10-Q 1 form10q.txt 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, 2001; 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, 2001 ----------------------- -------------------------- COMMON STOCK, PAR VALUE 389,662,185 SHARES $.01 PER SHARE Page 1 HEALTHSOUTH CORPORATION AND SUBSIDIARIES INDEX PART I -- FINANCIAL INFORMATION
Page ---- Item 1. Financial Statements Consolidated Balance Sheets - March 31, 2001 (Unaudited) 3 and December 31, 2000 Consolidated Statements of Income (Unaudited) -- Three Months Ended March 31, 2001 and 2000 5 Consolidated Statements of Cash Flows (Unaudited) -- Three Months Ended March 31, 2001 and 2000 6 Notes to Consolidated Financial Statements (Unaudited) -- Three Months Ended March 31, 2001 and 2000 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II -- OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Changes in Securities 18 Item 6. Exhibits and Reports on Form 8-K 18
Page 2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HEALTHSOUTH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
MARCH 31, DECEMBER 31, 2001 2000 ----------- ------------ (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 181,677 $ 180,317 Other marketable securities 1,362 90 Accounts receivable 967,880 946,965 Inventories, prepaid expenses and other current assets 324,252 303,746 ---------- ---------- TOTAL CURRENT ASSETS 1,475,171 1,431,118 OTHER ASSETS 240,694 230,898 PROPERTY, PLANT AND EQUIPMENT--NET 2,904,934 2,871,763 INTANGIBLE ASSETS--NET 2,832,210 2,846,661 ---------- ---------- TOTAL ASSETS $7,453,009 $7,380,440 ========== ==========
Page 3 HEALTHSOUTH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN THOUSANDS)
MARCH 31, DECEMBER 31, 2001 2000 ----------- ----------- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 32,404 $ 78,762 Salaries and wages payable 81,051 87,730 Deferred income taxes 9,612 4,227 Accrued interest payable and other liabilities 123,704 168,970 Current portion of long-term debt 26,466 43,225 ----------- ----------- TOTAL CURRENT LIABILITIES 273,237 382,914 LONG-TERM DEBT 3,227,228 3,168,604 DEFERRED INCOME TAXES 188,180 160,365 DEFERRED REVENUE AND OTHER LONG-TERM LIABILITIES 6,862 4,126 MINORITY INTERESTS--LIMITED PARTNERSHIPS 142,671 137,977 STOCKHOLDERS' EQUITY: Preferred Stock, $.10 par value--1,500,000 shares authorized; issued and outstanding-- none -- -- Common Stock, $.01 par value--600,000,000 shares authorized; 427,242,000 and 426,031,000 shares issued at March 31, 2001 and December 31, 2000, respectively 4,272 4,260 Additional paid-in capital 2,618,586 2,610,442 Accumulated other comprehensive income 8,757 7,074 Retained earnings 1,300,261 1,224,950 Treasury stock (280,524) (280,524) Receivable from Employee Stock Ownership Plan (2,699) (5,415) Notes receivable from stockholders, officers and management employees (33,822) (34,333) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 3,614,831 3,526,454 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,453,009 $ 7,380,440 =========== ===========
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, -------------------------------------- 2001 2000 ----------- ----------- Revenues $ 1,090,462 $ 1,021,335 Operating unit expenses 736,045 693,993 Corporate general and administrative expenses 32,654 34,021 Provision for doubtful accounts 24,383 23,256 Depreciation and amortization 91,219 89,655 Interest expense 59,420 49,560 Interest income (2,721) (2,835) ----------- ----------- 941,000 887,650 ----------- ----------- Income before income taxes and minority interests 149,462 133,685 Provision for income taxes 49,170 42,651 ----------- ----------- Income before minority interests 100,292 91,034 Minority interests (24,981) (25,708) ----------- ----------- Net income $ 75,311 $ 65,326 =========== =========== Weighted average common shares outstanding 388,143 385,644 =========== =========== Net income per common share $ 0.19 $ 0.17 =========== =========== Weighted average common shares outstanding -- assuming dilution 398,456 389,019 =========== =========== Net income per common share -- assuming dilution $ 0.19 $ 0.17 =========== ===========
