SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-KA
Amendment No. 1
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report: March 7, 1995
HEALTHSOUTH Corporation
------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 1-10315 63-0860407
------------------ --------- ------------
(State or Other (Commission (I.R.S. Employer
Jurisdiction of Incorporation File Number) Identification No.)
or Organization)
Two Perimeter Park South
Birmingham, Alabama 35243
- ---------------------------- -------------
(Address of Principal (Zip Code)
Executive Offices)
Registrant's Telephone Number, (205) 967-7116
Including Area Code:
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired.
The required audited consolidated financial statements of the acquired
business, ReLife, Inc. ("ReLife"), for the fiscal years ended September 30, 1993
and 1994, listed on the Index to Financial Statements included in this Current
Report on Form 8-KA, Amendment No. 1, are herewith filed.
(b) Pro Forma Financial Information.
The Consolidated Financial Statements of HEALTHSOUTH Corporation and
Subsidiaries for the Year Ended December 31, 1994, are contained within
HEALTHSOUTH Corporation's Annual Report on Form 10-K for the Year Ended December
31, 1994, which Annual Report on Form 10-K is being filed simultaneously with
this Current Report on Form 8-K. Such Consolidated Financial Statements are
hereby incorporated herein by reference. Such Consolidated Financial Statements
reflect the financial position and operations of ReLife for its most recent
fiscal year. Accordingly, pursuant to Rule 11-02(c)(2) of Regulation S-X, no pro
forma financial information is required to be filed herewith.
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 hereunto duly authorized.
Date: March 7, 1995
HEALTHSOUTH Corporation
By /s/ ANTHONY J. TANNER
-----------------------------------
Anthony J. Tanner,
Executive Vice President
and Secretary
ReLife, Inc.
Consolidated Financial Statements
Years ended September 30, 1994, 1993 and 1992
with Report of Independent Auditors
ReLife, Inc.
Consolidated Financial Statements
Years ended September 30, 1994, 1993 and 1992
Contents
Report of Independent Auditors................................................
Audited Financial Statements
Consolidated Balance Sheets...................................................
Consolidated Statements of Income.............................................
Consolidated Statements of Changes in Stockholders' Equity....................
Consolidated Statements of Cash Flows.........................................
Notes to Consolidated Financial Statements....................................
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors
ReLife, Inc.
We have audited the consolidated balance sheets of ReLife, Inc. as of September
30, 1994 and 1993, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ReLife, Inc. as of
September 30, 1994 and 1993, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended September 30,
1994, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Birmingham, Alabama
February 17, 1995
ReLife, Inc.
Consolidated Balance Sheets
September 30
1994 1993
-----------------------------
(in thousands)
Assets
Current assets:
Cash and cash equivalents $ 4,290 $ 14,861
Investments 2,379 -
Patient accounts receivable, net of allowances for
doubtful accounts and contractual adjustments of
$16,563,000 in 1994 and $14,423,000 in 1993 20,345 21,779
Other current assets 5,990 3,939
Income taxes receivable 2,928 -
Deferred income taxes 5,096 3,549
-----------------------------
Total current assets 41,028 44,128
Escrow funds - 394
Property and equipment, net of accumulated depreciation 36,860 35,879
Costs in excess of net assets of businesses acquired,
net of accumulated amortization 34,358 22,047
Other intangible assets, net of accumulated amortization 8,774 10,694
Other assets 640 312
-----------------------------
Total assets $121,660 $113,454
-----------------------------
September 30
1994 1993
-----------------------------
(in thousands)
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt and capital leases $ 262 $ 156
Accounts payable and accrued expenses 4,560 4,857
Accrued payroll and withholdings 3,865 4,270
Accrued compensated absences 1,321 1,165
Due to third-party payors 10,549 6,932
-----------------------------
Total current liabilities 20,557 17,380
Long-term debt, less current portion 33,361 31,229
Obligations under capital lease, less current portion 294 319
Deferred liability 5,655 458
Payable to Medical Center of Central Georgia 2,184 2,096
Deferred income taxes 2,469 4,549
-----------------------------
Total liabilities 64,520 56,031
Commitments and contingencies (Notes 2, 4, 8 and 9)
Stockholders' equity:
Preferred stock, $0.01 par value; 500,000 shares
authorized, none issued - -
Common stock, Class A, $.0l par value; 20,000,000
shares authorized, 5,292,242 and 5,156,612 shares
issued at September 30, 1994 and 1993, respectively 53 52
Common stock, Class B, $.01 par value; 3,000,000
shares authorized, 683,372 and 754,502 shares
issued at September 30, 1994 and 1993, respectively 7 7
Paid-in capital 42,970 42,432
Retained earnings 14,170 14,992
-----------------------------
57,200 57,483
Less common stock in treasury, at cost (100,000
shares of Class A and B) (60) (60)
-----------------------------
Total stockholders' equity 57,140 57,423
-----------------------------
Total liabilities and stockholders' equity $ 121,660 $ 113,454
-----------------------------
ReLife, Inc.
