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, 2000;
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, 2000
COMMON STOCK, PAR VALUE 386,317,752 SHARES
$.01 PER SHARE
1
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HEALTHSOUTH CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION
Page
--------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2000 (Unaudited) 3
and December 31, 1999
Consolidated Statements of Income (Unaudited) -- Three Months and Nine
Months Ended September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows (Unaudited) -- Nine Months
Ended September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements (Unaudited) -- Three Months
And Nine Months Ended September 30, 2000 and 1999 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 6. Exhibits and Reports on Form 8-K 19
</TABLE>
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,
2000 1999
--------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 166,590 $ 129,400
Other marketable securities 120 3,482
Accounts receivable--net 909,578 898,529
Inventories, prepaid expenses and
other current assets 246,009 200,047
Income tax refund receivable 0 39,438
--------------- ----------------
TOTAL CURRENT ASSETS 1,322,297 1,270,896
OTHER ASSETS 341,260 229,964
PROPERTY, PLANT AND EQUIPMENT--NET 2,700,120 2,502,967
INTANGIBLE ASSETS--NET 2,816,060 2,828,507
--------------- ----------------
TOTAL ASSETS $ 7,179,737 $ 6,832,334
=============== ================
</TABLE>
3
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HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 52,629 $ 76,549
Salaries and wages payable 81,364 93,046
Deferred income taxes 156,831 108,168
Accrued interest payable and other liabilities 116,359 102,604
Current portion of long-term debt 304,578 37,818
--------------- ----------------
TOTAL CURRENT LIABILITIES 711,761 418,185
LONG-TERM DEBT 2,916,641 3,076,830
DEFERRED REVENUE AND OTHER LONG-TERM LIABILITIES 6,811 4,573
MINORITY INTERESTS--LIMITED PARTNERSHIPS 141,391 126,384
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; 424,243,000 and 423,982,000
shares issued at September 30, 2000 and
December 31, 1999, respectively 4,242 4,240
Additional paid-in capital 2,586,508 2,584,572
Retained earnings 1,144,820 948,385
Treasury stock (280,523) (278,504)
Receivable from Employee Stock Ownership Plan (5,415) (7,898)
Notes receivable from stockholders, officers
and management employees (46,499) (44,433)
--------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 3,403,133 3,206,362
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,179,737 $ 6,832,334
=============== ================
</TABLE>
See accompanying notes.
4
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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,
-------------------------------------- --------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 1,060,457 $ 993,341 $ 3,118,115 $ 3,071,520
Operating unit expenses 711,872 671,060 2,106,326 1,965,209
Corporate general and administrative expenses 37,403 29,352 107,130 85,806
Provision for doubtful accounts 24,971 138,726 72,482 177,688
Depreciation and amortization 89,160 94,695 269,100 284,988
Interest expense 60,261 42,502 161,880 127,024
Interest income (2,398) (2,798) (7,334) (7,888)
-------------- -------------- -------------- --------------
921,269 973,537 2,709,584 2,632,827
-------------- -------------- -------------- --------------
Income before income taxes and
minority interests 139,188 19,804 408,531 438,693
Provision/(benefit) for income taxes 46,380 (2,826) 131,609 143,363
-------------- -------------- -------------- --------------
Income before minority interests 92,808 22,630 276,922 295,330
Minority interests (21,771) (26,960) (75,343) (75,748)
-------------- -------------- -------------- --------------
Net income (loss) $ 71,037 $ (4,330) $ 201,579 $ 219,582
============== ============== ============== ==============
Weighted average common shares outstanding 385,615 412,874 385,960 415,341
============== ============== ============== ==============
Net income (loss) per common share $ 0.18 $ (0.01) $ 0.52 $ 0.53
============== ============== ============== ==============
Weighted average common shares
outstanding -- assuming dilution 390,033 418,404 391,382 422,622
============== ============== ============== ==============
Net income (loss) per common share --
assuming dilution $ 0.18 $ (0.01) $ 0.52 $ 0.52
============== ============== ============== ==============
</TABLE>
See accompanying notes.