See accompanying notes. Page 5 HEALTHSOUTH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, -------------------------- 2001 2000 --------- --------- OPERATING ACTIVITIES Net income $ 75,311 $ 65,326 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 91,219 89,655 Provision for doubtful accounts 24,383 23,256 Issuance of restricted stock grants 492 -- Variable stock option appreciation (4,507) -- Income applicable to minority interests of limited partnerships 24,981 25,708 Provision for deferred income taxes 33,200 -- Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable (45,263) (38,485) Inventories, prepaid expenses and other current assets (20,473) (24,784) Accounts payable and accrued expenses (99,147) (63,624) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 80,196 77,052 INVESTING ACTIVITIES Purchases of property, plant and equipment (95,528) (90,052) Proceeds from sale of property, plant and equipment 992 217 Additions to intangible assets, net of effects of acquisitions (11,097) (1,728) Assets obtained through acquisitions, net of liabilities assumed (2,539) (13,189) Increases in other assets (10,788) (11,798) Proceeds received on sale of other marketable securities -- 1,359 Investments in other marketable securities (1,272) (67) --------- --------- NET CASH USED IN INVESTING ACTIVITIES (120,232) (115,258)
Page 6 HEALTHSOUTH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED - IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, -------------------------- 2001 2000 --------- --------- FINANCING ACTIVITIES Proceeds from borrowings $ 580,000 $ 327,000 Principal payments on long-term debt (535,398) (256,249) Proceeds from exercise of options 12,171 413 Purchase of treasury stock -- (2,019) Reduction in receivable from Employee Stock Ownership Plan 2,716 -- Decrease in loans to stockholders, officers and management employees 511 -- Proceeds from investment by minority interests 3,576 126 Purchase of limited partnership units (7,060) (3,343) Payment of cash distributions to limited partners (16,803) (19,274) Foreign currency translation adjustment 1,683 478 --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 41,396 47,132 --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS 1,360 8,926 Cash and cash equivalents at beginning of period 180,317 129,400 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 181,677 $ 138,326 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 34,213 $ 32,372 Income taxes 4,480 5,884
See accompanying notes. Page 7 HEALTHSOUTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) THREE MONTHS ENDED MARCH 31, 2001 AND 2000 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, 2000. 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, 2001, the effective interest rate associated with the 1998 Credit Agreement was approximately 6.53%. The Company also had a Short Term Credit Agreement with Bank of America and other participating banks (as amended, the "Short Term Credit Agreement"), providing for a $250,000,000 short term revolving credit facility. The terms of the Short Term Credit Agreement were substantially consistent with those of the 1998 Credit Agreement. Interest on the Short Term Credit Agreement was paid based on LIBOR plus a predetermined margin or a base rate. The Company was required to pay a fee on the unused portion of the credit facility ranging from 0.30% to 0.50%, depending on certain defined ratios. On October 31, 2000, the Company terminated the Short Term Credit Agreement and replaced it with a new $400,000,000 Credit Agreement (the "2000 Credit Agreement") with UBS AG and other participating banks. Interest on the 2000 Credit Agreement is paid based on LIBOR plus a predetermined margin or a base rate. The Company is required to pay a fee on the unused portion of the credit facility ranging from 0.25% to 0.50%, depending on certain defined ratios. The principal amount is payable in full in eight quarterly installments ending on June 22, 2003. At March 31, 2001, there were no amounts outstanding under the 2000 Credit Agreement. On March 24, 1994, the Company issued $250,000,000 principal amount of 9.5% Senior Subordinated Notes due 2001 (the "9.5% Notes"). The Company redeemed the 9.5% Notes at par on October 30, 2000. On March 20, 1998, the Company issued $500,000,000 in 3.25% Convertible Subordinated Debentures due 2003 (the "3.25% Convertible Debentures") in a private placement. An additional $67,750,000 principal amount of the 3.25% Convertible Debentures was issued on March 31, 1998 to cover underwriters' overallotments. Interest is payable on April 1 and October 1. The 3.25% Convertible Debentures are convertible into common stock of the Company at the option of the holder at a conversion price of $36.625 per share. The conversion price is subject to adjustment upon the occurrence of (a) a subdivision, combination or reclassification of outstanding shares of common stock, (b) the payment of a stock dividend or stock distribution on any shares of the Company's