic
Health Corporation, ReLife, NovaCare and SHC (Notes 2 and 10).
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities as of December 31, 1994 are as
follows:
<TABLE>
<CAPTION>
Current Noncurrent Total
------------------- ------------------- -------------------
(In thousands)
<S> <C> <C> <C>
Deferred tax assets:
NME Selected Hospitals Acquisition related
expense $ - $ 15,241 $ 15,241
Disposal of surgery centers 5,681 - 5,681
Accruals 2,975 - 2,975
Allowance for bad debts 21,459 - 21,459
Amortization - 5,686 5,686
Other 2,019 3,444 5,463
------------------- ------------------- -------------------
Total deferred tax assets 32,134 24,371 56,505
</TABLE>
- 39 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Income Taxes (continued)
<TABLE>
<CAPTION>
Current Noncurrent Total
------------------- ------------------- -------------------
(In thousands)
<S> <C> <C> <C>
Deferred tax liabilities:
Depreciation and amortization $ - $ 25,239 $ 25,239
Purchase price accounting - 4,941 4,941
Non-accrual experience method 12,353 - 12,353
Contracts 3,849 - 3,849
Capitalized costs - 10,487 10,487
Other 1,184 4,618 5,802
------------------- ------------------- -------------------
Total deferred tax liabilities 17,386 45,285 62,671
------------------- ------------------- -------------------
Net deferred tax assets (liabilities) $ 14,748 $ (20,914) $ (6,166)
=================== =================== ===================
</TABLE>
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Current Noncurrent Total
--------------------- --------------------- ---------------------
(In thousands)
<S> <C> <C> <C>
Deferred tax assets:
Accruals $ 8,016 $ - $ 8,016
Disposal of surgery centers 2,675 - 2,675
Impairment of assets 1,309 5,434 6,743
Development costs - 849 849
Acquired net operating loss - 16,277 16,277
Allowance for bad debts 29,089 - 29,089
Other 1,818 5,549 7,367
--------------------- --------------------- ---------------------
Total deferred tax assets 42,907 28,109 71,016
Deferred tax liabilities:
Depreciation and amortization $ - $ 30,960 $ 30,960
Non-accrual experience method 14,559 - 14,559
Purchase price accounting - 4,802 4,802
Contracts 3,849 - 3,849
Capitalized costs - 12,916 12,916
Other 2,522 3,164 5,686
--------------------- --------------------- ---------------------
Total deferred tax liabilities 20,930 51,842 72,772
--------------------- --------------------- ---------------------
Net deferred tax assets (liabilities) $ 21,977 $ (23,733) $ (1,756)
===================== ===================== =====================
</TABLE>
- 40 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Income Taxes (continued)
The provision for income taxes was as follows:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------------------------------
1993 1994 1995
--------------------- --------------------- ---------------------
(In thousands)
<S> <C> <C> <C>
Currently payable:
Federal $ 34,492 $ 70,641 $ 66,927
State 5,360 10,362 8,914
--------------------- --------------------- ---------------------
39,852 81,003 75,841
Deferred (benefit) expense :
Federal (1,362) (14,046) 342
State (497) (1,836) 38
--------------------- --------------------- ---------------------
(1,859) (15,882) 380
--------------------- --------------------- ---------------------
Total provision $ 37,993 $ 65,121 $ 76,221
===================== ===================== =====================
</TABLE>
The difference between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate to income before taxes was as
follows:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------------------------------
1993 1994 1995
--------------------- --------------------- ---------------------
(In thousands)
<S> <C> <C> <C>
Federal taxes at statutory rates $ 43,187 $ 64,636 $ 74,161
Add (deduct):
State income taxes, net of federal
tax benefit 2,987 4,899 5,832
Minority interests (10,282) (11,014) (15,102)
Disposal/impairment charges - 668 9,955
Other 2,101 5,932 1,375
-------------------- --------------------- ---------------------
$ 37,993 $ 65,121 $ 76,221
===================== ===================== =====================
</TABLE>
- 41 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Commitments and Contingencies
The Company is a party to legal proceedings incidental to its business. In the
opinion of management, any ultimate liability with respect to these actions will
not materially affect the consolidated financial position or results of
operations of the Company.
At December 31, 1995, anticipated capital expenditures for the next twelve
months are $180,000,000. This amount includes expenditures for maintenance and
expansion of the Company's existing facilities as well as development and
integration of the Company's services in selected metropolitan markets.