5
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HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 201,579 $ 219,582
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 269,100 284,988
Provision for doubtful accounts 72,482 177,688
Income applicable to minority interests of
limited partnerships 75,343 75,748
(Benefit) provision for deferred income taxes (31,864) 71,751
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable (80,641) (351,227)
Inventories, prepaid expenses and other current
assets (45,917) (90,970)
Accounts payable and accrued expenses 30,850 87,632
--------------- ---------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 490,932 475,192
INVESTING ACTIVITIES
Purchases of property, plant and equipment (355,702) (235,068)
Additions to intangible assets, net of effects of
acquisitions (27,321) (29,662)
Assets obtained through acquisitions, net of liabilities
assumed (64,874) (82,576)
Payments on purchase accounting accruals -- (22,063)
Proceeds from sale of assets held for sale -- 5,488
Changes in other assets (46,373) (10,848)
Proceeds received on sale of other marketable
securities 3,362 85
--------------- ---------------
NET CASH USED IN
INVESTING ACTIVITIES (490,908) (374,644)
</TABLE>
6
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HEALTHSOUTH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from borrowings $ 1,376,932 $ 303,596
Principal payments on long-term debt (1,274,622) (74,091)
Proceeds from exercise of options 1,938 4,142
Purchases of treasury stock (2,019) (196,155)
Reduction in receivable from Employee Stock
Ownership Plan 2,483 2,271
Increase in loans to stockholders (2,066) (39,318)
Proceeds from investment by minority interests 12,901 8,432
Purchase of limited partnership units (16,426) (6,809)
Payment of cash distributions to limited partners (61,955) (83,214)
--------------- --------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 37,166 (81,146)
--------------- ---------------
INCREASE IN CASH AND
CASH EQUIVALENTS 37,190 19,402
Cash and cash equivalents at beginning of period 129,400 138,827
--------------- ---------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 166,590 $ 158,229
=============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 161,433 $ 107,280
Income taxes 41,335 81,919
</TABLE>
7
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HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
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, 1999. 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"). 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, 2000, the
effective interest rate associated with the 1998 Credit
Agreement was approximately 7.25%.
At September 30, 2000, the Company also had a Short Term Credit
Agreement with Bank of America and other participating banks (as
amended, the "Short Term Credit Agreement"), providing for a
$250,000,000 short term revolving credit facility. The terms of
the Short Term Credit Agreement were substantially consistent
with those of the 1998 Credit Agreement. Interest on the Short
Term Credit Agreement was paid based on LIBOR plus a
predetermined margin or a base rate. The Company was required to
pay a fee on the unused portion of the credit facility ranging
from 0.30% to 0.50%, depending on certain defined ratios. At
September 30, 2000, we had no amounts drawn under the Short Term
Credit Agreement. On October 31, 2000, the Company replaced the
Short Term Credit Agreement with a new $400,000,000 Credit
Agreement (the "2000 Credit Agreement") with UBS AG and other
participating banks. Interest on the 2000 Credit Agreement is
paid based on LIBOR plus a predetermined margin or base rate.
The Company is required to pay a fee on the unused portion of
the credit facility ranging from 0.25% to 0.50%, depending on
certain defined ratios. The principal amount is payable in full
in eight quarterly installments ending on June 22, 2003.
On March 24, 1994, the Company issued $250,000,000 principal
amount of 9.5% Senior Subordinated Notes due 2001 (the "9.5%
Notes"). The Company redeemed the 9.5% Notes at par on October
30, 2000.
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
8
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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 then-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 then-existing credit
facilities.
On September 25, 2000, the Company issued $350,000,000 in
10-3/4% Senior Subordinated Notes due 2008 (the "10-3/4%
Notes"). Interest is payable on April 1 and October 1. The
10-3/4% 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 net proceeds from
the issuance of the 10-3/4% Notes were used by the Company to
redeem the 9.5% Notes and to pay down indebtedness outstanding
under its then-existing credit facilities. The 10-3/4% Notes
mature on October 1, 2008.
