SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 2
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1997; 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.)
ONE HEALTHSOUTH PARKWAY, 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 May 9, 1997
- - -------------------------------- ----------------------------
COMMON STOCK, PAR VALUE 343,016,747 SHARES
$.01 PER SHARE
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HEALTHSOUTH CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART 1 -- FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) -- March 31, 1997
and December 31, 1996 3
Consolidated Statements of Income (Unaudited) -- Three Months
Ended March 31, 1997 and 1996 5
Consolidated Statements of Cash Flows (Unaudited) -- Three Months
Ended March 31, 1997 and 1996 6
Notes to Consolidated Financial Statements (Unaudited) -- Three
Months Ended March 31, 1997 and 1996 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II -- OTHER INFORMATION
Item 2. Changes in Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------------- ---------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 151,351 $ 150,071
Other marketable securities 3,842 3,760
Accounts receivable 580,218 540,389
Inventories, prepaid expenses, and
other current assets 189,126 175,582
Deferred income taxes 16,335 15,238
--------------- ----------------
TOTAL CURRENT ASSETS 940,872 885,040
OTHER ASSETS 99,880 85,412
PROPERTY, PLANT AND EQUIPMENT--NET 1,534,388 1,464,833
INTANGIBLE ASSETS--NET 1,130,699 1,094,421
---------------
----------------
TOTAL ASSETS $ 3,705,839 $ 3,529,706
=============== ================
</TABLE>
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HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable $ 111,869 $ 116,451
Salaries and wages payable 41,712 67,793
Accrued interest payable and other liabilities 118,595 99,118
Current portion of long-term debt 39,510 38,726
--------------- ---------------
TOTAL CURRENT LIABILITIES 311,686 322,088
LONG-TERM DEBT 1,624,311 1,521,417
DEFERRED INCOME TAXES 42,126 41,850
OTHER LONG-TERM LIABILITIES 3,335 3,558
DEFERRED REVENUE 379 406
MINORITY INTERESTS-LIMITED PARTNERSHIPS 76,935 71,286
STOCKHOLDERS' EQUITY:
Preferred Stock, $.10 par value--1,500,000
shares authorized; issued and outstanding--
none 0 0
Common Stock, $.01 par value--500,000,000
shares authorized; 327,384,000 and 326,492,000
shares issued at March 31, 1997 and
December 31, 1996, respectively 3,274 3,265
Additional paid-in capital 1,072,718 1,060,012
Retained earnings 589,065 525,718
Treasury stock (323) (323)
Receivable from Employee Stock Ownership Plan (12,247) (14,148)
Notes receivable from stockholders (5,420) (5,423)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 1,647,067 1,569,101
---------------
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,705,839 $ 3,529,706
=============== ===============
</TABLE>
See accompanying notes.
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HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED - IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------------------
1997 1996
-------------------- --------------------
<S> <C> <C>
Revenues $ 691,631 $ 612,149
Operating units expenses 438,289 404,801
Corporate general and administrative expenses 17,849 18,449
Provision for doubtful accounts 14,713 14,102
Depreciation and amortization 57,371 47,164
Merger costs 15,875 28,939
Interest expense 25,673 24,851
Interest income (1,038) (1,827)
-------------------- --------------------
568,732 536,479
-------------------- --------------------
Income before income taxes and
minority interests 122,899 75,670
Provision for income taxes 42,411 24,472
-------------------- --------------------
Income before minority interests 80,488 51,198
Minority interests (15,908) (11,517)
-------------------- --------------------
Net income $ 64,580 $ 39,681
==================== ====================
Weighted average common and common
equivalent shares outstanding 342,772 336,151
==================== ====================
Net income per common and common
equivalent share $ 0.19 $ 0.12
==================== ====================
Net income per common share --
assuming full dilution $ 0.18 $ 0.12
==================== ====================
</TABLE>
See accompanying notes.
