-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, rOxuksjMgg8qN/nuVNwXLffAs+CsxBDiILAk4qDa1poiUIiG9Dr4eDT3HiS6aRHC FIupruhXIKmm45g3iIfCRg== 0000890613-95-000087.txt : 199506290000890613-95-000087.hdr.sgml : 19950629 ACCESSION NUMBER: 0000890613-95-000087 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950421 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19950628 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTHSOUTH CORP CENTRAL INDEX KEY: 0000785161 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 630860407 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-10315 FILM NUMBER: 95550356 BUSINESS ADDRESS: STREET 1: TWO PERIMETER PARK S STREET 2: STE 224W CITY: BIRMINGHAM STATE: AL ZIP: 35243 BUSINESS PHONE: 2059677116 MAIL ADDRESS: STREET 1: TWO PERIMETER PARK SOUTH CITY: BIRMINGHAM STATE: AL ZIP: 35243 FORMER COMPANY: FORMER CONFORMED NAME: HEALTHSOUTH REHABILITATION CORP DATE OF NAME CHANGE: 19920703 8-K/A 1 FORM 8-K/A AMENDMENT NO. 2 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 8-K/A Amendment No. 2 Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report: June 13, 1995 HEALTHSOUTH Corporation --------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 1-10315 63-0860407 ------------------ --------- ------------ (State or Other (Commission (I.R.S. Employer Jurisdiction of Incorporation File Number) Identification No.) or Organization) Two Perimeter Park South Birmingham, Alabama 35243 ---------------------------- ------------- (Address of Principal (Zip Code) Executive Offices) Registrant's Telephone Number, (205) 967-7116 Including Area Code: Item 2. ACQUISITION OR DISPOSITION OF ASSETS Effective June 13, 1995, HEALTHSOUTH Corporation, a Delaware corporation (the "Company"), and its wholly-owned subsidiary, ASC Atlanta Acquisition Company, Inc., a Delaware corporation ("ASC"), completed the acquisition of Surgical Health Corporation, a Delaware corporation ("SHC"), through a merger of ASC into SHC. As contemplated by the terms of the Amended and Restated Plan and Agreement of Merger by and among the parties, SHC is the surviving corporation in the merger, and is wholly-owned by the Company. SHC stockholders received .2633 shares of the Common Stock, par value $.01 per share, of the Company for each share of the Common Stock, par value $.0025 per share, Series A Convertible Preferred Stock, par value $.01 per share, Series B Convertible Preferred Stock, par value $.01 per share, or Series C Convertible Preferred Stock, par value $.01 per share, of SHC held by them. The exchange ratio represents a value of $4.60 per share to SHC's stockholders, resulting in an approximate value of the transaction of $155,000,000. Prior to consummation of the acquisition, SHC was the nation's second largest independent outpatient surgery company. It operated 36 outpatient surgery centers in 11 states. Item 5. OTHER EVENTS At the Annual Meeting of Stockholders of the Company held June 6, 1995, the stockholders of the Company approved a proposal to increase the number of authorized shares of Common Stock, par value $.01 per share, to 150,000,000 shares. On June 8, 1995, the Company filed a Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to effect such amendment. On June 20, 1995, SHC, as successor to ASC, completed a tender offer (the "Tender Offer") to purchase all of the outstanding 11 1/2% Senior Subordinated Notes due 2004 (the "Notes") of SHC at a cash price of $1,150 per $1,000 principal amount, plus accrued and unpaid interest up to, but not including, such date. The total principal amount of the Notes was $75,000,000, $67,500,000 of which was tendered in the offer. In connection with the Tender Offer, ASC solicited and received the requisite consents from the holders of the Notes to the adoption of proposed amendments to the Indenture pursuant to which the Notes were originally issued. - 2 - Item 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements of Businesses Acquired. The required audited consolidated financial statements of SHC at December 31, 1994, and the period then ended, were filed with the Company's Registration Statement on Form S-4 dated March 8, 1995 (Reg. No. 33-57987) and are hereby incorporated herein by reference. The required unaudited consolidated financial statements of SHC at March 31, 1995, and the period then ended, were filed with SHC's Quarterly Report on Form 10-Q dated May 12, 1995, and are hereby incorporated herein by reference. (b) Pro Forma Financial Information. The required Pro Forma Consolidated Financial Statements of the Company at December 31, 1994 were filed with Amendment No. 5 to the Company's Current Report on Form 8-K/A dated May 19, 1995, and are hereby incorporated herein by reference. It is impracticable to provide the required Pro Forma Consolidated Financial Statements for the Company at March 31, 1995, and the period then ended. Such required Pro Forma Consolidated Financial Statements will be filed under cover of Form 8-K/A as soon as practicable, but not later than 60 days after June 28, 1995. (c) Exhibits. (2) Amended and Restated Plan and Agreement of Merger, dated as of January 22, 1995, by and among HEALTHSOUTH Corporation, ASC Atlanta Acquisition Company, Inc. and Surgical Health Corporation, incorporated herein by reference to Annex A to the Prospectus forming a part of the Company's Registration Statement on Form S-4 (Reg. No. 33-57987), as filed with the Commission on March 8, 1995. (3) Restated Certificate of Incorporation of HEALTHSOUTH Corporation, as filed on June 8, 1995, with the Secretary of State of the State of Delaware. (99)-1 Audited consolidated financial statements of SHC at December 31, 1994, and the period then ended, as filed with the Company's Registration Statement on Form S-4 dated March 8, 1995 (Reg. No. 33-57987). - 3 - (99)-2 Pro Forma Consolidated Financial Statements of the Company at December 31, 1994, as filed with Amendment No. 5 to the Company Current Report on Form 8-K/A dated May 19, 1995. The Registrant undertakes to furnish supplementally to the Commission upon request a copy of any Exhibit to the Amended and Restated Plan and Agreement of Merger, incorporated by reference herein as Exhibit (2). - 4 - INDEX TO FINANCIAL STATEMENTS Page No. HEALTHSOUTH CORPORATION Pro Forma Consolidated Balance Sheet at March 31, 1995 (Unaudited) Pro Forma Consolidated Statement of Operations for the Three Months Ended March 31, 1995 (Unaudited) Pro Forma Consolidated Statement of Stockholders' Equity For the Three Months Ended March 31, 1995 (Unaudited) Pro Forma Consolidated Statement of Cash Flows For the Three Months Ended March 31, 1995 (Unaudited) Notes to Pro Forma Consolidated Financial Statements - 5 - SURGICAL HEALTH CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (000's omitted, except per share data)
December 31, 1994 March 31, 1995 ----------------- -------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents............................................... $ 2,786 $ 5,862 Accounts receivable, net................................................ 19,939 20,898 Other receivables....................................................... 854 691 Supplies .............................................................. 3,889 4,188 Prepaid expenses and other.............................................. 1,175 1,245 Income taxes refundable................................................. 599 220 --- --- Total current assets.......................................... 29,242 33,104 Property and equipment, net................................................ 67,834 71,569 Other assets: Intangible assets, net.................................................. 75,988 75,439 Deferred costs.......................................................... 9,796 9,291 Deposits and other...................................................... 1,142 1,166 ----- ----- .............................................................. 86,926 85,896 ------ ------ Total assets.................................................. $ 184,002 $ 190,569 = ======= = ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable........................................................ $ 3,974 $ 3,846 Accrued expenses........................................................ 10,638 8,160 Current portion of long-term debt and capital lease obligations......... 1,985 2,065 ----- ----- Total current liabilities..................................... 16,597 14,071 Long-term debt and capital lease obligations, less current portion......... 12,635 20,875 Senior subordinated notes.................................................. 75,000 75,000 Other long-term liabilities................................................ 2,743 2,292 Deferred income taxes...................................................... 713 713 Minority interests......................................................... 12,528 13,059 Commitments and contingencies.............................................. Redeemable common stock and warrants....................................... 3,034 3,034 Redeemable convertible preferred stock in series, $.01 par value: Authorized shares -- 15,022,053 Issued and outstanding shares -- 9,313,007 in 1995 and 1994; liquidation value of $32,948,000 in 1995 and $32,144,000 in 1994.............................................................. 93 93 Additional paid-in capital on redeemable convertible preferred stock...................................................... 26,476 26,476
1 SURGICAL HEALTH CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (000's omitted, except per share data)
December 31, 1994 March 31, 1995 ----------------- -------------- (Unaudited) Shareholders' equity: Preferred Stock, $.01 par value: Authorized shares -- 10,000,000 Issued and outstanding shares-- none................................. --- --- Non-voting common stock, $.0025 par value: Authorized shares -- 700,000 Issued and outstanding shares-- none................................. -- -- Common stock, $.0025 par value: Authorized shares -- 60,000,000 Issued and outstanding shares -- 21,680,917 in 1994 and 21,960,718 in 1995................................................ 54 54 Additional paid-in capital on common stock.............................. 33,392 33,449 Retained earnings....................................................... 737 1,453 --- ----- Total shareholders' equity.................................... 34,183 34,956 ------ ------ Total liabilities and shareholders' equity.................... $ 184,002 $ 190,569 = ======= = =======
See notes to condensed consolidated financial statements. 2 SURGICAL HEALTH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (000's omitted, except per share data)
Three Months Ended March 31, 1994 1995 Net revenues.................................................................. $ 23,478 $ 31,058 Facility operating costs...................................................... 17,268 23,497 General, administrative and development expenses.............................. 1,437 1,385 Provision for doubtful accounts............................................... 609 854 Interest expense.............................................................. 1,329 2,747 Merger costs.................................................................. 3,265 --- Interest and other income..................................................... (236) (468) ---- ---- Income (loss) before minority interests and income taxes...................... (194) 3,043 Minority interests in net earnings of partnerships............................ 1,341 1,809 ----- ----- Income (loss) before income taxes............................................. (1,535) 1,234 Income tax expense (benefit).................................................. (816) 518 ---- --- Net income (loss)............................................................. $ (719) $ 716 = ==== = === Net income (loss) per common share............................................ $ (.03) $ .02 = ==== = === Weighted average common and common equivalent shares outstanding................................................................ 21,804 33,082 ====== ====== See notes to condensed consolidated financial statements. 3 SURGICAL HEALTH CORPORATION CONDENSED CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK, COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY (Unaudited) (000's omitted)
Redeemable Convertible Preferred Stock Shareholders' Equity Additional Additional Series A Series B Series C Paid-In Paid-In Convertible Convertible Convertible Capital on Capital on Preferred Preferred Preferred Preferred Common Common Retained Stock Stock Stock Stock Stock Stock Earnings -------- --------- -------- ---------- - -------- --------- --------- Balance at December 31, 1994...... $ 19 $ 40 $ 34 $26,476 $ 54 $33,392 $ 737 Issuance of common stock from exercise of stock options and warrants....................... -- -- -- -- -- 57 -- Net income........................ -- -- -- -- -- -- 716 -- -- -- -- -- -- --- Balance at March 31, 1995......... $ 19 $ 40 $ 34 $26,476 $ 54 $33,449 $ 1,453 = == = == = == ======= = == ======= = =====
See notes to condensed consolidated financial statements. 4 SURGICAL HEALTH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (000's omitted)
Three Months Ended March 31, 1994 1995 Operating activities: Net income (loss)............................................................. $ (719) $ 716 Adjustment to reconcile net income (loss) to net cash provided by operating activities: Provision for doubtful accounts......................................... 609 854 Depreciation and amortization........................................... 2,333 3,541 Minority interests in net earnings of partnership....................... 1,341 1,809 Changes in operating assets and liabilities (net of acquired operating assets and liabilities): Accounts receivable................................................ (782) (1,813) Supplies........................................................... (94) (299) Prepaid expenses................................................... 516 (70) Other current assets............................................... 199 163 Accounts payable................................................... (687) (128) Accrued expenses................................................... 90 (2,478) Income taxes refundable............................................ (950) 379 ---- --- Net cash provided by operating activities..................................... 1,856 2,674 Investing activities: Purchase of property and equipment............................................ (8,515) (5,941) Increase in deferred costs, deposits and other................................ (229) (305) ---- ---- Net cash used in investing activities......................................... (8,744) (6,246) Financing activities: Proceeds from issuance of common stock........................................ --- 57 Contributions from limited partners........................................... 391 431 Distributions to limited partners............................................. (2,246) (1,710) Proceeds from issuance of long-term debt...................................... 10,323 8,800 Payments of capital lease obligations and long-term debt...................... (4,545) (480) Increase (decrease) in other liabilities...................................... 605 (450) --- ---- Net cash provided by financing activities..................................... 4,528 6,648 Net increase (decrease) in cash and cash equivalents.......................... (2,360) 3,076 Cash and cash equivalents at beginning of period.............................. 12,700 2,786 ------ ----- Cash and cash equivalents at end of period.................................... $ 10,340 $ 5,862 = ====== = ===== Supplemental information: Cash payments of interest..................................................... $ 1,351 $ 5,159 = ===== = ===== Cash payments of income taxes................................................. $ 683 $ 80 = === = ==
See notes to condensed consolidated financial statements. 5 SURGICAL HEALTH CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 1995 A. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments, consisting only of normal recurring accruals, which the Company considers necessary for a fair presentation of the financial position of the Company as of March 31, 1995 and the results of operations for the three months ended March 31, 1994 and 1995 have been included. These statements do not include certain disclosures required under generally accepted accounting principles and, therefore, should be read in conjunction with the financial statements and notes thereto for the three-year period ended December 31, 1994. The results of operations for the three-month period ended March 31, 1995 are not necessarily indicative of trends or results of operations to be expected for the year ending December 31, 1995. B. Description of Business As of March 31, 1995, the Company, through its wholly-owned subsidiaries, owned a majority or controlling interest in and managed 36 outpatient surgery centers, and had three additional outpatient surgery centers under development. C. Mergers Net revenues and net income (loss) for the merged companies as described in Note 1 "Description of Business" and "Basis of Presentation" to the 1994 Consolidated Financial Statements for 1994 follows:
Three Months Ended March 31, 1994 Net Net Income Revenues (Loss) (in 000's) The Company................................................... $ 21,501 $ (790) Merged companies.............................................. 1,977 71 ----- -- Combined...................................................... $ 23,478 $ (719) = ====== = ====
During the three months ended March 31, 1994, the Company expensed approximately $3,265,000 in costs incurred in connection with the Heritage merger. These costs include $2,490,000 of advisory fees, legal and accounting costs as well as other merger related expenses incurred in 6 SURGICAL HEALTH CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued) investigating, negotiating and closing the merger. Additionally, the Company expensed approximately $775,000 for severance and other costs associated with merger-related operations adjustments. D. Long-Term Debt and Capital Lease Obligations At March 31, 1995, long-term debt consisted of the following (in thousands): Long-term debt under Amended Loan and Security Agreement..................... $ 17,800 Capital lease obligations.................................................... 5,140 ----- 22,940 Current portion.............................................................. (2,065) ------ $ 20,875 ======
Effective June 28, 1994, the Company amended and restated its existing Loan and Security Agreement (the "Amended Agreement") with its primary lender. The Amended Agreement provides for a revolving credit facility of up to $50 million which expires on December 31, 1999. Borrowings outstanding under the Amended Agreement bear interest, at the Company's option, at either the bank's prime rate plus 1/4% or LIBOR plus 2 1/4%. As of May 1, 1995, the Company had approximately $30.4 million available for future borrowings under this agreement. E. Senior Subordinated Notes On June 29, 1994, the Company issued $75 million of 11.5% Senior Subordinated Notes due July 15, 2004 (the "Notes"). The Notes may not be redeemed by the Company prior to July 15, 1999, except that prior to July 15, 1997, the Company may redeem up to $18.75 million in aggregate principal amount of the notes at 110% of the principal amount plus accrued interest with the proceeds of an initial public offering of common stock. The terms of the Notes provide for limitations on the Company's ability to incur additional indebtedness (excluding borrowings under the Company's senior credit facility); to repurchase outstanding capital stock; to declare any dividends on any class of capital stock or to make certain investments. 7 SURGICAL HEALTH CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued) F. Income Taxes A reconciliation of the recorded income tax rate to the federal statutory rate of 34% is as follows:
Three Months Ended March 31 (in 000's) 1994 1995 Statutory federal income tax expense (benefit)................ $ (522) $ 420 State income taxes, net of federal benefit.................... (76) 69 Non-deductible amortization of intangible assets.............. (92) 92 Non-deductible merger costs................................... (107) -- Other......................................................... (19) (63) --- --- Income tax expense (benefit).................................. $ (816) $ 518 = ==== = ===
In 1995, income taxes are being provided for based on projected year end earnings and projected tax expense. Based on these projections, an effective tax rate of 42% was provided for the first quarter of 1995. G. Redeemable Convertible Preferred Stock and Shareholders' Equity At March 31, 1995, the Company had authorized 5,450,624; 6,000,000; and 3,571,429 shares of series A, series B and series C redeemable convertible preferred stock, respectively. The following is a summary of the issued and outstanding shares and liquidation value by series as of March 31, 1995.
