SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
Quarterly report pursuant to Section 13 or 15(d) of the Securities
/X/ Exchange Act of 1934 for the quarterly period ended June 30, 2000; or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___________ to
/ / _____________.
Commission File Number 1-10315
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HEALTHSOUTH CORPORATION
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 63-0860407
- ------------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
ONE HEALTHSOUTH PARKWAY, BIRMINGHAM, ALABAMA 35243
---------------------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(205) 967-7116
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all Reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such Reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at July 21, 2000
Common Stock, par value 385,653,057 shares
$.01 per share
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
INDEX
PART I -- FINANCIAL INFORMATION
Page
----
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - June 30, 2000 (Unaudited) 3
and December 31, 1999
Consolidated Statements of Income (Unaudited) -- Three Months and Six
Months Ended June 30, 2000 and 1999 5
Consolidated Statements of Cash Flows (Unaudited) -- Six Months
Ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements (Unaudited) -- Three Months
and Six Months Ended June 30, 2000 and 1999 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
2
PART I -- FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2000 1999
--------------- ---------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 170,957 $ 129,400
Other marketable securities 1,140 3,482
Accounts receivable--net 916,153 898,529
Inventories, prepaid expenses, and
other current assets 244,169 200,047
Income tax refund receivable 0 39,438
--------------- ---------------
TOTAL CURRENT ASSETS 1,332,419 1,270,896
OTHER ASSETS 307,388 229,964
PROPERTY, PLANT AND EQUIPMENT--NET 2,648,917 2,502,967
INTANGIBLE ASSETS--NET 2,833,614 2,828,507
--------------- ---------------
TOTAL ASSETS $ 7,122,338 $ 6,832,334
=============== ===============
3
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2000 1999
--------------- ---------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 52,717 $ 76,549
Salaries and wages payable 88,813 93,046
Deferred income taxes 140,795 108,168
Accrued interest payable and other liabilities 85,623 102,604
Current portion of long-term debt 355,578 37,818
--------------- ---------------
TOTAL CURRENT LIABILITIES 723,526 418,185
LONG-TERM DEBT 2,904,419 3,076,830
DEFERRED REVENUE AND OTHER LONG-TERM LIABILITIES 7,817 4,573
MINORITY INTERESTS--LIMITED PARTNERSHIPS 152,985 126,384
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; 424,150,000 and 423,982,000
shares issued at June 30, 2000 and
December 31, 1999, respectively 4,241 4,240
Additional paid-in capital 2,585,676 2,584,572
Retained earnings 1,075,354 948,385
Treasury stock (280,523) (278,504)
Receivable from Employee Stock Ownership Plan (5,415) (7,898)
Notes receivable from stockholders, officers
and management employees (45,742) (44,433)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 3,333,591 3,206,362
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,122,338 $ 6,832,334
=============== ===============
See accompanying notes.
4
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED - IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- ----------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
Revenues $ 1,036,322 $ 1,047,632 $ 2,057,658 $ 2,078,179
Operating unit expenses 700,462 649,413 1,394,454 1,294,150
Corporate general and administrative expenses 35,706 31,300 69,727 56,454
Provision for doubtful accounts 24,256 19,262 47,512 38,961
Depreciation and amortization 90,286 95,881 179,941 190,293
Interest expense 52,059 41,795 101,619 84,522
Interest income (2,102) (2,469) (4,936) (5,090)
-------------- -------------- -------------- --------------
900,667 835,182 1,788,317 1,659,290
-------------- -------------- -------------- --------------
Income before income taxes and
minority interests 135,655 212,450 269,341 418,889
Provision for income taxes 42,577 74,433 85,229 146,189
-------------- -------------- -------------- --------------
Income before minority interests 93,078 138,017 184,112 272,700
Minority interests (27,865) (24,012) (53,573) (48,788)
-------------- -------------- -------------- --------------
Net income $ 65,213 $ 114,005 $ 130,539 $ 223,912
============== ============== ============== ==============
Weighted average common shares outstanding 385,404 414,193 385,524 416,600
============== ============== ============== ==============
Net income per common share $ 0.17 $ 0.28 $ 0.34 $ 0.54
============== ============== ============== ==============
Weighted average common shares
outstanding -- assuming dilution 390,376 437,933 389,705 440,129
============== ============== ============== ==============
Net income per common share --
assuming dilution $ 0.17 $ 0.27 $ 0.33 $ 0.52
============== ============== ============== ==============
See accompanying notes.
