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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 For the fiscal year ended December 31, 1996; or
|_| Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ______ to ______
Commission File Number 1-10315
HEALTHSOUTH CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 63-0860407
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
ONE HEALTHSOUTH PARKWAY
BIRMINGHAM, ALABAMA 35243
(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, Including Area Code: (205) 967-7116
--------------
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
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 18, 1997:
Common Stock, par value $.01 per share -- $6,940,206,270
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 18, 1997
Common Stock, par value
$.01 per share 328,838,938 shares
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Annual Report on Form 10-K.
PART I
INTRODUCTORY NOTE: HEALTHSOUTH Corporation has declared a two-for-one
stock split to be effected in the form of a 100% stock dividend to be paid as of
March 17, 1997 to holders of record as of March 13, 1997. All share and
per-share amounts described in this Annual Report on Form 10-K (including the
financial statements included herein) have been restated to reflect such stock
split.
ITEM 1. BUSINESS.
GENERAL
HEALTHSOUTH Corporation ("HEALTHSOUTH" or the "Company) is the nation's
largest provider of outpatient surgery and rehabilitative healthcare services.
The Company provides these services through its national network of outpatient
and inpatient rehabilitation facilities, outpatient surgery centers, diagnostic
centers, occupational medicine 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 December 31, 1996, the
Company had over 1,000 patient care locations in 50 states.
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.
In addition to its rehabilitation facilities, the Company operates one
of the largest networks 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, diagnostic and occupational medicine businesses. 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, diagnostic and occupational medicine businesses provides it
with platforms 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 One HealthSouth
Parkway, Birmingham, Alabama 35243, and its telephone number is (205) 967-7116.
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COMPANY STRATEGY
The Company's principal objective is to be the provider of choice for
patients, physicians and payors alike for outpatient surgery 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.
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 cross-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
surgery 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 acquisitions in the outpatient surgery, diagnostic imaging and
occupational medicine 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 AND PENDING ACQUISITIONS
Beginning in 1994, the Company has consummated a series of significant
acquisitions. During 1995, the Company consummated pooling-of-interests mergers
with Surgical Health Corporation ("SHC"; 36 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). During 1996, the Company acquired
Surgical Care Affiliates, Inc. ("SCA"; 67 outpatient surgery centers in 24
states), Advantage Health Corporation ("Advantage Health"; approximately 136
inpatient and outpatient rehabilitation facilities in 11 states), Professional
Sports Care Management, Inc. ("PSCM"; 36 outpatient rehabilitation facilities in
New York, New Jersey and Connecticut) and ReadiCare, Inc. ("ReadiCare"; 37
occupational medicine centers in California and Washington) in
pooling-of-interests transactions. In addition, the Company entered into an
agreement to acquire Health Images, Inc. ("Health Images"; 55 diagnostic imaging
centers in 13 states and the United Kingdom) in a pooling-of-interests
transaction, which transaction was consummated in March 1997. Information on the
Company's facilities included herein includes all of the acquired facilities
other than the Health Images facilities. The NovaCare, Caremark, Advantage
Health and PSCM 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 one of the
largest providers of outpatient surgery services in the nation and the ReadiCare
and Health Images transactions have broadened the Company's services in
occupational medicine and diagnostic imaging. The Company believes that the
geographic dispersion of the more than 1,000 locations 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".
On February 17, 1997, the Company and Horizon/CMS Healthcare
Corporation ("Horizon/CMS") signed a definitive agreement pursuant to which
HEALTHSOUTH will acquire Horizon/CMS in a stock-for-stock merger in which the
stockholders of Horizon/CMS will receive 0.84338 of a share of HEALTHSOUTH
Common Stock per share of Horizon/CMS Common Stock. Horizon/CMS operates the
nation's second-largest network of rehabilitation facilities. The proposed
transaction is valued at approximately $1,600,000,000 (including the assumption
of approximately $700,000,000 in debt). Horizon/CMS operates 33 inpatient
rehabilitation hospitals, 58 specialty hospitals and subacute units and 282
outpatient rehabilitation locations. Horizon/CMS also owns, leases or manages
267 long-term care facilities, a contract therapy business holding 1,400
contracts, an institutional pharmacy business serving 38,500 beds and other
healthcare services. The transaction is subject to the approval of Horizon/CMS's
stockholders and to various regulatory approvals, including clearance under the
Hart-Scott- Rodino Antitrust Improvements Act of 1976, as amended, as well as to
the satisfaction of certain other conditions. The Company and Horizon/CMS
currently anticipate that the transaction will be consummated in mid-1997.
