================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1999; or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
_____________.
Commission File Number 1-10315
HEALTHSOUTH CORPORATION
-----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 63-0860407
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
ONE HEALTHSOUTH PARKWAY, BIRMINGHAM, ALABAMA 35243
-----------------------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(205) 967-7116
-----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all Reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such Reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 10, 1999
------------------------ ---------------------------
COMMON STOCK, PAR VALUE 414,726,276 SHARES
$.01 PER SHARE
Page 1
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
INDEX
PART 1 -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets - March 31, 1999 (Unaudited) 3
and December 31, 1998
Consolidated Statements of Income (Unaudited) -- Three Months
Ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows (Unaudited) -- Three Months
Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements (Unaudited) -- Three Months
Ended March 31, 1999 and 1998 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 6. Exhibits and Reports on Form 8-K 20
</TABLE>
Page 2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 116,272 $ 138,827
Other marketable securities 3,676 3,686
Accounts receivable 976,463 897,901
Inventories, prepaid expenses, and
other current assets 273,042 247,739
Income tax refund receivable 12,717 58,832
---------- ----------
TOTAL CURRENT ASSETS 1,382,170 1,346,985
OTHER ASSETS 171,138 177,851
PROPERTY, PLANT AND EQUIPMENT--NET 2,337,299 2,288,262
INTANGIBLE ASSETS--NET 2,929,553 2,959,910
---------- ----------
TOTAL ASSETS $6,820,160 $6,773,008
========== ==========
</TABLE>
Page 3
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
-------------- --------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 52,658 $ 76,099
Salaries and wages payable 122,035 111,243
Deferred income taxes 51,805 37,612
Accrued interest payable and other liabilities 141,909 126,110
Current portion of long-term debt 49,560 49,994
---------- ----------
TOTAL CURRENT LIABILITIES 417,967 401,058
LONG-TERM DEBT 2,769,856 2,780,932
DEFERRED INCOME TAXES 39,745 28,856
DEFERRED REVENUE AND OTHER LONG-TERM LIABILITIES 12,166 11,940
MINORITY INTERESTS--LIMITED PARTNERSHIPS 132,706 127,218
STOCKHOLDERS' EQUITY:
Preferred Stock, $.10 par value--1,500,000
shares authorized; issued and outstanding--
none 0 0
Common Stock, $.01 par value--600,000,000
shares authorized; 423,524,000 and 423,178,000
shares issued at March 31, 1999 and
December 31, 1998, respectively 4,235 4,232
Additional paid-in capital 2,579,601 2,577,647
Retained earnings 984,183 878,228
Treasury stock (105,017) (21,813)
Receivable from Employee Stock Ownership Plan (10,169) (10,169)
Notes receivable from stockholders (5,113) (5,121)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 3,447,720 3,423,004
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,820,160 $6,773,008
========== ==========
</TABLE>
See accompanying notes.
Page 4
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED - IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
------------- -----------
<S> <C> <C>
Revenues $1,030,547 $ 938,779
Operating unit expenses 644,736 580,196
Corporate general and administrative expenses 25,154 27,819
Provision for doubtful accounts 19,700 21,753
Depreciation and amortization 94,412 75,461
Interest expense 42,727 28,650
Interest income (2,620) (1,960)
---------- ---------
824,109 731,919
---------- ---------
Income before income taxes and
minority interests 206,438 206,860
Provision for income taxes 71,756 72,575
---------- ---------
Income before minority interests 134,682 134,285
Minority interests (24,777) (21,153)
---------- ---------
Net income $ 109,905 $ 113,132
========== =========
Weighted average common shares outstanding 419,036 418,923
========== =========
Net income per common share $ 0.26 $ 0.27
========== =========
Weighted average common shares
outstanding -- assuming dilution 442,073 432,679
========== =========
Net income per common share --
assuming dilution $ 0.26 $ 0.26
========== =========
</TABLE>
See accompanying notes.
Page 5
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 109,905 $ 113,132
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 94,412 75,461
Provision for doubtful accounts 19,700 21,753
Income applicable to minority interests of
limited partnerships 24,777 21,153
Provision for deferred income taxes 25,081 (2,134)
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable (98,142) (110,076)
Inventories, prepaid expenses and other current
assets 20,812 (54,470)
Accounts payable and accrued expenses 19,126 44,285
---------- ----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 215,671 109,104
INVESTING ACTIVITIES
Purchase of property, plant and equipment (102,083) (193,353)
Proceeds from sale of property, plant and equipment 3,488 --
Additions to intangible assets, net of effects of
acquisitions (5,186) (10,040)
Assets obtained through acquisitions, net of liabilities
assumed (2,834) (73,799)
Payments on purchase accounting and restructuring accruals (16,330) (182,256)
Changes in other assets 3,225 (4,058)
Proceeds received on sale of other marketable
securities 10 10,030
---------- ----------
NET CASH USED IN
INVESTING ACTIVITIES (119,710) (453,476)
</TABLE>
Page 6
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
------------ -------------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from borrowings $ 50,464 $ 989,659
Principal payments on long-term debt (63,186) (617,405)
Proceeds from exercise of options 1,957 38,987
Purchase of treasury stock (83,204) -
Reduction in receivable from Employee Stock
Ownership Plan - 2,078
Decrease in loans to stockholders 8 186
Proceeds from investment by minority interests 2,562 765
Purchase of limited partnership units (4,222) -
Payment of cash distributions to limited partners (22,895) (14,908)
------- --------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (118,516) 399,362
-------- --------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (22,555) 54,990
Cash and cash equivalents at beginning of period 138,827 162,992
-------- --------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 116,272 $ 217,982
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 21,044 $ 24,144
Income taxes 11,802 172,491
Non-cash financing activities:
The Company received a tax benefit from the disqualifying disposition of
incentive stock options of $14,697,000 for the three months ended March 31,
1998.