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<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------------
1997 1996
------------------- ----------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 64,580 $ 39,681
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 57,371 47,164
Provision for doubtful accounts 14,713 14,102
Income applicable to minority interests of
limited partnerships 15,908 11,517
Merger costs 15,875 28,939
Provision for deferred income taxes 3,525 392
Provision for deferred revenue (27) (317)
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable (47,624) (65,655)
Inventories, prepaid expenses and other current
assets (14,372) 10,257
Accounts payable and accrued expenses (34,425) (22,965)
------------------- ----------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 75,524 63,115
INVESTING ACTIVITIES
Purchases of property, plant and equipment (96,447) (53,329)
Additions to intangible assets, net of effects of
acquisitions (40,866) (39,060)
Assets obtained through acquisitions, net of liabilities
assumed (28,964) (26,892)
Changes in other assets (14,468) (2,387)
Proceeds received on sale of other marketable
securities 30 35
Investments in other marketable securities (112) 0
------------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (180,827) (121,633)
</TABLE>
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HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------------
1997 1996
------------------- ----------------
FINANCING ACTIVITIES
<S> <C> <C>
Proceeds from borrowings 193,900 142,822
Principal payments on long-term debt and leases (90,445) (123,835)
Proceeds from exercise of options 11,483 12,898
Purchase of treasury stock 0 (500)
Reduction in receivable from Employee Stock
Ownership Plan 1,901 1,738
Decrease in loans to stockholders 3 44
Dividends paid 0 (286)
Proceeds from investment by minority interests 3,009 1,680
Payment of cash distributions to limited partners (13,268) (10,617)
------------------- ----------------
NET CASH PROVIDED FROM
FINANCING ACTIVITIES 106,583 23,944
------------------- ----------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,280 (34,574)
Cash and cash equivalents at beginning of period 150,071 151,812
------------------- ----------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 151,351 $ 117,238
=================== ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 18,423 $ 16,473
Income taxes 34,635 20,069
</TABLE>
See accompanying notes.
Page 7
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
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, 1996. 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 Credit Agreement with
NationsBank, N.A. ("NationsBank") and other participating banks
(the "1995 Credit Agreement") which consisted of a $1,000,000,000
revolving credit facility. On April 18, 1996, the Company amended
and restated the 1995 Credit Agreement to increase the size of
the revolving credit facility to $1,250,000,000 (the "1996 Credit
Agreement"). 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 revolving credit facility ranging from
0.08% to 0.25%, depending on certain defined ratios. The
principal amount is payable in full on March 31, 2001. The
Company provided a negative pledge on all assets under the 1996
Credit Agreement, 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. In connection with the pending acquisition of
Horizon/CMS (see Note 4), the Company has obtained a
fully-underwritten commitment from NationsBank, N.A. for a
$1,000,000,000 Senior Bridge Loan Facility on substantially the
same terms as the 1996 Credit Agreement. In addition,
NationsBank, N.A. has provided the Company with a $300,000,000
interim revolving credit facility for working capital purposes on
substantially the same terms as the 1996 Credit Agreement,
pending the closing of the Senior Bridge Loan Facility.
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 $9.406 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.
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At March 31, 1997 and December 31, 1996, long-term debt
consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------------- -----------------
(in thousands)
<S> <C> <C>
Advances under the $1,250,000,000 1996
Credit Agreement $1,164,000 $995,000
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 134,821 200,143
----------------- -----------------
1,663,821 1,560,143
Less amounts due within one year 39,510 38,726
----------------- -----------------
$1,624,311 $1,521,417
================= =================
</TABLE>
Subsequent to March 31, 1997, the holders of the Convertible
Debentures surrendered substantially all of the Convertible
Debentures for conversion into approximately 12,226,000 shares of
the Company's Common Stock.
NOTE 3 -- On March 3, 1997, the Company consummated the acquisition of
Health Images, Inc. ("Health Images") in a transaction accounted
for as a pooling of interests. Accordingly, the Company's
historical financial statements for all periods prior to the
effective date of the merger have been restated to include the
results of Health Images. In the transaction, Health Images
stockholders received approximately 10,343,000 shares of the
Company's Common Stock. Health Images operates 49 freestanding
diagnostic centers in 13 states and six in the United Kingdom.
