SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2001; or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
_____________.
Commission File Number 1-10315
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HEALTHSOUTH CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 63-0860407
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
ONE HEALTHSOUTH PARKWAY, BIRMINGHAM, ALABAMA 35243
--------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(205) 967-7116
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all Reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such Reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 9, 2001
----------------------- --------------------------
COMMON STOCK, PAR VALUE 389,662,185 SHARES
$.01 PER SHARE
Page 1
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
INDEX
PART I -- FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2001 (Unaudited) 3
and December 31, 2000
Consolidated Statements of Income (Unaudited) -- Three Months
Ended March 31, 2001 and 2000 5
Consolidated Statements of Cash Flows (Unaudited) -- Three Months
Ended March 31, 2001 and 2000 6
Notes to Consolidated Financial Statements (Unaudited) -- Three Months
Ended March 31, 2001 and 2000 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 18
Item 6. Exhibits and Reports on Form 8-K 18
Page 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 181,677 $ 180,317
Other marketable securities 1,362 90
Accounts receivable 967,880 946,965
Inventories, prepaid expenses and
other current assets 324,252 303,746
---------- ----------
TOTAL CURRENT ASSETS 1,475,171 1,431,118
OTHER ASSETS 240,694 230,898
PROPERTY, PLANT AND EQUIPMENT--NET 2,904,934 2,871,763
INTANGIBLE ASSETS--NET 2,832,210 2,846,661
---------- ----------
TOTAL ASSETS $7,453,009 $7,380,440
========== ==========
Page 3
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2001 2000
----------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 32,404 $ 78,762
Salaries and wages payable 81,051 87,730
Deferred income taxes 9,612 4,227
Accrued interest payable and other liabilities 123,704 168,970
Current portion of long-term debt 26,466 43,225
----------- -----------
TOTAL CURRENT LIABILITIES 273,237 382,914
LONG-TERM DEBT 3,227,228 3,168,604
DEFERRED INCOME TAXES 188,180 160,365
DEFERRED REVENUE AND OTHER LONG-TERM LIABILITIES 6,862 4,126
MINORITY INTERESTS--LIMITED PARTNERSHIPS 142,671 137,977
STOCKHOLDERS' EQUITY:
Preferred Stock, $.10 par value--1,500,000
shares authorized; issued and outstanding--
none -- --
Common Stock, $.01 par value--600,000,000
shares authorized; 427,242,000 and 426,031,000
shares issued at March 31, 2001 and
December 31, 2000, respectively 4,272 4,260
Additional paid-in capital 2,618,586 2,610,442
Accumulated other comprehensive income 8,757 7,074
Retained earnings 1,300,261 1,224,950
Treasury stock (280,524) (280,524)
Receivable from Employee Stock Ownership Plan (2,699) (5,415)
Notes receivable from stockholders, officers
and management employees (33,822) (34,333)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 3,614,831 3,526,454
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,453,009 $ 7,380,440
=========== ===========
See accompanying notes.
Page 4
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED - IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
--------------------------------------
2001 2000
----------- -----------
Revenues $ 1,090,462 $ 1,021,335
Operating unit expenses 736,045 693,993
Corporate general and administrative expenses 32,654 34,021
Provision for doubtful accounts 24,383 23,256
Depreciation and amortization 91,219 89,655
Interest expense 59,420 49,560
Interest income (2,721) (2,835)
----------- -----------
941,000 887,650
----------- -----------
Income before income taxes and
minority interests 149,462 133,685
Provision for income taxes 49,170 42,651
----------- -----------
Income before minority interests 100,292 91,034
Minority interests (24,981) (25,708)
----------- -----------
Net income $ 75,311 $ 65,326
=========== ===========
Weighted average common shares outstanding 388,143 385,644
=========== ===========
Net income per common share $ 0.19 $ 0.17
=========== ===========
Weighted average common shares
outstanding -- assuming dilution 398,456 389,019
=========== ===========
Net income per common share --
assuming dilution $ 0.19 $ 0.17
=========== ===========
See accompanying notes.