</TABLE>
See accompanying notes.
Page 7
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
NOTE 1 -- The accompanying consolidated financial statements include the
accounts of HEALTHSOUTH Corporation (the "Company") and its
subsidiaries. This information should be read in conjunction with
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998. It is management's opinion that the accompanying
consolidated financial statements reflect all adjustments (which are
normal recurring adjustments, except as otherwise indicated)
necessary for a fair presentation of the results for the interim
period and the comparable period presented.
NOTE 2 -- The Company has a $1,750,000,000 revolving credit facility with
NationsBank, N.A. ("NationsBank") and other participating banks (the
"1998 Credit Agreement"). The 1998 Credit Agreement replaced a
previous $1,250,000,000 revolving credit agreement, also with
NationsBank. In conjunction with the 1998 Credit Agreement, the
Company also canceled its $350,000,000 364-day interim revolving
credit facility with NationsBank. Interest on the 1998 Credit
Agreement is paid based on LIBOR plus a predetermined margin, a base
rate, or competitively bid rates from the participating banks. The
Company is required to pay a fee based on the unused portion of the
revolving credit facility ranging from 0.09% to 0.25%, depending on
certain defined ratios. The principal amount is payable in full on
June 22, 2003. The Company has provided a negative pledge on all
assets under the 1998 Credit Agreement. At March 31, 1999, the
effective interest rate associated with the 1998 Credit Agreement
was approximately 5.6%.
The Company also has a Short Term Credit Agreement with NationsBank
(as amended, the "Short Term Credit Agreement"), providing for a
$500,000,000 short term revolving credit facility. The terms of the
Short Term Credit Agreement are substantially consistent with those
of the 1998 Credit Agreement. Interest on the Short Term Credit
Agreement is paid based on LIBOR plus a predetermined margin or a
base rate. The Company is required to pay a fee on the unused
portion of the credit facility ranging from 0.09% to 0.25%,
depending on certain defined ratios. The principal amount is payable
in full on February 15, 2000, with an earlier repayment required in
the event that the Company consummates any public offering or
private placement of debt securities. At March 31, 1999, the Company
had not drawn down any amounts under the Short Term Credit
Agreement.
On March 24, 1994, the Company issued $250,000,000 principal amount
of 9.5% Senior Subordinated Notes due 2001 (the "Notes"). Interest
is payable on April 1 and October 1. The Notes are senior
subordinated obligations of the Company and, as such, are
subordinated to all existing and future senior indebtedness of the
Company, and also are effectively subordinated to all existing and
future liabilities of the Company's subsidiaries and partnerships.
The Notes mature on April 1, 2001.
On March 20, 1998, the Company issued $500,000,000 in 3.25%
Convertible Subordinated Debentures due 2003 (the "3.25% Convertible
Debentures") in a private placement. An additional $67,750,000
principal amount of the 3.25% Convertible Debentures was issued on
March 31, 1998 to cover underwriters' overallotments. Interest is
payable on April 1 and October 1. The 3.25% Convertible Debentures
are convertible into Common Stock of the Company at the option of
the holder at a conversion price of $36.625 per share, subject to
adjustment upon the occurrence of certain events. The net proceeds
from the issuance of the 3.25% Convertible Debentures were used by
the Company to pay down indebtedness outstanding under its
then-existing credit facilities.
Page 8
<PAGE>
On June 22, 1998, the Company issued $250,000,000 in 6.875% Senior
Notes due 2005 and $250,000,000 in 7.0% Senior Notes due 2008
(collectively, the "Senior Notes"). Interest is payable on June 15
and December 15 of each year, commencing on December 15, 1998. The
Senior Notes are unsecured, unsubordinated obligations of the
Company. The net proceeds from the issuance of the Senior Notes were
used by the Company to pay down indebtedness outstanding under its
existing credit facilities.
At March 31, 1999, and December 31, 1998, long-term debt consisted
of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- -------------
(in thousands)
<S> <C> <C>
Advances under the 1998 Credit Agreement $ 1,325,000 $ 1,325,000
9.5% Senior Subordinated Notes due 2001 250,000 250,000
3.25% Convertible Subordinated Debentures
due 2003 567,750 567,750
6.875% Senior Notes due 2005 250,000 250,000
7.0% Senior Notes due 2008 250,000 250,000
Other long-term debt 176,666 188,176
--------------- -------------
2,819,416 2,830,926
Less amounts due within one year 49,560 49,994
--------------- -------------
$ 2,769,856 $ 2,780,932
=============== =============
</TABLE>
NOTE 3 -- During the first three months of 1999, the Company acquired two
outpatient rehabilitation facilities and six outpatient surgery
centers. The total purchase price of these acquired facilities was
approximately $2,833,000. The Company also entered into non-compete
agreements totaling approximately $260,000 in connection with these
transactions. The cost in excess of the acquired facilities' net
asset value was approximately $2,834,000. The results of operations
(not material individually or in the aggregate) of these
acquisitions are included in the consolidated financial statements
from their respective acquisition dates. Subsequent to the end of
the quarter, but effective as of March 31, the Company acquired an
additional 16 outpatient rehabilitation facilities in a transaction
valued at $14,000,000 and entered into non-compete agreements
totaling $2,000,000 in connection therewith.
On April 27, 1999, the Company entered into a definitive asset
purchase agreement to acquire from Mariner Post-Acute Network, Inc.
("MPN") substantially all of the assets of MPN's American Rehability
Services division, which operates outpatient rehabilitation centers
in 18 states. The acquisition will be accounted for as a purchase.
