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, 1997; or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
_____________.
Commission File Number 1-10315
HEALTHSOUTH CORPORATION
-----------------------------------------------------
(exact name of registrant as specified in its charter)
Delaware 63-0860407
- - ------------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
ONE HEALTHSOUTH PARKWAY, BIRMINGHAM, ALABAMA 35243
--------------------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(205) 967-7116
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all Reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such Reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at August 8, 1997
- - ----------------------- -----------------------------
COMMON STOCK, PAR VALUE 343,451,019 SHARES
$.01 PER SHARE
Page 1
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART 1 -- FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) -- June 30, 1997
and December 31, 1996 3
Consolidated Statements of Income (Unaudited) -- Three Months and Six
Months Ended June 30, 1997 and 1996 5
Consolidated Statements of Cash Flows (Unaudited) -- Six Months
Ended June 30, 1997 and 1996 6
Notes to Consolidated Financial Statements (Unaudited) -- Three
Months and Six Months Ended June 30, 1997 and 1996 8
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II -- OTHER INFORMATION
Item 2. Changes in Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
Page 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED - IN THOUSANDS)
JUNE 30, DECEMBER 31,
1997 1996
------------ --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 175,831 $ 150,071
Other marketable securities 3,839 3,760
Accounts receivable 622,142 540,389
Inventories, prepaid expenses, and
other current assets 195,952 175,582
Deferred income taxes 16,435 15,238
-------------- -------------
TOTAL CURRENT ASSETS 1,014,199 885,040
OTHER ASSETS 102,419 85,412
PROPERTY, PLANT AND EQUIPMENT--NET 1,627,443 1,464,833
INTANGIBLE ASSETS--NET 1,150,734 1,094,421
-------------- -------------
TOTAL ASSETS $ 3,894,795 $ 3,529,706
============== =============
Page 3
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED - IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, DECEMBER 31,
1997 1996
------------------ -------------------
CURRENT LIABILITIES
Accounts payable $ 91,005 $ 116,451
Salaries and wages payable 54,047 67,793
Accrued interest payable and other liabilities 100,611 99,118
Current portion of long-term debt 39,767 38,726
------------------- -------------------
TOTAL CURRENT LIABILITIES 285,430 322,088
LONG-TERM DEBT 1,635,697 1,521,417
DEFERRED INCOME TAXES 43,146 41,850
OTHER LONG-TERM LIABILITIES 3,047 3,558
DEFERRED REVENUE 577 406
MINORITY INTERESTS--LIMITED PARTNERSHIPS 78,102 71,286
STOCKHOLDERS' EQUITY:
Preferred Stock, $.10 par value--1,500,000
shares authorized; issued and outstanding--none 0 0
Common Stock, $.01 par value--500,000,000
shares authorized; 340,714,000 and 326,492,000
shares issued at June 30, 1997 and
December 31, 1996, respectively 3,407 3,265
Additional paid-in capital 1,193,818 1,060,012
Retained earnings 669,514 525,718
Treasury stock (323) (323)
Receivable from Employee Stock Ownership Plan (12,247) (14,148)
Notes receivable from stockholders (5,373) (5,423)
------------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 1,848,796 1,569,101
------------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,894,795 $ 3,529,706
=================== ================
See accompanying notes.
Page 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,
1997 1996 1997 1996
---------------- ---------------- ----------- ----------------
Revenues $ 723,017 $ 628,854 $ 1,414,648 $ 1,241,003
Operating unit expenses 451,650 409,225 889,939 814,026
Corporate general and administrative
expenses 18,509 19,358 36,358 37,807
Provision for doubtful accounts 18,075 14,251 32,788 28,353
Depreciation and amortization 60,145 49,792 117,516 96,956
Merger costs 0 0 15,875 28,939
Interest expense 27,742 24,352 53,415 49,203
Interest income (1,284) (1,691) (2,322) (3,518)
--------------- --------------- ---------- ---------------
574,837 515,287 1,143,569 1,051,766
=============== =============== ========== ===============
Income before income taxes and
minority interests 148,180 113,567 271,079 189,237
Provision for income taxes 50,054 38,002 92,465 62,474
-------------- -------------- --------- --------------
Income before minority interests 98,126 75,565 178,614 126,763
Minority interests (16,807) (13,580) (32,715) (25,097)
--------------- --------------- ---------- --------------
Net income $ 81,319 $ 61,985 $ 145,899 $ 101,666
=============== =============== ========== ===============
Weighted average common and common
equivalent shares outstanding 354,982 338,951 349,227 338,327
=============== =============== ========== ===============
Net income per common and common
equivalent share $ 0.23 $ 0.18 $ 0.42 $ 0.30
================ =============== =========== ================
Net income per common share --
assuming full dilution $ 0.23 $ 0.18 $ 0.41 $ 0.29
================ =============== =========== ===============
See accompanying notes.