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,
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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 $35 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.
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 13 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, the patient 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 December 31, 1996, the Company provided outpatient rehabilitative healthcare
services through 739 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
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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 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 December 31, 1996, the Company
operated 96 inpatient rehabilitation facilities with 5,749 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
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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 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 and is pursuing similar affiliations with a number of its existing
rehabilitation hospitals.
MEDICAL CENTERS. At December 31, 1996, the Company operated 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. One of
these facilities, the 112-bed HEALTHSOUTH Larkin Hospital in South Miami,
Florida, was sold in February 1997.
The Company acquired its 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 of the Company's medical centers have improved their operating efficiencies
and enhanced census.
Each of the Company's 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,
1996, the Company's inpatient facilities achieved an overall utilization, based
on patient days and available beds, of 72.56%.
Surgery Centers
As a result of the acquisitions of SHC, SSCI and SCA in 1995 and early
1996, the Company became one of the largest operators of outpatient surgery
centers in the United States. At December 31, 1996, it operated 135
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free-standing surgery centers, including five mobile lithotripsy units, in 35
states, and had an additional ten free-standing surgery centers under
development. Approximately 80% of these facilities are located in markets served
by the Company's 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.
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.
Diagnostic Centers
At December 31, 1996, the Company operated 14 diagnostic centers in
eight states. These centers provide outpatient diagnostic imaging services,
including magnetic resonance imaging ("MRI"), computerized tomography ("CT")
services, X-ray services, ultrasound services, mammography services, nuclear
medicine services and fluoroscopy. Not all services are provided at all sites;
however, most of the Company's diagnostic centers are multi-modality centers.
On March 3, 1997, the Company completed the acquisition of Health
Images, which operated a total of 55 diagnostic imaging centers, including six
centers in the United Kingdom. The Health Images centers are located in 13
states, including seven states where the Company did not previously operate
freestanding diagnostic imaging centers. In addition, the Health Images
acquisition provides the Company with its first sites in the United Kingdom.
Occupational Medicine Services
The Company's December 1996 acquisition of ReadiCare brought it 37
freestanding occupational medicine centers in California and Washington. These
centers provide cost-effective, outpatient primary medical care and
rehabilitation services to individuals for the treatment of work-related medical
problems. While the Company has historically provided occupational medicine
services through certain of its outpatient rehabilitation centers and associated
physicians, the Company believes that the ReadiCare acquisition provides it with
an additional platform for growth, and the Company intends to pursue additional
expansion in that arena.
Other Patient Care Services
In certain of its markets, the Company provides other patient care
services, including home healthcare, 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.
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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 125 universities and colleges and 700 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 40-50 professional sports
teams, as well as providing sports medicine services for Olympic and amateur
athletes. In 1996, the Company and the United States Olympic Committee
established the Richard M. Scrushy/HEALTHSOUTH Sports Medicine and Sport Science
Center at the USOC's Colorado Springs campus.
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, 1995 DECEMBER 31, 1996
- --------------------------- ----------------- -----------------
Medicare ............................................... 40.0% 37.8%
Commercial (1)................................................. 34.8 34.9
Workers' Compensation.......................................... 10.3 11.3
All Other Payors (2)........................................... 14.9 16.0
---- ----
100.0% 100.0%
- ----------
(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 SHC, SSCI, SCA, Advantage Health,
PSCM or ReadiCare facilities for periods or portions thereof prior to the
effective date of the acquisitions. Comparable information for those facilities
is not available and is not reflected in 1995 for the SHC or SSCI facilities or
in either year for the SCA, Advantage Health, PSCM or ReadiCare facilities.
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 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, 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.
- 10 -
The Company's diagnostic centers compete with local hospitals, other
multi-center imaging companies, local independent diagnostic centers and imaging
centers owned by local physician groups. The Company believes that the principal
competitive factors in the diagnostic services are price, quality of service,
ability to establish and maintain relationships with managed care payors and
referring physicians, reputation of interpreting physicians, facility location
and convenience of scheduling. Management believes that the Company's diagnostic
facilities compete successfully within their respective markets taking into
account these factors.
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 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.
- 11 -
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 Alabama,
Arizona, Connecticut, Maryland, Massachusetts, New Hampshire, New Mexico and
Rhode Island 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 304 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 and diagnostic 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, seven of the Company's outpatient centers are
Medicare-certified Comprehensive Outpatient Rehabilitation Facilities ("CORFs")
and 222 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
- 12 -
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.
