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