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 September 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 November 10, 1997
COMMON STOCK, PAR VALUE 393,640,782 SHARES
$.01 PER SHARE
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART 1 -- FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Consolidated Balance Sheets -- September 30, 1997
(Unaudited) and December 31, 1996 3
Consolidated Statements of Income (Unaudited) -- Three
Months and Nine Months Ended September 30, 1997 and 1996 5
Consolidated Statements of Cash Flows (Unaudited) -- Nine
Months Ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements (Unaudited) --
Three Months and Nine Months Ended September 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 16
Item 6. Exhibits and Reports on Form 8-K 16
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1997 1996
---------------- ----------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 189,408 $ 150,071
Other marketable securities 3,639 3,760
Accounts receivable 659,415 540,389
Inventories, prepaid expenses, and
other current assets 224,478 175,582
Deferred income taxes 19,514 15,238
---------------- ----------------
TOTAL CURRENT ASSETS 1,096,454 885,040
OTHER ASSETS 114,517 85,412
PROPERTY, PLANT AND EQUIPMENT--NET 1,659,300 1,464,833
INTANGIBLE ASSETS--NET 1,379,500 1,094,421
----------------
----------------
TOTAL ASSETS $ 4,249,771 $ 3,529,706
================ ================
Page 3
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------------ -----------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 97,158 $ 116,451
Salaries and wages payable 67,774 67,793
Accrued interest payable and other liabilities 98,155 99,118
Current portion of long-term debt 40,220 47,089
------------------ -----------------
TOTAL CURRENT LIABILITIES 303,307 330,451
LONG-TERM DEBT 1,882,466 1,513,054
DEFERRED INCOME TAXES 43,862 41,850
OTHER LONG-TERM LIABILITIES 2,655 3,558
DEFERRED REVENUE 16 406
MINORITY INTERESTS--LIMITED PARTNERSHIPS 80,054 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; 341,326,000 and 326,492,000
shares issued at September 30, 1997 and
December 31, 1996, respectively 3,413 3,265
Additional paid-in capital 1,197,230 1,060,012
Retained earnings 754,754 525,718
Treasury stock (323) (323)
Receivable from Employee Stock Ownership Plan (12,247) (14,148)
Notes receivable from stockholders (5,416) (5,423)
------------------ -----------------
TOTAL STOCKHOLDERS' EQUITY 1,937,411 1,569,101
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,249,771 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------- --------------------------------------
1997 1996 1997 1996
------------------- ------------------ ------------------ ------------------
Revenues $ 748,370 $ 651,742 $ 2,163,018 $ 1,892,745
Operating unit expenses 464,143 419,924 1,354,082 1,233,950
Corporate general and administrative expenses 19,568 18,598 55,926 56,405
Provision for doubtful accounts 19,023 15,151 51,811 43,504
Depreciation and amortization 63,743 53,902 181,259 150,858
Merger costs 0 5,513 15,875 34,452
Interest expense 27,765 23,645 81,180 72,848
Interest income (1,439) (995) (3,761) (4,513)
------------------- ------------------ ------------------ ------------------
592,803 535,738 1,736,372 1,587,504
------------------- ------------------ ------------------ ------------------
Income before income taxes and
minority interests 155,567 116,004 426,646 305,241
Provision for income taxes 52,882 39,012 145,347 101,486
------------------- ------------------ ------------------ ------------------
Income before minority interests 102,685 76,992 281,299 203,755
Minority interests (16,766) (13,511) (49,481) (38,608)
------------------- ------------------ ------------------ ------------------
Net income $ 85,919 $ 63,481 $ 231,818 $ 165,147
=================== ================== ================== ==================
Weighted average common and common
equivalent shares outstanding 356,802 342,045 351,740 342,022
=================== ================== ================== ==================
Net income per common and common
equivalent share $ 0.24 $ 0.19 $ 0.66 $ 0.48
=================== ================== ================== ==================
Net income per common share --
assuming full dilution $ 0.24 $ 0.18 $ 0.65 $ 0.48
=================== ================== ================== ==================
See accompanying notes.
