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 June 30, 1996; or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
_____________.
Commission File Number 1-10315
HEALTHSOUTH Corporation
-----------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 63-0860407
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Two Perimeter Park South, Birmingham, Alabama 35243
---------------------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(205) 967-7116
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all Reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such Reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 9, 1996
------------------------ -----------------------------
Common Stock, par value 155,051,946 shares
$.01 per share
1
HEALTHSOUTH Corporation and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART 1 -- FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets -- June 30, 1996 (Unaudited)
and December 31, 1995 3
Consolidated Statements of Income (Unaudited) -- Three Months and Six
Months Ended June 30, 1996 and 1995 5
Consolidated Statements of Cash Flows (Unaudited) -- Six Months
Ended June 30, 1996 and 1995 6
Notes to Consolidated Financial Statements (Unaudited) -- Three
Months and Six Months Ended June 30, 1996 and 1995 8
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTHSOUTH Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In Thousands)
June 30, December 31,
1996 1995
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 104,613 $ 152,244
Other marketable securities 3,825 4,077
Accounts receivable 481,326 409,150
Inventories, prepaid expenses, and
other current assets 134,207 116,083
Deferred income taxes 23,505 21,977
----------- ------------
TOTAL CURRENT ASSETS 747,476 703,531
OTHER ASSETS 70,278 70,493
PROPERTY, PLANT AND EQUIPMENT--NET 1,329,587 1,283,560
INTANGIBLE ASSETS--NET 937,414 873,911
----------- ------------
TOTAL ASSETS $ 3,$84,755 $ 2,931,495
=========== ============
3
HEALTHSOUTH Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS (continued)
June 30, December 31,
1996 1995
---- ----
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 108,063 $ 107,018
Salaries and wages payable 79,219 67,905
Accrued interest payable and other liabilities 89,963 87,308
Current portion of long-term debt 38,467 35,175
------------ ---------
TOTAL CURRENT LIABILITIES 315,712 297,406
LONG-TERM DEBT 1,380,988 1,356,489
DEFERRED INCOME TAXES 27,091 23,733
OTHER LONG-TERM LIABILITIES 5,375 8,459
DEFERRED REVENUE 890 1,525
MINORITY INTERESTS--LIMITED PARTNERSHIPS 66,027 57,985
STOCKHOLDERS' EQUITY:
Preferred Stock, $.10 par value--1,500,000
shares authorized; issued and outstanding--
none 0 0
Common Stock, $.01 par value--250,000,000
shares authorized; 154,050,000 and 152,193,000
shares issued at June 30, 1996 and
December 31, 1995, respectively 1,541 1,522
Additional paid-in capital 893,528 888,216
Retained earnings 414,350 334,582
Treasury stock (323) (16,065)
Receivable from Employee Stock Ownership Plan (14,148) (15,886)
Notes receivable from stockholders (6,276) (6,471)
------------ ---------
TOTAL STOCKHOLDERS' EQUITY 1,288,672 1,185,898
------------ ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,084,755 $ 2,931,495
============ =========
See accompanying notes.
4
HEALTHSOUTH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED - In Thousands, Except for Per Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -------------------------------
1996 1995 1996 1995
------------ ----------- ------------- ------------
Revenues $ 595,589 $ 499,668 $ 1,176,823 $ 951,512
Operating expenses:
Operating units 389,133 346,663 775,399 657,942
Corporate general and administrative 16,632 12,874 32,657 27,872
Provision for doubtful accounts 13,011 10,375 25,877 19,456
Depreciation and amortization 45,414 35,664 87,994 67,888
Interest expense 23,497 25,452 47,342 48,584
Interest income (1,668) (1,751) (3,474) (4,000)
Merger costs 0 29,194 28,939 29,194
Loss on impairment of assets 0 11,192 0 11,192
------------ ----------- ------------- ------------
486,019 469,663 994,734 858,128
------------ ----------- ------------- ------------
Income before income taxes and
minority interests 109,570 30,005 182,089 93,384
Provision for income taxes 36,657 8,431 59,954 29,846
------------ ----------- ------------- ------------
Income before minority interests 72,913 21,574 122,135 63,538
Minority interests (13,358) (9,648) (24,729) (18,690)
------------ ----------- ------------- ------------
Net income $ 59,555 $ 11,926 $ 97,406 $ 44,848
============ =========== ============= ============
Weighted average common and common
equivalent shares outstanding 164,256 143,488 163,959 143,366
============ =========== ============= ============
Net income per common and common
equivalent share $ 0.36 $ 0.08 $ 0.59 $ 0.31
============ =========== ============= ============
Net income per common share --
assuming full dilution $ 0.36 $ 0.08 $ 0.58 $ 0.31
============ =========== ============= ============
See accompanying notes.