Beginning December 1, 1993, the Company became self-insured for professional
liability and comprehensive general liability. The Company purchased coverage
for all claims incurred prior to December 1, 1993. In addition, the Company
purchased underlying insurance which would cover all claims once established
limits have been exceeded. It is the opinion of management that at December 31,
1995 the Company has adequate reserves to cover losses on asserted and
unasserted claims.
Prior to consummation of the SCA and Advantage Health mergers (see Note 2),
these companies carried professional malpractice and general liability
insurance. The policies were carried on a claims made basis. The companies had
policies in place to track and monitor incidents of significance. Management is
unaware of any claims that may result in a loss in excess of amounts covered by
existing insurance.
Operating leases generally consist of short-term lease agreements for buildings
where facilities are located. These leases generally have 5-year terms, with one
or more renewal options, with terms to be negotiated at the time of renewal.
Total rental expense for all operating leases was $35,812,000, $75,355,000 and
$100,183,000 for the years ended December 31, 1993, 1994 and 1995, respectively.
The following is a schedule of future minimum lease payments under all operating
leases having initial or remaining non-cancelable lease terms in excess of one
year:
- 42 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Commitments and Contingencies (continued)
Year ending December 31 (In thousands)
- -------------------------------------------- ---------------------
1996 $ 96,663
1997 88,066
1998 81,004
1999 70,720
2000 57,546
After 2000 269,627
---------------------
Total minimum payments required $ 663,626
=====================
13. Employee Benefit Plans
The Company has a 401(k) savings plan which matches 15% of the first 4% of
earnings that an employee contributes. All contributions are in the form of
cash. All employees who have completed one year of service with a minimum of
1,000 hours worked are eligible to participate in the plan. Company
contributions are gradually vested over a seven-year service period.
Contributions to the plan by the Company were approximately $544,000, $1,168,000
and $1,287,000 in 1993, 1994 and 1995, respectively.
In 1991, the Company established an Employee Stock Ownership Plan ("ESOP") for
the purpose of providing substantially all employees of the Company the
opportunity to save for their retirement and acquire a proprietary interest in
the Company. The ESOP currently owns approximately 830,000 shares of the
Company's common stock, which were purchased with funds borrowed from the
Company, $10,000,000 in 1991 (the "1991 ESOP Loan") and $10,000,000 in 1992 (the
"1992 ESOP Loan"). At December 31, 1995, the combined ESOP Loans had a balance
of $15,886,000. The 1991 ESOP Loan, which bears an interest rate of 10%, is
payable in annual installments covering interest and principal over a ten-year
period beginning in 1992. The 1992 ESOP Loan, which bears an interest rate of
8.5%, is payable in annual installments covering interest and principal over a
ten-year period beginning in 1993. Company contributions to the ESOP began in
1992 and shall at least equal the amount required to make all ESOP loan
amortization payments for each plan year. The Company recognizes compensation
expense based on the shares allocated method. The total compensation expense
related to the ESOP recognized by the Company was $3,198,000, $3,673,000 and
$3,524,000 in 1993, 1994 and 1995, respectively. Interest incurred on the ESOP
Loans was
- 43 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Employee Benefit Plans (continued)
approximately $1,743,000, $1,608,000 and $1,460,000 in 1993, 1994 and 1995,
respectively. Approximately 229,000 shares owned by the ESOP have been allocated
to participants at December 31, 1995.
During 1993, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 93-6, "Employers Accounting for Employee Stock
Ownership Plans". Among other provisions, SOP 93-6 requires that compensation
expense relating to employee stock ownership plans be measured based on the fair
market value of the shares when allocated to the employees. The provisions of
SOP 93-6 apply only to leveraged ESOPs formed after December 31, 1992, or shares
newly acquired by an existing leveraged ESOP after December 31, 1992. Because
all shares owned by the Company's ESOP were acquired prior to December 31, 1992,
the Company's accounting policies for the shares currently owned by the ESOP are
not affected by SOP 93-6.
14. Sale of Assets
During the second quarter of 1994, the Company consummated the sale of selected
properties to Capstone Capital Corporation ("Capstone"), a real estate
investment trust. These properties include six ancillary hospital facilities,
three outpatient rehabilitation facilities, two outpatient surgery centers, one
uncompleted medical office building and one research facility. The net proceeds
to the Company as a result of this transaction were approximately $58,425,000.
