SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 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
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HEALTHSOUTH CORPORATION
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 63-0860407
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
ONE HEALTHSOUTH PARKWAY, BIRMINGHAM, ALABAMA 35243
--------------------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(205) 967-7116
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all Reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such Reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 9, 2000
----- --------------------------
COMMON STOCK, PAR VALUE 385,438,613 SHARES
$.01 PER SHARE
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HEALTHSOUTH CORPORATION AND SUBSIDIARIES
INDEX
PART 1 -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2000 (Unaudited) 3
and December 31, 1999
Consolidated Statements of Income (Unaudited) -- Three Months
Ended March 31, 2000 and 1999 5
Consolidated Statements of Cash Flows (Unaudited) -- Three Months
Ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements (Unaudited) -- Three Months
Ended March 31, 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>
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<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 138,326 $ 129,400
Other marketable securities 2,190 3,482
Accounts receivable 913,883 898,529
Inventories, prepaid expenses, and
other current assets 224,860 200,047
Income tax refund receivable 39,438 39,438
---------------- ---------------
TOTAL CURRENT ASSETS 1,318,697 1,270,896
OTHER ASSETS 262,732 229,964
PROPERTY, PLANT AND EQUIPMENT--NET 2,545,064 2,502,967
INTANGIBLE ASSETS--NET 2,808,097 2,828,507
---------------- ---------------
TOTAL ASSETS $ 6,934,590 $ 6,832,334
================ ===============
</TABLE>
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<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
<TABLE>
March 31, December 31,
2000 1999
--------- ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 6,594 $ 76,549
Salaries and wages payable 91,517 93,046
Deferred income taxes 124,481 108,168
Accrued interest payable and other liabilities 115,366 102,604
Current portion of long-term debt 54,577 37,818
---------------- ---------------
TOTAL CURRENT LIABILITIES 392,535 418,185
LONG-TERM DEBT 3,135,419 3,076,830
DEFERRED REVENUE AND OTHER LONG-TERM LIABILITIES 6,475 4,573
MINORITY INTERESTS--LIMITED PARTNERSHIPS 132,944 126,384
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; 424,103,000 and 423,982,000
shares issued at March 31, 2000 and
December 31, 1999, respectively 4,241 4,240
Additional paid-in capital 2,584,984 2,584,572
Retained earnings 1,010,846 948,385
Treasury stock (280,523) (278,504)
Receivable from Employee Stock Ownership Plan (7,898) (7,898)
Notes receivable from stockholders, officers
and management employees (44,433) (44,433)
---------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 3,267,217 3,206,362
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,934,590 $ 6,832,334
================ ===============
</TABLE>
See accompanying notes.
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<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED - IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
Revenues $ 1,021,335 $ 1,030,547
Operating unit expenses 693,993 644,736
Corporate general and administrative expenses 34,021 25,154
Provision for doubtful accounts 23,256 19,700
Depreciation and amortization 89,655 94,412
Interest expense 49,560 42,727
Interest income (2,835) (2,620)
---------------- ----------------
887,650 824,109
---------------- ----------------
Income before income taxes and
minority interests 133,685 206,438
Provision for income taxes 42,651 71,756
---------------- ----------------
Income before minority interests 91,034 134,682
Minority interests (25,708) (24,777)
---------------- ----------------
Net income $ 65,326 $ 109,905
================ ================
Weighted average common shares outstanding 385,644 419,036
================ ================
Net income per common share $ 0.17 $ 0.26
================ ================
Weighted average common shares
outstanding -- assuming dilution 389,019 442,073
================ ================
Net income per common share --
assuming dilution $ 0.17 $ 0.26
================ ================
</TABLE>
See accompanying notes.
