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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
|X| Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required] For the fiscal year ended December
31, 1995; or
| | Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] For the transition period from
______ to ______
Commission File Number 1-10315
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HEALTHSOUTH Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware 63-0860407
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(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
Two Perimeter Park South
Birmingham, Alabama 35243
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(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, Including Area Code: (205) 967-7116
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Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
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Common Stock, par value New York Stock Exchange
$.01 per share
9.5% Senior Subordinated New York Stock Exchange
Notes due 2001
5% Convertible Subordinated New York Stock Exchange
Debentures due 2001
Securities Registered Pursuant to Section 12(g) of the Act: NONE
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 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. | |
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant as of March 15, 1996:
Common Stock, par value $.01 per share -- $5,339,826,576
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 15, 1996
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Common Stock, par value
$.01 per share 152,483,607 shares
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Annual Report on Form 10-K.
PART I
Item 1. Business.
General
HEALTHSOUTH Corporation ("HEALTHSOUTH" or the "Company) is the nation's
largest provider of outpatient and rehabilitative healthcare services. The
Company provides these services through its national network of outpatient and
inpatient rehabilitation facilities, outpatient surgery centers, medical centers
and other healthcare facilities. The Company believes that it provides patients,
physicians and payors with high-quality healthcare services at significantly
lower costs than traditional inpatient hospitals. Additionally, the Company's
national network, reputation for quality and focus on outcomes has enabled it to
secure contracts with national and regional managed care payors. At January 31,
1996, the Company had over 700 patient care locations in 42 states and the
District of Columbia.
In its outpatient and inpatient rehabilitation facilities, the Company
provides interdisciplinary programs for the rehabilitation of patients
experiencing disability due to a wide variety of physical conditions, such as
stroke, head injury, orthopaedic problems, neuromuscular disease and
sports-related injuries. The Company's rehabilitation services include physical
therapy, sports medicine, work hardening, neurorehabilitation, occupational
therapy, respiratory therapy, speech-language pathology and rehabilitation
nursing. Independent studies have shown that rehabilitation services like those
provided by the Company can save money for payors and employers.
The Company operates the largest network of free-standing outpatient
surgery centers in the United States. The Company's outpatient surgery centers
provide the facilities and medical support staff necessary for physicians to
perform non-emergency surgical procedures. While outpatient surgery is widely
recognized as generally less expensive than surgery performed in a hospital, the
Company believes that outpatient surgery performed at a free-standing outpatient
surgery center is generally less expensive than hospital-based outpatient
surgery. Approximately 80% of the Company's surgery center facilities are
located in markets served by its rehabilitative service facilities, enabling the
Company to pursue opportunities for cross-referrals.
Over the last two years, the Company has completed several significant
acquisitions in the rehabilitation business and has expanded into the surgery
center business. The Company believes that these acquisitions complement its
historical operations and enhance its market position. The Company further
believes that its expansion into the outpatient surgery business provides it
with a platform for future growth. The Company is continually evaluating
potential acquisitions in the outpatient and rehabilitative healthcare services
industry.
The Company was organized as a Delaware corporation in February 1984.
The Company's principal executive offices are located at Two Perimeter Park
South, Birmingham, Alabama 35243, and its telephone number is (205) 967-7116.
Company Strategy
The Company's principal objective is to be the provider of choice for
patients, physicians and payors alike for outpatient and rehabilitative
healthcare services throughout the United States. The Company's growth strategy
is based upon four primary elements: (i) the implementation of the Company's
integrated service model in appropriate markets, (ii) successful marketing to
managed care organizations and other payors, (iii) the provision of
high-quality, cost-effective healthcare services, and (iv) the expansion of its
national network.
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o Integrated Service Model. The Company seeks, where appropriate, to
provide an integrated system of healthcare services, including
outpatient rehabilitation services, inpatient rehabilitation services,
ambulatory surgery services and outpatient diagnostic services. The
Company believes that its integrated system offers payors the
convenience of dealing with a single provider for multiple services.
Additionally, it believes that its facilities can provide extensive
referral opportunities. For example, the Company estimates that
approximately one-third of its outpatient rehabilitation patients have
had outpatient surgery, virtually all inpatient rehabilitation patients
will require some form of outpatient rehabilitation, and virtually all
inpatient rehabilitation patients have had some type of diagnostic
procedure. The Company has implemented its Integrated Service Model in
certain of its markets, and intends to expand the model into other
appropriate markets.
o Marketing to Managed Care Organizations and Other Payors. Since the
late 1980s, the Company has focused on the development of contractual
relationships with managed care organizations, major insurance
companies, large regional and national employer groups and provider
alliances and networks. The Company's documented outcomes and
experience with several hundred thousand patients in delivering quality
healthcare services at reasonable prices has enhanced its
attractiveness to such entities and has given the Company a competitive
advantage over smaller and regional competitors. These relationships
have increased patient flow to the Company's facilities and contributed
to the Company's same-store growth.
o Cost-Effective Services. The Company's goal is to provide high-quality
healthcare services in cost-effective settings. To that end, the
Company has developed standardized clinical protocols for the treatment
of its patients. This results in "best practices" techniques being
utilized at all of the Company's facilities, allowing the consistent
achievement of demonstrable, cost-effective clinical outcomes. The
Company's reputation for its clinical programs is enhanced through its
relationships with major universities throughout the nation, and its
support of clinical research in its facilities. Further, independent
studies estimate that, for every dollar spent on rehabilitation, $11 to
$35 is saved. Finally, surgical procedures typically are less expensive
in outpatient surgery centers than in hospital settings. The Company
believes that outpatient and rehabilitative healthcare services will
assume increasing importance in the healthcare environment as payors
continue to seek to reduce overall costs by shifting patients to more
cost-effective treatment settings.
o Expansion of National Network. As the largest provider of outpatient
and rehabilitative healthcare services in the United States, the
Company is able to realize economies of scale and compete successfully
for national contracts with large payors and employers while retaining
the flexibility to respond to particular needs of local markets. The
national network affords the Company the opportunity to offer large
national and regional employers and payors the convenience of dealing
with a single provider, to utilize greater buying power through
centralized purchasing, to achieve more efficient costs of capital and
labor and to more effectively recruit and retain clinicians. The
Company believes that its recent and pending acquisitions in the
outpatient surgery and diagnostic imaging fields will further enhance
its national presence by broadening the scope of its existing services
and providing new opportunities for growth. These national benefits are
realized without sacrificing local market responsiveness. The Company's
objective is to provide those outpatient and rehabilitative healthcare
services needed within each local market by tailoring its services and
facilities to that market's needs, thus bringing the benefits of
nationally recognized expertise and quality into the local setting.
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Recent Acquisitions
In 1995 and early 1996, the Company consummated a series of significant
acquisitions. During 1995, the Company consummated pooling-of-interests mergers
with Surgical Health Corporation ("SHC"; 37 outpatient surgery centers in 11
states) and Sutter Surgery Centers, Inc. ("SSCI"; 12 outpatient surgery centers
in three states), as well as stock purchase acquisitions of the rehabilitation
hospitals division of NovaCare, Inc. ("NovaCare"; 11 inpatient rehabilitation
facilities, 12 other healthcare facilities and two Certificates of Need in eight
states) and Caremark Orthopedic Services Inc. ("Caremark"; 120 outpatient
rehabilitation facilities in 13 states). In addition, the Company entered into
agreements to acquire Surgical Care Affiliates, Inc. ("SCA"; 67 outpatient
surgery centers in 24 states) and Advantage Health Corporation ("Advantage
Health"; approximately 150 inpatient and outpatient rehabilitation facilities in
11 states) in pooling-of-interests transactions, which transactions were
consummated in January 1996 and March 1996 respectively. Information on the
Company's facilities included herein includes all of the acquired facilities
other than the Advantage Health facilities. The NovaCare, Caremark and Advantage
Health transactions have further enhanced the Company's position as the nation's
largest provider of inpatient and outpatient rehabilitative services, while the
SHC, SSCI and SCA transactions have made the Company the largest provider of
outpatient surgery services in the nation. The Company believes that the
geographic dispersion of the more than 850 locations (giving effect to the
Advantage Health acquisition) now operated by the Company makes it more
attractive to managed care networks, major insurance companies, regional and
national employers and regional provider alliances and enhances the Company's
ability to implement its Integrated Service Model in additional markets. See
Item 7, "Management's Discussion and Analysis of Financial Conditions and
Results of Operations".
Industry Background
In 1991 (the most recent year for which data are available),
approximately 4,000,000 people in the United States received rehabilitative
healthcare services. "Rehabilitative healthcare services" refers to the range of
skilled services provided to individuals in order to minimize physical and
cognitive impairments, maximize functional ability and restore lost functional
capacity. The focus of rehabilitative healthcare is to ameliorate physical and
cognitive impairments resulting from illness or injury, and to restore or
improve functional ability so that individuals can return to work and lead
independent and fulfilling lives. Typically, rehabilitative healthcare services
are provided by a variety of healthcare professionals including physiatrists,
rehabilitation nurses, physical therapists, occupational therapists,
speech-language pathologists, respiratory therapists, recreation therapists,
social workers, psychologists, rehabilitation counselors and others. Over 80% of
those receiving rehabilitative healthcare services return to their homes, work,
schools or active retirement.
