SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-KA
Amendment No. 6
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report: September 8, 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 5. OTHER EVENTS
On May 19, 1995, HEALTHSOUTH Corporation, a Delaware corporation (the
"Company"), consumated the transactions contemplated by that certain Stock
Purchase Agreement, dated February 3, 1995, between the Company and NovaCare,
Inc., a Delaware corporation ("NovaCare"), pursuant to which the Company
purchased the operations of NovaCare's rehabilitation hospital division.
While the Company has previously filed the required audited and
unaudited consolidated financial statements of the acquired business, this
amendment is being filed by the Company to file such audited financial
statements under the report of the Company's independent auditors, Ernst & Young
LLP.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired.
The required audited consolidated financial statements of the
acquired business, Rehab Systems Company, for the fiscal year ended
June 30, 1994 listed on the Index to Financial Statements included in
this Current Report on Form 8-K/A, Amendment No. 6, are herewith filed.
(b) Pro Forma Financial Information.
The required pro forma financial information was filed within the
required period after consummation of the transaction.
(c) Exhibits
2. Stock Purchase Agreement, dated February 3, 1995, among
HEALTHSOUTH Corporation, NovaCare, Inc., and NC Resources, Inc., filed
as Exhibit (2)-5 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, is hereby incorporated herein by
reference.
2
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: September 8, 1995.
HEALTHSOUTH Corporation
By /s/ ANTHONY J. TANNER
------------------------------
Anthony J. Tanner
Executive Vice President
and Secretary
3
Rehab Systems Company
(a wholly-owned subsidiary of NovaCare, Inc.)
Consolidated Financial Statements
Index to Financial Statements
Report of Independent Auditors
Consolidated Balance Sheet at June 30, 1994
Consolidated Statements of Operations for the year ended June 30, 1994
Consolidated Statement of Stockholder's Equity for the year ended June
30, 1994
Consolidated Statements of Cash Flows for the year ended June 30, 1994
Notes to Consolidated Financial Statements
4
Report of Independent Auditors
Board of Directors and Stockholder
Rehab Systems Company
We have audited the accompanying consolidated balance sheet of Rehab Systems
Company (a wholly-owned subsidiary of NovaCare, Inc.) as of June 30, 1994, and
the related consolidated statements of operations, stockholder's equity and cash
flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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 Rehab Systems
Company (a wholly-owned subsidiary of NovaCare, Inc.) at June 30, 1994, and the
consolidated results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
Birmingham, Alabama
July 10, 1995
Ernst & Young LLP
1
Rehab Systems Company
Consolidated Balance Sheet
June 30, 1994
(Dollars in thousands)
Assets
Current assets:
Cash and cash equivalents $ 7,340
Accounts receivable, net 39,775
Deferred income taxes 1,391
Other 5,648
----------------------
Total current assets 54,154
Funds held by trustees 3,013
Investment in affiliated company 34,643
Property and equipment, net 39,312
Excess cost of net assets acquired, net of accumulated
amortization of $1,145 at
June 30, 1994 63,020
Other assets 5,471
----------------------
Total assets $ 199,613
Liabilities and stockholder's equity Current liabilities:
Current portion of long-term debt and capital
lease obligations $ 2,292
Accounts payable and accrued expenses 18,133
Notes payable and advances - affiliates 63,901
----------------------
Total current liabilities 84,326
Long-term debt and capital lease obligations 54,208
Intercompany borrowings 25,000
Other noncurrent liabilities 2,131
----------------------
Total liabilities 165,665
Commitments and contingent liabilities
Stockholder's equity:
Common stock, $.01 par value; 1,000 shares
authorized, issued and outstanding -
Additional paid-in capital 38,449
Accumulated deficit (4,501)
----------------------
Total stockholder's equity 33,948
----------------------
Total liabilities and stockholder's equity $ 199,613
======================
See accompanying notes.