5
HEALTHSOUTH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - In Thousands)
Six Months Ended
June 30,
--------
1996 1995
---- ----
OPERATING ACTIVITIES
Net income $ 97,406 $ 44,848
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 87,994 67,888
Provision for doubtful accounts 25,877 19,456
Income applicable to minority interests of
limited partnerships 24,729 18,690
Loss on impairment of assets 0 11,192
Merger costs 28,939 29,194
Provision for deferred income taxes 1,841 8,951
Provision for deferred revenue (635) (260)
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable (93,170) (7,443)
Inventories, prepaid expenses and other current
assets (10,087) (4,495)
Accounts payable and accrued expenses (15,068) (59,385)
-------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 147,826 128,636
INVESTING ACTIVITIES
Purchases of property, plant and equipment (91,716) (80,742)
Proceeds from sale of property, plant and equipment 0 14,786
Additions to intangible assets, net of effects of
acquisitions (74,966) (26,464)
Assets obtained through acquisitions, net of liabilities
assumed (54,970) (309,052)
Changes in other assets (920) (7,603)
Proceeds received on sale of other marketable
securities 252 12,660
Investments in other marketable securities 0 (10,926)
-------- ----------
NET CASH USED IN INVESTING ACTIVITIES $(222,320) $ (407,341)
6
HEALTHSOUTH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED - In Thousands)
Six Months Ended
June 30,
---------------------------------
1996 1995
------- --------
FINANCING ACTIVITIES
Proceeds from borrowings $ 154,785 $ 719,144
Principal payments on long-term debt and leases (126,393) (425,724)
Proceeds from exercise of options 21,045 5,662
Proceeds from issuance of common stock 0 922
Reduction in receivable from Employee Stock
Ownership Plan 1,738 1,590
Increase in loans to stockholders 195 0
Dividends paid 0 (3,501)
Proceeds from investment by minority interests 569 (8,888)
Purchase of limited partnership interests 0 922
Payment of cash distributions to limited partners (21,439) (17,534)
-------- -------
NET CASH PROVIDED FROM
FINANCING ACTIVITIES 30,500 272,593
-------- -------
DECREASE IN CASH AND
CASH EQUIVALENTS (43,994) (6,112)
Cash and cash equivalents at beginning of period 148,607 116,517
-------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 104,613 $ 110,405
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 45,321 $ 46,791
Income taxes 37,487 51,019
See accompanying notes.
7
HEALTHSOUTH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three Months and Six Months Ended June 30, 1996 and 1995
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, 1995, as amended. It is management's
opinion that the accompanying consolidated financial statements
reflect all adjustments (which are normal recurring adjustments,
except as otherwise indicated) necessary for a fair presentation
of the results for the interim period and the comparable period
presented.
NOTE 2 -- During 1995, the Company entered into a $1,000,000,000 revolving
line of credit with NationsBank, N.A. ("NationsBank") and other
participating banks (the "1995 Credit Agreement"). On April 18,
1996, the Company amended and restated the 1995 Credit Agreement
to increase the size of the credit facility to $1,250,000,000
(the "1996 Credit Agreement"). The Company provided a negative
pledge on all assets 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. At June 30, 1996, the Company had drawn
$940,000,000 under the 1996 Credit Agreement.
On March 24, 1994, the Company issued $250,000,000 principal
amount of 9.5% Senior Subordinated Notes due 2001 (the "Notes").
Interest is payable on April 1 and October 1. The Notes are
senior subordinated obligations of the Company and, as such, are
subordinated to all existing and future senior indebtedness of
the Company. Also on March 24, 1994, the Company issued
$100,000,000 principal amount of 5% Convertible Subordinated
Debentures due 2001 (the "Convertible Debentures"). An
additional $15,000,000 principal amount of Convertible
Debentures was issued in April 1994 to cover underwriters'
overallotments. Interest is payable on April 1 and October 1.
