SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1996; or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
_____________.
Commission File Number 1-10315
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HEALTHSOUTH Corporation
----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 63-0860407
------------------------------ -----------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Two Perimeter Park South, Birmingham, Alabama 35243
---------------------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(205) 967-7116
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all
Reports required to be filed by Section 13 or 15(d) of the Securities and
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such Reports), and (2) has been subject
to such filing requirements for the past 90 days.
YES X NO
---- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 8, 1996
- ----------------------- -------------------------------
Common Stock, par value 155,481,368 shares
$.01 per share
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
PART 1 -- FINANCIAL INFORMATION
Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -- September 30, 1996 (Unaudited)
and December 31, 1995 3
Consolidated Statements of Income (Unaudited) -- Three Months and Nine
Months Ended September 30, 1996 and 1995 5
Consolidated Statements of Cash Flows (Unaudited) -- Nine Months
Ended September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements (Unaudited) -- Three
Months and Nine Months Ended September 30, 1996 and 1995 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTHSOUTH Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
--------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 121,067 $ 152,244
Other marketable securities 3,785 4,077
Accounts receivable 504,666 409,150
Inventories, prepaid expenses, and
other current assets 82,717 116,083
Deferred income taxes 22,396 21,977
--------------- -------------
TOTAL CURRENT ASSETS 734,631 703,531
OTHER ASSETS 75,039 70,493
PROPERTY, PLANT AND EQUIPMENT--NET 1,354,321 1,283,560
INTANGIBLE ASSETS--NET 1,018,781 873,911
--------------- -------------
TOTAL ASSETS $ 3,182,772 $ 2,931,495
=============== =============
</TABLE>
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS (continued)
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------------- ---------------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 75,546 $ 107,018
Salaries and wages payable 64,141 67,905
Accrued interest payable and other liabilities 86,183 87,308
Current portion of long-term debt 39,152 35,175
------------ ----------
TOTAL CURRENT LIABILITIES 265,022 297,406
LONG-TERM DEBT 1,424,775 1,356,489
DEFERRED INCOME TAXES 26,718 23,733
OTHER LONG-TERM LIABILITIES 5,375 8,459
DEFERRED REVENUE 597 1,525
MINORITY INTERESTS--LIMITED PARTNERSHIPS 63,054 57,985
STOCKHOLDERS' EQUITY:
Preferred Stock, $.10 par value--1,500,000
shares authorized; issued and outstanding--
none 0 0
Common Stock, $.01 par value--250,000,000
shares authorized; 156,178,000 and 152,193,000
shares issued at September 30, 1996 and
December 31, 1995, respectively 1,562 1,522
Additional paid-in capital 936,396 888,216
Retained earnings 479,124 334,582
Treasury stock (323) (16,065)
Receivable from Employee Stock Ownership Plan (14,148) (15,886)
Notes receivable from stockholders (5,380) (6,471)
------------ ----------
TOTAL STOCKHOLDERS' EQUITY 1,397,231 1,185,898
------------ ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,182,772 $ 2,931,495
============ ==========
</TABLE>
See accompanying notes.
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED - In Thousands, Except for Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 616,943 $ 518,537 $ 1,793,766 $1,470,049
Operating expenses:
Operating units 397,749 356,360 1,173,148 1,014,302
Corporate general and administrative 16,805 12,607 49,462 40,479
Provision for doubtful accounts 13,996 8,716 39,873 28,172
Depreciation and amortization 49,326 36,986 137,320 104,874
Interest expense 22,625 26,451 69,967 75,035
Interest income (975) (2,244) (4,449) (6,244)
Merger costs 5,513 0 34,452 29,194
Loss on impairment of assets 0 0 0 11,192
---------- ---------- ---------- ----------
505,039 438,876 1,499,773 1,297,004
---------- ---------- ---------- ----------
Income before income taxes and
minority interests 111,904 79,661 293,993 173,045
Provision for income taxes 37,574 25,938 97,528 55,784
---------- ---------- ---------- ----------
Income before minority interests 74,330 53,723 196,465 117,261
Minority interests (13,286) (12,076) (38,015) (30,766)
---------- ---------- ---------- ----------
Net income $ 61,044 $ 41,647 $ 158,450 $ 86,495
========== ========== ========== ==========
Weighted average common and common
equivalent shares outstanding 165,777 145,151 165,793 143,911
========== ========== ========== ==========
Net income per common and common
equivalent share $ 0.37 $ 0.29 $ 0.96 $ 0.60
========== ========== ========== ==========
Net income per common share --
assuming full dilution $ 0.36 $ 0.28 $ 0.94 $ 0.60
========== ========== ========== ==========
</TABLE>
See accompanying notes.