2
Rehab Systems Company
Consolidated Statement of Operations
Year ended June 30, 1994
(Dollars in thousands)
Net patient service revenues $ 135,356
Operating expenses:
Operating units 106,199
Corporate general and administrative 3,546
Royalty expense 9,847
Corporate expense allocation 5,830
Provision for doubtful accounts 1,231
Depreciation and amortization 6,180
Interest expense - third party 2,894
Interest expense - affiliates 4,911
----------------------
140,638
----------------------
Loss before income taxes and minority interest (5,282)
Allocated income tax benefit 1,289
----------------------
(3,993)
Minority interest 393
----------------------
Net loss $ (4,386)
======================
See accompanying notes.
3
Rehab Systems Company
Consolidated Statement of Stockholder's Equity
(Dollars in thousands)
Additional
Common Stock Paid-in Accumulated
--------------------------------
Number Amount Capital Deficit
---------------------------------------------------------------
Balance at June 30, 1993 1,000 $ - $ 18,191 $ (115)
Contributed in connection with
acquisitions:
Business acquisition (RHCA) - - 10,000 -
Investment in affiliate (NACC) - - 10,258 -
Net loss - - - (4,386)
---------------------------------------------------------------
Balance at June 30, 1994 1,000 $ - $ 38,449 $ (4,501)
===============================================================
See accompanying notes.
4
Rehab Systems Company
Consolidated Statement of Cash Flows
Year ended June 30, 1994
(Dollars in thousands)
Cash flows from operating activities
Net loss $ (4,386)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization 6,180
Minority interest 393
Provision for uncollectible accounts 1,231
Deferred income taxes 913
Deferred revenue (507)
Decrease in assets, net of effects from acquisition:
Accounts receivable (6,198)
Other assets (1,601)
Decrease in liabilities, net of effects from acquisition:
Accounts payable and accrued expenses (8,502)
----------------------
Net cash flows used by operating activities (12,477)
Cash flows from investing activities
Payments for business acquired (51,240)
Additions to property and equipment (4,109)
Disposition of property and equipment 179
----------------------
Net cash flows used by investing activities (55,170)
5
Rehab Systems Company
Consolidated Statement of Cash Flows (continued)
Year ended June 30, 1994
(Dollars in thousands)
Cash flows from financing activities
Notes payable and advances 50,107
Proceeds from long-term debt and credit agreements 54,247
Payment of long-term debt and credit agreements (42,457)
Capital contributions 10,000
Funds held by trustee (497)
----------------------
Net cash flow provided by financing activities 71,400
----------------------
Net change in cash and cash equivalents 3,753
Cash and cash equivalents, beginning of year 3,587
----------------------
Cash and cash equivalents, end of year $ 7,340
======================
Supplemental cash flow information Cash paid for:
Interest $ 3,832
======================
See accompanying notes.
6
Rehab Systems Company
Notes to Consolidated Financial Statements
June 30, 1994
1. Basis of Presentation
Rehab Systems Company (the "Company"), a wholly-owned subsidiary of NovaCare,
Inc. ("NovaCare"), provides acute rehabilitation care on a multi-disciplinary,
physician-directed basis to severely disabled patients through 11 medical
rehabilitation hospitals. Minority shareholders maintain a 20% ownership
interest in one of the hospitals. The Company also operates four community
re-entry programs to help patients return to their community through a
multi-disciplinary program of medical and social services. The consolidated
financial statements include each of the above mentioned entities and all
significant intercompany accounts and transactions have been eliminated in
consolidation.
NovaCare provides certain services to, and incurs costs on behalf of, the
Company. All of the allocations and estimates in the accompanying consolidated
financial statements are based on assumptions that the Company and NovaCare
believe are reasonable. However, these allocations and estimates are not
necessarily indicative of the costs and expenses that would have resulted if the
Company had been operated as a separate entity.
2. Significant Accounting Policies
Cash and Cash Equivalents
The Company considers investments to be cash equivalents if the securities
mature within 90 days from the date of acquisition. Throughout the period
covered by these consolidated financial statements, the Company participated in
NovaCare's cash management program and, as such, its cash funding requirements
were met principally by, and generally all cash generated was transferred to,
NovaCare.
Funds Held by Trustees
Under terms of trust indentures related to outstanding bond obligations, two
hospitals are required to maintain funds with bank trustees whose use is limited
to purposes specified by the bond documents, principally debt service. The fair
value of these funds approximates carrying value.
