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, 1998; or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
_____________.
Commission File Number 1-10315
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HEALTHSOUTH CORPORATION
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 63-0860407
- - ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
ONE HEALTHSOUTH PARKWAY, BIRMINGHAM, ALABAMA 35243
--------------------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(205) 967-7116
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all Reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such Reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at May 11, 1998
- - ----------------------- ---------------------------
COMMON STOCK, PAR VALUE 400,648,553 SHARES
$.01 PER SHARE
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I -- FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Consolidated Balance Sheets -- March 31, 1998 (Unaudited)
and December 31, 1997 3
Consolidated Statements of Income (Unaudited) -- Three
Months Ended March 31, 1998 and 1997 5
Consolidated Statements of Cash Flows (Unaudited) -- Three
Months Ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements (Unaudited) --
Three Months Ended March 31, 1998 and 1997 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II -- OTHER INFORMATION
Item 2. Changes in Securities 16
Item 6. Exhibits and Reports on Form 8-K 16
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
1998 1997
--------------------- -----------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 200,783 $ 148,073
Other marketable securities 4,296 4,326
Accounts receivable 838,158 745,994
Inventories, prepaid expenses, and
other current assets 238,985 184,805
--------------------- -----------------
TOTAL CURRENT ASSETS 1,282,222 1,083,198
OTHER ASSETS 227,796 223,718
PROPERTY, PLANT AND EQUIPMENT--NET 2,006,246 1,850,765
INTANGIBLE ASSETS--NET 2,275,542 2,243,372
---------------------
-----------------
TOTAL ASSETS $ 5,791,806 $ 5,401,053
===================== =================
3
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
1998 1997
---------------------- ------------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 65,021 $ 124,058
Salaries and wages payable 111,599 121,768
Income taxes payable 41,506 92,507
Deferred income taxes 28,765 34,119
Accrued interest payable and other liabilities 72,672 97,506
Current portion of long-term debt 47,106 46,489
---------------------- ------------------
TOTAL CURRENT LIABILITIES 366,669 516,447
LONG-TERM DEBT 1,926,393 1,555,335
DEFERRED INCOME TAXES 73,968 76,613
DEFERRED REVENUE AND OTHER LONG-TERM LIABILITIES 2,190 1,538
MINORITY INTERESTS--LIMITED PARTNERSHIPS 100,290 93,692
STOCKHOLDERS' EQUITY:
Preferred Stock, $.10 par value--1,500,000
shares authorized; issued and outstanding--
none 0 0
Common Stock, $.01 par value--500,000,000
shares authorized; 399,955,000 and 395,233,000
shares issued at March 31, 1998 and
December 31, 1997, respectively 4,000 3,952
Additional paid-in capital 2,371,030 2,317,821
Retained earnings 962,988 853,641
Treasury stock (323) (323)
Receivable from Employee Stock Ownership Plan (10,169) (12,247)
Notes receivable from stockholders (5,230) (5,416)
---------------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 3,322,296 3,157,428
---------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,791,806 $ 5,401,053
====================== ==================
See accompanying notes.
4
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED - IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------------
1998 1997
---------------------- -------------------
Revenues $ 907,663 $ 691,631
Operating unit expenses 561,491 438,289
Corporate general and administrative expenses 26,424 17,849
Provision for doubtful accounts 21,753 14,713
Depreciation and amortization 73,382 57,371
Merger costs 0 15,875
Interest expense 28,336 25,673
Interest income (1,641) (1,038)
---------------------- -------------------
709,745 568,732
---------------------- -------------------
Income before income taxes and
minority interests 197,918 122,899
Provision for income taxes 70,219 42,411
---------------------- -------------------
Income before minority interests 127,699 80,488
Minority interests (18,331) (15,908)
---------------------- -------------------
Net income $ 109,368 $ 64,580
====================== ===================
Weighted average common shares outstanding 398,496 327,727
====================== ===================
Net income per common share $ 0.27 $ 0.20
====================== ===================
Weighted average common shares
outstanding -- assuming dilution 412,253 354,998
====================== ===================
Net income per common share --
assuming dilution $ 0.27 $ 0.18
====================== ===================
See accompanying notes.
