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 June 30, 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 August 9, 1999
----------------------- -----------------------------
COMMON STOCK, PAR VALUE 414,958,784 SHARES
$.01 PER SHARE
Page 1
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART 1 -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
ITEM I. FINANCIAL STATEMENTS
Consolidated Balance Sheets -- June 30, 1999 (Unaudited) 3
and December 31, 1998
Consolidated Statements of Income (Unaudited) -- Three Months and Six 5
Months Ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows (Unaudited) -- Six Months 6
Ended June 30, 1999 and 1998
Notes to Consolidated Financial Statements (Unaudited) -- Three 8
Months and Six Months Ended June 30, 1999 and 1998
Item 2. Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
</TABLE>
Page 2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------------ ------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 166,603 $ 138,827
Other marketable securities 3,641 3,686
Accounts receivable 1,084,837 897,901
Inventories, prepaid expenses, and
other current assets 303,925 247,739
Income tax refund receivable 35,379 58,832
------------------ ------------------
TOTAL CURRENT ASSETS 1,594,385 1,346,985
OTHER ASSETS 198,764 177,851
PROPERTY, PLANT AND EQUIPMENT--NET 2,322,599 2,288,262
INTANGIBLE ASSETS--NET 2,954,177 2,959,910
------------------ ------------------
TOTAL ASSETS $ 7,069,925 $ 6,773,008
================== ==================
</TABLE>
Page 3
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------------ ------------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 114,943 $ 76,099
Salaries and wages payable 116,579 111,243
Deferred income taxes 49,478 37,612
Accrued interest payable and other liabilities 130,281 126,110
Current portion of long-term debt 49,335 49,994
------------------ ------------------
TOTAL CURRENT LIABILITIES 460,616 401,058
LONG-TERM DEBT 2,849,646 2,780,932
DEFERRED INCOME TAXES 63,379 28,856
DEFERRED REVENUE AND OTHER LONG-TERM LIABILITIES 791 11,940
MINORITY INTERESTS--LIMITED PARTNERSHIPS 136,111 127,218
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; 423,874,000 and 423,178,000
shares issued at June 30, 1999 and
December 31, 1998, respectively 4,239 4,232
Additional paid-in capital 2,581,446 2,577,647
Retained earnings 1,098,188 878,228
Treasury stock (111,478) (21,813)
Receivable from Employee Stock Ownership Plan (7,898) (10,169)
Notes receivable from stockholders (5,115) (5,121)
------------------ ------------------
TOTAL STOCKHOLDERS' EQUITY 3,559,382 3,423,004
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,069,925 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------- ---------------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues $ 1,047,632 $ 979,064 $ 2,078,179 $ 1,917,844
Operating unit expenses 649,413 599,474 1,294,150 1,179,672
Corporate general and administrative expenses 31,300 27,699 56,454 55,518
Provision for doubtful accounts 19,262 23,809 38,961 45,561
Depreciation and amortization 95,881 82,576 190,293 158,037
Interest expense 41,795 28,927 84,522 57,576
Interest income (2,469) (3,179) (5,090) (5,140)
---------------- ---------------- ---------------- ----------------
835,182 759,306 1,659,290 1,491,224
---------------- ---------------- ---------------- ----------------
Income before income taxes and
minority interests 212,450 219,758 418,889 426,620
Provision for income taxes 74,433 78,002 146,189 150,578
---------------- ---------------- ---------------- ----------------
Income before minority interests 138,017 141,756 272,700 276,042
Minority interests (24,012) (20,156) (48,788) (41,308)
---------------- ---------------- ---------------- ----------------
Net income $ 114,005 $ 121,600 $ 223,912 $ 234,734
================ ================ ================ ================
Weighted average common shares outstanding 414,193 421,055 416,600 419,966
================ ================ ================ ================
Net income per common share $ 0.28 $ 0.29 $ 0.54 $ 0.56
================ ================ ================ ================
Weighted average common shares
outstanding -- assuming dilution 437,933 448,642 440,129 440,674
================ ================ ================ ================
Net income per common share --
assuming dilution $ 0.27 $ 0.28 $ 0.52 $ 0.54
================ ================ ================ ================
</TABLE>
See accompanying notes.