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
- 13 -
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 currently operates four of its rehabilitation hospitals and
many of its outpatient rehabilitation facilities as limited partnerships with
third-party investors. Two of the rehabilitation hospital partnerships involve
physician investors, and two of the rehabilitation hospital partnerships involve
other institutional healthcare providers. Eight of the 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, occupational therapy, radiology services or radiation 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.
- 14 -
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 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, 1996, the Company had adequate reserves to
cover losses on asserted and unasserted claims.
EMPLOYEES
As of December 31, 1996, the Company employed 36,410 persons, of whom
20,930 were full-time employees and 15,480 were part-time employees. Of the
above employees, 595 were employed at the Company's headquarters in Birmingham,
Alabama. Except for approximately 80 employees at one rehabilitation hospital
(about 18% 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 200,000
square feet in a newly-constructed headquarters building in Birmingham, Alabama.
The headquarters building, which was occupied by the Company in February 1997,
was constructed on a 73-acre parcel of land owned by the Company pursuant to a
tax retention operating lease structured through NationsBanc Leasing
Corporation. Substantially all of the Company's outpatient rehabilitation
operations are carried out in leased facilities. The Company owns 33 of its
inpatient rehabilitation facilities and leases or operates under management
contracts the remainder of its inpatient rehabilitation facilities. The Company
also owns 40 of its surgery centers and leases the remainder. Prior to the
acquisition of Health Images, substantially all of the Company's diagnostic
centers operated in leased facilities. The Company constructed its
rehabilitation hospitals in Florence and Columbia, South Carolina, Kingsport and
Nashville, Tennessee, Concord, New Hampshire, and Dothan, Alabama, and is
constructing its Columbia, Missouri and Charlottesville, Virginia rehabilitation
hospitals, 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. The Company currently owns, and
from time to time may acquire, certain other improved and unimproved real
- 15 -
properties in connection with its business. See Notes 5 and 7 of "Notes to
Consolidated Financial Statements" for information with respect to the
properties owned by the Company and certain indebtedness related thereto.
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.
- 16 -
The following table sets forth a listing of the Company's patient care
services locations at December 31, 1996 (without giving effect to the Health
Images acquisition):
OUTPATIENT INPATIENT
REHABILITATION REHABILITATION MEDICAL SURGERY DIAGNOSTIC OTHER
STATE CENTERS(1) FACILITIES (BEDS)(2) CENTERS (BEDS)(2) CENTERS CENTERS SERVICES
- ----- ---------- -------------------- ----------------- ------- ------- --------
Alabama 16 9 (389) 1 (219) 5 3 10
Alaska 1
Arizona 26 3 (183) 2
Arkansas 1 1 (80) 2
California 48 1 (60) 21 31
Colorado 28 5 12
Connecticut 18 2 (40) 1
Delaware 7 2
District of Columbia 1 1
Florida 46 8 (613) 2 (397) 18 11
Georgia 13 1 (75) 3 1
Hawaii 5 1
Idaho 1
Illinois 50 2
Indiana 13 1 (80) 2
Iowa 3 1
Kansas 5 1
Kentucky 3 1 (40) 2
Louisiana 2 1 (43) 1 1
Maine 9 4 (155) 1
Maryland 14 1 (44) 6 3
Massachusetts 37 10 (639) 1 10
Michigan 3 1
Minnesota 11
Mississippi 2
Missouri 34 4 (107) 6 6
Montana 1
Nebraska 2
Nevada 4
New Hampshire 13 3 (148)
New Jersey 52 2 (170) 2 1 3
New Mexico 3 1 (60) 1
New York 39 1 (27) 1
North Carolina 12 3
North Dakota 1
Ohio 27 1 (24) 4 3
Oklahoma 11 1 (111) 2 1
Oregon 1
Pennsylvania 31 12 (1,041) 6
Rhode Island 3
South Carolina 9 4 (235) 2
South Dakota 1
Tennessee 13 5 (330) 6 1
Texas 72 10 (633) 1 (96) 16 2 14
Utah 1 1 (86) 1
Vermont 2 (52)
Virginia 11 2 (84) 1 (200) 1 2 10
Washington 36 2 17
West Virginia 4 (200) 1
Wisconsin 1 4
Wyoming 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.
- 17 -
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 March 12, 1997, a Special Meeting of Stockholders of the Company was
held, at which 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 500,000,000 shares as follows:
NUMBER
VOTING FOR AGAINST ABSTAIN
138,533,768 137,975,826 339,699 218,243
- 18 -
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 and a two-for-one stock split effected in the
form of a 100% stock dividend paid on March 17, 1997.