capital stock, (c) the issuance of rights or warrants to all holders of common stock entitling them to purchase shares of common stock at less than the current market price, or (d) the payment of certain Page 8 other distributions with respect to the Company's common stock. In addition, the Company may, from time to time, lower the conversion price for periods of not less than 20 days, in its discretion. The net proceeds from the issuance of the 3.25% Convertible Debentures were used by the Company to pay down indebtedness outstanding under its then-existing credit facilities. On June 22, 1998, the Company issued $250,000,000 in 6.875% Senior Notes due 2005 and $250,000,000 in 7.0% Senior Notes due 2008 (collectively, the "Senior Notes"). Interest is payable on June 15 and December 15. The Senior Notes are unsecured, unsubordinated obligations of the Company. The net proceeds from the issuance of the Senior Notes were used by the Company to pay down indebtedness outstanding under its then-existing credit facilities. On September 25, 2000, the Company issued $350,000,000 in 10-3/4% Senior Subordinated Notes due 2008 (the "10-3/4% Notes"). Interest is payable on April 1 and October 1. The 10-3/4% Notes are senior subordinated obligations of the Company and, as such, are subordinated to all existing and future senior indebtedness of the Company, and also are effectively subordinated to all existing and future liabilities of the Company's subsidiaries and partnerships. The net proceeds from the issuance of the 10-3/4% Notes were used by the Company to redeem the 9.5% Notes and to pay down indebtedness outstanding under its then-existing credit facilities. The 10-3/4% Notes mature on October 1, 2008. In October 2000, the Company entered into two six-month and one twelve-month interest rate swap arrangements with notional amounts of $240,000,000, $240,000,000 and $175,000,000 each. The swaps expire on various dates in April 2001 and November 2001. These arrangements have the effect of converting a portion of the Company's variable rate debt to a fixed rate. The arrangements did not have a material effect on the Company's operations. On February 1, 2001, the Company issued $375,000,000 in 8-1/2% Senior Notes due 2008 (the "8-1/2% Notes"). Interest is payable on February 1 and August 1. The 8-1/2% Notes are unsecured, unsubordinated obligations of the Company. The net proceeds from the issuance of the 8-1/2% Notes were used to pay down indebtedness outstanding under the Company's credit facilities. The 8-1/2% Notes mature on February 1, 2008. Page 9 At March 31, 2001, and December 31, 2000, long-term debt consisted of the following:
March 31, December 31, 2001 2000 ---------- ---------- (In thousands) Advances under a $1,750,000,000 credit agreement with banks $1,354,000 $1,655,000 3.25% Convertible Subordinated Debentures due 2003 567,750 567,750 6.875% Senior Notes due 2005 250,000 250,000 7.0% Senior Notes due 2008 250,000 250,000 10-3/4% Senior Subordinated Notes due 2008 350,000 350,000 8-1/2% Senior Notes due 2008 375,000 -- Other long-term debt 106,944 139,079 ---------- ---------- 3,253,694 3,211,829 Less amounts due within one year 26,466 43,225 ---------- ---------- $3,227,228 $3,168,604 ========== ==========
NOTE 3 -- During the first three months of 2001, the Company acquired two outpatient rehabilitation facilities and one outpatient surgery center. The total purchase price of these acquired facilities was approximately $2,539,000. The Company also entered into non-compete agreements totaling approximately $470,000 in connection with these transactions. The cost in excess of the acquired facilities' net asset value was approximately $3,045,000. The results of operations (not material individually or in the aggregate) of these acquisitions are included in the consolidated financial statements from their respective acquisition dates. NOTE 4 -- During 1998, the Company recorded impairment and restructuring charges related to the Company's decision to 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 7, 2001, approximately 97% 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 2001 are as follows:
Activity -------- Balance at Cash Non-Cash Balance at Description 12/31/00 Payments Impairments 03/31/01 ------------------------------------------------------------------------------------------------------------ (In thousands) Fourth Quarter 1998 Charge: Lease abandonment costs $21,113 $ 2,718 $ -- $18,395 ----------------------------------------------------- Total Fourth Quarter 1998 Charge $21,113 $ 2,718 $ -- $18,395 =====================================================