At September 30, 2000, and December 31, 1999, long-term debt
consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------- -----------------
(In thousands)
<S> <C> <C>
Advances under a $1,750,000,000 credit
agreement with banks $ 1,406,000 $ 1,625,000
Advances under a $250,000,000 Short Term
Credit Agreement with banks -- --
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
10-3/4% Senior Subordinated Notes due 2008 350,000 --
Other long-term debt 147,469 171,898
----------------- -----------------
3,221,219 3,114,648
Less amounts due within one year 304,578 37,818
----------------- -----------------
$ 2,916,641 $ 3,076,830
================= =================
</TABLE>
NOTE 3 -- During the first nine months of 2000, the Company acquired
seventeen outpatient rehabilitation facilities, two outpatient
surgery centers and eight diagnostic imaging centers. The total
purchase price of these acquired facilities was approximately
$64,875,000. The Company also entered into non-compete
agreements totaling approximately $5,320,000 in connection with
these transactions.
The cost in excess of the acquired facilities' net asset value
was approximately $59,363,000. The results of operations (not
material individually or in the aggregate) of
9
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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 close certain
facilities that did not fit with the Company's strategic vision,
underperforming facilities and facilities not located in target
markets (the "Fourth Quarter 1998 Charge"). As of November 9,
2000, approximately 96% of the locations identified in the
Fourth Quarter 1998 Charge had been closed.
Details of the impairment and restructuring charge activity
through the third quarter of 2000 are as follows:
<TABLE>
<CAPTION>
Activity
--------
Balance at Cash Non-Cash Balance at
Description 12/31/99 Payments Impairments 09/30/00
--------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Fourth Quarter 1998 Charge:
Lease abandonment costs $ 32,366 $ 4,218 $ -- $ 28,148
Other incremental costs 7,011 6,613 -- 398
---------------------------------------------------------
Total Fourth Quarter 1998 Charge $ 39,377 $ 10,831 $ -- $ 28,546
=========================================================
</TABLE>
The remaining balance at September 30, 2000 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. Late in the third quarter of
1999, the Company eliminated its separate divisional management
for its outpatient lines of business, and reorganized its
management under the following divisions: (1) Outpatient
Services East, (2) Outpatient Services West and (3) Inpatient
and Other Clinical Services. The inpatient and other clinical
services segment includes the operations of inpatient
rehabilitation facilities and medical centers, as well as the
operations of certain physician practices and other clinical
services which are managerially aligned with inpatient services.
The management of outpatient rehabilitation facilities
(including occupational medicine centers), outpatient surgery
centers and outpatient diagnostic centers was realigned from
their respective divisions to either the East or West outpatient
services division. The Company has aggregated the financial
results of its outpatient services divisions into the outpatient
services segment. These divisions have common economic
characteristics, provide similar services, serve a similar class
of customers, cross-utilize administrative services and operate
in similar regulatory environment. 1999 segment information has
been restated to reflect the management reorganization.
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Operating results and other financial data are presented for
the principal operating segments as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
2000 1999
----------------- -----------------
(In thousands)
<S> <C> <C>
Revenues:
Inpatient and other clinical services $ 522,624 $ 521,767
Outpatient services 534,603 464,340
----------------- -----------------
1,057,227 986,107
Unallocated corporate office 3,230 7,234
----------------- -----------------
Consolidated revenues $1,060,457 $ 993,341
================= =================
Income before minority interests and income taxes:
Inpatient and other clinical services $ 88,566 $ 91,314
Outpatient services 124,333 114,381
----------------- -----------------
212,899 205,695
Unallocated corporate office (73,711) (185,891)
----------------- -----------------
Consolidated income before minority interests
and income taxes $ 139,188 $ 19,804
================= =================
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
----------------- -----------------
(In thousands)
<S> <C> <C>
Revenues:
Inpatient and other clinical services $1,490,944 $1,536,064
Outpatient services 1,614,395 1,520,021
----------------- -----------------
3,105,339 3,056,085
Unallocated corporate office 12,776 15,435
----------------- -----------------
Consolidated revenues $3,118,115 $3,071,520
================= =================
Income before minority interests and income taxes:
Inpatient and other clinical services $ 268,237 $ 310,305
Outpatient services 356,956 382,613
----------------- -----------------
625,193 692,918
Unallocated corporate office (216,662) (254,225)
----------------- -----------------
Consolidated income before minority interests
and income taxes $ 408,531 $ 438,693
================= =================
</TABLE>
NOTE 6 -- During the first nine months of 2000, the Company granted
nonqualified stock options to certain Directors, employees and
others for 3,501,500 shares of Common Stock at exercise prices
ranging from $4.875 to $5.4375 per share.