Page 5
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - In Thousands)
SIX MONTHS ENDED
JUNE 30,
1997 1996
-------- -------
OPERATING ACTIVITIES
Net income $145,899 $101,666
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 117,516 96,956
Provision for doubtful accounts 32,788 28,353
Income applicable to minority interests of
limited partnerships 32,715 25,097
Merger costs 15,875 28,939
Provision for deferred income taxes 6,036 1,448
Provision for deferred revenue 171 (635)
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (109,810) (96,120)
Inventories, prepaid expenses and other
current assets (21,226) (10,080)
Accounts payable and accrued expenses (66,796) $(14,577)
--------- ----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 153,168 161,047
INVESTING ACTIVITIES
Purchases of property, plant and equipment (219,209) (101,736)
Additions to intangible assets, net of effects of
acquisitions (57,579) (75,918)
Assets obtained through acquisitions, net of
liabilities assumed (56,241) (54,970)
Changes in other assets (17,007) (692)
Proceeds received on sale of other marketable
securities 60 252
Investments in other marketable securities (139) 0
----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (350,115) (233,064)
Page 6
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED - In Thousands)
SIX MONTHS ENDED
JUNE 30,
1997 1996
----------- -----------
FINANCING ACTIVITIES
Proceeds from borrowings 339,666 160,257
Principal payments on long-term debt and leases (109,856) (133,615)
Proceeds from exercise of options 18,948 21,167
Purchase of treasury stock 0 (539)
Reduction in receivable from Employee Stock
Ownership Plan 1,901 1,738
Decrease in loans to stockholders 50 195
Dividends paid 0 (572)
Proceeds from investment by minority interests 548 569
Payment of cash distributions to limited partners (28,550) (21,495)
--------- --------
NET CASH PROVIDED FROM
FINANCING ACTIVITIES 222,707 27,705
--------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 25,760 (44,312)
Cash and cash equivalents at beginning of period 150,071 151,812
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $175,831 $107,500
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 53,454 47,865
Income taxes 86,888 40,315
Non-cash financing activities:
The holders of the Company's $115,000,000 in aggregate principal amount of 5%
Convertible Subordinated Debentures due 2001 surrendered the Debentures for
conversion into approximately 12,226,000 shares of the Company's Common Stock
at various dates during 1997.
See accompanying notes.
Page 7
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
NOTE 1 -- The accompanying consolidated financial statements include the
accounts of HEALTHSOUTH Corporation (the "Company") and its
subsidiaries. This information should be read in conjunction with
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, 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 Credit Agreement with
NationsBank, N.A. ("NationsBank") and other participating banks (the
"1995 Credit Agreement") which consisted of a $1,000,000,000
revolving credit facility. On April 18, 1996, the Company amended
and restated the 1995 Credit Agreement to increase the size of the
revolving credit facility to $1,250,000,000 (the "1996 Credit
Agreement"). Interest is paid based on LIBOR plus a predetermined
margin, a base rate, or competitively bid rates from the
participating banks. The Company is required to pay a fee on the
unused portion of the revolving credit facility ranging from 0.08%
to 0.25%, depending on certain defined ratios. The principal amount
is payable in full on March 31, 2001. The Company provided a
negative pledge on all assets under the 1996 Credit Agreement, and
the lenders released the first priority security interest in all
shares of stock of the Company's subsidiaries and rights and
interests in the Company's controlled partnerships which had been
granted under the 1995 Credit Agreement. In connection with the
pending acquisition of Horizon/CMS (see Note 4), the Company has
obtained a commitment from NationsBank, N.A. and nine other banks
for a $1,250,000,000 Senior Bridge Loan Facility on substantially
the same terms as the 1996 Credit Agreement. In addition,
NationsBank, N.A. has provided the Company with a $300,000,000
interim revolving credit facility for working capital purposes on
substantially the same terms as the 1996 Credit Agreement, pending
the closing of the Senior Bridge Loan Facility.