Consolidated Statements of Income
Year ended September 30
1994 1993 1992
-------------------------------------------
(in thousands except per share amounts)
Net patient service revenues $ 104,992 $ 87,156 $ 51,663
Management fees and other operating revenues 13,882 5,886 5,657
-------------------------------------------
Total operating revenues 118,874 93,042 57,320
Operating expenses:
Salaries and benefits 57,770 44,329 28,341
Other operating expenses 33,981 27,693 17,337
Depreciation and amortization 4,132 2,882 1,252
Rent 6,988 5,240 2,803
Interest expense 2,080 1,578 459
Interest income (313) (525) (781)
Loss on impairment of assets 10,500 - -
Loss on abandonment of computer project 4,500 - -
-------------------------------------------
Total operating expenses 119,638 81,197 49,411
-------------------------------------------
Income (loss) before provision for income taxes,
extraordinary item and cumulative effect of
accounting change (764) 11,845 7,909
Provision for income taxes 58 4,940 3,050
-------------------------------------------
Income (loss) before extraordinary item and
cumulative effect of accounting change (822) 6,905 4,859
Extraordinary item: loss on early extinguishment
of debt - - (238)
Cumulative effect of accounting change - - 235
-------------------------------------------
Net income (loss) $ (822) $ 6,905 $ 4,856
-------------------------------------------
Weighted average common and common equivalent
shares outstanding 7,124,727 6,889,288 6,423,658
-------------------------------------------
Net income (loss) per common and common equivalent
share before extraordinary item and cumulative
effect of accounting change $ (0.12) $ 1.00 $ 0.76
Extraordinary item - - (0.04)
Cumulative effect of accounting change - - 0.04
-------------------------------------------
Net income (loss) per common and common equivalent
share $ (0.12) $ 1.00 $ 0.76
-------------------------------------------
ReLife, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Years ended September 30, 1994, 1993 and 1992
Total
Common Stock Paid-In Retained Treasury Stockholders'
Class A Class B Capital Earnings Stock Equity
----------------------------------------------------------------------
(in thousands)
Balance, September 30, 1991 $ 35 $ 8 $ 15,879 $ 3,231 $ (60) $ 19,093
Issuance of common stock 10 -- 18,994 -- -- 19,004
Exercise of stock options 3 -- 224 -- -- 227
Tax benefit from exercise of options -- -- 1,807 -- -- 1,807
Issuance of common stock due to acquisition 3 -- 5,344 -- -- 5,347
Net income -- -- -- 4,856 -- 4,856
------------------------------------------------------------------
Balance, September 30, 1992 51 8 42,248 8,087 (60) 50,334
Exercise of stock options -- -- 25 -- -- 25
Tax benefit from exercise of options -- -- 159 -- -- 159
Class B stock conversion 1 (1) -- -- -- --
Net income -- -- -- 6,905 -- 6,905
------------------------------------------------------------------
Balance, September 30, 1993 52 7 42,432 14,992 (60) 57,423
Exercise of stock options 1 -- 180 -- -- 181
Tax benefit from exercise of options -- -- 358 -- -- 358
Net loss -- -- -- (822) -- (822)
------------------------------------------------------------------
Balance, September 30, 1994 $ 53 $ 7 $ 42,970 $ 14,170 $ (60) $ 57,140
------------------------------------------------------------------
ReLife, Inc.
Consolidated Statements of Changes in Stockholders' Equity (continued)
Change in Number of Shares
Class A Common Stock Class B Common Stock
-------------------------------------------------------------------------
Issued Outstanding Treasury Issued Outstanding Treasury
-------------------------------------------------------------------------
Balance, September 30, 1991 3,486,298 3,406,298 80,000 774,144 754,144 20,000
Issuance of common stock 1,041,000 1,041,000 -- -- -- --
Exercise of stock options 275,000 275,000 -- -- -- --
Issuance of common stock due to acquisition 304,672 304,672 -- -- -- --
Class B stock conversion 13,213 13,213 (13,213) (13,213) --
-------------------------------------------------------------------------
Balance, September 30, 1992 5,120,183 5,040,183 80,000 760,931 740,931 20,000
Exercise of stock options 30,000 30,000 -- -- -- --
Class B stock conversion 6,429 6,429 -- (6,429) (6,429) --
-------------------------------------------------------------------------
Balance, September 30, 1993 5,156,612 5,076,612 80,000 754,502 734,502 20,000
Exercise of stock options 64,500 64,500 -- -- -- --
Class B stock conversion 71,130 71,130 -- (71,130) (71,130) --
-------------------------------------------------------------------------
Balance, September 30, 1994 5,292,242 5,212,242 80,000 683,372 663,372 20,000
-------------------------------------------------------------------------
See accompanying notes.