Page 5
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 223,912 $ 234,734
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 190,293 158,037
Provision for doubtful accounts 38,961 45,561
Income applicable to minority interests of
limited partnerships 48,788 41,308
Provision for deferred income taxes 46,389 9,022
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable (219,386) (181,265)
Inventories, prepaid expenses and other current
assets (32,668) (69,020)
Accounts payable and accrued expenses 62,218 (876)
--------------- ---------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 358,507 237,501
INVESTING ACTIVITIES
Purchases of property, plant and equipment (159,481) (298,744)
Additions to intangible assets, net of effects of
acquisitions (13,964) (25,920)
Assets obtained through acquisitions, net of liabilities
assumed (79,143) (187,138)
Payments on purchase accounting accruals (16,706) (274,507)
Proceeds from sale of assets held for sale 3,563 -
Changes in other assets (4,968) (22,153)
Proceeds received on sale of other marketable
securities 45 14,870
--------------- ---------------
NET CASH USED IN
INVESTING ACTIVITIES (270,654) (793,592)
</TABLE>
Page 6
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from borrowings $ 141,968 $ 1,678,920
Principal payments on long-term debt (73,182) (1,085,720)
Proceeds from exercise of options 3,806 53,060
Purchase of treasury stock (89,665) -
Reduction in receivable from Employee Stock
Ownership Plan 2,271 2,078
Decrease in loans to stockholders 6 236
Proceeds from investment by minority interests 2,562 1,115
Purchase of limited partnership units (3,952) (1,658)
Payment of cash distributions to limited partners (43,891) (37,953)
--------------- ---------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (60,077) 610,078
--------------- ---------------
INCREASE IN CASH AND
CASH EQUIVALENTS 27,776 53,987
Cash and cash equivalents at beginning of period 138,827 162,992
--------------- ---------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 166,603 $ 216,979
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 84,449 $ 62,643
Income taxes 72,952 267,178
</TABLE>
Non-cash investing activities:
During 1998, the Company issued 699,000 shares of its common stock with a
market value of $19,397,000 as consideration for acquisitions accounted for
as purchases.
Non-cash financing activities:
The Company received a tax benefit from the disqualifying disposition of
incentive stock options of $17,691,000 for the six months ended June 30,
1998.
See accompanying notes.
Page 7
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 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 June 30, 1999,
the effective interest rate associated with the 1998 Credit
Agreement was approximately 5.5%.
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 June 30, 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. 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 June 30, 1999, and December 31, 1998, long-term debt
consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------------- -----------------
(In thousands)
<S> <C> <C>
Advances under the 1998 Credit Agreement $ 1,390,000 $ 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 191,231 188,176
----------------- -----------------
2,898,981 2,830,926
Less amounts due within one year 49,335 49,994
----------------- -----------------
$ 2,849,646 $ 2,780,932
================= =================
</TABLE>
NOTE 3 -- During the first six months of 1999, the Company acquired
four outpatient rehabilitation facilities and seven outpatient
surgery centers. The total purchase price of the acquired
facilities was approximately $24,622,000. The Company also
entered into non-compete agreements totaling approximately
$2,498,000 in connection with these transactions.
On June 29, 1999, the Company acquired from Mariner Post-Acute
Network, Inc. ("MPN") substantially all of the assets of MPN's
American Rehability Services division, which operated
approximately 160 outpatient rehabilitation centers in 18
states. The net cash purchase price was approximately
$54,521,000.
The cost in excess of the acquired facilities' net asset value
was approximately $58,991,000. 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.
Page 9
<PAGE>
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 July 31, 1999 approximately 90% of
the other locations identified in the restructuring plan had
been closed.