The remaining balance at March 31, 2001 is included in accrued interest payable and other liabilities in the accompanying balance sheet. Page 10 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 operates in three segments, which correspond to these divisions. Operating results and other financial data are presented for the principal operating segments as follows:
Three Months Ended March 31, 2001 2000 ---------- ---------- (In thousands) Revenues: Inpatient and other clinical services $ 492,038 $ 473,683 Outpatient services - West 296,725 279,057 Outpatient services - East 294,025 265,327 ----------- ----------- 1,082,788 1,018,067 Unallocated corporate office 7,674 3,268 ----------- ----------- Consolidated revenues $ 1,090,462 $ 1,021,335 =========== =========== Income before income taxes and minority interests: Inpatient and other clinical services $ 99,179 $ 96,069 Outpatient services - West 57,687 52,972 Outpatient services - East 67,925 61,718 ----------- ----------- 224,791 210,759 Unallocated corporate office (75,329) (77,074) ----------- ----------- Consolidated income before income taxes and minority interests $ 149,462 $ 133,685 =========== ===========
NOTE 6 -- During the first three months of 2001, the Company granted nonqualified stock options to certain Directors, employees and others for 4,159,000 shares of Common Stock at exercise prices ranging from $13.875 to $15.4375 per share. 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, 2001, we had approximately 2,018 locations in 50 states, Puerto Rico, the United Kingdom, Australia and Canada, including 1,417 outpatient rehabilitation locations, 124 inpatient rehabilitation facilities, five medical centers, 219 surgery centers, 142 diagnostic centers and 111 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. We determine allowances for doubtful accounts and contractual adjustments based on the specific agings and payor classifications at each facility, and contractual adjustments based on historical experience and the terms of payor contracts. Net accounts receivable includes only those amounts we estimate to be collectible. In 1998, we adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS 131 requires an enterprise to report operating segments based upon the way its operations are managed. This approach defines operating segments along the lines used by management to assess performance and make operating and resource allocation decisions. Based on our management and reporting structure, segment information has been presented for (1) inpatient and other clinical services, (2) outpatient services - East and (3) outpatient services - West. The inpatient and other clinical services segment includes the operations of our inpatient rehabilitation facilities and medical centers, as well as the operations of certain physician practices and other clinical services which are managerially aligned with our inpatient services. The outpatient services segments (East and West) include the operations of our outpatient rehabilitation facilities (including occupational medicine centers), outpatient surgery centers and outpatient diagnostic centers. 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 outpatient rehabilitation operations are measured on locations within markets in which similar operations existed at the end of the period and include the operations of additional outpatient rehabilitation ocations opened within the same market. New store outpatient rehabilitation operations are measured on locations within new Page 12 markets. Same store operations in our other business lines are measured based on specific locations. We may, from time to time, close or consolidate similar locations in multi-site markets to obtain efficiencies and respond to changes in demand. We determine the amortization period of the cost in excess of net asset value of purchased facilities based on an evaluation of the facts and circumstances of each individual purchase transaction. The evaluation includes an analysis of historic and projected financial performance, an evaluation of the estimated useful life of the buildings and fixed assets acquired, the indefinite useful life of certificates of need and licenses acquired, the competition within local markets, lease terms where applicable, and the legal terms of partnerships where applicable. We utilize independent appraisers and rely on our own management expertise in evaluating each of the factors noted above. With respect to the carrying