ReLife, Inc.
Consolidated Statements of Cash Flows
Year ended September 30
1994 1993 1992
------------------------------------------------
(in thousands)
Cash flows from operating activities
Net income (loss) $ (822) $ 6,905 $ 4,856
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 4,132 2,882 1,252
Provision for losses on patient receivables 1,888 1,195 842
Provision for losses on impairment of
assets 10,500 -- --
Provision for losses on abandonment of
computer project 4,500 -- --
Gain on sale of assets -- (3) (93)
Interest on payable to Medical Center of
Central Georgia 88 85 79
Deferred income taxes (3,627) 57 (194)
Cumulative effect of change in accounting
principle -- -- (235)
Loss from early extinguishment of debt -- -- 238
Decrease (increase) in assets, net of acquisitions:
Patient receivables 598 (4,650) (1,888)
Other current assets (373) (1,342) (902)
Escrow funds -- -- (394)
Other assets (127) 23 183
Increase (decrease) in liabilities, net of acquisitions:
Accounts payable and accrued expenses (1,248) (4,959) (170)
Accrued payroll, withholdings and
compensated absences (493) 1,151 687
Income taxes payable (2,937) -- (334)
Due to third-party payors 3,617 6,032 (1,502)
Deferred liability (103) (91) (109)
---------------------------------------------
Net cash provided by operating activities 15,593 7,285 2,316
ReLife, Inc.
Consolidated Statements of Cash Flows (continued)
Year ended September 30
1994 1993 1992
-------------------------------------
(In thousands)
Cash flows from investing activities
Increase in property and equipment, net of
acquisitions $ (6,070) $ (2,361) $ (2,263)
Proceeds from the sale of assets -- 22 --
Increase in intangible assets, net of
acquisitions (2,854) (966) (230)
Payment for purchases of certain assets and
liabilities of other entities (16,607) (35,840) (860)
Reduction of liabilities assumed from
acquisition (1,200) (7,390) (11,758)
Increase in investments (2,579) -- (3,555)
Decrease in investments -- 3,948 --
(Increase) decrease in funds in escrow for
acquisition 394 4,500 (4,500)
-------------------------------------
Net cash used in investing activities (28,916) (38,087) (23,166)
Cash flows from financing activities
Additions to long-term debt 7,443 30,000 --
Reduction of long-term debt (5,132) (43) (2,006)
Reduction of capital lease obligation (98) (18) (15)
Increase (decrease) in payable to Medical
Center of Central Georgia -- 17 (55)
Net proceeds from issuance of common stock -- -- 19,004
Prepayment penalty on early extinguishment of
debt -- -- (347)
Proceeds from exercise of stock options 181 25 227
Tax benefit from exercised options 358 159 1,807
-------------------------------------
Net cash provided by financing activities 2,752 30,140 18,615
-------------------------------------
Net decrease in cash and cash equivalents (10,571) (662) (2,235)
Cash and cash equivalents, beginning of year 14,861 15,523 17,758
-------------------------------------
Cash and cash equivalents, end of year $ 4,290 $ 14,861 $ 15,523
-------------------------------------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 2,331 $ 1,295 $ 430
Cash paid for income taxes 6,003 4,718 1,265
See accompanying notes.
ReLife, Inc.
Notes to Consolidated Financial Statements
September 30, 1994
1. Nature of Business and Basis of Presentation
ReLife, Inc. (ReLife) is a consolidated group of entities (see Note 4) which
specializes in physical rehabilitation services primarily in the Southeastern
United States. Lakeshore System Services, Inc., a 100%-owned subsidiary of
ReLife, is comprised of nine outpatient rehabilitation and transitional living
facilities, the North Alabama Rehabilitation Hospital (NARH) and the Central
Georgia Rehabilitation Hospital (CGRH). Lakeshore System Services, Inc. also
provides management and consulting services to several healthcare rehabilitation
institutions. ReLife of Tennessee, Inc., a 100%-owned subsidiary of ReLife, is
the general partner of the Edgefield Healthcare Limited Partnership (the
Edgefield Partnership) and has a 61% interest therein. The Edgefield Partnership
owns and operates Nashville Rehabilitation Hospital. ReLife Acquisition, Inc., a
100%-owned subsidiary of ReLife, is comprised of South Louisiana Rehabilitation
Hospital in Baton Rouge, Louisiana and Chattanooga Rehabilitation Hospital in
Chattanooga, Tennessee. In addition, ReLife Acquisition, Inc. owns 100% of
American Health Resources, Inc. (AHR) and West Virginia Rehabilitation
Resources, Inc. which contains Northern Kentucky Rehabilitation Hospital and
Huntington Rehabilitation Hospital. Rebound, Inc. (Rebound), a 100%-owned
subsidiary, contains five inpatient units operated under management contracts.