7
Rehab Systems Company
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided on a straight-line basis over the estimated useful
lives of assets, which principally range from three to seven years for property
and equipment and 30 to 40 years for buildings. Assets under capital leases and
leasehold improvements are amortized over the lesser of the lease term or the
asset's estimated useful life.
Excess Cost of Net Assets Acquired
Assets and liabilities acquired in connection with business combinations
accounted for under the purchase method are recorded at their respective fair
values. The excess of the purchase price over the fair value of net assets
acquired is amortized on a straight-line basis over a 40-year period.
The carrying value of goodwill will be evaluated whenever events or changes in
circumstances indicate that it may not be recoverable. Such evaluation will be
based on the estimated future cash flows (undiscounted and without interest
charges) of the acquired business. If those cash flows are less than the
underlying assets' carrying value, an impairment loss arises, and will be
measured as the difference between the asset carrying values and the fair value
of those assets, determined on the basis of discounted cash flows.
Income Taxes
The taxable income of the Company is included in the consolidated tax return of
NovaCare. As such, separate income tax returns were not prepared or filed by the
Company. Current and deferred income tax expense has been allocated to the
Company by applying the asset and liability approach set forth in Statement of
Financial Accounting Standards Board Statement No. 109, "Accounting for Income
Taxes".
8
Rehab Systems Company
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
Net Revenue
Net revenue is reported at the estimated net realizable amounts from patients,
third-party payors and others for services rendered, including estimated
retroactive adjustments under reimbursement agreements with third-party payors.
Retroactive adjustments are accrued on an estimated basis in the period related
services are rendered and adjusted in future periods as final settlements are
determined (see Note 5).
3. Related Party Transactions
Royalty Agreements
The Company has entered into license arrangements with a related entity for its
use of the "NovaCare" name and associated trademarks. Under those arrangements,
royalties are payable annually based upon the value of the trademarks as
established by independent appraisal.
Notes Payable and Advances
The Company's cash requirements are met by funds generated from operations and
by bank borrowings, supplemented as necessary by advances or borrowings from
affiliates. During 1994, the Company financed a portion of the acquisition of
Rehabilitation Hospital Corporation of America ("RHCA") from affiliates (see
Note 4).
Borrowings from affiliates are made pursuant to either formal borrowing
agreements ("notes payable") or less formal arrangements ("advances"). Notes
payable, which approximated $48,500,000 at June 30, 1994, are limited to
$75,000,000 and bear interest at prime plus 1.5% (8.75% at June 30, 1994).
Interest charged for the year ended June_30, 1994 was $3,931,000. Advances are
non-interest bearing and at June 30, 1994 the outstanding balance principally
comprised outstanding royalties and corporate expense allocations.
9
Rehab Systems Company
Notes to Consolidated Financial Statements (continued)
3. Related Party Transactions (continued)
Other Expenses
For the period January 1, 1994 to June 30, 1994, NovaCare changed its risk
management program to a self-insurance program and allocated the cost of
workers' compensation and group/health insurance to its other NovaCare units,
including the Company, on the basis of actual claims experience. Prior to that
date, NovaCare or the Company obtained insurance coverage from outside carriers
and allocated these expenses on the basis of premiums incurred. Charges
allocated to the Company and included under the caption operating units expenses
were $2,005,000 for the year ended June 30, 1994.
Corporate Expenses
The results of operations include significant transactions with NovaCare
business units that are outside of the Company's operations. These transactions
involve functions and services (such as executive management, cash management,
tax administration and legal services) that were provided to the Company by
these other NovaCare units. The cost of these functions and services has been
allocated to the Company based on the cost allocation methodology used for
filing costs reports for Medicare reimbursement purposes. NovaCare management
believes this allocation methodology is reasonable. Such charges and allocations
are not necessarily indicative of the costs that would have been incurred by the
Company as a separate entity.