Page 5
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2001 2000
--------- ---------
OPERATING ACTIVITIES
Net income $ 75,311 $ 65,326
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 91,219 89,655
Provision for doubtful accounts 24,383 23,256
Issuance of restricted stock grants 492 --
Variable stock option appreciation (4,507) --
Income applicable to minority interests of
limited partnerships 24,981 25,708
Provision for deferred income taxes 33,200 --
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable (45,263) (38,485)
Inventories, prepaid expenses and other current
assets (20,473) (24,784)
Accounts payable and accrued expenses (99,147) (63,624)
--------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 80,196 77,052
INVESTING ACTIVITIES
Purchases of property, plant and equipment (95,528) (90,052)
Proceeds from sale of property, plant and equipment 992 217
Additions to intangible assets, net of effects of
acquisitions (11,097) (1,728)
Assets obtained through acquisitions, net of liabilities
assumed (2,539) (13,189)
Increases in other assets (10,788) (11,798)
Proceeds received on sale of other marketable
securities -- 1,359
Investments in other marketable securities (1,272) (67)
--------- ---------
NET CASH USED IN
INVESTING ACTIVITIES (120,232) (115,258)
Page 6
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED - IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2001 2000
--------- ---------
FINANCING ACTIVITIES
Proceeds from borrowings $ 580,000 $ 327,000
Principal payments on long-term debt (535,398) (256,249)
Proceeds from exercise of options 12,171 413
Purchase of treasury stock -- (2,019)
Reduction in receivable from Employee Stock
Ownership Plan 2,716 --
Decrease in loans to stockholders, officers and
management employees 511 --
Proceeds from investment by minority interests 3,576 126
Purchase of limited partnership units (7,060) (3,343)
Payment of cash distributions to limited partners (16,803) (19,274)
Foreign currency translation adjustment 1,683 478
--------- ---------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 41,396 47,132
--------- ---------
INCREASE IN CASH AND
CASH EQUIVALENTS 1,360 8,926
Cash and cash equivalents at beginning of period 180,317 129,400
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 181,677 $ 138,326
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 34,213 $ 32,372
Income taxes 4,480 5,884
See accompanying notes.
Page 7
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
NOTE 1 -- The accompanying consolidated financial statements include the
accounts of HEALTHSOUTH Corporation (the "Company") and its
subsidiaries. This information should be read in conjunction with
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000. It is management's opinion that the accompanying
consolidated financial statements reflect all adjustments (which are
normal recurring adjustments, except as otherwise indicated)
necessary for a fair presentation of the results for the interim
period and the comparable period presented.
NOTE 2 -- The Company has a $1,750,000,000 revolving credit facility with Bank
of America, N.A. ("Bank of America") and other participating banks
(the "1998 Credit Agreement"). Interest on the 1998 Credit Agreement
is paid based on LIBOR plus a predetermined margin, a base rate, or
competitively bid rates from the participating banks. The Company is
required to pay a fee based on the unused portion of the revolving
credit facility ranging from 0.09% to 0.25%, depending on certain
defined ratios. The principal amount is payable in full on June 22,
2003. The Company has provided a negative pledge on all assets under
the 1998 Credit Agreement. At March 31, 2001, the effective interest
rate associated with the 1998 Credit Agreement was approximately
6.53%.
The Company also had a Short Term Credit Agreement with Bank of
America and other participating banks (as amended, the "Short Term
Credit Agreement"), providing for a $250,000,000 short term
revolving credit facility. The terms of the Short Term Credit
Agreement were substantially consistent with those of the 1998
Credit Agreement. Interest on the Short Term Credit Agreement was
paid based on LIBOR plus a predetermined margin or a base rate. The
Company was required to pay a fee on the unused portion of the
credit facility ranging from 0.30% to 0.50%, depending on certain
defined ratios. On October 31, 2000, the Company terminated the
Short Term Credit Agreement and replaced it with a new $400,000,000
Credit Agreement (the "2000 Credit Agreement") with UBS AG and other
participating banks. Interest on the 2000 Credit Agreement is paid
based on LIBOR plus a predetermined margin or a base rate. The
Company is required to pay a fee on the unused portion of the credit
facility ranging from 0.25% to 0.50%, depending on certain defined
ratios. The principal amount is payable in full in eight quarterly
installments ending on June 22, 2003. At March 31, 2001, there were
no amounts outstanding under the 2000 Credit Agreement.
On March 24, 1994, the Company issued $250,000,000 principal amount
of 9.5% Senior Subordinated Notes due 2001 (the "9.5% Notes"). The
Company redeemed the 9.5% Notes at par on October 30, 2000.
On March 20, 1998, the Company issued $500,000,000 in 3.25%
Convertible Subordinated Debentures due 2003 (the "3.25% Convertible
Debentures") in a private placement. An additional $67,750,000
principal amount of the 3.25% Convertible Debentures was issued on
March 31, 1998 to cover underwriters' overallotments. Interest is
payable on April 1 and October 1. The 3.25% Convertible Debentures
are convertible into common stock of the Company at the option of
the holder at a conversion price of $36.625 per share. The
conversion price is subject to adjustment upon the occurrence of (a)
a subdivision, combination or reclassification of outstanding shares
of common stock, (b) the payment of a stock dividend or stock
distribution on any shares of the Company's capital stock, (c) the
issuance of rights or warrants to all holders of common stock
entitling them to purchase shares of common stock at less than the
current market price, or (d) the payment of certain
Page 8
other distributions with respect to the Company's common stock. In
addition, the Company may, from time to time, lower the conversion
price for periods of not less than 20 days, in its discretion. The
net proceeds from the issuance of the 3.25% Convertible Debentures
were used by the Company to pay down indebtedness outstanding under
its then-existing credit facilities.