REPORTED
SALE PRICE
HIGH LOW
---- ---
1995
First Quarter........................................................... $ 10.22 $ 9.03
Second Quarter.......................................................... 10.82 8.16
Third Quarter........................................................... 12.88 8.63
Fourth Quarter.......................................................... 16.19 11.25
1996
First Quarter........................................................... $ 19.07 $ 13.50
Second Quarter.......................................................... 19.32 16.16
Third Quarter........................................................... 19.32 14.25
Fourth Quarter.......................................................... 19.88 17.57
-------------------------
The closing price for the Common Stock on the New York Stock Exchange
on March 25, 1997, was $20,875.
.
There were approximately 3,671 holders of record of the Common Stock as
of March 17, 1997, excluding those shares held by depository companies for
certain beneficial owners.
The Company has never paid cash dividends on its Common Stock (although
certain of the companies acquired by the Company in poolings-of-interests
transactions had paid dividends prior to such acquisitions) 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.
RECENT SALES OF UNREGISTERED SECURITIES
During the period covered by this Annual Report on Form 10-K, the
Company issued 52,584 shares of its Common Stock in a transaction not registered
under the Securities Act of 1933, as amended. Such shares were issued as of
November 14, 1996, to five individuals who were shareholders of a corporation
acquired by the Company in a merger transaction. Such shares were issued to such
individuals in exchange for all the issued and outstanding capital stock of the
acquired company. The Company issued such shares of its Common Stock in reliance
upon the exemption contained in Section 4(2) of the Securities Act of 1933, as
amended, inasmuch as the issuance of such shares did not involve any public
offering.
- 19 -
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 acquisition of ReLife, Inc. ("ReLife"), the 1995
SHC and SSCI acquisitions and the 1996 SCA and Advantage Health acquisitions,
each of which was accounted for as a pooling of interests.
YEAR ENDED DECEMBER 31,
1992 1993 1994 1995 1996
------------- ------------- ------------ ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income Statement Data:
Revenues $ 750,134 $ 979,206 $ 1,649,199 $ 2,003,146 $ 2,436,537
Operating expenses
Operating units 521,619 668,201 1,161,758 1,371,740 1,586,003
Corporate general and administrative 25,667 37,043 61,640 56,920 66,807
Provision for doubtful accounts 16,553 20,026 32,904 37,659 54,112
Depreciation and amortization 42,107 63,572 113,977 143,322 188,966
Interest expense 18,237 24,200 73,644 101,790 94,553
Interest income (8,595) (5,903) (6,387) (7,882) (5,912)
Merger and acquisition related expenses (1) ---- 333 6,520 34,159 41,515
Gain on sale of equity securities (2) ---- ---- (7,727) ---- ----
Loss on impairment of assets (2) ---- ---- 10,500 53,549 ----
Loss on abandonment of computer project (2) ---- ---- 4,500 ---- ----
Loss on disposal of surgery centers (2) ---- ---- 13,197 ---- ----
NME Selected Hospitals Acquisition
related expense (2) ---- 49,742 ---- ---- ----
Terminated merger expense 3,665 ---- ---- ---- ----
Loss on extinguishment of debt 883 ---- ---- ---- ----
Gain on sale of partnership interest ---- (1,400) ---- ---- ----
------------- -------------- ------------ ------------- -------------
620,136 855,814 1,464,526 1,791,257 2,026,044
------------- ------------- ------------ ------------- -------------
Income before income taxes and
minority interests 129,998 123,392 184,673 211,889 410,493
Provision for income taxes 38,550 37,993 65,121 76,221 140,238
------------- ------------- ------------ ------------- -------------
91,448 85,399 119,552 135,668 270,255
Minority interests 25,943 29,377 31,469 43,147 49,437
------------- ------------- ------------ ------------- -------------
Income from continuing operations 65,505 56,022 88,083 92,521 220,818
Income from discontinued operations 3,283 4,452 ---- ---- ----
------------- ------------- ------------ ------------- -------------
Net income $ 68,788 $ 60,474 $ 88,083 $ 92,521 $ 220,818
============= ============= ============ ============= =============
Weighted average common and common
equivalent shares outstanding (3) 254,296 264,958 280,854 297,460 326,290
============= ============= ============ ============= =============
Net income per common and common
equivalent shares (3)
Continuing operations $ 0.26 $ 0.21 $ 0.31 $ 0.31 $ 0.68
Discontinued operations 0.01 0.02 ---- ---- ----
------------- ------------- ------------ ------------- -------------
$ 0.27 $ 0.23 $ 0.31 $ 0.31 $ 0.68
============= ============= ============ ============= =============
Net income per common share --
assuming full dilution (3)(4) N/A N/A $ 0.31 $ 0.31 $ 0.66
============= ============= ============ ============= =============
- 20 -
December 31,
1992 1993 1994 1995 1996
------------- ------------- ------------ ------------- ---------
Balance Sheet Data: (IN THOUSANDS)
Cash and marketable securities $ 179,725 $ 148,308 $ 129,971 $ 156,321 $ 151,788
Working capital 269,120 284,691 282,667 406,125 543,975
Total assets 1,143,235 1,881,211 2,230,093 2,931,495 3,371,952
Long-term debt (5) 413,656 1,008,429 1,139,087 1,391,664 1,486,029
Stockholders' equity 581,954 646,397 757,583 1,185,898 1,515,924
- ----------
(1) Expenses related to SHC's Ballas Merger in 1993, the ReLife and Heritage
Acquisitions in 1994, the SHC, SSCI and NovaCare Rehabilitation Hospitals
Acquisitions in 1995 and the SCA, Advantage Health, PSCM and ReadiCare
mergers in 1996.