On March 24, 1994, the Company issued $250,000,000 principal amount
of 9.5% Senior Subordinated Notes due 2001 (the "Notes"). Interest
is payable on April 1 and October 1. The Notes are senior
subordinated obligations of the Company and, as such, are
subordinated to all existing and future senior indebtedness of the
Company. Also on March 24, 1994, the Company issued $100,000,000
principal amount of 5% Convertible Subordinated Debentures due 2001
(the "Convertible Debentures"). An additional $15,000,000 principal
amount of Convertible Debentures was issued in April 1994 to cover
underwriters' overallotments. The Convertible Debentures were
convertible into Common Stock of the Company at the option of the
holder at a conversion price of $9.406 per share, subject to
adjustment in certain events. As of April 1, 1997, the holders of
the Convertible Debentures surrendered substantially all of the
Convertible Debentures for conversion into approximately 12,226,000
shares of the Company's Common Stock. The net proceeds from the
issuance of the Notes and Convertible Debentures were used by the
Company to pay down indebtedness outstanding under its other
existing credit facilities.
Page 8
At June 30, 1997, and December 31, 1996, long-term debt consisted of the
following:
June 30, December 31,
1997 1996
---------- --------------
(in thousands)
Advances under the $1,250,000,000 1996
Credit Agreement $1,240,000 $ 995,000
Advances under the $300,000,000 interim
revolving credit facility 75,000 0
9.5% Senior Subordinated Notes due 2001 250,000 250,000
5% Convertible Subordinated Debentures due 2001 0 115,000
Other long-term debt 110,464 200,143
---------- ----------
1,675,464 1,560,143
Less amounts due within one year 39,767 38,726
---------- ----------
$1,635,697 $1,521,417
========== ==========
NOTE 3 -- On March 3, 1997, the Company consummated the acquisition of Health
Images, Inc. ("Health Images") in a transaction accounted for as a
pooling of interests. Accordingly, the Company's historical
financial statements for all periods prior to the effective date of
the merger have been restated to include the results of Health
Images. In the transaction, Health Images stockholders received
approximately 10,343,000 shares of the Company's Common Stock.
Health Images operates 49 freestanding diagnostic centers in 13
states and six in the United Kingdom.
Costs and expenses of $15,875,000, primarily representing
accounting, legal and financial advisory services, incurred by the
Company in connection with the merger were recorded in operations
during the quarter ending March 31, 1997, and reported as Merger
Costs in the accompanying consolidated statements of income for the
six months ending June 30, 1997. The effects of conforming the
accounting policies of the Company and Health Images were not
material.
During 1996, the Company consummated the acquisition of ReadiCare,
Inc. ("ReadiCare") in a transaction accounted for as a pooling of
interests. Prior to the merger, ReadiCare reported on a fiscal year
ending on February 28. Accordingly, at the time of the merger, the
historical financial statements of ReadiCare were recast to a
November 30 fiscal year end to more closely conform to the Company's
calendar fiscal year end. Beginning January 1, 1997, all facilities
acquired in the ReadiCare merger adopted a December 31 fiscal year
end; therefore, ReadiCare's historical results of operations for the
one month ended December 31, 1996, which included revenues of
$3,266,000 and a net loss of $926,000, are not included in the
Company's consolidated statements of income. ReadiCare's cash flow
for the one month period ended December 31, 1996, of ($543,000) is
included in the accompanying statement of cash flows for the six
months ended June 30, 1997.
NOTE 4 -- During the first six months of 1997, the Company acquired 69
outpatient rehabilitation facilities, two outpatient surgery centers
and five diagnostic imaging centers. The total purchase price of the
acquired facilities was approximately $56,241,000. The Company also
entered into non-compete agreements totaling approximately
$11,515,000 in connection with these transactions. The cost in
excess of the acquired facilities' net asset
Page 9
value was approximately $50,214,000. The results of operations (not
material individually or in the aggregate) of these acquisitions are
included in the consolidated financial statements from their
respective acquisition dates.