The net book value of the properties was approximately $50,735,000. Because the
Company is leasing back substantially all of the properties from Capstone,
payments which aggregate $6.9 million annually, the resulting gain on sale of
approximately $7,690,000 has been recorded on the accompanying consolidated
balance sheet as deferred revenue and will be amortized into income over the
initial lease terms of the properties. The Company is accounting for each of the
new leases as an operating lease with an initial lease term of 5 years. During
1995, the Company sold another inpatient rehabilitation hospital property to
Capstone under terms similar to those described above. Aggregate annual lease
payments for this property totaled $1.7 million. The resulting loss of
approximately $4,010,000 has been netted against the deferred gain described
above and will be amortized to expense over the initial lease term. The Company
and certain Company officers own approximately 4.5% of the outstanding common
stock of Capstone at December 31, 1995.
- 44 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. 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 (in
thousands):
<TABLE>
<S> <C>
Write down of land, buildings and equipment $ 4,806
Write off of excess of cost over fair value of net assets acquired and other
assets 2,762
Estimated operating losses through anticipated date of disposal 1,750
Accrual of future lease commitments and other obligations resulting from
disposal 3,879
----------------
$ 13,197
================
</TABLE>
The closings of the three surgery centers were completed by December 31, 1995.
An accrual of $5,629,000 and $929,000 is included in accrued liabilities on the
accompanying December 31, 1994 and 1995 consolidated balance sheets,
respectively, for the remaining costs to be incurred relative to the disposal of
these surgery centers and the other properties. The reduction in this accrual
relates primarily to costs incurred during 1995 as a result of closing these
centers.
16. Spin-Off of HMO Subsidiary
Effective December 1, 1993, SCA (see Note 2) spun off the net assets of its HMO
subsidiary, HealthWise of America, Inc. (HealthWise). The spin-off was
accomplished by a tax-free distribution of one HealthWise common share for every
ten shares of SCA'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 and are summarized as
follows (in thousands).
- 45 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Spin-Off of HMO Subsidiary (continued)
1993
----------------------
Net revenue $ 110,276
----------------------
Income before income taxes 7,296
Income taxes (2,844)
----------------------
Net income $ 4,452
======================
17. Impairment of Long-Term Assets
During 1994, certain events occurred which impaired the value of specific
long-term assets of ReLife (see Note 2). A hospital in Missouri with a distinct
part unit which ReLife was managing was purchased in 1994 by an acute care
provider which terminated the contract with ReLife. Remaining goodwill of
$1,700,000 and costs allocated to the management contract of $1,300,000 were
written off as there is no value remaining for the terminated contract.
A ReLife facility in central Florida incurred tornado damage and has not been
operating since September 1993. During 1994, management of ReLife determined
that it is probable that this facility will not reopen. Start-up costs of
$1,600,000 were written off. This facility is leased under an operating lease as
described in Note 12 through the year 2001. An impairment accrual has been
established based on the projected undiscounted net cash flows related to this
non-operating facility for the remainder of the lease term. The accrual totaled
$5,900,000 and consists of $4,700,000 in lease payments and $1,200,000 in fixed
costs and operating expenses, including property taxes, maintenance, security
and other related costs.
During 1994, ReLife entered into a contract for a new information system.
Payments under the contract and related costs were capitalized during the year.
After the agreement to merge with HEALTHSOUTH was entered into (see Note 2), the
computer project was abandoned resulting in a write-off of capitalized cost of
$4,500,000.
During the second quarter of 1995, the Company recognized an $11,192,000 loss on
impairment of assets which relates to six SHC (see Note 2) facilities in which
the undiscounted cash flows did not support the book value of the long-lived
assets of such facilities. The assets were written down to fair value as
determined from an independent appraisal of such properties.
- 46 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
17. Impairment of Long-Term Assets (continued)
In the fourth quarter of 1995 the Company recorded an asset impairment charge of
approximately $42,357,000 relating to goodwill and tangible assets identifiable
with eight surgery centers. Approximately $36,792,000 of this charge related to
surgery centers which the Company intends to operate on an ongoing basis while
the remaining loss of $5,565,000 is identifiable with four surgery centers which
the Company decided during the fourth quarter of 1995 to close.
The Company has historically assessed recoverability of goodwill and other
long-lived assets using undiscounted cash flows estimated to be received over
the useful lives of the related assets. In the fourth quarter of 1995, certain
events occurred which significantly impacted the Company's estimates of future
cash flows to be received from four of the Company's surgery centers. Those
events primarily related to a decline in operating results combined with a
deterioration in relationships with key physicians at certain of those
locations. As a result of these events, the Company revised its estimates of
undiscounted cash flows to be received over the remaining estimated useful lives
of these centers and determined that goodwill and other long-lived assets
(primarily property and equipment) had been impaired. The Company developed its
best estimates of future operating cash flows at these locations considering
future requirements for capital expenditures as well as the impact of inflation.