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------------
1996 1995
----------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 158,450 $ 86,495
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 137,320 104,874
Provision for doubtful accounts 39,873 28,172
Income applicable to minority interests of
limited partnerships 38,015 30,766
Loss on impairment of assets 0 11,192
Merger costs 34,452 29,194
Provision for deferred income taxes 2,995 (15,302)
Provision for deferred revenue (928) (389)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (120,631) (31,879)
Inventories, prepaid expenses and other current
assets 42,258 (1,328)
Accounts payable and accrued expenses (78,155) (46,441)
--------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 253,649 195,354
INVESTING ACTIVITIES
Purchases of property, plant and equipment (115,016) (114,562)
Proceeds from sale of property, plant and equipment 0 14,786
Additions to intangible assets, net of effects of
acquisitions (138,979) (53,982)
Assets obtained through acquisitions, net of liabilities
assumed (87,142) (334,603)
Cash obtained through immaterial pooling of interests 7,534 0
Changes in other assets (4,970) (4,070)
Proceeds received on sale of other marketable
securities 292 22,121
Investments in other marketable securities 0 (13,026)
----------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (338,281) (483,336)
</TABLE>
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED - In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------------
1996 1995
----------------- ----------------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from borrowings 166,594 804,513
Principal payments on long-term debt and leases (99,484) (457,957)
Proceeds from exercise of options 24,434 8,055
Proceeds from issuance of common stock 0 962
Purchase of treasury stock 0 (7,350)
Reduction in receivable from Employee Stock
Ownership Plan 1,738 1,591
Decrease in loans to stockholders 1,091 0
Dividends paid 0 (5,450)
Proceeds from investment by minority interests 517 250
Purchase of limited partnership interests 0 (2,825)
Payment of cash distributions to limited partners (37,798) (31,632)
----------------- ----------------
NET CASH PROVIDED FROM
FINANCING ACTIVITIES 57,092 310,157
----------------- ----------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (27,540) 22,175
Cash and cash equivalents at beginning of period 148,607 116,517
----------------- ----------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 121,067 $ 138,692
================= ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 56,505 $ 66,451
Income taxes 63,207 65,936
</TABLE>
Non-cash investing activities:
During 1996, the Company issued 1,811,444 shares of its common stock in
connection with its acquisition of Professional Sports Care Management,
Inc.
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 100% stock dividend.
See accompanying notes.
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three Months and Nine Months Ended September 30, 1996 and 1995
NOTE 1 -- The accompanying consolidated financial statements include
the accounts of HEALTHSOUTH Corporation (the "Company") and
its subsidiaries. This information should be read in
conjunction with the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995, as amended. It is
management's opinion that the accompanying consolidated
financial statements reflect all adjustments (which are
normal recurring adjustments, except as otherwise indicated)
necessary for a fair presentation of the results for the
interim period and the comparable period presented.
NOTE 2 -- During 1995, the Company entered into a $1,000,000,000
revolving line of credit with NationsBank, N.A.
("NationsBank") and other participating banks (the "1995
Credit Agreement"). On April 18, 1996, the Company amended
and restated the 1995 Credit Agreement to increase the size
of the credit facility to $1,250,000,000 (the "1996 Credit
Agreement"). The Company provided a negative pledge on all
assets and the lenders released the first priority security
interest in all shares of stock of the Company's subsidiaries
and rights and interests in the Company's controlled
partnerships which had been granted under the 1995 Credit
Agreement. At September 30, 1996, the Company had drawn
$977,000,000 under the 1996 Credit Agreement.