Rebound also contains two skilled nursing facilities, two transitional living
facilities and one long-term care facility, all of which are operated under an
operating lease. Health Providers Inc., a 100%-owned subsidiary of ReLife,
provides therapists on a contract basis throughout the United States.
The consolidated financial statements include the accounts of ReLife, Inc.,
Lakeshore System Services, Inc., ReLife Acquisition, Inc., Rebound, Inc., ReLife
of Tennessee, Inc. and Health Providers, Inc.
All significant intercompany accounts and transactions have been eliminated.
ReLife, Inc.
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies
Net Patient Service Revenues and Accounts Receivable
Net patient service revenues are recorded at ReLife's established billing rates
less allowance for contractual adjustments. Revenues from Medicare, Blue Cross
and other third-party reimbursement programs are subject to audit and final
determination by the appropriate agencies. Amounts received under such programs
are generally less than established billing rates, and the differences are
recorded as a reduction of net patient service revenues. Any differences between
final settlements and amounts accrued at the end of the prior reporting period
are included currently in the statement of income as an adjustment to net
patient service revenues.
Property and Equipment
Property and equipment are stated at cost or, with respect to contributed
property, appraised value at the date of acquisition. Costs of maintenance and
repairs are charged to expense when incurred while costs of betterments are
capitalized.
Upon sale or retirement of property and equipment, the cost and related
accumulated depreciation are eliminated from the respective accounts and the
resulting gain or loss, if any, is included in the statement of income.
Depreciation is computed on a straight-line basis over American Hospital
Association recommended lives ranging from two to thirty years.
Investments
Investments consist primarily of mutual funds, tax-exempt bonds and U.S.
Treasury notes and are stated at cost which approximates market.
Intangible Assets
Intangible assets represent certain expenditures which are expected to benefit
future periods. Costs in excess of net assets of businesses acquired are
amortized over periods ranging from twenty to forty years. Costs assigned to
management contracts and leases are amortized over the life of the contract or
lease and are included in other intangible assets in the accompanying balance
sheets. All other intangible assets are amortized over one to five years.
2. Significant Accounting Policies (continued)
Charity Care
ReLife provides care to patients who meet certain criteria under its charity
care policy without charge or at amounts less than its established rates.
Because ReLife does not pursue collection of amounts determined to qualify as
charity care, they are not reported as revenue.
ReLife maintains records to identify and monitor the level of charity care it
provides. The amount of charity care was approximately $691,000, $1,050,000 and
$675,000 for the years ended September 30, 1994, 1993 and 1992, respectively.
Cash and Cash Equivalents
Cash and cash equivalents represent demand deposits, money market investments
and U.S. Treasury bills with original maturities of three months or less.
Income Taxes
ReLife and its subsidiaries file a consolidated federal income tax return.
Deferred income taxes are recorded to reflect the tax consequences on future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts. During 1992, ReLife adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. Under Statement No.
109, deferred taxes are recognized using the liability method, whereby tax rates
are applied to cumulative temporary differences based on when and how they are
expected to affect the tax return. Deferred tax assets and liabilities are
adjusted for tax rate changes.
Net Income Per Share
Net income per common and common equivalent share is based on the combined
weighted average number of shares of Class A and Class B common stock
outstanding during each year and the assumed exercise of employee stock options.
2. Significant Accounting Policies (continued)
Medical Malpractice Claims
ReLife insures for medical malpractice losses through claims-made policies
which, in the opinion of management, are adequate to cover losses, if any.
Subsequent to year-end, as further described in Note 16, ReLife merged with
HEALTHSOUTH Corporation and became self-insured for medical malpractice claims.
In the opinion of management, all significant claims as of September 30, 1994
have been reported to the insurance carrier and losses related to any unreported
claims would be minimal.
Impairment of Assets
Long-lived assets, such as property and equipment and identifiable intangible
assets, are reviewed for impairment losses when certain impairment indicators
exist. If an impairment exists, the related asset is adjusted to the lower of
book value or estimated future undiscounted cash flows from the use and eventual
disposal of the asset.
3. Patient Accounts Receivable
Receivables from patients, insurance companies and third-party contractual
insured accounts (Medicare and Medicaid) are based on payment agreements which
generally result in the Company collecting an amount different from the
established rates. Final determination of the settlement is subject to review by
appropriate authorities. Adequate allowances are provided for doubtful accounts
and contractual adjustments. Uncollectible accounts are written off against the
allowance for doubtful accounts after adequate collection efforts are made. Net
accounts receivable include only those amounts estimated by management to be
collectible.
The concentration of net accounts receivable from third-party contractual payors
and others, as a percentage of total net accounts receivable, was as follows:
December 31
1994 1993
----------------------------------
Medicare 34% 38%
Medicaid 4% 3%
Other 62% 59%
----------------------------------
100% 100%
----------------------------------
4. Acquisitions
On May 26, 1993, ReLife acquired 100% of the stock of Rebound for net
consideration of approximately $14.0 million. Rebound operates 293 beds in
thirteen facilities. The purchase price exceeded the fair value of the net
assets acquired by approximately $11.2 million.