5
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------
1998 1997
------------------- ------------------
OPERATING ACTIVITIES
Net income $ 109,368 $ 64,580
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 73,382 57,371
Provision for doubtful accounts 21,753 14,713
Income applicable to minority interests of
limited partnerships 18,331 15,908
Merger costs 0 15,875
Provision for deferred income taxes (2,645) 3,525
Provision for deferred revenue 0 (27)
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable (109,177) (47,624)
Inventories, prepaid expenses and other current
assets (54,182) (14,372)
Accounts payable and accrued expenses 42,985 (34,425)
------------------- ------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 99,815 75,524
INVESTING ACTIVITIES
Purchases of property, plant and equipment (189,630) (96,447)
Additions to intangible assets, net of effects of
acquisitions (10,040) (40,866)
Assets obtained through acquisitions, net of liabilities
assumed (62,528) (28,964)
Payments on purchase accounting accruals related to 1997 acquisitions
and dispositions (182,256) 0
Changes in other assets (4,078) (14,468)
Proceeds received on sale of other marketable
securities 30 30
Investments in other marketable securities 0 (112)
------------------- ------------------
NET CASH USED IN
INVESTING ACTIVITIES (448,502) (180,827)
6
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED - IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------
1998 1997
------------------- ------------------
FINANCING ACTIVITIES
Proceeds from borrowings 989,175 193,900
Principal payments on long-term debt (616,848) (90,445)
Proceeds from exercise of options 38,560 11,483
Reduction in receivable from Employee Stock
Ownership Plan 2,078 1,901
Decrease in loans to stockholders 186 3
Proceeds from investment by minority interests 778 3,009
Payment of cash distributions to limited partners (12,532) (13,268)
------------------- ------------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 401,397 106,583
------------------- ------------------
INCREASE IN CASH AND
CASH EQUIVALENTS 52,710 1,280
Cash and cash equivalents at beginning of period 148,073 150,071
------------------- ------------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 200,783 $ 151,351
=================== ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 24,042 $ 18,423
Income taxes 172,173 34,635
Non-cash financing activities:
* During 1997, the Company had a two-for-one stock split on its common stock,
which was effected in the form of a 100% stock dividend.
* The Company received a tax benefit from the disqualifying disposition of
incentive stock options of $14,697,000 for the three months ended March 31,
1998.
See accompanying notes.
7
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
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, 1997. 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 -- During 1996, the Company entered into a Credit Agreement with
NationsBank, N.A., ("NationsBank") and other participating banks (the
"1996 Credit Agreement") which consisted of a $1,250,000,000 revolving
credit facility. Interest 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 on the unused portion of
the revolving credit facility ranging from 0.08% to 0.25%, depending
on certain defined ratios. The principal amount is payable in full on
March 31, 2001. The Company has provided a negative pledge on all
assets under the 1996 Credit Agreement. On March 15, 1998, pursuant to
the terms of the 1996 Credit Agreement, the Company elected to convert
$350,000,000 of the 1996 Credit Agreement into a two-year amortizing
term note maturing on December 31, 1999. In conjunction with this
election, the Company obtained an additional $350,000,000 364-day
facility from NationsBank (the "Interim Revolving Credit Facility")
which is on substantially the same terms as the 1996 Credit Agreement.
On March 24, 1994, the Company issued $250,000,000 principal amount of
9.5% Senior Subordinated Notes due 2001 (the "Notes"). Interest is
payable on April 1 and October 1. The Notes are senior subordinated
obligations of the Company and, as such, are subordinated to all
existing and future senior indebtedness of the Company. The net
proceeds from the issuance of the Notes were used by the Company to
pay down indebtedness outstanding under its existing credit
facilities.
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 $67,500,000
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, subject to
adjustment upon the occurrence of certain events. The net proceeds
from the issuance of the 3.25% Convertible Debentures were used by the
Company to pay down indebtedness outstanding under its existing credit
facilities.