Costs and expenses of $15,875,000, primarily representing
accounting, legal and financial advisory services, incurred by
the Company in connection with the merger have been recorded in
operations during the quarter ending March 31, 1997 and reported
as Merger Costs in the accompanying consolidated statements of
income. The effects of conforming the accounting policies of the
Company and Health Images were not material.
Combined and separate results of the Company and Health Images for the three
months ended March 31, 1997 and 1996 are as follows (in thousands):
HEALTH
HEALTHSOUTH IMAGES COMBINED
----------- ----------- ----------
Three Months ended March 31, 1997
Revenues $ 658,898 $ 32,733 $ 691,631
Net Income 63,433 1,147 64,580
Three Months ended March 31, 1996
Revenues $ 581,234 $ 30,915 $ 612,149
Net Income 37,851 1,830 39,681
During 1996, the Company consummated the acquisition of
ReadiCare, Inc. ("ReadiCare") in a transaction accounted for as a
pooling of interests. Prior to the merger, ReadiCare reported on
a fiscal year ending on February 28. Accordingly, at the time of
the merger, the historical financial statements of ReadiCare were
recast to a November 30 fiscal year end to more closely conform
to the Company's calendar fiscal year end. Beginning January 1,
1997, all facilities acquired in the ReadiCare merger adopted a
December 31 fiscal year end; therefore, ReadiCare's historical
results of operations for the one month ended December 31, 1996,
which included revenues of $3,266,000 and a net loss of $926,000,
are not included in the Company's consolidated statements of
income. ReadiCare's cash flow for the one month period ended
December 31, 1996 of ($543,000) is included in the accompanying
statement of cash flows for the three months ended March 31,
1997.
NOTE 4 -- During the first three months of 1997, the Company acquired 32
outpatient rehabilitation facilities, two outpatient surgery
centers and one diagnostic imaging center. The total purchase
price of the acquired facilities was approximately $28,964,000.
The Company also entered into non-compete agreements totaling
approximately $3,675,000 in connection with these transactions.
The cost in excess of the acquired facilities' net asset
Page 9
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value was approximately $21,602,000. 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.
On February 17, 1997, the Company entered into a definitive
agreement to acquire Horizon/CMS Healthcare Corporation
("Horizon/CMS") in a stock-for-stock merger in which the
stockholders of Horizon/CMS will receive 0.84338 of a share of
the Company's common stock per share of Horizon/CMS common stock.
The transaction is valued at approximately $1,600,000,000,
including the assumption by the Company of approximately
$700,000,000 in Horizon/CMS debt. It is expected that the
acquisition will be accounted for as a purchase. Consummation of
the transaction is subject to various regulatory approvals,
including clearance under the Hart-Scott-Rodino Antitrust
Improvements Act, and to the satisfaction of certain other
conditions. The Company currently anticipates that the
transaction will be consummated in mid-1997.
NOTE 5 -- During the first three months of 1997, the Company granted
incentive and nonqualified stock options to certain Directors and
employees for 2,240,000 shares of Common Stock at exercise prices
ranging from $18.44 to $20.81 per share.
NOTE 6 -- On January 18, 1997, the Company's Board of Directors authorized
a two-for-one stock split to be effected in the form of a 100%
stock dividend, subject to the approval by the Company's
stockholders of an amendment to its Certificate of Incorporation
increasing the number of authorized shares of common stock from
250,000,000 to 500,000,000. The Company's stockholders approved
the amendment on March 12, 1997. The stock dividend was payable
on March 17, 1997 to holders of record on March 13, 1997.
Accordingly, all share and per share amounts included in the
accompanying financial statements have been restated to give
effect to the stock split.