Page 5
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------------
1997 1996
------------------- ---------------------
OPERATING ACTIVITIES
Net income $ 231,818 $ 165,147
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 181,259 150,858
Provision for doubtful accounts 51,811 43,504
Income applicable to minority interests of
limited partnerships 49,481 38,608
Merger costs 15,875 34,452
Provision for deferred income taxes 9,614 2,370
Provision for deferred revenue (390) (928)
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable (150,138) (127,191)
Inventories, prepaid expenses and other current
assets (47,379) 42,254
Accounts payable and accrued expenses (72,247) (75,508)
------------------- ---------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 269,704 273,566
INVESTING ACTIVITIES
Purchases of property, plant and equipment (262,110) (132,629)
Additions to intangible assets, net of effects of
acquisitions (66,641) (140,140)
Assets obtained through acquisitions, net of liabilities
assumed (234,394) (87,142)
Cash obtained through immaterial pooling of interests 0 7,534
Changes in other assets (25,849) (5,187)
Proceeds received on sale of other marketable
securities 260 292
Investments in other marketable securities (139) 0
------------------- ---------------------
NET CASH USED IN INVESTING ACTIVITIES (588,873) (357,272)
Page 6
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED - IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------------
1997 1996
------------------- ---------------------
FINANCING ACTIVITIES
Proceeds from borrowings 569,978 178,402
Principal payments on long-term debt and leases (184,256) (110,614)
Proceeds from exercise of options 22,366 24,897
Purchase of treasury stock 0 (1,215)
Reduction in receivable from Employee Stock
Ownership Plan 1,901 1,738
Decrease in loans to stockholders 7 1,091
Dividends paid 0 (857)
Proceeds from investment by minority interests 557 517
Payment of cash distributions to limited partners (52,047) (37,925)
------------------- ---------------------
NET CASH PROVIDED FROM
FINANCING ACTIVITIES 358,506 56,034
------------------- ---------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 39,337 (27,672)
Cash and cash equivalents at beginning of period 150,071 151,812
------------------- ---------------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 189,408 $ 124,140
=================== =====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 77,237 $ 60,288
Income taxes 106,699 66,976
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 NINE MONTHS ENDED SEPTEMBER 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, and its Current Report
on Form 8-K filed August 26, 1997, 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
acquisition of Horizon/CMS Healthcare Corporation (see Note 10),
the Company 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 $500,000,000 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 Senior Bridge Loan Facility was closed
on October 22, 1997, and all amounts outstanding under the
interim credit facility were repaid from proceeds under the
Senior Bridge Loan Facility on October 30, 1997.
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 September 30, 1997, and December 31, 1996, long-term debt
consisted of the following:
September 30, December 31,
1997 1996
----------------- -----------------
(in thousands)
Advances under the $1,250,000,000 1996
Credit Agreement $1,235,000 $ 995,000
Advances under the $500,000,000 interim
revolving credit facility 295,000 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 142,686 200,143
----------------- -----------------
1,922,686 1,560,143
Less amounts due within one year 40,220 47,089
----------------- -----------------
$1,882,466 $1,513,054
================= =================
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. At the time of the merger, Health Images
operated 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. 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
nine months ended September 30, 1997.
NOTE 4 -- Effective September 30, 1997, the Company acquired ASC Network
Corporation ("ASC") in a cash-for-stock merger. At the time of
the merger, ASC operated 29 outpatient surgery centers in eight
states. The total purchase price for ASC was approximately
$130,827,000, plus the assumption of approximately $74,000,000
in debt. Also during the first nine months of 1997, the Company
acquired 101 outpatient rehabilitation facilities, four
Page 9
outpatient surgery centers and five diagnostic imaging centers.