On March 24, 1994, the Company issued $250,000,000 principal
amount of 9.5% Senior Subordinated Notes due 2001 (the
"Notes"). Interest is payable on April 1 and October 1. The
Notes are senior subordinated obligations of the Company and,
as such, are subordinated to all existing and future senior
indebtedness of the Company. Also on March 24, 1994, the
Company issued $100,000,000 principal amount of 5%
Convertible Subordinated Debentures due 2001 (the
"Convertible Debentures"). An additional $15,000,000
principal amount of Convertible Debentures was issued in
April 1994 to cover underwriters' overallotments. Interest is
payable on April 1 and October 1. The Convertible Debentures
are convertible into Common Stock of the Company at the
option of the holder at a conversion price of $18.8125 per
share, subject to adjustment in certain events. The net
proceeds from the issuance of the Notes and Convertible
Debentures were used by the Company to pay down indebtedness
outstanding under its other existing credit facilities.
<PAGE>
At September 30, 1996 and December 31, 1995, long-term debt
consisted of the following:
<TABLE>
<CAPTION>
December 31,
September 30,
1996 1995
-------------------- ---------------------
(in thousands)
<S> <C> <C>
Advances under the $1,250,000,000 1996
Credit Agreement $ 977,000 $ 790,000
9.5% Senior Subordinated Notes due 2001 250,000 250,000
5% Convertible Subordinated Debentures due 2001 115,000 115,000
Other long-term debt 122,927 236,664
-------------------- ---------------------
1,464,927 1,391,664
Less amounts due within one year 39,152 35,175
-------------------- ---------------------
$ 1,424,775 $ 1,356,489
==================== =====================
</TABLE>
NOTE 3 -- On January 17, 1996, the Company consummated the acquisition
of Surgical Care Affiliates, Inc. ("SCA") in a transaction
accounted for as a pooling of interests. In the transaction,
SCA stockholders received an aggregate of 45,928,339 shares
of the Company's common stock. At the time of the merger, SCA
operated 67 surgery centers in 24 states.
On March 14, 1996, the Company consummated the acquisition of
Advantage Health Corporation ("Advantage Health") in a
transaction accounted for as a pooling of interests. In the
transaction, Advantage Health stockholders and option holders
received an aggregate of 9,101,989 shares of the Company's
common stock. At the time of 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.
Accordingly, the Company's historical financial statements
for all periods prior to the effective dates of the mergers
have been restated to include the results of SCA and
Advantage Health. The effects of conforming the accounting
policies of the Company, SCA and Advantage Health were not
material.
Prior to the mergers, SCA reported on a fiscal year ending on
December 31 and 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 restated financial statements
for all periods prior to and including December 31, 1995 are
based on a combination of the Company's and SCA's results for
their December 31 fiscal years and Advantage Health's results
for its recast November 30 fiscal year. Beginning January 1,
1996, all facilities acquired in the Advantage Health merger
adopted a December 31 fiscal year end; accordingly, all
consolidated financial statements for periods after December
31, 1995 are based on a consolidation of all of the Company's
subsidiaries on a December 31 year end. Advantage Health's
historical results of operations for the one month ended
December 31, 1995 are not included in the Company's
consolidated statements of income
<PAGE>
or cash flows. An adjustment has been made to stockholders'
equity as of January 1, 1996 to adjust for the effect of
excluding Advantage Health's results of operations for the
one month ended December 31, 1995. The following is a summary
of Advantage Health's results of operations and cash flows
for the one month ended December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
Statement of Income Data:
<S> <C>
Revenues $ 16,111
Operating expenses:
Operating units 14,392
Corporate general and administrative 1,499
Provision for doubtful accounts 1,013
Depreciation and amortization 283
Interest expense 288
Interest income (16)
Loss on impairment of assets 21,111
------------------------------
38,570
------------------------------
Loss before income taxes and
minority interests (22,460)
Provision (benefit) for income taxes (4,959)
------------------------------
(17,501)
Minority interests (136)
------------------------------
Net income $ (17,637)
==============================
Statement of Cash Flow Data:
Net cash used in operating activities $ (2,971)
Net cash provided by investing activities 105
Net cash used in financing activities (771)
------------------------------
Net decrease in cash $ (3,637)
==============================
</TABLE>
Costs and expenses of $28,939,000, primarily accounting,
legal and financial advisory services, incurred by the
Company in connection with the SCA and Advantage Health
mergers have been recorded in operations during the quarter
ending March 31, 1996 and reported as Merger Costs in the
accompanying consolidated statements of income.