8
At March 31, 1998 and December 31, 1997, long-term debt consisted of the
following:
March 31, December 31,
1998 1997
-------------------- -------------------
(in thousands)
Advances under the 1996 Credit Agreement $ 981,250 $ 1,175,000
9.5% Senior Subordinated Notes due 2001 250,000 250,000
3.25% Convertible Subordinated Debentures
due 2003 567,500 0
Other long-term debt 174,749 176,824
-------------------- -------------------
1,973,499 1,601,824
Less amounts due within one year 47,106 46,489
-------------------- -------------------
$ 1,926,393 $ 1,555,335
==================== ===================
NOTE 3 -- During the first three months of 1998, the Company acquired 42
outpatient rehabilitation facilities, three outpatient surgery centers
and six diagnostic imaging centers. The total purchase price of the
acquired facilities was approximately $62,528,000. The Company also
entered into non-compete agreements totaling approximately $8,533,000
in connection with these transactions. The cost in excess of the
acquired facilities' net asset value was approximately $55,189,000.
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.
On April 15, 1998, the Company entered into a definitive agreement to
acquire 34 ambulatory surgery centers from Columbia/HCA Healthcare
Corporation. The transaction is valued at approximately $550,000,000,
payable in cash at closing. It is expected that the acquisition will
be accounted for as a purchase. Consummation of the transaction is
subject to various regulatory approvals, including clearance under the
Hart-Scott-Rodino Antitrust Improvements Act, and to the satisfaction
of certain other conditions. The Company currently anticipates that
the transaction will be consummated in the third quarter of 1998.
On May 5, 1998, the Company entered into a definitive agreement to
acquire National Surgery Centers, Inc. ("NSC") in a transaction to be
accounted for as a pooling of interests. NSC operates 40 outpatient
surgery centers in 14 states. Under the terms of the agreement, all
shares of common stock of NSC will be exchanged for shares of the
Company's Common Stock valued at $30.50 per share of NSC common stock,
but not less than .8714 nor more than 1.1509 shares of the Company's
Common Stock per share of NSC common stock. Consummation of the
transaction is subject to various regulatory approvals, including
clearance under the Hart-Scott-Rodino Antitrust Improvements Act, and
to the satisfaction of certain other conditions. The Company currently
anticipates that the transaction will be consummated in the third
quarter of 1998.
NOTE 4 -- During the first three months of 1998, the Company granted incentive
and nonqualified stock options to certain Directors, employees and
others for 300,000 shares of Common Stock at exercise prices ranging
from $26.94 to $28.00 per share.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company provides outpatient and rehabilitative healthcare services
through its inpatient and outpatient rehabilitation facilities, surgery centers,
diagnostic centers and medical centers. The Company has expanded its operations
through the acquisition or opening of new facilities and satellite locations and
by enhancing its existing operations. As of March 31, 1998, the Company had over
1,800 locations in 50 states, the United Kingdom and Australia, including
approximately 1,200 outpatient rehabilitation locations, 134 inpatient
rehabilitation facilities, four medical centers, 176 surgery centers, 113
diagnostic centers and approximately 225 locations providing other patient care
services.
The Company's 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.
The Company determines 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. The Company utilizes independent
appraisers and relies on its 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 purchased facilities and other intangible assets, the
Company determines 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, the Company's carrying value of
the asset will be reduced by the estimated shortfall of cash flows to the
estimated fair market value.
The Company, in many cases, operates more than one site within a market. In
such markets, there is customarily an outpatient center or inpatient facility
with associated satellite outpatient locations. For purposes of the following
discussion and analysis, same store operations are measured on locations within
markets in which similar operations existed at the end of the period and include
the operations of additional locations opened within the same market. New store
operations are measured on locations within new markets. The Company may, from
time to time, close or consolidate similar locations in multi-site markets to
obtain efficiencies and respond to changes in demand.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 1998
The Company operated approximately 1,200 outpatient rehabilitation
locations (which includes base facilities and satellites) at March 31, 1998,
compared to 780 outpatient rehabilitation locations at
10
March 31, 1997. In addition, the Company operated 134 inpatient rehabilitation
facilities, four medical centers, 176 surgery centers, and 113 diagnostic
centers at March 31, 1998, compared with 97 inpatient facilities, four medical
centers, 140 surgery centers and 73 diagnostic centers at March 31, 1997.