Issued and Outstanding Liquidation Shares Values Series A .................................................................. 1,911,902 $ 3,676,000 Series B .................................................................. 3,961,413 15,142,000 Series C .................................................................. 3,439,692 14,130,000 --------- ---------- Total............................................................. 9,313,007 $ 32,948,000 ========= = ==========
Since December 31, 1994 options to purchase 5,000 shares of the Company's common stock at $3.67 per share have been issued to a consultant of the Company. In June 1994, the holders of the outstanding convertible preferred stock agreed to amend the Company's Certificate of Incorporation to provide that the outstanding preferred stock cannot be redeemed prior to July 15, 2004. 8 H. Commitments and Contingencies As of March 31, 1995, the Company had under construction three surgery centers. The Company estimates that it will cost approximately $6.0 million to complete the construction and equip these centers. The Company is a party in two related state court proceedings commenced in November 1992 and January 1993 challenging the determination by the Georgia State Health Planning Agency that no Certificate of Need (CON) was required for the relocation of the Company's Northlake Center for Outpatient Surgery in Atlanta, Georgia (the Northlake Center). The Company received favorable rulings on these matters by the state court; however, these rulings were appealed to the Georgia Supreme Court. No decision on such appeal has been rendered. The Company believes that it has meritorious defenses; however, if the Company does not receive a favorable decision in the Supreme Court, it may be required to discontinue operation of the Northlake Center. The Company intends to apply for a CON in such event. Although the likelihood of an unfavorable outcome of the appeal process or the possibility of obtaining a CON cannot be assessed at this time, the Company believes that the resolution of this matter will not have a material adverse effect on the Company's financial position or results of operations. Total assets of the Northlake Center at March 31, 1995 are $1,796,000, including cash and accounts receivable of $244,000. In addition, the Company's noncancellable lease on this facility requires annual lease payments of $243,600 (with annual increases of at least 2%) through 2008. Net revenues of the Northlake Center in the first quarter of 1994 and 1995 were $157,000 and $227,000, respectively. In January 1995, the Company entered into a merger agreement with HEALTHSOUTH Corporation under which all of the Company's outstanding shares of common stock and redeemable convertible preferred stock would be exchanged for common stock of HEALTHSOUTH Corporation. The Company must obtain the consent of the Lender under the Amended Agreement prior to consummation of the merger. In addition, should this merger be consummated, the Company would be required to offer to purchase all outstanding Senior Subordinated Notes at a purchase price equal to 101% of the aggregate principal amount of the notes, plus accrued and unpaid interest. I. Subsequent Events On May 3, 1995, the Company acquired substantially all of the assets of an outpatient surgery center in Washington, Missouri. The aggregate purchase price was approximately $1,835,000. 9 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 hereunto duly authorized. Date: June 28, 1995. HEALTHSOUTH Corporation By /s/ RICHARD M. SCRUSHY ---------------------------------------- Richard M. Scrushy, Chairman of the Board and Chief Executive Officer - 6 - EXHIBIT (3) RESTATED CERTIFICATE OF INCORPORATION OF HEALTHSOUTH REHABILITATION CORPORATION HEALTHSOUTH Rehabilitation Corporation, a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies as follows: 1. The name of the Corporation, prior to the amendments made herein, is HEALTHSOUTH Rehabilitation Corporation. The Corporation was originally incorporated under the name AMCARE, Inc. The date of filing its original Certificate of Incorporation with the Secretary of State was February 22, 1984. 2. This Restated Certificate of Incorporation further amends and restates the Restated Certificate of Incorporation of the Corporation by inserting therein a new Article FIRST and a new first paragraph in Article FOURTH. 3. The text of the Certificate of Incorporation, as amended or supplemented heretofore, is further amended hereby to read as herein set forth in full: "FIRST: The name of the Corporation is HEALTHSOUTH Corporation. 1 EXHIBIT (3) SECOND: The address of its registered office in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. THIRD: The nature of the business or purposes to be conducted or promoted are: (a) To engage in the business of providing comprehensive rehabilitation and clinical healthcare services on an ambulatory and inpatient basis in rehabilitation clinics and hospitals to the general public through the provision of physician services, physical therapy, social and/or psychological, respiratory therapy, cardiac rehabilitation, pulmonary rehabilitation, occupational therapy, speech pathology, prosthetic and orthotic devices, nursing care, drugs and biologicals, supplies, appliances and equipment and other services and to do any and all things necessary and appropriate to carry out such business effectively, including, without limitation, the owning, leasing, management and operation of medical facilities and other physical properties, either directly or indirectly, or in concert with others. (b) To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is One Hundred One Million Five Hundred Thousand (101,500,000) shares, consisting of One Hundred Million (100,000,000) shares of Common Stock, par value One Cent ($.01) per share, and One Million Five Hundred Thousand (1,500,000) shares of Preferred Stock, par value Ten Cents ($.10) per share. Shares of Preferred Stock may be issued from time-to-time in one or more series, each such series to have such distinctive designation or title as may be stated and expressed in this Article FOURTH or as may be fixed by the Board of Directors 2 EXHIBIT (3) prior to the issuance of any shares thereof. Each such series of Preferred Stock shall have such voting powers, full or limited, or no voting powers, and such preferences and such relative, participating, optional or other special rights (including, without limitation, the right to convert the shares of such Preferred Stock into shares of the Corporation's Common Stock at such rate and upon such terms and conditions as may be fixed by the Corporation's Board of Directors), with such qualifications, limitations or restrictions of such preferences or rights as shall be stated and expressed in this Article FOURTH or in the resolution or resolutions providing for the issue of such series of Preferred Stock as may be adopted from time-to-time by the Board of Directors prior to the issuance of any shares thereof, in accordance with the laws of the State of Delaware. Except as may be otherwise provided in this Article FOURTH or in the resolution or resolutions providing for the issue of a particular series, the Board of Directors may from time-to-time increase the number of shares of any series already created by providing that any unissued shares of Preferred Stock shall constitute part of such series, or may decrease (but not below the number of shares thereof then outstanding) the number of shares of any series already created by providing that any unissued shares previously assigned to such series shall no longer constitute part thereof. FIFTH: The Board of Directors shall have the power to make, alter or repeal the Bylaws of the Corporation at any meeting at which a quorum is present by the affirmative vote of a majority of the whole Board of Directors. Election of Directors need not be by written ballot. 3 EXHIBIT (3) SIXTH: Special Meetings of the stockholders of the Corporation may be called only by the Board of Directors of the Corporation by resolution adopted by a majority of the whole Board of Directors or in writing by the holders of at least 20% of the outstanding shares of the Corporation entitled to vote in elections of Directors. SEVENTH: (a) Unless the conditions set forth in clauses (1) through (4) of this Article SEVENTH, Section (a) are satisfied, the affirmative vote of the holders of Sixty-Six and Two-Thirds Percent (66-2/3%) of all shares of the Corporation entitled to vote in elections of Directors, considered for the purposes of this Article SEVENTH as one class, shall be required for the adoption or authorization of a business combination (as hereinafter defined) with any other entity (as hereinafter defined) if, as of the record date for the determination of stockholders entitled to notice thereof and to vote thereon, the other entity is the beneficial owner, directly or indirectly, of more than Twenty Percent (20%) of the outstanding shares of the Corporation entitled to vote in elections of Directors, considered for the purposes of this Article SEVENTH as one class. The Sixty-Six and Two-Thirds Percent (66-2/3%) voting requirement set forth in the foregoing sentence shall not be applicable if: (1) The cash, or fair market value of other consideration, to be received per share by holders of the Corporation's Common Stock in the business combination is at least an amount equal to (A) the highest per share price paid by the other entity in acquiring any of its holdings of the Corporation's Common Stock plus (B) the aggregate amount, if any, by which Five Percent (5%) per annum of that per share price exceeds the aggregate amount of all dividends paid in cash, in each case since the date on which the other entity acquired the Twenty Percent (20%) interest; (2) After the other entity has acquired a Twenty Percent (20%) interest and prior to the consummation of the business combina- tion: (A) the other entity shall have taken steps to ensure that the 4 EXHIBIT (3) Corporation's Board of Directors included at all times representation by continuing Director(s) (as hereinafter defined) proportionate to the stockholders of the public holders of the Corporation's Common Stock not affiliated with the other entity (with a continuing Director to occupy any resulting fractional board position); (B) the other entity shall not have acquired any newly issued shares, directly or indirectly, from the Corporation (except upon conversion of convertible securities acquired by it prior to obtaining a Twenty Percent (20%) interest or as a result of a pro rata share dividend or share split); and (C) the other entity shall not have acquired any additional outstanding shares of the Corporation's Common Stock or securities convertible into shares of the Corporation's Common Stock except as a part of the transaction that resulted in the other entity's acquiring its Twenty Percent (20%) interest; (3) The other entity shall not have (A) received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or tax credits provided by the Corporation or (B) made any major change in the Corporation's business or equity capital structure without in either case the approval of at least a majority of all the Directors and at least two-thirds of the continuing Directors prior to the consummation of the business combination; and (4) A proxy statement responsive to the requirements of the Securities Exchange Act of 1934 shall have been mailed to public stockholders of the Corporation for the purpose of soliciting stockholder approval of the business combination and shall have contained at the front thereof, in a prominent place, any recommendations as to the advisability (or inadvisability) of the business combination that the continuing Directors, or any of them, may choose to state and, if deemed advisable by a majority of the continuing Directors, an opinion of a reputable investment banking firm as to the fairness of the terms of the business combination, from the point of view of the remaining public stockholders of the Corporation (the investment banking firm to be selected by a majority of the continuing Directors and to be paid a reasonable fee for its services by the Corporation upon receipt of the opinion). The provisions of this Article SEVENTH shall also apply to a business combination with any other entity that at any time has been the beneficial owner, directly or indirectly, of more than Twenty Percent (20%) of the outstanding shares of the Corporation entitled to vote in elections of Directors, considered for the purposes of this Article SEVENTH as one class, notwithstanding the fact that the other entity has 5 EXHIBIT (3) reduced its shareholders below Twenty Percent (20%) if, as of the record date for the determination of stockholders entitled to notice of and to vote on the business combination, the other entity is an "affiliate" (as hereinafter defined) of the Corporation. (b) As used in this Article SEVENTH, (1) the term "other entity" shall include any corporation, person or other entity and any other entity with which it or its "affiliate" or "associate" (as defined below) has any agreement, arrangement, or understanding, directly or indirectly, for the purpose of acquiring, holding, voting, or disposing of shares of the Corporation, or that is its "affiliate" or "associate" as those terms are defined in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934 as in effect on September 1, 1986, together with the successors and assigns of those persons in any transaction or series of transactions not involving a public offering of the Corporation's shares within the meaning of the Securities Act of 1933; (2) an other entity shall be deemed to be the beneficial owner of any shares of the Corporation that the other entity (as defined above) has the right to acquire pursuant to any agreement or upon exercise of conversion rights, warrants or options, or otherwise; (3) the outstanding shares of any class of the Corporation shall include shares deemed owned through application of clause (2) above but shall not include any other shares that may be issuable pursuant to any agreement or upon exercise of conversion rights, warrants or options, or otherwise; (4) the term "business combination" shall include (A) the sale, exchange, lease, transfer or other disposition by the Corporation of all, or substantially all, of its assets or business to any other entity, (B) the consolidation of the Corporation with or its merger into any other entity, (C) the merger into the Corporation of any other entity, or (D) a combination or major- 6 EXHIBIT (3) ity share acquisition in which the Corporation is the acquiring corporation and its voting shares are issued or transferred to any other entity or to stockholders of any other entity, and the term "business combination" shall also include any agreement, contract or other arrangement with an other entity providing for any of the transactions described in (A) through (D) of this clause (4); (5) the term "continuing Director" shall mean either a person who was a member of the Corporation's Board of Directors on August 15, 1986, or a person who was elected to the Corporation's Board of