SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 1996; or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____________ to _____________. Commission File Number 1-10315 ------- HEALTHSOUTH Corporation ---------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 63-0860407 ------------------------------ ----------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) Two Perimeter Park South, Birmingham, Alabama 35243 --------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (205) 967-7116 -------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all Reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such Reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ---- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at November 8, 1996 - ----------------------- ------------------------------- Common Stock, par value 155,481,368 shares $.01 per share
HEALTHSOUTH Corporation and Subsidiaries QUARTERLY REPORT ON FORM 10-Q INDEX <TABLE> PART 1 -- FINANCIAL INFORMATION Page ---- <S> <C> Item 1. Financial Statements Consolidated Balance Sheets -- September 30, 1996 (Unaudited) and December 31, 1995 3 Consolidated Statements of Income (Unaudited) -- Three Months and Nine Months Ended September 30, 1996 and 1995 5 Consolidated Statements of Cash Flows (Unaudited) -- Nine Months Ended September 30, 1996 and 1995 6 Notes to Consolidated Financial Statements (Unaudited) -- Three Months and Nine Months Ended September 30, 1996 and 1995 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II -- OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 16 </TABLE>
PART I -- FINANCIAL INFORMATION Item 1. Financial Statements HEALTHSOUTH Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (In Thousands) <TABLE> <CAPTION> September 30, December 31, 1996 1995 --------------- -------------- (Unaudited) <S> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents $ 121,067 $ 152,244 Other marketable securities 3,785 4,077 Accounts receivable 504,666 409,150 Inventories, prepaid expenses, and other current assets 82,717 116,083 Deferred income taxes 22,396 21,977 --------------- ------------- TOTAL CURRENT ASSETS 734,631 703,531 OTHER ASSETS 75,039 70,493 PROPERTY, PLANT AND EQUIPMENT--NET 1,354,321 1,283,560 INTANGIBLE ASSETS--NET 1,018,781 873,911 --------------- ------------- TOTAL ASSETS $ 3,182,772 $ 2,931,495 =============== ============= </TABLE>
HEALTHSOUTH Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (continued) (In Thousands) <TABLE> <CAPTION> September 30, December 31, 1996 1995 -------------- --------------- (unaudited) <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 75,546 $ 107,018 Salaries and wages payable 64,141 67,905 Accrued interest payable and other liabilities 86,183 87,308 Current portion of long-term debt 39,152 35,175 ------------ ---------- TOTAL CURRENT LIABILITIES 265,022 297,406 LONG-TERM DEBT 1,424,775 1,356,489 DEFERRED INCOME TAXES 26,718 23,733 OTHER LONG-TERM LIABILITIES 5,375 8,459 DEFERRED REVENUE 597 1,525 MINORITY INTERESTS--LIMITED PARTNERSHIPS 63,054 57,985 STOCKHOLDERS' EQUITY: Preferred Stock, $.10 par value--1,500,000 shares authorized; issued and outstanding-- none 0 0 Common Stock, $.01 par value--250,000,000 shares authorized; 156,178,000 and 152,193,000 shares issued at September 30, 1996 and December 31, 1995, respectively 1,562 1,522 Additional paid-in capital 936,396 888,216 Retained earnings 479,124 334,582 Treasury stock (323) (16,065) Receivable from Employee Stock Ownership Plan (14,148) (15,886) Notes receivable from stockholders (5,380) (6,471) ------------ ---------- TOTAL STOCKHOLDERS' EQUITY 1,397,231 1,185,898 ------------ ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,182,772 $ 2,931,495 ============ ========== </TABLE> See accompanying notes.