5
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
----------------------------------
2000 1999
--------------- ---------------
OPERATING ACTIVITIES
Net income $ 130,539 $ 223,912
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 179,941 190,293
Provision for doubtful accounts 47,512 38,961
Income applicable to minority interests of
limited partnerships 53,573 48,788
(Benefit) provision for deferred income taxes (9,747) 46,389
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable (62,245) (219,386)
Inventories, prepaid expenses and other current
assets (44,079) (32,668)
Accounts payable and accrued expenses (7,943) 62,218
--------------- ---------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 287,551 358,507
INVESTING ACTIVITIES
Purchases of property, plant and equipment (245,792) (159,481)
Additions to intangible assets, net of effects of
acquisitions (17,261) (13,964)
Assets obtained through acquisitions, net of liabilities
assumed (62,148) (79,143)
Payments on purchase accounting accruals -- (16,706)
Proceeds from sale of assets held for sale 400 3,563
Changes in other assets (26,834) (4,968)
Proceeds received on sale of other marketable
securities 2,342 45
--------------- ---------------
NET CASH USED IN
INVESTING ACTIVITIES (349,293) (270,654)
6
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED - IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
----------------------------------
2000 1999
------------- ---------------
FINANCING ACTIVITIES
Proceeds from borrowings $ 797,000 $ 141,968
Principal payments on long-term debt (654,905) (73,182)
Proceeds from exercise of options 1,106 3,806
Purchase of treasury stock (2,019) (89,665)
Reduction in receivable from Employee Stock
Ownership Plan 2,483 2,271
(Increase) decrease in loans to stockholders (1,309) 6
Proceeds from investment by minority interests 9,773 2,562
Purchase of limited partnership units (12,147) (3,952)
Payment of cash distributions to limited partners (36,683) (43,891)
------------- ---------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 103,299 (60,077)
------------- ---------------
INCREASE IN CASH AND
CASH EQUIVALENTS 41,557 27,776
Cash and cash equivalents at beginning of period 129,400 138,827
------------- -------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 170,957 $ 166,603
============= ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 115,718 $ 84,449
Income taxes 39,321 72,952
7
See accompanying notes
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
NOTE 1 -- The accompanying consolidated financial statements include the
accounts of HEALTHSOUTH Corporation (the "Company") and its
subsidiaries. This information should be read in conjunction
with the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999. It is management's opinion that
the accompanying consolidated financial statements reflect all
adjustments (which are normal recurring adjustments, except as
otherwise indicated) necessary for a fair presentation of the
results for the interim period and the comparable period
presented.
NOTE 2 -- The Company has a $1,750,000,000 revolving credit facility with
Bank of America, N.A. ("Bank of America") and other
participating banks (the "1998 Credit Agreement"). Interest on
the 1998 Credit Agreement is paid based on LIBOR plus a
predetermined margin, a base rate, or competitively bid rates
from the participating banks. The Company is required to pay a
fee based on the unused portion of the revolving credit facility
ranging from 0.09% to 0.25%, depending on certain defined
ratios. The principal amount is payable in full on June 22,
2003. The Company has provided a negative pledge on all assets
under the 1998 Credit Agreement. At June 30, 2000, the effective
interest rate associated with the 1998 Credit Agreement was
approximately 7.04%.
The Company also has 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 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 June 30, 2000, the effective interest
rate associated with the Short Term Credit Agreement was
approximately 8.02%.
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 days, in its discretion. The net
proceeds from the issuance of the 3.25% Convertible
8
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.
At June 30, 2000, and December 31, 1999, long-term debt
consisted of the following:
June 30, December 31,
2000 1999
----------------- ---------------
(In thousands)
Advances under a $1,750,000,000 credit
agreement with banks $ 1,725,000 $ 1,625,000
Advances under a $250,000,000 Short Term
Credit Agreement with banks 51,000 --
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 166,247 171,898
----------------- -----------------
3,259,997 3,114,648
Less amounts due within one year 355,578 37,818
----------------- -----------------
$ 2,904,419 $ 3,076,830
================= =================
NOTE 3 -- During the first six months of 2000, the Company acquired
fifteen outpatient rehabilitation facilities, two outpatient
surgery centers and eight diagnostic imaging centers. The total
purchase price of these acquired facilities was approximately
$63,147,776. The Company also entered into non-compete
agreements totaling approximately $4,220,000 in connection with
these transactions.