Directors by the public stockholders of the Corporation prior to the time when the other entity acquired in excess of five percent (5%) of the shares of the Corporation entitled to vote in the election of Directors, considered for the purposes of this Article SEVENTH as one class, or a person recommended to succeed a continuing Director by a majority of the continuing Directors; and (6) for the purposes of Article SEVENTH, Section (a), clause (1), the term "other consideration to be received" shall mean shares of the Corporation's Common Stock retained by its existing public stockholders in the event of a business combination with the other entity in which the Corporation is the surviving corporation. (c) A majority of the continuing Directors shall have the power and duty to determine for the purposes of this Article SEVENTH, on the basis of information known to them, whether (1) the other entity beneficially owns more than Twenty Percent (20%) of the outstanding shares of the Corporation entitled to vote in elections of Directors, (2) an other entity is an "affiliate" or "associate" (as defined above) of another, or (3) an other entity has an agreement, arrangement or understanding with another. EXHIBIT (3) (d) Nothing contained in this Article SEVENTH shall be construed to relieve any other entity from any fiduciary obligation imposed by law. EIGHTH: Subject to the last sentence of this Article EIGHTH, the Corporation reserves the right to amend and repeal any provision contained in this Certificate of Incorporation including, without limiting the generality of the foregoing, the addition of a provision requiring a supermajority vote of stockholders to remove Directors. The provisions set forth in Articles SIXTH, SEVENTH and this Article EIGHTH of this Certificate of Incorporation may not be repealed or amended in any respect, unless such action is approved by the affirmative vote of the holders of Sixty-Six and TwoThirds Percent (66-2/3%) of all shares of the Corporation entitled to vote in elections of Directors, considered for purposes of this Article EIGHTH as one class. NINTH: No Director of this Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director; provided, however, that this Article NINTH shall not eliminate the liability of a Director (a) for any breach of the Director's duty of loyalty to the Corporation or its stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) under Section 174 of the General Corporation Law of Delaware, or (d) for any transaction from which the Director derived an improper personal benefit. (4) In accordance with the applicable provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware, this Restated Certificate of 8 EXHIBIT (3) Incorporation has been duly adopted by the Directors of the Corporation and by vote of the stockholders. IN WITNESS WHEREOF, said HEALTHSOUTH Rehabilitation Corporation has caused its corporate seal to be hereunto affixed and this Certificate to be signed by Anthony J. Tanner, its Executive Vice President, and attested by William W. Horton, its Assistant Secretary, this 29th day of December, 1994. HEALTHSOUTH Rehabilitation Corporation By /s/ Anthony J. Tanner __________________________________ Anthony J. Tanner Executive Vice President [ CORPORATE SEAL ] ATTEST: By /s/ William W. Horton _______________________________ William W. Horton Assistant Secretary EX-99.1 2 EXHIBIT 99.1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Surgical Health Corporation We have audited the accompanying consolidated balance sheets of Surgical Health Corporation and subsidiaries as of December 31, 1993 and 1994, and the related consolidated statements of operations redeemable convertible preferred stock and common stock and other shareholders|Al equity and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company|Als management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 1992 and 1993 consolidated financial statements of Heritage Surgical Corporation, a wholly-owned subsidiary, which statements reflect total assets constituting 53% in 1992 and 42% in 1993, total revenues constituting 44% in 1992 and 46% in 1993 and total net income constituting 57% in 1992 and 54% in 1993, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for Heritage Surgical Corporation, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referredto above present fairly, in all material respects, the consolidated financial position of Surgical Health Corporation and subsidiaries at December 31, 1993 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Atlanta, Georgia March 1, 1995 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Heritage Surgical Corporation: We have audited the accompanying consolidated balance sheets of Heritage Surgical Corporation (a Tennessee corporation) as of December 31, 1992 and 1993, and the related consolidated statements of income, shareholders' equity and cash flows for the years then ended (not presented separately herein). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements (not presented separately herein) referred to above present fairly, in all material respects, the financial position of Heritage Surgical Corporation as of December 31, 1992 and 1993, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. As discussed in the notes to the consolidated financial statements, the Company adopted SFAS 109 on January 1, 1993, and did not restate prior periods. Implementation of SFAS 109 required conversion to the liability method of accounting for deferred income taxes. As a result of the implementation of the standard, the classification of certain items on the balance sheet changed with no material effect on the Company's financial condition. ARTHUR ANDERSEN LLP Nashville, Tennessee March 11, 1994 SURGICAL HEALTH CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ----------------------------- 1993 1994 -------------- -------------- ASSETS Current assets: Cash and cash equivalents.................................................... $ 12,699,961 $ 2,786,123 Accounts receivable, net of allowance for bad debts of $2,064,000 in 1993 and $2,568,000 in 1994..................................................... 14,175,377 19,939,089 Other receivables............................................................ 542,309 854,006 Supplies..................................................................... 2,938,599 3,888,752 Prepaid expenses and other................................................... 2,317,728 1,174,454 Income taxes refundable...................................................... -- 599,169 Total current assets....................................................... 32,673,974 29,241,593 Property and equipment: Land and land improvements................................................... 4,034,911 3,261,308 Buildings.................................................................... 3,058,319 14,752,210 Leaseholds and leasehold improvements........................................ 9,608,439 15,058,251 Equipment, furniture and fixtures............................................ 30,775,496 47,892,201 Construction in progress..................................................... 8,110,991 2,334,801 55,588,156 83,298,771 Less accumulated depreciation and amortization............................... (8,574,744) (15,464,348) 47,013,412 67,834,423 Other assets: Intangible assets............................................................ 73,769,563 75,988,135 Deferred costs............................................................... 7,406,067 9,795,828 Deposits and other........................................................... 1,564,338 1,142,476 Investments in unconsolidated entities....................................... 468,742 - 83,208,710 86,926,439 Total assets............................................................... $ 162,896,096 $ 184,002,455 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable............................................................. $ 4,694,700 $ 3,973,548 Accrued expenses............................................................. 3,431,204 9,207,661 Accrued compensation......................................................... 1,352,156 1,430,569 Income taxes payable......................................................... 326,083 -- Current portion of long-term debt and capital lease obligations ............. 10,158,598 1,984,712 Total current liabilities.................................................. 19,962,741 16,596,490 Long-term debt and capital lease obligations, less current portion ............ 59,672,637 87,635,174 Other long-term liabilities.................................................... 2,827,109 2,743,273 Deferred income taxes.......................................................... 1,205,892 712,827 Minority interests............................................................. 13,324,759 12,528,466 Commitments and contingencies Redeemable common stock and warrants........................................... 2,713,407 3,034,339 Redeemable convertible preferred stock in series, $.01 par value: Authorized shares--15,022,053 ............................................. Issued and outstanding shares--9,523,400 in 1993 and 9,313,007 in 1994; liquidation value of $30,032,000 in 1993 and $32,144,000 in 1994 ........ 95,234 93,130 Additional paid-in capital on redeemable convertible preferred stock ...... 26,954,050 26,475,558 Shareholders' equity: Preferred stock, $.01 par value: ............................................ Authorized shares--10,000,000 ............................................. Issued and outstanding shares--none in 1993 and 1994....................... -- -- Non-voting common stock, $.0025 par value: .................................. Authorized shares--700,000 ................................................ Issued and outstanding shares--none in 1993 and 1994....................... -- -- Common stock. $.0025 par value: ............................................. Authorized shares-- 60,000,000 ............................................ Issued and outstanding shares--21,373,680 in 1993 and 21,680,917 in 1994 .. 53,434 54,202 Additional paid-in capital on common stock................................. 32,085,944 33,391,713 Retained earnings.......................................................... 4,000,889 737,283 Total shareholders' equity............................................... 36,140,267 34,183,198 Total liabilities and shareholders|Al equity.............................. .$ 162,896,096 $ 184,002,455
See accompanying notes. SURGICAL HEALTH CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ---------------------------------------- 1992 1993 1994 ------ ------ ------ Net revenues...................................... $ 36,561,415 $ 80,882,690 $ 108,257,719 Operating costs................................... 29,605,875 61,950,476 84,547,790 Operating income.................................. 6,955,540 18,932,214 23,709,929 General, administrative and development expenses . 2,460,340 4,311,128 8,756,375 Interest expense.................................. 1,327,987 4,233,979 8,030,938 Merger costs...................................... -- 332,523 3,570,961 Gain on sale of partnership interest.............. -- (1,400,137) -- Interest and other income......................... (491,119) (325,718) (575,262) Income before minority interests, income taxes and extraordinary item ......................... 3,658,332 11,780,439 3,926,917 Minority interests in net earnings of partnerships.................................... (2,842,677) (5,254,400) (6,198,714) Income (loss) before income taxes and extraordinary item.............................. 815,655 6,526,039 (2,271,797) Income taxes...................................... 628,075 2,616,693 469,755 Income (loss) before extraordinary item........... 187,580 3,909,346 (2,741,552) Extraordinary loss from early extinguishment of debt, net of income tax benefit of $226,000..... -- -- 201,122 Net income (loss)................................. 187,580 3,909,346 (2,942,674) Warrant accretion................................. -- -- 320,932 Net income (loss) attributable to common shares .. $ 187,580 $ 3,909,346 $ (3,263,606) Pro forma net income data: Net income as reported ........................... $ 187,580 $ 3,909,346 Pro forma income taxes (benefit).................. (147,400) 304,000 Pro forma net income ............................. $ 334,980 $ 3,605,346 before extraordinary item per common share (pro forma for 1992 and 1993) ................. $ .02 $ .11 $ (.14) Extraordinary loss per common share............... -- -- (.01) Net income (loss) attributable to common shares per common share (pro forma for 1992 and 1993) .. $ .02 $ .11 $ (.15) Weighted average common and common equivalent shares outstanding................................ 20,424,825 31,428,040 21,814,316
See accompanying notes. SURGICAL HEALTH CORPORATION CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY
THIS TABLE SPLITS ONTO NEXT PAGE REDEEMABLE CONVERTIBLE PREFERRED STOCK --------------------------------------------------------------- ADDITIONAL SERIES A SERIES B SERIES C PAID-IN CONVERTIBLE CONVERTIBLE CONVERTIBLE CAPITAL ON PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED STOCK COMMON STOCK STOCK STOCK STOCK SUBSCRIBED STOCK ---------- ----------- ------------ ----------- ----------- ------------ Balance at December 31, 1991...................... $ 11,908 $ - $ - $1,653,933 $6,191,897 $ 20,786 Issuance of 4,259,840 shares of series A convertible preferred stock previously subscribed........................................ 42,598 - - 6,149,299 (6,191,897) - Issuance of 5,653,263 shares of series B convertible preferred stock, less offering costs of $85,388........................................ - 56,533 - 16,817,868 - - Issuance of 2,834,478 shares of common stock ..... - - - - - 7,086 Issuance of 4,487,919 shares of common stock in connection with acquisitions...................... - - - - - 11,220 Issuance of 20,000 shares of common stock upon exercise of stock options.......................... - - - - - 50 Common stock subscribed............................. - - - - - - Net income.......................................... - - - - - - Dividends paid...................................... - - - - - - Balance at December 31, 1992.......................... 54,506 56,533 - 24,621,100 - 39,142 Issuance of 470,208 shares of common stock in connection with Ballas and MWA acquisitions ...... - - - - - 1,175 Conversion of 3,427,885 shares of series A convertible preferred stock and 1,638,317 shares of series B convertible preferred stock into 5,066,202 shares of common stock.................................... (34,279) (16,383) - (9,779,387) - 12,666 Issuance of 123,000 shares of common stock ........ - - - - - 308 Issuance of 5,437 shares of common stock in connection with acquisitions..................... - - - - - 13 Issuance of stock purchase warrant................. - - - - - - Issuance of 52,000 shares of common stock upon exercise of stock options........................ - - - - - 130 Issuance of 3,485,715 shares of series C convertible preferred stock, less offering costs of $52,808....................................... - - 34,857 12,112,337 - - Net income......................................... - - - - - - Dividends paid....................................... - - - - - - Balance at December 31, 1993......................... 20,227 40,150 34,857 26,954,050 - 53,434 Accretion of redeemable warrants..................... - - - - - - Conversion of 110,837 shares of series A convertible preferred stock, 53,533 shares of series B convertible preferred stock and 46,023 of series C convertible preferred stock into 210,393 shares of common stock..................... (1,109) (535) (460) (478,492) - 526 Issuance of 54,320 shares of common stock upon exercise of stock options............................ - - - - - 136 Stock option compensation............................ - - - - - - Issuance of 42,524 shares of common stock upon exercise of stock warrants........................... - - - - - 106 Net loss............................................. - - - - - - Balance at December 31, 1994......................... $ 19,118 $ 39,615 $ 34,397 $26,475,558 $ - $ 54,202
