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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 September 30, 2002;
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to _________.
Commission File Number 1-10315
-------
HEALTHSOUTH CORPORATION
------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 63-0860407
- ------------------------------- -----------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
ONE HEALTHSOUTH PARKWAY, BIRMINGHAM, ALABAMA 35243
-------------------------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(205) 967-7116
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all Reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such Reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 12, 2002
- ----------------------- ---------------------------------
COMMON STOCK, PAR VALUE 396,427,172 SHARES
$.01 PER SHARE
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
INDEX
PART I -- FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets -- September 30, 2002 (Unaudited) and
December 31, 2001 3
Consolidated Statements of Income (Unaudited) -- Three Months and
Nine Months Ended September 30, 2002 and 2001 5
Consolidated Statements of Cash Flows (Unaudited) -- Nine Months
Ended September 30, 2002 and 2001 6
Notes to Consolidated Financial Statements (Unaudited) -- Three Months
and Nine Months Ended September 30, 2002 and 2001 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 24
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 27
Item 6. Exhibits and Reports on Form 8-K 28
Page 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 389,367 $ 276,583
Other marketable securities 1,074 1,873
Accounts receivable--net 1,028,562 940,414
Inventories, prepaid expenses and
other current assets 440,567 438,295
Income tax refund receivable 24,881 79,290
------------- ------------
TOTAL CURRENT ASSETS 1,884,451 1,736,455
OTHER ASSETS 326,734 342,943
PROPERTY, PLANT AND EQUIPMENT--NET 3,067,666 2,774,736
GOODWILL--NET 2,552,232 2,630,530
INTANGIBLE ASSETS--NET 99,382 94,573
------------- ------------
TOTAL ASSETS $ 7,930,465 $ 7,579,237
============= ============
Page 3
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 30,738 $ 37,085
Salaries and wages payable 56,499 65,364
Deferred income taxes 94,288 99,873
Accrued interest payable and other liabilities 149,968 134,762
Current portion of long-term debt 376,112 21,912
------------- -----------
TOTAL CURRENT LIABILITIES 707,605 358,996
LONG-TERM DEBT 2,835,699 3,005,035
DEFERRED INCOME TAXES 257,007 259,535
DEFERRED REVENUE AND OTHER LONG-TERM LIABILITIES 4,654 4,206
MINORITY INTERESTS--LIMITED PARTNERSHIPS 161,579 154,541
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; 438,068,000 and 430,422,000
shares issued at September 30, 2002 and
December 31, 2001, respectively 4,381 4,304
Additional paid-in capital 2,712,516 2,657,804
Accumulated other comprehensive income 252 16,607
Retained earnings 1,565,675 1,430,846
Treasury stock, at cost; 42,680,000 shares at September 30, 2002
and 38,742,000 shares at December 31, 2001 (313,719) (280,524)
Receivable from Employee Stock Ownership Plan (1,405) (2,699)
Notes receivable from stockholders, officers
and management employees (3,779) (29,414)
------------- -----------
TOTAL STOCKHOLDERS' EQUITY 3,963,921 3,796,924
------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,930,465 $7,579,237
============= ============
See accompanying notes.