The transaction, which does not involve the assumption of
liabilities, is valued at $55,000,000. Consummation of the
transaction is subject to various regulatory approvals, including
clearance under the Hart-Scott-Rodino Antitrust Improvements Act,
and to the satisfaction of certain other conditions. The Company
currently anticipates that the transaction will be consummated in
the second quarter of 1999.
NOTE 4 -- During 1998, the Company recorded impairment and restructuring
charges related to the Company's decision to dispose of or otherwise
discontinue substantially all of its home health operations and to
close certain facilities that do not fit with the Company's
strategic vision, underperforming facilities and facilities not
located in target markets. The home health operations covered by the
plan were closed by December 31, 1998. As of May 12, 1999,
approximately 84% of the other locations identified in the
restructuring plan had been closed.
Page 9
<PAGE>
Details of the impairment and restructuring charge activity for the
first quarter of 1999 are as follows:
<TABLE>
<CAPTION>
Balance at Balance at
12/31/98 Activity 03/31/99
-------------- -------------- ------------
(in thousands)
<S> <C> <C> <C>
Impairment of assets:
Property, plant and equipment $19,380 $3,488 $15,892
Lease abandonment costs 49,476 1,502 47,974
Severance packages 1,274 63 1,211
Other incremental costs 16,404 536 15,868
-------------- -------------- ------------
$86,534 $5,589 $80,945
============== ============== ============
</TABLE>
Of the remaining balance at March 31, 1999, $15,892,000 is included
as other assets and the remaining $65,053,000 is included in accrued
interest payable and other liabilities in the accompanying balance
sheet.
NOTE 5 -- The Company has adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information". SFAS 131 requires the
utilization of a "management approach" to define and report the
financial results of operating segments. The management approach
defines operating segments along the lines used by management to
assess performance and make operating and resource allocation
decisions. The Company has aggregated the financial results of its
outpatient rehabilitation facilities, outpatient surgery centers and
outpatient diagnostic centers into the outpatient services segment.
These three types of facilities have common economic
characteristics, provide similar services, serve a similar class of
customers, cross-utilize administrative services and operate in
similar regulatory environment. In addition, the Company's
integrated service model strategy combines these services in a
seamless environment for the delivery of patient care on an episodic
basis.
Operating results and other financial data are presented for the
principal operating segments as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
--------------- -----------
(In thousands)
<S> <C> <C>
Revenues:
Inpatient and other clinical services $ 486,504 $ 472,391
Outpatient services 529,705 453,442
----------- ---------
1,016,209 925,833
Unallocated corporate office 14,338 12,946
----------- ---------
Consolidated revenues $ 1,030,547 $ 938,779
=========== =========
Income before minority interests and income taxes:
Inpatient and other clinical services $ 108,769 $ 100,549
Outpatient services 159,943 148,913
----------- ---------
268,712 249,462
Unallocated corporate office (62,274) (42,602)
----------- ---------
Consolidated income before minority interests
and income taxes $ 206,438 $ 206,860
=========== =========
</TABLE>
Page 10
<PAGE>
NOTE 6 -- During the first three months of 1999, the Company granted
nonqualified stock options to certain Directors, employees and
others for 3,782,000 shares of Common Stock at exercise prices
ranging from $11.00 to $15.94 per share.
Page 11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company provides outpatient and rehabilitative healthcare services
through its inpatient and outpatient rehabilitation facilities, surgery centers,
diagnostic centers and medical centers. The Company has expanded its operations
through the acquisition or opening of new facilities and satellite locations and
by enhancing its existing operations. As of March 31, 1999, the Company had
nearly 1,900 locations in 50 states, the United Kingdom and Australia (excluding
facilities being closed, consolidated or held for sale), including approximately
1,214 outpatient rehabilitation locations, 128 inpatient rehabilitation
facilities, four medical centers, 222 surgery centers, 119 diagnostic centers
and 119 occupational health centers.
The Company's revenues include net patient service revenues and other
operating revenues. Net patient service revenues are reported at estimated net
realizable amounts from patients, insurance companies, third-party payors
(primarily Medicare and Medicaid) and others for services rendered. Revenues
from third-party payors also include estimated retroactive adjustments under
reimbursement agreements which are subject to final review and settlement by
appropriate authorities. Management determines allowances for doubtful accounts
and contractual adjustments based on historical experience and the terms of
payor contracts. Net accounts receivable include only those amounts estimated by
management to be collectible.
The Company determines the amortization period of the cost in excess of
net asset value of purchased facilities based on an evaluation of the facts and
circumstances of each individual purchase transaction. The evaluation includes
an analysis of historic and projected financial performance, an evaluation of
the estimated useful life of the buildings and fixed assets acquired, the
indefinite useful life of Certificates of Need and licenses acquired, the
competition within local markets, lease terms where applicable, and the legal
terms of partnerships where applicable. The Company utilizes independent
appraisers and relies on its own management expertise in evaluating each of the
factors noted above. In connection with recent developments, including changes
in the reimbursement environment in the healthcare industry, the closing or
consolidation of certain of its locations, and the integration of some of its
purchased facilities in connection with implementation of its Integrated Service
Model strategy, the Company is undertaking a comprehensive review of its
amortization policies with respect to the excess of cost over net asset value of
purchased facilities. This review may result in future changes in certain of the
Company's accounting estimates following completion of such review. With respect
to the carrying value of the excess of cost over net asset value of purchased
facilities and other intangible assets, the Company determines on a quarterly
basis whether an impairment event has occurred by considering factors such as
the market value of the asset, a significant adverse change in legal factors or
in the business climate, adverse action by regulators, a history of operating
losses or cash flow losses, or a projection of continuing losses associated with
an operating entity. The carrying value of excess cost over net asset value of
purchased facilities and other intangible assets will be evaluated if the facts
and circumstances suggest that it has been impaired. If this evaluation
indicates that the value of the asset will not be recoverable, as determined
based on the undiscounted cash flows of the entity acquired over the remaining
amortization period, the Company's carrying value of the asset will be reduced
by the estimated shortfall of cash flows to the estimated fair market value.