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<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 65,326 $ 109,905
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 89,655 94,412
Provision for doubtful accounts 23,256 19,700
Income applicable to minority interests of
limited partnerships 25,708 24,777
Provision for deferred income taxes - 25,081
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable (38,485) (98,142)
Inventories, prepaid expenses and other current
assets (24,784) 20,812
Accounts payable and accrued expenses (63,624) 19,126
--------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 77,052 215,671
INVESTING ACTIVITIES
Purchases of property, plant and equipment (90,052) (102,083)
Proceeds from sale of property, plant and equipment 217 3,488
Additions to intangible assets, net of effects of
acquisitions (1,728) (5,186)
Assets obtained through acquisitions, net of liabilities
assumed (13,189) (2,834)
Payments on purchase accounting accruals - (16,330)
Other changes (11,798) 3,225
Proceeds received on sale of other marketable
securities 1,359 10
Investments in other marketable securities (67) -
--------- ---------
NET CASH USED IN
INVESTING ACTIVITIES (115,258) (119,710)
</TABLE>
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HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
----------- -------------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from borrowings $ 327,000 $ 50,464
Principal payments on long-term debt (256,249) (63,186)
Proceeds from exercise of options 413 1,957
Purchase of treasury stock (2,019) (83,204)
Decrease in loans to stockholders - 8
Proceeds from investment by minority interests 126 2,562
Purchase of limited partnership units (2,865) (4,222)
Payment of cash distributions to limited partners (19,274) (22,895)
--------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 47,132 (118,516)
--------- ---------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 8,926 (22,555)
Cash and cash equivalents at beginning of period 129,400 138,827
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 138,326 $ 116,272
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 32,372 $ 21,044
Income taxes 5,884 11,802
</TABLE>
See accompanying notes.
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<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 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 March 31, 2000, the effective interest
rate associated with the 1998 Credit Agreement was approximately
6.5%.
The Company also has a Short Term Credit Agreement with Bank of
America (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 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 0.30% to 0.50%,
depending on certain defined ratios. The principal amount is payable
in full on December 12, 2000. At March 31, 2000, there were no
amounts outstanding 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
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
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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 March 31, 2000, and December 31, 1999, long-term debt consisted
of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------------- -----------------
(In thousands)
<S> <C> <C>
Advances under a $1,750,000,000 credit
agreement with banks $1,700,000 $ 1,625,000
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 172,246 171,898
----------------- -----------------
3,189,996 3,114,648
Less amounts due within one year 54,577 37,818
----------------- -----------------
$3,135,419 $ 3,076,830
================= =================
</TABLE>
NOTE 3 -- During the first three months of 2000, the Company acquired eight
outpatient rehabilitation facilities, one outpatient surgery center
and three diagnostic imaging centers. The total purchase price of
these acquired facilities was approximately $13,189,000. The Company
also entered into non-compete agreements totaling approximately
$1,755,000 in connection with these transactions.
The cost in excess of the acquired facilities' net asset value was
approximately $1,182,000. 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.
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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 May 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 for the
first quarter of 2000 are as follows:
<TABLE>
<CAPTION>
Activity
--------
Balance at Cash Non-Cash Balance at
Description 12/31/99 Payments Impairments 03/31/00
--------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Fourth Quarter 1998 Charge:
Lease abandonment costs $ 32,366 $ 1,424 $ - $ 30,942
Other incremental costs 7,011 1,152 - 5,859
---------------------------------------------------------
Total Fourth Quarter 1998 Charge $ 39,377 $ 2,576 $ - $ 36,801
=========================================================
</TABLE>
The remaining balance at March 31, 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
March 31,
2000 1999
----------------- -----------------
(In thousands)
<S> <C> <C>
Revenues:
Inpatient and other clinical services $ 466,746 $ 482,207
Outpatient services 539,762 518,853
----------------- -----------------
1,006,508 1,001,060
Unallocated corporate office 14,827 29,487
----------------- -----------------
Consolidated revenues $ 1,021,335 $ 1,030,547
================= =================
Income before minority interests and income taxes:
Inpatient and other clinical services $ 88,134 $ 118,300
Outpatient services 113,774 132,636
----------------- -----------------
201,908 250,936
Unallocated corporate office (68,223) (44,498)
----------------- -----------------
Consolidated income before minority interests
and income taxes $ 133,685 $ 206,438
================= =================
</TABLE>
NOTE 6 -- During the first three months of 2000, the Company granted
nonqualified stock options to certain Directors, employees and
others for 3,491,500 shares of Common Stock at exercise prices
ranging from $4.875 to $5.25 per share.