The Company's operations generated revenues of $907,663,000 for the quarter
ended March 31, 1998, an increase of $216,032,000, or 31.2%, as compared to the
same period in 1997. The increase in revenues is primarily attributable to
increases in patient volume and the addition of new outpatient, inpatient,
diagnostic and surgery centers. Same store revenues for the quarter ended March
31, 1998 were $763,281,000, an increase of $71,650,000, or 10.4%, as compared to
the same period in 1997. New store revenues were $144,382,000. Revenues
generated from patients under Medicare and Medicaid plans respectively accounted
for 35.4% and 2.7% of revenue for the first quarter of 1998, compared to 37.6%
and 2.7% for the same period in 1997. Revenues from any other single third-party
payor were not significant in relation to the Company's revenues. During the
first quarter of 1998, same store outpatient visits, inpatient days, surgical
cases and diagnostic cases increased 16.0%, 9.7%, 7.6% and 11.4%, respectively.
Revenue per outpatient visit, inpatient day, surgical case and diagnostic case
for same store operations increased (decreased) by 1.0%, 0.4%, (1.1)% and
(1.4)%, respectively.
Operating expenses, at the operating unit level, were $561,491,000, or
61.9% of revenues, for the quarter ended March 31, 1998, compared to
$438,289,000, or 63.4% of revenues, for the first quarter of 1997. The decrease
in operating expenses as a percentage of revenues is primarily attributable to
the 10.4% increase in same store revenues noted above. In same store operations,
the incremental costs associated with increased revenues are significantly less
as a percentage of those increased revenues. Same store operating expenses were
$469,257,000, or 61.5% of comparable revenue. New store operating expenses were
$92,234,000, or 63.9% of comparable revenue. Corporate general and
administrative expenses increased from $17,849,000 during the 1997 quarter to
$26,424,000 during the 1998 quarter. As a percentage of revenue, corporate
general and administrative expenses increased from 2.6% in the 1997 quarter to
2.9% in the 1998 quarter. The provision for doubtful accounts was $21,753,000,
or 2.4% of revenues, for the first quarter of 1998, compared to $14,713,000, or
2.1% of revenues, for the same period in 1997. Management believes that this
provision is adequate to cover any uncollectible revenues.
Depreciation and amortization expense was $73,382,000 for the quarter ended
March 31, 1998, compared to $57,371,000 for the same period in 1997. The
increase represents the investment in additional assets by the Company. Interest
expense was $28,336,000 for the quarter ended March 31, 1998, compared to
$25,673,000 for the quarter ended March 31, 1997. For the first quarter of 1998,
interest income was $1,641,000, compared to $1,038,000 for the first quarter of
1997.
As a result of the acquisition of Health Images, Inc., the Company
recognized $15,875,000, primarily representing accounting, legal and financial
advisory services, in merger costs during the first quarter of 1997.
Income before minority interests and income taxes for the first quarter of
1998 was $197,918,000, compared to $122,899,000 for the same period in 1997.
Minority interests decreased income before income taxes by $18,331,000 for the
quarter ended March 31, 1998, compared to decreasing income before income taxes
by $15,908,000 for the first quarter of 1997. The provision for income taxes for
the first quarter of 1998 was $70,219,000, compared to $42,411,000 for the same
period in 1997, resulting in effective tax rates of 39.1% and 39.6%,
respectively. Net income for the first quarter of 1998 was $109,368,000,
compared to $64,580,000 for the first quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had working capital of $915,553,000,
including cash and marketable securities of $205,079,000. Working capital at
December 31, 1997, was $566,751,000, including cash and marketable securities of
$152,399,000. For the first three months of 1998, cash provided by operations
was $99,815,000, compared to $75,524,000 for the same period in 1997. Additions
11
to property, plant, and equipment and acquisitions accounted for $189,630,000
and $62,528,000, respectively, during the first three months of 1998. Those same
investing activities accounted for $96,447,000 and $28,964,000, respectively, in
the same period in 1997. Financing activities provided $401,397,000 and
$106,583,000 during the first three months of 1998 and 1997, respectively. Net
borrowing proceeds (borrowing less principal reductions) for the first three
months of 1998 and 1997 were $372,327,000 and $103,455,000, respectively.