On February 17, 1997, the Company entered into a definitive
agreement to acquire Horizon/CMS Healthcare Corporation
("Horizon/CMS") in a stock-for-stock merger in which the
stockholders of Horizon/CMS will receive 0.84338 of a share of the
Company's common stock per share of Horizon/CMS common stock. The
transaction is valued at approximately $1,600,000,000, including the
assumption by the Company of approximately $700,000,000 in
Horizon/CMS debt. It is expected that the acquisition will be
accounted for as a purchase. Consummation of the transaction is
subject to various regulatory approvals, including clearance under
the Hart-Scott-Rodino Antitrust Improvements Act, and to the
satisfaction of certain other conditions. The Company currently
anticipates that the transaction will be consummated in the third
quarter of 1997.
NOTE 5 -- During the first six months of 1997, the Company granted incentive
and nonqualified stock options to certain Directors and employees
for 2,240,000 shares of Common Stock at exercise prices ranging from
$18.44 to $20.81 per share.
NOTE 6 -- On January 18, 1997, the Company's Board of Directors authorized a
two-for-one stock split to be effected in the form of a 100% stock
dividend, subject to the approval by the Company's stockholders of
an amendment to its Certificate of Incorporation increasing the
number of authorized shares of common stock from 250,000,000 to
500,000,000. The Company's stockholders approved the amendment on
March 12, 1997. The stock dividend was payable on March 17, 1997, to
holders of record on March 13, 1997. Accordingly, all share and per
share amounts included in the accompanying financial statements have
been restated to give effect to the stock split.
NOTE 7 -- In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," which is required to be
adopted on December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements
for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in
an increase in primary earnings per share for the quarters ended
June 30, 1997, and June 30, 1996, of $0.01 and $0.01 per share,
respectively. The impact of Statement No. 128 on the calculation of
fully diluted earnings per share for these quarters is not expected
to be material.
Page 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company provides outpatient and rehabilitative healthcare services
through its inpatient and outpatient rehabilitation facilities, surgery centers,
diagnostic centers and medical centers. The Company has expanded its operations
through the acquisition or opening of new facilities and satellite locations and
by enhancing its existing operations. As of June 30, 1997, the Company had over
1,250 locations in 50 states, the District of Columbia and the United Kingdom,
including approximately 830 outpatient rehabilitation locations, 99 inpatient
rehabilitation facilities, four medical centers, 142 surgery centers, 77
diagnostic centers and approximately 137 locations providing other patient care
services.
The Company's revenues include net patient service revenues and other
operating revenues. Net patient service revenues are reported at estimated net
realizable amounts from patients, insurance companies, third-party payors
(primarily Medicare and Medicaid) and others for services rendered. Revenues
from third-party payors also include estimated retroactive adjustments under
reimbursement agreements which are subject to final review and settlement by
appropriate authorities. Management determines allowances for doubtful accounts
and contractual adjustments based on historical experience and the terms of
payor contracts. Net accounts receivable include only those amounts estimated by
management to be collectible.
The Company determines the amortization period of the cost in excess of net
asset value of purchased facilities based on an evaluation of the facts and
circumstances of each individual purchase transaction. The evaluation includes
an analysis of historic and projected financial performance, an evaluation of
the estimated useful life of the buildings and fixed assets acquired, the
indefinite useful life of Certificates of Need and licenses acquired, the
competition within local markets, lease terms where applicable, and the legal
terms of partnerships where applicable. The Company utilizes independent
appraisers and relies on its own management expertise in evaluating each of the
factors noted above. With respect to the carrying value of the excess of cost
over net asset value of purchased facilities and other intangible assets, the
Company determines on a quarterly basis whether an impairment event has occurred
by considering factors such as the market value of the asset, a significant
adverse change in legal factors or in the business climate, adverse action by a
regulator, a history of operating losses or cash flow losses, or a projection of
continuing losses associated with an operating entity. The carrying value of
excess cost over net asset value of purchased facilities and other intangible
assets will be evaluated if the facts and circumstances suggest that it has been
impaired. If this evaluation indicates that the value of the asset will not be
recoverable, as determined based on the undiscounted cash flows of the entity
acquired over the remaining amortization period, the Company's carrying value of
the asset will be reduced by the estimated shortfall of cash flows.
The Company, in many cases, operates more than one site within a market. In
such markets, there is customarily an outpatient center or inpatient facility
with associated satellite outpatient locations. For purposes of the following
discussion and analysis, same store operations are measured on locations within
markets in which similar operations existed at the end of the period and include
the operations of additional locations opened within the same market. New store
operations are measured on locations within new markets.