The cost in excess of the acquired facilities' net asset value
was approximately $56,101,794. 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.
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 July 20, 2000,
approximately 96% of the locations identified in the Fourth
Quarter 1998 Charge had been closed.
Details of the impairment and restructuring charge activity
through the second quarter of 2000 are as follows:
ACTIVITY
BALANCE AT CASH NON-CASH BALANCE AT
DESCRIPTION 12/31/99 PAYMENTS IMPAIRMENTS 06/30/00
---------------------------------------------------------------------------------------
(In thousands)
Fourth Quarter 1998 Charge:
Lease abandonment costs $ 32,366 $ 3,550 $ -- $ 28,816
Other incremental costs 7,011 6,199 -- 812
----------------------------------------------------
Total Fourth Quarter 1998 Charge $ 39,377 $ 9,749 $ -- $ 29,628
========== ========= ======= ========
The remaining balance at June 30, 2000 is included in accrued
interest payable and other liabilities in the accompanying
balance sheet.
NOTE 5 -- The Company has adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS 131
requires the utilization of a "management approach" to define
and report the financial results of operating segments. The
management approach defines operating segments along the lines
used by management to assess performance and make operating and
resource allocation decisions. Late in the third quarter of
1999, the Company eliminated its separate divisional management
for its outpatient lines of business, and reorganized its
management under the following divisions: (1) Outpatient
Services East, (2) Outpatient Services West and (3) Inpatient
and Other Clinical Services. The inpatient and other clinical
services segment includes the operations of inpatient
rehabilitation facilities and medical centers, as well as the
operations of certain physician practices and other clinical
services which are managerially aligned with inpatient services.
The management of outpatient rehabilitation facilities
(including occupational medicine centers), outpatient surgery
centers and outpatient diagnostic centers was realigned from
their respective divisions to either the East or West outpatient
services division. The Company has aggregated the financial
results of its outpatient services divisions into the outpatient
services segment. These divisions have common economic
characteristics, provide similar services, serve a similar class
of customers, cross-utilize administrative services and operate
in similar regulatory environment. 1999 segment information has
been restated to reflect the management reorganization.
10
Operating results and other financial data are presented for the
principal operating segments as follows:
THREE MONTHS ENDED
JUNE 30,
2000 1999
----------------- -----------------
(In Thousands)
Revenues:
Inpatient and other clinical services $ 490,979 $ 506,090
Outpatient services 540,030 536,828
----------------- -----------------
1,031,009 1,042,918
Unallocated corporate office 5,313 4,714
----------------- -----------------
Consolidated revenues $ 1,036,322 $ 1,047,632
================= =================
Income before minority interests and income taxes:
Inpatient and other clinical services $ 91,536 $ 100,691
Outpatient services 118,849 135,595
----------------- -----------------
210,385 236,286
Unallocated corporate office (74,730) (23,836)
----------------- -----------------
Consolidated income before minority interests
and income taxes $ 135,655 $ 212,450
================= =================
SIX MONTHS ENDED
JUNE 30,
2000 1999
----------------- -----------------
(In thousands)
Revenues:
Inpatient and other clinical services $ 968,320 $ 1,014,297
Outpatient services 1,079,792 1,055,681
----------------- -----------------
2,048,112 2,069,978
Unallocated corporate office 9,546 8,201
----------------- -----------------
Consolidated revenues $ 2,057,658 $ 2,078,179
================= =================
Income before minority interests and income taxes:
Inpatient and other clinical services $ 179,671 $ 218,991
Outpatient services 232,623 268,232
----------------- -----------------
412,294 487,223
Unallocated corporate office (142,953) (68,334)
----------------- -----------------
Consolidated income before minority interests
and income taxes $ 269,341 $ 418,889
================= =================
NOTE 6 -- During the first six 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.
11
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.
12
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 June 30, 2000, we had 2,036 locations
in 50 states, Puerto Rico, the United Kingdom and Australia (excluding
facilities being closed, consolidated or held for sale), including 1,429
outpatient rehabilitation locations, 122 inpatient rehabilitation facilities,
five medical centers, 224 surgery centers, 137 diagnostic centers and 119
occupational medicine centers.