On June 22, 1998, the Company issued $250,000,000 in 6.875% Senior
Notes due 2005 and $250,000,000 in 7.0% Senior Notes due 2008
(collectively, the "Senior Notes"). Interest is payable on June 15
and December 15. The Senior Notes are unsecured, unsubordinated
obligations of the Company. The net proceeds from the issuance of
the Senior Notes were used by the Company to pay down indebtedness
outstanding under its then-existing credit facilities.
On September 25, 2000, the Company issued $350,000,000 in 10-3/4%
Senior Subordinated Notes due 2008 (the "10-3/4% Notes"). Interest
is payable on April 1 and October 1. The 10-3/4% Notes are senior
subordinated obligations of the Company and, as such, are
subordinated to all existing and future senior indebtedness of the
Company, and also are effectively subordinated to all existing and
future liabilities of the Company's subsidiaries and partnerships.
The net proceeds from the issuance of the 10-3/4% Notes were used by
the Company to redeem the 9.5% Notes and to pay down indebtedness
outstanding under its then-existing credit facilities. The 10-3/4%
Notes mature on October 1, 2008.
In October 2000, the Company entered into two six-month and one
twelve-month interest rate swap arrangements with notional amounts
of $240,000,000, $240,000,000 and $175,000,000 each. The swaps
expire on various dates in April 2001 and November 2001. These
arrangements have the effect of converting a portion of the
Company's variable rate debt to a fixed rate. The arrangements did
not have a material effect on the Company's operations.
On February 1, 2001, the Company issued $375,000,000 in 8-1/2%
Senior Notes due 2008 (the "8-1/2% Notes"). Interest is payable on
February 1 and August 1. The 8-1/2% Notes are unsecured,
unsubordinated obligations of the Company. The net proceeds from the
issuance of the 8-1/2% Notes were used to pay down indebtedness
outstanding under the Company's credit facilities. The 8-1/2% Notes
mature on February 1, 2008.
Page 9
At March 31, 2001, and December 31, 2000, long-term debt consisted of
the following:
March 31, December 31,
2001 2000
---------- ----------
(In thousands)
Advances under a $1,750,000,000 credit
agreement with banks $1,354,000 $1,655,000
3.25% Convertible Subordinated Debentures
due 2003 567,750 567,750
6.875% Senior Notes due 2005 250,000 250,000
7.0% Senior Notes due 2008 250,000 250,000
10-3/4% Senior Subordinated Notes due 2008 350,000 350,000
8-1/2% Senior Notes due 2008 375,000 --
Other long-term debt 106,944 139,079
---------- ----------
3,253,694 3,211,829
Less amounts due within one year 26,466 43,225
---------- ----------
$3,227,228 $3,168,604
========== ==========
NOTE 3 -- During the first three months of 2001, the Company acquired two
outpatient rehabilitation facilities and one outpatient surgery
center. The total purchase price of these acquired facilities was
approximately $2,539,000. The Company also entered into non-compete
agreements totaling approximately $470,000 in connection with these
transactions.
The cost in excess of the acquired facilities' net asset value was
approximately $3,045,000. The results of operations (not material
individually or in the aggregate) of these acquisitions are included
in the consolidated financial statements from their respective
acquisition dates.
NOTE 4 -- During 1998, the Company recorded impairment and restructuring
charges related to the Company's decision to close certain
facilities that did not fit with the Company's strategic vision,
underperforming facilities and facilities not located in target
markets (the "Fourth Quarter 1998 Charge"). As of May 7, 2001,
approximately 97% of the locations identified in the Fourth Quarter
1998 Charge had been closed.
Details of the impairment and restructuring charge activity for the
first quarter of 2001 are as follows:
Activity
--------
Balance at Cash Non-Cash Balance at
Description 12/31/00 Payments Impairments 03/31/01
------------------------------------------------------------------------------------------------------------
(In thousands)
Fourth Quarter 1998 Charge:
Lease abandonment costs $21,113 $ 2,718 $ -- $18,395
-----------------------------------------------------
Total Fourth Quarter 1998 Charge $21,113 $ 2,718 $ -- $18,395
=====================================================
The remaining balance at March 31, 2001 is included in accrued
interest payable and other liabilities in the accompanying balance
sheet.
Page 10
NOTE 5 -- The Company has adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information". SFAS 131 requires the
utilization of a "management approach" to define and report the
financial results of operating segments. The management approach
defines operating segments along the lines used by management to
assess performance and make operating and resource allocation
decisions. Late in the third quarter of 1999, the Company eliminated
its separate divisional management for its outpatient lines of
business, and reorganized its management under the following
divisions: (1) Outpatient Services - East, (2) Outpatient Services -
West and (3) Inpatient and Other Clinical Services. The inpatient
and other clinical services segment includes the operations of
inpatient rehabilitation facilities and medical centers, as well as
the operations of certain physician practices and other clinical
services which are managerially aligned with inpatient services. The
management of outpatient rehabilitation facilities (including
occupational medicine centers), outpatient surgery centers and
outpatient diagnostic centers was realigned from their respective
divisions to either the East or West outpatient services division.