Page 4
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED - IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- -- --------------- -------------- -- --------------
2002 2001 2002 2001
-------------- --------------- -------------- --------------
Revenues $ 1,093,785 $ 1,075,874 $ 3,387,243 $ 3,265,324
Operating unit expenses 786,947 714,750 2,270,760 2,173,500
Corporate general and administrative expenses 55,125 38,958 138,382 122,827
Provision for doubtful accounts 23,898 23,980 74,534 83,221
Depreciation and amortization 79,505 95,790 236,894 280,231
Early extinguishment of debt (25,078) -- (19,544) 6,475
Loss on sale of assets -- -- 76,690 139,883
Interest expense 57,972 50,914 158,907 165,580
Interest income (1,938) (1,430) (4,205) (5,742)
-------------- --------------- -------------- --------------
976,431 922,962 2,932,418 2,965,975
-------------- --------------- -------------- --------------
Income before income taxes, minority interests
and cumulative effect of accounting change 117,354 152,912 454,825 299,349
Provision for income taxes 33,919 51,659 147,869 93,193
-------------- --------------- -------------- --------------
Income before minority interests and
cumulative effect of accounting change 83,435 101,253 306,956 206,156
Minority interests (29,821) (22,127) (88,087) (71,667)
-------------- --------------- -------------- --------------
Income before cumulative effect of
accounting change 53,614 79,126 218,869 134,489
Cumulative effect of accounting change, net of tax (Note 7) -- -- (83,165) --
-------------- --------------- -------------- --------------
Net income $ 53,614 $ 79,126 $ 135,704 $ 134,489
============== =============== ============== ==============
Weighted average common shares outstanding 397,237 390,455 394,867 389,135
============== =============== ============== ==============
Income per common share before
cumulative effect of accounting change $ 0.13 $ 0.20 $ 0.55 $ 0.35
Cumulative effect of accounting change -- -- (0.21) --
-------------- --------------- -------------- --------------
Net income per common share $ 0.13 $ 0.20 $ 0.34 $ 0.35
============== =============== ============== ==============
Weighted average common shares
outstanding -- assuming dilution 399,352 401,074 400,334 399,077
============== =============== ============== ==============
Income per common share before
cumulative effect of accounting change --
assuming dilution $ 0.13 $ 0.20 $ 0.55 $ 0.34
Cumulative effect of accounting change -- -- (0.21) --
-------------- --------------- -------------- --------------
Net income per common share --
assuming dilution $ 0.13 $ 0.20 $ 0.34 $ 0.34
============== =============== ============== ==============
See accompanying notes.
Page 5
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------- -- ----------------
2002 2001
---------------- ----------------
OPERATING ACTIVITIES
Net income $ 135,704 $ 134,489
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of accounting change 115,042 --
Depreciation and amortization 236,894 280,231
Provision for doubtful accounts 74,534 83,221
Equity-based compensation (724) 4,281
Income applicable to minority interests of
limited partnerships 88,087 71,667
Loss on sale of assets 76,690 139,883
Gain on extinguishment of debt (25,078) --
Impairment charges 5,534 6,475
Provision for deferred income taxes 18,382 44,442
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable (177,886) (82,068)
Inventories, prepaid expenses and other current
assets 50,459 (94,253)
Accounts payable and accrued expenses (1,856) (179,684)
-------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 595,782 408,684
INVESTING ACTIVITIES
Purchases of property, plant and equipment (560,425) (287,535)
Proceeds from sale of non-strategic assets 12,272 103,498
Additions to intangible assets, net of effects of
acquisitions (69,809) (41,384)
Assets obtained through acquisitions, net of liabilities
assumed (16,907) (5,031)
Purchase of limited partnership units (26,147) (21,708)
Changes in other assets (1,010) (56,816)
Proceeds from sale of marketable securities 799 --
Investments in other marketable securities -- (2,096)
-------- --------
NET CASH USED IN
INVESTING ACTIVITIES (661,227) (311,072)
Page 6
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED - IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------- -- ----------------
2002 2001
---------------- ----------------
FINANCING ACTIVITIES
Proceeds from borrowings $ 1,642,578 $ 1,667,000
Principal payments on long-term debt (1,432,636) (1,770,657)
Proceeds from exercise of options 31,087 39,465
Purchase of treasury stock (33,195) --
Reduction in receivable from Employee Stock
Ownership Plan 1,294 2,716
Decrease in loans to stockholders 25,635 4,806
Proceeds from investment by minority interests -- 20,946
Payment of cash distributions to limited partners (54,902) (54,099)
Foreign currency translation adjustment (1,632) 2,770
---------------- ----------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 178,229 (87,053)
---------------- ----------------
INCREASE IN CASH AND
CASH EQUIVALENTS 112,784 10,559
Cash and cash equivalents at beginning of period 276,583 180,317
---------------- ----------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 389,367 $ 190,876
================ ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 123,072 $ 153,822
Income taxes 38,653 33,434
See accompanying notes.
Page 7
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
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, 2001. 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 had a $1,750,000,000 revolving credit facility
with Bank of America, N.A. and other participating banks (the
"1998 Credit Agreement"). Interest on the 1998 Credit Agreement
was paid based on LIBOR plus a predetermined margin, a base
rate, or competitively bid rates from the participating banks.