NOTE 4 -- On August 20, 1996, the Company consummated the acquisition
of Professional Sports Care Management, Inc. ("PSCM") in a
transaction accounted for as a pooling of interests. In the
transaction, PSCM stockholders received an aggregate of
1,811,444 shares of the Company's common stock. At the time
of the merger, PSCM operated a network of 36 outpatient
rehabilitation centers in three states.
Costs and expenses of $5,513,000, primarily accounting, legal
and financial advisory services, incurred by the Company in
connection with the PSCM merger have been recorded in
operations during the quarter ending September 30, 1996 and
reported as merger costs in the accompanying consolidated
statements of income.
<PAGE>
Due to the immateriality of the PSCM merger, the Company's
historical financial statements for all periods prior to July
1, 1996 have not been restated to include the results of
PSCM. Instead, stockholders' equity has been increased by
approximately $43,230,000 as of July 1, 1996 to reflect the
effects of the PSCM merger.
PSCM's results of operations are included in the accompanying
financial statements from July 1, 1996 forward. Separate
results of PSCM for periods prior to the merger are as
follows (in thousands):
Year ended December 31, 1994:
Revenues $ 16,430
Net income 469
Year ended December 31, 1995:
Revenues 27,110
Net income 2,082
Six months ended June 30, 1996:
Revenues 19,327
Net income 1,305
NOTE 5 -- During the first nine months of 1996, the Company acquired 58
outpatient facilities, four outpatient surgery centers, one
inpatient rehabilitation hospital and one diagnostic imaging
center. The total purchase price of the acquired facilities
was approximately $87,142,000. The Company also entered into
non-compete agreements totaling approximately $8,258,000 in
connection with these transactions. The cost in excess of the
acquired facilities' net asset value was approximately
$53,185,000. The results of operations (not material
individually or in the aggregate) of these acquisitions are
included in the consolidated financial statements from their
respective acquisition dates.
NOTE 6 -- During the first nine months of 1996, the Company granted
incentive and nonqualified stock options to certain
Directors, employees and others for 2,179,000 shares of
Common Stock at exercise prices ranging from $32.50 to $37.75
per share.
NOTE 7 -- On September 11, 1996, the Company signed an agreement to
acquire ReadiCare, Inc. ("ReadiCare") in a transaction to be
accounted for as a pooling of interests. ReadiCare operates
37 occupational healthcare sites in two states. Under the
terms of the agreement, all shares of common stock of
ReadiCare will be exchanged for shares of the Company's
Common Stock pursuant to an exchange ratio that will yield an
aggregate value of approximately $80,000,000 to ReadiCare
stockholders. The transaction is subject to approval by the
stockholders of ReadiCare. The transaction is expected to be
completed during the fourth quarter of 1996.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company provides outpatient and rehabilitative healthcare
services through its inpatient and outpatient rehabilitation facilities, surgery
centers and medical centers. The Company has expanded its operations through the
acquisition or opening of new facilities and satellite locations and by
enhancing its existing operations. As of September 30, 1996, the Company had
1,030 locations in 48 states and the District of Columbia, including 690
outpatient rehabilitation locations, 96 inpatient rehabilitation facilities,
five medical centers, 134 surgery centers and 105 locations providing other
patient care services.