Demand for rehabilitative healthcare services continues to be driven by
advances in medical technologies, an aging population and the recognition on the
part of the payor community (insurers, self-insured companies, managed care
organizations and federal, state and local governments) that appropriately
administered rehabilitative services can improve quality of life as well as
lower overall healthcare costs. Studies conducted by insurance companies
demonstrate the ability of rehabilitation to significantly reduce the cost of
future care. Estimates of the savings range from $11 to $30 per dollar spent on
rehabilitation. Further, reimbursement changes have encouraged the rapid
discharge of patients from acute-care hospitals while they remain in need of
rehabilitative healthcare services.
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Patient Care Services
The Company began its operations in 1984 with a focus on providing
comprehensive orthopaedic and musculoskeletal rehabilitation services on an
outpatient basis. Over the succeeding 12 years, the Company has consistently
sought and implemented opportunities to expand its services through acquisitions
and de novo development activities that complement its historic focus on
orthopaedic, sports medicine and occupational medicine services and that provide
independent platforms for growth. The Company's acquisitions and internal growth
have enabled it to become the largest provider of rehabilitative healthcare
services, both inpatient and outpatient, in the United States. In addition, the
Company has added outpatient surgery services, diagnostic imaging services and
other outpatient services which provide natural enhancements to its
rehabilitative healthcare locations and facilitate the implementation of its
Integrated Service Model. The Company believes that these additional businesses
also provide opportunities for growth in other areas not directly related to the
rehabilitative business, and the Company intends to pursue further expansion in
those businesses.
Rehabilitative Services: General
When a patient is referred to one of the Company's rehabilitation
facilities, he undergoes an initial evaluation and assessment process that
results in the development of a rehabilitation care plan designed specifically
for that patient. Depending upon the patient's disability, this evaluation
process may involve the services of a single discipline, such as physical
therapy for a knee injury, or of multiple disciplines, as in the case of a
complicated stroke patient. HEALTHSOUTH has developed numerous rehabilitation
programs, which include stroke, head injury, spinal cord injury, neuromuscular
and work injury, that combine certain services to address the needs of patients
with similar disabilities. In this way, all of the facilities' patients,
regardless of the severity and complexity of their disabilities, can receive the
level and intensity of those services necessary for them to be restored to as
productive, active and independent a lifestyle as possible.
Outpatient Rehabilitation Services
The Company operates the largest group of affiliated proprietary
outpatient rehabilitation facilities in the United States. The Company's
outpatient rehabilitation centers offer a comprehensive range of rehabilitative
healthcare services, including physical therapy and occupational therapy, that
are tailored to the individual patient's needs, focusing predominantly on
orthopaedic injuries, sports injuries, work injuries, hand and upper extremity
injuries, back injuries, and various neurological neuromuscular conditions. As
of January 31, 1996, the Company provided outpatient rehabilitative healthcare
services through approximately 500 outpatient locations, including freestanding
outpatient centers and their satellites and outpatient satellites of inpatient
facilities.
The continuing emphasis on containing the increases in healthcare
costs, as evidenced by Medicare's prospective payment system, the growth in
managed care and the various alternative healthcare reform proposals, results in
the early discharge of patients from acute-care facilities. As a result, many
hospital patients do not receive the intensity of services that may be necessary
for them to achieve a full recovery from their diseases, disorders or traumatic
conditions. The Company's outpatient rehabilitation services play a significant
role in the continuum of care because they provide hospital-level services, in
terms of intensity, quality and frequency, in a more cost- efficient setting.
Patients treated at the Company's outpatient centers will undergo
varying courses of therapy depending upon their needs. Some patients may only
require a few hours of therapy per week for a few weeks, while others may spend
up to five hours per day in therapy for six months or more, depending on the
nature, severity and complexity of their injuries.
In general, the Company initially establishes an outpatient center in a
given market, either by acquiring an existing private therapy practice or
through de novo development, and institutes its clinical protocols and programs
in response to the community's general need for services. The Company will then
establish satellite clinics that are
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dependent upon the main facility for management and administrative services.
These satellite clinics generally provide a specific evaluative or specialty
service/program, such as hand therapy or foot and ankle therapy, in response to
specific market demands. The Company's outpatient rehabilitation facilities
range in size from 1,200 square feet for specialty clinics to 20,000 square feet
for large, full-service facilities. Currently, the typical outpatient facility
configuration ranges in size from 2,000 to 5,000 square feet and costs less than
$500,000 to build and equip.
Patient utilization of the Company's outpatient rehabilitation
facilities cannot be measured in the conventional manner applied to acute-care
hospitals, nursing homes and other healthcare providers which have a fixed
number of licensed beds and serve patients on a 24-hour basis. Utilization
patterns in outpatient rehabilitation facilities will be affected by the market
to be served, the types of injuries treated, the patient mix and the number of
available therapists, among other factors. Moreover, because of variations in
size, location, hours of operation, referring physician base and services
provided and other differences among each of the Company's outpatient
facilities, it is not possible to accurately assess patient utilization against
a norm.
Inpatient Services
Inpatient Rehabilitation Facilities. At January 31, 1996, the Company
operated 77 inpatient rehabilitation facilities with 4,618 beds, representing
the largest group of affiliated proprietary inpatient rehabilitation facilities
in the United States. The Company's inpatient rehabilitation facilities provide
high-quality comprehensive services to patients who require intensive
institutional rehabilitation care.
Inpatient rehabilitation patients are typically those who are
experiencing significant physical disabilities due to various conditions, such
as head injury, spinal cord injury, stroke, certain orthopaedic problems and
neuromuscular disease. The Company's inpatient rehabilitation facilities provide
the medical, nursing, therapy and ancillary services required to comply with
local, state and federal regulations as well as accreditation standards of the
Joint Commission on Accreditation of Healthcare Organizations (the "JCAHO") and
the Commission on Accreditation of Rehabilitation Facilities ("CARF").
All of the Company's inpatient rehabilitation facilities utilize an
interdisciplinary team approach to the rehabilitation process and involve the
patient and family, as well as the payor, in the determination of the goals for
the patient. Internal case managers monitor each patient's progress and provide
documentation of patient status, achievement of goals, functional outcomes and
efficiency.
The Company acquires or develops inpatient rehabilitation facilities in
those communities where it believes there is a demonstrated need for
comprehensive inpatient rehabilitation services. Depending upon the specific
market opportunity, these facilities may be licensed as rehabilitation hospitals
or skilled nursing facilities. The Company believes that it can provide
high-quality rehabilitation services in either type of facility, but prefers to
utilize the rehabilitation hospital form.
In certain markets where it does not provide free-standing outpatient
facilities, the Company's rehabilitation hospitals may provide outpatient
rehabilitation services as a complement to their inpatient services. Typically,
this opportunity arises when patients complete their inpatient course of
treatment but remain in need of additional therapy that can be accomplished on
an outpatient basis. Depending upon the demand for outpatient services and
physical space constraints, the rehabilitation hospital may establish the
services either within its building or in a satellite location. In either case,
the clinical protocols and programs developed for use in the free-standing
outpatient centers will be utilized by these facilities.
The Company's Nashville, Tennessee (Vanderbilt University), Memphis,
Tennessee (Methodist Hospitals), Dothan, Alabama (Southeast Alabama Medical
Center) and Charleston, South Carolina (North Trident Regional Medical Center)
hospital facilities have been developed in conjunction with local tertiary-care
facilities. This
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strategy of developing effective referral and service networks prior to opening
results in improved operating efficiencies for the new facilities. The Company
is utilizing this same concept in rehabilitation hospitals under development
with the University of Missouri and the University of Virginia.
Medical Centers. The Company operates five medical centers with 912
licensed beds in four distinct markets. These facilities provide general and
specialty medical and surgical healthcare services, emphasizing orthopaedics,
sports medicine and rehabilitation.
The Company acquired its five medical centers as outgrowths of its
rehabilitative healthcare services. Often, patients require medical and surgical
interventions prior to the initiation of their rehabilitative care. In each of
the markets in which the Company has acquired a medical center, the Company had
well-established relationships with the medical communities serving each
facility. In addition, each of the facilities enjoyed well-established
reputations in orthopaedics and/or sports medicine prior to their acquisition by
the Company. Following the acquisition of each of its medical centers, the
Company has provided the resources to improve upon the physical plant and expand
services through the introduction of new technology. The Company has also
developed additional relationships between these facilities and certain
university facilities, including the University of Miami, Auburn University and
the University of Alabama at Birmingham. Through these relationships, the influx
of celebrity athletes and personalities and the acquisition of new technology,
all five medical centers have improved their operating efficiencies and enhanced
census.
Each of the five medical center facilities is licensed as an acute-care
hospital, is accredited by the JCAHO and participates in the Medicare
prospective payment system. See this Item, "Business -- Regulation".
Inpatient Facility Utilization. In measuring patient utilization of the
Company's inpatient facilities, various factors must be considered. Due to
market demand, demographics, start-up status, renovation, patient mix and other
factors, the Company may not treat all licensed beds in a particular facility as
available beds, which sometimes results in a material variance between licensed
beds and beds actually available for utilization at any specific time. The
Company is in a position to increase the number of available beds at such
facilities as market conditions dictate. During the year ended December 31,
1995, the Company's inpatient facilities achieved an overall utilization, based
on patient days and available beds, of 70.5%.