On April 1, 1994, ReLife acquired the assets of North Florida Institute for
Rehabilitation (NFIR), which consists of two outpatient centers and a
certificate of need to operate a 40-bed rehabilitation hospital, for
consideration of $1.3 million of cash, $1.2 million assumption and payoff of
NFIR's long-term debt and a $1.4 million note bearing interest at 5.5% annually
for seven years. Assets and liabilities acquired at the date of acquisition were
$1.7 million and $1.3 million, respectively, with resulting goodwill of
approximately $2.3 million.
On August 16, 1994, ReLife acquired the net assets of Health Providers, Inc.
(HPI), a contract therapist provider, for $9.3 million cash plus contingent
payments based on the achievement of certain levels of future earnings. Such
contingency payments will be paid each fiscal year in which HPI's annual pretax
income exceeds a certain threshold. The contingent payment will cease upon the
earlier of the payment of the maximum amount of contingent payments allowed or
ten years. The purchase price exceeded the fair value of the net assets acquired
by approximately $8 million.
On September 16, 1994, ReLife acquired certain assets of TriCare Rehabilitation
Systems, Inc. (TriCare) consisting of an outpatient center and the management of
an inpatient rehabilitation facility in Birmingham, Alabama, for consideration
of $4.6 million consisting of $3.5 million cash paid at closing and
approximately $1.1 million net cash advanced during the Company's management
agreement of TriCare from March 1, 1993 through the date of acquisition. Assets
acquired at the date of acquisition were $1.0 million with resulting goodwill of
approximately $3.6 million.
All of the acquisitions described above were accounted for as purchases and,
accordingly, the results of operations of the acquired business are included in
the accompanying consolidated financial statements from their respective dates
of acquisition.
4. Acquisitions (continued)
The following table summarized the unaudited consolidated pro forma results of
operations, assuming the acquisitions described above had occurred at the
beginning of each of the following periods. This pro forma summary does not
necessarily reflect the results of operations as they would have been had ReLife
and the acquired entities constituted a single entity during such periods.
Year ended September 30
1994 1993
---------------------------
(in thousands, except for
per share amounts)
Total operating revenues $134,025 $127,301
Net income 431 6,347
Net income per common and common equivalent share $ 0.06 $ 0.92
5. Property and Equipment
Property and equipment are summarized as follows:
1994 1993
---------------------------
(in thousands)
Land $ 2,181 $ 1,774
Buildings and improvements 29,510 28,296
Renovations 1,319 1,162
Fixed equipment 918 963
Major movable equipment 7,930 6,576
Vehicles 382 142
---------------------------
42,240 38,913
Less accumulated depreciation 5,380 3,034
---------------------------
$ 36,860 $ 35,879
---------------------------
6. Intangible Assets
Intangible assets are summarized as follows:
1994 1993
---------------------------
(in thousands)
Costs in excess of net assets of
businesses acquired $35,379 $23,050
Less accumulated amortization 1,021 1,003
---------------------------
$34,358 $22,047
---------------------------
Other intangible assets:
Organization costs $ 634 $ 370
Loan commitment fee 1,078 126
Project costs 540 610
Management contracts and leases 8,560 9,860
---------------------------
10,812 10,966
Less accumulated amortization 2,038 272
---------------------------
$ 8,774 $10,694
---------------------------
7. Long-Term Debt
Long-term debt is summarized as follows:
1994 1993
---------------------------
(in thousands)
Line of credit, interest approximating prime
(7.125% and 6% at September 30,
1994 and 1993, respectively) $31,000 $30,000
Mortgage payable monthly through December 2002,
including interest at 9% 1,228 1,275
NFIR note payable, monthly through April 2001,
including interest at 5.5% 1,358 --
---------------------------
33,586 31,275
Less current portion of long-term debt 225 46
---------------------------
$33,361 $31,229
---------------------------
7. Long-Term Debt (continued)
The noncurrent portion of long-term debt matures in increments of $244,000,
$6,073,000, $8,027,000, $8,045,000 and $10,972,000 for the years 1996, 1997,
1998, 1999, and thereafter, respectively.
During 1994, ReLife negotiated a line of credit with a group of banks for a $55
million credit facility available for acquisitions and general working capital
needs. The credit facility provides for a three-year revolving note and a
four-year term note payable in 16 equal consecutive quarterly installments
beginning January 1997, with interest approximating prime. ReLife pays an
availability fee of .375% based on the unused portion of the line and a service
fee of .10% of the commitment amount. The agreement requires maintenance of
certain financial ratios and other restrictive covenants, including a
restriction on the incurrence of additional debt.
As collateral for the funds advanced under the credit facility, ReLife pledged
all of the capital stock of Rebound and ReLife Acquisition Corporation which
pledged all of its stock in AHR and Renaissance. ReLife also granted the lenders
a security interest in all of its accounts receivable and certain personal
property and rights associated therewith.