value of the excess of cost over net asset value of individual purchased facilities and other intangible assets, we determine on a quarterly basis whether an impairment event has occurred by considering factors such as the market value of the asset, a significant adverse change in legal factors or in the business climate, adverse action by regulators, a history of operating losses or cash flow losses, or a projection of continuing losses associated with an operating entity. The carrying value of excess cost over net asset value of purchased facilities and other intangible assets will be evaluated if the facts and circumstances suggest that it has been impaired. If this evaluation indicates that the value of the asset will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, our carrying value of the asset will be reduced to the estimated fair market value. Fair value is determined based on the individual facts and circumstances of the impairment event, and the available information related to it. Such information might include quoted market prices, prices for comparable assets, estimated future cash flows discounted at a rate commensurate with the risks involved, and independent appraisals. For purposes of analyzing impairment, assets are generally grouped at the individual operational facility level, which is the lowest level for which there are identifiable cash flows. If the group of assets being tested was acquired by the Company as part of a purchase business combination, any goodwill that arose as part of the transaction is included as part of the asset grouping. RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 2001 Our operations generated revenues of $1,090,462,000 for the quarter ended March 31, 2001, an increase of $69,127,000, or 6.8%, as compared to the same period in 2000. The increase in revenues is primarily attributable to increases in patient volume. Same store revenues for the quarter ended March 31, 2001 were $1,066,522,000, an increase of $52,830,000, or 5.2%, as compared to the same period in 2000, excluding facilities in operation in 2000 but no longer in operation in 2001. New store revenues were $23,940,000. Revenues generated from patients under the Medicare and Medicaid programs respectively accounted for 30.5% and 2.5% of revenue for the first quarter of 2001, compared to 30.0% and 2.3% for the same period in 2000. Revenues from any other single third-party payor were not significant in relation to our revenues. During the first quarter of 2001, same store outpatient visits, inpatient days, surgical cases and diagnostic cases increased 0.1%, 2.9%, 4.4% and 6.9%, respectively. Revenue per outpatient visit, inpatient day, surgical case and diagnostic case for same store operations increased (decreased) by 2.2%, 0.9%, (1.4)% and 3.4%, respectively. Operating expenses (expenses excluding corporate general and administrative expenses, provision for doubtful accounts, depreciation and amortization and interest expense) were $736,045,000, or 67.5% of revenues, for the quarter ended March 31, 2001, compared to 67.9% of revenues for the first quarter of 2000. Same store operating expenses were $719,842,000, or 67.5% of comparable revenue. New store operating expenses were $16,203,000, or 67.7% of comparable revenue. Corporate general and administrative expenses decreased from $34,021,000 during the 2000 quarter to $32,654,000 during the 2001 quarter. The provision for doubtful accounts was $24,383,000, or 2.2% of revenues, for the first quarter of 2001, compared to $23,256,000, or 2.3% of revenues, for the same period in 2000. Management believes that the allowance for doubtful accounts generated by this provision is adequate to cover any uncollectible revenues. Depreciation and amortization expense was $91,219,000 for the quarter ended March 31, 2001, compared to $89,655,000 for the same period in 2000. The increase was primarily attributable to our investment in additional assets. Interest expense was $59,420,000 for the quarter ended March 31, 2001, Page 13 compared to $49,560,000 for the quarter ended March 31, 2000. The increase is primarily attributable to the increases in effective interest rates. For the first quarter of 2001, interest income was $2,721,000, compared to $2,835,000 for the first quarter of 2000. Income before income taxes and minority interests for the first quarter of 2001 was $149,462,000, compared to $133,685,000 for the same period in 2000. Minority interests decreased income before income taxes by $24,981,000 for the quarter ended March 31, 2001, compared to decreasing income before income taxes by $25,708,000 for the first quarter of 2000. The provision for income taxes for the first quarter of 2001 was $49,170,000, compared to $42,651,000 for the same period in 2000. The effective tax rate was 39.5% for the quarters ended March 31, 2001 and 2000. Net income for the first quarter of 2001 was $75,311,000, compared to $65,326,000 for the first quarter of 2000. