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 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 ------- 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 Page 1
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 Page 2
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> Page 3
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. Page 4
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 expenses: Operating units 438,289 404,801 Corporate general and administrative 17,849 18,449 Provision for doubtful accounts 14,713 14,102 Depreciation and amortization 57,371 47,164 Interest expense 25,673 24,851 Interest income (1,038) (1,827) Merger costs 15,875 28,939 -------------------- -------------------- 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. Page 5
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> Page 6
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
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. Page 8
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. 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
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, employees and others 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. Page 10
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 Page 11
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 66.1% of revenues for the first quarter of 1996. 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. Page 12
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
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
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
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: May 15, 1997 RICHARD M. SCRUSHY ---------------------------- Richard M. Scrushy Chairman of the Board and Chief Executive Officer Date: May 15, 1997 AARON BEAM, JR. ---------------------------- Aaron Beam, Jr. Executive Vice President and Chief Financial Officer Page 16