The Company's revenues include net patient service revenues and other
operating revenues. Net patient service revenues are reported at estimated net
realizable amounts from patients, insurance companies, third-party payors
(primarily Medicare and Medicaid) and others for services rendered. Revenues
from third-party payors also include estimated retroactive adjustments under
reimbursement agreements which are subject to final review and settlement by
appropriate authorities. Management determines allowances for doubtful accounts
and contractual adjustments based on historical experience and the terms of
payor contracts. Net accounts receivable include only those amounts estimated by
management to be collectible.
The Company determines the amortization period of the cost in excess
of net asset value of purchased facilities based on an evaluation of the facts
and circumstances of each individual purchase transaction. The evaluation
includes an analysis of historic and projected financial performance, an
evaluation of the estimated useful life of the buildings and fixed assets
acquired, the indefinite useful life of Certificates of Need and licenses
acquired, the competition within local markets, lease terms where applicable,
and the legal terms of partnerships where applicable. The Company utilizes
independent appraisers and relies on its own management expertise in evaluating
each of the factors noted above. With respect to the carrying value of the
excess of cost over net asset value of purchased facilities and other intangible
assets, the Company determines on a quarterly basis whether an impairment event
has occurred by considering factors such as the market value of the asset, a
significant adverse change in legal factors or in the business climate, adverse
action by a regulator, a history of operating losses or cash flow losses, or a
projection of continuing losses associated with an operating entity. The
carrying value of excess cost over net asset value of purchased facilities and
other intangible assets will be evaluated if the facts and circumstances suggest
that it has been impaired. If this evaluation indicates that the value of the
asset will not be recoverable, as determined based on the undiscounted cash
flows of the entity acquired over the remaining amortization period, the
Company's carrying value of the asset will be reduced by the estimated shortfall
of cash flows.
The Company, in many cases, operates more than one site within a
market. In such markets, there is customarily an outpatient center or inpatient
facility with associated satellite outpatient locations. For purposes of the
following discussion and analysis, same store operations are measured on
locations within markets in which similar operations existed at the end of the
period and include the operations of additional locations opened within the same
market. New store operations are measured on locations within new markets.
Effective January 17, 1996, the Company consummated the acquisition
of Surgical Care Affiliates, Inc. ("SCA") through a merger accounted for as a
pooling of interests. Accordingly, the Company's financial statements have been
restated to include the results of SCA for all periods presented (see Note 3 of
"Notes to Consolidated Financial Statements" for further discussion). Effective
March 14, 1996, the Company consummated the acquisition of Advantage Health
Corporation ("Advantage Health"), also through a merger accounted for as a
pooling of interests. The results of operations described below for the quarter
ended September 30, 1995 are based on a combination of both the Company's
results for its
<PAGE>
quarter ended September 30, 1995 and Advantage Health's results for its quarter
ended August 31, 1995 (see Note 3 of "Notes to Consolidated Financial
Statements" for further discussion). All data set forth for periods prior to
December 31, 1995 relating to revenues derived from Medicare and Medicaid do not
take into account revenues of the Advantage Health facilities or the SCA
facilities.
Effective August 20, 1996, the Company consummated the acquisition of
Professional Sports Care Management, Inc. ("PSCM") through a merger accounted
for as a pooling of interests. In the transaction, PSCM stockholders received an
aggregate of 1,811,444 shares of the Company's common stock. At the time of the
merger, PSCM operated a network of 36 outpatient rehabilitation centers in three
states. Due to the immateriality of the PSCM merger, the Company's historical
financial statements for all periods prior to July 1, 1996 have not been
restated to include the results of PSCM. Instead, an adjustment has been made to
stockholders' equity as of July 1, 1996 to include the effects of the PSCM
merger. PSCM's results of operations are included in the accompanying financial
statements and the following discussion from July 1, 1996 forward (see Note 4 of
"Notes to Consolidated Financial Statements" for further discussion).
RESULTS OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER 30, 1996
The Company operated 690 outpatient locations (which includes base
facilities and satellites) at September 30, 1996, compared to 404 outpatient
locations at September 30, 1995. In addition, the Company operated 96 inpatient
rehabilitation facilities, five medical centers and 134 surgery centers at
September 30, 1996, compared with 94 inpatient facilities, five medical centers
and 121 surgery centers at September 30, 1995.