The Convertible Debentures are convertible into Common Stock of
the Company at the option of the holder at a conversion price of
$18.8125 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.
8
At June 30, 1996 and December 31, 1995, long-term debt
consisted of the following:
June 30, December 31,
1996 1995
----------------- -----------------
(in thousands)
Advances under the $1,250,000,000 1996
Credit Agreement $ 940,000 $ 790,000
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 114,455 236,664
----------------- -----------------
1,419,455 1,391,664
Less amounts due within one year 38,467 35,175
----------------- -----------------
$ 1,380,988 $ 1,356,489
================= =================
NOTE 3 -- On January 17, 1996, the Company consummated the acquisition of
Surgical Care Affiliates, Inc. ("SCA") in a transaction
accounted for as a pooling of interests. In the transaction, SCA
stockholders received an aggregate of 45,928,339 shares of the
Company's common stock. At the time of the merger, SCA operated
67 surgery centers in 24 states.
On March 14, 1996, the Company consummated the acquisition of
Advantage Health Corporation ("Advantage Health") in a
transaction accounted for as a pooling of interests. In the
transaction, Advantage Health stockholders and option holders
received an aggregate of 9,101,989 shares of the Company's
common stock. At the time of the merger, Advantage Health
operated a network of 136 sites of service, including four
freestanding rehabilitation hospitals, one freestanding
multi-use hospital, one nursing home, 68 outpatient
rehabilitation facilities, 14 inpatient managed rehabilitation
units, 24 rehabilitation services management contracts and six
managed sub-acute rehabilitation units.
Accordingly, the Company's historical financial statements for
all periods prior to the effective dates of the mergers have
been restated to include the results of SCA and Advantage
Health. The effects of conforming the accounting policies of the
Company, SCA and Advantage Health were not material.
Prior to the mergers, SCA reported on a fiscal year ending on
December 31 and Advantage Health reported on a fiscal year
ending on August 31. Accordingly, the historical financial
statements of Advantage Health have been recast to a November 30
fiscal year end to more closely conform to the Company's
calendar fiscal year end. The restated financial statements for
all periods prior to and including December 31, 1995 are based
on a combination of the Company's and SCA's results for their
December 31 fiscal years and Advantage Health's results for its
recast November 30 fiscal year. Beginning January 1, 1996, all
facilities acquired in the Advantage Health merger adopted a
December 31 fiscal year end; accordingly, all consolidated
financial statements for periods after December 31, 1995 are
based on a consolidation of all of the Company's subsidiaries on
a December 31 year end. Advantage Health's historical results of
operations for the one month ended December 31, 1995 are not
included in the Company's consolidated statements of income
9
or cash flows. An adjustment has been made to stockholders'
equity as of January 1, 1996 to adjust for the effect of
excluding Advantage Health's results of operations for the one
month ended December 31, 1995. The following is a summary of
Advantage Health's results of operations and cash flows for the
one month ended December 31, 1995 (in thousands):
Statement of Income Data:
Revenues $ 16,111
Operating expenses:
Operating units 14,392
Corporate general and administrative 1,499
Provision for doubtful accounts 1,013
Depreciation and amortization 283
Interest expense 288
Interest income (16)
Loss on impairment of assets 21,111
--------------------------
38,570
--------------------------
Loss before income taxes and
minority interests (22,460)
Provision (benefit) for income taxes (4,959)
--------------------------
(17,501)
Minority interests (136)
==========================
Net income $ (17,637)
==========================
Statement of Cash Flow Data:
Net cash used in operating activities $ (2,971)
Net cash provided by investing activities 105
Net cash used in financing activities (771)
==========================
Net decrease in cash $ (3,637)
==========================
Costs and expenses of $28,939,000, primarily accounting, legal
and financial advisory services, incurred by the Company in
connection with the mergers have been recorded in operations
during the quarter ending March 31, 1996 and reported as Merger
Costs in the accompanying consolidated statements of income.
NOTE 4 -- During the first six months of 1996, the Company acquired 33
outpatient facilities, one outpatient surgery center, one
inpatient rehabilitation hospital and one diagnostic imaging
center. The total purchase price of the acquired facilities was
approximately $54,970,000. The Company also entered into
non-compete agreements totaling approximately $4,580,000 in
connection with these transactions. The cost in excess of the
acquired facilities' net asset value was approximately
$29,198,000. The results of operations (not material
individually or in the aggregate) of these acquisitions are
included in the consolidated financial statements from their
respective acquisition dates.