4. Business Acquisition
Effective October 1, 1993, the Company purchased all of the outstanding common
stock of RHCA for approximately $30,300,000 in cash. Funding for this
acquisition was provided by Ninth Avenue Capital Corporation ("NACC") and
through an additional capital contribution by NovaCare of $10 million. RHCA
owned five medical rehabilitation hospitals and six outpatient facilities. The
Company sold one of these hospitals in March 1994 which had no effect on the
results of operations of the Company.
10
Rehab Systems Company
Notes to Consolidated Financial Statements (continued)
4. Business Acquisition (continued)
The principal stockholders of RHCA were limited partnerships in which NovaCare's
Chairman of the Board and Chief Executive Officer is a general partner of the
general partner. In addition to the purchase price, the Company paid the limited
partnerships approximately $21,000,000 for existing advances from the
partnerships, accrued interest on the advances, redemption of preferred stock
and accumulated and unpaid dividends.
The results of operations of RHCA have been included in the consolidated results
of the Company from October 1, 1993. The acquisition was accounted for as a
purchase and, accordingly, the aggregate purchase price was allocated to assets
and liabilities acquired based on their fair values at the date of acquisition.
The following unaudited pro forma results of operations give effect to the
acquisition of RHCA as if it had occurred on July 1, 1993 (in thousands):
Net revenues $144,066
Net loss (5,027)
The above pro forma information is not necessarily indicative of the results of
operations that would have occurred had the acquisition been made as of July 1,
1993, or the results which may occur in the future.
Information with respect to the RHCA acquisition was as follows (in thousands):
Cash paid (net of cash acquired) $ 51,240
Liabilities assumed 55,520
------------------------
106,760
Fair value of assets acquired 43,739
------------------------
Cost in excess of fair value of net assets acquired $ 63,021
========================
11
Rehab Systems Company
Notes to Consolidated Financial Statements (continued)
5. Receivables and Third-Party Reimbursements
Accounts receivable consisted of the following (in thousands):
Accounts receivable $ 47,846
Due from Medicare 10,298
Less: allowance for doubtful accounts and
contractual adjustments (18,369)
------------------------
$ 39,775
========================
Certain of the Company's services are reimbursed by third-party programs such as
Medicare or Medicaid, under which reimbursement for services is subject to
federal and state regulations. In 1994, approximately 65% of net revenues were
from Medicare or Medicaid.
Although reimbursement for services billed directly to Medicare is ultimately
received under cost-based reimbursement regulations, Medicare is initially
billed using NovaCare's standard pricing schedules. Charges are consistent for
Medicare and non-Medicare patients. Aggregate billings are adjusted to allowable
cost on the basis of cost reports prepared and subject to audit and retroactive
adjustment.
The cost reports for fiscal 1990 and prior years have been settled by Medicare
audit. Certain Medicare cost reports for fiscal 1991 through 1993, and all
Medicare cost reports for fiscal 1994, remain subject to audit and retroactive
adjustment. In the opinion of management, the results of these audits will not
have a material effect on the consolidated financial position or results of
operations for the Company.
6. Investment in Affiliated Company
The Company holds a 14% interest in an affiliated entity, NACC, a Delaware
Corporation. NACC, which is wholly-owned by the Company and other NovaCare
subsidiaries, principally acts as an investment and financing vehicle for
NovaCare. The Company accounts for its investment in NACC using the cost method
of accounting. During 1994, the common stock of NACC was contributed by NovaCare
to the Company. In consideration for the common stock of NACC the Company
assumed $25,000,000 in borrowings from NovaCare and $10,258,000 was credited to
additional
12
Rehab Systems Company
Notes to Consolidated Financial Statements (continued)
6. Investment in Affiliated Company (continued)
paid in capital. This transaction was recorded at NovaCare's historical cost.
Those borrowings, which bear interest at 5.5%, are due in 2000 and are
classified as long-term intercompany borrowings in the accompanying consolidated
balance sheet. The fair value of these borrowings, based upon the current rates
offered to the Company for debt at the same remaining maturities, was estimated
to be approximately $22,620,000 at June 30, 1994. Interest charged for the year
ended June 30, 1994 was $980,000.