NOTE 7 -- In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share", which is required to be
adopted on December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. The impact is
expected to result in an increase in primary earnings per share
for the quarters ended March 31, 1997 and March 31, 1996 of $0.01
and $0.01 per share, respectively. The impact of Statement No.
128 on the calculation of fully diluted earnings per share for
these quarters is not expected to be material.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company provides outpatient and rehabilitative healthcare services
through its inpatient and outpatient rehabilitation facilities, surgery centers,
diagnostic 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 March 31, 1997, the Company had over
1,200 locations in 50 states, the District of Columbia and the United Kingdom,
including approximately 780 outpatient rehabilitation locations, 97 inpatient
rehabilitation facilities, four medical centers, 140 surgery centers, 73
diagnostic centers and approximately 116 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 March 3, 1997, the Company consummated the acquisition of
Health Images, Inc. ("Health Images") through a merger accounted for as a
pooling of interests. Accordingly, the Company's financial statements have been
restated to include the results of Health Images for all periods presented (see
Note 3 of "Notes to Consolidated Financial Statements" for further discussion).
All data set forth for
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periods prior to December 31, 1996 relating to revenues derived from Medicare
and Medicaid do not take into account revenues of the Health Images facilities.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 1997
The Company operated approximately 780 outpatient rehabilitation
locations (which includes base facilities and satellites) at March 31, 1997,
compared to 624 outpatient rehabilitation locations at March 31, 1996. In
addition, the Company operated 97 inpatient rehabilitation facilities, four
medical centers, 140 surgery centers, and 73 diagnostic centers at March 31,
1997, compared with 95 inpatient facilities, five medical centers, 128 surgery
centers and 72 diagnostic centers at March 31, 1996.
The Company's operations generated revenues of $691,631,000 for the
quarter ended March 31, 1997, an increase of $79,482,000, or 13.0%, as compared
to the same period in 1996. The increase in revenues is primarily attributable
to increases in patient volume and the addition of new outpatient and surgery
centers. Same store revenues for the quarter ended March 31, 1997 were
$670,119,000, an increase of $57,970,000, or 9.5%, as compared to the same
period in 1996. New store revenues were $21,512,000. Revenues generated from
patients under Medicare and Medicaid plans respectively accounted for 37.6% and
2.7% of revenue for the first quarter of 1997, compared to 38.3% and 2.9% for
the same period in 1996. Revenues from any other single third-party payor were
not significant in relation to the Company's revenues. During the first quarter
of 1997, same store outpatient visits, inpatient days, surgical cases and
diagnostic cases increased 16.4%, 10.3%, 6.5% and 11.4%, respectively. Revenue
per outpatient visit, inpatient day, surgical case and diagnostic case for same
store operations increased by 0.4%, 0.1%, 3.7% and 5.1%, respectively.
Operating expenses, at the operating unit level, were $438,289,000, or
63.4% of revenues, for the quarter ended March 31, 1997, compared to $404,801,
or 66.1% of revenues, for the first quarter of 1996. The decrease in operating
expenses as a percentage of revenues is primarily attributable to the 9.5%
increase in same store revenues noted above. In same store operations, the
incremental costs associated with increased revenues are significantly less as a
percentage of those increased revenues. Same store operating expenses were
$424,664,000, or 63.4% of comparable revenue. New store operating expenses were
$13,625,000, or 63.3% of comparable revenue. Corporate general and
administrative expenses decreased from $18,449,000 during the 1996 quarter to
$17,849,000 during the 1997 quarter. As a percentage of revenue, corporate
general and administrative expenses decreased from 3.0% in the 1996 quarter to
2.6% in the 1997 quarter. The provision for doubtful accounts was $14,713,000,
or 2.1% of revenues, for the first quarter of 1997, compared to $14,102,000, or
2.3% of revenues, for the same period in 1996. Management believes that this
provision is adequate to cover any uncollectible revenues.
