SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 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 November 9, 1999
----------------------- -------------------------------
COMMON STOCK, PAR VALUE 386,255,711 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>
Item 1. Financial Statements <C>
Consolidated Balance Sheets -- September 30, 1999 (Unaudited)
and December 31, 1998 3
Consolidated Statements of Income (Unaudited) -- Three Months and Nine
Months Ended September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows (Unaudited) -- Nine Months
Ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements (Unaudited) -- Three
Months and Nine Months Ended September 30, 1999 and 1998 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 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>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 158,229 $ 138,827
Other marketable securities 3,601 3,686
Accounts receivable 1,081,799 897,901
Inventories, prepaid expenses and
other current assets 324,866 247,739
Income tax refund receivable 73,006 58,832
---------- ----------
TOTAL CURRENT ASSETS 1,641,501 1,346,985
OTHER ASSETS 205,655 177,851
PROPERTY, PLANT AND EQUIPMENT--NET 2,330,082 2,288,262
INTANGIBLE ASSETS--NET 2,945,958 2,959,910
---------- ----------
TOTAL ASSETS $7,123,196 $6,773,008
========== ==========
</TABLE>
Page 3
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 148,526 $ 76,099
Salaries and wages payable 98,932 111,243
Deferred income taxes 59,331 37,612
Accrued interest payable and other liabilities 137,757 126,110
Current portion of long-term debt 49,280 49,994
----------- -----------
TOTAL CURRENT LIABILITIES 493,826 401,058
LONG-TERM DEBT 3,011,329 2,780,932
DEFERRED INCOME TAXES 78,888 28,856
DEFERRED REVENUE AND OTHER LONG-TERM LIABILITIES 2,818 11,940
MINORITY INTERESTS--LIMITED PARTNERSHIPS 129,618 127,218
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; 423,921,000 and 423,178,000
shares issued at September 30, 1999 and
December 31, 1998, respectively 4,239 4,232
Additional paid-in capital 2,581,782 2,577,647
Retained earnings 1,091,001 878,228
Treasury stock (217,968) (21,813)
Receivable from Employee Stock Ownership Plan (7,898) (10,169)
Notes receivable from stockholders, officers
and management employees (44,439) (5,121)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 3,406,717 3,423,004
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,123,196 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 993,341 $ 1,047,422 $ 3,071,520 $ 2,965,265
Operating unit expenses 671,059 673,392 1,965,209 1,853,062
Corporate general and administrative expenses 29,352 27,503 85,806 83,021
Provision for doubtful accounts 138,727 24,015 177,688 69,577
Depreciation and amortization 94,695 88,888 284,988 246,925
Merger costs 0 25,630 0 25,630
Loss on impairment of home health assets 0 77,571 0 77,571
Interest expense 42,502 46,126 127,024 103,702
Interest income (2,798) (3,450) (7,888) (8,589)
----------- ----------- ----------- -----------
973,537 959,675 2,632,827 2,450,899
----------- ----------- ----------- -----------
Income before income taxes and
minority interests 19,804 87,747 438,693 514,366
Provision for income taxes (2,826) 63,907 143,363 214,485
----------- ----------- ----------- -----------
Income before minority interests 22,630 23,840 295,330 299,881
Minority interests (26,960) (18,170) (75,748) (59,478)
----------- ----------- ----------- -----------
Net (loss) income $ (4,330) $ 5,670 $ 219,582 $ 240,403
=========== =========== =========== ===========
Weighted average common shares outstanding 412,874 422,649 415,341 420,957
=========== =========== =========== ===========
Net (loss) income per common share $ (0.01) $ 0.01 $ 0.53 $ 0.57
=========== =========== =========== ===========
Weighted average common shares
outstanding -- assuming dilution 418,404 433,034 422,622 433,913
=========== =========== =========== ===========
Net (loss) income per common share --
assuming dilution $ (0.01) $ 0.01 $ 0.52 $ 0.55
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
Page 5
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 219,582 $ 240,403
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 284,988 246,925
Provision for doubtful accounts 177,688 69,577
Income applicable to minority interests of
limited partnerships 75,748 59,478
Merger costs -- 25,630
Impairment and restructuring charges -- 77,571
Provision for deferred income taxes 71,751 13,145
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable (351,227) (314,418)
Inventories, prepaid expenses and other current
assets (90,970) (73,714)
Accounts payable and accrued expenses 87,632 14,164
----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 475,192 358,761
INVESTING ACTIVITIES
Purchases of property, plant and equipment (235,068) (473,344)