In 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS 131 requires an enterprise to report
operating segments based upon the way its operations are managed. This approach
defines operating segments along the lines used by management to assess
performance and make operating and resource allocation decisions. Based on the
Company's management and reporting structure, segment information has been
presented for inpatient and other clinical services and outpatient services.
The inpatient and other clinical services segments includes the
operations of its inpatient rehabilitation facilities and medical centers, as
well as the operations of certain physician practices and
Page 12
<PAGE>
other clinical services which are managerially aligned with the Company's
inpatient services. The Company has aggregated the financial results of its
outpatient rehabilitation facilities (including occupational health centers),
outpatient surgery centers and outpatient diagnostic centers into the outpatient
services segment. These three types of facilities have common economic
characteristics, provide similar services, serve a similar class of customers,
cross-utilize administrative services and operate in a similar regulatory
environment. In addition, the Company's Integrated Service Model strategy
combines these services in a seamless environment for the delivery of patient
care on an episodic basis.
Substantially all of the Company's revenues are derived from private
and governmental third-party payors. The Company's reimbursement from
governmental third-party payors is based upon cost reports and other
reimbursement mechanisms which require the application and interpretation of
complex regulations and policies, and such reimbursement is subject to various
levels of review and adjustment by fiscal intermediaries and others, which may
affect the final determination of reimbursement. In addition, there are
increasing pressures from many payor sources to control healthcare costs and to
reduce or limit increases in reimbursement rates for medical services. There can
be no assurance that payments under governmental and third-party payor programs
will remain at levels comparable to present levels. In addition, there have
been, and the Company expects that there will continue to be, a number of
proposals to limit Medicare reimbursement for certain services. The Company
cannot now predict whether any of these proposals will be adopted or, if adopted
and implemented, what effect such proposals would have on the Company. Changes
in reimbursement policies or rates by private or governmental payors could have
an adverse effect on the future results of operations of the Company.
The Company, in many cases, operates more than one site within a
market. In such markets, there is customarily an outpatient center or inpatient
facility with associated satellite outpatient locations. For purposes of the
following discussion and analysis, same store operations are measured on
locations within markets in which similar operations existed at the end of the
period and include the operations of additional locations opened within the same
market. New store operations are measured on locations within new markets. The
Company may, from time to time, close or consolidate similar locations in
multi-site markets to obtain efficiencies and respond to changes in demand.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 1999
The Company's operations generated revenues of $1,030,547,000 for the
quarter ended March 31, 1999, an increase of $91,768,000, or 9.8%, as compared
to the same period in 1998. The increase in revenues is primarily attributable
to increases in patient volume and the addition of new outpatient, inpatient,
diagnostic and surgery centers. Same store revenues for the quarter ended March
31, 1999, excluding discontinued home health operations in both periods, were
$959,244,000, an increase of $47,800,000, or 5.2%, as compared to the same
period in 1998. New store revenues were $68,773,000. Revenues generated from
patients under Medicare and Medicaid plans respectively accounted for 33.6% and
2.2% of revenue for the first quarter of 1999, compared to 35.4% and 2.7% for
the same period in 1998. Revenues from any other single third-party payor were
not significant in relation to the Company's revenues. During the first quarter
of 1999, same store outpatient visits, inpatient days, surgical cases and
diagnostic cases increased 15.1%, 7.1%, 6.5% and 11.8%, respectively. Revenue
per outpatient visit, inpatient day, surgical case and diagnostic case for same
store operations decreased by 2.9%, 3.5%, 1.8% and 3.1%, respectively.
Operating expenses, at the operating unit level, were $644,736,000, or
62.6% of revenues, for the quarter ended March 31, 1999, compared to 61.8% of
revenues for the first quarter of 1998. Same store operating expenses, excluding
discontinued home health operations, were $596,905,000, or 62.2% of comparable
revenue. New store operating expenses were $43,940,000, or 63.9% of comparable
revenue. Corporate general and administrative expenses decreased from
$27,819,000 during the 1998 quarter to $25,154,000 during the 1999 quarter. As a
percentage of revenue, corporate general and administrative expenses decreased
from 3.0% during the 1998 quarter to 2.4% in 1999 quarter. The provision for
doubtful accounts was $19,700,000, or 1.9% of revenues, for the first quarter of
1999, compared to $21,753,000, or 2.3% of revenues, for the same period in 1998.
Management believes that this provision is adequate to cover any uncollectible
revenues.
Page 13
<PAGE>
Depreciation and amortization expense was $94,412,000 for the quarter
ended March 31, 1999, compared to $75,461,000 for the same period in 1998. The
increase represents the investment in additional assets by the Company. Interest
expense was $42,727,000 for the quarter ended March 31, 1999, compared to
$28,650,000 for the quarter ended March 31, 1998. For the first quarter of 1999,
interest income was $2,620,000, compared to $1,960,000 for the first quarter of
1998.
Income before minority interests and income taxes for the first quarter
of 1999 was $206,438,000, compared to $206,860,000 for the same period in 1998.
Minority interests decreased income before income taxes by $24,777,000 for the
quarter ended March 31, 1999, compared to decreasing income before income taxes
by $21,153,000 for the first quarter of 1998. The provision for income taxes for
the first quarter of 1999 was $71,756,000, compared to $72,575,000 for the same
period in 1998. The effective tax rates for the quarters ended March 31, 1999
and 1998 were 39.5% and 39.1%, respectively. Net income for the first quarter of
1999 was $109,905,000, compared to $113,132,000 for the first quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had working capital of $964,203,000,
including cash and marketable securities of $119,948,000. Working capital at
December 31, 1998, was $945,927,000, including cash and marketable securities of
$142,513,000. For the first three months of 1999, cash provided by operations
was $215,671,000, compared to $109,104,000 for the same period in 1998.