Depreciation and amortization expense was $57,371,000 for the quarter
ended March 31, 1997, compared to $47,164,000 for the same period in 1996. The
increase represents the investment in additional assets by the Company. Interest
expense was $25,673,000 for the quarter ended March 31, 1997, compared to
$24,851,000 for the quarter ended March 31, 1996. For the first quarter of 1997,
interest income was $1,038,000, compared to $1,827,000 for the first quarter of
1996.
As a result of the Health Images acquisition, the Company recognized
$15,875,000, primarily representing accounting, legal and financial advisory
services, in merger costs during the first three months of 1997.
Income before minority interests and income taxes for the first quarter
of 1997 was $122,899,000, compared to $75,670,000 for the same period in 1996.
Minority interests decreased income before income taxes by $15,908,000 for the
quarter ended March 31, 1997, compared to decreasing income before income taxes
by $11,517,000 for the first quarter of 1996. The provision for income taxes for
the first quarter of 1997 was $42,411,000, compared to $24,472,000 for the same
period in 1996, resulting in effective tax rates of 39.6% and 38.1%,
respectively. Net income for the first quarter of 1997 was $64,580,000, compared
to $39,681,000 for the first quarter of 1996.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had working capital of $629,186,000,
including cash and marketable securities of $155,193,000. Working capital at
December 31, 1996 was $562,952,000, including cash and marketable securities of
$153,831,000. For the first three months of 1997, cash provided by operations
was $75,524,000, compared to $63,115,000 for the same period in 1996. Additions
to property, plant, and equipment and acquisitions accounted for $96,447,000 and
$28,964,000, respectively, during the first three months of 1997. Those same
investing activities accounted for $53,329,000 and $26,892,000, respectively, in
the same period in 1996. Financing activities provided $106,583,000 and
$23,944,000 during the first three months of 1997 and 1996, respectively. Net
borrowing proceeds (borrowing less principal reductions) for the first three
months of 1997 and 1996 were $103,455,000 and $18,987,000, respectively.
Accounts receivable were $580,218,000 at March 31, 1997, compared to
$540,389,000 at December 31, 1996. The number of days of average quarterly
revenues in ending receivables at March 31, 1997 was 75.5, compared to 76.8 days
of average annual revenues in ending receivables at December 31, 1996. The
concentration of net accounts receivable from patients, third-party payors,
insurance companies and others at March 31, 1997 is consistent with the related
concentration of revenues for the period then ended.
At March 31, 1997, the Company had a $1,250,000,000 revolving line of
credit with NationsBank, N.A. (Carolinas) and other participating banks (the
"1996 Credit Agreement"). 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 March 31, 2001. The Company provided
a negative pledge on all assets for the 1996 Credit Agreement. The effective
interest rate on the average outstanding balance under the revolving line of
credit was 5.78% for the three months ended March 31, 1997, compared to the
average prime rate of 8.27% during the same period. At March 31, 1997, the
Company had drawn $1,164,000,000 under the 1996 Credit Agreement.
On February 17, 1997, the Company entered into a definitive agreement
to acquire Horizon/CMS Healthcare Corporation ("Horizon/CMS") in a
stock-for-stock merger in which the stockholders of Horizon/CMS will receive
0.84338 of a share of the Company's common stock per share of Horizon/CMS common
stock. The transaction is valued at approximately $1,600,000,000, including the
assumption by the Company of approximately $700,000,000 in Horizon/CMS debt. It
is expected that the transaction will be accounted for as a purchase.
Consummation of the transaction is subject to various regulatory approvals,
including clearance under the Hart-Scott-Rodino Antitrust Improvements Act, and
to the satisfaction of certain other conditions. The Company currently
anticipates that the transaction will be consummated in mid-1997.
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 $50,000,000 on
maintenance and expansion of its existing facilities and approximately
$300,000,000 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.