See accompanying notes. SURGICAL HEALTH CORPORATION CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY (CONTINUED...SPLIT TABLE)
SHAREHOLDERS' EQUITY ------------------------------------- ADDITIONAL PAID-IN CAPITAL ON COMMON COMMON STOCK RETAINED STOCK SUBSCRIBED EARNINGS ---------- ---------- -------- Balance at December 31, 1991.......................... $1,094,974 $ - $ 1,688,961 Issuance of 4,259,840 shares of series A convertible preferred stock previously subscribed........................................ - - - Issuance of 5,653,263 shares of series B convertible preferred stock, less offering costs of $85,388........................................ - - - Issuance of 2,834,478 shares of common stock ..... 4,220,523 - - Issuance of 4,487,919 shares of common stock in connection with acquisitions...................... 14,718,833 - - Issuance of 20,000 shares of common stock upon exercise of stock options.......................... 7,950 - - Common stock subscribed............................. - 213,000 - Net income.......................................... - - 187,580 Dividends paid...................................... - - (1,124,998) Balance at December 31, 1992.......................... 20,042,280 213,000 751,543 Issuance of 470,208 shares of common stock in connection with Ballas and MWA acquisitions ...... 1,498,764 - - Conversion of 3,427,885 shares of series A convertible preferred stock and 1,638,317 shares of series B convertible preferred stock into 5,066,202 shares of common stock.................................... 9,817,383 - - Issuance of 123,000 shares of common stock ........ 544,152 (213,000) - Issuance of 5,437 shares of common stock in connection with acquisitions..................... 18,487 - - Issuance of stock purchase warrant................. 144,208 - - Issuance of 52,000 shares of common stock upon exercise of stock options........................ 20,670 - - Issuance of 3,485,715 shares of series C convertible preferred stock, less offering costs of $52,808....................................... - - - Net income......................................... - - 3,909,346 Dividends paid....................................... - - (660,000) Balance at December 31, 1993......................... 32,085,944 - 4,000,889 Accretion of redeemable warrants..................... - - (320,932) Conversion of 110,837 shares of series A convertible preferred stock, 53,533 shares of series B convertible preferred stock and 46,023 of series C convertible preferred stock into 210,393 shares of common stock..................... 480,070 - - Issuance of 54,320 shares of common stock upon exercise of stock options............................ 20,638 - - Stock option compensation............................ 804,685 - - Issuance of 42,524 shares of common stock upon exercise of stock warrants........................... 376 - - Net loss............................................. - - (2,942,674) Balance at December 31, 1994......................... $33,391,713 $ - $ 737,283
See accompanying notes. SURGICAL HEALTH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, ----------------------------------------------- 1992 1993 1994 --------------- --------------- --------------- Operating activities Net income (loss) ............................................ $ 187,580 $ 3,909,346 $ (2,942,674) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization .............................. 3,097,202 6,848,027 11,089,967 Amortization of loan origination costs ..................... -- 337,950 638,042 Minority interests in earnings of partnerships ............. 2,842,677 5,254,400 6,198,714 Loss on early extinguishment of debt ....................... -- -- 427,122 Stock option compensation .................................. -- -- 804,685 Gain on sale of partnership interests ...................... -- (1,400,137) -- Deferred income taxes ...................................... 94,573 868,612 (341,801) Changes in operating assets and liabilities (net of acquired operating assets and liabilities): Accounts receivable .................................. (4,195,775) (2,801,468) (5,763,712) Other receivables .................................... 62,997 (193,752) (184,517) Supplies ............................................. (689,018) (573,315) (950,153) Prepaid expenses and other ........................... (78,637) (1,647,978) 1,143,274 Income taxes refundable .............................. -- -- (599,169) Accounts payable ..................................... 2,119,570 270,148 (721,152) Accrued expenses and compensation .................... 519,717 2,269,790 5,771,034 Income taxes payable ................................. 498,802 32,738 (477,347) Net cash provided by operating activities ...................... 4,459,688 13,174,361 14,092,313 Investing activities Payments for purchase of majority interests in surgery centers, net of cash acquired .............................. (21,525,462) (25,706,471) (3,831,868) Purchase of property and equipment ........................... (8,075,378) (17,652,446) (37,210,354) Purchase of medical assets ................................... (1,764,644) (408,116) -- Proceeds from sale of property and equipment ................. -- -- 9,291,939 Proceeds from sale of partnership interest ................... -- 3,163,225 423,085 Increase in other assets ..................................... (1,642,052) (4,735,835) (5,493,853) Net cash used in investing activities ........................ (33,007,536) (45,339,643) (36,821,051) Financing activities Proceeds from issuance of redeemable convertible preferred stock ............................................ 23,066,298 12,147,194 -- Proceeds from issuance of common stock ....................... 4,448,606 1,852,198 21,256 Contributions from limited partners .......................... 1,915,000 2,698,712 1,784,250 Distributions to limited partners ............................ (1,914,743) (4,356,045) (8,779,257) Proceeds from issuance of long-term debt ..................... 11,275,925 40,547,822 105,179,305 Payments on long-term debt and capital lease obligations ................................................ (3,908,400) (14,507,525) (85,390,654) Dividends paid ............................................... (1,124,998) (660,000) -- Net cash provided by financing activities .................... 33,757,688 37,722,356 12,814,900 Net increase (decrease) in cash and cash equivalents ......... 5,209,840 5,557,074 (9,913,838) Cash and cash equivalents at beginning of year ............... 1,933,047 7,142,887 12,699,961 Cash and cash equivalents at end of year ..................... $ 7,142,887 $ 12,699,961 $ 2,786,123
See accompanying notes. SURGICAL HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Significant Accounting Policies Description of Business Surgical Health Corporation (the "Company") was incorporated on April 24, 1991 to develop, acquire and manage outpatient surgery centers. The Company merged with Ballas Outpatient Management, Inc. ("Ballas") and Midwest Anesthesia, Inc. ("MWA") on February 11, 1993 in a transaction accounted for as a pooling of interests. Ballas (formerly Outpatient Surgery Center, Inc.) was incorporated in December 1984 and MWA was incorporated in July 1985. On January 18, 1994, the Company merged with Heritage Surgical Corporation ("Heritage") in a transaction accounted for as a pooling of interests. Heritage was incorporated in November 1991. All financial data for periods prior to the mergers have been restated to include the accounts and results of operations of the merged companies. See "Basis of Presentation" below. As of December 31, 1994, the Company, through its wholly-owned subsidiaries, owned and managed 36 outpatient surgery centers. Basis of Presentation On February 11, 1993, the Company acquired all the outstanding stock of Ballas, an outpatient surgery center in St. Louis, Missouri, in exchange for 1,882,336 shares of the Company's common stock and also acquired all the outstanding stock of MWA, a provider of anesthesia services to patients of Ballas, in exchange for 823,500 shares of the Company's common stock. On January 18, 1994, the Company acquired all the outstanding common stock of Heritage, an operator of eleven outpatient surgery centers, in exchange for 12,079,186 shares of the Company's common stock. The Company agreed to allow the holders of Heritage common stock options and stock purchase warrants to convert such options and warrants into shares of the Company's common stock upon exercise of the related option and warrant by the holder in accordance with its original terms. Common stock in the aggregate number of 1,464,960 shares would be issued if all such options and warrants were exercised. These acquisitions have been accounted for as poolings of interests; and accordingly, all financial data for periods prior to the acquisitions have been restated to include the results of the merged companies. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Certain of the Company's wholly-owned subsidiaries are general partners in limited partnerships which own and operate outpatient surgery centers. In each instance where the subsidiary owns at least a 50% interest in the partnership and also controls the operations of the partnership, the accounts and operations of such partnerships are included in the consolidated financial statements. Where the subsidiary owns less than a 50% interest in the partnership, the Company's investment in such partnership is accounted for using the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Supplies Supplies include medical supplies and drugs and are stated at the lower of cost (first-in, first-out method) or market. SURGICAL HEALTH CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. Significant Accounting Policies--Continued Property and Equipment Property and equipment purchased directly is stated at cost; property and equipment obtained through a purchase business combination is stated at estimated fair value as of the date of acquisition. Property and equipment under capital leases is recorded at the lower of the present value of the future minimum lease payments or the fair value of the related equipment. Depreciation (which includes the amortization of assets under capital leases) is computed using the straight line method over the related asset's estimated useful life (or the term of the related lease, if less), ranging from seven to thirty years. Intangible Assets Intangible assets principally represent the amount by which the cost of acquired net assets exceeds their related fair value (goodwill). This amount is being amortized on a straight-line basis over a forty-year period. Medical licenses represent the value of Certificates of Need obtained in connection with certain acquisitions and are being amortized on a straight-line basis over a forty-year period. Management contracts represent the amount assigned to acquire management service contracts and are amortized over the contractual term of the related agreement. The carrying value of goodwill will be evaluated if the facts and circumstances suggest that it has been impaired. If this evaluation indicates that goodwill 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 goodwill will be reduced by the estimated short fall of cash flows. Deferred Costs Organization costs incurred in connection with the formation of partnerships are deferred and amortized over a five-year period commencing when the center opens. Deferred costs also include pre-opening costs incurred in preparing a constructed facility for operations which are deferred and amortized over a twelve-month period from the date of opening. Costs incurred with respect to pending acquisitions or development projects (direct out-of-pocket costs as well as deposits or option payments) are deferred until completed or abandoned. The costs associated with completed projects are capitalized and costs associated with abandoned projects are expensed. During the fourth quarter of 1994, the Company reevaluated its continuing involvement in certain development projects. As a result of this analysis, the Company made a determination to abandon certain projects and charged approximately $503,000 of related deferred costs to expense in 1994. The costs incurred in connection with the negotiating and closing of financing agreements, principally the fair market value of stock purchase warrants and legal fees, are capitalized and amortized over the term of the related agreement. At December 31, 1993 and 1994, accumulated amortization of deferred costs was approximately $1,560,000 and $4,165,000, respectively. Net Revenues Net revenues are reported at the estimated net realizable amount from patients, third-party payors and others. Such revenues are recognized as the related services are performed. Contractual adjustments resulting from agreements with various organizations to provide services for amounts which differ from standard charges are recorded as deductions from revenues. Amounts which are determined to be uncollectible are charged to operating expenses. SURGICAL HEALTH CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. Significant Accounting Policies--Continued Concentration of Credit Risk The Company's principal financial instrument subject to potential concentration of credit risk is trade accounts receivable. The concentration of credit risk with respect to trade accounts receivable is limited due to the large number of payors and their dispersion across many different insurance companies, individuals and geographic locations. Minority Interests Minority interests represent the equity interests of the minority investors in the Company's majority-owned partnerships. The amount of the minority interests is adjusted for the minority investors' share of the partnerships' income or loss and is decreased by distributions paid to minority investors. Minority interests in net earnings of partnerships reflect the minority investors respective share of the income or loss of the related partnership. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Net Income (Loss) Per Common Share Net income (loss) per common share is based upon the weighted average number of common and common equivalent shares outstanding. Common equivalent shares, when dilutive, include the effects of outstanding stock options and warrants as well as the assumed conversion of outstanding redeemable convertible preferred stock. In addition, pro forma net income per common share for 1992 and 1993 reflects a pro forma tax provision relating to certain acquisitions of S corporations accounted for as poolings of interests. In 1994, the net loss attributable to common shares includes accretion for the increase in redemption value of redeemable warrants. 2. Mergers Net revenues and net income (loss) for the merged companies (as described in Note 1, "Description of Business" and "Basis of Presentation") for 1992, 1993 and 1994 follows (in thousands): NET NET INCOME REVENUES (LOSS) ---------- ------------ Year ended December 31, 1992 The Company................. $ 6,341 $ (852) Heritage.................... 16,057 765 Ballas and MWA.............. 14,283 271 Conforming adjustments ..... (120) 4 Combined.................... $ 36,561$ 188 Year ended December 31, 1993 The Company................. $ 41,318 $ 1,819 Heritage.................... 37,527 2,107 Ballas and MWA.............. 2,038 (17) Combined.................... $ 80,883 $ 3,909 Year ended December 31, 1994 The Company................. $ 106,281 $ (3,014) Heritage.................... 1,977 71 Combined.................... $ 108,258 $ (2,943) SURGICAL HEALTH CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. Mergers--Continued Conforming adjustments relate principally to amounts necessary to conform the depreciation policies used by Ballas and MWA. 3. Acquisitions In February 1992, the Company, through a majority-owned limited partnership, acquired certain medical equipment and a license to operate an outpatient surgery center from Multi-Care Surgery Center, Inc. ("Multi-Care"), a provider of ambulatory healthcare services in Atlanta, Georgia, for cash consideration of approximately $1,810,000 and a 10% note payable for $400,000. In connection with the Multi-Care asset purchase, the Company entered into a consulting agreement with an individual related to Multi-Care under the terms of which the Company agreed to make annual payments of $100,000 for five years and to issue warrants to this individual to purchase 25,000 shares of the Company's common stock at a price per share equal to any future initial public offering price per share of the Company's common stock. The warrants expire at a date three years subsequent to an initial public offering. In April 1992, the Company, through a wholly-owned subsidiary, acquired a 51% interest in Indian River Surgery Center, an outpatient surgery center located in Vero Beach, Florida, for cash consideration of $207,000 and the issuance of 555,484 shares of the Company's common stock. The common stock was recorded at its estimated fair value of $630,000. Interests in three outpatient surgery centers were acquired in April 1992 for $546,437 in cash consideration and the issuance of 1,099,147 shares of the Company|Als common stock. The common stock was recorded at its estimated fair value of $1,246,594. The Company acquired a 41% interest in Gulf Coast Lithotripsy Associates, L.P., located in Houston, Texas, a 28% interest in Coastal Lithotripsy Associates, L.P., located in Atlanta, Georgia and a 31% interest in Chesapeake Lithotripsy Associates, L.P., located in Baltimore, Maryland. In June 1992, the Company, through a wholly-owned subsidiary, acquired all of the outstanding common stock of Surgicenter of San Antonio, Inc., an outpatient surgery center in San Antonio, Texas, for cash consideration of approximately $3,400,000 and a 9% note payable for $200,000. In August 1992, the Company, through a majority-owned limited partnership, acquired all the outstanding common stock of Collier Surgi-Center, Inc., an outpatient surgery center in Naples, Florida, for cash consideration of approximately $1,082,000 and the issuance of a 10% interest in the partnership. Additionally, an earnout payment of $237,000 was paid in 1994 and was recorded as additional purchase price. In September 1992, the Company, through a majority-owned limited partnership, acquired all the assets of Surgical Partners Joint Venture, an outpatient surgery center in Evanston, Illinois, for cash consideration of approximately $3,900,000, an 8% note payable for $1,665,000 and the issuance of a 21% interest in the partnership. Additionally, an earnout payment of $404,000 was paid in 1993 and was recorded as additional purchase price. In September 1992, the Company, through a majority-owned limited partnership, acquired all assets of North Dade Specialists, Inc., a development stage outpatient surgery center in North Miami Beach, Florida, for cash consideration of approximately $350,000 and the issuance of a 49% interest in the partnership. In September 1992, the Company, through a majority-owned limited partnership, acquired substantially all the assets of the Center for Outpatient Surgery, Inc., an outpatient surgery center in Phoenix, Arizona, for cash consideration of approximately $2,220,000 and a 9% note payable for $2,110,000. SURGICAL HEALTH CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. Acquisitions--Continued In September 1992, the Company acquired, in a single transaction, partnership interests in three operating outpatient surgery centers. The facilities acquired were South Bay Ambulatory Surgery Center, a 50% partnership interest, UTC Surgicenter, a 50% partnership interest and Center for Surgery of Encinitas, a 50% partnership interest, all of which are located in San Diego, California. In addition to the three operating centers, the Company acquired partnership interests in two outpatient surgery centers under development, Newport Beach Surgery Center (a 50% partnership interest), located in Newport Beach, California, and The Surgery Center of The Woodlands (a 30% partnership interest), located in The Woodlands, Texas. The Company issued 2,833,288 shares of common stock as consideration, which was recorded at its estimated fair value of $12,853,459. In October 1992, the Company, through a wholly-owned subsidiary, acquired a 60% partnership interest in Boca Raton Outpatient Surgery and Laser Center, an outpatient surgery center located in Boca Raton, Florida, for cash consideration of $5,000,000. Additionally, earnout payments, based upon a multiple of the partnership|Als net income for the twelve-month periods ending February 28, 1993, l994, 1995 and 1996 are due and payable by April 30 of each year. The Company paid $1,500,000 and $2,714,000 in 1993 and 1994, respectively. These amounts were recorded as additional purchase price. In October 1992, the Company, through a majority-owned limited partnership, acquired substantially all the assets of Surgery Center, Inc., an outpatient surgery center located in Bradenton, Florida for cash consideration of approximately $750,000. In October 1992, the Company, through a majority-owned limited partnership, acquired substantially all the assets of Gwinnett Ambulatory Surgical Unit, L.P., an outpatient surgery center in Snellville, Georgia, for cash consideration of approximately $3,300,000 and the issuance of a 20% interest in the partnership. Additionally, an earnout payment of $759,000 was paid in 1993 and was recorded as additional purchase price. In December 1992, the Company, through a majority-owned limited partnership, acquired all the assets of Palms Wellington Surgical Partners Limited, a development stage outpatient surgery center in Royal Palm Beach, Florida, for cash consideration of approximately $285,000, a 12% note payable for $415,000 and the issuance of a 49% interest in the partnership. Additionally, an earnout payment based upon a multiple of the partnership's calendar year 1995 net income, to the extent such amount exceeds a base amount, is due in April 1996. In December 1992, the Company, through a majority-owned limited partnership, acquired all the assets of Oklahoma Ambulatory Surgery Center, Inc., an outpatient surgery center in Midwest City, Oklahoma, for cash consideration of approximately $100,000, a 10% note payable of $1,400,000 and the issuance of a 10% interest in the partnership. Additionally, an earnout payment of $530,000 was paid in March 1993 and was recorded as additional purchase price. In January 1993, the Company acquired all the outstanding common stock of Heritage Medical Services of Maryland, Inc.; Heritage Medical Services of Texas, Inc. and Heritage Medical Services of Georgia, Inc. The sole asset of these three companies was a general partnership interest in the three outpatient surgery centers in which the Company originally acquired a partnership interest in April 1992. As a result, the Company increased its ownership interest in each of these three partnerships to 51%. The common stock was purchased with subordinated promissory notes in the principal amount of $3,546,621. Certain of the Company's shareholders (including several who are also officers and/or directors) were the principal shareholders of these three companies. Additionally, the Company purchased the management service contracts for these three partnerships from Heritage Group, Inc., a company owned by certain shareholders of the Company for subordinated promissory notes in the principal amount of $1,316,817. SURGICAL HEALTH CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. Acquisitions--Continued In March 1993, the Company, through a majority-owned limited partnership, acquired substantially all the assets of Podiatry Associates of Oklahoma, Inc., an outpatient surgery center in Oklahoma City, Oklahoma, for cash consideration of approximately $7,320,000 and the issuance of an 11% interest in the partnership. In April 1993, the Company, through a majority-owned limited partnership, acquired certain medical equipment and a license to operate an outpatient surgery center in Tucker, Georgia from Northlake Tucker Ambulatory Surgery Center, Inc. for cash consideration of approximately $350,000. In July 1993, the Company, through two majority-owned limited partnerships, acquired substantially all the assets of Central Florida Surgical Centers, Inc. ("Central Florida") and Oakwater Surgical Center, Inc. ("Oakwater"). Central Florida and Oakwater each owned and operated an outpatient surgery center in Orlando, Florida and were majority-controlled by the same shareholders. The purchase price consisted of approximately $8,640,000 in cash and issuance of a 30% interest in each of the newly formed limited partnerships. In August 1993, the Company, through a wholly-owned subsidiary, acquired all of the common stock of Tesson Ferry Medical Management, Inc. and South County Outpatient Management, Inc. for consideration of approximately $225,000. The sole asset of these two companies were general partner interests in two newly formed limited partnerships. The Company, through these two partnerships, constructed a medical office building and outpatient surgery center in St. Louis, Missouri. Additionally, the Company acquired the rights to the related management service contracts for the two partnerships from a company which is majority-owned by one of the Company's officers and directors for $200,000. In September 1993, the Company, through a wholly-owned subsidiary, purchased a 60% interest in an outpatient surgery center in Cincinnati, Ohio for a total purchase price of approximately $3,323,000. The purchase price consisted of $1,594,000 in cash, notes payable of approximately $775,000 and the issuance of 219,752 shares of the Company's common stock which was recorded at its estimated fair value of approximately $810,000. In addition, the Company granted to an individual warrants for the purchase of 42,525 shares of common stock at an exercise price of $.01 per share for payment of brokerage fees on this transaction. The warrant was recorded at its estimated fair value of approximately $144,000. In September 1993, the Company purchased an additional 20% interest in The Surgery Center of The Woodlands for a purchase price of $300,000 in cash. This purchase increased the Company|Als ownership interest to 50%. In November 1993, the Company, through a majority-owned limited partnership, purchased substantially all the assets of Surgery Center Associates, Inc., an outpatient surgery center located in St. Louis, Missouri for cash consideration of $4,154,000. Additionally, the Company granted to the seller a warrant to purchase 25,000 shares of the Company|Als common stock at a price per share equal to any future initial public offering price per share. This warrant expires three years subsequent to an initial public offering. In December 1993, the Company, through a majority-owned limited partnership, purchased all the assets of Hawthorn Place Joint Venture, an outpatient surgery center located in Libertyville, Illinois for consideration of $3,000,000. Additionally, an earnout payment of $1,118,000 was paid in 1994 and was recorded as additional purchase price. SURGICAL HEALTH CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. Acquisitions--Continued In March 1994, the Company, through a wholly-owned subsidiary, acquired all the outstanding capital stock of Tesson Ferry Anesthesia, Inc. ("TFA") from an individual who is also an officer and director of the Company. The purchase price for the stock is to be paid based upon a multiple of TFA|Als adjusted net income for the first three twelve-month periods following the start of business operations by TFA. TFA was formed to provide anesthesia services to patients of an outpatient surgery center acquired by the Company in the development stage in August 1993. Up to 30% of the capital stock of TFA may be issued by the Company to anesthesiologists providing services at such center. TFA commenced operations in May 1994. In April 1994, the Company issued 8% subordinated promissory notes in the aggregate principal amount of $245,000 in connection with finalizing the earnout provision of the purchase of the common stock of Heritage Medical Services of Maryland, Inc. Certain of the Company|Als shareholders (including several who are officers or directors) were the principal shareholders of this company. Each of the above acquisitions was accounted for as a purchase transaction and accordingly the various assets acquired have been recorded at their respective fair value as of the date of acquisition. The Company records amounts paid, if any, under the earnout provisions described above as additional purchase consideration in the period the amount is determinable. The excess of the total acquisition costs (consisting of the related purchase price, assumed liabilities and associated acquisition costs) over the fair value of the net assets acquired was approximately $33,640,000 in 1993 and $3,832,000 in 1994. The results of operations of the acquired businesses have been included in the consolidated statement of income since their respective purchase dates. The following unaudited pro forma summary of consolidated results of operations has been prepared as if each of the above acquisitions had been acquired on the later of January 1, 1992 or the respective acquired entities' start of business.