The Company was 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 Company recorded
a loss of $5,534,000 in the second quarter of 2002 related to
the write-off of the unamortized balance of loan fees on the
1998 Credit Agreement, which was terminated in June 2002.
On June 14, 2002, the Company entered into a five-year,
$1,250,000,000 revolving credit facility (the "2002 Credit
Agreement"), which replaced the 1998 Credit Agreement. Interest
on the 2002 Credit Agreement is paid based on LIBOR plus a
predetermined margin or a base rate. The Company is required to
pay a fee based on the unused portion of the revolving credit
facility ranging from .275% to .500% depending on the Company's
debt ratings. The principal amount is payable in full on June
14, 2007. The Company has provided a negative pledge on all
assets under the 2002 Credit Agreement. The effective interest
rate on the average outstanding balance under the 2002 Credit
Agreement was 3.26% for the nine months ended September 30,
2002, compared to the average prime rate of 4.75% during the
same period. At September 30, 2002, we had drawn $150,000,000
under the 2002 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
$67,750,000 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 Debentures
were used by the Company to pay down indebtedness outstanding
under its then-existing credit facilities. The 3.25% Convertible
Debentures mature on April 1, 2003.
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
Page 8
pay down indebtedness outstanding under its then-existing credit
facilities. The Senior Notes mature on June 15, 2005 and June
15, 2008.
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 its then-outstanding 9.5% Senior Notes due 2001 and to
pay down indebtedness outstanding under its then-existing credit
facilities. The 10-3/4% Notes mature on October 1, 2008.
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.
On September 28, 2001, the Company issued $400,000,000 in 8-3/8%
Senior Notes due 2011 (the "8-3/8% Notes"). Interest is payable
on April 1 and October 1. The 8-3/8% Notes are unsecured,
unsubordinated obligations of the Company. The net proceeds from
the issuance of the 8-3/8% Notes were used to pay down
indebtedness outstanding under the Company's credit facilities.
The 8-3/8% Notes mature on October 1, 2011.
On September 28, 2001, the Company issued $200,000,000 in 7-3/8%
Senior Notes due 2006 (the "7-3/8% Notes"). Interest is payable
on April 1 and October 1. The 7-3/8% Notes are unsecured,
unsubordinated obligations of the Company. The net proceeds from
the issuance of the 7-3/8% Notes were used to pay down
indebtedness outstanding under the Company's credit facilities.
The 7-3/8% Notes mature on October 1, 2006.
On May 17, 2002, the Company issued $1,000,000,000 in 7-5/8%
Senior Notes due 2012 (the "7-5/8% Notes"). Interest is payable
on June 1 and December 1. The 7-5/8% Notes are unsecured,
unsubordinated obligations of the Company. The net proceeds from
the issuance of the 7-5/8% Notes were used to pay down
indebtedness outstanding under the Company's credit facilities
and for other corporate purposes. The 7-5/8% Notes mature on
June 1, 2012.
Page 9
At September 30, 2002, and December 31, 2001, long-term debt consisted
of the following:
September 30, December 31,
2002 2001
----------------- ---------------
(In thousands)
Advances under a $1,250,000,000 credit
agreement with banks $ 150,000 $ 540,000
3.25% Convertible Subordinated Debentures
due 2003 354,150 567,750
6.875% Senior Notes due 2005 245,000 250,000
7-3/8% Senior Notes due 2006 180,300 200,000
7.0% Senior Notes due 2008 250,000 250,000
10-3/4% Senior Subordinated Notes due 2008 319,260 350,000
8-1/2% Senior Notes due 2008 343,000 375,000
8-3/8% Senior Notes due 2011 347,700 400,000
7-5/8% Senior Notes due 2012 931,650 --
Other long-term debt 90,751 94,197
----------------- ---------------
3,211,811 3,026,947
Less amounts due within one year 376,112 21,912
----------------- ---------------
$2,835,699 $3,005,035
================= ===============
During 1995 and 1998, the Company entered into two tax retention
operating lease agreements structured through financial
institutions for its corporate headquarters building and for
nine of its rehabilitation hospitals. In December 2001, the
Company entered into a seven-and-one-half year operating lease
agreement to provide for the financing of a replacement medical
center in Birmingham, Alabama. On May 29, 2002, the Company
exercised its option to purchase the properties financed under
these leases. The total purchase price of these properties was
approximately $207,109,000.