The total purchase price of the acquired facilities was
approximately $103,567,000, plus the assumption of approximately
$13,200,000 in debt. The Company also entered into non-compete
agreements totaling approximately $21,610,000 in connection with
these transactions. The cost in excess of the acquired
facilities' net asset value was approximately $297,293,000. 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 nine months of 1997, the Company granted
incentive and nonqualified stock options to certain Directors
and employees for 6,240,000 shares of Common Stock at exercise
prices ranging from $18.44 to $23.63 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 September 30, 1997,
and September 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.
NOTE 8 -- Effective July 1, 1997, the Company began expensing amounts
reflecting the costs of implementing its clinical and
administrative programs and protocols at acquired facilities in
the period in which such costs are incurred. Through June 30,
1997, the Company has capitalized such costs and amortized them
over 36 months. Such costs at June 30 aggregated $64,643,000,
net of accumulated amortization. Such capitalized costs at June
30 will be amortized in accordance with the Company's existing
policy and gave rise to gross amortization expense of
approximately $10,351,000 in the third quarter of 1997 and will
give rise to gross amortization expense of approximately
$9,978,000 in the fourth quarter of 1997. The amount of such
gross amortization expense will continue to decrease through the
second quarter of 2000, at which time all such costs will be
fully amortized.
NOTE 9 -- Through June 30, 1997, the Company has assigned value to and
capitalized organization and partnership formation costs which
have been (a) incurred by the Company, (b) obtained by the
Company in acquisitions accounted for as poolings of interest,
or (c) obtained by the Company in acquisitions accounted for as
purchases. Effective July 1, 1997, the Company will not assign
value to organization and partnership formation costs obtained
in acquisitions accounted for as purchases except to the extent
that objective evidence exists that such costs will provide
future economic benefits to the Company after the acquisition.
Such organization and partnership formation costs at June 30
which were obtained by the Company in purchase transactions
aggregated $8,380,000, net of accumulated amortization. Such
costs at June 30 will be amortized in accordance with the
Company's existing policy and gave rise to gross amortization
expense of approximately
Page 10
$1,777,000 in the third quarter of 1997 and will give rise to
gross amortization expense of approximately $1,734,000 in the
fourth quarter of 1997. The amount of such gross amortization
expense will continue to decrease through the second quarter of
2000, at which time all such costs will be fully amortized.
NOTE 10 -- Effective October 29, 1997, the Company consummated the
acquisition of Horizon/CMS Healthcare Corporation
("Horizon/CMS") in a stock-for-stock merger in which the
stockholders of Horizon/CMS received 0.84338 of a share of the
Company's common stock per share of Horizon/CMS common stock.
The transaction is valued at approximately $1,650,000,000,
including the assumption by the Company of approximately
$700,000,000 in Horizon/CMS debt. The acquisition will be
accounted for as a purchase.
On November 3, 1997, the Company entered into a definitive
agreement to sell certain non-strategic assets of Horizon/CMS to
Integrated Health Services, Inc. ("IHS"). These assets include
approximately 139 long-term care facilities, 12 specialty
hospitals, 35 institutional pharmacy locations, and over 1,000
rehabilitation therapy contracts with long-term care facilities.
The transaction is valued at approximately $1,250,000,000,
including the payment by IHS of approximately $1,150,000,000 in
cash and the assumption by IHS of approximately $100,000,000 in
debt. The Company currently anticipates that the transaction
with IHS will be consummated in late 1997 or early 1998. The
Company expects to use the proceeds of such transaction to
reduce indebtedness under the Senior Bridge Loan Facility
described in Note 2.
Page 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,
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 September 30, 1997, the Company had
over 1,370 locations in 50 states, the District of Columbia and the United
Kingdom, including approximately 880 outpatient rehabilitation locations, 99
inpatient rehabilitation facilities, four medical centers, 174 surgery centers,
77 diagnostic centers and approximately 140 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 12
RESULTS OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER 30, 1997
The Company operated approximately 880 outpatient rehabilitation locations
(which includes base facilities and satellites) at September 30, 1997, compared
to approximately 690 outpatient rehabilitation locations at September 30, 1996.