7. Property and Equipment
The components of property and equipment are as follows (in thousands):
Land and buildings $ 27,979
Property, equipment and furniture 21,409
Leasehold improvements 1,334
------------------------
50,722
Less: accumulated depreciation and amortization (11,410)
------------------------
$ 39,312
========================
Included in property and equipment are the following assets held under capital
leases (in thousands):
Property, equipment and furniture $ 9,882
Less: accumulated amortization (7,490)
------------------------
$ 2,392
========================
Depreciation expense and amortization of capital leases aggregated $3,969,000
for fiscal 1994.
13
Rehab Systems Company
Notes to Consolidated Financial Statements (continued)
8. Long-Term Debt and Capital Lease Obligations
Long-term debt consisted of the following (in thousands):
Revolving credit facility (prime rate plus .5% or
LIBOR plus .88%) expiring May 27, 1997 $ 34,765
West Virginia commercial development revenue
bonds (9.5% and 12%), payable through 2015 17,715
Capital lease obligations 2,751
Other 1,269
------------------------
56,500
Less: current portion 2,292
------------------------
$ 54,208
========================
In May 1994, NovaCare entered into a revolving credit facility in the amount of
$115,000,000 with a syndicate of banks. This facility was increased to
$175,000,000 effective November 28, 1994. The Company is able to borrow under
that agreement. At June 30, 1994, the interest rate on amounts borrowed was
5.25%. The revolving credit facility agreement requires maintenance by NovaCare
of minimum working capital and net worth amounts as well as certain financial
ratios. At June 30, 1994, NovaCare was in compliance with these requirements. A
commitment fee of .25% per annum on the average daily available balance is paid
quarterly.
The West Virginia commercial development revenue bonds were issued by two
subsidiaries of the Company to construct rehabilitation facilities in the state.
Proceeds were restricted to permitted construction expenditures. Sinking fund
requirements are reflected in the table below. The obligations are guaranteed by
NovaCare, require maintenance of certain financial ratios and restrict the
payment of dividends by the subsidiaries. At June 30, 1994, the Company was in
compliance with these requirements.
14
Rehab Systems Company
Notes to Consolidated Financial Statements (continued)
8. Long-Term Debt and Capital Lease Obligations (continued)
Aggregate annual maturities of long-term debt for each of the next five years at
June 30, 1994 are as follows (in thousands).
1995 $ 572
1996 621
1997 35,377
1998 430
1999 434
Thereafter 16,315
------------------------
$ 53,749
========================
The fair value of the Company's long-term debt, based upon the quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt at the same remaining maturities, was estimated to be
$61,309,000 at June 30, 1994.
9. Leases
The Company is obligated under capital leases for office and hospital equipment.
All capital leases expire over the next five years.
Hospital facility land and buildings are leased under operating leases having
initial terms ranging between 10 and 13 years with renewal options of five
years. Rent during the renewal periods will be market-based rates as defined in
the lease agreements. The agreements contain contingent rental provisions based
on revenue levels at the respective facilities. Payment of certain leases is
collateralized by letters of credit totaling $1,653,000 which expire on various
dates through May 1995. Under the terms of the lease agreements, these letters
of credit must be renewed but may be reduced or eliminated if certain lease
coverage ratios are attained. With regard to a significant portion of these
operating leases, the Company initially purchased and developed the land,
constructed the hospital facility and sold the land and buildings to unrelated
third parties from which the Company subsequently leased back the land and
buildings.
The Company also rents office operating space and office transportation and
therapy equipment under non-cancelable leases.
15
Rehab Systems Company
Notes to Consolidated Financial Statements (continued)
9. Leases (continued)
Future minimum lease commitments for all non-cancelable leases at June 30, 1994
are as follows (in thousands):
Capital Operating
Fiscal Year Leases Leases
---------------------------------------------------------------------------------------------------------------
1995 $ 1,799 $ 9,253
1996 483 9,131
1997 245 9,085
1998 228 8,883
1999 92 8,769
2000 and thereafter - 24,432
------------------------------------------------
Total minimum lease payments 2,847 $ 69,553
========================
Less: amount representing interest 96
------------------------
Present value of minimum payments
under capital lease obligations 2,751
Current amount 1,720
------------------------
Long-term amount $ 1,031
========================
Total rent expense charged to operations for the year ended June 30, 1994 was
$11,360,000 including contingent rent of $1,386,000.
10. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses include the following (in thousands):
Accounts payable $ 4,293
Accrued compensation and benefits 4,920
Due to Medicare 3,123
Other 5,797
------------------------
$ 18,133
========================
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Rehab Systems Company
Notes to Consolidated Financial Statements (continued)
11. Income Taxes
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities as of June 30, 1994 are as follows
(in thousands).
Current Noncurrent Total
------------------------------------------------------------------------
Deferred tax assets:
Accruals and reserves not
currently deductible for
tax purposes $ 1,403 $ - $ 1,403
Acquired operating loss
carryforward - 3,464 3,464
Deferred revenue - 978 978
------------------------------------------------------------------------
Total deferred tax assets 1,403 4,442 5,845
Valuation allowance on
acquired operating loss
carryforward - (3,464) (3,464)
------------------------------------------------------------------------
1,403 978 2,381
Deferred tax liabilities:
Expenses capitalized for
financial statement
purposes - 320 320
Depreciation and capital
leases - 324 324
Other 12 - 12
------------------------------------------------------------------------
Total deferred tax liabilities $ 12 $ 644 $ 656
------------------------------------------------------------------------
Net deferred tax asset $ 1,391 $ 334 $ 1,725
========================================================================
17
Rehab Systems Company
Notes to Consolidated Financial Statements (continued)
11. Income Taxes (continued)
Significant components of income tax benefit are as follows (in thousands):
Current:
Federal $ (2,362)
State 160
------------------------
(2,202)
Deferred:
Federal 876
State 37
------------------------
913
------------------------
$ (1,289)
========================
At June 30, 1994, the Company has net operating loss carryforwards of
approximately $8,247,000 for income tax purposes that expire in years 2002
through 2008. Those carryforwards result from the acquisition of RHCA. For
financial reporting purposes a valuation allowance of $3,464,000 has been
recognized to offset the deferred tax assets related to those carryforwards. The
acquired operating loss carryforwards are subject to restrictions under Section
382 of the Internal Revenue Code and separate tax return limitations.
The reconciliation of the expected tax benefit (computed by applying the federal
statutory rate to loss before income taxes) to actual tax benefit was as follows
(in thousands):
Expected tax benefit $ (1,796)
Add (deduct):
State income taxes net of federal benefit 130
Non-deductible amortization of excess cost of net assets acquired
393
Other, net (16)
------------------------
$ (1,289)
========================
18
Rehab Systems Company
Notes to Consolidated Financial Statements (continued)
11. Income Taxes (continued)
In accordance with the Company's tax sharing agreement with NovaCare, the
benefit of net operating losses which were utilized in the consolidated tax
returns of NovaCare have been recognized. On a separate return basis, the
benefit would not have been recognized.
12. Benefit Plans
NovaCare has in place defined contribution 401(k) plans in which substantially
all employees of the Company may participate. Under those plans, employees may
make voluntary contributions of their compensation, which are partially matched
by the Company. Company contributions for 1994 were $487,000.
13. Contingencies
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability, if any, with respect to these actions will not have a
material adverse effect on the financial position or results of operations of
the Company.
14. Concentration of Credit Risk
The Company operates facilities located in various cities across the United
States. It grants credit without collateral to its patients, most of whom are
local residents with insured third-party payor agreements. The mix of
receivables from patients and third-party payors was as follows:
Medicare 42%
Medicaid 12
Other third party payors 44
Patients 2
---------
100%
=========
19
Rehab Systems Company
Notes to Consolidated Financial Statements (continued)
15. Subsequent Event
On February 3, 1995, NovaCare reached an agreement for the sale of the Company
to HEALTHSOUTH Corporation. The sale is contingent upon regulatory approval. In
accordance with the agreement, certain assets will be retained by and certain
liabilities will be transferred to NovaCare. The effects of this transaction
have not been reflected in these financial statements.
20