The 7-5/8% Senior Notes reflect a deferred benefit of
$22,950,000 related to the early termination of an interest rate
swap. This benefit will be amortized as a reduction to interest
expense over the remaining term of the notes.
Effective April 1, 2002, the Company adopted the provisions of
FASB Statement No. 145.
NOTE 3 -- During the first nine months of 2002, the Company acquired two
outpatient rehabilitation facilities, one outpatient diagnostic
center and one surgery center. The total purchase price of these
acquired facilities was approximately $16,906,000. The Company
also entered into non-compete agreements totaling approximately
$2,900,000 in connection with these transactions.
The cost in excess of the acquired facilities' net asset value
was approximately $15,547,000. 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"). Approximately 98% of
the locations identified in the Fourth Quarter 1998 Charge have
been closed.
Page 10
Details of the impairment and restructuring charge activity
through the first nine months of 2002 are as follows:
Activity
--------
Balance at Cash Non-Cash Balance at
Description 12/31/01 Payments Impairments 09/30/02
--------------------------------------------------------------------------------------------
(In thousands)
Fourth Quarter 1998 Charge:
Lease abandonment costs $ 9,465 $ 5,396 $ -- $ 4,069
---------------------------------------------------------
Total Fourth Quarter 1998 Charge $ 9,465 $ 5,396 $ -- $ 4,069
=========================================================
The remaining balance at September 30, 2002 is included in
accrued interest payable and other liabilities in the
accompanying balance sheet.
NOTE 5 -- The Company has adopted the provisions of FASB Statement No.
131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 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. The key indicators used by management are revenue and
net income before unusual and non-recurring charges and the
cumulative effect of accounting change. The effects of unusual
and non-recurring items and the cumulative effect of accounting
change are excluded since management believes these changes are
not indicative of the Company's operating performance. The
Company has based its management and reporting structure on four
segments: (1) Inpatient and Other Clinical Services, (2)
Ambulatory - Surgery Services, (3) Ambulatory - Other Services
and (4) Non-Patient Care 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 ambulatory - surgery services segment includes the
operations of ambulatory surgery facilities. The ambulatory -
other services segment includes the operations of outpatient
rehabilitation facilities and outpatient diagnostic centers. The
non-patient care services segment includes the operations of the
corporate office, general and administrative costs, non-clinical
subsidiaries and other operations that are independent of the
inpatient and outpatient services segments.
Page 11
Operating results and other financial data are presented for the
principal operating segments as follows:
Three Months Ended
September 30,
-------------------------------------------
2002 2001
---------------- ---------------
(In thousands)
Revenues:
Inpatient and other clinical services $ 563,498 $ 520,710
Ambulatory - Surgery services 253,331 234,339
Ambulatory - Other services 267,577 302,409
---------------- ---------------
1,084,406 1,057,458
Non-patient care services 9,379 18,416
---------------- ---------------
Total revenues $ 1,093,785 $ 1,075,874
================ ===============
Income before unusual and non-recurring items,
income taxes and minority interests:
Inpatient and other clinical services $ 142,390 $ 99,845
Ambulatory - Surgery services 54,055 53,765
Ambulatory - Other services 18,835 73,723
---------------- ---------------
215,280 227,333
Non-patient care services (123,004) (74,421)
---------------- ---------------
Income before unusual and non-recurring
items, income taxes and minority interests 92,276 152,912
Unusual and non-recurring items 25,078 --
---------------- ---------------
Income before income taxes and
minority interests $ 117,354 $ 152,912
================ ===============
Page 12
Nine Months Ended
September 30,
---------------- ----------- ---------------
2002 2001
---------------- ---------------
(In thousands)
Revenues:
Inpatient and other clinical services $ 1,677,965 $ 1,562,353
Ambulatory - Surgery services 773,840 728,811
Ambulatory - Other services 913,055 920,318
---------------- ---------------
3,364,860 3,211,482
Non-patient care services 22,383 53,842
---------------- ---------------
Total revenues $ 3,387,243 $ 3,265,324