(2) See "Notes to Consolidated Financial Statements".
(3) Adjusted to reflect a two-for-one stock split effected in the form of a
100% stock dividend paid on April 17, 1995 and a two-for-one stock split
effected in the form of a 100% stock dividend paid on March 17, 1997.
(4) Fully-diluted earnings per share in 1994, 1995 and 1996 reflect shares
reserved for issuance upon conversion of HEALTHSOUTH's 5% Convertible
Subordinated Debentures due 2001.
(5) Includes current portion of long-term debt.
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 three
years (common share amounts have been adjusted to reflect a two-for-one stock
split effected in the form of a 100% stock dividend paid on March 17, 1997):
- On December 29, 1994, the Company acquired ReLife, Inc. (the "ReLife
Acquisition"). A total of 22,050,580 shares of the Company's 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.
- On April 1, 1995, the Company 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.
- On June 13, 1995, the Company acquired Surgical Health Corporation
(the "SHC Acquisition"). A total of 17,062,960 shares of the
Company's 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.
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- On October 26, 1995, the Company acquired Sutter Surgery Centers,
Inc. (the "SSCI Acquisition"). A total of 3,552,002 shares of the
Company's 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.
- On December 1, 1995, the Company 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 13 states.
- On January 17, 1996, the Company acquired Surgical Care Affiliates,
Inc. (the "SCA Acquisition"). A total of 91,856,678 shares of the
Company's Common Stock were issued in the transaction, representing a
value of approximately $1,400,000,000 at the time of the acquisition.
At that time, SCA operated a network of 67 freestanding surgery
centers in 24 states.
- On March 14, 1996, the Company acquired Advantage Health Corporation
(the "Advantage Health Acquisition"). A total of 18,203,978 shares of
the Company's Common Stock were issued in the transaction,
representing a value of approximately $315,000,000 at the time of the
acquisition. At that time, Advantage Health operated a network of 136
sites of service, including four freestanding rehabilitation
hospitals, one freestanding multi-use hospital, one nursing home, 68
outpatient rehabilitation facilities, 14 inpatient managed
rehabilitation units, 24 rehabilitation services management contracts
and six managed sub-acute rehabilitation units, primarily located in
the northeastern United States.
- On August 20, 1996, the Company acquired Professional Sports Care
Management, Inc. (the "PSCM Acquisition"). A total of 3,622,888
shares of the Company's Common Stock were issued in the transaction,
representing a value of approximately $59,000,000 at the time of the
acquisition. At that time, PSCM operated a network of 36 outpatient
rehabilitation centers in three states.
- On December 2, 1996, the Company acquired ReadiCare, Inc. (the
"ReadiCare Acquisition"). A total of 4,007,954 shares of the
Company's Common Stock were issued in the transaction, representing a
value of approximately $76,000,000 at the time of the acquisition. At
that time, ReadiCare operated a network of 37 outpatient medical and
rehabilitation centers in two states.
The NovaCare Rehabilitation Hospitals Acquisition and the Caremark
Acquisition each were accounted for under the purchase method of accounting and,
accordingly, the acquired operations are included in the Company's consolidated
financial information from their respective dates of acquisition. Each of the
ReLife Acquisition, the SHC Acquisition, the SSCI Acquisition, the SCA
Acquisition and the Advantage Health Acquisition was 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, SSCI,
SCA and Advantage Health did not separately track such revenues. The PSCM
Acquisition and the ReadiCare Acquisition were also accounted for as poolings of
interests. However, due to the immateriality of PSCM and ReadiCare, the
Company's historical financial statements for all periods prior to the quarters
in which the respective mergers took place have not been restated. Instead,
stockholders' equity has been increased during 1996 to reflect the effects of
the PSCM Acquisition and the ReadiCare Acquisition. The results of operations of
PSCM and ReadiCare are included in the accompanying financial statements and the
following discussion from the date of acquisition forward (see Note 2 of "Notes
to Consolidated Financial Statements" for further 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
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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, the
Company's carrying value of the asset will be reduced by the estimated shortfall
of cash flows.