Surgery Centers
As a result of the acquisitions of SHC, SSCI and SCA in 1995 and early
1996, the Company became the largest operator of outpatient surgery centers in
the United States. It currently operates 123 free-standing surgery centers,
including five mobile lithotripsy units, in 30 states, and has an additional ten
free-standing surgery centers under development. Approximately 80% of these
facilities are located in markets served by the Company outpatient and
rehabilitative service facilities, enabling the Company to pursue opportunities
for cross-referrals between surgery and rehabilitative facilities as well as to
centralize administrative functions. The Company's surgery centers provide the
facilities and medical support staff necessary for physicians to perform
non-emergency surgical procedures. Its typical surgery center is a free-standing
facility with three to six fully equipped operating and procedure rooms and
ancillary areas for reception, preparation, recovery and administration. Each of
the Company's surgery centers is available for use only by licensed physicians,
oral surgeons and podiatrists, and the centers do not perform surgery on an
emergency basis.
Outpatient surgery centers, unlike hospitals, have not historically
provided overnight accommodations, food services or other ancillary services.
Over the past several years, states have increasingly permitted the use of
extended-stay recovery facilities by outpatient surgery centers. As a result,
many outpatient surgery centers are adding extended recovery care capabilities
where permitted. Fifty-two of the Company's surgery centers currently provide
for extended recovery stays. The Company's ability to develop such recovery care
facilities is dependent upon state regulatory environments in the particular
states where its centers are located.
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The Company's outpatient surgery centers implement quality control
procedures to evaluate the level of care provided the centers. Each center has a
medical advisory committee of three to ten physicians which reviews the
professional credentials of physicians applying for medical staff privileges at
the center.
Other Patient Care Services
In certain of its markets, the Company provides other patient care
services, including home healthcare, diagnostic services, physician services and
contract management of hospital-based rehabilitative healthcare services. The
Company evaluates market opportunities on a case-by-case basis in determining
whether to provide additional services of these types, which may be
complementary to facility-based services provided by the Company or stand-alone
businesses.
Marketing of Facilities and Services
The Company markets its facilities, and their services and programs, on
local, regional and national levels. Local and regional marketing activities are
typically coordinated by facility-based marketing personnel, whereas large-scale
regional and national efforts are coordinated by corporate-based personnel.
In general, the Company develops a marketing plan for each facility
based on a variety of factors, including population characteristics, physician
characteristics and incidence of disability statistics, in order to identify
specific service opportunities. Facility-oriented marketing programs are focused
on increasing the volume of patient referrals to the specific facility and
involve the development of ongoing relationships with area schools, businesses
and industries as well as physicians, health maintenance organizations and
preferred provider organizations.
The Company's larger-scale marketing activities are focused more
broadly on efforts to generate patient referrals to multiple facilities and the
creation of new business opportunities. Such activities include the development
and maintenance of contractual relationships or national pricing agreements with
large third-party payors, such as CIGNA, Metrahealth or other national insurance
companies, with national HMO/PPO companies, such as
Healthcare-COMPARE/AFFORDABLE, Hospital Network of America and Multiplan, with
national case management companies, such as INTRACORP and Crawford & Co., and
with national employers, such as Wal-Mart, Georgia-Pacific Corporation, Dillard
Department Stores, Goodyear Tire & Rubber and Winn-Dixie. In addition, since
many of the facilities acquired by the Company during the past two years had
very limited contractual relationships with payors, managed care providers,
employers and others, the Company is expanding its existing payor relationships
to include these facilities.
The Company carries out broader programs designed to further enhance
its public image. Among these is the HEALTHSOUTH Sports Medicine Council, headed
by Bo Jackson, which is dedicated to developing educational programs focused on
athletics for use in high schools. The Company has ongoing relationships with
the Ladies Professional Golf Association, the Southeastern Conference and more
than 400 universities, colleges and high schools to provide sports medicine
coverage of events and rehabilitative healthcare services for injured athletes.
In addition, the Company has established relationships with or provided
treatment services for athletes from some 35 to 40 major professional sports
teams, as well as providing sports medicine services for Olympic and amateur
athletes.
The Company is a national sponsor of the United Cerebral Palsy
Association and the National Arthritis Foundation and supports many other
charitable organizations on national and local levels. Through these endeavors,
the Company provides its employees with opportunities to support their
communities.
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Sources of Revenues
Private pay revenue sources represent the majority of the Company's
revenues. The following table sets forth the percentages of the Company's
revenues from various sources for the periods indicated:
Year Ended Year Ended
Source December 31, 1994 December 31, 1995
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Medicare ................................. 41.0% 40.0%
Commercial (1) ........................... 34.1 34.8
Workers' Compensation..................... 10.9 10.3
All Other Payors (2)...................... 14.0 14.9
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100.0% 100.0%
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(1) Includes commercial insurance, HMOs, PPOs and other managed care plans.
(2) Medicaid is included in this category, but is insignificant in amount.
The above table does not reflect the facilities acquired from ReLife,
Inc. ("ReLife") in 1994, the SHC facilities and the SSCI facilities for
periods or portions thereof prior to the effective date of the
acquisitions. Comparable information for the ReLife, SHC and SSCI
facilities is not available and is not reflected in either year in the
table.
See this Item "Business -- Regulation -- Medicare Participation and
Reimbursement" for a description of the reimbursement regulations applicable to
the Company's facilities.
Competition
The Company competes in the geographic markets in which its facilities
are located. In addition, the Company's rehabilitation facilities compete on a
regional and national basis with other providers of specialized services such as
sports medicine and work hardening, and specific concentrations such as head
injury rehabilitation and orthopaedic surgery. The competition faced in each of
these markets is similar, with variations arising from the number of healthcare
providers in the given metropolitan area. The primary competitive factors in the
rehabilitation services business are quality of services, projected patient
outcomes, charges for services, responsiveness to the needs of the patients,
community and physicians, and ability to tailor programs and services to meet
specific needs of the patients. Competitors and potential competitors include
hospitals, private practice therapists, rehabilitation agencies and others. Some
of these competitors may have greater patient referral support and financial and
personnel resources in particular markets than the Company. Management believes
that the Company competes successfully within the marketplace based upon its
reputation for quality, competitive prices, positive rehabilitation outcomes,
innovative programs, clean and bright facilities and responsiveness to needs.
The Company's medical centers are located in four urban areas of the
country, all with well established healthcare services provided by a number of
proprietary, not-for-profit, and municipal hospital facilities. The Company's
facilities compete directly with these local hospitals as well as various
nationally recognized centers of excellence in orthopaedics, sports medicine and
other specialties. Because the Company's facilities enjoy a national and
international reputation for orthopaedic surgery and sports medicine, the
Company believes that its medical centers' level of service and continuum of
care enable them to compete successfully, both locally and nationally.
The Company's surgery centers compete primarily with hospitals and
other operators of freestanding surgery centers in attracting physicians and
patients, and in developing new centers and in acquiring existing centers. The
primary competitive factors in the outpatient surgery business are convenience,
cost, quality of service,
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physician loyalty and reputation. Hospitals have many competitive advantages in
attracting physicians and patients, including established standing in a
community, historical physician loyalty and convenience for physicians making
rounds or performing inpatient surgery in the hospital. However, the Company
believes that its national market system and its historical presence in certain
of the markets where its surgery centers are located will enhance the Company's
ability to operate these facilities successfully.
The Company potentially faces competition any time it initiates a
Certificate of Need ("CON") project or seeks to acquire an existing facility or
CON. See this Item, "Business -- Regulation". This competition may arise either
from competing companies, national or regional, or from local hospitals which
file competing applications or oppose the proposed CON project. The necessity
for these approvals serves as a barrier to entry and has the potential to limit
competition by creating a franchise to provide services to a given area. To date
the Company has been successful in obtaining each of the CONs or similar
approvals which it has sought, although there can be no assurance that it will
achieve similar success in the future.
Regulation
The healthcare industry is subject to regulation by federal, state and
local governments. The various levels of regulatory activity affect the
Company's business activities by controlling its growth, requiring licensure or
certification of its facilities, regulating the use of its properties and
controlling the reimbursement to the Company for services provided.
Licensure, Certification and Certificate of Need Regulations
Capital expenditures for the construction of new facilities, the
addition of beds or the acquisition of existing facilities may be reviewable by
state regulators under a statutory scheme which is sometimes referred to as a
CON program. States with CON programs place limits on the construction and
acquisition of healthcare facilities and the expansion of existing facilities
and services. In such states, approvals are required for capital expenditures
exceeding certain amounts which involve inpatient rehabilitation facilities or
services. Outpatient rehabilitation facilities and services do not require such
approvals in a majority of states.
State CON statutes generally provide that, prior to the addition of new
beds, the construction of new facilities or the introduction of new services, a
state health planning designated agency (a "SHPDA") must determine that a need
exists for those beds, facilities or services. The CON process is intended to
promote comprehensive healthcare planning, assist in providing high quality
healthcare at the lowest possible cost and avoid unnecessary duplication by
ensuring that only those healthcare facilities that are needed will be built.