Additions to intangible assets, net of effects of
acquisitions (29,662) (33,690)
Assets obtained through acquisitions, net of liabilities
assumed (82,576) (707,011)
Payments on purchase accounting accruals (22,063) (295,508)
Proceeds from sale of assets held for sale 5,488 --
Changes in other assets (10,848) (23,711)
Proceeds received on sale of other marketable
securities 85 18,310
----------- -----------
NET CASH USED IN
INVESTING ACTIVITIES (374,644) (1,514,954)
</TABLE>
Page 6
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
1999 1998
---- ----
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from borrowings $ 303,596 $ 2,389,272
Principal payments on long-term debt (74,091) (1,194,016)
Proceeds from exercise of options 4,142 60,779
Purchases of treasury stock (196,155) --
Reduction in receivable from Employee Stock
Ownership Plan 2,271 2,078
(Increase) decrease in loans to stockholders, officers
and management employees (39,318) 252
Proceeds from investment by minority interests 8,432 2,061
Purchase of limited partnership units (6,809) (1,658)
Payment of cash distributions to limited partners (83,214) (59,174)
----------- -----------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (81,146) 1,199,594
----------- -----------
INCREASE IN CASH AND
CASH EQUIVALENTS 19,402 43,401
Cash and cash equivalents at beginning of period 138,827 162,992
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 158,229 $ 206,393
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 107,280 $ 81,085
Income taxes 81,919 286,401
</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 $21,804,000 for the nine months ended September
30, 1998.
See accompanying notes.
Page 7
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 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
Bank of America, N.A. ("Bank of America") and other
participating banks (the "1998 Credit Agreement"). The 1998
Credit Agreement replaced a previous $1,250,000,000 revolving
credit agreement, also with Bank of America. In conjunction with
the 1998 Credit Agreement, the Company also canceled its
$350,000,000 364-day interim revolving credit facility with Bank
of America. 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 September 30, 1999, the effective interest rate associated
with the 1998 Credit Agreement was approximately 5.8%.
The Company also has a Short Term Credit Agreement with Bank of
America (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 September 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. The conversion price is subject to
adjustment upon the occurrence of (a) a subdivision, combination
or reclassification of outstanding shares of Common Stock, (b)
the payment of a stock dividend or stock distribution on any
shares of the Company's capital stock, (c) the
Page 8
<PAGE>
issuance of rights or warrants to all holders of Common Stock
entitling them to purchase shares of Common Stock at less than
the current market price, or (d) the payment of certain other
distributions with respect to the Company's Common Stock. In
addition, the Company may, from time to time, lower the
conversion price for periods of not less than 20 days, in its
discretion. The net proceeds from the issuance of the 3.25%
Convertible Debentures were used by the Company to pay down
indebtedness outstanding under its 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.
At September 30, 1999, and December 31, 1998, long-term debt
consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Advances under the 1998 Credit Agreement $1,575,000 $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 167,859 188,176
---------- ----------
3,060,609 2,830,926
Less amounts due within one year 49,280 49,994
---------- ----------
$3,011,329 $2,780,932
========== ==========
</TABLE>
NOTE 3 -- During the first nine months of 1999, the Company acquired ten
outpatient rehabilitation facilities and seven outpatient
surgery centers. The total purchase price of the acquired
facilities was approximately $28,055,000. The Company also
entered into non-compete agreements totaling approximately
$2,900,000 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 $72,277,000. The results of operations (not
material individually or in the aggregate) of these acquisitions
are included in the consolidated financial statements from their
respective acquisition dates.
NOTE 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 (the "Third Quarter 1998 Charge") 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 "Fourth Quarter 1998 Charge"). The home
health operations covered by the Third Quarter 1998 Charge were
closed by December 31, 1998. As of
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<PAGE>
September 30, 1999 approximately 94% of the locations identified
in the Fourth Quarter 1998 Charge had been closed.