Our revenues include net patient service revenues and other operating
revenues. Net patient service revenues are reported at estimated net realizable
amounts from patients, insurance companies, third-party payors (primarily
Medicare and Medicaid) and others for services rendered. Revenues from
third-party payors also include estimated retroactive adjustments under
reimbursement agreements which are subject to final review and settlement by
appropriate authorities. Management determines allowances for doubtful accounts
and contractual adjustments based on historical experience and the terms of
payor contracts. Net accounts receivable include only those amounts estimated by
management to be collectible.
In 1998, we adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and
Related Information". SFAS 131 requires an enterprise to report operating
segments based upon the way its operations are managed. This approach defines
operating segments along the lines used by management to assess performance and
make operating and resource allocation decisions. Based on our management and
reporting structure, segment information has been presented for (1) inpatient
and other clinical services and (2) outpatient services.
The inpatient and other clinical services segments includes the
operations of our inpatient rehabilitation facilities and medical centers, as
well as the operations of certain physician practices and other clinical
services which are managerially aligned with our inpatient services. The
outpatient services division (East and West) includes the operations of our
outpatient rehabilitation facilities (including occupational medicine centers),
outpatient surgery centers and outpatient diagnostic centers. We have aggregated
the financial results of the East and West outpatient services divisions into
the outpatient services segment. The divisions have common economic
characteristics, provide similar services, serve a similar class of customers,
cross-utilize administrative services and operate in a similar regulatory
environment. 1999 segment information has been restated to reflect the
realignment of the outpatient management structure into the East and West
management teams from the line-of-business management structure previously used.
Substantially all of our revenues are derived from private and
governmental third-party payors. Our reimbursement from governmental third-party
payors is based upon cost reports and other reimbursement mechanisms which
require the application and interpretation of complex regulations and policies,
and such reimbursement is subject to various levels of review and adjustment by
fiscal intermediaries and others, which may affect the final determination of
reimbursement. In addition, there are increasing pressures from many payor
sources to control healthcare costs and to reduce or limit increases in
reimbursement rates for medical services. There can be no assurance that
payments under governmental and third-party payor programs will remain at levels
comparable to present levels. In addition, there have been, and we expect that
there will continue to be, a number of proposals to limit Medicare reimbursement
for certain services. We cannot now predict whether any of these proposals will
be adopted or, if adopted and implemented, what effect such proposals would have
on us. Changes in reimbursement policies or rates by private or governmental
payors could have an adverse effect on our future results of operations.
In many cases, we operate more than one site within a market. In such
markets, there is customarily an outpatient center or inpatient facility with
associated satellite outpatient locations. For
13
purposes of the following discussion and analysis, same store operations are
measured on locations within markets in which similar operations existed at the
end of the period and include the operations of additional locations opened
within the same market. New store operations are measured on locations within
new markets. We may, from time to time, close or consolidate similar locations
in multi-site markets to obtain efficiencies and respond to changes in demand.