Typically, the provider of services submits an application to the
appropriate SHPDA with information concerning the area and population to be
served, the anticipated demand for the facility or service to be provided, the
amount of capital expenditure, the estimated annual operating costs, the
relationship of the proposed facility or service to the overall state health
plan and the cost per patient day for the type of care contemplated. Whether the
CON is granted is based upon a finding of need by the SHPDA in accordance with
criteria set forth in CON statutes and state and regional health facilities
plans. If the proposed facility or service is found to be necessary and the
applicant to be the appropriate provider, the SHPDA will issue a CON containing
a maximum amount of expenditure and a specific time period for the holder of the
CON to implement the approved project.
Licensure and certification are separate, but related, regulatory
activities. The former is usually a state or local requirement and the latter is
a federal requirement. In almost all instances, licensure and certification will
follow specific standards and requirements that are set forth in readily
available public documents. Compliance with the requirements is monitored by
annual on-site inspections by representatives of various government agencies.
All of the Company's inpatient rehabilitation facilities and medical centers and
substantially all of the Company's surgery centers are currently required to be
licensed, but only the outpatient rehabilitation facilities located in
- 10 -
Alabama, Arizona, Connecticut, Maryland, Massachusetts and New Hampshire
currently must satisfy such a licensing requirement.
Medicare Participation and Reimbursement
In order to participate in the Medicare program and receive Medicare
reimbursement, each facility must comply with the applicable regulations of the
United States Department of Health and Human Services relating to, among other
things, the type of facility, its equipment, its personnel and its standards of
medical care, as well as compliance with all state and local laws and
regulations. All of the Company's inpatient facilities, except for the St. Louis
head injury center, participate in the Medicare program. Approximately 165 of
the Company's outpatient rehabilitation facilities currently participate in, or
are awaiting the assignment of a provider number to participate in, the Medicare
program. All of the Company's surgery centers are certified (or awaiting
certification) under the Medicare program. Its Medicare-certified facilities,
inpatient and outpatient, undergo annual on-site Medicare certification surveys
in order to maintain their certification status. Failure to comply with the
program's conditions of participation may result in loss of program
reimbursement or other governmental sanctions. All such facilities have been
deemed to be in satisfactory compliance on all applicable surveys. The Company
has developed its operational systems to assure compliance with the various
standards and requirements of the Medicare program and has established ongoing
quality assurance activities to monitor compliance. The Company believes that
all of such facilities currently meet all applicable Medicare requirements.
As a result of the Social Security Act Amendments of 1983, Congress
adopted a prospective payment system ("PPS") to cover the routine and ancillary
operating costs of most Medicare inpatient hospital services. Under this system,
the Secretary of Health and Human Services has established fixed payment amounts
per discharge based on diagnosis-related groups ("DRGs"). With limited
exceptions, a hospital's payment for Medicare inpatients is limited to the DRG
rate, regardless of the number of services provided to the patient or the length
of the patient's hospital stay. Under PPS, a hospital may retain the difference,
if any, between its DRG rate and its operating costs incurred in furnishing
inpatient services, and is at risk for any operating costs that exceed its DRG
rate. The Company's medical center facilities are generally subject to PPS with
respect to Medicare inpatient services.
The PPS program has been beneficial for the rehabilitation segment of
the healthcare industry because of the economic pressure on acute-care hospitals
to discharge patients as soon as possible. The result has been increased demand
for rehabilitation services for those patients discharged early from acute-care
hospitals. Outpatient rehabilitation services and free-standing inpatient
rehabilitation facilities are currently exempt from PPS, and inpatient
rehabilitation units within acute-care hospitals are eligible to obtain an
exemption from PPS upon satisfaction of certain federal criteria.
Currently, five of the Company's outpatient centers are
Medicare-certified Comprehensive Outpatient Rehabilitation Facilities ("CORFs")
and 143 are Medicare-certified rehabilitation agencies. CORFs have been
designated cost-reimbursed Medicare providers since 1982. Under the regulations,
CORFs are reimbursed reasonable costs (subject to certain limits) for services
provided to Medicare beneficiaries. Outpatient rehabilitation facilities
certified by Medicare as rehabilitation agencies are reimbursed on the basis of
the lower of reasonable costs for services provided to Medicare beneficiaries or
charges for such services. Outpatient rehabilitation facilities which are
physician-directed clinics, as well as outpatient surgery centers, are
reimbursed by Medicare on a fee screen basis; that is, they receive a fixed fee,
which is determined by the geographical area in which the facility is located,
for each procedure performed. The Company's outpatient rehabilitation facilities
submit monthly bills to their fiscal intermediaries for services provided to
Medicare beneficiaries, and the Company files annual cost reports with the
intermediaries for each such facility. Adjustments are then made if costs have
exceeded payments from the fiscal intermediary or vice versa.
The Company's inpatient facilities (other than the medical center
facilities) either are not currently covered by PPS or are exempt from PPS, and
are also cost-reimbursed, receiving the lower of reasonable costs or charges.
- 11 -
Typically, the fiscal intermediary pays a set rate based on the prior year's
costs for each facility. As with outpatient facilities subject to cost-based
reimbursement, annual cost reports are filed with the Company's fiscal
intermediary and payment adjustments are made, if necessary.
Congress has directed the United States Department of Health and Human
Services to develop regulations, which could subject inpatient rehabilitation
hospitals to PPS in place of the current "reasonable cost within limits" system
of reimbursement. In addition, informal proposals have been made for a
prospective payment system for Medicare outpatient care. Other proposals for a
prospective payment system for rehabilitation hospitals are also being
considered by the federal government. Therefore, the Company cannot predict at
this time the effect that any such changes may have on its operations.
Regulations relating to prospective payment or other aspects of reimbursement
may be developed in the future which could adversely affect reimbursement for
services provided by the Company.
Over the past several years an increasing number of healthcare
providers have been accused of violating the federal False Claims Act. That Act
prohibits the knowing presentation of a false claim to the United States
government. Because the Company performs thousands of similar procedures a year
for which it is reimbursed by Medicare and there is a relatively long statute of
limitations, a billing error could result in significant civil penalties. The
Company does not believe that it is or has been in violation of the False Claims
Act.
Relationships with Physicians and Other Providers
Various state and federal laws regulate relationships among providers
of healthcare services, including employment or service contracts and investment
relationships. These restrictions include a federal criminal law prohibiting (i)
the offer, payment, solicitation or receipt of remuneration by individuals or
entities, to induce referrals of patients for services reimbursed under the
Medicare or Medicaid programs or (ii) the leasing, purchasing, ordering,
arranging for or recommending the lease, purchase or order of any item, good,
facility or service covered by such programs (the "Fraud and Abuse Law"). In
addition to federal criminal sanctions, violators of the Fraud and Abuse Law may
be subject to significant civil sanctions, including fines and/or exclusion from
the Medicare and/or Medicaid programs.
In 1991, the Office of the Inspector General ("OIG") of the United
States Department of Health and Human Services promulgated regulations
describing compensation arrangements which are not viewed as illegal
remuneration under the Fraud and Abuse Law (the "Safe Harbor Rules"). The Safe
Harbor Rules create certain standards ("Safe Harbors") for identified types of
compensation arrangements which, if fully complied with, assure participants in
the particular arrangement that the OIG will not treat such participation as a
criminal offense under the Fraud and Abuse Law or as the basis for an exclusion
from the Medicare and Medicaid programs or an imposition of civil sanctions. The
OIG closely scrutinizes health care joint ventures involving physicians and
other referral sources. In 1989, the OIG published a Fraud Alert that outlined
questionable features of "suspect" joint ventures.
In 1992, regulations were published in the Federal Register
implementing the OIG sanction and civil money penalty provisions established in
the Fraud and Abuse Law. The regulations (the "Exclusion Regulations") provide
that the OIG may exclude a Medicare provider from participation in the Medicare
Program for a five-year period upon a finding that the Fraud and Abuse Law has
been violated. The regulations expressly incorporate a test adopted by three
federal circuit courts providing that if one purpose of remuneration that is
offered, paid, solicited or received is to induce referrals, then the statute is
violated. The regulations also provide that after the OIG establishes a factual
basis for excluding a provider from the program, the burden of proof shifts to
the provider to prove that the Fraud and Abuse Law has not been violated.
The Company operates five of its rehabilitation hospitals and almost
all of its outpatient rehabilitation facilities as limited partnerships. Three
of the rehabilitation hospital partnerships involve physician investors, and two
of the rehabilitation hospital partnerships involve other institutional
healthcare providers. Seven of the
- 12 -
outpatient partnerships currently have a total of 21 physician limited partners,
some of whom refer patients to the partnerships. Those partnerships which are
providers of services under the Medicare program, and their limited partners,
are subject to the Fraud and Abuse Law. A number of the relationships
established by the Company with physicians and other healthcare providers do not
fit within any of the Safe Harbors. The Safe Harbor Rules do not expand the
scope of activities that the Fraud and Abuse Law prohibits, nor do they provide
that failure to fall within a Safe Harbor constitutes a violation of the Fraud
and Abuse Law; however, the OIG has informally indicated that failure to fall
within a Safe Harbor may subject an arrangement to increased scrutiny.