NOTE 7 -- In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation - an interpretation of APB No. 25"
(FIN No. 44"). FIN No. 44 clarifies the application of
Accounting Principles Board Opinion No. 25 ("APB 25") for
certain issues, including: (a) the definition of "employee" for
purposes of applying APB 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to the terms of
a previously fixed stock option award, and (d) the accounting
for an exchange of stock compensation awards in a business
combination. The Company adopted FIN No. 44 on July 1, 2000, and
this adoption did not have an impact on the Company's financial
position or results of operations for the quarter and nine
months ended September 30, 2000.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
HEALTHSOUTH provides outpatient and rehabilitative healthcare services
through our inpatient and outpatient rehabilitation facilities, surgery centers,
diagnostic centers and medical centers. We have expanded our operations through
the acquisition or opening of new facilities and satellite locations and by
enhancing our existing operations. As of September 30, 2000, we had
approximately 2,010 locations in 50 states, Puerto Rico, the United Kingdom,
Australia and Canada, including 1,397 outpatient rehabilitation locations, 124
inpatient rehabilitation facilities, five medical centers, 222 surgery centers,
145 diagnostic centers and 117 occupational medicine centers.
Our 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.
In 1998, we 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 our management and
reporting structure, segment information has been presented for (1) inpatient
and other clinical services and (2) outpatient services.
The inpatient and other clinical services segments includes the
operations of our inpatient rehabilitation facilities and medical centers, as
well as the operations of certain physician practices and other clinical
services which are managerially aligned with our inpatient services. The
outpatient services division (East and West) includes the operations of our
outpatient rehabilitation facilities (including occupational medicine centers),
outpatient surgery centers and outpatient diagnostic centers. We have aggregated
the financial results of the East and West outpatient services divisions into
the outpatient services segment. The divisions have common economic
characteristics, provide similar services, serve a similar class of customers,
cross-utilize administrative services and operate in a similar regulatory
environment. 1999 segment information has been restated to reflect the
realignment of the outpatient management structure into the East and West
management teams from the line-of-business management structure previously used.
Substantially all of our revenues are derived from private and
governmental third-party payors. Our 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 we expect that
there will continue to be, a number of proposals to limit Medicare reimbursement
for certain services. We cannot now predict whether any of these proposals will
be adopted or, if adopted and implemented, what effect such proposals would have
on us. Changes in reimbursement policies or rates by private or governmental
payors could have an adverse effect on our future results of operations.
In many cases, we operate 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
12
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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. We may, from time to time, close or consolidate similar locations
in multi-site markets to obtain efficiencies and respond to changes in demand.
We determine 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. We utilize independent appraisers and
rely on our own management expertise in evaluating each of the factors noted
above. With respect to the carrying value of the excess of cost over net asset
value of individual purchased facilities and other intangible assets, we
determine 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, our carrying value of the asset
will be reduced to the estimated fair market 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 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.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER 30, 2000
Our operations generated revenues of $1,060,457,000 for the quarter
ended September 30, 2000, an increase of $67,116,000, or 6.8%, as compared to
the same period in 1999. The increase in revenues is primarily attributable to
increases in patient volumes. Same store revenues for the quarter ended
September 30, 2000 were $1,033,386,000, an increase of $40,045,000, or 4.0%, as
compared to the same period in 1999. New store revenues were $27,071,000.
Revenues generated from patients under the Medicare and Medicaid programs
respectively accounted for 28.0% and 2.8% of revenue for the third quarter of
2000, compared to 31.4% and 2.5% for the same period in 1999. Revenues from any
other single third-party payor were not significant in relation to our revenues.