Details of the impairment and restructuring charge through
the second quarter of 1999 are as follows:
<TABLE>
<CAPTION>
Balance at Balance at
12/31/98 Activity 06/30/99
--------------- -------------- ---------------
(In thousands)
<S> <C> <C> <C>
Impairment of assets:
Property, plant and equipment $ 19,380 $ 4,128 $ 15,252
Lease abandonment costs 49,476 3,796 45,680
Severance packages 1,274 1,274 0
Other incremental costs 16,404 2,767 13,637
--------------- -------------- ---------------
$ 86,534 $ 11,965 $ 74,569
=============== ============== ===============
</TABLE>
Of the remaining balance at June 30, 1999, $15,252,000 is
included as other assets and the remaining $59,317,000 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.
Page 10
<PAGE>
Operating results and other financial data are presented for
the principal operating segments as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1999 1998
----------------- -----------------
(In thousands)
<S> <C> <C>
Revenues:
Inpatient and other clinical services $ 490,766 $ 460,569
Outpatient services 541,375 502,246
----------------- -----------------
1,032,141 962,815
Unallocated corporate office 15,491 16,249
----------------- -----------------
Consolidated revenues $ 1,047,632 $ 979,064
================= =================
Income before minority interests and income taxes:
Inpatient and other clinical services $ 116,287 $ 103,135
Outpatient services 164,934 158,803
----------------- -----------------
281,221 261,938
Unallocated corporate office (68,771) (42,180)
----------------- -----------------
Consolidated income before minority interests
and income taxes $ 212,450 $ 219,758
================= =================
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
----------------- -----------------
(In thousands)
<S> <C> <C>
Revenues:
Inpatient and other clinical services $ 977,270 $ 932,961
Outpatient services 1,071,080 955,688
----------------- -----------------
2,048,350 1,888,649
Unallocated corporate office 29,829 29,195
----------------- -----------------
Consolidated revenues $ 2,078,179 $ 1,917,844
================= =================
Income before minority interests and income taxes:
Inpatient and other clinical services $ 225,057 $ 203,686
Outpatient services 324,877 307,716
----------------- -----------------
549,934 511,402
Unallocated corporate office (131,045) (84,782)
----------------- -----------------
Consolidated income before minority interests
and income taxes $ 418,889 $ 426,620
================= =================
</TABLE>
NOTE 6 -- During the first six months of 1999, the Company granted
nonqualified stock options to certain Directors, employees and
others for 3,801,000 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 June 30, 1999, the Company had
nearly 2,000 locations in 50 states, the United Kingdom and Australia (excluding
facilities being closed, consolidated or held for sale), including approximately
1,360 outpatient rehabilitation locations, 128 inpatient rehabilitation
facilities, four medical centers, 223 surgery centers, 122 diagnostic centers
and 124 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 other clinical
services which are managerially aligned with the Company's inpatient services.
The
Page 12
<PAGE>
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 JUNE 30, 1999
The Company's operations generated revenues of $1,047,632,000 for the
quarter ended June 30, 1999, an increase of $68,568,000, or 7.0%, 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 June
30, 1999, excluding discontinued home health operations in both periods, were
$980,807,000, an increase of $25,803,000, or 2.6%, as compared to the same
period in 1998. New store revenues were $65,816,000. Revenues generated from
patients under Medicare and Medicaid plans respectively accounted for 34.1% and
2.5% of revenue for the second quarter of 1999, compared to 36.1% and 2.6% 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 second quarter
of 1999, same store outpatient visits, inpatient days, surgical cases and
diagnostic cases increased 10.8%, 8.4%, 9.3% and 11.2%, respectively. Revenue
per outpatient visit, inpatient day, surgical case and diagnostic case for same
store operations decreased by 2.3%, 3.9%, 2.4% and 2.3%, respectively.
Operating expenses, at the operating unit level, were $649,413,000, or
62.0% of revenues, for the quarter ended June 30, 1999, compared to 61.2% of
revenues for the second quarter of 1998. Same store operating expenses,
excluding discontinued home health operations, were $606,192,000, or 61.8% of
comparable revenue. New store operating expenses were $41,092,000, or 62.4% of
comparable revenue. Corporate general and administrative expenses increased from
$27,699,000 during the 1998 quarter to $31,300,000 during the 1999 quarter. As a
percentage of revenue, corporate general and administrative expenses increased
from 2.8% in the 1998 quarter to 3.0% in the 1999 quarter. The provision for
doubtful accounts was $19,262,000, or 1.8% of revenues, for the second quarter
of 1999, compared to $23,809,000, or 2.4% 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 $95,881,000 for the quarter
ended June 30, 1999, compared to $82,576,000 for the same period in 1998. The
increase represents the investment in additional assets by the Company. Interest
expense was $41,795,000 for the quarter ended June 30, 1999, compared to
$28,927,000 for the quarter ended June 30, 1998. For the second quarter of 1999,
interest income was $2,469,000, compared to $3,179,000 for the second quarter of
1998.