NOTE 5 -- During the first six months of 1996, the Company granted
incentive and nonqualified stock options to certain Directors,
employees and others for 1,925,000 shares of Common Stock
10
at exercise prices ranging from $32.50 to $35.50 per share.
NOTE 6 -- On May 16, 1996, the Company signed an agreement to acquire
Professional Sports Care Management, Inc. ("PSCM") in a
transaction to be accounted for as a pooling of interests. PSCM
operates 36 outpatient rehabilitation centers in three states.
Under the terms of the agreement, all shares of common stock of
PSCM will be exchanged for shares of the Company's Common Stock
pursuant to an exchange ratio that will yield an aggregate value
of approximately $67,000,000 to PSCM stockholders. The
transaction is subject to approval by the stockholders of PSCM.
The transaction is expected to be completed during the third
quarter of 1996.
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
The Company provides outpatient and rehabilitative healthcare services
through its inpatient and outpatient rehabilitation facilities, surgery centers
and medical centers. The Company has expanded its operations through the
acquisition or opening of new facilities and satellite locations and by
enhancing its existing operations. As of June 30, 1996, the Company had 978
locations in 46 states and the District of Columbia, including 643 outpatient
rehabilitation locations, 96 inpatient rehabilitation facilities, five medical
centers, 130 surgery centers and 104 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 January 17, 1996, the Company consummated the acquisition of
Surgical Care Affiliates, Inc. ("SCA") through a merger accounted for as a
pooling of interests. Accordingly, the Company's financial statements have been
restated to include the results of SCA for all periods presented (see Note 3 of
"Notes to Consolidated Financial Statements" for further discussion). Effective
March 14, 1996, the Company consummated the acquisition of Advantage Health
Corporation ("Advantage Health"), also through a merger accounted for as a
pooling of interests. The results of operations described below for the quarter
ended June 30, 1995 are based on a combination of both the Company's results for
its
12
quarter ended June 30, 1995 and Advantage Health's results for its quarter ended
May 31, 1995 (see Note 3 of "Notes to Consolidated Financial Statements" for
further discussion). All data set forth for periods prior to December 31, 1995
relating to revenues derived from Medicare and Medicaid do not take into account
revenues of the Advantage Health facilities or the SCA facilities.
Results of Operations -- Three Months Ended June 30, 1996
The Company operated 643 outpatient locations (which includes base
facilities and satellites) at June 30, 1996, compared to 382 outpatient
locations at June 30, 1995. In addition, the Company operated 96 inpatient
rehabilitation facilities, five medical centers and 130 surgery centers at June
30, 1996, compared with 94 inpatient facilities, five medical centers and 121
surgery centers at June 30, 1995.
The Company's operations generated revenues of $595,589,000 for the
quarter ended June 30, 1996, an increase of $95,921,000, or 19.2%, as compared
to the same period in 1995. The increase in revenues is primarily attributable
to increases in patient volume, the December 1, 1995 acquisition of Caremark
Orthopedic Services Inc. and the addition of new outpatient centers. Same store
revenues for the quarter ended June 30, 1996 were $551,108,000, an increase of
$51,440,000, or 10.3%, as compared to the same period in 1995. New store
revenues were $44,481,000. Revenues generated from patients under Medicare and
Medicaid plans respectively accounted for 37.5% and 2.7% of revenue for the
second quarter of 1996, compared to 40.1% and 2.1% for the same period in 1995.
Revenues from any other single third-party payor were not significant in
relation to the Company's revenues. During the second quarter of 1996, same
store outpatient visits, inpatient days and surgical cases increased 15.6%, 9.8%
and 6.5%, respectively. Revenue per outpatient visit, revenue per inpatient day
and revenue per surgical case for same store operations increased (decreased) by
(1.0)%, 0.4% and 5.9%, respectively.