The Company operates in three segments, which correspond to these
divisions.
Operating results and other financial data are presented for the
principal operating segments as follows:
Three Months Ended
March 31,
2001 2000
---------- ----------
(In thousands)
Revenues:
Inpatient and other clinical services $ 492,038 $ 473,683
Outpatient services - West 296,725 279,057
Outpatient services - East 294,025 265,327
----------- -----------
1,082,788 1,018,067
Unallocated corporate office 7,674 3,268
----------- -----------
Consolidated revenues $ 1,090,462 $ 1,021,335
=========== ===========
Income before income taxes and minority interests:
Inpatient and other clinical services $ 99,179 $ 96,069
Outpatient services - West 57,687 52,972
Outpatient services - East 67,925 61,718
----------- -----------
224,791 210,759
Unallocated corporate office (75,329) (77,074)
----------- -----------
Consolidated income before income taxes
and minority interests $ 149,462 $ 133,685
=========== ===========
NOTE 6 -- During the first three months of 2001, the Company granted
nonqualified stock options to certain Directors, employees and
others for 4,159,000 shares of Common Stock at exercise prices
ranging from $13.875 to $15.4375 per share.
Page 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
HEALTHSOUTH provides outpatient and rehabilitative healthcare services
through our inpatient and outpatient rehabilitation facilities, surgery centers,
diagnostic centers and medical centers. We have expanded our operations through
the acquisition or opening of new facilities and satellite locations and by
enhancing our existing operations. As of March 31, 2001, we had approximately
2,018 locations in 50 states, Puerto Rico, the United Kingdom, Australia and
Canada, including 1,417 outpatient rehabilitation locations, 124 inpatient
rehabilitation facilities, five medical centers, 219 surgery centers, 142
diagnostic centers and 111 occupational medicine centers.
Our revenues include net patient service revenues and other operating
revenues. Net patient service revenues are reported at estimated net realizable
amounts from patients, insurance companies, third-party payors (primarily
Medicare and Medicaid) and others for services rendered. Revenues from
third-party payors also include estimated retroactive adjustments under
reimbursement agreements which are subject to final review and settlement by
appropriate authorities. We determine allowances for doubtful accounts and
contractual adjustments based on the specific agings and payor classifications
at each facility, and contractual adjustments based on historical experience and
the terms of payor contracts. Net accounts receivable includes only those
amounts we estimate to be collectible.
In 1998, we adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and
Related Information". SFAS 131 requires an enterprise to report operating
segments based upon the way its operations are managed. This approach defines
operating segments along the lines used by management to assess performance and
make operating and resource allocation decisions. Based on our management and
reporting structure, segment information has been presented for (1) inpatient
and other clinical services, (2) outpatient services - East and (3) outpatient
services - West. The inpatient and other clinical services segment includes the
operations of our inpatient rehabilitation facilities and medical centers, as
well as the operations of certain physician practices and other clinical
services which are managerially aligned with our inpatient services. The
outpatient services segments (East and West) include the operations of our
outpatient rehabilitation facilities (including occupational medicine centers),
outpatient surgery centers and outpatient diagnostic centers.
Substantially all of our revenues are derived from private and
governmental third-party payors. Our reimbursement from governmental third-party
payors is based upon cost reports and other reimbursement mechanisms which
require the application and interpretation of complex regulations and policies,
and such reimbursement is subject to various levels of review and adjustment by
fiscal intermediaries and others, which may affect the final determination of
reimbursement. In addition, there are increasing pressures from many payor
sources to control healthcare costs and to reduce or limit increases in
reimbursement rates for medical services. There can be no assurance that
payments under governmental and third-party payor programs will remain at levels
comparable to present levels. In addition, there have been, and we expect that
there will continue to be, a number of proposals to limit Medicare reimbursement
for certain services. We cannot now predict whether any of these proposals will
be adopted or, if adopted and implemented, what effect such proposals would have
on us. Changes in reimbursement policies or rates by private or governmental
payors could have an adverse effect on our future results of operations.
In many cases, we operate more than one site within a market. In such
markets, there is customarily an outpatient center or inpatient facility with
associated satellite outpatient locations. For purposes of the following
discussion and analysis, same store outpatient rehabilitation operations are
measured on locations within markets in which similar operations existed at the
end of the period and include the operations of additional outpatient
rehabilitation ocations opened within the same market. New store outpatient
rehabilitation operations are measured on locations within new
Page 12
markets. Same store operations in our other business lines are measured based on
specific locations. We may, from time to time, close or consolidate similar
locations in multi-site markets to obtain efficiencies and respond to changes in
demand.