HEALTHSOUTH Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED - In Thousands, Except for Per Share Data) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 1996 1995 1996 1995 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Revenues $ 616,943 $ 518,537 $ 1,793,766 $1,470,049 Operating expenses: Operating units 397,749 356,360 1,173,148 1,014,302 Corporate general and administrative 16,805 12,607 49,462 40,479 Provision for doubtful accounts 13,996 8,716 39,873 28,172 Depreciation and amortization 49,326 36,986 137,320 104,874 Interest expense 22,625 26,451 69,967 75,035 Interest income (975) (2,244) (4,449) (6,244) Merger costs 5,513 0 34,452 29,194 Loss on impairment of assets 0 0 0 11,192 ---------- ---------- ---------- ---------- 505,039 438,876 1,499,773 1,297,004 ---------- ---------- ---------- ---------- Income before income taxes and minority interests 111,904 79,661 293,993 173,045 Provision for income taxes 37,574 25,938 97,528 55,784 ---------- ---------- ---------- ---------- Income before minority interests 74,330 53,723 196,465 117,261 Minority interests (13,286) (12,076) (38,015) (30,766) ---------- ---------- ---------- ---------- Net income $ 61,044 $ 41,647 $ 158,450 $ 86,495 ========== ========== ========== ========== Weighted average common and common equivalent shares outstanding 165,777 145,151 165,793 143,911 ========== ========== ========== ========== Net income per common and common equivalent share $ 0.37 $ 0.29 $ 0.96 $ 0.60 ========== ========== ========== ========== Net income per common share -- assuming full dilution $ 0.36 $ 0.28 $ 0.94 $ 0.60 ========== ========== ========== ========== </TABLE> See accompanying notes.
HEALTHSOUTH Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED In Thousands) <TABLE> <CAPTION> Nine Months Ended September 30, --------------------------------------- 1996 1995 ----------------- ---------------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 158,450 $ 86,495 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 137,320 104,874 Provision for doubtful accounts 39,873 28,172 Income applicable to minority interests of limited partnerships 38,015 30,766 Loss on impairment of assets 0 11,192 Merger costs 34,452 29,194 Provision for deferred income taxes 2,995 (15,302) Provision for deferred revenue (928) (389) Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable (120,631) (31,879) Inventories, prepaid expenses and other current assets 42,258 (1,328) Accounts payable and accrued expenses (78,155) (46,441) -------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 253,649 195,354 INVESTING ACTIVITIES Purchases of property, plant and equipment (115,016) (114,562) Proceeds from sale of property, plant and equipment 0 14,786 Additions to intangible assets, net of effects of acquisitions (138,979) (53,982) Assets obtained through acquisitions, net of liabilities assumed (87,142) (334,603) Cash obtained through immaterial pooling of interests 7,534 0 Changes in other assets (4,970) (4,070) Proceeds received on sale of other marketable securities 292 22,121 Investments in other marketable securities 0 (13,026) ----------------- ---------------- NET CASH USED IN INVESTING ACTIVITIES (338,281) (483,336) </TABLE>
HEALTHSOUTH Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (UNAUDITED - In Thousands) <TABLE> <CAPTION> Nine Months Ended September 30, --------------------------------------- 1996 1995 ----------------- ---------------- <S> <C> <C> FINANCING ACTIVITIES Proceeds from borrowings 166,594 804,513 Principal payments on long-term debt and leases (99,484) (457,957) Proceeds from exercise of options 24,434 8,055 Proceeds from issuance of common stock 0 962 Purchase of treasury stock 0 (7,350) Reduction in receivable from Employee Stock Ownership Plan 1,738 1,591 Decrease in loans to stockholders 1,091 0 Dividends paid 0 (5,450) Proceeds from investment by minority interests 517 250 Purchase of limited partnership interests 0 (2,825) Payment of cash distributions to limited partners (37,798) (31,632) ----------------- ---------------- NET CASH PROVIDED FROM FINANCING ACTIVITIES 57,092 310,157 ----------------- ---------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (27,540) 22,175 Cash and cash equivalents at beginning of period 148,607 116,517 ----------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 121,067 $ 138,692 ================= ================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 56,505 $ 66,451 Income taxes 63,207 65,936 </TABLE> Non-cash investing activities: During 1996, the Company issued 1,811,444 shares of its common stock in connection with its acquisition of Professional Sports Care Management, Inc. Non-cash financing activities: During 1995 the Company had a two-for-one stock split on its common stock, which was effected in the form of a 100% stock dividend. See accompanying notes.