Details of the impairment and restructuring charges through the
third quarter of 1999 are as follows:
<TABLE>
<CAPTION>
Activity
--------
Balance at Cash Non-Cash Balance at
Description 12/31/98 Payments Impairments 09/30/99
--------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Third Quarter 1998 Charge:
Other incremental costs $ 415 $ 415 $ -- $ --
======= ======= ============ =======
Fourth Quarter 1998 Charge:
Lease abandonment costs $49,476 $14,988 $ -- $34,488
Severance packages 1,274 1,274 -- --
Other incremental costs 15,989 4,866 -- 11,123
------- ------- ------------ -------
Total Fourth Quarter 1998 Charge $66,739 $21,128 $ -- $45,611
======= ======= ============ =======
</TABLE>
The remaining balance at September 30, 1999 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 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.
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<PAGE>
Operating results and other financial data are presented for the
principal operating segments as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Revenues:
Inpatient and other clinical services $ 446,720 $ 492,200
Outpatient services 531,931 542,988
----------- -----------
978,651 1,035,188
Unallocated corporate office 14,690 12,234
----------- -----------
Consolidated revenues $ 993,341 $ 1,047,422
=========== ===========
Income before minority interests and income taxes:
Inpatient and other clinical services $ 2,525 $ 8,356
Outpatient services 81,058 143,166
----------- -----------
83,583 151,522
Unallocated corporate office (63,779) (63,775)
------------ ------------
Consolidated income before minority interests
and income taxes $ 19,804 $ 87,747
============ ============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Revenues:
Inpatient and other clinical services $ 1,423,991 $ 1,425,160
Outpatient services 1,603,011 1,498,676
----------- -----------
3,027,002 2,923,836
Unallocated corporate office 44,518 41,429
----------- -----------
Consolidated revenues $ 3,071,520 $ 2,965,265
=========== ===========
Income before minority interests and income taxes:
Inpatient and other clinical services $ 227,581 $ 212,040
Outpatient services 405,935 450,882
----------- -----------
633,516 662,922
Unallocated corporate office (194,823) (148,556)
----------- -----------
Consolidated income before minority interests
and income taxes $ 438,693 $ 514,366
=========== ===========
</TABLE>
NOTE 6 -- During the first nine 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.
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<PAGE>
NOTE 7 -- In April 1998, the AICPA issued SOP 98-5, "Reporting on the
Costs of Start-Up Activities." SOP 98-5 requires that the costs
of start-up activities be expensed as incurred. The SOP broadly
defines start-up activities as those one-time activities related
to opening a new facility, introducing a new product or service,
conducting business in a new territory, conducting business with
a new class of customer, initiating a new process in an existing
facility, or beginning some new operation. Start-up activities
also include organizational costs. SOP 98-5 is effective for
years beginning after December 15, 1998. In 1997, the Company
began expensing as incurred all costs related to start-up
activities. Therefore, the adoption of SOP 98-5 will not have a
material effect on the Company's financial statements.
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<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 September 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
1,368 outpatient rehabilitation locations, 131 inpatient rehabilitation
facilities, four medical centers, 224 surgery centers, 124 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 ("goodwill") 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 has completed during the third
quarter of 1999 a comprehensive review of its amortization policies with respect
to goodwill. The results of this review support the Company's existing useful
lives.
With respect to the carrying value of goodwill 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 goodwill 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 over the remaining
amortization period, an impairment loss is calculated based on the excess of the
carrying amount of the asset over the asset's fair value.
In addition, the Company records impairment losses on long-lived assets
used in operations when events and circumstances indicate that the assets might
be impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those assets. In such cases, the
impaired assets are written down to fair value. Fair value is determined based
on the individual facts and circumstances of the impairment event, and the
available information related to it. Such information might include quoted
market prices, prices for comparable assets, estimated future cash flows
discounted at a rate commensurate with the risks involved, and independent
appraisals. For purposes of analyzing impairment, assets are generally grouped
at the individual operational facility level, which is the lowest level for
which there are identifiable cash flows. If the group of assets being tested was
acquired by the
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<PAGE>
Company as part of a purchase business combination, any goodwill that arose as
part of the transaction is included as part of the asset grouping.