Income before minority interests and income taxes for the second
quarter of 1999 was $212,450,000, compared to $219,758,000 for the same period
in 1998. Minority interests decreased income before income taxes by $24,012,000
for the quarter ended June 30, 1999, compared to decreasing income before income
taxes by $20,156,000 for the second quarter of 1998. The provision for income
taxes for the second quarter of 1999 was $74,433,000, compared to $78,002,000
for the same period in 1998. The effective tax rates for the quarters ended June
30, 1999 and 1998 were 39.5% and 39.1%, respectively. Net income for the second
quarter of 1999 was $114,005,000, compared to $121,600,000 for the second
quarter of 1998.
RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1999
Revenues for the six months ended June 30, 1999, were $2,078,179,000,
an increase of $160,335,000, or 8.4%, over the six months ended June 30, 1998.
Same store revenues, excluding discontinued home health operations in both
periods, were $1,940,706,000, an increase of $72,857,000, or 3.9%, as compared
to the same period in 1998. New store revenues were $134,614,000. Revenues
generated from patients under Medicare and Medicaid plans respectively accounted
for 33.8% and 2.3% of revenue for the first six months of 1999, compared to
35.8% and 2.6% 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 six months of 1999, same store outpatient visits, inpatient
days, surgical cases and diagnostic cases increased 14.2%, 9.1%, 9.8% and 14.2%,
respectively. Revenue per outpatient visit, inpatient day, surgical case and
diagnostic case for same store operations decreased by 2.5%, 3.8%,2.1% and 2.7%,
respectively.
Operating expenses, at the operating unit level, were $1,294,150,000,
or 62.3% of revenues, for the six months ended June 30, 1999, compared to
$1,179,672,000, or 61.5% of revenues, for the first six months of 1998. Same
store operating expenses, excluding discontinued home health operations, were
$1,203,995,000, or 62.0% of comparable revenue. New store operating expenses
were $84,134,000, or 62.5% of comparable revenue. Net income for the six months
ended June 30, 1999, was $223,912,000, compared to $234,734,000 for the same
period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had working capital of $1,133,769,000,
including cash and marketable securities of $170,244,000. Working capital at
December 31, 1998, was $945,927,000, including cash and marketable securities of
$142,513,000. For the first six months of 1999, cash provided by operations was
$358,507,000, compared to $237,501,000 for the same period in 1998. Additions to
property, plant, and equipment and acquisitions accounted for $159,481,000 and
$79,143,000, respectively, during the first six months of 1999. Those same
investing activities accounted for $298,744,000 and $187,138,000, respectively,
in the same period in 1998. Financing activities used $60,077,000 and provided
$610,078,000 during the first six months of 1999 and 1998, respectively. Net
borrowing proceeds (borrowing less principal reductions) for the first six
months of 1999 and 1998 were $68,786,000 and $593,200,000, respectively.
Accounts receivable were $1,084,837,000 at June 30, 1999, compared to
$897,901,000 at December 31, 1998. The number of days of average revenues in
ending receivables at June 30, 1999, was 94.5, compared to 81.8 days of average
revenues in ending receivables at December 31, 1998. The increase is primarily
due to delays by payors in processing and paying claims. The company continues
to work with payors to resolve such issues, but there can be no assurance that
such efforts will be successful. The concentration of net accounts receivable
from patients, third-party payors, insurance companies and others at June 30,
1999, is consistent with the related concentration of revenues for the period
then ended.