HEALTHSOUTH Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Three Months and Nine Months Ended September 30, 1996 and 1995 NOTE 1 -- The accompanying consolidated financial statements include the accounts of HEALTHSOUTH Corporation (the "Company") and its subsidiaries. This information should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, as amended. It is management's opinion that the accompanying consolidated financial statements reflect all adjustments (which are normal recurring adjustments, except as otherwise indicated) necessary for a fair presentation of the results for the interim period and the comparable period presented. NOTE 2 -- During 1995, the Company entered into a $1,000,000,000 revolving line of credit with NationsBank, N.A. ("NationsBank") and other participating banks (the "1995 Credit Agreement"). On April 18, 1996, the Company amended and restated the 1995 Credit Agreement to increase the size of the credit facility to $1,250,000,000 (the "1996 Credit Agreement"). The Company provided a negative pledge on all assets and the lenders released the first priority security interest in all shares of stock of the Company's subsidiaries and rights and interests in the Company's controlled partnerships which had been granted under the 1995 Credit Agreement. At September 30, 1996, the Company had drawn $977,000,000 under the 1996 Credit Agreement. On March 24, 1994, the Company issued $250,000,000 principal amount of 9.5% Senior Subordinated Notes due 2001 (the "Notes"). Interest is payable on April 1 and October 1. The Notes are senior subordinated obligations of the Company and, as such, are subordinated to all existing and future senior indebtedness of the Company. Also on March 24, 1994, the Company issued $100,000,000 principal amount of 5% Convertible Subordinated Debentures due 2001 (the "Convertible Debentures"). An additional $15,000,000 principal amount of Convertible Debentures was issued in April 1994 to cover underwriters' overallotments. Interest is payable on April 1 and October 1. The Convertible Debentures are convertible into Common Stock of the Company at the option of the holder at a conversion price of $18.8125 per share, subject to adjustment in certain events. The net proceeds from the issuance of the Notes and Convertible Debentures were used by the Company to pay down indebtedness outstanding under its other existing credit facilities.
At September 30, 1996 and December 31, 1995, long-term debt consisted of the following: <TABLE> <CAPTION> December 31, September 30, 1996 1995 -------------------- --------------------- (in thousands) <S> <C> <C> Advances under the $1,250,000,000 1996 Credit Agreement $ 977,000 $ 790,000 9.5% Senior Subordinated Notes due 2001 250,000 250,000 5% Convertible Subordinated Debentures due 2001 115,000 115,000 Other long-term debt 122,927 236,664 -------------------- --------------------- 1,464,927 1,391,664 Less amounts due within one year 39,152 35,175 -------------------- --------------------- $ 1,424,775 $ 1,356,489 ==================== ===================== </TABLE> NOTE 3 -- On January 17, 1996, the Company consummated the acquisition of Surgical Care Affiliates, Inc. ("SCA") in a transaction accounted for as a pooling of interests. In the transaction, SCA stockholders received an aggregate of 45,928,339 shares of the Company's common stock. At the time of the merger, SCA operated 67 surgery centers in 24 states. On March 14, 1996, the Company consummated the acquisition of Advantage Health Corporation ("Advantage Health") in a transaction accounted for as a pooling of interests. In the transaction, Advantage Health stockholders and option holders received an aggregate of 9,101,989 shares of the Company's common stock. At the time of the merger, Advantage Health operated a network of 136 sites of service, including four freestanding rehabilitation