Additions to property, plant, and equipment and acquisitions accounted for
$102,083,000 and $2,834,000, respectively, during the first three months of
1999. Those same investing activities accounted for $193,353,000 and
$73,799,000, respectively, in the same period in 1998. Financing activities used
$118,516,000 and provided $399,362,000 during the first three months of 1999 and
1998, respectively. Net borrowing (reductions) proceeds (borrowing less
principal reductions) for the first three months of 1999 and 1998 were
$(12,722,000) and $372,254,000, respectively.
Accounts receivable were $976,463,000 at March 31, 1999, compared to
$897,901,000 at December 31, 1998. The number of days of average revenues in
ending receivables at March 31, 1999, was 85.3, compared to 81.8 days of average
revenues in ending receivables at December 31, 1998. The concentration of net
accounts receivable from patients, third-party payors, insurance companies and
others at March 31, 1999, is consistent with the related concentration of
revenues for the period then ended.
The Company has a $1,750,000,000 revolving credit facility with
NationsBank, N.A. ("NationsBank") and other participating banks (the "1998
Credit Agreement"). The 1998 Credit Agreement replaced a previous $1,250,000,000
revolving credit agreement, also with NationsBank. In conjunction with the 1998
Credit Agreement, the Company also canceled its $350,000,000 364-day interim
revolving credit facility with NationsBank. Interest on the 1998 Credit
Agreement is paid based on LIBOR plus a predetermined margin, a base rate, or
competitively bid rates from the participating banks. The Company is required to
pay a fee based on the unused portion of the revolving credit facility ranging
from 0.09% to 0.25%, depending on certain defined ratios. The principal amount
is payable in full on June 22, 2003. The Company has provided a negative pledge
on all assets under the 1998 Credit Agreement. The effective interest rate on
the average outstanding balance under the 1998 Credit Agreement was 5.6% for the
three months ended March 31, 1999, compared to the average prime rate of 7.8%
during the same period. At March 31, 1999, the Company had drawn $1,325,000,000
under the 1998 Credit Agreement.
The Company also has a Short Term Credit Agreement with NationsBank (as
amended, the "Short Term Credit Agreement"), providing for a $500,000,000 short
term revolving credit facility. The terms of the Short Term Credit Agreement are
substantially consistent with those of the 1998 Credit Agreement. Interest on
the Short Term Credit Agreement is paid based on LIBOR plus a predetermined
margin or a base rate. The Company is required to pay a fee on the unused
portion of the credit facility ranging from 0.09% to 0.25%, depending on certain
defined ratios. The principal amount is payable in full on February 15, 2000,
with an earlier repayment required in the event that the Company consummates any
public offering or private placement of debt securities. At March 31, 1999, the
Company had not drawn down any amounts under the Short Term Credit Agreement.
Page 14
<PAGE>
On March 20, 1998, the Company issued $500,000,000 in 3.25% Convertible
Subordinated Debentures due 2003 (the "3.25% Convertible Debentures") in a
private placement. An additional $67,750,000 principal amount of the 3.25%
Convertible Debentures was issued on March 31, 1998 to cover underwriters'
overallotments. Interest is payable on April 1 and October 1 of each year,
commencing on October 1, 1998. The Convertible Debentures are convertible into
Common Stock of the Company at the option of the holder at a conversion price of
$36.625 per share, subject to the adjustment upon the occurrence of certain
events. The net proceeds from the issuance of the Convertible Debentures were
used by the Company to pay down indebtedness outstanding under its other
existing credit facilities.
On June 22, 1998, the Company issued $250,000,000 in 6.875% Senior
Notes due 2005 and $250,000,000 in 7.0% Senior Notes due 2008 (collectively, the
"Senior Notes"). Interest is payable on June 15 and December 15 of each year,
commencing on December 15, 1998. The Senior Notes are unsecured, unsubordinated
obligations of the Company. The net proceeds from the issuance of the Senior
Notes were used by the Company to pay down indebtedness outstanding under its
existing credit facilities.
On February 8, 1999, the Company announced a plan to repurchase up to
70,000,000 shares of its common stock over the next 36 months through open
market purchases, block trades or privately negotiated transactions. Through the
first three months of 1999, the Company had repurchased 6,918,000 shares.
On April 27, 1999, the Company entered into a definitive asset purchase
agreement to acquire from Mariner Post-Acute Network, Inc. ("MPN") substantially
all of the assets of MPN's American Rehability Services division, which operates
outpatient rehabilitation facilities in 18 states. The acquisition will be
accounted for as a purchase. The transaction, which does not involve the
assumption of liabilities, is valued at $55,000,000. Consummation of the
transaction is subject to various regulatory approvals, including clearance
under the Hart-Scott-Rodino Antitrust Improvements Act, and to the satisfaction
of certain other conditions. The Company currently anticipates that the
transaction will be consummated in the second quarter of 1999.
The Company intends to pursue the acquisition or development of
additional healthcare operations, including outpatient rehabilitation
facilities, inpatient rehabilitation facilities, ambulatory surgery centers,
outpatient diagnostic centers and companies engaged in the provision of other
complementary services, and to expand certain of its existing facilities. While
it is not possible to estimate precisely the amounts which will actually be
expended in the foregoing areas, the Company anticipates that over the next
twelve months, it will spend approximately $100,000,000 to $200,000,000 on
maintenance and expansion of its existing facilities and approximately
$300,000,000 to $500,000,000 to repurchase outstanding shares of its common
stock, depending on market conditions, and on continued development of the
Integrated Service Model.