Effective March 3, 1997, the Company consummated the acquisition of Health
Images, Inc. ("Health Images") through a merger accounted for as a pooling of
interests. Accordingly, the Company's financial statements have been restated to
include the results of Health Images for all periods presented (see Note 3 of
"Notes to Consolidated Financial Statements" for further discussion). All data
set forth for periods prior to December 31, 1996, relating to revenues derived
from Medicare and Medicaid do not take into account revenues of the Health
Images facilities.
Page 11
RESULTS OF OPERATIONS -- THREE MONTHS ENDED JUNE 30, 1997
The Company operated 830 outpatient locations (which includes base
facilities and satellites) at June 30, 1997, compared to 679 outpatient
locations at June 30, 1996. In addition, the Company operated 99 inpatient
rehabilitation facilities, four medical centers, 142 surgery centers, and 77
diagnostic centers at June 30, 1997, compared with 96 inpatient facilities, five
medical centers, 130 surgery centers and 72 diagnostic centers at June 30, 1996.
The Company's operations generated revenues of $723,017,000 for the quarter
ended June 30, 1997, an increase of $94,163,000, or 15.0%, as compared to the
same period in 1996. The increase in revenues is primarily attributable to
increases in patient volume and the addition of new outpatient and surgery
centers. Same store revenues for the quarter ended June 30, 1997, were
$698,796,000, an increase of $69,942,000, or 11.1%, as compared to the same
period in 1996. New store revenues were $24,221,000. Revenues generated from
patients under Medicare and Medicaid plans respectively accounted for 38.0% and
2.3% of revenue for the second quarter of 1997, compared to 37.5% and 2.7% for
the same period in 1996. Revenues from any other single third-party payor were
not significant in relation to the Company's revenues. During the second quarter
of 1997, same store outpatient visits, inpatient days, surgical cases and
diagnostic cases increased 16.6%, 11.2%, 7.6% and 12.0%, respectively. Revenue
per outpatient visit, inpatient day, surgical case and diagnostic case for same
store operations increased (decreased) by 1.0%, (0.4)%, 0.4% and 4.9%,
respectively.
Operating expenses, at the operating unit level, were $451,650,000, or
62.5% of revenues, for the quarter ended June 30, 1997, compared to 65.1% of
revenues for the second quarter of 1996. The decrease in operating expenses as a
percentage of revenues is primarily attributable to the 11.1% increase in same
store revenues noted above. In same store operations, the incremental costs
associated with increased revenues are significantly less as a percentage of
those increased revenues. Same store operating expenses were $434,047,000, or
62.1% of comparable revenue. New store operating expenses were $17,604,000, or
72.7% of comparable revenue. Corporate general and administrative expenses
decreased from $19,358,000 during the 1996 quarter to $18,509,000 during the
1997 quarter. As a percentage of revenue, corporate general and administrative
expenses decreased from 3.1% in the 1996 quarter to 2.6% in the 1997 quarter.
The provision for doubtful accounts was $18,075,000, or 2.5% of revenues, for
the second quarter of 1997, compared to $14,251,000, or 2.3% of revenues, for
the same period in 1996. Management believes that this provision is adequate to
cover any uncollectible revenues.
Depreciation and amortization expense was $60,145,000 for the quarter ended
June 30, 1997, compared to $49,792,000 for the same period in 1996. The increase
represents the investment in additional assets by the Company. Interest expense
was $27,742,000 for the quarter ended June 30, 1997, compared to $24,352,000 for
the quarter ended June 30, 1996. For the second quarter of 1997, interest income
was $1,284,000, compared to $1,691,000 for the second quarter of 1996.
Income before minority interests and income taxes for the second quarter of
1997 was $148,180,000, compared to $113,567,000 for the same period in 1996.
Minority interests decreased income before income taxes by $16,807,000 for the
quarter ended June 30, 1997, compared to decreasing income before income taxes
by $13,580,000 for the second quarter of 1996. The provision for income taxes
for the second quarter of 1997 was $50,054,000, compared to $38,002,000 for the
same period in 1996, resulting in effective tax rates of 38.1% and 38.0%,
respectively. Net income for the second quarter of 1997 was $81,319,000,
compared to $61,985,000 for the second quarter of 1996.
Page 12
RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1997
Revenues for the six months ended June 30, 1997, were $1,414,648,000, an
increase of $173,645,000, or 14.0%, over the six months ended June 30, 1996.
Same store revenues were $1,375,198,000, an increase of $134,195,000, or 10.8%,
as compared to the same period in 1996. New store revenues were $39,450,000.