hospitals, one freestanding multi-use hospital, one nursing home, 68 outpatient rehabilitation facilities, 14 inpatient managed rehabilitation units, 24 rehabilitation services management contracts and six managed sub-acute rehabilitation units. Accordingly, the Company's historical financial statements for all periods prior to the effective dates of the mergers have been restated to include the results of SCA and Advantage Health. The effects of conforming the accounting policies of the Company, SCA and Advantage Health were not material. Prior to the mergers, SCA reported on a fiscal year ending on December 31 and Advantage Health reported on a fiscal year ending on August 31. Accordingly, the historical financial statements of Advantage Health have been recast to a November 30 fiscal year end to more closely conform to the Company's calendar fiscal year end. The restated financial statements for all periods prior to and including December 31, 1995 are based on a combination of the Company's and SCA's results for their December 31 fiscal years and Advantage Health's results for its recast November 30 fiscal year. Beginning January 1, 1996, all facilities acquired in the Advantage Health merger adopted a December 31 fiscal year end; accordingly, all consolidated financial statements for periods after December 31, 1995 are based on a consolidation of all of the Company's subsidiaries on a December 31 year end. Advantage Health's historical results of operations for the one month ended December 31, 1995 are not included in the Company's consolidated statements of income
or cash flows. An adjustment has been made to stockholders' equity as of January 1, 1996 to adjust for the effect of excluding Advantage Health's results of operations for the one month ended December 31, 1995. The following is a summary of Advantage Health's results of operations and cash flows for the one month ended December 31, 1995 (in thousands): <TABLE> <CAPTION> Statement of Income Data: <S> <C> Revenues $ 16,111 Operating expenses: Operating units 14,392 Corporate general and administrative 1,499 Provision for doubtful accounts 1,013 Depreciation and amortization 283 Interest expense 288 Interest income (16) Loss on impairment of assets 21,111 ------------------------------ 38,570 ------------------------------ Loss before income taxes and minority interests (22,460) Provision (benefit) for income taxes (4,959) ------------------------------ (17,501) Minority interests (136) ------------------------------ Net income $ (17,637) ============================== Statement of Cash Flow Data: Net cash used in operating activities $ (2,971) Net cash provided by investing activities 105 Net cash used in financing activities (771) ------------------------------ Net decrease in cash $ (3,637) ============================== </TABLE> Costs and expenses of $28,939,000, primarily accounting, legal and financial advisory services, incurred by the Company in connection with the SCA and Advantage Health mergers have been recorded in operations during the quarter ending March 31, 1996 and reported as Merger Costs in the accompanying consolidated statements of income. NOTE 4 -- On August 20, 1996, the Company consummated the acquisition of Professional Sports Care Management, Inc. ("PSCM") in a transaction accounted for as a pooling of interests. In the transaction, PSCM stockholders received an aggregate of 1,811,444 shares of the Company's common stock. At the time of the merger, PSCM operated a network of 36 outpatient rehabilitation centers in three states. Costs and expenses of $5,513,000, primarily accounting, legal and financial advisory services, incurred by the Company in connection with the PSCM merger have been recorded in operations during the quarter ending September 30, 1996 and reported as merger costs in the accompanying consolidated statements of income.