Although the Company is continually considering and evaluating
acquisitions and opportunities for future growth, the Company has not entered
into any agreements with respect to material future acquisitions except as
described above. The Company believes that existing cash, cash flow from
operations, and borrowings under existing credit facilities will be sufficient
to satisfy the Company's estimated cash requirements for the next twelve months
and for the reasonably foreseeable future.
Inflation in recent years has not had a significant effect on the
Company's business, and is not expected to adversely affect the Company in the
future unless it increases significantly.
EXPOSURES TO MARKET RISK
The Company is exposed to market risk related to changes in interest
rates. Because of its favorable borrowing arrangements and current market
conditions, the Company currently does not use derivatives, such as swaps or
caps, to alter the interest characteristics of its debt instruments and
investment securities. The impact on earnings and value of market risk-sensitive
financial instruments (principally marketable security investments and long-term
debt) is subject to change as a result of movements in market rates and prices.
The Company uses sensitivity analysis models to evaluate these impacts.
The Company's investment in marketable securities was $3,676,000 at
March 31, 1999, which represents less than 1% of total assets at that date.
These securities are generally short-term, highly liquid
Page 15
<PAGE>
instruments and, accordingly, their fair value approximates cost. Earnings on
investments in marketable securities are not significant to the Company's
results of operations, and therefore any changes in interest rates would have a
minimal impact on future pre-tax earnings.
With respect to the Company's interest-bearing liabilities,
approximately $1,325,000,000 in long-term debt at March 31, 1999 is subject to
variable rates of interest, while the remaining balance in long-term debt of
$1,494,416,000 is subject to fixed rates of interest (see Note 2 of "Notes to
Consolidated Financial Statements" for further description). This compares to
$1,325,000,000 in long-term debt subject to variable rates of interest and
$1,505,926,000 in long-term debt subject to fixed rates of interest at December
31, 1998. The fair value of the Company's total long-term debt, based on
discounted cash flow analyses, except for the 3.25% Convertible Debentures,
approximates its carrying value at March 31, 1999 and December 31, 1998. The
fair value of the 3.25% Convertible Debentures was approximately $476,000,000
and $483,000,000 at March 31, 1999 and December 31, 1998, respectively. Based on
a hypothetical 1% increase in interest rates, the potential losses in future
annual pre-tax earnings would be approximately $13,250,000. The impact of such a
change on the carrying value of long-term debt would not be significant. These
amounts are determined considering the impact of the hypothetical interest rates
on the Company's borrowing cost and long-term debt balances. These analyses do
not consider the effects, if any, of the potential changes in the overall level
of economic activity that could exist in such an environment. Further, in the
event of a change of significant magnitude, management would expect to take
actions intended to further mitigate its exposure to such change.
Foreign operations, and the related market risks associated with
foreign currency, are currently insignificant to the Company's results of
operations and financial position.
COMPUTER TECHNOLOGIES AND YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code
in existing computer systems as the year 2000 approaches. Many existing computer
programs use only two digits to identify a year in the date field. The issue is
whether such code exists in the Company's mission-critical applications and if
that code will produce accurate information to date-sensitive calculations after
the turn of the century.
The Company is involved in an extensive, ongoing program to identify
and correct problems arising from the year 2000 issues. The program is broken
down into the following categories: (1) mission-critical computer applications
which are internally maintained by the Company's information technology
department; (2) mission-critical computer applications which are maintained by
third-party vendors; (3) non-mission-critical applications, whether internally
or externally maintained; (4) hardware; (5) embedded applications which control
certain medical and other equipment; (6) computer applications of its
significant suppliers; and (7) computer applications of its significant payors.
Mission-critical computer applications are those which are integral to
the Company's business mission, which have no reasonable manual alternative for
producing the same information and results, and the failure of which to produce
accurate information and results would have a significant adverse impact on the
Company. Such applications include the Company's general business systems and
its patient billing systems. Most of the Company's clinical applications are not
considered mission-critical, because reasonable manual alternatives are
available to produce the same information and results for as long as necessary.
The Company's review of its internally maintained mission-critical
applications revealed that such applications contained very few date-sensitive
calculations. The revisions to these applications have been completed and
tested. Implementation was completed during the first quarter of 1999 at a cost
of approximately $150,000.
The Company's general business applications are licensed from and
maintained by the same vendor. All such applications are already year 2000
compliant. The coding and testing of all of the Company's other externally
maintained mission-critical applications for year 2000 compliance was
Page 16
<PAGE>
completed during 1998. Installation of certain applications is still in process
and is expected to be completed by June 30, 1999. The total cost of such
installation is estimated to be approximately $1,500,000.
The Company has reviewed all of its non-mission-critical applications
and determined that some of these applications are not year 2000 compliant and
will not be made to be compliant. In such cases, the Company has developed
manual alternatives to produce the information that such systems currently
produce. The incremental cost of the manual systems is not currently estimated
to be material. The Company plans to evaluate the effectiveness of the manual
systems before any decisions are made on the replacement of the non-compliant
applications.
The Company has engaged an independent contractor to inventory and test
all of its computer hardware for year 2000 compliance at an estimated cost of
$800,000 to $1,000,000. The contractor has completed site visits to each of the
Company's locations with over five processors. The Company has received the data
from the site visits and is currently determining an appropriate remediation
plan. The preliminary estimate of the range of cost to complete a remediation
plan is approximately $25,000,000 to $30,000,000. The contractor has sent
diskettes containing test programs to each of the Company's locations with five
or fewer processors. Data from these locations are currently being analyzed and
an appropriate remediation plan is being developed. The cost of remediation for
those facilities with five or fewer processors cannot be estimated until the
analysis is complete.