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 include the
operations of the Company's 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 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 SEPTEMBER 30, 1999
The Company's operations generated revenues of $993,341,000 for the
quarter ended September 30, 1999, a decrease of $54,081,000, or 5.2%, as
compared to the same period in 1998. The decrease in revenues is primarily
attributable to an increase in the Medicare mix in the Company's inpatient
segment and lower-than-expected same-store growth in the outpatient segment, as
well as continued pricing pressure in both segments. Same store revenues for the
quarter ended September 30, 1999, were $984,320,000, a decrease of $40,026,000,
or 3.9%, as compared to the same period in 1998, excluding discontinued home
health operations. New store revenues were $9,021,000. Revenues generated from
patients under Medicare and Medicaid plans respectively accounted for 31.4% and
2.5% of revenue for the third quarter of 1999, compared to 35.1% and 2.9% 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 third quarter
of 1999, same store outpatient visits, inpatient days, surgical cases and
diagnostic cases increased (decreased) by 8.8%, 4.4%, (1.2)% and 5.7%,
respectively. Revenue per outpatient visit, inpatient day, surgical case and
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<PAGE>
diagnostic case for same store operations increased (decreased) by 0.2%, (8.2)%,
(5.1)% and (9.5)%, respectively.
Operating unit expenses were $671,059,000, or 67.6% of revenues, for
the quarter ended September 30, 1999, compared to 64.3% of revenues for the
third quarter of 1998. Same store operating unit expenses were $664,908,000, or
67.6% of comparable revenue. New store operating unit expenses were $6,151,000,
or 68.2% of comparable revenue. Corporate general and administrative expenses
increased from $27,503,000 during the 1998 quarter to $29,352,000 during the
1999 quarter. As a percentage of revenue, corporate general and administrative
expenses increased from 2.6% during the 1998 quarter to 3.0% in the 1999
quarter. The provision for doubtful accounts was $138,727,000, or 14.0% of
revenues, for the third quarter of 1999, compared to $24,015,000, or 2.3% of
revenues, for the same period in 1998. The 1999 provision for doubtful accounts
reflects the provision of additional reserves in the amount of $117,752,000
related to accounts receivable determined by management to be uncollectible
during the third quarter of 1999. Those additional reserves primarily relate to
accounts receivable of facilities included in the impairment and restructuring
charges recognized in 1998. These accounts receivable were determined to be
uncollectible by local and regional operations management personnel who assumed
collection responsibilities in the third quarter of 1999 in connection with the
restructuring of the Company's outpatient regional business offices, which had
previously been responsible for collection activities. Management believes that
this provision is adequate to cover any uncollectible revenues.
Depreciation and amortization expense was $94,695,000 for the quarter
ended September 30, 1999, compared to $88,888,000 for the same period in 1998.
The increase represents the investment in additional assets by the Company.
Interest expense was $42,502,000 for the quarter ended September 30, 1999,
compared to $46,126,000 for the quarter ended September 30, 1998. For the third
quarter of 1999, interest income was $2,798,000, compared to $3,450,000 for the
third quarter of 1998.
Income before minority interests and income taxes for the third quarter
of 1999 was $19,804,000, compared to $87,747,000 for the same period in 1998.
Minority interests decreased income before income taxes by $26,960,000 for the
quarter ended September 30, 1999, compared to decreasing income before income
taxes by $18,170,000 for the third quarter of 1998. The provision for income
taxes for the third quarter of 1999 was $(2,826,000), compared to $63,907,000
for the same period in 1998. The effective tax rates for the quarters ending
September 30, 1999 and 1998 were 39.5% and 39.1%, respectively. Net (loss)
income for the third quarter of 1999 was $(4,330,000), compared to $5,670,000
for the third quarter of 1998.
RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues for the nine months ended September 30, 1999, were
$3,071,520,000, an increase of $106,255,000, or 3.6%, over the nine months ended
September 30, 1998. Same store revenues were $3,027,724,000, an increase of
$135,530,000, or 4.7%, as compared to the same period in 1998, excluding
discontinued home health operations. New store revenues were $43,796,000.