In addition, the Company operated 99 inpatient rehabilitation facilities, four
medical centers, 174 surgery centers, and 77 diagnostic centers at September 30,
1997, compared with 96 inpatient facilities, five medical centers, 131 surgery
centers and 70 diagnostic centers at September 30, 1996.
The Company's operations generated revenues of $748,370,000 for the quarter
ended September 30, 1997, an increase of $96,628,000, or 14.8%, 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 September 30, 1997, were
$724,480,000, an increase of $72,738,000, or 11.2%, as compared to the same
period in 1996. New store revenues were $23,890,000. Revenues generated from
patients under Medicare and Medicaid plans respectively accounted for 36.4% and
2.3% of revenue for the third quarter of 1997, compared to 37.2% and 3.0% 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 16.2%, 9.5%, 6.8% and 12.4%, respectively. Revenue
per outpatient visit, inpatient day, surgical case and diagnostic case for same
store operations increased (decreased) by 1.0%, (0.3)%, 0.1% and 2.9%,
respectively.
Operating expenses, at the operating unit level, were $464,143,000, or
62.0% of revenues, for the quarter ended September 30, 1997, compared to 64.4%
of revenues for the third quarter of 1996. The decrease in operating expenses as
a percentage of revenues is primarily attributable to the 11.2% 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 $449,035,000, or
62.0% of comparable revenue. New store operating expenses were $15,108,000, or
62.7% of comparable revenue. Corporate general and administrative expenses
increased from $18,598,000 during the 1996 quarter to $19,568,000 during the
1997 quarter. As a percentage of revenue, corporate general and administrative
expenses decreased from 2.9% in the 1996 quarter to 2.6% in the 1997 quarter.
The provision for doubtful accounts was $19,023,000, or 2.5% of revenues, for
the third quarter of 1997, compared to $15,151,000, 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 $63,743,000 for the quarter ended
September 30, 1997, compared to $53,902,000 for the same period in 1996. The
increase represents the investment in additional assets by the Company. Interest
expense was $27,765,000 for the quarter ended September 30, 1997, compared to
$23,645,000 for the quarter ended September 30, 1996. For the third quarter of
1997, interest income was $1,439,000, compared to $995,000 for the third quarter
of 1996.
Income before minority interests and income taxes for the third quarter of
1997 was $155,567,000, compared to $116,004,000 for the same period in 1996.
Minority interests decreased income before income taxes by $16,766,000 for the
quarter ended September 30, 1997, compared to decreasing income before income
taxes by $13,511,000 for the third quarter of 1996. The provision for income
taxes for the third quarter of 1997 was $52,882,000, compared to $39,012,000 for
the same period in 1996, resulting in effective tax rates of 38.1% and 38.1%,
respectively. Net income for the third quarter of 1997 was $85,919,000, compared
to $63,481,000 for the third quarter of 1996.
Page 13
RESULTS OF OPERATIONS --NINE MONTHS ENDED SEPTEMBER 30, 1997
Revenues for the nine months ended September 30, 1997, were $2,163,018,000,
an increase of $270,273,000, or 14.3%, over the nine months ended September 30,
1996. Same store revenues were $2,118,013,000, an increase of $225,268,000, or
11.9%, as compared to the same period in 1996. New store revenues were
$45,005,000. Revenues generated from patients under Medicare and Medicaid plans
respectively accounted for 37.4% and 2.3% of revenue for the first nine months
of 1997, compared to 37.8% and 2.9% for the same period in 1996. Revenues from
any other single third-party payor were not significant in relation to the
Company's revenues. During the first nine months of 1997, same store outpatient
visits, inpatient days, surgical cases and diagnostic cases increased 16.4%,
11.8%, 6.9% and 14.4%, respectively. Revenue per outpatient visit, inpatient
day, surgical case and diagnostic case for same store operations increased
(decreased) by 1.8%, (0.9)%, 0.3% and 3.7%, respectively.