We determine the amortization period of the cost in excess of net
asset value of purchased facilities based on an evaluation of the facts and
circumstances of each individual purchase transaction. The evaluation includes
an analysis of historic and projected financial performance, an evaluation of
the estimated useful life of the buildings and fixed assets acquired, the
indefinite useful life of certificates of need and licenses acquired, the
competition within local markets, lease terms where applicable, and the legal
terms of partnerships where applicable. We utilize independent appraisers and
rely on our own management expertise in evaluating each of the factors noted
above. With respect to the carrying value of the excess of cost over net asset
value of individual purchased facilities and other intangible assets, we
determine on a quarterly basis whether an impairment event has occurred by
considering factors such as the market value of the asset, a significant adverse
change in legal factors or in the business climate, adverse action by
regulators, a history of operating losses or cash flow losses, or a projection
of continuing losses associated with an operating entity. The carrying value of
excess cost over net asset value of purchased facilities and other intangible
assets will be evaluated if the facts and circumstances suggest that it has been
impaired. If this evaluation indicates that the value of the asset will not be
recoverable, as determined based on the undiscounted cash flows of the entity
acquired over the remaining amortization period, our carrying value of the asset
will be reduced to the estimated fair market value. Fair value is determined
based on the individual facts and circumstances of the impairment event, and the
available information related to it. Such information might include quoted
market prices, prices for comparable assets, estimated future cash flows
discounted at a rate commensurate with the risks involved, and independent
appraisals. For purposes of analyzing impairment, assets are generally grouped
at the individual operational facility level, which is the lowest level for
which there are identifiable cash flows. If the group of assets being tested was
acquired by the Company as part of a purchase business combination, any goodwill
that arose as part of the transaction is included as part of the asset grouping.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED JUNE 30, 2000
Our operations generated revenues of $1,036,322,000 for the quarter
ended June 30, 2000, a decrease of $11,310,000, or 1.1%, 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 June 30, 2000 were $1,017,892,000, a
decrease of $29,740,000, or 2.9%, as compared to the same period in 1999. New
store revenues were $18,430,000. Revenues generated from patients under the
Medicare and Medicaid programs respectively accounted for 29.4% and 2.5% of
revenue for the second quarter of 2000, compared to 34.1% and 2.5% for the same
period in 1999. Revenues from any other single third-party payor were not
significant in relation to our revenues. During the second quarter of 2000, same
store outpatient visits, inpatient days, surgical cases and diagnostic cases
increased (decreased) 4.9%, 1.1%, (0.9)% and 1.2%, respectively. Revenue per
outpatient visit, inpatient day, surgical case and diagnostic case for same
store operations increased (decreased) by (0.9)%, (5.0)%, 2.1% and (6.2)%,
respectively. When compared to the first quarter of 2000, second quarter 2000
outpatient visits, inpatient days, surgical cases and diagnostic cases increased
(decreased) 1.7%, (1.7)%, 1.4% and 3.5%. When compared to the first quarter of
2000, second quarter 2000 revenue per outpatient visit, inpatient day, surgical
case and diagnostic case for same store operations increased (decreased) by
2.3%, 2.0%, 0.3% and (4.9)%.
Operating expenses, at the operating unit level, were $700,462,000, or
67.6% of revenues, for the quarter ended June 30, 2000, compared to 62.0% of
revenues for the second quarter of 1999. Same store operating expenses were
$686,073,000, or 67.4% of comparable revenue. New store operating expenses were
$14,389,000, or 78.1% of comparable revenue. Corporate general and
administrative expenses increased from $31,300,000 during the 1999 quarter to
$35,706,000 during the 2000 quarter. As a percentage of revenue, corporate
general and administrative expenses increased from 3.0% during the 1999 quarter
to 3.4% in the 2000 quarter. However, when compared to the first quarter of
2000, corporate
14
general and administrative expenses increased by $1,685,000, or 5.0%. The
provision for doubtful accounts was $24,256,000, or 2.3% of revenues, for the
second quarter of 2000, compared to $19,262,000, or 1.8% 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.
Depreciation and amortization expense was $90,286,000 for the quarter
ended June 30, 2000, compared to $95,881,000 for the same period in 1999. The
decrease was primarily attributable to the full amortization of certain
intangible assets. Interest expense was $52,059,000 for the quarter ended June
30, 2000, compared to $41,795,000 for the quarter ended June 30, 1999. The
increase is primarily attributable to the increase in outstanding debt. For the
second quarter of 2000, interest income was $2,102,000, compared to $2,469,000
for the second quarter of 1999.
Income before minority interests and income taxes for the second
quarter of 2000 was $135,655,000, compared to $212,450,000 for the same period
in 1999. Minority interests decreased income before income taxes by $27,865,000
for the quarter ended June 30, 2000, compared to decreasing income before income
taxes by $24,012,000 for the first quarter of 1999. The provision for income
taxes for the second quarter of 2000 was $42,577,000, compared to $74,433,000
for the same period in 1999. The effective tax rate was 39.5% for the quarters
ended June 30, 2000 and 1999. Net income for the second quarter of 2000 was
$65,213,000, compared to $114,005,000 for the second quarter of 1999.
RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 2000
Revenues for the six months ended June 30, 2000, were $2,057,658,000, a
decrease of $20,521,000, or 1.0%, over the six months ended June 30, 1999. Same
store revenues were $2,020,772,000, a decrease of $57,407,000, or 2.8%, as
compared to the same period in 1999. New store revenues were $36,886,000.