Due to the immateriality of the PSCM merger, the Company's historical financial statements for all periods prior to July 1, 1996 have not been restated to include the results of PSCM. Instead, stockholders' equity has been increased by approximately $43,230,000 as of July 1, 1996 to reflect the effects of the PSCM merger. PSCM's results of operations are included in the accompanying financial statements from July 1, 1996 forward. Separate results of PSCM for periods prior to the merger are as follows (in thousands): Year ended December 31, 1994: Revenues $ 16,430 Net income 469 Year ended December 31, 1995: Revenues 27,110 Net income 2,082 Six months ended June 30, 1996: Revenues 19,327 Net income 1,305 NOTE 5 -- During the first nine months of 1996, the Company acquired 58 outpatient facilities, four outpatient surgery centers, one inpatient rehabilitation hospital and one diagnostic imaging center. The total purchase price of the acquired facilities was approximately $87,142,000. The Company also entered into non-compete agreements totaling approximately $8,258,000 in connection with these transactions. The cost in excess of the acquired facilities' net asset value was approximately $53,185,000. The results of operations (not material individually or in the aggregate) of these acquisitions are included in the consolidated financial statements from their respective acquisition dates. NOTE 6 -- During the first nine months of 1996, the Company granted incentive and nonqualified stock options to certain Directors, employees and others for 2,179,000 shares of Common Stock at exercise prices ranging from $32.50 to $37.75 per share. NOTE 7 -- On September 11, 1996, the Company signed an agreement to acquire ReadiCare, Inc. ("ReadiCare") in a transaction to be accounted for as a pooling of interests. ReadiCare operates 37 occupational healthcare sites in two states. Under the terms of the agreement, all shares of common stock of ReadiCare will be exchanged for shares of the Company's Common Stock pursuant to an exchange ratio that will yield an aggregate value of approximately $80,000,000 to ReadiCare stockholders. The transaction is subject to approval by the stockholders of ReadiCare. The transaction is expected to be completed during the fourth quarter of 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company provides outpatient and rehabilitative healthcare services through its inpatient and outpatient rehabilitation facilities, surgery centers and medical centers. The Company has expanded its operations through the acquisition or opening of new facilities and satellite locations and by enhancing its existing operations. As of September 30, 1996, the Company had 1,030 locations in 48 states and the District of Columbia, including 690 outpatient rehabilitation locations, 96 inpatient rehabilitation facilities, five medical centers, 134 surgery centers and 105 locations providing other patient care services. The Company's revenues include net patient service revenues and other operating revenues. Net patient service revenues are reported at estimated net realizable amounts from patients, insurance companies, third-party payors (primarily Medicare and Medicaid) and others for services rendered. Revenues from third-party payors also include estimated retroactive adjustments under reimbursement agreements which are subject to final review and settlement by appropriate authorities. Management determines allowances for doubtful accounts and contractual adjustments based on historical experience and the terms of payor contracts. Net accounts receivable include only those amounts estimated by management to be collectible. The Company determines the amortization period of the cost in excess of net asset value of purchased facilities based on an evaluation of the facts and circumstances of each individual purchase transaction. The evaluation includes an analysis of historic and projected financial performance, an evaluation of the estimated useful life of the buildings and fixed assets acquired, the indefinite useful life of Certificates of Need and licenses acquired, the competition within local markets, lease terms where applicable, and the legal terms of partnerships where applicable. The Company utilizes independent appraisers and relies on its own management expertise in evaluating each of the factors noted above. With respect to the carrying value of the excess of cost over net asset value of purchased facilities and other intangible assets, the Company determines on a quarterly basis whether an impairment event has occurred by considering factors such as the market value of the asset, a significant adverse change in legal factors or in the business climate, adverse action by a regulator, a history of operating losses or cash flow losses, or a projection of continuing losses associated with an operating entity. The carrying value of excess cost over net asset value of purchased facilities and other intangible assets will be evaluated if the facts and circumstances suggest that it has been impaired. If this evaluation indicates that the value of the asset will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the Company's carrying value of the asset will be reduced by the estimated shortfall of cash flows. The Company, in many cases, operates more than one site within a market. In such markets, there is customarily an outpatient center or inpatient facility with associated