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 did not have a material effect on the Company's
financial statements.
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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 March 31, 2000, we had 2,029 locations
in 50 states, Puerto Rico, the United Kingdom and Australia (excluding
facilities being closed, consolidated or held for sale), including 1,426
outpatient rehabilitation locations, 120 inpatient rehabilitation facilities,
five medical centers, 228 surgery centers, 128 diagnostic centers and 122
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.
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.
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
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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 management reorganization.
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 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.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 2000
Our operations generated revenues of $1,021,335,000 for the quarter
ended March 31, 2000, a decrease of $9,212,000, or 0.89%, as compared to the
same period in 1999. The decrease in revenues is primarily attributable to
declines in government reimbursement as a result of the Balanced Budget Act of
1997. Same store revenues for the quarter ended March 31, 2000 were
$1,002,180,000, a decrease of $28,367,000, or 2.8%, as compared to the same
period in 1999. New store revenues were $19,155,000. Revenues generated from
patients under the Medicare and Medicaid programs respectively accounted for
30.0% and 2.3% of revenue for the first quarter of 2000, compared to 33.6% and
2.2% for the same period in 1999. Revenues from any other single third-party
payor were not significant in relation to our revenues. During the first quarter
of 2000, same store outpatient visits, inpatient days, surgical cases and
diagnostic cases increased (decreased) 7.5%, 4.5%, (0.1)% and 0.1%,
respectively. Revenue per outpatient visit, inpatient day, surgical case and
diagnostic case for same store operations increased (decreased) by (6.7)%,
(6.3)%, 3.8% and (13.5)%, respectively.
Operating expenses, at the operating unit level, were $693,993,000, or
67.9% of revenues, for the quarter ended March 31, 2000, compared to 62.6% of
revenues for the first quarter of 1999. Same store operating expenses, excluding
discontinued home health operations, were $679,597,000, or 67.8% of comparable
revenue. New store operating expenses were $14,396,000, or 75.2% of comparable
revenue. Corporate general and administrative expenses increased from
$25,154,000 during the 1999 quarter to $34,021,000 during the 2000 quarter. As a
percentage of revenue, corporate general and administrative expenses increased
from 2.4% during the 1999 quarter to 3.3% in the 2000 quarter. However, when
compared to the fourth quarter of 1999 corporate general and administrative
expenses of $33,681,000, corporate general and administrative expenses increased
by $340,000, or 1.01%. The provision for doubtful accounts was $23,256,000, or
2.3% of revenues, for the first quarter of 2000, compared to $19,700,000, or
1.9% 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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<PAGE>
Depreciation and amortization expense was $89,655,000 for the quarter
ended March 31, 2000, compared to $94,412,000 for the same period in 1999. The
decrease was primarily attributable to the full amortization of certain
intangible assets. Interest expense was $49,560,000 for the quarter ended March
31, 2000, compared to $42,727,000 for the quarter ended March 31, 1999. The
increase is primarily attributable to the increase in outstanding debt. For the
first quarter of 2000, interest income was $2,835,000, compared to $2,620,000
for the first quarter of 1999.
Income before minority interests and income taxes for the first quarter
of 2000 was $133,685,000, compared to $206,438,000 for the same period in 1999.