Revenues generated from patients under Medicare and Medicaid plans respectively
accounted for 33.0% and 2.4% of revenue for the first nine months of 1999,
compared to 35.9% and 2.8% 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 nine months of 1999, same store outpatient visits,
inpatient days, surgical cases and diagnostic cases increased 10.9%, 7.7%, 18.8%
and 19.1%, respectively. Revenue per outpatient visit, inpatient day, surgical
case and diagnostic case for same store operations decreased by 1.4%, 6.3%, 5.7%
and 7.1%, respectively.
Operating unit expenses were $1,965,209,000, or 64.0% of revenues, for
the nine months ended September 30, 1999, as compared to $1,853,062,000, or
62.5% of revenues, for the first nine months of 1998. Same store operating unit
expenses were $1,936,229,000, or 64.0% of comparable revenue. New store
operating unit expenses were $28,980,000, or 66.2% of comparable revenue. Net
income for the nine months ended September 30, 1999, was $219,582,000, compared
to $240,403,000 for the same period in 1998.
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LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had working capital of
$1,147,675,000, including cash and marketable securities of $161,830,000.
Working capital at December 31, 1998, was $945,927,000, including cash and
marketable securities of $142,513,000. For the first nine months of 1999, cash
provided by operations was $475,192,000, compared to $358,761,000 for the same
period in 1998. Additions to property, plant, and equipment and acquisitions
accounted for $235,068,000 and $82,576,000, respectively, during the first nine
months of 1999. Those same investing activities accounted for $473,344,000 and
$707,011,000, respectively, in the same period in 1998. Financing activities
used $81,146,000 and provided $1,199,594,000 during the first nine months of
1999 and 1998, respectively. Net borrowing proceeds (borrowing less principal
reductions) for the first nine months of 1999 and 1998 were $229,505,000 and
$1,195,256,000, respectively.
Accounts receivable were $1,081,799,000 at September 30, 1999, compared
to $897,901,000 at December 31, 1998. The number of days of average revenues in
ending receivables at September 30, 1999, was 96.2, 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 compani es and
others at September 30, 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 Bank of
America, N.A. ("Bank of America") and other participating banks (the "1998
Credit Agreement"). The 1998 Credit Agreement replaced a previous $1,250,000,000
revolving credit agreement, also with Bank of America. In conjunction with the
1998 Credit Agreement, the Company also canceled its $350,000,000 364-day
interim revolving credit facility with Bank of America. 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 nine months ended September 30, 1999, compared to the average
prime rate of 7.9% during the same period. At September 30, 1999, the Company
had drawn $1,575,000,000 under the 1998 Credit Agreement.
The Company also has a Short Term Credit Agreement with Bank of America
(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
September 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 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. The conversion
price is subject to adjustment upon the occurrence of (a) a subdivision,
combination or reclassification of outstanding shares of Common Stock, (b) the
payment of a stock dividend or stock distribution on any shares of the Company's
capital stock, (c) the issuance of rights or warrants to all holders of Common
Stock entitling them to purchase shares of Common Stock at less than the current
market price, or (d) the payment of certain other distributions with respect to
the Company's Common Stock. In addition, the Company may, from time to time,
lower the conversion price for periods
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of not less than 20 days, in its discretion. The net proceeds from the issuance
of the 3.25% Convertible Debentures were used by the Company to pay down
indebtedness outstanding under its 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 nine months of 1999, the Company repurchased approximately 25,719,000
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. On
September 9, the Company announced that its Board had indefinitely tabled the
spin-off proposal due to a variety of factors, including the anticipated
timeframe to complete the spin-off, developments in the healthcare capital
markets and favorable developments in the likely structure of the prospective
payment system for inpatient rehabilitation services, among others. The Company
is not currently pursuing any activities with respect to the spin-off proposal.