satellite outpatient locations. For purposes of the following discussion and analysis, same store operations are measured on locations within markets in which similar operations existed at the end of the period and include the operations of additional locations opened within the same market. New store operations are measured on locations within new markets. Effective January 17, 1996, the Company consummated the acquisition of Surgical Care Affiliates, Inc. ("SCA") through a merger accounted for as a pooling of interests. Accordingly, the Company's financial statements have been restated to include the results of SCA for all periods presented (see Note 3 of "Notes to Consolidated Financial Statements" for further discussion). Effective March 14, 1996, the Company consummated the acquisition of Advantage Health Corporation ("Advantage Health"), also through a merger accounted for as a pooling of interests. The results of operations described below for the quarter ended September 30, 1995 are based on a combination of both the Company's results for its
quarter ended September 30, 1995 and Advantage Health's results for its quarter ended August 31, 1995 (see Note 3 of "Notes to Consolidated Financial Statements" for further discussion). All data set forth for periods prior to December 31, 1995 relating to revenues derived from Medicare and Medicaid do not take into account revenues of the Advantage Health facilities or the SCA facilities. Effective August 20, 1996, the Company consummated the acquisition of Professional Sports Care Management, Inc. ("PSCM") through a merger accounted for as a pooling of interests. In the transaction, PSCM stockholders received an aggregate of 1,811,444 shares of the Company's common stock. At the time of the merger, PSCM operated a network of 36 outpatient rehabilitation centers in three states. Due to the immateriality of the PSCM merger, the Company's historical financial statements for all periods prior to July 1, 1996 have not been restated to include the results of PSCM. Instead, an adjustment has been made to stockholders' equity as of July 1, 1996 to include the effects of the PSCM merger. PSCM's results of operations are included in the accompanying financial statements and the following discussion from July 1, 1996 forward (see Note 4 of "Notes to Consolidated Financial Statements" for further discussion). RESULTS OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER 30, 1996 The Company operated 690 outpatient locations (which includes base facilities and satellites) at September 30, 1996, compared to 404 outpatient locations at September 30, 1995. In addition, the Company operated 96 inpatient rehabilitation facilities, five medical centers and 134 surgery centers at September 30, 1996, compared with 94 inpatient facilities, five medical centers and 121 surgery centers at September 30, 1995. The Company's operations generated revenues of $616,943,000 for the quarter ended September 30, 1996, an increase of $98,406,000, or 19.0%, as compared to the same period in 1995. The increase in revenues is primarily attributable to increases in patient volume, the December 1, 1995 acquisition of Caremark Orthopedic Services Inc. and the addition of new outpatient and surgery centers. Same store revenues for the quarter ended September 30, 1996 were $573,159,000, an increase of $54,622,000, or 10.5%, as compared to the same period in 1995. New store revenues were $43,784,000. Revenues generated from patients under Medicare and Medicaid plans respectively accounted for 37.2% and 3.0% of revenue for the third quarter of 1996, compared to 39.4% and 3.3% for the same period in 1995. Revenues from any other single third-party payor were not significant in relation to the Company's revenues. During the third quarter of 1996, same store outpatient visits, inpatient days and surgical cases increased 15.5%, 9.2% and 5.8%, respectively. Revenue per outpatient visit, revenue per inpatient day and revenue per surgical case for same store operations increased by 2.8%, 2.9% and 4.5%, respectively. Operating expenses, at the operating unit level, were $397,749,000, or 64.5% of revenues, for the quarter ended September 30, 1996, compared to 68.7% of revenues for the third quarter of 1995. Same store operating expenses were $369,643,000, or 64.5% of comparable revenue. New store operating expenses were $28,106,000, or 64.2% of comparable revenue. Corporate general and administrative expenses increased from $12,607,000 during the 1995 quarter to $16,805,000 during the 1996 quarter. As a percentage of revenue, corporate general and administrative expenses increased from 2.4% in the 1995 quarter to 2.7% in the 1996 quarter. The provision for doubtful accounts was $13,996,000, or 2.3% of revenues, for the third quarter of 1996, compared to $8,716,000, or 1.7% of revenues, for the same period in 1995. Management believes that this provision is adequate to cover any uncollectible revenues. Depreciation and amortization expense was $49,326,000 for the quarter ended September 30, 1996, compared to $36,986,000 for the same period in 1995. The increase represents the investment in additional assets by the Company. Interest expense was $22,625,000 for the quarter ended September 30, 1996, compared to $26,451,000 for the quarter ended September 30, 1995. For the third quarter of 1996, interest income was $975,000, compared to $2,244,000 for the third quarter of 1995.