We determine the amortization period of the cost in excess of net asset
value of purchased facilities based on an evaluation of the facts and
circumstances of each individual purchase transaction. The evaluation includes
an analysis of historic and projected financial performance, an evaluation of
the estimated useful life of the buildings and fixed assets acquired, the
indefinite useful life of certificates of need and licenses acquired, the
competition within local markets, lease terms where applicable, and the legal
terms of partnerships where applicable. We utilize independent appraisers and
rely on our own management expertise in evaluating each of the factors noted
above. With respect to the carrying value of the excess of cost over net asset
value of individual purchased facilities and other intangible assets, we
determine on a quarterly basis whether an impairment event has occurred by
considering factors such as the market value of the asset, a significant adverse
change in legal factors or in the business climate, adverse action by
regulators, a history of operating losses or cash flow losses, or a projection
of continuing losses associated with an operating entity. The carrying value of
excess cost over net asset value of purchased facilities and other intangible
assets will be evaluated if the facts and circumstances suggest that it has been
impaired. If this evaluation indicates that the value of the asset will not be
recoverable, as determined based on the undiscounted cash flows of the entity
acquired over the remaining amortization period, our carrying value of the asset
will be reduced to the estimated fair market value. Fair value is determined
based on the individual facts and circumstances of the impairment event, and the
available information related to it. Such information might include quoted
market prices, prices for comparable assets, estimated future cash flows
discounted at a rate commensurate with the risks involved, and independent
appraisals. For purposes of analyzing impairment, assets are generally grouped
at the individual operational facility level, which is the lowest level for
which there are identifiable cash flows. If the group of assets being tested was
acquired by the Company as part of a purchase business combination, any goodwill
that arose as part of the transaction is included as part of the asset grouping.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 2001
Our operations generated revenues of $1,090,462,000 for the quarter
ended March 31, 2001, an increase of $69,127,000, or 6.8%, as compared to the
same period in 2000. The increase in revenues is primarily attributable to
increases in patient volume. Same store revenues for the quarter ended March 31,
2001 were $1,066,522,000, an increase of $52,830,000, or 5.2%, as compared to
the same period in 2000, excluding facilities in operation in 2000 but no longer
in operation in 2001. New store revenues were $23,940,000. Revenues generated
from patients under the Medicare and Medicaid programs respectively accounted
for 30.5% and 2.5% of revenue for the first quarter of 2001, compared to 30.0%
and 2.3% for the same period in 2000. Revenues from any other single third-party
payor were not significant in relation to our revenues. During the first quarter
of 2001, same store outpatient visits, inpatient days, surgical cases and
diagnostic cases increased 0.1%, 2.9%, 4.4% and 6.9%, respectively. Revenue per
outpatient visit, inpatient day, surgical case and diagnostic case for same
store operations increased (decreased) by 2.2%, 0.9%, (1.4)% and 3.4%,
respectively.
Operating expenses (expenses excluding corporate general and
administrative expenses, provision for doubtful accounts, depreciation and
amortization and interest expense) were $736,045,000, or 67.5% of revenues, for
the quarter ended March 31, 2001, compared to 67.9% of revenues for the first
quarter of 2000. Same store operating expenses were $719,842,000, or 67.5% of
comparable revenue. New store operating expenses were $16,203,000, or 67.7% of
comparable revenue. Corporate general and administrative expenses decreased from
$34,021,000 during the 2000 quarter to $32,654,000 during the 2001 quarter. The
provision for doubtful accounts was $24,383,000, or 2.2% of revenues, for the
first quarter of 2001, compared to $23,256,000, or 2.3% of revenues, for the
same period in 2000. Management believes that the allowance for doubtful
accounts generated by this provision is adequate to cover any uncollectible
revenues.
Depreciation and amortization expense was $91,219,000 for the quarter
ended March 31, 2001, compared to $89,655,000 for the same period in 2000. The
increase was primarily attributable to our investment in additional assets.
Interest expense was $59,420,000 for the quarter ended March 31, 2001,
Page 13
compared to $49,560,000 for the quarter ended March 31, 2000. The increase is
primarily attributable to the increases in effective interest rates. For the
first quarter of 2001, interest income was $2,721,000, compared to $2,835,000
for the first quarter of 2000.
Income before income taxes and minority interests for the first quarter
of 2001 was $149,462,000, compared to $133,685,000 for the same period in 2000.
Minority interests decreased income before income taxes by $24,981,000 for the
quarter ended March 31, 2001, compared to decreasing income before income taxes
by $25,708,000 for the first quarter of 2000. The provision for income taxes for
the first quarter of 2001 was $49,170,000, compared to $42,651,000 for the same
period in 2000. The effective tax rate was 39.5% for the quarters ended March
31, 2001 and 2000. Net income for the first quarter of 2001 was $75,311,000,
compared to $65,326,000 for the first quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2001, we had working capital of $1,201,934,000,
including cash and marketable securities of $183,039,000. Working capital at
December 31, 2000, was $1,048,204,000, including cash and marketable securities
of $180,407,000. For the first three months of 2001, cash provided by operating
activities was $80,196,000, compared to $77,052,000 for the same period in 2000.