8. Capital and Operating Leases
On September 1, 1990, ReLife began leasing the property and equipment, as well
as the license to operate CGRH, from Medical Center of Central Georgia (MCCG)
for a ten-year period. Under the terms of the operating lease, ReLife has
assumed the net working capital of CGRH and is to repay that amount plus an
inflation adjustment factor to MCCG at the end of the lease term. Various
reductions of the liability have been made as a result of transactions involving
CGRH prior to the lease that were settled in 1991 and 1992. Rent expense related
to the lease was $1,425,000 for each of the years ended September 30, 1994, 1993
and 1992. The lease payments are $112,500 per month for the first five years of
the lease and $125,000 per month for the last five years of the lease. The lease
is cancelable at ReLife's option if CGRH's average daily census falls below a
certain level for a consecutive six-month period.
ReLife leases four of its facilities under an operating lease acquired in the
Rebound acquisition. Under the terms of the lease which expires November 30,
2001, ReLife is obligated to pay lease payments of $191,000 per month. In
addition to the future lease payments, ReLife shall make annual participation
payments beginning in 1996 equal to
8. Capital and Operating Leases (continued)
four percent of the amount by which net revenue for the facilities, as defined,
for the year exceeds net revenue for the facilities for 1993. In the event
ReLife cancels the lease, the value of all rents payable during the remainder of
the lease term is payable in one lump sum, discounted at 8% per annum, offset by
such amounts as the lessor may receive by subletting the facilities.
As of September 30, 1994, minimum rental payments under noncancelable operating
leases are due in increments of $7,746,000, $7,731,000, $7,177,000, $6,540,000,
$6,343,000 and $15,934,000 for the years 1995, 1996, 1997, 1998, 1999 and
thereafter, respectively.
As of September 30, 1994, minimum rental payments under capital leases are due
in increments of $62,000, $45,000, $45,000, $45,000, $45,000 and $267,000 for
the years 1995, 1996, 1997, 1998, 1999 and thereafter, respectively. The total
of these payments is reduced by $178,000, which represents interest on the
payments. The present value of net minimum lease payments is $331,000, of which
$37,000 represents the current obligation under capital leases.
Depreciation expense includes amortization of assets under capital leases.
9. Transactions with Affiliates
Lakeshore, Inc. (Lakeshore) owns approximately 6% of the outstanding common
stock of ReLife. ReLife received management and referral fee revenues from
Lakeshore totaling approximately $4,578,000, $4,059,000 and $4,639,000 for 1994,
1993 and 1992, respectively. ReLife has receivables of $346,000 and $316,000
from Lakeshore at September 30, 1994 and 1993, respectively, related to the
management and referral fees.
ReLife pays rent for occupying certain facilities and reimburses or charges
Lakeshore for the allocated cost of services shared by Lakeshore and ReLife such
as data processing, plant operation and environmental services, purchasing,
security and payroll processing. The total net amount included in expenses for
rent and shared services is approximately ($503,000), ($463,000) and $563,000
for fiscal years ended September 30, 1994, 1993 and 1992, respectively.
9. Transactions with Affiliates (continued)
Prior to 1994, the minority interest partner charged the Edgefield Partnership
for the use of certain laboratory and radiology services. The Edgefield
Partnership charged the minority interest partner for security, rent and other
services. The net amount of charges incurred by the Edgefield Partnership was
approximately ($50,000) and $337,000 during the years ended September 30, 1993
and 1992, respectively. The Edgefield Partnership recognized approximately
$403,000 and $401,000 in management fees expense and approximately $646,000 and
$462,000 in interest expense for services and advances provided by ReLife during
the years ended September 30, 1993 and 1992, respectively. A minority interest
in the net loss of the Edgefield Partnership was not recorded in fiscal 1994,
1993 and 1992 because the minority interest liability was reduced to zero upon
ReLife's prepayment of the Edgefield mortgage note payable in early 1992. ReLife
will continue to absorb the losses of Edgefield Partnership as long as losses
are incurred. Upon restoration of the Partnership to a profitable position,
ReLife will absorb 100% of the net income of the Edgefield Partnership until the
minority partners' losses absorbed are recovered.