Most of the Company's surgery centers are owned by limited
partnerships, which include as limited partners physicians who perform surgical
procedures at such centers. Subsequent to the promulgation of the Safe Harbor
Rules in 1991, the Department of Health and Human Services issued for public
comment additional proposed Safe Harbors, one of which specifically addresses
surgeon ownership interests in ambulatory surgery centers (the "Proposed ASC
Safe Harbor"). As proposed, the Proposed ASC Safe Harbor would protect payments
to be made to surgeons as a return on investment interest in a surgery center
if, among other conditions, all the investors are surgeons who are in a position
to refer patients directly to the center and perform surgery on such referred
patients. Since a subsidiary of the Company is an investor in each limited
partnership which owns a surgery center, the Company's arrangements with
physician investors do not fit within the Proposed ASC Safe Harbor as currently
proposed. The Company is unable at this time to predict whether the Proposed ASC
Safe Harbor will become final, and if so, whether the language and requirements
will remain as currently proposed, or whether changes will be made prior to
becoming final. There can be no assurance that the Company will ever meet the
criteria under the Proposed ASC Safe Harbor as proposed or as it may be adopted
in final form. The Company believes, however, that its arrangements with
physicians with respect to its surgery center facilities should not fall within
the activities prohibited by the Fraud and Abuse Law.
While several federal court decisions have aggressively applied the
restrictions of the Fraud and Abuse Law, they provide little guidance as to the
application of the Fraud and Abuse Law to the Company's limited partnerships.
The Company believes that it is in compliance with the current requirements of
applicable federal and state law, but no assurances can be given that a federal
or state agency charged with enforcement of the Fraud and Abuse Law and similar
laws might not assert a contrary position or that new federal or state laws, or
new interpretations of existing laws, might not adversely affect relationships
established by the Company with physicians or other healthcare providers or
result in the imposition of penalties on the Company or certain of its
facilities. Even the assertion of a violation could have a material adverse
effect upon the Company.
The so-called "Stark II" provisions of the Omnibus Budget
Reconciliation Act of 1993 amend the federal Medicare statute to prohibit the
making by a physician of referrals for "designated health services" (including
physical therapy and occupational therapy) to an entity in which the physician
has an investment interest or other financial relationship, subject to certain
exceptions. Such prohibition took effect on January 1, 1995 and applies to all
of the Company's outpatient rehabilitation facility partnerships with physician
limited partners. In addition, a number of states have passed or are considering
statutes which prohibit or limit physician referrals of patients to facilities
in which they have an investment interest. In response to these regulatory
activities, the Company has restructured most of its rehabilitation facility
partnerships which involve physician investors, in order to eliminate physician
ownership interests not permitted by applicable law. The Company intends to take
such actions as may be required to cause the remaining partnerships to be in
compliance with applicable laws and regulations, including, if necessary, the
prohibition of physician partners from referring patients. The Company believes
that this restructuring has not adversely affected and will not adversely affect
the operations of its facilities.
Ambulatory surgery is not identified as a "designated health service",
and the Company does not believe that ambulatory surgery is subject to the
restrictions set forth in Stark II. However, lithotripsy facilities operated by
the Company frequently operate on hospital campuses, and it is possible to
conclude that such services are "inpatient and outpatient hospital services" --
a category of proscribed services within the meaning of Stark II. Similarly,
physicians frequently perform endoscopic procedures in the procedure rooms of
the Company's surgery centers, and it is also possible to construe these
services to be "designated health services". While the Company
- 13 -
does not believe that Stark II was intended to apply to such services, if that
were determined to be the case, the Company intends to take steps necessary to
cause the operation of its facilities to comply with the law.
The Company cannot predict whether other regulatory or statutory
provisions will be enacted by federal or state authorities which would prohibit
or otherwise regulate relationships which the Company has established or may
establish with other healthcare providers or the possibility of materially
adverse effects on its business or revenues arising from such future actions.
Management of the Company believes, however, that the Company will be able to
adjust its operations so as to be in compliance with any regulatory or statutory
provision as may be applicable. See this Item, "Business -- Patient Care
Services" and "Business -- Sources of Revenues".
Insurance
Beginning December 1, 1993, the Company became self-insured for
professional liability and comprehensive general liability. The Company
purchased coverage for all claims incurred prior to December 1, 1993. In
addition, the Company purchased underlying insurance which would cover all
claims once established limits have been exceeded. It is the opinion of
management that as of December 31, 1995, the Company had adequate reserves to
cover losses on asserted and unasserted claims.
Employees
As of January 31, 1996, the Company employed 26,427 persons, of whom
17,016 were full-time employees and 9,411 were part-time employees. Of the above
employees, 417 were employed at the Company's headquarters in Birmingham,
Alabama. Except for approximately 100 employees at one rehabilitation hospital
(about 20% of that facility's workforce), none of the Company's employees are
represented by a labor union. The Company is not aware of any current activities
to organize its employees at other facilities. Management of the Company
considers the relationship between the Company and its employees to be good.
Item 2. Properties.
The Company's executive offices currently occupy approximately 120,000
square feet of leased space in Birmingham, Alabama. In August 1995, the Company
announced plans to construct new executive offices on property acquired by it
earlier in the year. The expanded executive offices are expected to be fully
available by December 1996. All of the Company's outpatient operations are
carried out in leased facilities, except for its outpatient rehabilitation
facilities located in Birmingham and Montgomery, Alabama, Orlando and Panama
City, Florida, Bedford, New Hampshire and one of its facilities in Baltimore,
Maryland. The Company owns 33 of its inpatient rehabilitation facilities and
leases or operates under management contracts 44 of its inpatient rehabilitation
facilities. The Company also owns 27 of its surgery centers and leases the
remainder. The Company constructed its rehabilitation hospitals in Florence and
Columbia, South Carolina, Kingsport and Nashville, Tennessee, Concord, New
Hampshire, and Dothan, Alabama on property leased under long-term ground leases.
The property on which the Company's Memphis, Tennessee rehabilitation hospital
is located is owned in partnership by the Company and Methodist Hospitals of
Memphis. The Company owns its four medical center facilities in Birmingham,
Alabama, Richmond, Virginia and Miami, Florida and leases its medical center
facility in Dallas, Texas. The Company currently owns, and from time to time may
acquire, certain other improved and unimproved real properties in connection
with its business. See Notes 4 and 6 of "Notes to Consolidated Financial
Statements" for information with respect to the properties owned by the Company
and certain indebtedness related thereto.
- 14 -
In management's opinion, the Company's physical properties are adequate
for the Company's needs for the foreseeable future, and are consistent with its
expansion plans described elsewhere in this Annual Report on Form 10-K.