Operating expenses, at the operating unit level, were $1,354,082,000, or
62.6% of revenues, for the nine months ended September 30, 1997, as compared to
$1,233,950,000, or 65.2% of revenues, for the first nine months of 1996. Same
store operating expenses were $1,325,054,000, or 62.6% of comparable revenue.
New store operating expenses were $29,028,000, or 64.5% 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 nine
months ended September 30, 1997, was $231,818,000, compared to $165,147,000 for
the same period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had working capital of $793,147,000,
including cash and marketable securities of $193,047,000. Working capital at
December 31, 1996, was $554,589,000, including cash and marketable securities of
$153,831,000. For the first nine months of 1997, cash provided by operations was
$269,704,000, compared to $273,566,000 for the same period in 1996. Additions to
property, plant, and equipment and acquisitions accounted for $262,110,000 and
$234,394,000, respectively, during the first nine months of 1997. Those same
investing activities accounted for $132,629,000 and $87,142,000, respectively,
in the same period in 1996. Financing activities provided $358,506,000 and
$56,034,000 during the first nine months of 1997 and 1996, respectively. Net
borrowing proceeds (borrowing less principal reductions) for the first nine
months of 1997 and 1996 were $385,722,000 and $67,788,000, respectively.
Accounts receivable were $659,415,000 at September 30, 1997, compared to
$540,389,000 at December 31, 1996. The number of days of average quarterly
revenues in ending receivables at September 30, 1997, was 79.4, 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 September 30, 1997, is consistent with the
related concentration of revenues for the period then ended.
At September 30, 1997, the Company had a $1,250,000,000 revolving line of
credit with NationsBank, N.A. 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 5.96%
for the nine months ended September 30, 1997, compared to the average prime rate
of 8.42% during the same period. At September 30, 1997, the Company had drawn
$1,235,000,000 under the 1996 Credit Agreement and $295,000,000 under the
interim revolving credit facility described below.
Effective October 29, 1997, the Company consummated the acquisition of
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 14
common stock. The transaction is valued at approximately $1,650,000,000,
including the assumption by the Company of approximately $700,000,000 in
Horizon/CMS debt. The acquisition will be accounted for as a purchase.
On November 3, 1997, the Company entered into a definitive agreement to
sell certain non-strategic assets of Horizon/CMS to Integrated Health Services,
Inc. ("IHS"). These assets include approximately 139 long-term care facilities,
12 specialty hospitals, 35 institutional pharmacy locations, and over 1,000
rehabilitation therapy contracts with long-term care facilities. The transaction
is valued at approximately $1,250,000,000, including the payment by IHS of
approximately $1,150,000,000 in cash and the assumption by IHS of approximately
$100,000,000 in debt. The Company currently anticipates that the transaction
with IHS will be consummated in late 1997 or early 1998. The Company expects to
use the proceeds of such transaction to reduce indebtedness under the Senior
Bridge Loan Facility described below.
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 $100,000,000 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. In connection with the
acquisition of Horizon/CMS, the Company 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 $500,000,000 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 Senior Bridge Loan Facility was closed on October 22, 1997, and
all amounts outstanding under the interim credit facility were repaid from
proceeds under the Senior Bridge Loan Facility on October 30, 1997. 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 15
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 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 September 30, 1997, the Company filed a
Current Report on Form 8-K on August 26, 1997, as amended on September
25, 1997, reporting under Item 5 the restatement of the Company's
audited consolidated financial statements at December 31, 1995 and
1996 and for the years ended December 31, 1994, 1995 and 1996 and the
resulting revisions to Management's Discussion and Analysis of
Financial Condition and Results of Operations to reflect the Company's
acquisition of Health Images, Inc. in a transaction accounted for as a
pooling of interests.
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: November 14, 1997 RICHARD M. SCRUSHY
--------------------------
Richard M. Scrushy
Chairman of the Board and
Chief Executive Officer
Date: November 14, 1997 MICHAEL D. MARTIN
-------------------------------------
Michael D. Martin
Executive Vice President,
Chief Financial Officer and Treasurer
Page 17