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 $200,000,000 to $300,000,000 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. 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 had not used derivatives, such as swaps or caps, to alter the
interest characteristics of its debt instruments and investment securities at
September 30, 1999. The Company entered into certain swap arrangements in the
fourth quarter of 1999, which will be described in subsequent reports covering
that period. 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 $3,601,000 at
September 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
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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 $1,575,000,000 in long-term debt at September 30, 1999 is subject
to variable rates of interest, while the remaining balance in long-term debt of
$1,485,609,000 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 September 30, 1999 and December 31, 1998. The
fair value of the 3.25% Convertible Debentures was approximately $468,000,000
and $483,000,000 at September 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 $15,750,000. 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
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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 announced on September 9, 1999 that it expected to incur
restructuring and other charges ranging from $250,000,000 to $300,000,000 during
the third and fourth quarters of 1999. A component of the other charges will be
the write-off of computer hardware and software that will be abandoned due to
year 2000 compliance issues. The Company anticipates that this charge will be
approximately $25,000,000 to $30,000,000 and will be recognized during the
fourth quarter.
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.
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. 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.
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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. Without limiting the
generality of the preceding statement, all statements in the Report concerning
or relating to estimated and projected earnings, margins, costs, expenditures,
cash flows, growth rates and financial results 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. The Company's actual results may differ materially from the results
anticipated in these forward-looking statements as a result of a variety of
factors. While it is impossible to identify all such factors, factors which
could cause actual results to differ materially from those estimated by the
Company include, but are not limited to, changes in the regulation of the
healthcare industry at either or both of the federal and state levels, changes
in reimbursement for the Company's services by governmental or private payors,
competitive pressures in the healthcare industry and the Company's response
thereto, the Company's ability to obtain and retain favorable arrangements with
third-party payors, unanticipated delays in the Company's implementation of its
Integrated Service Model, general conditions in the economy and capital markets,
and other factors which may be identified from time to time in the Company's
Securities and Exchange Commission filings and other public announcements. There
can be no assurance that these factors or other factors will not affect the
accuracy of such forward-looking statements.
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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. The parties have filed various
briefs related to this motion. The Company cannot predict when the court will
hear arguments or rule on its 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.
ITEM 2. CHANGES IN SECURITIES.
(c) Recent Sales of Unregistered Securities
The Company had no sales of unregistered securities during the
three months ended September 30, 1999.
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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 September 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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Amendment No. 1 to be signed on its behalf
by the undersigned thereunto duly authorized.
HEALTHSOUTH CORPORATION
-----------------------------
(Registrant)
Date: November 15, 1999 RICHARD M. SCRUSHY
-----------------------------
Richard M. Scrushy
Chairman of the Board and
Chief Executive Officer
Date: November 15, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator
Net income (loss) $ (4,330) $ 5,670 $ 219,582 $ 240,403
--------- --------- --------- ---------
Numerator for basic earnings per share--income available to
common stockholders (4,330) 5,670 219,582 240,403
Effect of dilutive securities:
Elimination of interest and amortization on 3.25% Convertible
Subordination Debentures due 2003, less the related
effect of the provision of income taxes --(1) --(1) --(1) --(1)
--------- --------- --------- ---------
Numerator for diluted earnings per share--income available to
common stockholder after assumed conversion $ (4,330) $ 5,670 219,582 240,403
========= ========= ========= =========
Denominator
Denominator for basic earnings per share--weighted average
shares 412,874 422,649 415,341 420,957
Effect of dilutive securities:
Net effect of dilutive stock options 5,230 10,385 6,981 12,956
Restricted shares issued 300 -- 300
Assumed conversion of 3.25% Convertible Subordinated
Debentures due 2003 --(1) --(1) --(1) --(1)
--------- --------- --------- ---------
Dilutive potential common shares 5,530 10,385 7,281 12,956
--------- --------- --------- ---------
Denominator of diluted earnings per share--adjusted 418,404 433,034 422,622 433,913
========= ========= ========= =========
Basic earnings (loss) per share $ (0.01) $ 0.01 $ 0.53 $ 0.57
========= ========= ========= =========
Diluted earnings (loss) per share $ (0.01) $ 0.01 $ 0.52 $ 0.55
========= ========= ========= =========
</TABLE>
(1) The effect of these securities was antidilutive for all periods presented.
Page 24
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000785161
<NAME> HEALTHSOUTH
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<S> <C>
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0
0
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<EPS-BASIC> 0.53
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</TABLE>