The following table sets forth a listing of the Company's patient care
services locations at January 31, 1996:
Outpatient Inpatient
Rehabilitation Rehabilitation Medical Surgery Diagnostic Other
State Market Centers(1) Facilities (Beds)(2) Centers (Beds)(2) Centers Centers Services
- ----- ------ ---------- -------------------- ----------------- ------- ------- --------
Alabama Auburn 1
Birmingham 6 6(225) 1(219) 1 3
Dothan 1(34) 1
Florence 2 1
Gadsden 1 1 2
Huntsville 3 1(50)
Mobile 2 1
Montgomery 1 1(80)
Muscle Shoals 1
Opelika 1
Tuscaloosa 1 1
Valley 1
Alaska Anchorage 1
Arizona Mesa 3
Phoenix 7 1(60) 1
Prescott 2
Scottsdale 3 1(43)
Tucson 2 1(80) 1
Arkansas Fort Smith 1(80) 1
Little Rock 1 1
Van Buren 1
California Anaheim 1
Bakersfield 1 1(60) 1
Canoga Park 1
Carmichael 1
Cerritos 1
Elk Grove 1
Folsom 1
Foster City 1
Fresno 2
Huntington 2 1
Inglewood 1
Marina Del Rey 1 2
Murrieta 1
Newport Beach 1 1
Oakland 1 1
Oceanside 1
Palo Alto 1
Rancho Cordova 1
Redding 1
Redlands 1
Riverside 1
Sacramento 2 2
San Carlos 1
San Diego 12 3
San Francisco 2 1 1
- 15 -
Outpatient Inpatient
Rehabilitation Rehabilitation Medical Surgery Diagnostic Other
State Market Centers(1) Facilities (Beds)(2) Centers (Beds)(2) Centers Centers Services
- ----- ------ ---------- -------------------- ----------------- ------- ------- --------
San Jose 1
San Leandro 1
San Luis Obispo 1
Santa Monica 1
Santa Rosa 2 1
Torrance 2
Vacaville 1
Van Nuys 2
Whittier 1
Woodland Hills 1
Colorado Colorado Springs 8 1 1
Denver 3 1 2
Englewood 2
Fort Collins 2 1
Longmont 1
Pueblo 1
Vail 1
Wheat Ridge 4
Connecticut Fairfield 1
Delaware Newark 4
District of
Columbia Washington 1 1
Florida Boca Raton 2 2
Coral Gables 2
Fort Lauderdale 1 1(108) 1
Fort Myers 1 1
Fort Pierce 1
Fort Walton Beach 1
Jacksonville 2
Lake Worth 1
Largo 1(40)
Lecanto 1
Melbourne 3 1(80) 1
Merritt Island 3
Miami 2 2(165) 2(397) 1 1 1
Naples 1
Ocala 2
Ocoee 2 1
Orlando 6 3
Palm Bay 2
Panama City 3
Port St. Lucie 3 1
St. Petersburg 1
Sarasota 2 1(60) 2
Tallahassee 2 1(70)
Tampa 4 1
Tarpon Springs 1
Vero Beach 1 1(70) 1
West Palm Beach 2 1
Georgia Atlanta 6 1(14) 3 1
Columbus 1
Gainesville 1
- 16 -
Outpatient Inpatient
Rehabilitation Rehabilitation Medical Surgery Diagnostic Other
State Market Centers(1) Facilities (Beds)(2) Centers (Beds)(2) Centers Centers Services
- ----- ------ ---------- -------------------- ----------------- ------- ------- --------
Macon 1 2(75)
Hawaii Honolulu 1
Kahului 1
Kihei 1
Lahaina 1
Idaho Boise 1(3)
Illinois Barrington 2
Carol Stream 2
Chicago 27 2
Elgin 2
Gurnee 2
Joliet 2
Lake Zurich 2
Naperville 2
Rockford 3
Woodstock 2
Indiana Evansville 1(80) 1
Fort Wayne 4
Indianapolis 1 1
Jeffersonville 1
La Porte 1
Muncie 3
New Albany 1
South Bend 1
Warsaw 1
Iowa Des Moines 3
Kansas Kansas City 2
Great Bend 1
Kentucky Edgewood 1(40)
Lexington 1
Louisville 2 1
Louisiana Baton Rouge 1 1(43)
Metaire 1
New Orleans 1
Shreveport 1
Maine Bangor 2
Maryland Annapolis 2
Baltimore 8 4
Chevy Chase 1 1
Hagerstown 1
Rockville 1 1 1
Salisbury 1 1(44)
Severna Park 1
Wheaton 1
Massachusetts Abington 1
Springfield 1
- 17 -
Outpatient Inpatient
Rehabilitation Rehabilitation Medical Surgery Diagnostic Other
State Market Centers(1) Facilities (Beds)(2) Centers (Beds)(2) Centers Centers Services
- ----- ------ ---------- -------------------- ----------------- ------- ------- --------
Michigan Marquette 1
Monroe 1
Mississippi Jackson 1
Pascagoula 1
Meridian 1
Missouri Blue Springs 1
Brentwood 1
Bridgeton 1
Cape Girardeau 3
Chesterfield 1
Columbia 2
Kansas City 2 2(21) 1
Lake Ozark 1
Springfield 3
St. Joseph 1
St. Louis 16 1(26) 4 2
Nebraska Omaha 2
Nevada Las Vegas 3
New Hampshire Bedford 3
Concord 1(100)
Dover 2
Manchester 1
Somersworth 1
New Jersey Atlantic City 1
Bridgewater 1 1
Brunswick 1 1(15)
Edison 2
Emerson 2
Haddonfield 1
Linden 2
Madison 1
Monahawkin 1
Mt. Laurel 1
Newton 1
North Bergen 1
Paramus 2
Roseland 1
Sparta 1
Succasunna 1
Tinton Falls 1
Toms River 1 1(155)
New Mexico Albuquerque 3 1(60) 1
New York Albany 1
Great Neck 2
Huntington 1
Liverpool 1
Monsey 2
New York 2
Orangeburg 1
Pulaski 1
- 18 -
Outpatient Inpatient
Rehabilitation Rehabilitation Medical Surgery Diagnostic Other
State Market Centers(1) Facilities (Beds)(2) Centers (Beds)(2) Centers Centers Services
- ----- ------ ---------- -------------------- ----------------- ------- ------- --------
Syracuse 1
North Carolina Asheville 1
Chapel Hill 1
Charlotte 1 1
Concord 1
Durham 1
Greensboro 1
Kinston 1(17)
Marion 1
Monroe 1
Raleigh 2 1
Shelby 1
Statesville 1
Wilmington 1
Wilson 1
Ohio Ashtabula 1
Centerville 2
Cincinnati 1
Columbus 5
Cuyahoga Falls 1
Dayton 2
Dublin 1
Fairlawn 1
Independence 1
Lorain 5
Oregon 2
Toledo 2
Westerville 1
Oklahoma Ada 2
Oklahoma City 4 1(111) 2 1
Tulsa 2 1
Weatherford 1
Pennsylvania Altoona 2 1(66)
Camp Hill 1
Erie 1 2(207)
Harrisburg 3
Lancaster 1
Mechanicsburg 2 2(201)
Mt. Pleasant 1
Paoli 1
Pittsburgh 6 1(89)
Pleasant Gap 4 1(88)
Scranton 1
Springfield 1
York 3 1(88)
South Carolina Charleston 1 1(36) 1
Columbia 3 1(89)
Florence 1 1(88)
Greenville 1
Goose Creek 1
Lancaster 2(54)
- 19 -
Outpatient Inpatient
Rehabilitation Rehabilitation Medical Surgery Diagnostic Other
State Market Centers(1) Facilities (Beds)(2) Centers (Beds)(2) Centers Centers Services
- ----- ------ ---------- -------------------- ----------------- ------- ------- --------
Tennessee Chattanooga 2 1(80) 2
Clarksville 1
Kingsport 1(50)
Knoxville 2 1
Dyersburg 1
Collierville 1
Union City 1
Martin 1(40)
Memphis 4 1(80) 1
Nashville 2 1(80) 1 1
Texas Allen 1
Amarillo 1
Arlington 2 1(60) 1
Austin 7 1(80) 1
Beaumont 1
Dallas 9 3(173) 1(96) 1 1 1
El Paso 1 1
Fort Worth 5 1(60) 1 1
Houston 11 2(186) 4 1 1
Midland 1(60)
San Antonio 2 3(127) 2 5
Stafford 1
Texarkana 1 1(60)
Victoria 1
Waco 2
Wylie 1 1
Utah Salt Lake City 1
Sandy 1 1(86)
Virginia Alexandria 1
Arlington 1
Falls Church 1
Norfolk 1
Richmond 2 3(84) 1(200) 1 1
Roanoke 1
Virginia Beach 3
Warrenton 1
Washington Seattle 20 1
Tacoma 3
West Virginia Beckley 1
Huntington 1(40)
Morgantown 1(80)
Parkersburg 1(40)
Princeton 1(40)
Wisconsin Eau Claire 1
Green Bay 1
Oshkosh 1
Wausau 1
Wauwatosa 1
______________________
(1) Includes freestanding outpatient centers and their satellites and
outpatient satellites of inpatient rehabilitation facilities.
(2) "Beds" refers to the number of beds for which a license or certificate
of need has been granted, which may vary materially from beds available
for use.
(3) Under construction.
- 20 -
Item 3. Legal Proceedings.
In the ordinary course of its business, the Company may be subject,
from time to time, to claims and legal actions by patients and others. The
Company does not believe that any such pending actions, if adversely decided,
would have a material adverse effect on its financial condition. See Item 1,
"Business -- Insurance" and Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a description of the
Company's insurance coverage arrangements.
From time to time, the Company appeals decisions of various rate-making
authorities with respect to Medicare rates established for the Company's
facilities. These appeals are initiated in the ordinary course of business.
Management believes that adequate reserves have been established for possible
adverse decisions on any pending appeals and that the outcomes of currently
pending appeals, either individually or in the aggregate, will have no material
adverse effect on the Company's operations.
Item 4. Submission of Matters to a Vote of Security Holders.
On January 17, 1996, a Special Meeting of Stockholders of the Company
was held, at which the following actions were taken:
1. The shares of Common Stock represented at the Special Meeting were
voted in favor of the merger with SCA as follows:
NUMBER
VOTING FOR AGAINST ABSTAIN
------ --- ------- -------
69,296,381 68,987,300 138,189 170,892
2. The shares of Common Stock represented at the Special Meeting were
voted for the approval of an Amendment to the Restated Certificate of
Incorporation of the Company to increase the authorized shares of Common Stock
to 250,000,000 shares as follows:
NUMBER
VOTING FOR AGAINST ABSTAIN
------ --- ------- -------
71,658,079 70,713,604 750,958 193,517
- 21 -
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock is listed for trading on the New York Stock
Exchange (Symbol: HRC). The following table sets forth for the fiscal periods
indicated the high and low reported sale prices for the Company's Common Stock
as reported on the NYSE Composite Transactions Tape. All prices shown have been
adjusted for a two-for-one stock split effected in the form of a 100% stock
dividend paid on April 17, 1995.
Reported
Sale Price
High Low
1994
First Quarter................................................................ $ 16.13 $ 11.69
Second Quarter............................................................... 17.32 12.63
Third Quarter................................................................ 19.69 12.88
Fourth Quarter............................................................... 19.32 16.13
1995
First Quarter................................................................ $ 20.44 $ 18.06
Second Quarter............................................................... 21.63 16.32
Third Quarter................................................................ 25.75 17.25
Fourth Quarter............................................................... 32.38 22.50
-------------------------
The closing price for the Common Stock on the New York Stock Exchange
on March 21, 1996, was $36-5/8.
There were approximately 4,413 holders of record of the Common Stock as
of March 21, 1996, excluding those shares held by depository companies for
certain beneficial owners.