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2001, we had working capital of $1,201,934,000, including cash and marketable securities of $183,039,000. Working capital at December 31, 2000, was $1,048,204,000, including cash and marketable securities of $180,407,000. For the first three months of 2001, cash provided by operating activities was $80,196,000, compared to $77,052,000 for the same period in 2000. The increase is primarily attributable to the increase in net income. Additions to property, plant and equipment and acquisitions accounted for $95,528,000 and $2,539,000, respectively, during the first three months of 2001. Those same investing activities accounted for $90,052,000 and $13,189,000, respectively, in the same period in 2000. Financing activities provided $41,396,000 and provided $47,132,000 during the first three months of 2001 and 2000, respectively. Net borrowing proceeds (borrowing less principal reductions) for the first three months of 2001 and 2000 were $44,602,000 and $70,751,000, respectively. Net accounts receivable were $967,880,000 at March 31, 2001, compared to $946,965,000 at December 31, 2000. The number of days of average quarterly revenues in ending receivables at March 31, 2001, was 79.9, compared to 80.9 days of average quarterly revenues in ending receivables at December 31, 2000. The concentration of net accounts receivable from patients, third-party payors, insurance companies and others at March 31, 2001, 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 6.89% for the three months ended March 31, 2001, compared to the average prime rate of 8.62% during the same period. At March 31, 2001, we had drawn $1,354,000,000 under the 1998 Credit Agreement. On October 31, 2000, we entered into a new $400,000,000 Credit Agreement (the "2000 Credit Agreement") with UBS AG and other participating banks, replacing our previous Short Term Credit Agreement with Bank of America, N.A. and other participating banks. Interest on the 2000 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 0.25% to 0.50%, depending on certain defined ratios. The principal amount is payable in eight quarterly installments ending on June 22, 2003. At March 31, 2001, there were no amounts outstanding under the 2000 Credit Agreement. On February 1, 2001, we issued $375,000,000 in 8-1/2% Senior Notes due 2008 (the "8-1/2% Notes"). Interest is payable on February 1 and August 1. The 8-1/2% Notes are unsecured, unsubordinated obligations of HEALTHSOUTH. The net proceeds from the issuance of the 8-1/2% Notes were used to pay down indebtedness under our credit facilities. The 8-1/2% Notes mature on February 1, 2008. Page 14 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 $100,000,000 to $150,000,000 on maintenance and expansion of our existing facilities and approximately $200,000,000 to $250,000,000 on development activities 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. After the end of the quarter, we closed on the sale of substantially all of our occupational medicine centers. The proceeds of this sale will be used towards debt retirement. 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. 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 $1,362,000 at March 31, 2001, 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 2000, we entered into three short-term interest rate swap arrangements intended to hedge our exposure to rising interest rates in the capital markets. Two of these arrangements have a notional amount of $240,000,000 and one has a notional amount of $175,000,000. These mature six months and twelve months, respectively, 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 pay the counterparty a fixed rate of interest on the notional amount, and the counterparty pays us a variable rate of interest equal to the 90-day LIBOR rate. The variable rate paid to us by the counterparty on the six-month maturities and the twelve-month maturity are reset once and three times, respectively, during the term of the swaps. Thus, these interest rate swaps have the effect of fixing the interest rates on an aggregate of $655,000,000 of our variable-rate debt through