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.
RESULTS OF OPERATIONS OF THE COMPANY
Twelve-Month Periods Ended December 31, 1994 and 1995
The company operated 537 outpatient rehabilitation locations at
December 31, 1995, compared to 283 outpatient rehabilitation locations at
December 31, 1994. In addition, the Company operated 95 inpatient rehabilitation
facilities, 122 surgery centers and five medical centers at December 31, 1995,
compared to 82 inpatient rehabilitation facilities, 112 surgery centers and five
medical centers at December 31, 1994.
The Company's operations generated revenues of $2,003,146,000 in 1995,
an increase of $353,947,000, or 21.5%, as compared to 1994 revenues. Same store
revenues for the twelve months ended December 31, 1995 were $1,817,359,000, an
increase of $168,160,000, or 10.2%, as compared to the same period in 1994. New
store revenues for 1995 were $185,787,000. 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 five
surgery centers and one outpatient diagnostic imaging operation, and (4) the
acquisition of outpatient rehabilitation operations in 34 new markets. See Note
9 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 the Medicare and Medicaid
programs 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
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relation to the Company's total revenues. During 1995, same store outpatient
visits, inpatient days and surgery center cases increased 21.7%, 10.8% and 4.8%,
respectively. Revenue per outpatient visit, inpatient day and surgery case for
same store operations increased (decreased) by 0.8%, 2.5% and (0.9%),
respectively.
Operating expenses, at the operating unit level, were $1,371,740,000,
or 68.5% of revenues, for 1995, compared to 70.4% of revenues for 1994. Same
store operating expenses for 1995 were $1,243,508,000, or 68.4% of related
revenues. New store operating expenses were $128,232,000, or 69.0% of related
revenues. Corporate general and administrative expenses decreased from
$61,640,000 in 1994 to $56,920,000 in 1995. As a percentage of revenues,
corporate general and administrative expenses decreased from 3.7% in 1994 to
2.8% in 1995. Total operating expenses were $1,428,660,000, or 71.3% of
revenues, for 1995, compared to $1,223,398,000, or 74.2% of revenues, for 1994.
The provision for doubtful accounts was $37,659,000, or 1.9% of revenues, for
1995, compared to $32,904,000, or 2.0% of revenues, for 1994.
Depreciation and amortization expense was $143,322,000 for 1995,
compared to $113,977,000 for 1994. The increase represents the investment in
additional assets by the Company. Interest expense increased to $101,790,000 in
1995, compared to $73,644,000 for 1994, primarily because of the increased
average borrowings during 1995 under the Company's revolving line of credit. For
1995, interest income was $7,882,000, compared to $6,387,000 for 1994.
Merger expenses in 1994 of $6,520,000 represent costs incurred or
accrued in connection with completing the ReLife Acquisition ($2,949,000) and
SHC's acquisition of Heritage Surgical Corporation ($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 14 of "Notes to Consolidated Financial
Statements".
During the fourth quarter of 1994, the Company adopted a formal plan to
dispose of three surgery centers and certain other properties during fiscal
1995. Accordingly, a charge of $13,197,000 was made to reflect the expected
losses resulting from the disposal of these centers. The closings of the three
surgery centers were completed by December 31, 1995. For further discussion, see
Note 13 of "Notes to Consolidated Financial Statements".
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 certain assets to net
realizable value as the result of a facility consolidation in a market where the
Company's existing services overlapped with those of an acquired facility. The
employee separations and facility consolidation were completed by the end of
1995.
In the fourth quarter of 1995, the Company incurred direct costs and
expenses of $4,965,000 in connection with the SSCI Acquisition. These expenses
consist primarily of fees related to legal, accounting and financial advisory
services and are included in merger and acquisition related acquisition expenses
for the year ended December 31, 1995.
Also during 1995, the Company recognized a $53,549,000 loss on
impairment of assets. The impaired assets relate to six SHC facilities and eight
SCA facilities in which the projected undiscounted cash flows did not
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support the book value of the long-lived assets of such facilities. See Note 14
of "Notes to Consolidated Financial Statements".