YEARS ENDED DECEMBER 31, 1992 1993 ------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net revenues.......................... $66,227 $88,990 Net income............................ 2,019 4,128 Net income per common share........... .08 .13
These pro forma results do not purport to be indicative of the results that would have actually been obtained if the respective businesses had been acquired as of January 1, 1992 or of results which may occur in the future. SURGICAL HEALTH CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. Intangible Assets Intangible assets consist of the following amounts: DECEMBER 31, 1993 1994 --------- --------- Excess of cost over net assets acquired ................................. $69,273,072 $ 73,624,971 Medical licenses ......................... 4,924,315 4,975,260 Management contracts ..................... 1,217,277 1,417,277 Other .................................... 238,920 238,920 75,653,584 80,256,428 Accumulated amortization ................. (1,884,021) (4,268,293) $73,769,563 $ 75,988,135 5. Long-Term Debt and Capital Lease Obligations At December 31, 1993 and 1994, long-term debt and capital lease obligations consisted of the following:
DECEMBER 31, 1993 1994 ----------- ------------ Senior subordinated notes, interest at 11.5%, due July 15, 2004.......................................................... $ -- $ 75,000,000 Revolving credit facility..................................... 31,617,260 9,000,000 Various notes repaid in 1994.................................. 30,798,641 -- Capital lease obligations..................................... 7,268,993 5,484,251 Other......................................................... 146,341 135,635 69,831,235 89,619,886 Current portion............................................... (10,158,598) (1,984,712) $ 59,672,637 $ 87,635,174
In June 1994, the Company issued $75 million of 11.5% Senior Subordinated Notes due July 15, 1999 (the "Notes"). The Notes may not be redeemed by the Company prior to July 15, 1999, except that prior to July 15, 1997, the Company may redeem up to $18.75 million in aggregate principal amount of the notes at 110% of the principal amount plus accrued interest with the proceeds of an initial public offering of common stock. The terms of the Notes provide for limitations on the Company's ability to incur additional indebtedness (excluding borrowings under the senior credit facility); to repurchase outstanding capital stock; to declare any dividends on capital stock; to make certain investments or to merge the Company. The proceeds of these Notes were used to repay all of the Company's outstanding long-term debt with the exception of its capital lease obligations. The aggregate principal balance of such indebtedness was approximately $74,544,000. In connection with this repayment, the Company recognized an extraordinary loss resulting from the write-off of the unamortized balance of deferred loan fees in the amount of $427,122 (before deduction of related income tax benefit of $226,000). In June 1994, the Company amended and restated its existing Loan and Security Agreement (the "Amended Agreement") with its primary lender. The Amended Agreement provides for a revolving credit facility of up to $50 million which expires on December 31, 1999. Borrowings outstanding under the Amended Agreement bear interest, at the Company|Als option, at either the bank's prime rate (8.5% at December 31, 1994) plus 1/4% or LIBOR (5.9% at December 31, 1994) plus 2 1/4 %. Commitment fees of 1/2 % are payable quarterly on the unused portion. As of December 31, 1994, the Company had approximately $41,000,000 available under this Amended Agreement for future borrowings. SURGICAL HEALTH CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. Long-Term Debt and Capital Lease Obligations--Continued In connection with the revolving credit facility, the Company issued to the bank a stock purchase warrant to purchase 596,679 shares of its common stock or a similar number of shares of non-voting common stock at an exercise price of $.01 per share. The warrant expires in February 2003 and may be exercised at any time at the option of the warrant holder. Under the terms of the warrant agreement, the warrant holder has certain registration rights and antidilution protection from future equity securities issued at below fair market value, and can restrict the payment of dividends to any class of capital stock. The warrant agreement also requires the Company to repurchase the warrant, at the option of the warrant holder, at any time during the period February 2000 to February 2003. The purchase price is to be based upon a multiple of the Company|Als then operating cash flows, as defined in the warrant agreement. This put right expires upon the successful completion of an initial public offering of the Company's common stock in which the proceeds to the Company and any selling stockholders are not less than $12,000,000. The Company recorded the warrants issued at their estimated fair value of $1,903,406 and has included the amount in loan origination costs and treated the item as a non-cash financing transaction for purposes of the Statement of Cash Flows. The loan origination costs are being amortized over the term of the Amended Agreement. The excess of the redemption value over the carrying value has been accreted by periodic charges to common stock additional paid-in-capital over the life of the issue. The Amended Agreement contains numerous restrictive covenants, which limit, among other things, future borrowings; payment of dividends on any class of the Company|Als capital stock; distributions by the Company|Als majority-owned partnerships; loans to subsidiaries, affiliates or third parties and certain investments. The Amended Agreement also requires the maintenance of specified levels of cash flows, interest coverage and net worth. Through March 1, 1995, the Company had borrowed an additional $8,300,000 under the Amended Agreement. Borrowings under the Amended Agreement are secured by all the assets of the majority-owned partnerships to which such borrowings are advanced as well as a pledge of the related partnership interest and stock of the Company|Als wholly-owned subsidiaries which serve as the partnerships|Al general partner. Substantially all the assets of the Company and the Company's majority-owned partnerships are pledged to secure the Company|Als indebtedness. The Company leases certain medical equipment under long-term lease arrangements which have been recorded as capital leases. During 1993 and 1994, the Company entered into capital lease obligations in the original principal amounts of approximately $3,100,000 and $200,000, respectively. The aggregate future minimum payments of these capital lease obligations as of December 31, 1994 are as follows: 1995............................. $ 2,492,827 1996............................. 2,324,502 1997............................. 1,183,595 1998............................. 346,514 1999............................. 20,967 Thereafter....................... 45,558 6,413,963 Less amount representing interest....................... (929,712) $ 5,484,251 SURGICAL HEALTH CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. Long-Term Debt and Capital Lease Obligations--Continued Assets recorded under capital leases consist of the following: DECEMBER 31, ----------------------- 1993 1994 ---- ----- Equipment, furniture and fixtures......................... $ 9,682,023 $ 9,877,810 Accumulated amortization......... (2,654,841) (4,548,462) $ 7,027,182 $ 5,329,348 The Company paid interest on its long-term debt and capital lease obligations during 1992, 1993, and 1994 of approximately $1,275,000, $3,897,000 and $3,110,000 (including interest of $42,000 in 1992, $280,000 in 1993 and $635,000 in 1994 capitalized in connection with construction projects), respectively. The carrying amount of long-term debt and capital lease obligations approximates fair value. 6. Redeemable Convertible Preferred Stock At December 31, 1994, the Company had authorized 5,450,624; 6,000,000; and 3,571,429 shares of series A, series B and series C redeemable convertible preferred stock, respectively. The following is a summary of the issued and outstanding shares and liquidation value by series as of December 31, 1993 and 1994:
1993 1994 ------------------------------- ----------------------------- ISSUED AND LIQUIDATION ISSUED AND LIQUIDATION OUTSTANDING SHARES VALUES OUTSTANDING SHARES VALUES ------------------ ------------ ----------------- ----------- Series A ........ 2,022,739 $ 3,502,000 1,911,902 $ 3,586,000 Series B ........ 4,014,946 13,775,000 3,961,413 14,773,000 Series C ........ 3,485,715 12,755,000 3,439,692 13,785,000 Total ........... 9,523,400 $ 30,032,000 9,313,007 $ 32,144,000
The holders of the series A, series B, and series C convertible preferred stock (collectively, the "preferred stock"), are entitled to receive dividends, if declared by the Board of Directors and affirmed by a majority of the directors elected by the holders of the preferred stock. No dividends will be paid to holders of series A convertible preferred stock until dividends have first been paid to holders of series B and series C convertible preferred stock. The holders of the preferred stock have the right to require the Company to redeem all of the outstanding preferred stock on or after July 1, 1997 (the "redemption date") following a majority vote by the holders of preferred stock and the consent of the Company|Als lender under the Amended Agreement (see Note 5). However, the preferred stock may not be redeemed as long as the Company has outstanding debt on the revolving credit agreement or the senior subordinated notes. In the event the preferred stock is redeemed, the redemption price of approximately $26,567,000 is equal to the original issue price plus any declared but unpaid dividends at December 31, 1994. The Company has no funding requirements prior to the redemption date. Each share of preferred stock is also convertible into one share of common stock at the option of the holder at any time prior to July 1, 1997. If not redeemed prior to July 1, 1997, the conversion ratio shall reduce to 90% of the immediately preceding conversion ratio, and for each 90 day period thereafter until redeemed, the conversion ratio would reduce to 90% of the immediately preceding adjusted conversion ratio. The conversion ratio will be adjusted for dilution in the event of future issuances of capital stock for a per share consideration less than that paid by the preferred shareholders, except for issuance of up to an aggregate of 3,725,000 shares to employees or to principal owners of facilities which may be acquired. The preferred shareholders waived this right with respect to the stock purchase warrants issued to the bank (see Note 5) and also with respect to the shares, options and warrants issued in the Heritage acquisition (see Note 1). SURGICAL HEALTH CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. Redeemable Convertible Preferred Stock--Continued In the event of any liquidation, dissolution, or winding up of the business, the holders of the preferred stock would be entitled to receive a liquidation payment, prior to any distribution to common shareholders. The liquidation payment would be equal to the greater of either (i) $1.45 per share for series A, $3 per share for series B and $3.50 per share for series C, plus an amount equal to a dividend of 10% per annum less cash dividends paid, or (ii) an amount per share that would have been payable had each share been converted to common stock immediately prior to liquidation. For the purposes of the liquidation payment, the rights of holders of series A are considered junior to the rights of holders of series B and series C. In the accompanying balance sheet, the liquidation values of the preferred stock have been calculated as $1.45 per share for series A, $3 per share for series B and $3.50 per share for series C, plus an amount equal to a dividend of 10% per annum. No dividends have been paid. The preferred stock has restrictive rights which require approval by the preferred shareholders, as defined in the amended certificate of incorporation, to enact any subsequent changes in capital structure, any consent to liquidation, an amendment to the certificate of incorporation or bylaws, and any distribution of shares of the Company|Als capital stock, or a redemption of the preferred stock. No dividends on preferred stock were declared in 1992, 1993 or 1994. On February 10, 1993, the holders of 3,427,885 shares of series A convertible preferred stock and 1,638,317 shares of series B convertible preferred stock converted such shares into 5,066,202 shares of common stock. As a result, approximately $9,830,000 was transferred from preferred stock to common stock. Assuming this conversion had occurred effective with the respective date of issuance of the converted preferred shares, the net income per common share for the years ended December 31, 1992 and 1993 would not have been materially different. On January 18, 1994, the holders of 110,837 shares of series A convertible preferred stock, 53,533 shares of series B convertible preferred stock and 46,023 shares of series C convertible preferred stock converted such shares into 210,393 shares of common stock. As a result, approximately $480,000 was transferred from preferred stock to common stock. 7. Shareholders' Equity The Company's Certificate of Incorporation authorizes the issuance of up to 700,000 shares of non-voting common stock. Shares of nonvoting common stock, if issued, would be convertible at the option of the holder on a one for one basis into common stock. Such shares would also have certain antidilution provisions but would have no preferences to those of the common shareholders in dividends or in the event of liquidation. In June 1993, the Company amended its Certificate of Incorporation to increase the number of authorized shares of common stock to 30,000,000 shares. Additionally, in January 1994, the Company amended its Certificate of Incorporation to increase the number of authorized shares of common stock to 60,000,000 shares and also to increase the authorized number of preferred shares to 25,022,053 shares of which 10,000,000 shares are undesignated. At December 31, 1994, the Company had reserved 20,723,009 shares of common stock for possible future issuance in the event the outstanding shares of series A, series B, and series C convertible preferred stock are converted and the outstanding stock options and stock purchase warrants are exercised. As of December 31, 1994, the Company had stock option plans which provide for the issuance of up to 4,883,360 shares of common stock to key employees, directors and consultants of the Company. Under these plans, the Company may issue incentive or nonqualified options and all options granted expire ten years from the date of grant. Options granted under the plans generally vest 20% per year. SURGICAL HEALTH CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. Shareholder's Equity--Continued In connection with the termination of an officer of the Company during the fourth quarter of 1994, the Company agreed to accelerate the vesting of certain options and to extend the exercise period of vested options from 90 days to 3 years. These changes in option terms resulted in a compensation charge of $804,685 during the fourth quarter. A summary of transactions during 1992, 1993 and 1994 under these option plans follows: NUMBER OF OPTION PRICE SHARES PER SHARE ------------- -------------- 1992 Granted............................. 2,595,033 $.40-4.54 Exercised........................... (20,000) .40 Outstanding at December 31, 1992.... 2,575,033 .40-4.54 1993 Granted............................. 1,535,327 2.27-3.50 Exercised........................... (52,000) .40 Canceled............................ (48,000) .40 Outstanding at December 31, 1993.... 4,010,360 .40-4.54 1994 Granted............................. 1,079,551 3.67 Exercised........................... (54,320) .40 Canceled............................ (1,287,686) .40-3.67 Outstanding at December 31, 1994.... 