The Company has never paid cash dividends on its Common Stock and does
not anticipate the payment of cash dividends in the foreseeable future. The
Company currently anticipates that any future earnings will be retained to
finance the Company's operations.
- 22 -
Item 6. Selected Financial Data.
Set forth below is a summary of selected consolidated financial data
for the Company for the years indicated. All amounts have been restated to
reflect the effects of the 1994 ReLife acquisition and the 1995 SHC and SSCI
acquisitions, each of which was accounted for as a pooling of interests.
Year Ended December 31,
----------------------------------------------------------------------------------
1991 1992 1993 1994 1995
----------- ---------- ------------ ----------- ---------
(in thousands, except per share data)
Income Statement Data:
Revenues $ 277,655 $ 503,657 $ 678,425 $ 1,274,365 $ 1,556,687
Operating expenses:
Operating units 200,350 373,984 486,546 930,845 1,087,554
Corporate general and administrative 10,901 17,354 26,593 48,606 42,514
Provision for doubtful accounts 6,092 13,431 17,947 27,646 31,637
Depreciation and amortization 15,115 30,019 47,827 89,305 121,195
Interest expense 10,507 12,667 19,107 66,874 91,693
Interest income (5,835) (5,434) (4,352) (4,566) (5,879)
Merger and acquisition related expenses (1) ---- ---- 333 6,520 34,159
Loss on impairment of assets (2) ---- ---- ---- 10,500 11,192
Loss on abandonment of computer project (2) ---- ---- ---- 4,500 ----
NME Selected Hospitals Acquisition
related expense (2) ---- ---- 49,742 ---- ----
Terminated merger expense ---- 3,665 ---- ---- ----
Gain on sale of partnership interest ---- ---- (1,400) ---- ----
------------- ------------- ------------- ------------- -------------
237,130 445,686 642,343 1,180,230 1,414,065
Income before income taxes and
minority interests 40,525 57,971 36,082 94,135 142,622
Provision for income taxes 13,582 18,842 12,062 34,778 48,091
------------- ------------- ------------ ------------- -------------
Income before minority interests 26,943 39,129 24,020 59,357 94,531
Minority interests 1,272 4,430 6,684 8,864 15,582
-------------- -------------- ------------- -------------- --------------
Net income $ 25,671 $ 34,699 $ 17,336 $ 50,493 $ 78,949
============= ============= ============ ============= =============
Weighted average common and common
equivalent shares outstanding (3) 57,390 75,988 79,484 86,461 94,246
============= ============= ============ ============= =============
Net income per common and common
equivalent share(3) $ 0.45 $ 0.46 $ 0.22 $ 0.58 $ 0.84
============= ============= ============ ============= =============
Net income per common share--
assuming full dilution(3)(4) $ 0.43 $ N/A $ N/A $ 0.58 $ 0.82
============= ============= ============ ============= =============
December 31,
1991 1992 1993 1994 1995
---------- ------------- ------------ ----------- ---------
Balance Sheet Data:
Cash and marketable securities $ 126,508 $ 113,268 $ 94,084 $ 90,066 $ 108,973
Working capital 184,729 210,217 216,670 236,877 327,474
Total assets 503,797 818,089 1,487,772 1,778,939 2,460,129
Long-term debt(5) 171,275 343,477 906,972 1,052,064 1,281,287
Stockholders' equity 302,176 402,369 431,811 504,223 927,710
___________________
(1) Expenses related to SHC's Ballas Merger in 1993, the ReLife and Heritage
Acquisitions in 1994 and the SHC, SSCI and NovaCare Rehabilitation
Hospitals Acquisition in 1995.
(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Notes to Consolidated Financial Statements".
(3) Adjusted to reflect a three-for-two stock split effected in the form of a
50% stock dividend paid on December 31, 1991 and a two-for-one stock split
effected in the form of a 100% stock dividend paid on April 17, 1995.
(4) Fully-diluted earnings per share in 1991 reflects shares reserved for
issuance upon exercise of dilutive stock options and shares reserved for
issuance upon conversion of HEALTHSOUTH's 7 3/4% Convertible Subordinated
Debentures due 2014, all of which were converted into Common Stock prior
to June 3, 1991. Fully-diluted earnings per share in 1994 and 1995 reflect
shares reserved for issuance upon conversion of HEALTHSOUTH's 5%
Convertible Subordinated Debentures due 2001.
(5) Includes current portion of long-term debt.
- 23 -
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
The following discussion is intended to facilitate the understanding
and assessment of significant changes and trends related to the results of
operations and financial condition of the Company, including certain factors
related to recent acquisitions by the Company, the timing and nature of which
have significantly affected the Company's results of operations. This discussion
and analysis should be read in conjunction with the Company's consolidated
financial statements and notes thereto included elsewhere in this Annual Report
on Form 10-K.
The Company completed the following acquisitions over the last two
years:
o On December 31, 1993, HEALTHSOUTH acquired substantially all
of the assets of the rehabilitation services division of
National Medical Enterprises, Inc. (the "NME Selected
Hospitals Acquisition"). The purchase price was approximately
$315,000,000, plus net working capital. The Company acquired
28 inpatient rehabilitation facilities, with an aggregate of
2,296 licensed beds, and 45 outpatient rehabilitation centers.
o On December 29, 1994, HEALTHSOUTH acquired ReLife, Inc. (the
"ReLife Acquisition"). A total of 11,025,290 shares of
HEALTHSOUTH Common Stock were issued in the transaction,
representing a value of $180,000,000 at the time of the
acquisition. At that time, ReLife operated 31 inpatient
facilities with an aggregate of 1,102 licensed beds, including
nine free-standing rehabilitation hospitals, nine acute
rehabilitation units, five sub-acute rehabilitation units,
seven transitional living units and one residential facility,
and also provided outpatient rehabilitation services at 12
centers.
o Effective April 1, 1995, HEALTHSOUTH purchased the operations
of the rehabilitation hospital division of NovaCare, Inc. (the
"NovaCare Rehabilitation Hospitals Acquisition"). The purchase
price was approximately $235,000,000. The NovaCare
Rehabilitation Hospitals consisted of 11 rehabilitation
hospitals in seven states, 12 other facilities and two
Certificates of Need.
o On June 13, 1995, HEALTHSOUTH acquired Surgical Health
Corporation (the "SHC Acquisition"). A total of 8,531,480
shares of HEALTHSOUTH Common Stock were issued in the
transaction, representing a value of $155,000,000 at the time
of the acquisition. The Company also purchased SHC's
$75,000,000 aggregate principal amount of 11.5% Senior
Subordinated Notes due 2004 for an aggregate consideration of
approximately $86,000,000. At that time, SHC operated a
network of 36 free-standing surgery centers in 11 states, and
five mobile lithotripsy units.
o On October 26, 1995, HEALTHSOUTH acquired Sutter Surgery
Centers, Inc. (the "SSCI Acquisition"). A total of 1,776,001
shares of HEALTHSOUTH Common Stock were issued in the
transaction, representing a value of $44,444,000 at the time
of the acquisition. At that time, SSCI operated a network of
12 freestanding surgery centers in three states, with an
aggregate of 54 operating and procedure rooms.
o On December 1, 1995, HEALTHSOUTH acquired Caremark Orthopedic
Services Inc. (the "Caremark Acquisition"). The purchase price
was approximately $127,500,000. At that time Caremark owned
and operated approximately 120 outpatient rehabilitation
centers in thirteen states.
- 24 -
The NME Selected Hospitals Acquisition, the NovaCare Rehabilitation
Hospitals Acquisition and the Caremark Acquisition each were accounted for under
the purchase method of accounting and, accordingly, such operations are included
in the Company's consolidated financial information from their respective dates
of acquisition. The ReLife Acquisition, the SHC Acquisition and the SSCI
Acquisition were each accounted for as a pooling of interests and, with the
exception of data set forth relating to revenues derived from Medicare and
Medicaid, all amounts shown in the following discussion have been restated to
reflect such acquisitions. ReLife, SHC and SSCI did not separately track such
revenues. The results of operations of SHC in turn reflect SHC's 1994
acquisition of Heritage Surgical Corporation (the "Heritage Acquisition"), which
also was accounted for as a pooling of interests.
As described below under " -- Liquidity and Capital Resources", in the
fourth quarter of 1995, the Company entered into agreements to acquire Surgical
Care Affiliates, Inc. and Advantage Health Corporation through mergers. These
transactions were consummated during the first quarter of 1996, and are not
reflected in the following discussion.
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
regulators, 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, an impairment loss is
calculated based on the excess of the carrying value of the asset over the
asset's fair value.
Governmental, commercial and private payors have increasingly
recognized the need to contain their costs for healthcare services. These
payors, accordingly, are turning to closer monitoring of services, prior
authorization requirements, utilization review and increased utilization of
outpatient services. During the periods discussed below, the Company has
experienced an increased effort by these payors to contain costs through
negotiated discount pricing. The Company views these efforts as an opportunity
to demonstrate the effectiveness of its clinical programs and its ability to
provide its rehabilitative healthcare services efficiently. The Company has
entered into a number of contracts with payors to provide services and has
realized an increased volume of patients as a result.
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, 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.