During the third quarter of 2000, same store outpatient visits, inpatient days,
surgical cases and diagnostic cases increased 0.8%, 7.8%, 1.1% and 5.6%,
respectively. Revenue per outpatient visit, inpatient day, surgical case and
diagnostic case for same store operations increased (decreased) by 4.1%, 1.9%,
(1.2)% and (10.9)%, respectively.
Operating unit expenses (expenses excluding corporate general and
administrative expenses, provision for doubtful accounts, depreciation and
amortization and interest expense) were $711,872,000, or 67.1% of revenues, for
the quarter ended September 30, 2000, compared to 67.6% of revenues for the
third quarter of 1999. Same store operating unit expenses were $693,104,000, or
67.1% of comparable revenue. New store operating unit expenses were $18,768,000,
or 69.3% of comparable revenue. Corporate general and administrative expenses
increased from $29,352,000 during the 1999 quarter to $37,403,000 during the
2000 quarter. As a percentage of revenue, corporate general and administrative
expenses increased from 3.0% during the 1999 quarter to 3.5% in the 2000
quarter. However, when compared to the second quarter of 2000, corporate general
and administrative expenses increased by $1,697,000, or 4.8%. The provision for
doubtful accounts was $24,971,000, or 2.4% of revenues, for the third quarter of
2000, compared to $138,726,000, or 14.0% of revenues, for the same period in
1999. Management believes that the allowance for doubtful accounts generated by
this provision is adequate to cover any uncollectible revenues.
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Depreciation and amortization expense was $89,160,000 for the quarter
ended September 30, 2000, compared to $94,695,000 for the same period in 1999.
The decrease was primarily attributable to the full amortization of certain
intangible assets. Interest expense was $60,261,000 for the quarter ended
September 30, 2000, compared to $42,502,000 for the quarter ended September 30,
1999. The increase is primarily attributable to increases in effective interest
rates. For the third quarter of 2000, interest income was $2,398,000, compared
to $2,798,000 for the third quarter of 1999.
Income before minority interests and income taxes for the third quarter
of 2000 was $139,188,000, compared to $19,804,000 for the same period in 1999.
Minority interests decreased income before income taxes by $21,771,000 for the
quarter ended September 30, 2000, compared to decreasing income before income
taxes by $26,960,000 for the third quarter of 1999. The provision for income
taxes for the third quarter of 2000 was $46,380,000, compared to $(2,826,000)
for the same period in 1999. The effective tax rate was 39.5% for the quarters
ended September 30, 2000 and 1999. Net income (loss) for the third quarter of
2000 was $71,037,000, compared to $(4,330,000) for the third quarter of 1999.
RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 2000
Revenues for the nine months ended September 30, 2000, were
$3,118,115,000, an increase of $46,595,000, or 1.5%, over the nine months ended
September 30, 1999. Same store revenues were $3,051,475,000, a decrease of
$20,045,000, or (0.65%), as compared to the same period in 1999. New store
revenues were $66,640,000. Revenues generated from patients under Medicare and
Medicaid plans respectively accounted for 29.1% and 2.5% of revenue for the
first nine months of 2000, compared to 33.0% and 2.4% for the same period in
1999. Revenues from any other single third-party payor were not significant in
relation to the Company's revenues. During the first nine months of 2000, same
store outpatient visits, inpatient days, surgical cases and diagnostic cases
increased 4.3%, 4.4%, .02% and 1.7%, respectively. Revenue per outpatient visit,
inpatient day, surgical case and diagnostic case for same store operations
increased (decreased) by (1.9)%, (3.2)%, 1.6% and (10.7)%, respectively.