Page 14
<PAGE>
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 5.5% for the
six months ended June 30, 1999, compared to the average prime rate of 7.75%
during the same period. At June 30, 1999, the Company had drawn $1,390,000,000
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 June 30, 1999, the
Company had not drawn down any amounts under the Short Term Credit Agreement.
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 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. 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. In the
first six months of 1999, the Company repurchased approximately 7,552,000
shares.
In June 1999, the Company announced that its Board of Directors had
given preliminary approval to the exploration and development of a plan to
divide its inpatient and outpatient businesses into separate public companies
through the tax-free spin-off of the Company's inpatient operations. The
Company, working with its special tax counsel and its tax accountants, has been
engaged in reviewing the various tax, structural, operational and business
issues associated with the proposed transaction.
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
Page 15
<PAGE>
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. 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 $3,641,000 at
June 30, 1999, which represents less than 1% of total assets at that date. These
securities are generally short-term, highly liquid 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 $1,390,000,000 in long-term debt at June 30, 1999 is subject to
variable rates of interest, while the remaining balance in long-term debt of
$1,508,981,000 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 June 30, 1999 and December 31, 1998. The fair
value of the 3.25% Convertible Debentures was approximately $476,000,000 and
$483,000,000 at June 30, 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 $13,900,000. 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)
Page 16
<PAGE>
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 completed
during 1998. Installation of certain applications has been completed at a total
cost of 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 engaged an independent contractor to inventory and test all
of its computer hardware for year 2000 compliance at a cost of approximately
$1,100,000. The contractor completed the inventory and testing during the first
six months of 1999. The Company has utilized the information received from the
contractor to develop a remediation plan. The execution of the remediation plan
is underway and will continue into the fourth quarter of 1999. The estimate of
the range of cost to complete remediation is approximately $35,000,000 to
$40,000,000.
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
95% of those suppliers, and no significant problems have been identified.
Page 17
<PAGE>
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. 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 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
Page 18
<PAGE>
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 19
<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 filed a motion to dismiss the consolidated amended
complaint in the federal action in late June and is currently awaiting the
plaintiffs' response to such motion. The Company cannot predict when the court
will hear arguments or rule on such motion. 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 remain at an early stage, 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.
Page 20
<PAGE>
ITEM 2. CHANGES IN SECURITIES.
(c) Recent Sales of Unregistered Securities
The Company had no sales of unregistered securities during the
three months ended June 30, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 20, 1999, the Annual Meeting of Stockholders of the Company was
held, at which shares of Common Stock represented at the Annual Meeting were
voted in favor of the election of Directors as follows:
<TABLE>
<CAPTION>
FOR WITHHOLD
--------------------------- ---------------------------
<S> <C> <C>
1. Richard M. Scrushy 374,231,022 5,674,425
2. Phillip C. Watkins, M.D. 376,299,926 3,605,521
3. George H. Strong 376,221,311 3,684,136
4. C. Sage Givens 374,501,267 5,404,180
5. Charles W. Newhall III 374,509,551 5,395,896
6. John S. Chamberlin 376,266,307 3,639,140
7. Michael D. Martin 374,429,633 5,475,814
8. James P. Bennett 374,393,284 5,512,163
9. Larry D. Striplin, Jr. 376,251,975 3,653,472
10. Anthony J. Tanner 374,442,751 5,462,696
11. P. Daryl Brown 374,409,772 5,495,675
12. Joel C. Gordon 374,480,071 5,425,376
</TABLE>
In addition, shares of Common Stock represented at the Annual Meeting
were voted in favor of the approval and adoption of the Company's 1999 Exchange
Stock Option Plan as follows:
<TABLE>
<CAPTION>
Number of Shares
Voting For Against Abstain