3,747,905 .40-4.54 At December 31, 1994, options covering 1,931,979 shares of common stock were exercisable. In 1993, the Board of Directors of the Company authorized the Company to issue warrants for the purchase of the Company's common stock. The warrants generally expire five years from the date of issuance. Warrants to purchase 251,292 shares of common stock at prices ranging from $.57 to $4.54 per share are outstanding and exercisable at December 31, 1994. In 1993, in connection with the formation of a new majority-owned partnership, the Company issued a warrant to purchase 12,785 shares of common stock to the partnerships. This warrant expires in February 1998 and has an exercise price of $4.54 per share. In conjunction with a $1,000,000 note payable paid in 1994, the Company granted to an investor a warrant to purchase 33,162 shares of common stock at $3.50 per share. This warrant expires in December 1997. In 1993, the Company granted in connection with an acquisition and the related issuance of 219,752 shares of common stock the right for the holder, at its sole option, to require the Company to repurchase such shares at $3.69 per share in September 1996. These shares are classified as redeemable common stock in the consolidated balance sheet. Dividends paid by Ballas and MWA to their pre-merger shareholders aggregated $1,124,998 and $660,000 in 1992 and 1993, respectively. SURGICAL HEALTH CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. Operating Leases The Company leases space for its corporate office as well as its outpatient surgery centers under the terms of operating lease agreements that expire at various dates through 2009. Certain of these leases contain renewal options for additional periods of five to fifteen years at the then fair market rental rates. These leases generally provide for the payment of minimum annual rents (increasing at various rates over the lease term) in addition to insurance, operating costs and property taxes. Rent expense approximated $1,875,000 in 1992, $5,956,000 in 1993 and $7,527,000 in 1994. At December 31, 1994, the future minimum lease payments under non-cancelable operating leases were as follows: 1995........... $ 7,486,200 1996........... 7,452,774 1997........... 7,259,343 1998........... 7,108,871 1999........... 6,820,077 Thereafter..... 32,660,114 $ 68,787,379 9. Income Taxes Prior to the merger with the Company, Ballas and MWA were S corporations under the Internal Revenue Code and consequently their earnings were not subject to federal or state income taxes. The shareholders of Ballas and MWA included their respective share of the acquired companies' earnings or losses in their individual income tax returns. Their portion of the Company's income during 1992 and for the period January 1, 1993 to February 11, 1993 was not included in the Company's income tax provision (see Note 10). The provision for income taxes includes the following components: YEARS ENDED DECEMBER 31, 1992 1993 1994 ------ ------ ------ Current: Federal .................... $ 397,196 $1,334,256 $ 392,584 State ...................... 136,306 413,825 192,972 Deferred ..................... 94,573 868,612 (341,801) $ 628,075 $2,616,693 $ 243,755 SURGICAL HEALTH CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. Income Taxes--Continued A reconciliation of the provision for income taxes to the federal statutory rate of 34% is as follows:
YEARS ENDED DECEMBER 31, -------------------------------------------------- 1992 1993 1994 -------- ------ -------- Statutory federal income tax expense (benefit) ......... $ 277,300 $ 2,219,200 $ (917,600) State income taxes, net of federal benefit ............. 102,700 365,700 127,400 Tax effect of S corporation (income) loss .............. (93,500) 5,700 -- Non-deductible merger costs ............................ -- 58,200 617,700 Increase (decrease) in valuation allowance for deferred tax assets .................................. 224,900 (318,600) -- Non-deductible amortization of intangible assets ................................................. 106,100 229,400 397,400 Other .................................................. 10,575 57,093 18,855 Income tax expense ..................................... $ 628,075 $ 2,616,693 $ 243,755
A deferred tax asset is required to be recognized for the tax benefit of deductible temporary differences and net operating loss carryforwards. A valuation allowance is recognized if it is more likely than not that some or all of the deferred tax asset will not be realized. A valuation allowance of $318,600 at December 31, 1992 was established for the net deferred tax assets of the Company. During 1993, the valuation allowance was reduced as it became more likely than not that the deferred tax assets would be realized. The valuation allowance was not changed for 1994. During 1994, the Company utilized net operating loss carryforwards of $123,000. Deferred income taxes reflect the tax effects of differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. The significant components of the Company's deferred tax assets and liabilities at December 31, 1993 and 1994 are as follows: DECEMBER 31, 1993 1994 ------ ------ Deferred tax assets: Net operating loss carryforwards................. $ 88,900 $ 42,200 Accrued liabilities............. 103,400 709,500 Asset valuation allowances ..... 503,300 761,300 Alternative minimum tax......... -- 424,000 Other........................... 23,378 10,087 Total......................... 718,978 1,947,087 Deferred tax liabilities: Depreciation and amortization .. 1,669,700 2,275,200 Cash basis reporting............ 156,100 104,000 Other........................... 99,070 280,714 Total......................... 1,924,870 2,659,914 Net deferred tax balance........ $ 1,205,892 $ 712,827 At December 31, 1994, the Company and its subsidiaries had available net operating loss carryforwards of approximately $111,000. These net operating loss carryforwards expire beginning in 2001 through 2007. Because of changes in ownership of the Company, the utilization of these losses in the future may be limited. The Company made federal and state income tax payments of approximately $1,818,000 in 1993 and $1,100,000 in 1994. No federal and state income tax payments were made in 1992. SURGICAL HEALTH CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. Pro Forma Income Taxes As described in Note 9, Ballas and MWA were previously taxed as S corporations. Effective with the completion of the merger in February 1993, the acquired companies became subject to federal and state income taxes. The following pro forma information reflects the historical provision for income taxes adjusted for the increase or decrease in income taxes that would have resulted if Ballas and MWA had been subject to federal and state income taxes and had been consolidated subsidiaries for 1992 and 1993. YEARS ENDED DECEMBER 31, ` 1992 1993 -------- -------- Pro forma income taxes: Current: Federal................. $ 301,196 $ 1,739,856 State................... 144,406 414,225 Deferred................ 35,073 766,612 $ 480,675 $ 2,920,693 The pro forma provision for income taxes differs from the amount computed by applying the federal statutory rate of 34% to income before income taxes as follows: YEARS ENDED DECEMBER 31, ------------------------ 1992 1993 ------- -------- Statutory federal income tax expense............ $ 277,300 $ 2,219,200 State income taxes, net of federal benefit ..... 108,000 365,700 Non-deductible amortization of intangible assets..................................... 106,100 229,400 Ballas and MWA non-deductible merger costs ..... -- 101,200 Other........................................... (10,725) 5,193 $ 480,675 $ 2,920,693 11. Commitments and Contingencies As of December 31, 1994, the Company is constructing three outpatient surgery centers and is expanding an existing facility. The Company estimates that it will cost approximately $9.3 million to complete these projects. Additionally, since December 31, 1994, the Company has signed long-term lease agreements in connection with the development of two outpatient surgery centers. These leases require payments of $49,500 per month over their term. The Company's majority-owned partnerships carry malpractice and general liability insurance on a claims-made basis. Should these claims-made policies not be renewed or replaced with equivalent insurance, claims based on occurrences during the term of the respective policies, but asserted subsequently, would be uninsured. To date, the partnerships have obtained equivalent insurance at the expiration of the current coverage periods. At December 31, 1994, the Company's majority-owned partnerships have several malpractice claims outstanding which have arisen in the normal course of business. In addition, it is possible that certain incidents may have occurred which have not been reported as of this date. The Company has policies and procedures in place to track and monitor incidents of significance. Based on the Company's knowledge of the facts to date, consultation with its legal advisors and extent of existing insurance coverages, management believes the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position or the results of operations. SURGICAL HEALTH CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. Other Receivables The Company had made advances of approximately $784,000 to Surgical Care Foundation ("SCF"), a not for profit entity which provides recovery bed service to one of the Company's surgery centers. Of these advances, $275,000 had been made through a company in which an officer and director of the Company is the majority shareholder. During the fourth quarter of 1994, the Company concluded the advances to SCF are not collectible and fully reserved for the advances. The Company entered into an agreement to provide advances to an anesthesiologist who provides services at one of its facilities. During the fourth quarter of 1994, the Company established a reserve of $216,000 for advances that may not be collectible. In connection with the development of a surgery facility, the Company received approximately $100,000 of subscription receivables from the limited partners and advanced approximately $338,000 to an entity which is owned by certain of the limited partners. During the fourth quarter of 1994, the Company concluded these receivables are not collectible and fully reserved for the receivables. 13. Related Party Transactions In connection with the development of a medical office building and an outpatient surgery center in St. Louis, Missouri, the Company paid development fees of $300,000 to a Company in which an officer and director of the Company is a majority shareholder. The Company leases one of its outpatient surgery centers from a limited partnership whose general partner is wholly-owned by an officer and director of the Company. Rent expense under this lease was approximately $494,000, $592,000, and $954,000 in 1992, 1993, and 1994, respectively. During 1992, certain partnerships paid a management fee to a Company whose majority shareholders are also shareholders of the Company. The related expense of approximately $300,000 is included in operating costs in the consolidated statement of income for the year ended December 31, 1992. The Company paid this company certain fees in connection with the development, organization and syndication of certain of the Company's outpatient surgery centers. These fees aggregated $325,000 and $505,000 in 1992 and 1993, respectively. The Company had a net receivable of $143,119 at December 31, 1993 due from a corporation which is also a shareholder of the Company. The net payable and net receivable were included in payables to affiliates and other receivables and arose in connection with the acquisition of several outpatient surgery centers previously owned by this corporation. At December 31, 1994, the Company had a net receivable of $103,000 from a company in which an officer and director of the Company is a shareholder. 14. Defined Contribution Plans Effective April 1, 1994, the Company amended the 401(k) Profit-sharing Plan of Heritage Surgical Corporation (the "401(k) plan") established January 1, 1993. The amended 401(k) plan allows participation of all eligible Company employees at its centers and the corporate office. Employer contributions are made at the discretion of the Company. The Company made no contributions in 1993 and 1994. A defined contribution profit sharing plan co-sponsered by two wholly-owned subsidiaries of the Company with certain other companies was terminated in 1993. Profit sharing contributions charged to operations were approximately $175,000 in 1992 and $210,000 in 1993. SURGICAL HEALTH CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 15. Merger Costs In connection with the February 1993 merger between the Company, Ballas and MWA, the Company incurred legal, accounting and other out-of-pocket costs of $332,532. These costs were expensed in 1993. In connection with the January 1994 merger between the Company and Heritage, the Company incurred advisory fees, legal and accounting costs and other direct costs of $3,570,961 for investigating, negotiating, and closing this transaction. These costs were expensed in 1994. 16. Gain on Sale of Partnership Interest In May 1993, the Company sold its 51% partnership interest in Coastal Lithotripsy Associates, L.P. and the associated management services contract for net proceeds of approximately $3,163,000. The Company recognized a gain of $1,400,137 from this sale. For the four months ended April 30, 1993, this partnership had net revenues of $642,000 and the Company's interest in its net income was $109,000. 17. Sale of Real Estate On June 29, 1994, the Company completed the sale of the real estate and associated improvements relative to two of its outpatient surgery centers. The aggregate proceeds were approximately $2 million. The Company also entered into agreements to lease the two facilities for initial lease terms of 13 to 15 years. The aggregate annual lease payments with respect to these two properties are approximately $370,000. Additionally, in July 1994, a majority-owned partnership sold an uncompleted medical office building for aggregate proceeds of $7.4 million. The Company also entered into an agreement to lease this medical office building for an initial lease term of 15 years. The aggregate annual lease payments with respect to this building are approximately $830,000. The Company also agreed to complete construction of the facility including the related tenant improvements. The Company deferred an insignificant gain resulting from the sale of these three facilities. The Company is accounting for each of the new leases as an operating lease. 18. Fair Value of Financial Instruments The following methods were used by the Company in estimating its fair value disclosures for financial instruments. Cash and Cash Equivalents The carrying amount reported in the consolidated balance sheet for cash and cash equivalents approximate its fair value. Long-Term Debt The fair values of the Company|Als long-term debt are estimated using quoted market prices and discounted cash flow analyses, based on the Company|Als current incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts and fair values of the Company's financial instruments are as follows: DECEMBER 31, 1994 ---------------------------- CARRYING AMOUNT FAIR VALUE --------------- ------------ Cash and cash equivalents................. $ 2,786,123 $ 2,786,123 Long-term debt (including current portion)................................ 