Revenues generated from patients under Medicare and Medicaid plans respectively
accounted for 29.7% and 2.4% of revenue for the first six months of 2000,
compared to 33.8% and 2.3% for the same period in 1999. Revenues from any other
single third-party payor were not significant in relation to the Company's
revenues. During the first six months of 2000, same store outpatient visits,
inpatient days, surgical cases and diagnostic cases increased (decreased) 6.2%,
2.7%, (0.5)% and (0.8)%, respectively. Revenue per outpatient visit, inpatient
day, surgical case and diagnostic case for same store operations increased
(decreased) by (3.4)%, (5.9)%, 3.0% and (9.8)%, respectively.
Operating expenses, at the operating unit level, were $1,394,454,000,
or 67.8% of revenues, for the six months ended June 30, 2000, compared to
$1,294,150,000, or 62.3% of revenues, for the first six months of 1999. Same
store operating expenses were $1,365,714,000, or 67.6% of comparable revenue.
New store operating expenses were $28,740,000, or 77.9% of comparable revenue.
Net income for the six months ended June 30, 2000, was $130,539,000, compared to
$223,912,000 for the same period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, we had working capital of $608,893,000, including
cash and marketable securities of $172,097,000. Working capital at December 31,
1999, was $852,711,000, including cash and marketable securities of
$132,882,000. For the first six months of 2000, cash provided by operating
activities was $287,551,000, compared to $358,507,000 for the same period in
1999. The decrease is primarily attributable to the decline in net income.
Additions to property, plant, and equipment and acquisitions accounted for
$245,792,000 and $62,148,000, respectively, during the first six months of 2000.
Those same investing activities accounted for $159,481,000 and $79,143,000,
respectively, in the same period in 1999. Financing activities provided
$103,299,000 and used $60,077,000 during the first six months of 2000 and 1999,
respectively. Net borrowing proceeds (borrowing less principal reductions) for
the first six months of 2000 and 1999 were $142,095,000 and $68,786,000,
respectively.
Net accounts receivable were $916,153,000 at June 30, 2000, compared to
$898,529,000 at December 31, 1999. The number of days of average quarterly
revenues in ending receivables at June 30, 2000, was 80.4, compared to 82.6 days
of average quarterly revenues in ending receivables at December 31,
15
1999. The concentration of net accounts receivable from patients, third-party
payors, insurance companies and others at June 30, 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 6.60% for the six months ended June 30, 2000, compared to
the average prime rate of 8.92% during the same period. At June 30, 2000, we had
drawn $1,725,000,000 under the 1998 Credit Agreement.
We also have 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 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 effective interest rate on the average
outstanding balance under the Short Term Credit Agreement was 7.76% for the six
months ended June 30, 2000, compared to the average prime rate of 8.92% during
the same period. The principal amount is payable in full on December 12, 2000.
At June 30, 2000, we had drawn $51,000,000 under the Short Term Credit
Agreement.
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 June 30,
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. We will also spend $250,000,000 to
satisfy our 9.5% Senior Subordinated Notes due 2001, which mature April 1, 2001.
We are currently pursuing opportunities for the refinancing of some of
our existing indebtedness. While there can be no assurance as to the
availability or terms of such refinancing, we believe that there are favorable
conditions in the capital markets that will allow us to effect refinancing
transactions. We would expect to adjust our planned expenditures as necessary if
we do not consummate such refinancing activities.
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, borrowings under existing credit facilities and proceeds
of potential refinancing activities 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.
16
EXPOSURES TO MARKET RISK
We are exposed to market risk related to changes in interest rates. The
impact on earnings and value of market risk-sensitive financial instruments
(principally marketable security investments and long-term debt) is subject to
change as a result of movements in market rate and prices. We use sensitivity
analysis models to evaluate these impacts. We do not hold or issue derivative
instruments for trading purposes and are not a party to any instruments with
leverage features.
Our investment in marketable securities was $1,140,000 at June 30,
2000, which represents less than 1% of total assets at that date. These
securities are generally short-term, highly liquid instruments and, accordingly,
their fair value approximates cost. Earnings on investments in marketable
securities are not significant to our results of operations, and therefore any
changes in interest rates would have a minimal impact on future pre-tax
earnings.