Income before minority interests and income taxes for 1995 was
$211,889,000, compared to $184,673,000 for 1994. Minority interests reduced
income before income taxes by $43,147,000, compared to $31,469,000 for 1994. The
provision for income taxes for 1995 was $76,221,000, compared to $65,121,000 for
1994, resulting in effective tax rates of 45.2% for 1995 and 42.5% for 1994. Net
income for 1995 was $92,521,000.
Twelve-Month Periods Ended December 31, 1995 and 1996
The Company operated 739 outpatient rehabilitation locations at
December 31, 1996, compared to 537 outpatient rehabilitation locations at
December 31, 1995. In addition, the Company operated 96 inpatient rehabilitation
facilities, 135 surgery centers and five medical centers at December 31, 1996,
compared to 95 inpatient rehabilitation facilities, 122 surgery centers and five
medical centers at December 31, 1995.
The Company's operations generated revenues of $2,436,537,000 in 1996,
an increase of $433,391,000, or 21.6%, as compared to 1995 revenues. Same store
revenues for the twelve months ended December 31, 1996 were $2,276,676,000, an
increase of $273,530,000, or 13.7%, as compared to the same period in 1995. New
store revenues for 1996 were $159,861,000. New store revenues reflect the
acquisition of one inpatient rehabilitation hospital, the addition of eight new
outpatient surgery centers, and the acquisition of outpatient rehabilitation
operations in 57 new markets. See Note 9 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 the Medicare and Medicaid programs respectively accounted for
37.8% and 2.9% of total revenues for 1996, compared to 40.0% and 2.5% of total
revenues for 1995. Revenues from any other single third-party payor were not
significant in relation to the Company's total revenues. During 1996, same store
outpatient visits, inpatient days and surgery center cases increased 19.9%,
10.8% and 7.3%, respectively. Revenue per outpatient visit, inpatient day and
surgery case for same store operations increased (decreased) by (0.8)%, 3.8% and
1.1%, respectively.
Operating expenses, at the operating unit level, were $1,586,003,000,
or 65.1% of revenues, for 1996, compared to 68.5% of revenues for 1995. Same
store operating expenses for 1996 were $1,486,575,000, or 65.3% of related
revenues. New store operating expenses were $99,428,000, or 62.2% of related
revenues. Corporate general and administrative expenses increased from
$56,920,000 in 1995 to $66,807,000 in 1996. As a percentage of revenues,
corporate general and administrative expenses decreased from 2.8% in 1995 to
2.7% in 1996. Total operating expenses were $1,652,810,000, or 67.8% of
revenues, for 1996, compared to $1,428,660,000, or 71.3% of revenues, for 1995.
The provision for doubtful accounts was $54,112,000, or 2.2% of revenues, for
1996, compared to $37,659,000, or 1.9% of revenues, for 1995.
Depreciation and amortization expense was $188,966,000 for 1996,
compared to $143,322,000 for 1995. The increase resulted from the investment in
additional assets by the Company. Interest expense decreased to $94,553,000 in
1996, compared to $101,790,000 for 1995, primarily because of the favorable
interest rates on the Company's revolving credit facility (see "Liquidity and
Capital Resources"). For 1996, interest income was $5,912,000 compared to
$7,882,000 for 1995. The decrease in interest income resulted primarily from a
decrease in the average amount outstanding in interest-bearing investments.
Merger expenses in 1996 of $41,515,000 represent costs incurred or
accrued in connection with completing the SCA Acquisition ($19,727,000), the
Advantage Health Acquisition ($9,212,000), the PSCM Acquisition ($5,513,000) and
the ReadiCare Acquisition ($7,063,000). For further discussion, see Note 2 of
"Notes to Consolidated Financial Statements".
Income before minority interests and income taxes for 1996 was
$410,493,000, compared to $211,889,000 for 1995. Minority interests reduced
income before income taxes by $49,437,000, compared to $43,147,000 for
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1995. The provision for income taxes for 1996 was $140,238,000, compared to
$76,221,000 for 1995, resulting in effective tax rates of 38.8% for 1996 and
45.2% for 1995. Net income for 1996 was $220,818,000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had working capital of $543,975,000,
including cash and marketable securities of $151,788,000. Working capital at
December 31, 1995 was $406,125,000, including cash and marketable securities of
$156,321,000. For 1996, cash provided by operations was $367,656,000, compared
to $306,157,000 for 1995. The Company used $451,343,000 for investing activities
during 1996, compared to $764,825,000 for 1995. Additions to property, plant and
equipment and acquisitions accounted for $172,962,000 and $91,391,000,
respectively, during 1996. Those same investing activities accounted for
$172,172,000 and $493,914,000, respectively, in 1995. Financing activities
provided $83,108,000 and $494,100,000 during 1996 and 1995, respectively. Net
borrowing proceeds (borrowings less principal reductions) for 1996 and 1995 were
$88,851,000 and $213,155,000, respectively.