Operating unit expenses were $2,106,326,000, or 67.6% of revenues, for
the nine months ended September 30, 2000, compared to $1,965,209,000, or 64.0%
of revenues, for the first nine months of 1999. Same store operating unit
expenses were $2,055,924,000, or 67.4% of comparable revenue. New store
operating unit expenses were $50,402,000, or 75.6% of comparable revenue. Net
income for the nine months ended September 30, 2000, was $201,579,000, compared
to $219,582,000 for the same period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, we had working capital of $610,536,000,
including cash and marketable securities of $166,710,000. Working capital at
December 31, 1999, was $852,711,000, including cash and marketable securities of
$132,882,000. For the first nine months of 2000, cash provided by operating
activities was $490,932,000, compared to $475,192,000 for the same period in
1999. Additions to property, plant, and equipment and acquisitions accounted for
$355,702,000 and $64,874,000, respectively, during the first nine months of
2000. Those same investing activities accounted for $235,068,000 and
$82,576,000, respectively, in the same period in 1999. Financing activities
provided $37,166,000 and used $81,146,000 during the first nine months of 2000
and 1999, respectively. Net borrowing proceeds (borrowing less principal
reductions) for the first nine months of 2000 and 1999 were $102,310,000 and
$229,505,000, respectively.
Net accounts receivable were $909,578,000 at September 30, 2000,
compared to $898,529,000 at December 31, 1999. The number of days of average
quarterly revenues in ending receivables at September 30, 2000, was 78.9,
compared to 82.6 days of average quarterly revenues in ending receivables at
December 31, 1999. The concentration of net accounts receivable from patients,
third-party payors, insurance companies and others at September 30, 2000, is
consistent with the related concentration of revenues for the period then ended.
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We have 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"). 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. We are 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. We
have 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 6.81% for the nine months ended September 30, 2000,
compared to the average prime rate of 9.11% during the same period. At September
30, 2000, we had drawn $1,406,000,000 under the 1998 Credit Agreement.
We also had a Short Term Credit Agreement with Bank of America and
other participating banks (as amended, the "Short Term Credit Agreement"),
providing for a $250,000,000 short term revolving credit facility. The terms of
the Short Term Credit Agreement were substantially consistent with those of the
1998 Credit Agreement. Interest on the Short Term Credit Agreement was paid
based on LIBOR plus a predetermined margin or a base rate. We were required to
pay a fee on the unused portion of the credit facility ranging from 0.30% to
0.50%, depending on certain defined ratios. The effective interest rate on the
average outstanding balance under the Short Term Credit Agreement was 7.97% for
the nine months ended September 30, 2000, compared to the average prime rate of
9.11% during the same period. The principal amount was payable in full on
December 12, 2000. At September 30, 2000, we had no amounts drawn under the
Short Term Credit Agreement. On October 31, 2000, we replaced the Short Term
Credit Agreement with a new $400,000,000 Credit Agreement (the "2000 Credit
Agreement") with UBS AG and other participating banks. Interest on the 2000
Credit Agreement is paid based on LIBOR plus a predetermined margin or base
rate. We are required to pay a fee on the unused portion of the credit facility
ranging from 0.25% to 0.50%, depending on certain defined ratios. The principal
amount is payable in full in eight quarterly installments ending on June 22,
2003.
We intend 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 our existing facilities. While it is not possible to
estimate precisely the amounts which will actually be expended in the foregoing
areas, we anticipate that over the next twelve months, we will spend
approximately $150,000,000 to $200,000,000 on maintenance and expansion of our
existing facilities and approximately $150,000,000 to $200,000,000 on
development activities and Internet and e-commerce initiatives, and on continued
development of the Integrated Service Model. We also redeemed the $250,000,000
principal amount of our 9.5% Senior Subordinated Notes at par on October 30,
2000.
Although we are continually considering and evaluating acquisitions and
opportunities for future growth, we have not entered into any agreements with
respect to material future acquisitions. We believe that existing cash, cash
flow from operations and borrowings under existing credit facilities will be
sufficient to satisfy our 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 our
business, and is not expected to adversely affect us in the future unless it
increases significantly.
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EXPOSURES TO MARKET RISK
We are exposed to market risk related to changes in interest rates. 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 rate and prices. We use sensitivity
analysis models to evaluate these impacts. We do not hold or issue derivative
instruments for trading purposes and are not a party to any instruments with
leverage features.
Our investment in marketable securities was $120,000 at September 30,
2000, 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 our results of operations, and therefore any
changes in interest rates would have a minimal impact on future pre-tax
earnings.