With respect to our interest-bearing liabilities, approximately
$1,776,000,000 in long-term debt at June 30, 2000 is subject to variable rates
of interest, while the remaining balance in long-term debt of $1,483,997,000 is
subject to fixed rates of interest (see Note 2 of "Notes to Consolidated
Financial Statements" for further description). This compares to $1,625,000,000
in long-term debt subject to variable rates of interest and $1,489,648,000 in
long-term debt subject to fixed rates of interest at December 31, 1999. The fair
value of our total long-term debt, based on discounted cash flow analyses,
approximates its carrying value at June 30, 2000 and December 31, 1999 except
for the 3.25% Convertible Debentures, 6.875% Senior Notes and 7.0% Senior Notes.
The fair value of the 3.25% Convertible Debentures was approximately
$453,000,000 and $443,000,000 at June 30, 2000 and December 31, 1999,
respectively. The fair value of the 6.875% Senior Notes due 2005 was
approximately $220,000,000 and $216,600,000 at June 30, 2000 and December 31,
1999, respectively. The fair value of the 7% senior Notes due 2008 was
approximately $209,000,000 and $207,250,000 at June 30, 2000 and December 31,
1999, respectively. Based on a hypothetical 1% increase in interest rates, the
potential losses in future annual pre-tax earnings would be approximately
$17,760,000. 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.
17
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.
18
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 June 30, 2000.
19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 18, 2000, we held our 2000 Annual Meeting of Stockholders of the
Company, at which shares of common stock represented at the Annual Meeting were
voted in favor of the election of Directors as follows:
FOR WITHHOLD
--------------------------- ---------------------------
1. Richard M. Scrushy 336,417,260 4,573,510
2. Phillip C. Watkins, M.D. 337,627,652 3,363,118
3. George H. Strong 337,056,500 3,934,270
4. C. Sage Givens 337,139,133 3,851,637
5. Charles W. Newhall III 337,663,019 3,327,751
6. John S. Chamberlin 337,584,457 3,406,313
7. Jan L. Jones 337,670,947 3,319,823
8. James P. Bennett 337,593,854 3,396,916
9. Larry D. Striplin, Jr. 337,596,189 3,394,581
10. Joel C. Gordon 337,025,179 3,965,591
No other matters were submitted to the Annual Meeting.
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
six months ended June 30, 2000.
No other items of Part II are applicable to the Registrant for the
period covered by this Quarterly Report on Form 10-Q.
20
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: July 26, 2000 RICHARD M. SCRUSHY
-------------------------
Richard M. Scrushy
Chairman of the Board and
Chief Executive Officer
Date: July 26, 2000 WILLIAM T. OWENS
-------------------------
William T. Owens
Executive Vice President and
Chief Financial Officer
21
EXHIBIT 11
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
COMPUTATION OF INCOME PER SHARE (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------
2000 1999 2000 1999
----------- ------------ ---------- ---------
Numerator:
Net income $ 65,213 $ 114,005 $ 130,539 223,912
----------- ------------ ---------- ---------
Numerator for basic earnings per share -- income available to
common stockholders 65,213 114,005 130,539 223,912
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 -- (1) 6,224
----------- ------------ ---------- ---------
Numerator for diluted earnings per share -- income available to
common stockholders after assumed conversion $ 65,213 $ 117,117 $ 130,539 230,136
=========== ============ ========== =========
Denominator:
Denominator for basic earnings per share -- weighted-average
shares 385,404 414,193 385,524 416,600
Effect of dilutive securities:
Net effect of dilutive stock options 4,222 7,938 3,431 7,727
Restricted shares issued 750 300 750 300
Assumed conversion of 3.25% Convertible Subordinated
Debentures due 2003 -- (1) 15,502 -- (1) 15,502
----------- ------------ ---------- ---------
Dilutive potential common shares 4,972 23,740 4,181 23,529
----------- ------------ ---------- ---------
Denominator of diluted earnings per share -- adjusted
weighted-average shares and assumed conversions 390,376 437,933 389,705 440,129
=========== ============ ========== =========
Basic earnings per share $ 0.17 $ 0.28 $ 0.34 $ 0.54
=========== ============ ========== =========
Diluted earnings per share $ 0.17 $ 0.27 $ 0.33 $ 0.52
=========== ============ ========== =========
(1) The effect of these securities was antidilutive for the three months and six
months ended June 30, 2000.
22