Net accounts receivable were $510,567,000 at December 31, 1996,
compared to $409,150,000 at December 31, 1995. The number of days of average
revenues in average receivables was 66.7 at December 31, 1996, compared to 63.2
at December 31, 1995. The concentration of net accounts receivable from
patients, third-party payors, insurance companies and others at December 31,
1996 was consistent with the related concentration of revenues for the period
then ended.
The Company has a $1,250,000,000 revolving credit facility with
NationsBank, N.A. ("NationsBank") and other participating banks (the "1996
Credit Agreement"). The 1996 Credit Agreement replaced a previous $1,000,000,000
revolving credit agreement, also with NationsBank. 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 credit facility was 5.98% for the twelve months ended December 31,
1996, compared to the average prime rate of 8.29% during the same period. At
December 31, 1996, the Company had drawn $995,000,000 under the 1996 Credit
Agreement. For further discussion, see Note 7 of "Notes to Consolidated
Financial Statements".
In 1994, the Company issued $115,000,000 principal amount of 5%
Convertible Subordinated Debentures due 2001 (the "Debentures"). The Company has
called the Debentures for redemption on April 1, 1997. Because the recent market
price of the Company's Common Stock substantially exceeds the conversion price
of the Debentures, the Company expects that substantially all of the Debentures
will be converted into Common Stock.
On February 17, 1997, the Company entered into a definitive agreement
to acquire Horizon/CMS Healthcare Corporation ("Horizon/CMS") in a
stock-for-stock merger in which the stockholders of Horizon/CMS will receive
0.84338 of a share of the Company's common stock per share of Horizon/CMS common
stock. The transaction is valued at approximately $1,600,000,000, including the
assumption by the Company of approximately $700,000,000 in Horizon/CMS debt. It
is expected that the transaction will be accounted for as a purchase.
Horizon/CMS operates 33 inpatient rehabilitation hospitals, 58 specialty
hospitals and subacute units and 282 outpatient rehabilitation centers.
Horizon/CMS also owns, leases or manages 267 long-term care facilities, a
contract therapy business, an institutional pharmacy business and other
healthcare services. Consummation of the transaction is subject to various
regulatory approvals, including clearance under the Hart-Scott-Rodino Antitrust
Improvements Act, and to the satisfaction of certain other conditions. The
Company currently anticipates that the transaction will be consummated in
mid-1997.
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. In the transaction, Health Images stockholders received approximately
10,400,000 shares of the Company's common stock. Health Images operates 49
freestanding diagnostic imaging centers in 13 states and six in England. The
effects of conforming the accounting policies of the Company and Health Images
are not expected to be material. For further discussion, see Note 2 of "Notes to
Consolidated Financial Statements".
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The Company intends to pursue the acquisition or development of
additional healthcare operations, including comprehensive outpatient
rehabilitation facilities, inpatient rehabilitation facilities, ambulatory
surgery centers, outpatient diagnostic centers and companies engaged in the
provision of rehabilitation-related services, and to expand certain of its
existing facilities. While it is not possible to estimate precisely the amounts
which will actually be expended in the foregoing areas, the Company anticipates
that over the next twelve months, it will spend approximately $50,000,000 on
maintenance and expansion of its existing facilities and approximately
$300,000,000 on development of the Integrated Service Model. See Item 1,
"Business -- Company Strategy".
Although the Company is continually considering and evaluating
acquisitions and opportunities for future growth, the Company has not entered
into any agreements with respect to material future acquisitions other than the
transactions with Horizon/CMS and Health Images. In connection with the pending
acquisition of Horizon/CMS, the Company has obtained a fully-underwritten
commitment from NationsBank, N.A. for a $1,000,000,000 Senior Bridge Loan
Facility on substantially the same terms as the 1996 Credit Agreement. The
Company believes that existing cash, cash flow from operations, and borrowings
under the revolving line of credit and the bridge loan facility 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 Annual Report on Form 10-K 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 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated financial statements of the Company meeting the
requirements of Regulation S-X are filed on the succeeding pages of this Item 8
of this Annual Report on Form 10-K, as listed below:
Page
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Report of Independent Auditors 30
Consolidated Balance Sheets as of December 31