Operating expenses, at the operating unit level, were $389,133,000, or
65.3% of revenues, for the quarter ended June 30, 1996, compared to 69.4% of
revenues for the second quarter of 1995. Same store operating expenses were
$356,936,000, or 64.8% of comparable revenue. New store operating expenses were
$32,197,000, or 72.4% of comparable revenue. Corporate general and
administrative expenses increased from $12,874,000 during the 1995 quarter to
$16,632,000 during the 1996 quarter. As a percentage of revenue, corporate
general and administrative expenses increased from 2.6% in the 1995 quarter to
2.8% in the 1996 quarter. The provision for doubtful accounts was $13,011,000,
or 2.2% of revenues, for the second quarter of 1996, compared to $10,375,000, or
2.1% of revenues, for the same period in 1995. Management believes that this
provision is adequate to cover any uncollectible revenues.
Depreciation and amortization expense was $45,414,000 for the quarter
ended June 30, 1996, compared to $35,664,000 for the same period in 1995. The
increase represents the investment in additional assets by the Company. Interest
expense was $23,497,000 for the quarter ended June 30, 1996, compared to
$25,452,000 for the quarter ended June 30, 1995. For the second quarter of 1996,
interest income was $1,668,000, compared to $1,751,000 for the second quarter of
1995.
Income before minority interests and income taxes for the second
quarter of 1996 was $109,570,000, compared to $30,005,000 for the same period in
1995. Income before minority interests and income taxes for the 1995 quarter
includes merger costs and impairment losses relating to the Surgical Health
Corporation and Novacare rehabilitation hospitals acquisitions totaling
$40,386,000. Minority interests decreased income before income taxes by
$13,358,000 for the quarter ended June 30, 1996, compared to decreasing income
before income taxes by $9,648,000 for the second quarter of 1995. The provision
for income taxes for the second quarter of 1996 was $36,657,000, compared to
$8,431,000 for the same period in 1995, resulting in effective tax rates of
38.1% and 41.4%, respectively. Net income for the second quarter of 1996 was
$59,555,000, compared to $11,926,000 for the second quarter of 1995.
13
Results of Operations -- Six Months Ended June 30, 1996
Revenues for the six months ended June 30, 1996 were $1,176,823,000, an
increase of $225,311,000, or 23.7%, over the six months ended June 30, 1995.
Same store revenues were $1,067,595,000, an increase of $116,083,000, or 12.2%
as compared to the same period in 1995. New store revenues were $109,228,000.
The increase in revenues is primarily attributable to the acquisition of the
NovaCare rehabilitation hospitals division in April 1995, the December 1, 1995
acquisition of Caremark Orthopedic Services Inc., increases in patient volume
and the addition of new outpatient centers. Revenues generated from patients
under Medicare and Medicaid plans respectively accounted for 38.1% and 2.8% of
revenue for the first six months of 1996, compared to 41.1% and 2.3% for the
same period in 1995. Revenues from any other single third-party payor were not
significant in relation to the Company's revenues. During the first six months
of 1996, same store outpatient visits, inpatient days and surgical cases
increased 15.5%, 10.5% and 6.4%, respectively. Revenue per outpatient visit,
revenue per inpatient day and revenue per surgical case for same store
operations increased (decreased) by (1.0)%, 1.5% and 4.9%, respectively.
Operating expenses, at the operating unit level, were $775,399,000, or
65.9% of revenues, for the six months ended June 30, 1996, as compared to
$657,942,000, or 69.1% of revenues, for the first six months of 1995. Same store
operating expenses were $700,342,000, or 65.6% of comparable revenue. New store
operating expenses were $75,057,000, or 68.7% of comparable revenue. As a result
of the SCA and Advantage Health acquisitions, the Company recognized merger
costs of $28,939,000 during the first quarter of 1996 (see Note 3 of "Notes to
Consolidated Financial Statements" for further discussion). Net income for the
six months ended June 30, 1996 was $97,406,000, compared to $44,848,000 for the
same period in 1995.
Liquidity and Capital Resources
As of June 30, 1996, the Company had working capital of $431,764,000,
including cash and marketable securities of $108,438,000. Working capital at
December 31, 1995 was $406,125,000, including cash and marketable securities of
$156,321,000. For the first six months of 1996, cash provided by operations was
$147,826,000, compared to $128,636,000 for the same period in 1995. Additions to
property, plant, and equipment and acquisitions accounted for $91,716,000 and
$54,970,000, respectively, during the first six months of 1996. Those same
investing activities accounted for $80,742,000 and $309,052,000, respectively,
in the same period in 1995. Financing activities provided $30,500,000 and
$272,593,000 during the first six months of 1996 and 1995, respectively. Net
borrowing proceeds (borrowing less principal reductions) for the first six
months of 1996 and 1995 were $28,392,000 and $293,420,000, respectively.