Income before minority interests and income taxes for the third quarter of 1996 was $111,904,000, compared to $79,661,000 for the same period in 1995. Income before minority interests and income taxes for the 1996 quarter includes merger costs relating to the PSCM acquisition totaling $5,513,000. Minority interests decreased income before income taxes by $13,286,000 for the quarter ended September 30, 1996, compared to decreasing income before income taxes by $12,076,000 for the third quarter of 1995. The provision for income taxes for the third quarter of 1996 was $37,574,000, compared to $25,938,000 for the same period in 1995, resulting in effective tax rates of 38.1% and 38.4%, respectively. Net income for the third quarter of 1996 was $61,044,000, compared to $41,647,000 for the third quarter of 1995. RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 1996 Revenues for the nine months ended September 30, 1996 were $1,793,766,000, an increase of $323,717,000, or 22.0%, over the nine months ended September 30, 1995. Same store revenues were $1,677,211,000, an increase of $207,162,000, or 14.1%, as compared to the same period in 1995. New store revenues were $116,555,000. The increase in revenues is primarily attributable to the acquisition of the NovaCare rehabilitation hospitals division in April 1995, the December 1, 1995 acquisition of Caremark Orthopedic Services Inc., increases in patient volume and the addition of new outpatient and surgery centers. Revenues generated from patients under Medicare and Medicaid plans respectively accounted for 37.8% and 2.9% of revenue for the first nine months of 1996, compared to 40.7% and 2.7% for the same period in 1995. Revenues from any other single third-party payor were not significant in relation to the Company's revenues. During the first nine months of 1996, same store outpatient visits, inpatient days and surgical cases increased 16.3%, 11.8% and 5.1%, respectively. Revenue per outpatient visit, revenue per inpatient day and revenue per surgical case for same store operations increased by 1.7%, 0.4% and 2.5%, respectively. Operating expenses, at the operating unit level, were $1,173,148,000, or 65.4% of revenues, for the nine months ended September 30, 1996, as compared to $1,014,302,000, or 69.0% of revenues, for the first nine months of 1995. Same store operating expenses were $1,096,061,000, or 65.4% of comparable revenue. New store operating expenses were $77,087,000, or 66.1% of comparable revenue. As a result of the SCA and Advantage Health acquisitions, the Company recognized merger costs of $28,939,000 during the first quarter of 1996 (see Note 3 of "Notes to Consolidated Financial Statements" for further discussion). Net income for the nine months ended September 30, 1996 was $158,450,000, compared to $86,495,000 for the same period in 1995. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1996, the Company had working capital of $469,609,000, including cash and marketable securities of $124,852,000. Working capital at December 31, 1995 was $406,125,000, including cash and marketable securities of $156,321,000. For the first nine months of 1996, cash provided by operations was $253,649,000, compared to $195,354,000 for the same period in 1995. Additions to property, plant, and equipment and acquisitions accounted for $115,016,000 and $87,142,000, respectively, during the first nine months of 1996. Those same investing activities accounted for $114,562,000 and $334,603,000, respectively, in the same period in 1995. Financing activities provided $57,092,000 and $310,157,000 during the first nine months of 1996 and 1995, respectively. Net borrowing proceeds (borrowing less principal reductions) for the first nine months of 1996 and 1995 were $67,110,000 and $346,556,000, respectively. Accounts receivable were $504,666,000 at September 30, 1996, compared to $409,150,000 at December 31, 1995. The number of days of average revenues in average receivables was 67.6 at September 30, 1996, compared to 63.8 at December 31, 1995. The concentration of net accounts receivable from patients, third-party payors, insurance companies and others at September 30, 1996 is consistent with the related concentration of revenues for the period then ended.