The projections of cash flows also took into account estimates of significant
one-time expenses as well as estimates of additional revenues and resulting
income from future marketing efforts in the respective locations. The amount of
the impairment charge was determined by discounting the estimates of future cash
flows, using an estimated 8.5% incremental borrowing rate which management
believes is commensurate with the risks involved. The resulting net present
value of future cash flows was then compared to the historical net book value of
goodwill and other long-lived assets at each operating location which resulted
in an impairment loss relative to these centers of $36,792,000.
The remaining impairment charge of $5,565,000 relative to the centers to be
closed was based on the fair value of the related assets less estimated costs to
sell. Assets held for sale having a remaining net book value of $2,838,726 are
included in property and equipment on the accompanying December 31, 1995 balance
sheet. The Company intends to close those centers and dispose of the related
assets during the next fiscal year.
The above amounts are included in operations in the accompanying consolidated
statement of income.
- 47 -
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
18. Subsequent Events
Effective January 17, 1996, the Company merged with Surgical Care Affiliates,
Inc. in a transaction accounted for as a pooling of interests (see Note 2).
Effective March 14, 1996, the Company merged with Advantage Health Corporation
in a transaction accounted for as a pooling of interests (see Note 2).
On January 17, 1996, the Company voted to increase the number of its authorized
common shares to 250,000,000. At no time during 1995 did the shares outstanding
exceed those authorized.
On April 18, 1996, the credit facility (Note 7) was amended and restated to
increase the maximum amount available thereunder to $1,250,000 and to eliminate
the security interests thereunder.
- 48 -
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits.
1. Financial Statements.
The consolidated financial statements of the Company and its
subsidiaries filed as a part of this Amendment No. 1 to Annual Report on Form
10-K are listed in Item 8 hereof, which listing is hereby incorporated herein
by reference.
2. Financial Statement Schedules.
The financial statement schedules required by Regulation S-X are filed
under Item 14(d) of this Amendment No. 1 to Annual Report on Form 10-K, as
listed below:
Schedules Supporting the Financial Statements
Schedule II Valuation and Qualifying Accounts 50
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission have been
omitted because they are not required under the related instructions or are
inapplicable, or because the information has been provided in the Consolidated
Financial Statements or the Notes thereto.
3. Exhibits.
The Exhibits filed as a part of this Amendment No. 1 to Annual Report
on Form 10-K are listed in Item 14(c) hereof, which listing is hereby
incorporated herein by reference.
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed by the Company during the
last quarter of the period covered by this Amendment No. 1 to Annual Report on
Form 10-K.
(c) Exhibits.
The Exhibits required by Regulation S-K are set forth in the following
list and are filed by attachment to this Amendment No. 1 to Annual Report on
Form 10-K.
(11) HEALTHSOUTH Corporation and Subsidiaries, Computation of Income
Per Share.
(23)-1 Consent of Ernst & Young LLP.
(d) Financial Statement Schedules.
Schedule II: Valuation and Qualifying Accounts
- 49 -
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at Additions Charged Additions Charged
Beginning of to Costs and to Other Accounts - Deductions - Balance at
Description Period Expenses Describe Describe End of Period
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1993:
Allowance for doubtful
accounts and con- 369,821 (1)
tractual adjustments $ 62,174 $ 20,026 $ 52,021 (2) $ 368,930 (3) $ 135,112
============== ============== ============== ============== ==============
Year ended December 31,
1994:
Allowance for doubtful
accounts and con- 757,916 (1)
tractual adjustments $ 135,112 $ 32,904 $ 7,041 (2) $ 769,822 (3) $ 163,151
============== ============== ============== ============== ==============
Year ended December 31,
1995:
Allowance for doubtful
accounts and con- 958,552 (1)
tractual adjustments $ 163,151 $ 37,659 $ 28,650 (2) $ 952,837 (3) $ 235,175
============== ============== ============== ============== ==============
- -------------------------
<FN>
(1) Provisions for contractual adjustments which are netted against gross
revenues.
(2) Allowances of acquisitions in years 1993, 1994 and 1995, respectively.
(3) Write-offs of uncollectible patient accounts receivable and third party
contractual adjustments, net of third party retroactive settlements.
</FN>
</TABLE>
- 50 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No.1 to be
signed on its behalf by the undersigned, thereunto duly authorized.