Accounts receivable were $481,326,000 at June 30, 1996, compared to
$409,150,000 at December 31, 1995. The number of days of average revenues in
average receivables was 66.9 at June 30, 1996, compared to 63.8 at December 31,
1995. The concentration of net accounts receivable from patients, third-party
payors, insurance companies and others at June 30, 1996 is consistent with the
related concentration of revenues for the period then ended.
At June 30, 1996, the Company had a $1,250,000,000 revolving line of
credit with NationsBank, N.A. and 31 other participating banks. Interest is paid
based on LIBOR plus a predetermined margin, prime, or competitively bid rates
from the participating banks (see Note 2 of "Notes to Consolidated Financial
Statements"). The effective interest rate on the average outstanding balance
under the revolving line of credit was 6.1% for the six months ended June 30,
1996, compared to the average prime rate of 8.3% during the same period. At June
30, 1996, the Company had drawn $940,000,000 under its revolving line of credit.
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
14
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 $30,000,000 on maintenance and expansion of its existing
facilities and approximately $150,000,000 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.
On May 16, 1996, the Company entered into a Plan and Agreement of
Merger with Professional Sports Care Management, Inc. ("PSCM"), pursuant to
which the Company has agreed to acquire PSCM in a stock-for-stock merger to be
accounted for as a pooling of interests. PSCM operates 36 outpatient
rehabilitation centers in New York, New Jersey and Connecticut. Under the terms
of the Plan and Agreement of Merger, the Company will issue shares of its common
stock valued at approximately $67,000,000 in the aggregate to the stockholders
of PSCM. The transaction, which is subject to approval by the stockholders of
PSCM, is expected to be consummated in the third quarter of 1996. Although the
Company is continually considering and evaluating acquisitions and opportunities
for future growth, the Company has not entered into any other agreements with
respect to material future acquisitions. The Company believes that existing
cash, cash flow from operations, and borrowings under the revolving line of
credit will be sufficient to satisfy the Company's estimated cash requirements
for the next twelve months and thereafter.
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.
15
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
On May 2, 1996, the Annual Meeting of Stockholders of HEALTHSOUTH
Corporation was held, at which the shares of Common Stock represented at the
Annual Meeting were voted for the election of Directors as follows:
NUMBER
VOTING FOR WITHHOLD
-------------------- ------------------ ------------------
Richard M. Scrushy 125,892,680 123,941,948 1,950,732
Phillip C. Watkins, M.D. 125,892,680 123,942,320 1,950,360
George H. Strong 125,892,680 123,942,109 1,950,571
C. Sage Givens 125,892,680 123,942,320 1,950,360
Charles W. Newhall, III 125,892,680 123,942,320 1,950,360
John S. Chamberlin 125,892,680 123,942,173 1,950,507
Aaron Beam, Jr. 125,892,680 123,942,320 1,950,360
James P. Bennett 125,892,680 123,940,454 1,952,226
Larry R. House 125,892,680 123,942,320 1,950,360
Anthony J. Tanner 125,892,680 123,942,320 1,950,360
Richard F. Celeste 125,892,680 123,941,539 1,951,141
P. Daryl Brown 125,892,680 123,942,320 1,950,360
Joel C. Gordon 125,892,680 123,938,343 1,954,337
Raymond J. Dunn, III 125,892,680 123,938,736 1,953,944
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 June 30, 1996, the Company filed a
Current Report on Form 8-K dated May 20, 1996, reporting under
Item 5 combined results of operations of the Company and
Advantage Health Corporation for the month of April 1996.
No other items of Part II are applicable to the Registrant for the
period covered by this Quarterly Report on Form 10-Q.
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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: August 14, 1996 RICHARD M. SCRUSHY
--------------------------
Richard M. Scrushy
Chairman of the Board and
Chief Executive Officer
Date: August 14, 1996 AARON BEAM, JR.
--------------------------
Aaron Beam, Jr.
Executive Vice President and
Chief Financial Officer
17