The Company has completed its review of embedded applications which
control certain medical and other equipment. As expected, the review revealed
that the nature of the Company's business is such that any failure of these type
applications is not expected to have a material adverse effect on its business.
In particular, the Company has focused on reviewing and testing those
applications the failure of which would be likely to cause a significant risk of
death or serious injury to patients under treatment in the Company's facilities,
and the Company believes that, because of the types of services it primarily
provides and the nature of its patient population, there is little likelihood of
such an event occurring because of the failure of an embedded application.
The Company has sent inquiries to its significant suppliers of
equipment and medical supplies concerning the year 2000 compliance of their
significant computer applications. Responses have been received from over 89% of
those suppliers, and no significant problems have been identified. Third
requests have been mailed to all non-respondents.
The Company has also sent inquiries to its significant third-party
payors. Responses have been received from payors representing over 86% of the
Company's revenues. Such responses indicate that these payors' systems will be
year 2000 compliant. Third requests have been mailed to non-respondents. The
Company will continue to evaluate year 2000 risks with respect to such payors as
additional responses are received. In that connection, it should be noted that
substantially all of the Company's revenues are derived from reimbursement by
governmental and private third-party payors, and that the Company is dependent
upon such payors' evaluation of their year 2000 compliance status to assess such
risks. If such payors are incorrect in their evaluation of their own year 2000
compliance status, this could result in delays or errors in reimbursement to the
Company by such payors, the effects of which could be material to the Company.
Each of the Company's facilities is required, by Company policy, to
maintain a disaster recovery plan. The management of each facility has been
instructed to review and update such facility's specific disaster recovery plan
in light of potential local area problems that may occur as a result of year
2000 computer failures. Such potential problems include, but are not limited to,
interruption and/or loss of electrical power and water, breakdowns in
telecommunications systems and the inability to transport supplies and/or
personnel. The Company's primary exposure resides in its inpatient locations,
where patients will be in residence during the time that such potential problems
may occur. Execution of each facility's disaster recovery plan should mitigate
this exposure for a period of ten to fourteen days. If such potential problems
continue to occur after that period of time, the Company will have to take
actions that
Page 17
<PAGE>
are not currently contemplated in the various disaster recovery plans. It is not
currently possible to estimate the cost or scope of such actions.
Guidance from the Securities and Exchange Commission requires the
Company to describe its "reasonably likely worst case scenario" in connection
with year 2000 issues. As discussed above, while there is always the potential
risk of serious injury or death resulting from a failure of embedded
applications in medical and other equipment used by the Company, the Company
does not believe that such events are reasonably likely to occur. The Company
believes that the most reasonably likely worst case to which it would be exposed
is that, notwithstanding the Company's attempts to obtain year 2000 compliance
assurance from third-party payors, there is a material failure in such payors'
systems which prevents or substantially delays reimbursement to the Company for
its services. In such event, the Company would be forced to rely on cash on hand
and available borrowing capacity to the extent of any shortfall in
reimbursement, and could be forced to incur additional costs for personnel and
other resources necessary to resolve any payment issues. It is not possible at
this time to predict the nature or amount of such costs or the materiality of
any reimbursement issues that may arise as a result of the failure of payors'
payment systems, the effect of which could be substantial. The Company continues
to endeavor to obtain reliable information from its payors as to their
compliance status, and will attempt to adopt and revise its contingency plans
for dealing with payment issues if, as and when such issues become susceptible
of prediction.
Based on the information currently available, the Company believes that
its risk associated with problems arising from year 2000 issues is not
significant. However, because of the many uncertainties associated with year
2000 compliance issues, and because the Company's assessment is necessarily
based on information from third-party vendors, payors and suppliers, there can
be no assurance that the Company's assessment is correct or as to the
materiality or effect of any failure of such assessment to be correct. The
Company will continue with its assessment process as described above and, to the
extent that changes in such assessment require it, will attempt to develop
alternatives or modifications to its compliance plan described above. There can,
however, be no assurance that such compliance plan, as it may be changed,
augmented or modified from time to time, will be successful.
FORWARD-LOOKING STATEMENTS
Statements contained in this Quarterly Report on Form 10-Q which are
not historical facts are forward-looking statements. In addition, the Company,
through its senior management, from time to time makes forward-looking public
statements concerning its expected future operations and performance and other
developments. Such forward-looking statements are necessarily estimates
reflecting the Company's best judgment based upon current information, involve a
number of risks and uncertainties and are made pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. There can be
no assurance that other factors will not affect the accuracy of such
forward-looking statements or that HEALTHSOUTH's actual results will not differ
materially from the results anticipated in such forward-looking statements.
While is impossible to identify all such factors, factors which could cause
actual results to differ materially from those estimated by the Company include,
but are not limited to, changes in the regulation of the healthcare industry at
either or both of the federal and state levels, changes or delays in
reimbursement for the Company's services by governmental or private payors,
competitive pressures in the healthcare industry and the Company's response
thereto, the Company's ability to obtain and retain favorable arrangements with
third-party payors, unanticipated delays in the Company's implementation of its
Integrated Service Model, general conditions in the economy and capital markets,
and other factors which may be identified from time to time in the Company's
Securities and Exchange Commission filings and other public announcements.