Minority interests decreased income before income taxes by $25,708,000 for the
quarter ended March 31, 2000, compared to decreasing income before income taxes
by $24,777,000 for the first quarter of 1999. The provision for income taxes for
the first quarter of 2000 was $42,651,000, compared to $71,756,000 for the same
period in 1999. The effective tax rate was 39.5% for the quarters ended March
31, 2000 and 1999. Net income for the first quarter of 2000 was $65,326,000,
compared to $109,905,000 for the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, we had working capital of $926,162,000, including
cash and marketable securities of $140,516,000. Working capital at December 31,
1999, was $852,711,000, including cash and marketable securities of
$132,882,000. For the first three months of 2000, cash provided by operating
activities was $77,052,000, compared to $215,671,000 for the same period in
1999. The decrease is primarily attributable to the decline in net income and
the effect of implementing short term cash management procedures in the fourth
quarter of 1999 designed to ensure adequate liquidity in the event of year 2000
date change difficulties. Additions to property, plant, and equipment and
acquisitions accounted for $90,052,000 and $13,189,000, respectively, during the
first three months of 2000. Those same investing activities accounted for
$102,083,000 and $2,834,000, respectively, in the same period in 1999. Financing
activities provided $47,132,000 and used $118,516,000 during the first three
months of 2000 and 1999, respectively. Net borrowing proceeds (reductions)
(borrowing less principal reductions) for the first three months of 2000 and
1999 were $70,751,000 and $(12,722,000), respectively.
Net accounts receivable were $913,883,000 at March 31, 2000, compared
to $898,529,000 at December 31, 1999. The number of days of average quarterly
revenues in ending receivables at March 31, 2000, was 81.4, 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 March 31, 2000, is consistent with the related
concentration of revenues for the period then ended.
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 6.5% for the three months ended March 31, 2000, compared to
the average prime rate of 8.7% during the same period. At March 31, 2000, we had
drawn $1,700,000,000 under the 1998 Credit Agreement.
We also have a Short Term Credit Agreement with Bank of America (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 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. We are 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 principal amount is payable in full on December 12, 2000.
Page 14
<PAGE>
At March 31, 2000, there were no amounts outstanding under the Short Term Credit
Agreement.
On March 20, 1998, we 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 HEALTHSOUTH common stock 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 our common stock, (b)
the payment of a stock dividend or stock distribution on any shares of our
capital stock, (c) the issuance of rights or warrants to all holders of our
common stock entitling them to purchase shares of our common stock at less than
the current market price, or (d) the payment of certain other distributions with
respect to our common stock. In addition, we may, from time to time, lower the
conversion price for periods of not less than 20 days, in our discretion. We
used net proceeds from the issuance of the 3.25% Convertible Debentures to pay
down indebtedness outstanding under our then-existing credit facilities.
On June 22, 1998, we 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 HEALTHSOUTH. We used the net proceeds
from the issuance of the Senior Notes to pay down indebtedness outstanding under
our then-existing credit facilities.
On February 8, 1999, we announced a plan to repurchase up to 70,000,000
shares of our common stock over the next 36 months through open market
purchases, block trades or privately negotiated transactions. As of March 31,
2000, we had repurchased approximately 36,700,637 shares under this plan.
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 $200,000,000 to $250,000,000 on maintenance and expansion of our
existing facilities and approximately $200,000,000 to $250,000,000 on
development activities and Internet and e-commerce initiatives, and on continued
development of the Integrated Service Model.
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.
Page 15
<PAGE>
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, as well as the
interest rate swaps described below) 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 $2,190,000 at March 31,
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.
As described below, a significant portion of our long-term indebtedness
is subject to variable rates of interest, generally equal to LIBOR plus a
predetermined percentage. In October 1999, we entered into three short-term
interest rate swap arrangements intended to hedge our exposure to rising
interest rates resulting from the capital markets' perception of risks
associated with year 2000 issues. Each of these arrangements had a notional
amount of $250,000,000 and matured six months from the date of the original
transaction. The notional amounts are used to measure interest to be paid or
received and do not represent an amount of exposure to credit loss. In each of
these arrangements, we paid the counterparty a fixed rate of interest on the
notional amount, and the counterparty paid us a variable rate of interest equal
to the 90-day LIBOR rate. The variable rate paid to us by the counterparty was
reset once during the term of the swap. Thus, these interest rate swaps had the
effect of fixing the interest rates on an aggregate of $750,000,000 of our
variable-rate debt through their maturity dates. The arrangements matured at
various dates in April 2000. At March 31, 2000, the weighted average interest
rate we were obligated to pay under these interest rate swaps was 5.978%, and
the weighted average interest rate we received was 5.974%.