The Company's operations generated revenues of $616,943,000 for the
quarter ended September 30, 1996, an increase of $98,406,000, or 19.0%, as
compared to the same period in 1995. The increase in revenues is primarily
attributable to increases in patient volume, the December 1, 1995 acquisition of
Caremark Orthopedic Services Inc. and the addition of new outpatient and surgery
centers. Same store revenues for the quarter ended September 30, 1996 were
$573,159,000, an increase of $54,622,000, or 10.5%, as compared to the same
period in 1995. New store revenues were $43,784,000. Revenues generated from
patients under Medicare and Medicaid plans respectively accounted for 37.2% and
3.0% of revenue for the third quarter of 1996, compared to 39.4% and 3.3% for
the same period in 1995. Revenues from any other single third-party payor were
not significant in relation to the Company's revenues. During the third quarter
of 1996, same store outpatient visits, inpatient days and surgical cases
increased 15.5%, 9.2% and 5.8%, respectively. Revenue per outpatient visit,
revenue per inpatient day and revenue per surgical case for same store
operations increased by 2.8%, 2.9% and 4.5%, respectively.
Operating expenses, at the operating unit level, were $397,749,000,
or 64.5% of revenues, for the quarter ended September 30, 1996, compared to
68.7% of revenues for the third quarter of 1995. Same store operating expenses
were $369,643,000, or 64.5% of comparable revenue. New store operating expenses
were $28,106,000, or 64.2% of comparable revenue. Corporate general and
administrative expenses increased from $12,607,000 during the 1995 quarter to
$16,805,000 during the 1996 quarter. As a percentage of revenue, corporate
general and administrative expenses increased from 2.4% in the 1995 quarter to
2.7% in the 1996 quarter. The provision for doubtful accounts was $13,996,000,
or 2.3% of revenues, for the third quarter of 1996, compared to $8,716,000, or
1.7% of revenues, for the same period in 1995. Management believes that this
provision is adequate to cover any uncollectible revenues.
Depreciation and amortization expense was $49,326,000 for the quarter
ended September 30, 1996, compared to $36,986,000 for the same period in 1995.
The increase represents the investment in additional assets by the Company.
Interest expense was $22,625,000 for the quarter ended September 30, 1996,
compared to $26,451,000 for the quarter ended September 30, 1995. For the third
quarter of 1996, interest income was $975,000, compared to $2,244,000 for the
third quarter of 1995.
<PAGE>
Income before minority interests and income taxes for the third
quarter of 1996 was $111,904,000, compared to $79,661,000 for the same period in
1995. Income before minority interests and income taxes for the 1996 quarter
includes merger costs relating to the PSCM acquisition totaling $5,513,000.
Minority interests decreased income before income taxes by $13,286,000 for the
quarter ended September 30, 1996, compared to decreasing income before income
taxes by $12,076,000 for the third quarter of 1995. The provision for income
taxes for the third quarter of 1996 was $37,574,000, compared to $25,938,000 for
the same period in 1995, resulting in effective tax rates of 38.1% and 38.4%,
respectively. Net income for the third quarter of 1996 was $61,044,000, compared
to $41,647,000 for the third quarter of 1995.
RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 1996
Revenues for the nine months ended September 30, 1996 were
$1,793,766,000, an increase of $323,717,000, or 22.0%, over the nine months
ended September 30, 1995. Same store revenues were $1,677,211,000, an increase
of $207,162,000, or 14.1%, as compared to the same period in 1995. New store
revenues were $116,555,000. The increase in revenues is primarily attributable
to the acquisition of the NovaCare rehabilitation hospitals division in April
1995, the December 1, 1995 acquisition of Caremark Orthopedic Services Inc.,
increases in patient volume and the addition of new outpatient and surgery
centers. Revenues generated from patients under Medicare and Medicaid plans
respectively accounted for 37.8% and 2.9% of revenue for the first nine months
of 1996, compared to 40.7% and 2.7% for the same period in 1995. Revenues from
any other single third-party payor were not significant in relation to the
Company's revenues. During the first nine months of 1996, same store outpatient
visits, inpatient days and surgical cases increased 16.3%, 11.8% and 5.1%,
respectively. Revenue per outpatient visit, revenue per inpatient day and
revenue per surgical case for same store operations increased by 1.7%, 0.4% and
2.5%, respectively.