10. Income Taxes
The components of the current deferred tax asset are:
1994 1993
---------------------------
(in thousands)
Allowance for doubtful accounts $4,189 $2,917
Vacation accrual 339 260
Self-insured health claim liability 406 216
Other 162 156
---------------------------
$5,096 $3,549
---------------------------
10. Income Taxes (continued)
The components of the noncurrent deferred tax liability are:
1994 1993
---------------------------
(in thousands)
Property and equipment $ 3,414 $ 3,028
Contracts and leases 1,420 3,592
Net operating loss carryforwards (2,365) (2,309)
Other -- 238
---------------------------
$ 2,469 $ 4,549
---------------------------
The provision for income taxes is as follows for the fiscal years ended
September 30, 1994, 1993 and 1992:
1994 1993 1992
----------------------------------
(in thousands)
Current:
Federal $ 3,263 $ 4,181 $ 2,758
State 422 702 486
----------------------------------
3,685 4,883 3,244
Deferred:
Federal (3,162) 49 (165)
State (465) 8 (29)
----------------------------------
(3,627) 57 (194)
----------------------------------
$ 58 $ 4,940 $ 3,050
----------------------------------
The portion of tax expense related to the adjustment of the deferred tax
liability for the enacted change in the corporate tax rate from 34% to 35% is
not material.
10. Income Taxes (continued)
A reconciliation of ReLife's income tax provision to the amounts that would be
provided using the statutory rates is as follows for the years ended September
30, 1994, 1993 and 1992:
1994 1993 1992
----------------------------------
(in thousands)
Federal tax at statutory rates $ (260) $ 4,041 $ 2,689
State taxes, net (186) 471 301
Tax-exempt interest income (55) (72) (64)
Nondeductible amortization 240 222 72
Other 319 278 52
----------------------------------
$ 58 $ 4,940 $ 3,050
----------------------------------
During 1992, ReLife adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, and recognized a cumulative effect of a change in
accounting principle of $235,000. ReLife elected not to restate prior year
financial statements as a result of adoption of Financial Accounting Standards
No. 109.
In connection with the acquisition of Renaissance, ReLife established a
valuation allowance totaling $945,000 to reduce to zero the deferred income tax
asset resulting from preacquisition net operating loss carryforwards where
circumstances indicated it was more likely than not that the deferred tax asset
would not be realized. Through September 30, 1994, ReLife utilized approximately
$1,338,000 of Renaissance preacquisition net operating loss carryforwards for
tax purposes and recognized a reduction of current income taxes payable of
$455,000. The utilization of this preacquisition net operating loss carryforward
resulted in a reduction of costs in excess of net assets of businesses acquired.
During 1993, the Renaissance facilities continued to generate positive operating
results and the remaining valuation allowance was removed resulting in a
reduction of costs in excess of net assets of businesses acquired of $651,000.
At September 30, 1994, ReLife has remaining approximately $3,818,000 of
Renaissance preacquisition net operating loss carryforwards which expire in 2005
and which can be used to offset future taxable income generated by the
Renaissance facilities.
10. Income Taxes (continued)
At September 30, 1994, ReLife has preacquisition net operating loss
carryforwards for tax purposes of approximately $2,000,000 which can be used to
offset future taxable income generated by Rebound. The Rebound carryforwards
expire in 2008.
11. Profit Sharing Plan
ReLife has a 401(k) profit sharing plan covering substantially all employees.
Employee contributions are eligible for up to 100% discretionary matching
contributions from ReLife. For the years ended September 30, 1994 and 1993,
ReLife accrued contribution expenses of $125,000 and $60,000, respectively.
12. Stockholders' Equity
ReLife has two classes of common stock. The Class A common stock has one vote
per share and the Class B common stock has ten votes per share on all matters
presented to the stockholders. Additionally, cash dividends on the Class A
common stock must be at least equal to the dividends on the Class B common
stock. Each share of the Class B common stock is convertible at the holder's
election into one share of Class A common stock. The holders of the Class A and
Class B common stock are entitled to elect 25% and 75% of ReLife's Board of
Directors, respectively.
Upon the formation of ReLife, Lakeshore was granted options to purchase 203,584
shares of ReLife's Class A common stock at $0.825 per share. These options are
currently exercisable and expire on June 12, 1997.
Upon the formation of ReLife, an officer was granted noncompensatory options to
purchase 839,600 shares of the Class A common stock and 600,000 shares of the
Class B common stock at $0.825 and $0.25 per share, respectively. During 1992,
275,000 shares of these Class A common stock options were exercised at $0.825
with a market price of $18.67. The tax benefit of $1,807,000 arising from the
compensation expense for income tax purposes has been accounted for as an
increase in additional paid-in-capital. The remaining options are currently
exercisable and expire one year after the death of the officer.
12. Stockholders' Equity (continued)
Certain other officers of ReLife were granted noncompensatory options during the
period from January 1989 to January 1990 to purchase 295,000 shares of the Class
A common stock at $0.825 per share. On May 18, 1992, an additional 110,000
shares of the Class A common stock were granted at $12.50 per share. Of these
options, 53,500 were exercised during 1994 at $0.825 with a market price of
$18.00 and 30,000 were exercised during 1993 at $0.825 with a market price of
$15.00. The tax benefit of $358,000 and $159,000 during 1994 and 1993,
respectively, arising from the compensation expense for income tax purposes has
been accounted for as an increase in additional paid-in-capital. There is
currently exercisable 212,500 shares with the remaining 109,000 becoming
exercisable over the next year.