At September 30, 1996, the Company had a $1,250,000,000 revolving line of credit with NationsBank, N.A. and other participating banks. Interest is paid based on LIBOR plus a predetermined margin, prime, or competitively bid rates from the participating banks (see Note 2 of "Notes to Consolidated Financial Statements"). The effective interest rate on the average outstanding balance under the revolving line of credit was 6.02% for the nine months ended September 30, 1996, compared to the average prime rate of 8.28% during the same period. At September 30, 1996, the Company had drawn $977,000,000 under its revolving line of credit. The Company intends to pursue the acquisition or development of additional healthcare operations, including comprehensive outpatient rehabilitation facilities, ambulatory surgery centers, inpatient rehabilitation facilities and companies engaged in the provision of outpatient surgery and rehabilitation-related services, and to expand certain of its existing facilities. While it is not possible to estimate precisely the amounts which will actually be expended in the foregoing areas, the Company anticipates that over the next twelve months, it will spend approximately $30,000,000 on maintenance and expansion of its existing facilities and approximately $150,000,000 on development of the Integrated Service Model, pursuant to which the Company plans to utilize its services in particular markets to provide an integrated continuum of coordinated care. On September 11, 1996, the Company entered into a Plan and Agreement of Merger with ReadiCare, Inc. ("ReadiCare"), pursuant to which the Company has agreed to acquire ReadiCare in a stock-for-stock merger to be accounted for as a pooling of interests. ReadiCare operates 37 occupational healthcare sites in California and Washington. Under the terms of the Plan and Agreement of Merger, the Company will issue shares of its common stock valued at approximately $80,000,000 in the aggregate to the stockholders of ReadiCare. The transaction, which is subject to approval by the stockholders of ReadiCare, is expected to be consummated in the fourth quarter of 1996. Although the Company is continually considering and evaluating acquisitions and opportunities for future growth, the Company has not entered into any other agreements with respect to material future acquisitions. The Company believes that existing cash, cash flow from operations, and borrowings under the revolving line of credit will be sufficient to satisfy the Company's estimated cash requirements for the next twelve months and thereafter. Inflation in recent years has not had a significant effect on the Company's business, and is not expected to adversely affect the Company in the future unless it increases significantly. Statements contained in this Quarterly Report on Form 10-Q which are not historical facts are forward-looking statements. In addition, the Company, through its senior management, from time to time makes forward-looking public statements concerning its expected future operations and performance and other developments. Such forward-looking statements are necessarily estimates reflecting the Company's best judgment based upon current information and involve a number of risks and uncertainties, and there can be no assurance that other factors will not affect the accuracy of such forward-looking statements. While it is impossible to identify all such factors, factors which could cause actual results to differ materially from those estimated by the Company include, but are not limited to, changes in the regulation of the healthcare industry at either or both of the federal and state levels, changes in reimbursement for the Company's services by governmental or private payors, competitive pressures in the healthcare industry and the Company's response thereto, the Company's ability to obtain and retain favorable arrangements with third-party payors, unanticipated delays in the Company's implementation of its Integrated Service Model, general conditions in the economy and capital markets, and other factors which may be identified from time to time in the Company's Securities and Exchange Commission filings and other public announcements.
PART II -- OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 11. Computation of Income Per Share (unaudited) 27. Financial Data Schedule (b) Reports on Form 8-K During the three months ended September 30, 1996, the Company filed no Current Reports on Form 8-K. No other items of Part II are applicable to the Registrant for the period covered by this Quarterly Report on Form 10-Q.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. HEALTHSOUTH Corporation ----------------------- (Registrant) Date: November 14, 1996 /s/ RICHARD M. SCRUSHY --------------------------- Richard M. Scrushy Chairman of the Board and Chief Executive Officer Date: November 14, 1996 /s/ AARON BEAM, JR. --------------------------- Aaron Beam, Jr. Executive Vice President and Chief Financial Officer