Operating expenses, at the operating unit level, were $1,173,148,000,
or 65.4% of revenues, for the nine months ended September 30, 1996, as compared
to $1,014,302,000, or 69.0% of revenues, for the first nine months of 1995. Same
store operating expenses were $1,096,061,000, or 65.4% of comparable revenue.
New store operating expenses were $77,087,000, or 66.1% of comparable revenue.
As a result of the SCA and Advantage Health acquisitions, the Company recognized
merger costs of $28,939,000 during the first quarter of 1996 (see Note 3 of
"Notes to Consolidated Financial Statements" for further discussion). Net income
for the nine months ended September 30, 1996 was $158,450,000, compared to
$86,495,000 for the same period in 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had working capital of
$469,609,000, including cash and marketable securities of $124,852,000. Working
capital at December 31, 1995 was $406,125,000, including cash and marketable
securities of $156,321,000. For the first nine months of 1996, cash provided by
operations was $253,649,000, compared to $195,354,000 for the same period in
1995. Additions to property, plant, and equipment and acquisitions accounted for
$115,016,000 and $87,142,000, respectively, during the first nine months of
1996. Those same investing activities accounted for $114,562,000 and
$334,603,000, respectively, in the same period in 1995. Financing activities
provided $57,092,000 and $310,157,000 during the first nine months of 1996 and
1995, respectively. Net borrowing proceeds (borrowing less principal reductions)
for the first nine months of 1996 and 1995 were $67,110,000 and $346,556,000,
respectively.
Accounts receivable were $504,666,000 at September 30, 1996, compared
to $409,150,000 at December 31, 1995. The number of days of average revenues in
average receivables was 67.6 at September 30, 1996, compared to 63.8 at December
31, 1995. The concentration of net accounts receivable from patients,
third-party payors, insurance companies and others at September 30, 1996 is
consistent with the related concentration of revenues for the period then ended.
<PAGE>
At September 30, 1996, the Company had a $1,250,000,000 revolving
line of credit with NationsBank, N.A. and other participating banks. Interest is
paid based on LIBOR plus a predetermined margin, prime, or competitively bid
rates from the participating banks (see Note 2 of "Notes to Consolidated
Financial Statements"). The effective interest rate on the average outstanding
balance under the revolving line of credit was 6.02% for the nine months ended
September 30, 1996, compared to the average prime rate of 8.28% during the same
period. At September 30, 1996, the Company had drawn $977,000,000 under its
revolving line of credit.
The Company intends to pursue the acquisition or development of
additional healthcare operations, including comprehensive outpatient
rehabilitation facilities, ambulatory surgery centers, inpatient rehabilitation
facilities and companies engaged in the provision of outpatient surgery and
rehabilitation-related services, and to expand certain of its existing
facilities. While it is not possible to estimate precisely the amounts which
will actually be expended in the foregoing areas, the Company anticipates that
over the next twelve months, it will spend approximately $30,000,000 on
maintenance and expansion of its existing facilities and approximately
$150,000,000 on development of the Integrated Service Model, pursuant to which
the Company plans to utilize its services in particular markets to provide an
integrated continuum of coordinated care.
On September 11, 1996, the Company entered into a Plan and Agreement
of Merger with ReadiCare, Inc. ("ReadiCare"), pursuant to which the Company has
agreed to acquire ReadiCare in a stock-for-stock merger to be accounted for as a
pooling of interests. ReadiCare operates 37 occupational healthcare sites in
California and Washington. Under the terms of the Plan and Agreement of Merger,
the Company will issue shares of its common stock valued at approximately
$80,000,000 in the aggregate to the stockholders of ReadiCare. The transaction,
which is subject to approval by the stockholders of ReadiCare, is expected to be
consummated in the fourth quarter of 1996. Although the Company is continually
considering and evaluating acquisitions and opportunities for future growth, the
Company has not entered into any other 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 thereafter.