The increase is primarily attributable to the increase in net income. Additions
to property, plant and equipment and acquisitions accounted for $95,528,000 and
$2,539,000, respectively, during the first three months of 2001. Those same
investing activities accounted for $90,052,000 and $13,189,000, respectively, in
the same period in 2000. Financing activities provided $41,396,000 and provided
$47,132,000 during the first three months of 2001 and 2000, respectively. Net
borrowing proceeds (borrowing less principal reductions) for the first three
months of 2001 and 2000 were $44,602,000 and $70,751,000, respectively.
Net accounts receivable were $967,880,000 at March 31, 2001, compared
to $946,965,000 at December 31, 2000. The number of days of average quarterly
revenues in ending receivables at March 31, 2001, was 79.9, compared to 80.9
days of average quarterly revenues in ending receivables at December 31, 2000.
The concentration of net accounts receivable from patients, third-party payors,
insurance companies and others at March 31, 2001, is consistent with the related
concentration of revenues for the period then ended.
We have a $1,750,000,000 revolving credit facility with Bank of
America, N.A. ("Bank of America") and other participating banks (the "1998
Credit Agreement"). Interest on the 1998 Credit Agreement is paid based on LIBOR
plus a predetermined margin, a base rate, or competitively bid rates from the
participating banks. We are required to pay a fee based on the unused portion of
the revolving credit facility ranging from 0.09% to 0.25%, depending on certain
defined ratios. The principal amount is payable in full on June 22, 2003. We
have provided a negative pledge on all assets under the 1998 Credit Agreement.
The effective interest rate on the average outstanding balance under the 1998
Credit Agreement was 6.89% for the three months ended March 31, 2001, compared
to the average prime rate of 8.62% during the same period. At March 31, 2001, we
had drawn $1,354,000,000 under the 1998 Credit Agreement.
On October 31, 2000, we entered into a new $400,000,000 Credit
Agreement (the "2000 Credit Agreement") with UBS AG and other participating
banks, replacing our previous Short Term Credit Agreement with Bank of America,
N.A. and other participating banks. Interest on the 2000 Credit Agreement is
paid based on LIBOR plus a predetermined margin or a base rate. We are required
to pay a fee on the unused portion of the credit facility ranging from 0.25% to
0.50%, depending on certain defined ratios. The principal amount is payable in
eight quarterly installments ending on June 22, 2003. At March 31, 2001, there
were no amounts outstanding under the 2000 Credit Agreement.
On February 1, 2001, we issued $375,000,000 in 8-1/2% Senior Notes due
2008 (the "8-1/2% Notes"). Interest is payable on February 1 and August 1. The
8-1/2% Notes are unsecured, unsubordinated obligations of HEALTHSOUTH. The net
proceeds from the issuance of the 8-1/2% Notes were used to pay down
indebtedness under our credit facilities. The 8-1/2% Notes mature on February 1,
2008.
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We intend to pursue the acquisition or development of additional
healthcare operations, including outpatient rehabilitation facilities, inpatient
rehabilitation facilities, ambulatory surgery centers, outpatient diagnostic
centers and companies engaged in the provision of other complementary services,
and to expand certain of our existing facilities. While it is not possible to
estimate precisely the amounts which will actually be expended in the foregoing
areas, we anticipate that over the next twelve months, we will spend
approximately $100,000,000 to $150,000,000 on maintenance and expansion of our
existing facilities and approximately $200,000,000 to $250,000,000 on
development activities and on continued development of the Integrated Service
Model.
Although we are continually considering and evaluating acquisitions and
opportunities for future growth, we have not entered into any agreements with
respect to material future acquisitions. We believe that existing cash, cash
flow from operations, and borrowings under existing credit facilities will be
sufficient to satisfy our estimated cash requirements for the next twelve months
and for the reasonably foreseeable future.
After the end of the quarter, we closed on the sale of substantially
all of our occupational medicine centers. The proceeds of this sale will be used
towards debt retirement.
Inflation in recent years has not had a significant effect on our
business, and is not expected to adversely affect us in the future unless it
increases significantly.
EXPOSURES TO MARKET RISK
We are exposed to market risk related to changes in interest rates. The
impact on earnings and value of market risk-sensitive financial instruments
(principally marketable security investments and long-term debt, as well as the
interest rate swaps described below) is subject to change as a result of
movements in market rate and prices. We use sensitivity analysis models to
evaluate these impacts. We do not hold or issue derivative instruments for
trading purposes and are not a party to any instruments with leverage features.
Our investment in marketable securities was $1,362,000 at March 31,
2001, which represents less than 1% of total assets at that date. These
securities are generally short-term, highly liquid instruments and, accordingly,
their fair value approximates cost. Earnings on investments in marketable
securities are not significant to our results of operations, and therefore any
changes in interest rates would have a minimal impact on future pre-tax
earnings.