their maturity dates. The arrangements matured or will mature at various date in April 2001 and November 2001. We would be exposed to credit losses if the counterparties did not perform their obligations under the swap arrangements; however, the counterparties are major commercial banks whom we believe to be creditworthy, and we expect them to fully satisfy their obligations. At March 31, 2001, the weighted average interest rate we were obligated to pay under these interest rate swaps was 6.70%, and the weighted average interest rate we received was 5.51%. With respect to our interest-bearing liabilities, approximately $1,354,000,000 in long-term debt at March 31, 2001 is subject to variable rates of interest, while the remaining balance in long-term debt of $1,899,694,000 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 $1,655,000,000 in long-term debt subject to variable rates of interest and $1,556,829,000 in long-term debt subject to fixed rates of interest at December 31, 2000. The fair value of our total long-term debt, based on discounted cash flow analyses, approximates its carrying value at March 31, 2001 and December 31, 2000 except for the 3.25% Convertible Debentures, 6.875% Senior Notes, 7.0% Senior Notes and 10-3/4% Notes. The fair value of the 3.25% Convertible Debentures was approximately $508,136,000 and $503,765,000 at March 31, 2001 and December 31, 2000, respectively. The fair value of the 6.875% Senior Notes due 2005 was approximately $240,813,000 and $252,025,000 at March 31, 2001 and December 31, 2000, respectively. The fair value of the 7% Senior Notes due 2008 was approximately $230,413,000 and $225,125,000 at March 31, 2001 and December 31, 2000, respectively. The fair value of the 10-3/4% Notes due 2008 was approximately $372,313,000 and $366,625,000 at March 31, 2001 and December 31, 2000, respectively. Based on a hypothetical 1% increase in interest rates, the potential losses in future annual pre-tax earnings would be approximately $13,540,000. 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 15 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 16 PART II -- OTHER INFORMATION Item 1. LEGAL PROCEEDINGS. We were 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 our then-current directors, certain of our former directors and certain of our officers 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. On September 13, 2000, the magistrate judge issued his report and recommendation, recommending that the court dismiss the amended complaint in its entirety, with leave to amend. The plaintiffs objected to that report, and we responded to that objection. On December 20, 2000, without oral argument, the court issued an order rejecting the magistrate judge's report and recommendation and denying our motion to dismiss. We believed that the December 20, 2000 order failed to follow the standards required under the Private Securities Litigation Reform Act of 1995 and Rule 9(b) of the Federal Rules of Civil Procedure, and we filed a motion asking the court to reconsider that order or to certify it for an interlocutory appeal to the United States Eleventh Circuit Court of Appeals. Oral argument on that motion was held on March 2, 2001, and the court denied that motion on March 12, 2001. Accordingly, we filed our answer to the consolidated amended complaint on March 26, 2001. 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. Page 17 Item 2. CHANGES IN SECURITIES. (c) Recent Sales of Unregistered Securities We had no unregistered sales of equity securities during the three months ended March 31, 2001. Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 11. Computation of Income Per Share (unaudited) (b) Reports on Form 8-K During the three months ended March 31, 2001, we filed (1) a Current Report on form 8-K dated January 10, 2001, furnishing under Item 9 the text of slides currently being used in investor and analyst presentations by our management; and (2) a Current Report on form 8-K dated March 14, 2001, furnishing under Item 9 the text of slides currently being used in investor and analyst presentations by our management. No other items of Part II are applicable to the Registrant for the period covered by this Quarterly Report on Form 10-Q. Page 18 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, 2001 RICHARD M. SCRUSHY ---------------------------- Richard M. Scrushy Chairman of the Board and Chief Executive Officer Date: May 15, 2001 WILLIAM T. OWENS ---------------------------- William T. Owens Executive Vice President and Chief Financial Officer Page 19