----------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
379,905,447 277,176,690 101,494,466 1,234,291
</TABLE>
In addition, shares of Common Stock represented at the Annual Meeting
were voted in favor of the approval and adoption of the Company's 1999 Executive
Equity Loan Plan as follows:
<TABLE>
<CAPTION>
Number of Shares
Voting For Against Abstain
----------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
324,419,192 298,615,001 23,847,828 1,956,363
</TABLE>
Finally, shares of Common Stock represented at the Annual Meeting were
voted against a stockholder proposal relating to the composition of the Board of
Directors as follows:
<TABLE>
<CAPTION>
Number of Shares
Voting For Against Abstain
----------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
324,419,182 50,257,167 249,567,390 24,594,625
</TABLE>
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<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
six months ended June 30, 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 22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHSOUTH CORPORATION
------------------------------
(Registrant)
Date: August 13, 1999 RICHARD M. SCRUSHY
------------------------------
Richard M. Scrushy
Chairman of the Board and
Chief Executive Officer
Date: August 13, 1999 MICHAEL D. MARTIN
------------------------------
Michael D. Martin
Executive Vice President and
Chief Financial Officer
Page 23
EXHIBIT 11
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
COMPUTATION OF INCOME PER SHARE (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-----------------------------------
1999 1998
--------------- ----------------
<S> <C> <C>
Numerator:
Net income $ 114,005 $ 121,600
--------------- ----------------
Numerator for basic earnings per share -- income available to
common stockholders 114,005 121,600
Effect of dilutive securities:
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 3,112
--------------- ----------------
Numerator for diluted earnings per share -- income available to
common stockholders after assumed conversion $ 117,117 $ 124,712
=============== ================
Denominator:
Denominator for basic earnings per share -- weighted-average
shares 414,193 421,055
Effect of dilutive securities:
Net effect of dilutive stock options 7,938 12,085
Restricted shares issued 300 -
Assumed conversion of 3.25% Convertible Subordinated
Debentures due 2003 15,502 15,502
--------------- ----------------
Dilutive potential common shares 23,740 27,587
--------------- ----------------
Denominator of diluted earnings per share -- adjusted
weighted-average shares and assumed conversions 437,933 448,642
=============== ================
Basic earnings per share $ 0.28 $ 0.29
=============== ================
Diluted earnings per share $ 0.27 $ 0.28
=============== ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Numerator:
Net income $ 223,912 $ 234,734
---------------- ----------------
Numerator for basic earnings per share -- income available to
common stockholders 223,912 234,734
Effect of dilutive securities:
Elimination of interest and amortization on 3.25% Convertible
Subordinated Debentures due 2003, less the related
effect of the provision of income taxes 6,224 3,492
---------------- ----------------
Numerator for diluted earnings per share -- income available to
common stockholders after assumed conversion $ 230,136 $ 238,226
================ ================
Denominator:
Denominator for basic earnings per share -- weighted-average
shares 416,600 419,966
Effect of dilutive securities:
Net effect of dilutive stock options 7,727 12,123
Restricted shares issued 300 -
Assumed conversion of 3.25% Convertible Subordinated
Debentures due 2003 15,502 8,585
---------------- ----------------
Dilutive potential common shares 23,529 20,708
---------------- ----------------
Denominator of diluted earnings per share -- adjusted
weighted-average shares and assumed conversions 440,129 440,674
================ ================
Basic earnings per share $ 0.54 $ 0.56
================ ================
Diluted earnings per share $ 0.52 $ 0.54
================ ================
</TABLE>
Page 24
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 166,603
<SECURITIES> 3,641
<RECEIVABLES> 1,766,847
<ALLOWANCES> (682,010)
<INVENTORY> 77,747
<CURRENT-ASSETS> 1,594,385
<PP&E> 3,059,841
<DEPRECIATION> (737,242)
<TOTAL-ASSETS> 7,069,925
<CURRENT-LIABILITIES> 460,616
<BONDS> 2,849,646
0
0
<COMMON> 4,239
<OTHER-SE> 3,555,143
<TOTAL-LIABILITY-AND-EQUITY> 7,069,925
<SALES> 0
<TOTAL-REVENUES> 2,078,179
<CGS> 0
<TOTAL-COSTS> 1,350,604
<OTHER-EXPENSES> 190,293
<LOSS-PROVISION> 38,961
<INTEREST-EXPENSE> 84,522
<INCOME-PRETAX> 418,889
<INCOME-TAX> 146,189
<INCOME-CONTINUING> 223,912
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 223,912
<EPS-BASIC> 0.54
<EPS-DILUTED> 0.52
</TABLE>
