-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IIRje0ghDvr2GawfRMJbjrTM2vx+zvHCy3NB15VxJXsXEDZtrdZ2Wy1kUpGnp7uX l+JtGy32su9cPveTFc+CDw== 0001005150-00-000715.txt : 20000516 0001005150-00-000715.hdr.sgml : 20000516 ACCESSION NUMBER: 0001005150-00-000715 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTHSOUTH CORP CENTRAL INDEX KEY: 0000785161 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 630860407 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14940 FILM NUMBER: 632023 BUSINESS ADDRESS: STREET 1: ONE HEALTHSOUTH PKWY STREET 2: STE 224W CITY: BIRMINGHAM STATE: AL ZIP: 35243 BUSINESS PHONE: 2059677116 MAIL ADDRESS: STREET 1: ONE HEALTHSOUTH PARKWAY CITY: BIRMINGHAM STATE: AL ZIP: 35243 FORMER COMPANY: FORMER CONFORMED NAME: HEALTHSOUTH REHABILITATION CORP DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q 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 ------- 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 Page 1 HEALTHSOUTH CORPORATION AND SUBSIDIARIES INDEX PART 1 -- FINANCIAL INFORMATION
Page ---- 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
Page 2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HEALTHSOUTH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
MARCH 31, DECEMBER 31, 2000 1999 ---------------- --------------- (Unaudited) 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 ================ ===============
Page 3 HEALTHSOUTH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN THOUSANDS) March 31, December 31, 2000 1999 --------- ------------ (Unaudited) 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 ================ ===============
See accompanying notes. Page 4 HEALTHSOUTH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED - IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Three Months Ended March 31, ------------------------------------- 2000 1999 ---------------- ---------------- 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 ================ ================
See accompanying notes. Page 5 HEALTHSOUTH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ----------------------- 2000 1999 ---------- ---------- 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)
Page 6 HEALTHSOUTH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED - IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, -------------------------- 2000 1999 ----------- ------------- 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
See accompanying notes. Page 7 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 Page 8 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:
March 31, December 31, 2000 1999 ----------------- ----------------- (In thousands) 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 ================= =================
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. Page 9 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:
Activity -------- Balance at Cash Non-Cash Balance at Description 12/31/99 Payments Impairments 03/31/00 -------------------------------------------------------------------------------------------- (In thousands) 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 =========================================================
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. Page 10 Operating results and other financial data are presented for the principal operating segments as follows:
Three Months Ended March 31, 2000 1999 ----------------- ----------------- (In thousands) 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 ================= =================
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. Page 11 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 Page 12 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. Page 13 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 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 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 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 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 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 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 EX-11 2 EXHIBIT 11 EXHIBIT 11 HEALTHSOUTH CORPORATION AND SUBSIDIARIES COMPUTATION OF INCOME PER SHARE (UNAUDITED) (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, ------------------------------------ 2000 1999 ---------------- ---------------- 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 ================ ================
(1) The effect of these securities was antidilutive for the three months ended March 31, 2000. EX-27 3 FDS --
5 1000 U.S. DOLLARS 3-MOS DEC-31-2000 MAR-31-2000 1 $138,326 2,190 1,584,627 (670,744) 92,068 1,318,697 3,376,022 (830,958) 6,934,590 392,535 3,135,419 0 0 4,241 3,262,976 6,934,590 0 1,021,335 0 728,014 89,655 23,256 49,560 133,685 42,651 65,326 0 0 0 65,326 0.17 0.17
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