Page 18
<PAGE>
PART II -- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
The Company was served with certain lawsuits filed beginning September
30, 1998 purporting to be class actions under the federal and Alabama securities
laws. Such lawsuits were filed following a decline in the Company's stock price
at the end of the third quarter of 1998. Seven such suits were filed in the
United States District Court for the Northern District of Alabama. In January
1999, those suits were ordered to be consolidated under the case style In re
HEALTHSOUTH Corporation Securities Litigation, Master File No. CV98-O-2634-S. On
April 12, 1999, the plaintiffs filed a consolidated amended complaint against
the Company and certain of its current and former officers and directors
alleging that, during the period April 24, 1997 through September 30, 1998, the
defendants misrepresented or failed to disclose certain material facts
concerning the Company's business and financial condition and the impact of the
Balanced Budget Act of 1997 on the Company's operations in order to artificially
inflate the price of the Company's Common Stock and issued or sold shares of
such stock during the purported class period, all allegedly in violation of
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
Certain of the named plaintiffs in the consolidated amended complaint also
purport to represent separate subclasses consisting of former stockholders of
Horizon/CMS Healthcare Corporation and National Surgery Centers, Inc. who
received shares of the Company's Common Stock in connection with the Company's
acquisition of those entities and assert additional claims under Section 11 of
the Securities Act of 1933 with respect to the registration of securities issued
in those acquisitions.
Another suit, Peter J. Petrunya v. HEALTHSOUTH Corporation, et al.,
Civil Action No. 98-05931, was filed in the Circuit Court for Jefferson County,
Alabama, alleging that during the period July 16, 1996 through September 30,
1998 the defendants misrepresented or failed to disclose certain material facts
concerning the Company's business and financial condition, allegedly in
violation of Sections 8-6-17 and 8-6-19 of the Alabama Securities Act. The
Petrunya complaint was voluntarily dismissed by the plaintiff without prejudice
in January 1999. Additionally, a suit styled Dennis Family Trust v. Richard M.
Scrushy, et al., Civil Action No. 98-06592, has been filed in the Circuit Court
for Jefferson County, Alabama, purportedly as a derivative action on behalf of
the Company. That suit largely replicates the allegations originally set forth
in the individual complaints filed in the federal actions described in the
preceding paragraph and alleges that the current directors of the Company,
certain former directors and certain officers of the Company breached their
fiduciary duties to the Company and engaged in other allegedly tortious conduct.
The plaintiff in that case has forborne pursuing its claim thus far pending
further developments in the federal action, and the Company has not yet been
required to file a responsive pleading in the case.
The Company is due to file its initial response to the consolidated
amended complaint in the federal action in late May. The Company believes that
all claims asserted in the above suits are without merit, and expects to
vigorously defend against such claims. Because such suits have only recently
been filed, the Company cannot currently predict the outcome of any such suits
or the magnitude of any potential loss if the Company's defense is unsuccessful.
Item 2. CHANGES IN SECURITIES.
(c) Recent Sales of Unregistered Securities
The Company had no sales of unregistered securities during the
three months ended March 31, 1999.
Page 19
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
11. Computation of Income Per Share (unaudited)
27. Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no Current Reports on Form 8-K during the
three months ended March 31, 1999.
No other items of Part II are applicable to the Registrant for the
period covered by this Quarterly Report on Form 10-Q.
Page 20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed
on its behalf by the undersigned thereunto duly authorized.
HEALTHSOUTH CORPORATION
------------------------------------
(Registrant)
Date: May 14, 1999 /s/ RICHARD M. SCRUSHY
------------------------------------
Richard M. Scrushy
Chairman of the Board and
Chief Executive Officer
Date: May 14, 1999 /s/ MICHAEL D. MARTIN
------------------------------------
Michael D. Martin
Executive Vice President and
Chief Financial Officer
Page 21
EXHIBIT 11
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
COMPUTATION OF INCOME PER SHARE (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Numerator
Net income $ 109,905 $ 113,132
--------- ---------
Numerator for basic earnings per share -- income available to
common stockholders 109,905 113,132
Effect of dilutive securities:
Elimination of interest and amortization on 5% Convertible
Subordinated Debentures due 2001, less the related effect
of the provision of income taxes -- --
Elimination of interest and amortization on 3.25%
Convertible Subordinated Debentures due 2003, less
the related effect of the provision of income taxes 3,112 304
--------- ---------
Numerator for diluted earnings per share -- income available to
common stockholders after assumed conversion $ 113,017 $ 113,436
========= =========
Denominator:
Denominator for basic earnings per share -- weighted average
shares 419,036 418,923
Effect of dilutive securities:
Net effect of dilutive stock options 7,535 12,087
Assumed conversion of 5% Convertible Subordinated
Debentures due 2001 -- --
Assumed conversion of 3.25% Convertible Subordinated
Debentures due 2003 15,502 1,669
--------- ---------
Dilutive potential common shares 23,037 13,756
--------- ---------
Denominator of diluted earnings per share--adjusted
weighted-average shares and assumed conversions 442,073 432,679
========= =========
Basic earnings per share $ 0.26 $ 0.27
========= =========
Diluted earnings per share $ 0.26 $ 0.26
========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000785161
<NAME> HEALTHSOUTH CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 116,272
<SECURITIES> 3,676
<RECEIVABLES> 1,686,188
<ALLOWANCES> (709,725)
<INVENTORY> 78,462
<CURRENT-ASSETS> 1,382,170
<PP&E> 3,026,872
<DEPRECIATION> (689,573)
<TOTAL-ASSETS> 6,820,160
<CURRENT-LIABILITIES> 417,967
<BONDS> 2,769,856
0
0
<COMMON> 4,235
<OTHER-SE> 3,443,485
<TOTAL-LIABILITY-AND-EQUITY> 6,820,160
<SALES> 0
<TOTAL-REVENUES> 1,030,547
<CGS> 0
<TOTAL-COSTS> 669,890
<OTHER-EXPENSES> 94,412
<LOSS-PROVISION> 19,700
<INTEREST-EXPENSE> 42,727
<INCOME-PRETAX> 206,438
<INCOME-TAX> 71,756
<INCOME-CONTINUING> 109,905
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109,905
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
</TABLE>