Additionally, ReLife has reserved 400,000 shares of the Class A common stock for
issuance pursuant to its 1991 Stock Option Plan (Plan), the terms and conditions
of award to be determined by the Compensation Committee of the Board of
Directors subject to the provisions of the Plan. Options do not vest until two
years from the date of grant.
The following table summarizes the activity in options under the 1991 Stock
Option Plan.
Shares Option Price
----------------------------------
Shares under option, October 1, 1991 -- --
Options granted 220,000 $ 12.50
Options canceled (35,000) 12.50
-----------
Shares under option, September 30, 1992 and 1993 185,000 12.50
Options granted 227,500 13.75-20.00
Options canceled (71,000) 12.50
Options exercised (11,000) 12.50
-----------
Shares under option, September 30, 1994 330,500
-----------
All options were granted at market or above market prices on the date of grant.
12. Stockholders' Equity (continued)
On June 20, 1991, the stockholders authorized 500,000 shares of preferred stock.
The voting rights of the preferred stock shall be fixed by ReLife's Board of
Directors, provided that the preferred stock vote as one class on all matters
with the Class A and Class B common stock except matters with respect to
proposed changes in the rights or preferences of the preferred stock. The
preferential nature, dividend rates and determination of whether the dividends
are cumulative or noncumulative shall be determined by ReLife's Board of
Directors.
13. Other Operating Expenses
Other operating expenses in the accompanying statements of income are summarized
as follows:
1994 1993 1992
-------------------------------
(in thousands)
Purchased services $ 7,614 $ 6,526 $ 3,937
Professional and other fees 3,470 2,713 2,310
Supplies 4,587 4,363 3,006
Contract labor 4,071 3,106 1,724
Bad debts 1,888 1,195 842
Insurance 1,717 1,845 969
Utilities 2,057 1,609 920
Travel 1,420 1,014 549
Taxes and licenses 1,658 2,317 780
Repairs and maintenance 886 736 319
Other 4,613 2,269 1,981
-------------------------------
$33,981 $27,693 $17,337
-------------------------------
14. Supplemental Disclosures of NonCash Investing and Financing Activities
During 1994, ReLife assumed a note payable of $1,444,000 in connection with the
purchase of NFIR. During 1992, ReLife assumed a mortgage note payable of
$1,338,000 in connection with the purchase of a building.
15. Impairment of Long-Term Assets
During 1994, certain events have occurred impairing the value of specific
long-term assets of ReLife. A hospital in Missouri with a distinct part unit
which ReLife was managing (acquired in the Rebound acquisition) was purchased in
1994 by an acute care provider which terminated the contract with ReLife.
Remaining goodwill of $1,700,000 and costs allocated to the management contract
of $1,300,000, which were allocated to this facility based on the initial fair
market value appraisals of all Rebound facilities, were written off as there is
no value remaining for the terminated contract.
A Rebound facility in central Florida incurred tornado damage and has not been
operating since September 1993. At September 30, 1994, management of ReLife has
determined that it is probable that this facility will not reopen. Start-up
costs of $1,600,000 were written off. This facility is leased under a long-term
operating lease as described in Note 8. The lease payments related to this
facility were determined to be $5,900,000 based on the net projected cash flows
of all the facilities under the lease. This value was written off resulting in a
current accrued liability of $600,000 and a long-term deferred liability of
$5,300,000.
During 1994, ReLife entered into an agreement to upgrade its computer system.
Lease payments and other costs have been capitalized during the conversion phase
of implementing the new computer system which were to be amortized over the
remaining lease term after implementation was completed. After the Agreement to
merge with HEALTHSOUTH Corporation was entered into (see Note 17), the computer
project was abandoned resulting in a write-off of capitalized cost of
$4,500,000.
The above amounts are shown as operating expenses in the Consolidated Statement
of Income.
16. Subsequent Events
ReLife signed a definitive agreement on September 19, 1994 to merge with
HEALTHSOUTH Corporation. The merger, to be accounted for as a pooling of
interests, is valued at approximately $180 million and closed on December 29,
1994. In connection with this merger, each holder of the class A and B common
share of ReLife exchanged their shares for .7053 shares of HRC common stock.
On December 29, 1994, HRC repaid ReLife's line of credit, which had an
outstanding balance of $41 million.
As a condition to receiving Federal Trade Commission approval for the merger,
ReLife's management contract with Roper Hospital in Charleston, South Carolina
must be terminated and ReLife's Nashville Rehabilitation Hospital in Nashville,
Tennessee must be sold within one year. Management does not expect that these
transactions will result in a material gain or loss.
On October 1, 1994, ReLife entered into a lease agreement with Lakeshore
Rehabilitation Hospital to lease the facilities for a term of twenty years. The
rent for the lease calls for an initial payment of $10 million and annual
payments of $2 million over the lease term.