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 other than the
transaction with Horizon/CMS. In connection with the pending acquisition of
Page 13
<PAGE>
Horizon/CMS, the Company has obtained a fully-underwritten commitment from
NationsBank, N.A. for a $1,000,000,000 Senior Bridge Loan Facility on
substantially the same terms as the 1996 Credit Agreement. In addition,
NationsBank, N.A. has provided the Company with a $300,000,000 interim revolving
credit facility for working capital purposes on substantially the same terms as
the 1996 Credit Agreement, pending the closing of the Senior Bridge Loan
Facility. The Company believes that existing cash, cash flow from operations,
and borrowings under the revolving line of credit and the interim and bridge
loan facilities 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 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 14
<PAGE>
PART II -- OTHER INFORMATION
Item 2. CHANGES IN SECURITIES.
(c) Recent Sales of Unregistered Securities
There were no sales of securities in transactions not
registered under the Securities Act of 1933, as amended,
during the period covered by this Quarterly Report on Form
10-Q.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .
The information required under this item was previously
reported under Item 4 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996, and is
hereby incorporated herein by reference.
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 March 31, 1997, the Company
filed (i) a Current Report on Form 8-K filed February 19,
1997, reporting under Item 5 the proposed acquisition of
Horizon/CMS Healthcare Corporation, and (ii) a Current Report
on Form 8-K filed March 13, 1997, reporting under Item 2 the
consummation of the acquisition of Health Images, Inc. and
incorporating by reference under Item 7 the required
historical financial statements of Health Images, Inc. and
related pro forma financial information.
No other items of Part II are applicable to the Registrant for the
period covered by this Quarterly Report on Form 10-Q.
Page 15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Amendment No.1 to this Report to be signed
on its behalf by the undersigned thereunto duly authorized.
HEALTHSOUTH CORPORATION
-----------------------
(Registrant)
Date: September 25, 1997 RICHARD M. SCRUSHY
----------------------------
Richard M. Scrushy
Chairman of the Board and
Chief Executive Officer
Page 16
EXHIBIT 11
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
COMPUTATION OF INCOME PER SHARE (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1996
------------------ ------------------
PRIMARY:
<S> <C> <C>
Weighted average common shares outstanding 327,727 315,443
Net effect of dilutive stock options 15,045 20,708
-------- --------
Total Common and Common Equivalent Shares 342,772 336,151
======== ========
Net income $ 64,580 $ 39,681
======== ========
Net income per common and common equivalent share $ 0.19 $ 0.12
======== ========
FULLY DILUTED:
Weighted average common shares outstanding 327,727 315,443
Net effect of dilutive stock options 15,045 20,708
-------- --------
342,772 336,151
Assumed conversion of 5% Convertible Subordinated
Debentures due 2001 12,226 12,226
-------- --------
Total Common and Common Equivalent Shares,
Fully Diluted 354,998 348,377
======== ========
Net income $ 64,580 $ 39,681
Elimination of interest and amortization on 5%
Convertible Subordinated Debentures due 2001, less
the related effect on the provision for income taxes 960 951
-------- --------
Net income, fully diluted $ 65,540 $ 40,632
======== ========
Net income per common and common equivalent share $ 0.18 $ 0.12
======== ========
</TABLE>
Page 17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 151,351
<SECURITIES> 3,842
<RECEIVABLES> 903,664
<ALLOWANCES> (323,446)
<INVENTORY> 47,756
<CURRENT-ASSETS> 940,872
<PP&E> 2,025,165
<DEPRECIATION> (490,777)
<TOTAL-ASSETS> 3,705,839
<CURRENT-LIABILITIES> 311,686
<BONDS> 1,624,311
0
0
<COMMON> 3,274
<OTHER-SE> 1,643,793
<TOTAL-LIABILITY-AND-EQUITY> 3,705,839
<SALES> 0
<TOTAL-REVENUES> 691,631
<CGS> 0
<TOTAL-COSTS> 456,138
<OTHER-EXPENSES> 57,371
<LOSS-PROVISION> 14,713
<INTEREST-EXPENSE> 25,673
<INCOME-PRETAX> 122,899
<INCOME-TAX> 42,411
<INCOME-CONTINUING> 64,580
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,580
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.18
</TABLE>