With respect to our interest-bearing liabilities, approximately
$1,700,000,000 in long-term debt at March 31, 2000 is subject to variable rates
of interest, while the remaining balance in long-term debt of $1,489,996,000 is
subject to fixed rates of interest, prior to giving effect to the interest rate
swaps described above (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 March 31, 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
$444,000,000 and $443,000,000 at March 31, 2000 and December 31, 1999,
respectively. The fair value of the 6.875% Senior Notes due 2005 was
approximately $216,650,000 and $216,600,000 at March 31, 2000 and December 31,
1999, respectively. The fair value of the 7% senior Notes due 2008 was
approximately $206,875,000 and $207,250,000 at March 31, 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
$17,000,000. 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.
Page 16
<PAGE>
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.
Page 17
<PAGE>
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. We cannot predict when the court will hear arguments or rule on
our motion. 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 securities during the
three months ended March 31, 2000.
Page 18
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
11. Computation of Income Per Share (unaudited)
27. Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no Current Reports on Form 8-K during the
three months ended March 31, 2000.
No other items of Part II are applicable to the Registrant for the
period covered by this Quarterly Report on Form 10-Q.
Page 19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed
on its behalf by the undersigned thereunto duly authorized.
HEALTHSOUTH CORPORATION
(Registrant)
Date: May 15, 2000 RICHARD M. SCRUSHY
----------------------------
Richard M. Scrushy
Chairman of the Board and
Chief Executive Officer
Date: May 15, 2000 WILLIAM T. OWENS
----------------------------
William T. Owens
Executive Vice President and
Chief Financial Officer
Page 20
EXHIBIT 11
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
COMPUTATION OF INCOME PER SHARE (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
Numerator:
Net income $ 65,326 $ 109,905
---------------- ----------------
Numerator for basic earnings per share -- income available to
common stockholders 65,326 109,905
Effect of dilutive securities:
Elimination of interest and amortization on 3.25% Convertible
Subordinated Debentures due 2003, less the related
effect of the provision of income taxes - (1) 3,112
---------------- ----------------
Numerator for diluted earnings per share -- income available to
common stockholders after assumed conversion $ 65,326 $ 113,017
================ ================
Denominator:
Denominator for basic earnings per share -- weighted-average
shares 385,644 419,036
Effect of dilutive securities:
Net effect of dilutive stock options 2,625 7,535
Restricted shares issued 750 -
Assumed conversion of 3.25% Convertible Subordinated
Debentures due 2003 - (1) 15,502
---------------- ----------------
Dilutive potential common shares 3,375 23,037
---------------- ----------------
Denominator of diluted earnings per share -- adjusted
weighted-average shares and assumed conversions 389,019 442,073
================ ================
Basic earnings per share $ 0.17 $ 0.26
================ ================
Diluted earnings per share $ 0.17 $ 0.26
================ ================
</TABLE>
(1) The effect of these securities was antidilutive for the three months
ended March 31, 2000.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> $138,326
<SECURITIES> 2,190
<RECEIVABLES> 1,584,627
<ALLOWANCES> (670,744)
<INVENTORY> 92,068
<CURRENT-ASSETS> 1,318,697
<PP&E> 3,376,022
<DEPRECIATION> (830,958)
<TOTAL-ASSETS> 6,934,590
<CURRENT-LIABILITIES> 392,535
<BONDS> 3,135,419
0
0
<COMMON> 4,241
<OTHER-SE> 3,262,976
<TOTAL-LIABILITY-AND-EQUITY> 6,934,590
<SALES> 0
<TOTAL-REVENUES> 1,021,335
<CGS> 0
<TOTAL-COSTS> 728,014
<OTHER-EXPENSES> 89,655
<LOSS-PROVISION> 23,256
<INTEREST-EXPENSE> 49,560
<INCOME-PRETAX> 133,685
<INCOME-TAX> 42,651
<INCOME-CONTINUING> 65,326
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 65,326
<EPS-BASIC> 0.17
<EPS-DILUTED> 0.17
</TABLE>