- 25 -
Results of Operations of the Company
Twelve-Month Periods Ended December 31, 1993 and 1994
The Company operated 238 outpatient rehabilitation locations at
December 31, 1994, compared to 171 outpatient rehabilitation locations at
December 31, 1993. In addition, the Company operated 66 inpatient facilities, 47
surgery centers and five medical centers at December 31, 1994, compared to 39
inpatient facilities, 39 surgery centers and four medical centers at December
31, 1993.
The Company's operations generated revenues of $1,274,365,000 in 1994,
an increase of $595,940,000, or 87.8%, as compared to 1993 revenues. Same store
revenues for the twelve months ended December 31, 1994 were $784,884,000, an
increase of $106,459,000, or 15.7%, as compared to the same period in 1993. New
store revenues for 1994 were $489,481,000. New store revenues primarily reflect
the 28 inpatient rehabilitation facilities and 45 associated outpatient
rehabilitation locations associated with the NME Selected Hospitals Acquisition.
The increase in revenues is primarily attributable to the addition of these
operations and increases in patient volume. Revenues generated from patients
under Medicare and Medicaid plans respectively accounted for 41.0% and 3.2% of
revenues for 1994, compared to 30.6% and 1.0% of revenues for 1993. The increase
in Medicare revenues is primarily attributable to the NME Selected Hospitals
Acquisition, since the acquired facilities had a greater proportion of Medicare
patients than the Company's historical experience in its existing facilities.
Revenues from any other single third-party payor were not significant in
relation to the Company's revenues. During 1994, same store outpatient visits,
inpatient days and surgery center cases increased 21.8%, 23.0% and 5.0%,
respectively. Revenue per outpatient visit, inpatient day and surgery case for
the same store operations increased (decreased) by (7.8)%, (8.4)% and 0.9%,
respectively.
Operating expenses, at the operating unit level, were $930,845,000, or
73.0% of revenues, for 1994, compared to 71.7% of revenues for 1993. Same store
operating expenses for 1994 were $588,048,000, or 74.9% of related revenues. New
store operating expenses were $342,797,000, or 70.0% of related revenues.
Corporate general and administrative expenses increased from $26,593,000 in 1993
to $48,606,000 in 1994. As a percentage of revenues, corporate general and
administrative expense decreased from 3.9% in 1993 to 3.8% in 1994. Total
operating expenses were $979,451,000, or 76.9% of revenues, for 1994, compared
to $513,139,000, or 75.6% of revenues, for 1993. The provision for doubtful
accounts was $27,646,000, or 2.2% of revenues, for 1994, compared to
$17,947,000, or 2.6% of revenues, for 1993.
Depreciation and amortization expense was $89,305,000 for 1994,
compared to $47,827,000 for 1993. The increase represents the investment in
additional assets by the Company. Interest expense increased to $66,874,000 in
1994, compared to $19,107,000 for 1993, primarily because of the increased
borrowings during the year under the Company's revolving line of credit, the
issuance of $250,000,000 principal amount of 9.5% Senior Subordinated Notes due
2001 and the issuance of $115,000,000 principal amount of 5% Convertible
Subordinated Debentures due 2001. For 1994, interest income was $4,566,000,
compared to $4,352,000 for 1993.
As a result of the NME Selected Hospitals Acquisition, the Company
recognized an expense of approximately $49,742,000 during the year ended
December 31, 1993. By recognizing this expense, the Company accrued
approximately $3,000,000 for costs related to certain employee separations and
relocations. In addition, the Company provided approximately $39,000,000 for the
write-down of certain assets to net realizable value as the result of planned
facility consolidations, and approximately $7,700,000 for the write-off of
certain capitalized development projects. The consolidations are applicable in
selected markets where the Company's services overlap with those of the acquired
facilities. The costs of development projects in certain target markets that
were previously capitalized were written off due to the acquisition of NME
facilities in or near those markets. For further discussion, see Note 10 of
"Notes to Consolidated Financial Statements".
During 1994 and 1995, the Company completed the implementation of the
plan of consolidation related to the NME Selected Hospitals Acquisition. The
accrual for costs related to employee separations was increased
- 26 -
by $338,000 due to a change in estimate. This adjustment was charged to
operations in 1994. The total accrual was then reduced by approximately $758,000
and $2,580,000 in actual employee separation costs during 1994 and 1995,
respectively. In addition, assets with a net book value of $17,911,000 and
$21,089,000 were written off against the $39,000,000 provided for in the plan
during 1994 and 1995, respectively. Finally, the Company wrote off all of the
$7,700,000 in capitalized development projects provided for in the plan during
1994.
Merger and acquisition related expenses in 1994 of $6,520,000 represent
costs incurred or accrued in connection with completing the ReLife Acquisition
($2,949,000) and the Heritage Acquisition ($3,571,000). For further discussion,
see Note 2 of "Notes to Consolidated Financial Statements".
During 1994, the Company recognized a $10,500,000 loss on impairment of
assets. This amount relates to the termination of a ReLife management contract
and a permanently damaged ReLife facility. The Company determined not to attempt
to reopen such damaged facility because, under its existing licensure, the
facility was not consistent with the Company's plans. Also during 1994, the
Company recognized a $4,500,000 loss on abandonment of a ReLife computer
project. For further discussion, see Note 15 of "Notes to Consolidated Financial
Statements".
Income before minority interests and income taxes for 1994 was
$94,135,000, compared to $36,082,000 for 1993. Minority interests reduced income
before income taxes by $8,864,000 in 1994, compared to $6,684,000 in 1993. The
provision for income taxes for 1994 was $34,778,000, compared to $12,062,000 for
1993, resulting in effective tax rates of 40.8% for 1994 and 41.0% for 1993. Net
income for 1994 was $50,493,000.
Twelve-Month Periods Ended December 31, 1994 and 1995
The Company operated 473 outpatient rehabilitation locations at
December 31, 1995, compared to 238 outpatient rehabilitation locations at
December 31, 1994. In addition, the Company operated 77 inpatient facilities, 56
surgery centers and five medical centers at December 31, 1995, compared to 66
inpatient facilities, 47 surgery centers and five medical centers at December
31, 1994.
The Company's operations generated revenues of $1,556,687,000 in 1995,
an increase of $282,322,000, or 22.2%, as compared to 1994 revenues. Same store
revenues for the twelve months ended December 31, 1995 were $1,410,278,000, an
increase of $135,913,000, or 10.7%, as compared to the same period in 1994. New
store revenues for 1995 were $146,409,000. New store revenues reflect (1) the 11
rehabilitation hospitals and 12 other facilities associated with the Novacare
Rehabilitation Hospitals Acquisition, (2) the 120 outpatient rehabilitation
centers associated with the Caremark Acquisition, (3) the acquisition of one
surgery center and one outpatient diagnostic imaging operation, and (4) the
acquisition of outpatient rehabilitation operations in 31 new markets. See Note
10 of "Notes to Consolidated Financial Statements". The increase in revenues is
primarily attributable to the addition of these operations and increases in
patient volume. Revenues generated from patients under Medicare and Medicaid
plans respectively accounted for 40.0% and 2.5% of total revenues for 1995,
compared to 41.0% and 3.2% of total revenues for 1994. Revenues from any other
single third-party payor were not significant in relation to the Company's total
revenues. During 1995, same store outpatient visits, inpatient days and surgery
center cases increased 24.6%, 11.0% and 12.0%, respectively. Revenue per
outpatient visit, inpatient day and surgery case for same store operations
increased (decreased) by (0.8%), 1.4% and (0.2%), respectively. These decreases
were offset by increased volume from managed care and national accounts and by
control of expenses.
Operating expenses, at the operating unit level, were $1,087,554,000,
or 69.9% of revenues, for 1995, compared to 73.0% of revenues for 1994. Same
store operating expenses for 1995 were $983,709,000, or 69.8% of related
revenues. New store operating expenses were $103,845,000, or 70.9% of related
revenues. Corporate general and administrative expenses decreased from
$48,606,000 in 1994 to $42,514,000 in 1995. As a percentage of revenues,
corporate general and administrative expenses decreased from 3.8% in 1994 to
2.7% in 1995. Total operating expenses were $1,130,068,000, or 72.6% of
revenues, for 1995, compared to $979,451,000, or 76.9%
- 27 -
of revenues, for 1994. The provision for doubtful accounts was $31,637,000, or
2.0% of revenues, for 1995, compared to $27,646,000, or 2.2% of revenues, for
1994.
Depreciation and amortization expense was $121,195,000 for 1995,
compared to $89,305,000 for 1994. The increase resulted from the investment in
additional assets by the Company. Interest expense increased to $91,693,000 in
1995, compared to $66,874,000 for 1994, primarily because of the increased
average borrowings during 1995 under the Company's revolving line of credit. For
1995, interest income was $5,879,000 compared to $4,566,000 for 1994.
As a result of the NovaCare and SHC acquisitions, the Company
recognized $29,194,000 in merger and acquisition related expenses during the
second quarter of 1995. Fees related to legal, accounting and financial advisory
services accounted for $3,400,000 of the expense. Costs and expenses related to
the purchase of the SHC Notes (see "--Liquidity and Capital Resources" and Note
7 of "Notes to Consolidated Financial Statements") totaled $14,606,000. Accruals
for employee separations were approximately $1,188,000. In addition, the Company
provided approximately $10,000,000 for the write-down of ce