89,619,886 88,617,613 The carrying amounts of cash and long-term debt approximated fair value at December 31, 1993. SURGICAL HEALTH CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 19. Subsequent Event In January 1995, the Company entered into a merger agreement with HealthSouth Corporation under which all of the Company|Als outstanding shares of common stock and redeemable convertible preferred stock would be exchanged for common stock of HealthSouth Corporation. The Company must obtain the approval of the holders of a majority of the aggregate principal amount of the outstanding Senior Subordinated Notes and the consent of the Lender under the Amended Agreement prior to consummation of the merger. In addition, should this merger be consummated, the Company would be required to offer to purchase all outstanding Senior Subordinated Notes at a purchase price equal to 101% of the aggregate principal amount of the notes, plus accrued and unpaid interest. On January 20, 1995, the Company entered into a non-binding letter of intent to acquire substantially all of the assets of an outpatient surgery center in Washington, Missouri. The aggregate purchase price contemplated in the letter of intent is $1,835,000. The parties are currently negotiating a definitive purchase agreement. EX-99.2 3 EXHIBIT 99.2 PRO FORMA CONDENSED FINANCIAL INFORMATION The following pro forma condensed financial information and explanatory notes are presented to reflect the effect of the proposed merger (the "Merger") of Surgical Health Corporation ("SHC") with a wholly-owned subsidiary of HEALTHSOUTH Corporation ("HEALTHSOUTH") on the historical financial statements of HEALTHSOUTH and SHC. The Merger is reflected in the pro forma condensed financial information as a pooling of interests. The HEALTHSOUTH historical amounts reflect the combination of HEALTHSOUTH and ReLife, Inc. ("ReLife") for all periods presented, as HEALTHSOUTH acquired ReLife in December 1994 in a transaction accounted for as a pooling of interests. In addition, the pro forma condensed financial information reflects the impact of the acquisition from NovaCare, Inc. ("NovaCare") by HEALTHSOUTH of 11 rehabilitation hospitals, 12 other facilities and two Certificates of Need (the "NovaCare Rehabilitation Hospitals Acquisition") on the results of operations and financial position for the year ended December 31, 1994. Prior to the NovaCare Rehabilitation Hospitals Acquisition, which was consummated in the second quarter of 1995, these facilities were operated by a wholly-owned second-tier subsidiary of NovaCare, Rehab Systems Company ("RSC"). The pro forma condensed balance sheet assumes that the Merger was consummated on December 31, 1994, and the pro forma condensed income statements assume that the SHC Merger was consummated on January 1, 1992. The assumptions are described in the accompanying Notes to Pro Forma Condensed Financial Information. All HEALTHSOUTH shares outstanding and per share amounts have been adjusted to reflect a two-for-one stock split effected in the form of a 100 percent stock dividend payable on April 17, 1995. The pro forma information should be read in conjunction with the historical financial statements of HEALTHSOUTH, SHC and RSC and the related notes thereto included in documents incorporated in HEALTHSOUTH's Registration Statement on Form S-4 (Registration No. 33-57987) by reference. The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations or combined financial position that would have resulted had the Merger and other acquisitions described above been consummated at the dates indicated, nor is it necessarily indicative of the results of operations of future periods or future combined financial position. 5 HEALTHSOUTH Corporation and Subsidiaries Pro Forma Condensed Combined Balance Sheet (Unaudited) December 31, 1994
Acquisition --------------------------------------- Pro Forma Pro Forma Pro Forma Pro Forma HEALTHSOUTH NovaCare Adjustments Combined SHC Adjustments Combined ----------- --------- ----------- --------- ------- ----------- --------- (In thousands) ASSETS Current assets: Cash and cash equivalents $ 65,949 $ 8,858 $ (4,973) (1) $ 69,834 $ 2,786 $ 0 $ 72,620 Other marketable securities 16,628 0 0 16,628 0 0 16,628 Accounts receivable 222,720 42,608 (259) (1) 265,069 19,939 0 285,008 Inventories, prepaid expenses and other current assets 90,663 5,515 (42) (1) 96,136 6,517 0 102,653 ------ ----- ------ ------ ----- ------ ------- Total current assets 395,960 56,981 (5,274) 447,667 29,242 0 476,909 Other assets 41,932 49,844 (40,637) (1) 51,139 1,142 0 52,281 Property, plant and equipment, net 789,538 38,724 (1,719) (1) 946,543 67,834 0 1,014,377 120,000 (2) Intangible assets, net 324,904 62,447 (1,242) (1) 364,103 85,784 (2,856) (1) 447,031 (22,006) (2) ------ ----- ------ ------ ----- ------ ------- Total assets $1,552,334 $ 207,997 $ 49,122 $1,809,452 $ 184,002 $ (2,856) $1,990,598 ========== ======= ====== ========= ======= ====== ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable $ 83,180 $ 20,347 $ (454) (1) $ 103,073 $ 3,973 $ 4,000 (2) $ 111,046 Salaries and wages payable 32,672 0 0 32,672 1,430 0 34,102 Accrued interest payable and other liabilities 46,714 672 (275) 47,111 9,208 (1,560) (2) 47,698 (7,061) (1) Current portion of long-term debt 14,713 1,732 (146) (1) 16,299 1,985 0 18,284 ------ ----- ------ ------ ----- ------ ------- Total current liabilities 177,279 22,751 (875) 199,155 16,596 (4,621) 211,130 Long-term debt 930,061 56,756 (38,620) (1) 1,163,197 87,635 11,250 (1) 1,262,082 215,000 (2) Deferred income taxes 7,882 0 0 7,882 713 0 8,595 Other long-term liabilities 5,655 0 0 5,655 2,743 0 8,398 Payable to affiliates 0 92,377 (92,377) (1) 0 0 0 0 Deferred revenue 7,526 736 0 8,262 0 0 8,262 Minority interests (2,203) 1,370 0 0 3,034 (3,034) (3) 0 Redeemable common stock and warrants 0 0 0 0 26,569 (26,569) (3) 0 Redeemable convertible preferred stock 0 Stockholders' equity: Preferred Stock, $.10 par 0 0 0 0 0 0 Common Stock, $.01 par 342 0 0 342 54 (15) (3) 381 Additional paid-in capital 306,565 34,006 83,000 (1) 306,565 33,392 29,618 (3) 369,575 (117,006) (2) Retained earnings 137,027 0 0 137,027 737 (2,440) (2) 128,279 Treasury stock (323) 0 0 (323) 0 0 (323) Receivable from Employee Stock Ownership Plan (17,477) 0 0 (17,477) 0 0 (17,477) ------- ------ ------- ------- ------ ------ ------- Total stockholders' equity 426,134 34,006 (34,006) 426,134 34,183 20,118 480,435 ------- ------ ------- ------- ------ ------ ------- Total liabilities and stock- holders' equity $1,552,334 $ 207,996 $ 49,122 $1,809,452 $ 184,002 $ (2,856) $1,990,598 ========== ========= ======== ========= ======== ======== =========
See accompanying notes. 6 HEALTHSOUTH Corporation and Subsidiaries Pro Forma Condensed Combined Income Statement (Unaudited) Year Ended December 31, 1994
Acquisition --------------------------------------- Pro Forma Pro Forma Pro Forma Pro Forma HEALTHSOUTH NovaCare Adjustments Combined SHC Adjustments Combined ----------- -------- ----------- --------- ------- ----------- ---------- (In thousands, except per share amounts) --------------------------------------- Revenues $1,127,441 $ 142,548 $ 5,455 (6) $1,275,444 $ 108,749 $ 0 $1,384,193 Operating expenses: Operating units 835,888 128,233 (12,406) (3) 951,715 70,824 0 1,022,539 Corporate general and administrative 37,139 0 0 37,139 8,756 0 45,895 Provision for doubtful accounts 20,583 1,269 0 21,852 3,156 0 25,008 Depreciation and amortization 75,588 7,041 (1,918) (1) 86,161 11,090 0 97,251 5,450 (4) Interest expense 57,255 11,096 8,457 (5) 76,808 8,031 (728) (1) 84,111 Interest income (4,224) 0 0 (4,224) (84) 0 (4,308) Merger expenses 2,949 0 0 2,949 3,571 0 6,520 Loss on extinguishment of debt 0 0 0 0 0 14,106 (1) 14,106 Loss on impairment of assets 10,500 0 0 10,500 0 0 10,500 Loss on abandonment of computer project 4,500 0 0 4,500 0 0 4,500 ------ ------ ----- ------ --- ------ ------ 1,040,178 147,639 (417) 1,187,400 105,344 13,378 1,306,122 Income before income taxes and minority interests 87,263 (5,091) 5,872 88,044 3,405 (13,378) 78,071 Provision for income taxes 33,835 (1,084) 1,215 (7) 33,966 470 (6,777) (1) 27,659 ------ ------ ----- ------ --- ------ ------ 53,428 (4,007) 4,657 54,078 2,935 (6,601) 50,412 Minority interests 203 445 0 648 6,199 0 6,847 ------ ------ ----- ------ --- ------ ------ Net income $ 53,225 $ (4,452) $ 4,657 $ 53,430 $ (3,264) $ (6,601) $ 43,565 ======= ======= ====== ======= ======= ======= ======= Weighted average common and common equivalent shares outstanding 75,876 N/A N/A 75,876 21,814 (13,493) 84,197 ======= ======= ====== ======= ======= ======= ======= Net income per common and common equivalent share $ 0.70 $ N/A $ N/A $ 0.70 $ (0.15) $ N/A $ 0.52 ======= ======= ====== ======= ======= ======= ======= Net income per common share-- assuming full dilution $ 0.70 $ N/A $ N/A $ 0.70 $ N/A $ N/A $ 0.52 ======= ======= ====== ======= ======= ======= =======
See accompanying notes. 7 HEALTHSOUTH Corporation and Subsidiaries Notes to Pro Forma Condensed Financial Information A. The NovaCare Rehabilitation Hospitals Acquisition In February 1995 HEALTHSOUTH entered into a definitive agreement to purchase the rehabilitation hospitals division of NovaCare, Inc. ("NovaCare"), consisting of 11 rehabilitation hospitals, 12 other facilities, and certificates of need to build two additional facilities (the "NovaCare Rehabilitation Hospitals Acquisition"). The purchase price will be approximately $215,000,000 in cash and the assumption of approximately $20,000,000 in long-term debt. The transaction will be accounted for as a purchase and is expected to be completed in the second quarter of 1995. HEALTHSOUTH intends to finance the cost of the NovaCare Rehabilitation Hospitals Acquisition through additional borrowings under its existing credit facilities, as amended. NovaCare has historically reported on a June 30 fiscal year end. NovaCare's results of operations have been recast to a December 31 fiscal year end in the accompanying 1994 pro forma condensed income statement. This was accomplished by excluding the results of operations for the six months ending December 31, 1993 from their historical June 30, 1994 income statement and then adding to it their results of operations for the six months ending December 31, 1994. The accompanying pro forma adjustments are necessary for the NovaCare Rehabilitation Hospitals Acquisition: 1. To eliminate assets (including associated depreciation and amortization expenses) and liabilities of Rehab Systems Company (a wholly owned subsidiary of NovaCare, Inc.) which are excluded from the NovaCare Rehabilitation Hospitals Acquisition. The excluded assets and liabilities are as follows (in thousands): Cash and cash equivalents $ 4,973 Accounts receivable 259 Other current assets 42 Equipment, net 1,719 Intangible assets, net 1,242 Other assets (primary investments in subsidiaries) 40,637 Accounts payable (454) Other current liabilities (275) Current portion of long term debt (146) Long term debt (38,620) Payable to affiliates (92,377) ------- Net excluded asset (liability) $ (83,000) =======
Also being excluded is depreciation and amortization expense of $1,918,000 related to the excluded assets. 2. To allocate the excess of the $215,000,000 cash purchase price over the net tangible asset value of the acquired NovaCare facilities, which is approximately $159,199,000. Of this excess, $120,000,000 has been allocated to leasehold value and the remaining $39,199,000 has been allocated to 10 goodwill. This allocation serves to decrease historical goodwill of the NovaCare facilities by $22,006,000. This adjustment also reflects the increase in long-term debt necessary to finance the transaction. The $120,000,000 allocated to leasehold value was based on total lease payments for the remaining lease terms capitalized at 8.33% capitalization rate. There are seven leases involved. Total lease payments approximate $10,700,000 annually. Six of the leases have remaining terms ranging from 19 to 29 years. The seventh lease has a remaining term of six years. 3. To eliminate intercompany management fees of $4,196,000 and royalty fees of $8,210,000 of the acquired NovaCare facilities. These fees totaling $12,406,000 are included in operating unit expenses in the accompanying income statement. 4. To adjust depreciation and amortization expense to reflect the allocation of the excess purchase price over the net tangible asset value described in Item 1 above as follows (in thousands):
Purchase Price Allocation Useful Annual Adjustment Life Amortization --------------- -------- ------------ Leasehold value.................... $ 120,000 20 years $ 6,000 Goodwill........................... (22,006) 40 years (550) ---- $ 5,450 =====
No additional adjustments to NovaCare's historical depreciation and amortization are necessary. The remaining net assets acquired approximate their fair value. Because NovaCare's results of operations before intercompany items (described in item 3 above) are profitable, both on a historical and pro forma basis, the 40-year amortization period for goodwill is appropriate and consistent with HEALTHSOUTH policy. Leasehold value is being amortized over the weighted average remaining terms of the leases, which is 20 years. 5. To increase interest expense by $17,916,000 to reflect pro forma borrowings of $215,000,000, described above, at an 8.33% variable interest rate, which represents HEALTHSOUTH's weighted average cost of debt, as if they were outstanding for the entire year, and to decrease interest expense by $9,459,000, which represents interest on NovaCare debt not assumed by HEALTHSOUTH. A 1/8% variance in the assumed interest rate would change pro forma interest expense by approximately $269,000. 6. To adjust estimated Medicare reimbursement for the changes in reimbursable expenses described in items 1, 3, 4 and 5 above. These changes are as follows (in thousands): Depreciation and amortization (item 1) $ (1,918) Intercompany management fees (item 3) (4,196) Depreciation and amortization (item 4) 5,450 Interest expense (item 5) 8,457 ----- 7,793 Assumed Medicare utilization 70% --- Increased reimbursement $ 5,455 =====
11 The Medicare utilization rate of 70% assumes a slight improvement in NovaCare's historical Medicare percentage of 78% as a result of bringing these facilities into the HEALTHSOUTH network. 7. To adjust the NovaCare provision for income taxes to an effective rate of 39% (net of minority interests). B. The SHC Merger The proposed SHC Merger is intended to be accounted for as a pooling of interests. The pro forma condensed income statements assume that the SHC Merger was consummated on January 1, 1992. The pro forma condensed balance sheet assumes that the SHC Merger was consummated on December 31, 1994. The pro forma condensed financial information contains no adjustments to conform the accounting policies of the two companies because any such adjustments have been determined to be immaterial by the management of HEALTHSOUTH. The following pro forma adjustments are necessary for the SHC Merger: 1. To adjust pro forma long-term debt by $11,250,000, assuming the $75,000,000 of 11.5% Senior Subordinated Notes due 2004 (issued on June 28, 1994) are purchased by HEALTHSOUTH at 115% of their face value. The resulting $2,856,000 loss from the write-off of unamortized balance of deferred loan costs and $11,250,000 loss on early extinguishment of debt has been charged to retained earnings, net of taxes of $(7,061,000). The $728,000 decrease in interest expense represents the $3,632,000 increase in interest expense for the pro forma borrowings of $86,250,000, described above, at a 8.33% variable rate, which represents HEALTHSOUTH's weighted average cost of debt, as if they were outstanding for six months and two days, and to decrease interest expense by $4,360,000, which represents SHC's $75,000,000 Senior Subordinated Notes due 2004 at a 11.5% rate over a period of 6 months and 2 days. 2. The pro forma condensed income statements do not reflect non-recurring costs resulting directly from the Merger. The management of HEALTHSOUTH estimates that these costs will approximate $4,000,000 and will be charged to operations in the quarter the Merger is consummated. The amount includes costs to merge the two companies and professional fees. However, this estimated expense, net of taxes of $1,560,000, has been charged to retained earnings in the accompanying pro forma balance sheet. 3. To adjust pro forma share amounts based on historical share amounts, converting each outstanding share of SHC Common Stock and redeemable preferred stock into .2486 shares of HEALTHSOUTH Common Stock. The conversion ratio is based upon an assumed Base Period Trading Price for HEALTHSOUTH's Common Stock equal to or in excess of $18.50 per share. SHC's weighted average common and common equivalent shares outstanding have also been adjusted using the .2486 exchange ratio. Assuming the exchange ratio was .2788 (which is the maximum Exchange Ratio), then pro forma earnings per share data would be as follows: 12
Year ended December 31, 1994 1993 1992 ---- ---- ---- Net income per common and common equivalent share $.51 $.22 $.47 ==== ==== ==== Net income per common and common equivalent share-- assuming full dilution $.51 $N/A $N/A ==== ==== ====
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