With respect to our interest-bearing liabilities, approximately
$1,406,000,000 in long-term debt at September 30, 2000 is subject to variable
rates of interest, while the remaining balance in long-term debt of
$1,815,219,000 is subject to fixed rates of interest (see Note 2 of "Notes to
Consolidated Financial Statements" for further description). This compares to
$1,625,000,000 in long-term debt subject to variable rates of interest and
$1,489,648,000 in long-term debt subject to fixed rates of interest at December
31, 1999. The fair value of our total long-term debt, based on discounted cash
flow analyses, approximates its carrying value at September 30, 2000 and
December 31, 1999 except for the 3.25% Convertible Debentures, 6.875% Senior
Notes and 7.0% Senior Notes. The fair value of the 3.25% Convertible Debentures
was approximately $476,000,000 and $443,000,000 at September 30, 2000 and
December 31, 1999, respectively. The fair value of the 6.875% Senior Notes due
2005 was approximately $221,000,000 and $216,600,000 at September 30, 2000 and
December 31, 1999, respectively. The fair value of the 7% senior Notes due 2008
was approximately $206,000,000 and $207,250,000 at September 30, 2000 and
December 31, 1999, respectively. Based on a hypothetical 1% increase in interest
rates, the potential losses in future annual pre-tax earnings would be
approximately $14,060,000. 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 our 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 our results of operations and
financial position.
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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 this Quarterly Report
on Form 10-Q concerning or relating to estimated and projected earnings,
margins, costs, expenditures, cash flows, growth rates and financial results are
forward-looking statements. In addition, HEALTHSOUTH, through its senior
management, from time to time makes forward-looking public statements concerning
our expected future operations and performance and other developments. Such
forward-looking statements are necessarily estimates reflecting our best
judgment based upon current information, involve a number of risks and
uncertainties and are made pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. There can be no assurance that
other factors will not affect the accuracy of such forward-looking statements or
that our 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 us 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 our services by governmental or private
payors, competitive pressures in the healthcare industry and our response
thereto, our ability to obtain and retain favorable arrangements with
third-party payors, unanticipated delays in the implementation of our Integrated
Service Model, general conditions in the economy and capital markets, and other
factors which may be identified from time to time in our Securities and Exchange
Commission filings and other public announcements.
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PART II -- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
HEALTHSOUTH was served with various lawsuits filed beginning September
30, 1998 purporting to be class actions under the federal and Alabama securities
laws. These lawsuits were filed following a decline in our 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
HEALTHSOUTH and certain of our 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 our business and financial condition and the impact of the Balanced
Budget Act of 1997 on our operations in order to artificially inflate the price
of our 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
HEALTHSOUTH common stock in connection with our 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
HEALTHSOUTH. 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 HEALTHSOUTH,
certain former directors and certain officers of HEALTHSOUTH breached their
fiduciary duties to HEALTHSOUTH 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 defendants have not yet been
required to file a responsive pleading in the case.
We filed a motion to dismiss the consolidated amended complaint in the
federal action in late June 1999. The parties have filed various briefs related
to this motion. On September 13, 2000, the magistrate judge issued his report
and recommendation, recommending that the court dismiss the amended complaint in
its entirety with leave to amend. The plaintiffs have objected to that report,
and we are filing a response to that objection. We cannot predict when the court
will rule on our motion or whether the court will follow the recommendation of
the magistrate judge. We believe that all claims asserted in the above suits are
without merit, and expect to vigorously defend against such claims. Because such
suits remain at an early stage, we cannot currently predict the outcome of any
such suits or the magnitude of any potential loss if our defense is
unsuccessful.
Item 2. CHANGES IN SECURITIES.
(c) Recent Sales of Unregistered Securities
The Company had no sales of unregistered equity securities
during the three months ended September 30, 2000.
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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, 2000.
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 Quarterly Report on Form 10-Q to be signed
on its behalf by the undersigned thereunto duly authorized.
HEALTHSOUTH CORPORATION
(Registrant)
Date: November 14, 2000 RICHARD M. SCRUSHY
------------------------------
Richard M. Scrushy
Chairman of the Board and
Chief Executive Officer
Date: November 14, 2000 WILLIAM T. OWENS
------------------------------
William T. Owens
Executive Vice President and
Chief Financial Officer
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