Revenues generated from patients under Medicare and Medicaid plans respectively
accounted for 37.9% and 2.4% of revenue for the first six months of 1997,
compared to 38.1% and 2.8% for the same period in 1996. Revenues from any other
single third-party payor were not significant in relation to the Company's
revenues. During the first six months of 1997, same store outpatient visits,
inpatient days, surgical cases and diagnostic cases increased 16.5%, 10.8%, 7.4%
and 11.7%, respectively. Revenue per outpatient visit, inpatient day, surgical
case and diagnostic case for same store operations increased (decreased) by
1.7%, (0.6)%, 1.8% and 5.9%, respectively.
Operating expenses, at the operating unit level, were $889,939,000, or
62.9% of revenues, for the six months ended June 30, 1997, as compared to
$814,026,000, or 65.6% of revenues, for the first six months of 1996. Same store
operating expenses were $861,064,000, or 62.6% of comparable revenue. New store
operating expenses were $28,875,000, or 73.2% of comparable revenue. As a result
of the Health Images acquisition, the Company recognized merger costs of
$15,875,000 during the first quarter of 1997. Net income for the six months
ended June 30, 1997, was $145,899,000, compared to $101,666,000 for the same
period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company had working capital of $728,769,000,
including cash and marketable securities of $179,670,000. Working capital at
December 31, 1996, was $562,952,000, including cash and marketable securities of
$153,831,000. For the first six months of 1997, cash provided by operations was
$153,168,000, compared to $161,047,000 for the same period in 1996. Additions to
property, plant, and equipment and acquisitions accounted for $219,209,000 and
$56,241,000, respectively, during the first six months of 1997. Those same
investing activities accounted for $101,736,000 and $54,970,000, respectively,
in the same period in 1996. Financing activities provided $222,707,000 and
$27,705,000 during the first six months of 1997 and 1996, respectively. Net
borrowing proceeds (borrowing less principal reductions) for the first six
months of 1997 and 1996 were $229,810,000 and $26,642,000, respectively.
Accounts receivable were $622,142,000 at June 30, 1997, compared to
$540,389,000 at December 31, 1996. The number of days of average quarterly
revenues in ending receivables at June 30, 1997, was 78.3, compared to 76.8 days
of average annual revenues in ending receivables at December 31, 1996. The
concentration of net accounts receivable from patients, third-party payors,
insurance companies and others at June 30, 1997, is consistent with the related
concentration of revenues for the period then ended.
At June 30, 1997, the Company had a $1,250,000,000 revolving line of credit
with NationsBank, N.A. (Carolinas) and other participating banks (the "1996
Credit Agreement"). Interest is paid based on LIBOR plus a predetermined margin,
a base rate or competitively bid rates from the participating banks. This credit
facility has a maturity date of March 31, 2001. The Company provided a negative
pledge on all assets for the 1996 Credit Agreement. The effective interest rate
on the average outstanding balance under the revolving line of credit was 5.81%
for the six months ended June 30, 1997, compared to the average prime rate of
8.38% during the same period. At June 30, 1997, the Company had drawn
$1,240,000,000 under the 1996 Credit Agreement and $75,000,000 under the interim
revolving credit facility described below.
On February 17, 1997, the Company entered into a definitive agreement to
acquire Horizon/CMS Healthcare Corporation ("Horizon/CMS") in a stock-for-stock
merger in which the stockholders of Horizon/CMS will receive 0.84338 of a share
of the Company's common stock per share of Horizon/CMS
Page 13
common stock. The transaction is valued at approximately $1,600,000,000,
including the assumption by the Company of approximately $700,000,000 in
Horizon/CMS debt. It is expected that the transaction will be accounted for as a
purchase. Consummation of the transaction is subject to various regulatory
approvals, including clearance under the Hart-Scott-Rodino Antitrust
Improvements Act, and to the satisfaction of certain other conditions. The
Company currently anticipates that the transaction will be consummated in the
third quarter of 1997.
The Company intends to pursue the acquisition or development of additional
healthcare operations, including comprehensive outpatient rehabilitation
facilities, ambulatory surgery centers, inpatient rehabilitation facilities and
companies engaged in the provision of outpatient surgery and
rehabilitation-related services, and to expand certain of its existing
facilities. While it is not possible to estimate precisely the amounts which
will actually be expended in the foregoing areas, the Company anticipates that
over the next twelve months, it will spend approximately $50,000,000 on
maintenance and expansion of its existing facilities and approximately
$300,000,000 on development of the Integrated Service Model, pursuant to which
the Company plans to utilize its services in particular markets to provide an
integrated continuum of coordinated care.