As described below, a significant portion of our long-term indebtedness
is subject to variable rates of interest, generally equal to LIBOR plus a
predetermined percentage. In October 2000, we entered into three short-term
interest rate swap arrangements intended to hedge our exposure to rising
interest rates in the capital markets. Two of these arrangements have a notional
amount of $240,000,000 and one has a notional amount of $175,000,000. These
mature six months and twelve months, respectively, from the date of the original
transaction. The notional amounts are used to measure interest to be paid or
received and do not represent an amount of exposure to credit loss. In each of
these arrangements, we pay the counterparty a fixed rate of interest on the
notional amount, and the counterparty pays us a variable rate of interest equal
to the 90-day LIBOR rate. The variable rate paid to us by the counterparty on
the six-month maturities and the twelve-month maturity are reset once and three
times, respectively, during the term of the swaps. Thus, these interest rate
swaps have the effect of fixing the interest rates on an aggregate of
$655,000,000 of our variable-rate debt through their maturity dates. The
arrangements matured or will mature at various date in April 2001 and November
2001. We would be exposed to credit losses if the counterparties did not perform
their obligations under the swap arrangements; however, the counterparties are
major commercial banks whom we believe to be creditworthy, and we expect them to
fully satisfy their obligations. At March 31, 2001, the weighted average
interest rate we were obligated to pay under these interest rate swaps was
6.70%, and the weighted average interest rate we received was 5.51%.
With respect to our interest-bearing liabilities, approximately
$1,354,000,000 in long-term debt at March 31, 2001 is subject to variable rates
of interest, while the remaining balance in long-term debt of $1,899,694,000 is
subject to fixed rates of interest, prior to giving effect to the interest rate
swaps described above (see Note 2 of "Notes to Consolidated Financial
Statements" for further description). This compares to $1,655,000,000 in
long-term debt subject to variable rates of interest and $1,556,829,000 in
long-term debt subject to fixed rates of interest at December 31, 2000. The fair
value of our total long-term debt, based on discounted cash flow analyses,
approximates its carrying value at March 31, 2001 and December 31, 2000 except
for the 3.25% Convertible Debentures, 6.875% Senior Notes, 7.0% Senior Notes and
10-3/4% Notes. The fair value of the 3.25% Convertible Debentures was
approximately $508,136,000 and $503,765,000 at March 31, 2001 and December 31,
2000, respectively. The fair value of the 6.875% Senior Notes due 2005 was
approximately $240,813,000 and $252,025,000 at March 31, 2001 and December 31,
2000, respectively. The fair value of the 7% Senior Notes due 2008 was
approximately $230,413,000 and $225,125,000 at March 31, 2001 and December 31,
2000, respectively. The fair value of the 10-3/4% Notes due 2008 was
approximately $372,313,000 and $366,625,000 at March 31, 2001 and December 31,
2000, respectively. Based on a hypothetical 1% increase in interest rates, the
potential losses in future annual pre-tax earnings would be approximately
$13,540,000. The impact of such a change on the carrying value of long-term debt
would not be significant. These amounts are determined considering the impact of
the hypothetical interest rates on our borrowing cost and long-term debt
balances. These analyses do not consider the effects, if any, of the potential
changes in the overall level of economic activity that could exist in such an
environment. Further, in the event of a change of significant magnitude,
management would expect to take actions intended to further mitigate its
exposure to such change.
Foreign operations, and the related market risks associated with
foreign currency, are currently insignificant to our results of operations and
financial position.
Page 15
FORWARD-LOOKING STATEMENTS
Statements contained in this Quarterly Report on Form 10-Q which are
not historical facts are forward-looking statements. Without limiting the
generality of the preceding statement, all statements in this Quarterly Report
on Form 10-Q concerning or relating to estimated and projected earnings,
margins, costs, expenditures, cash flows, growth rates and financial results are
forward-looking statements. In addition, HEALTHSOUTH, through its senior
management, from time to time makes forward-looking public statements concerning
our expected future operations and performance and other developments. Such
forward-looking statements are necessarily estimates reflecting our best
judgment based upon current information, involve a number of risks and
uncertainties and are made pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. There can be no assurance that
other factors will not affect the accuracy of such forward-looking statements or
that our actual results will not differ materially from the results anticipated
in such forward-looking statements. While is impossible to identify all such
factors, factors which could cause actual results to differ materially from
those estimated by us include, but are not limited to, changes in the regulation
of the healthcare industry at either or both of the federal and state levels,
changes or delays in reimbursement for our services by governmental or private
payors, competitive pressures in the healthcare industry and our response
thereto, our ability to obtain and retain favorable arrangements with
third-party payors, unanticipated delays in the implementation of our Integrated
Service Model, general conditions in the economy and capital markets, and other
factors which may be identified from time to time in our Securities and Exchange
Commission filings and other public announcements.