HEALTHSOUTH Corporation
By /s/RICHARD M. SCRUSHY
---------------------------------------------
Richard M. Scrushy,
Chairman of the Board
and Chief Executive Officer
Date: June 12, 1996
- 51 -
<PAGE>
EXHIBIT 11
HEALTHSOUTH Corporation and Subsidiaries
Computation of Income Per Share (Unaudited)
In Thousands, except for per share data
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1994 1995
-------------- -------------- ---------
<S> <C> <C> <C>
PRIMARY:
Weighted average common shares outstanding 127,572 131,510 139,631
Net effect of dilutive stock options 4,907 8,917 9,099
-------------- -------------- ------------
Total Common and Common Equivalent Shares 132,479 140,427 148,730
============== ============== ============
Net income/(loss) $ 60,474 $ 88,083 $ 92,521
============== ============== ============
Net income/(loss) per common and
common equivalent share $ 0.46 $ 0.63 $ 0.62
============== ============== ============
FULLY DILUTED:
Weighted average common shares outstanding 127,572 131,510 139,631
Net effect of dilutive stock options 4,907 8,917 9,099
-------------- -------------- ------------
132,479 140,427 148,730
Assumed conversion of 5% Convertible
Subordinated Debentures due 2001 (1) 4,722 6,113
-------------- -------------- ------------
Total Common and Common Equivalent Shares,
Fully Diluted $ 132,479 $ 145,149 $ 154,843
============== ============== ============
Net income $ 60,474 $ 88,083 $ 92,521
Elimination of interest and amortization on 5%
Convertible Subordinated Debentures due 2001, less
the related effect on the provision for income taxes (1) 2,927 3,826
-------------- -------------- ------------
Net income, fully diluted $ 60,474 $ 91,010 $ 96,347
============== ============== ============
Net income per common and common equivalent share N/A $ 0.63 $ 0.62
============== ============== ============
<FN>
(1) There were no other potentially dilutive securities outstanding for this
period.
</FN>
</TABLE>
<PAGE>
Exhibit (23) - Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-13489) pertaining to the 1984 Incentive Stock Option Plan, in the
Registration Statement (Form S-8 No. 33-23642) pertaining to the 1988
Non-Qualified Stock Option Plan, in the Registration Statement (Form S-8 No.
33-34908) pertaining to the 1989 Stock Option Plan, in the Registration
Statement (Form S-8 No. 33-40798) pertaining to the 1990 Stock Option Plan, in
the Registration Statement (Form S-8 No. 33-50440) pertaining to the 1991 Stock
Option Plan, in the Registration Statement (Form S-8 No. 33-64308) pertaining to
the 1992 Stock Option Plan, in the Registration Statement (Form S-8 No.
33-64316) pertaining to the 1993 Consultants' Stock Option Plan, in the
Registration Statement (Form S-8 No. 33-55303 ) pertaining to the 1993 Stock
Option Plan, in the Registration Statement (Form S-8 No. 333-02221) pertaining
to the 1995 Stock Option Plan, in the Registration Statement (Form S-8 No.
33-6231) pertaining to the Surgical Health Corporation and Heritage Surgical
Corporation Stock Option Plans and in the Registration Statement (Form S-8 No.
33-64615) pertaining to the Sutter Surgery Centers, Inc. Stock Option Plans, of
our report dated May 23, 1996, with respect to the consolidated financial
statements and schedule of HEALTHSOUTH Corporation and Subsidiaries included in
the Annual Report (Form 10-K/A) for the year ended December 31, 1995.
Birmingham, Alabama
May 23, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000785161
<NAME> HEALTHSOUTH Corporation
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> $ 152,244
<SECURITIES> 4,077
<RECEIVABLES> 644,325
<ALLOWANCES> 235,175
<INVENTORY> 39,239
<CURRENT-ASSETS> 703,531
<PP&E> 1,568,332
<DEPRECIATION> 284,772
<TOTAL-ASSETS> 2,931,495
<CURRENT-LIABILITIES> 297,406
<BONDS> 1,356,489
<COMMON> 1,522
0
0
<OTHER-SE> 1,184,376
<TOTAL-LIABILITY-AND-EQUITY> 2,931,495
<SALES> 0
<TOTAL-REVENUES> 2,003,146
<CGS> 0
<TOTAL-COSTS> 1,428,660
<OTHER-EXPENSES> 143,322
<LOSS-PROVISION> 37,659
<INTEREST-EXPENSE> 101,790
<INCOME-PRETAX> 211,889
<INCOME-TAX> 76,221
<INCOME-CONTINUING> 92,521
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 92,521
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.62
</TABLE>