Although the Company is continually considering and evaluating acquisitions
and opportunities for future growth, the Company has not entered into any
agreements with respect to material future acquisitions other than the
transaction with Horizon/CMS. In connection with the pending acquisition of
Horizon/CMS, the Company has obtained a commitment from NationsBank, N.A. and
nine other banks for a $1,250,000,000 Senior Bridge Loan Facility on
substantially the same terms as the 1996 Credit Agreement. In addition,
NationsBank, N.A. has provided the Company with a $300,000,000 interim revolving
credit facility for working capital purposes on substantially the same terms as
the 1996 Credit Agreement, pending the closing of the Senior Bridge Loan
Facility. The Company believes that existing cash, cash flow from operations,
and borrowings under the revolving line of credit and the interim and bridge
loan facilities will be sufficient to satisfy the Company's estimated cash
requirements for the next twelve months, and for the reasonably foreseeable
future.
Inflation in recent years has not had a significant effect on the Company's
business, and is not expected to adversely affect the Company in the future
unless it increases significantly.
Statements contained in this Quarterly Report on Form 10-Q which are not
historical facts are forward-looking statements. In addition, the Company,
through its senior management, from time to time makes forward-looking public
statements concerning its expected future operations and performance and other
developments. Such forward-looking statements are necessarily estimates
reflecting the Company's best judgment based upon current information and
involve a number of risks and uncertainties, and there can be no assurance that
other factors will not affect the accuracy of such forward-looking statements.
While it is impossible to identify all such factors, factors which could cause
actual results to differ materially from those estimated by the Company include,
but are not limited to, changes in the regulation of the healthcare industry at
either or both of the federal and state levels, changes in reimbursement for the
Company's services by governmental or private payors, competitive pressures in
the healthcare industry and the Company's response thereto, the Company's
ability to obtain and retain favorable arrangements with third-party payors,
unanticipated delays in the Company's implementation of its Integrated Service
Model, general conditions in the economy and capital markets, and other factors
which may be identified from time to time in the Company's Securities and
Exchange Commission filings and other public announcements.
Page 14
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
(c) Recent Sales of Unregistered Securities
There were no sales of securities in transactions not registered
under the Securities Act of 1933, as amended, during the period
covered by this Quarterly Report on Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 1, 1997, the Annual Meeting of Stock holders of the Company was
held, at which shares of Common Stock represented at the Annual Meeting were
voted in favor of the election of Directors as follows:
FOR WITHHOLD
-------------- ----------------
1. Richard M. Scrushy 286,677,403 3,219,479
2. Phillip C. Watkins, M.D. 286,677,403 3,219,479
3. George H. Strong 286,677,403 3,219,479
4. C. Sage Givens 286,677,403 3,219,479
5. Charles W. Newhall III 286,677,403 3,219,479
6. John S. Chamberlin 286,677,403 3,219,479
7. Aaron Beam, Jr. 286,677,403 3,219,479
8. James P. Bennett 286,677,403 3,219,479
9. Larry R. House 286,677,403 3,219,479
10. Anthony J. Tanner 286,677,403 3,219,479
11. Richard F. Celeste 286,677,403 3,219,479
12. P. Daryl Brown 286,677,403 3,219,479
13. Joel C. Gordon 286,677,403 3,219,479
In addition, shares of Common Stock represented at the Annual Meeting were
voted in favor of the approval and adoption of the Company's 1997 Stock Option
Plan as follows:
Number of Shares
Voting For Against Abstain
---------------------- ---------------- ------------------- -----------------
289,497,882 272,497,820 16,485,588 913,470
Page 15
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, 1997, the Company filed no
Current Reports on Form 8-K.
No other items of Part II are applicable to the Registrant for the period
covered by this Quarterly Report on Form 10-Q.
Page 16
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, 1997 /s/ RICHARD M. SCRUSHY
--------------------------
Richard M. Scrushy
Chairman of the Board and
Chief Executive Officer
Date: August 14, 1997 /s/ AARON BEAM, JR.
--------------------------
Aaron Beam, Jr.
Executive Vice President and
Chief Financial Officer
Page 17