Accounts receivable were $838,158,000 at March 31, 1998, compared to
$745,994,000 at December 31, 1997. The number of days of average quarterly
revenues in average receivables at March 31, 1998, was 74.9, compared to 75.7
days of average revenues in average receivables at December 31, 1997. The
concentration of net accounts receivable from patients, third-party payors,
insurance companies and others at March 31, 1998, is consistent with the related
concentration of revenues for the period then ended.
During 1996, the Company entered into a Credit Agreement with NationsBank,
N.A., ("NationsBank") and other participating banks (the "1996 Credit
Agreement") which consisted of a $1,250,000,000 revolving credit facility.
Interest 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 on the unused portion of the revolving credit facility ranging from
0.08% to 0.25%, depending on certain defined ratios. The principal amount is
payable in full on March 31, 2001. The Company has provided a negative pledge on
all assets under the 1996 Credit Agreement. On March 15, 1998, pursuant to the
terms of the 1996 Credit Agreement, the Company elected to convert $350,000,000
of the 1996 Credit Agreement into a two-year amortizing term note maturing on
December 31, 1999. In conjunction with this election, the Company obtained an
additional $350,000,000 364-day facility from NationsBank (the "Interim
Revolving Credit Facility") which is on substantially the same terms as the 1996
Credit Agreement. The effective interest rate on the average outstanding balance
under the 1996 Credit Agreement was 6.2% for the three months ended March 31,
1998, compared to the average prime rate of 8.5% during the same period. At
March 31, 1998, the Company had drawn $981,250,000 under the 1996 Credit
Agreement.
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 $67,500,000 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 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, subject to the adjustment
upon the occurrence of certain events. The net proceeds from the issuance of the
Convertible Debentures were used by the Company to pay down indebtedness
outstanding under its other existing credit facilities.
On April 15, 1998, the Company entered into a definitive agreement to
acquire 34 ambulatory surgery centers from Columbia/HCA Healthcare Corporation.
The transaction is valued at approximately $550,000,000, payable in cash at
closing. It is expected that the acquisition will be accounted for as a
purchase. Consummation of the transaction is subject to various regulatory
approvals, including clearance under the Hart-Scott-Rodino Antitrust
Improvements Act, and to the satisfaction of certain other conditions. The
Company currently anticipates that the transaction will be consummated in the
third quarter of 1998.
On May 5, 1998, the Company entered into a definitive agreement to acquire
National Surgery Centers, Inc. ("NSC") in a transaction to be accounted for as a
pooling of interests. NSC operates 40 outpatient surgery centers in 14 states.
Under the terms of the agreement, all shares of common stock of NSC will be
exchanged for shares of the Company's Common Stock valued at $30.50 per share of
NSC common stock, but not less than .8714 nor more than 1.1509 shares of the
Company's Common Stock per share of NSC common stock. Consummation of the
transaction is subject to various regulatory approvals, including clearance
under the Hart-Scott-Rodino Antitrust Improvements Act, and to the satisfaction
of
12
certain other conditions. The Company currently anticipates that the transaction
will be consummated in the third quarter of 1998.
The Company intends to pursue the acquisition or development of additional
healthcare operations, including comprehensive outpatient rehabilitation
facilities, ambulatory surgery centers, inpatient rehabilitation facilities and
companies engaged in the provision of outpatient surgery and
rehabilitation-related services, and to expand certain of its existing
facilities. While it is not possible to estimate precisely the amounts which
will actually be expended in the foregoing areas, the Company anticipates that
over the next twelve months, it will spend approximately $100,000,000 on
maintenance and expansion of its existing facilities and approximately
$300,000,000 on development of the Integrated Service Model, pursuant to which
the Company plans to utilize its services in particular markets to provide an
integrated continuum of coordinated care.