Page 16
PART II -- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
We were served with various lawsuits filed beginning September 30, 1998
purporting to be class actions under the federal and Alabama securities laws.
These lawsuits were filed following a decline in our stock price at the end of
the third quarter of 1998. Seven such suits were filed in the United States
District Court for the Northern District of Alabama. In January 1999, those
suits were ordered to be consolidated under the case style In re HEALTHSOUTH
Corporation Securities Litigation, Master File No. CV98-O-2634-S. On April 12,
1999, the plaintiffs filed a consolidated amended complaint against HEALTHSOUTH
and certain of our current and former officers and directors alleging that,
during the period April 24, 1997 through September 30, 1998, the defendants
misrepresented or failed to disclose certain material facts concerning our
business and financial condition and the impact of the Balanced Budget Act of
1997 on our operations in order to artificially inflate the price of our common
stock and issued or sold shares of such stock during the purported class period,
all allegedly in violation of Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 thereunder. Certain of the named plaintiffs in the
consolidated amended complaint also purport to represent separate subclasses
consisting of former stockholders of Horizon/CMS Healthcare Corporation and
National Surgery Centers, Inc. who received shares of HEALTHSOUTH common stock
in connection with our acquisition of those entities and assert additional
claims under Section 11 of the Securities Act of 1933 with respect to the
registration of securities issued in those acquisitions.
Another suit, Peter J. Petrunya v. HEALTHSOUTH Corporation, et al.,
Civil Action No. 98-05931, was filed in the Circuit Court for Jefferson County,
Alabama, alleging that during the period July 16, 1996 through September 30,
1998 the defendants misrepresented or failed to disclose certain material facts
concerning the Company's business and financial condition, allegedly in
violation of Sections 8-6-17 and 8-6-19 of the Alabama Securities Act. The
Petrunya complaint was voluntarily dismissed by the plaintiff without prejudice
in January 1999. Additionally, a suit styled Dennis Family Trust v. Richard M.
Scrushy, et al., Civil Action No. 98-06592, has been filed in the Circuit Court
for Jefferson County, Alabama, purportedly as a derivative action on behalf of
HEALTHSOUTH. That suit largely replicates the allegations originally set forth
in the individual complaints filed in the federal actions described in the
preceding paragraph and alleges that our then-current directors, certain of our
former directors and certain of our officers breached their fiduciary duties to
HEALTHSOUTH and engaged in other allegedly tortious conduct. The plaintiff in
that case has forborne pursuing its claim thus far pending further developments
in the federal action, and the defendants have not yet been required to file a
responsive pleading in the case.
We filed a motion to dismiss the consolidated amended complaint in the
federal action in late June 1999. On September 13, 2000, the magistrate judge
issued his report and recommendation, recommending that the court dismiss the
amended complaint in its entirety, with leave to amend. The plaintiffs objected
to that report, and we responded to that objection. On December 20, 2000,
without oral argument, the court issued an order rejecting the magistrate
judge's report and recommendation and denying our motion to dismiss. We believed
that the December 20, 2000 order failed to follow the standards required under
the Private Securities Litigation Reform Act of 1995 and Rule 9(b) of the
Federal Rules of Civil Procedure, and we filed a motion asking the court to
reconsider that order or to certify it for an interlocutory appeal to the United
States Eleventh Circuit Court of Appeals. Oral argument on that motion was held
on March 2, 2001, and the court denied that motion on March 12, 2001.
Accordingly, we filed our answer to the consolidated amended complaint on March
26, 2001. We believe that all claims asserted in the above suits are without
merit, and expect to vigorously defend against such claims. Because such suits
remain at an early stage, we cannot currently predict the outcome of any such
suits or the magnitude of any potential loss if our defense is unsuccessful.
Page 17
Item 2. CHANGES IN SECURITIES.
(c) Recent Sales of Unregistered Securities
We had no unregistered sales of equity securities during the three
months ended March 31, 2001.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
11. Computation of Income Per Share (unaudited)
(b) Reports on Form 8-K
During the three months ended March 31, 2001, we filed
(1) a Current Report on form 8-K dated January 10, 2001,
furnishing under Item 9 the text of slides currently
being used in investor and analyst presentations by
our management; and
(2) a Current Report on form 8-K dated March 14, 2001,
furnishing under Item 9 the text of slides currently
being used in investor and analyst presentations by
our management.
No other items of Part II are applicable to the Registrant for the
period covered by this Quarterly Report on Form 10-Q.
Page 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed
on its behalf by the undersigned thereunto duly authorized.
HEALTHSOUTH CORPORATION
-----------------------
(Registrant)
Date: May 15, 2001 RICHARD M. SCRUSHY
----------------------------
Richard M. Scrushy
Chairman of the Board and
Chief Executive Officer
Date: May 15, 2001 WILLIAM T. OWENS
----------------------------
William T. Owens
Executive Vice President and
Chief Financial Officer
Page 19