Inflation in recent years has not had a significant effect on the
Company's business, and is not expected to adversely affect the Company in the
future unless it increases significantly.
Statements contained in this Quarterly Report on Form 10-Q 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.
<PAGE>
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
11. Computation of Income Per Share (unaudited)
27. Financial Data Schedule
(b) Reports on Form 8-K
During the three months ended September 30, 1996, the
Company filed no Current Reports on Form 8-K.
No other items of Part II are applicable to the Registrant for the
period covered by this Quarterly Report on Form 10-Q.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHSOUTH Corporation
-----------------------
(Registrant)
Date: November 14, 1996 /s/ RICHARD M. SCRUSHY
---------------------------
Richard M. Scrushy
Chairman of the Board and
Chief Executive Officer
Date: November 14, 1996 /s/ AARON BEAM, JR.
---------------------------
Aaron Beam, Jr.
Executive Vice President and
Chief Financial Officer
EXHIBIT 11
HEALTHSOUTH Corporation and Subsidiaries
COMPUTATION OF INCOME PER SHARE (UNAUDITED)
(In Thousands, Except for Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average common shares outstanding 155,951 136,878 155,416 136,256
Net effect of dilutive stock options 9,826 8,273 10,377 7,655
------- ------- ------- -------
Total Common and Common Equivalent Shares 165,777 145,151 165,793 143,911
======= ======= ======= =======
Net income $ 61,044 $ 41,647 $158,450 $ 86,495
======= ======= ======= =======
Net income per common and common
equivalent share $ 0.37 $ 0.29 $ 0.96 $ 0.60
======= ======= ======= =======
FULLY DILUTED:
Weighted average common shares outstanding 155,951 136,878 155,416 136,256
Net effect of dilutive stock options 9,826 8,273 10,377 7,655
------- ------- ------- -------
165,777 145,151 165,793 143,911
Assumed conversion of 5% Convertible Subordinated
Debentures due 2001 6,113 6,113 6,113 6,113
------- ------- ------- -------
Total Common and Common Equivalent Shares,
Fully Diluted 171,890 151,264 171,906 150,024
======= ======= ======= =======
Net income $ 61,044 $ 41,647 $158,450 $ 86,495
Elimination of interest and amortization on 5%
Convertible Subordinated Debentures due 2001, less
the related effect on the provision for income taxes 961 963 2,863 2,857
------- ------- ------- -------
Net income, fully diluted $ 62,005 $ 42,610 $161,313 $ 89,352
======= ======= ======= =======
Net income per common and common equivalent share $ 0.36 $ 0.28 $ 0.94 $ 0.60
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 121,067
<SECURITIES> 3,785
<RECEIVABLES> 763,668
<ALLOWANCES> (259,002)
<INVENTORY> 38,459
<CURRENT-ASSETS> 734,631
<PP&E> 1,702,736
<DEPRECIATION> (348,415)
<TOTAL-ASSETS> 3,182,772
<CURRENT-LIABILITIES> 265,022
<BONDS> 1,424,775
0
0
<COMMON> 1,562
<OTHER-SE> 1,395,669
<TOTAL-LIABILITY-AND-EQUITY> 3,182,772
<SALES> 0
<TOTAL-REVENUES> 1,793,766
<CGS> 0
<TOTAL-COSTS> 1,222,610
<OTHER-EXPENSES> 137,320
<LOSS-PROVISION> 39,873
<INTEREST-EXPENSE> 69,967
<INCOME-PRETAX> 293,993
<INCOME-TAX> 97,528
<INCOME-CONTINUING> 158,450
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 158,450
<EPS-PRIMARY> 0.96
<EPS-DILUTED> 0.94
</TABLE>