Although the Company is continually considering and evaluating acquisitions
and opportunities for future growth, the Company has not entered into any
agreements with respect to material future acquisitions other than the
transactions with Columbia/HCA and NSC described above. In order to meet
expected cash needs in connection with the Columbia/HCA surgery centers
acquisition and to provide cash for other planned expenditures, the Company is
actively exploring both an increase in its existing bank credit facilities and
the possibility of raising capital through the issuance of debt in the public
market or in institutional private placements. Any such transactions are
currently expected to occur in the second quarter of 1998. The Company believes
that existing cash, cash flow from operations, borrowings under the 1996 Credit
Agreement and the Interim Revolving Credit Facility and the proceeds of any
expansion of its credit facilities or other new financing will be sufficient to
satisfy the Company's estimated cash requirements for the next twelve months and
for the reasonably foreseeable future. There can, however, be no assurance as to
the terms on which any such expansion of its credit facilities or other new
financing arrangements can be effected.
Inflation in recent years has not had a significant effect on the Company's
business, and is not expected to adversely affect the Company in the future
unless it increases significantly.
EXPOSURES TO MARKET RISK
The Company is exposed to market risk related to changes in interest rates.
Because of its favorable borrowing arrangements and current market conditions,
the Company currently does not use derivatives, such as swaps or caps, to alter
the interest characteristics of its debt instruments and investment securities.
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 rates and prices. The Company uses
sensitivity analysis models to evaluate these impacts.
The Company's investment in marketable securities was $4,296,000 at March
31, 1998, which represents less than 0.1% 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 the Company's results of operations, and
therefore any changes in interest rates would have a minimal impact on future
pre-tax earnings.
With respect to the Company's interest-bearing liabilities, approximately
$981,250,000 in long-term debt at March 31, 1998 is subject to variable rates of
interest, while the remaining balance in long-term debt of $992,249,000 is
subject to fixed rates of interest (see Note 2 of "Notes to Consolidated
Financial Statements" for further description). The fair value of the Company's
total long-term debt, based on discounted cash flow analyses, approximates its
carrying value at March 31, 1998. Based on a hypothetical 1% increase in
interest rates, the potential losses in future annual pre-tax earnings would be
approximately $9,813,000. 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 the Company's
borrowing cost and long-term debt balances. These analyses do not consider the
effects, if any, of the
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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 the Company's results of operations and
financial position.
COMPUTER TECHNOLOGIES AND YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. Many existing computer
programs use only two digits to identify a year in the date field. The issue is
whether such code exists in the Company's mission-critical applications and if
that code will produce accurate information with relation to date-sensitive
calculations after the turn of the century.
The Company has completed a thorough review of its material computer
applications and determined that such applications contain very few
date-sensitive calculations. The Company's computer applications are divided
into two categories, those maintained internally by the Company's Information
Technology Group and those maintained externally by the applications' vendors.
For internally maintained applications, revisions are currently being made and
are expected to be implemented by the first quarter of 1999. The Company expects
that the total cost associated with these revisions will be less than
$1,000,000. These costs will be primarily incurred during 1998 and be charged to
expense as incurred. For externally maintained systems, the Company has received
written confirmation from the vendors that each system is currently year 2000
compliant or will be made year 2000 compliant during 1998. The cost to be
incurred by the Company related to externally maintained systems is expected to
be minimal.
The Company has initiated a program to determine whether the computer
applications of its significant payors and suppliers will be upgraded in a
timely manner. The Company has not completed this review; however, initial
responses indicate that no significant problems are currently expected to arise.
The Company has also initiated a program to determine whether embedded
applications which control certain medical and other equipment will be affected.
The nature of the Company's business is such that any failure of these type
applications is not expected to have a material adverse effect on its business.
Because of the many uncertainties associated with year 2000 compliance
issues, and because the Company's assessment is necessarily based on information
from third party-vendors, payors and suppliers, there can be no assurance that
the Company's assessment is correct or as to the materiality or effect of any
failure of such assessment to be correct.
FORWARD-LOOKING STATEMENTS
Statements contained in this Quarterly Report on Form 10-Q which are not
historical facts are forward-looking statements. In addition, the Company,
through its senior management, from time to time makes forward-looking public
statements concerning its expected future operations and performance and other
developments. Such forward-looking statements are necessarily estimates
reflecting the Company's best judgment based upon current information and
involve a number of risks and uncertainties, and there can be no assurance that
other factors will not affect the accuracy of such forward-looking statements.
While it is impossible to identify all such factors, factors which could cause
actual results to differ materially from those estimated by the Company 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 in reimbursement for the
Company's services by governmental or private payors, competitive pressures in
the healthcare industry and the Company's response thereto, the Company's
ability to obtain and retain favorable arrangements with third-party payors,
unanticipated delays in the Company's implementation of its Integrated Service
Model, general conditions in the economy and capital markets, and other factors
which may be identified
14
from time to time in the Company's Securities and Exchange Commission filings
and other public announcements.
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PART II -- OTHER INFORMATION
Item 2. CHANGES IN SECURITIES.
(c) Recent Sales of Unregistered Securities
On March 20, 1998, the Company consummated the sale, in a private
placement, of $500,000,000 principal amount of 3.25% Convertible Subordinated
Debentures due 2003 (the "3.25% Convertible Debentures"). On March 31, 1998, the
Company sold an additional $67,750,000 principal amount of the 3.25% Convertible
Debentures to cover over-allotment options.
Interest is payable on the 3.25% Convertible Debentures on April 1 and
October 1, commencing October 1, 1998. The 3.25% Convertible Debentures are
convertible into Common Stock of the Company at an initial conversion price of
$36.625 per share and are redeemable at stated redemption premiums on or after
April 5, 2001.
The 3.25% Convertible Debentures were sold by the Company to Smith Barney
Inc.; Bear, Stearns & Co. Inc.; Cowen & Company; Credit Suisse First Boston
Corporation; J. P. Morgan Securities Inc.; Morgan Stanley & Co. Incorporated;
NationsBanc Montgomery Securities LLC; and Paine Webber Incorporated, as initial
purchasers (the "Initial Purchasers"), in reliance on the exemption set forth in
Section 4(2) of the Securities Act of 1933, as amended. The 3.25% Convertible
Debentures were sold to the Initial Purchasers at a purchase price of 98.25% of
par. The Company has been advised that the Initial Purchasers subsequently
resold the Debentures in the United States to "qualified institutional buyers"
in reliance on Rule 144A under the Securities Act and to institutional
accredited investors in reliance on the exemption from registration provided by
Regulation D under the Securities Act, and outside the United States in offshore
transactions in reliance on Regulation S under the Securities Act. The Company
obtained and relied upon certain representations and covenants from the Initial
Purchasers in determining the availability of such exemptions. Of the total
amount of the 3.25% Convertible Debentures sold, $559,550,000 were sold under
Rule 144A, $6,220,000 were sold under Regulation S, and $2,000,000 were sold
under Regulation D.
On May 8, 1998, the Company filed a Registration Statement on Form S-3
covering the resale of the 3.25% Convertible Debentures by the holders thereof.
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
During the three months ended March 31, 1998, the Company filed a Current
Report on Form 8-K on January 15, 1998, reporting under Item 2 the consummation
of the sale of the long-term care assets of Horizon/CMS Healthcare Corporation
to Integrated Health Services, Inc. and reporting under Item 7 certain pro forma
financial information relating to such transaction.
No other items of Part II are applicable to the Registrant for the period
covered by this Quarterly Report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHSOUTH CORPORATION
-------------------------------------
(Registrant)
Date: May 15, 1998 RICHARD M. SCRUSHY
-------------------------------------
Richard M. Scrushy
Chairman of the Board and
Chief Executive Officer
Date: May 15, 1998 MICHAEL D. MARTIN
-------------------------------------
Michael D. Martin
Executive Vice President,
Chief Financial Officer and Treasurer
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