================ ===============
Income before unusual and non-recurring items,
income taxes, minority interests
and cumulative effect of accounting change:
Inpatient and other clinical services $ 436,656 $ 271,089
Ambulatory - Surgery services 197,368 184,691
Ambulatory - Other services 206,633 213,109
---------------- ---------------
840,657 668,889
Non-patient care services (328,686) (229,657)
---------------- ---------------
Income before unusual and non-recurring
items, income taxes, minority interests and
cumulative effect of accounting change 511,971 439,232
Unusual and non-recurring items (57,146) (139,883)
Cumulative effect of accounting change (115,042) --
---------------- ---------------
Income before income taxes and
minority interests $ 339,783 $ 299,349
================ ===============
Unusual and non-recurring items are excluded from the segment
presentation because they are not representative of operating
data used by the Chief Operation Decision Maker to measure
segment operational performance. During the three months and
nine months ended September 30, 2002, these items comprised, as
applicable, (a) a gain on the early extinguishment of debt in
the third quarter and (b) a loss on the early extinguishment of
debt and a loss on the the disposition of five nursing home
facilites managed for the Company by a third party in the second
quarter. During the nine months ended September 30, 2001, these
items comprised (a) a loss on the sale of the Company's
occupational medicine operations, (b) an increase in bad debt
reserves in connection with the sale of the Company's Richmond,
Virginia medical center, (c) amounts paid in settlement of a
lawsuit with the United States Department of Justice, and (d) a
loss on the early termination of a secondary credit facility.
NOTE 6 -- During the first nine months of 2002, the Company granted
nonqualified stock options to certain Directors, employees and
others to purchase 4,343,000 shares of Common Stock at exercise
prices ranging from $3.70 to $14.90 per share.
NOTE 7 -- In June 2001, the Financial Accounting Standards Board issued
FASB Statement No. 141, "Business Combinations" ("SFAS No.
141"), and FASB Statement No. 142, "Goodwill and Other
Intangibles" ("SFAS No. 142"). SFAS No. 141 eliminates the use
of the pooling method for business combinations and requires
that all acquisitions be accounted for under the purchase
method. This statement is effective for acquisitions completed
after June 30, 2001. SFAS No. 142 requires the periodic testing
of goodwill for impairment rather than a monthly amortization of
the balance. This testing takes place in two steps: (1) the
determination of the fair value of a reporting unit, and (2) the
determination of the implied fair value of the goodwill. The
Company adopted this statement on January 1, 2002. If the policy
had been in effect in the third quarter of 2001, reported net
income for that period would have increased by $12,234,000, or
$.03 per share (assuming dilution). In July 2002, the Company
completed the evaluation of goodwill at December 31, 2001 for
impairment under SFAS No. 142 and recognized a goodwill
impairment of $83,165,000, net of tax of $31,877,000. The
Company utilized independent appraisers in conducting this
evaluation. The effects of this impairment are reflected as the
cumulative effect of a change in accounting principle in the
results of operations for the nine months ended September 30,
2002.
Page 13
The following table represents net income and earnings per share results during
1999, 2000 and 2001 as if FAS 142 had been in effect:
TWELVE MONTHS ENDED
DECEMBER 31,
----------- ----------- -----------
2001 2000 1999
----------- ----------- -----------
Reported net income $ 202,387 $ 278,465 $ 76,517
Add back: Goodwill amortization (net of tax) 46,670 45,304 45,491
----------- ----------- -----------
Adjusted net income $ 249,057 $ 323,769 $ 122,008
=========== =========== ===========
BASIC EARNINGS PER SHARE:
Reported net income $ 0.52 $ 0.72 $ 0.19
Add back: Goodwill amortization (net
of tax) 0.12 0.12 0.11
----------- ----------- -----------
Adjusted net income $ 0.64 $ 0.84 $ 0.30
=========== =========== ===========
DILUTED EARNINGS PER SHARE:
Reported net income $ 0.51 $ 0.71 $ 0.18
Add back: Goodwill amortization (net
of tax) 0.11 0.12 0.11
----------- ----------- -----------
Adjusted net income $ 0.62 $ 0.83 $ 0.29
=========== =========== ===========
Page 14
The following table represents intangibles to be amortized:
Weighted
9/30/02 Average
Residual Amortization Gross Accumulated YTD 2002
Amount Period Amount Amortization Expense
-------- ------------ ------ ------------ ---------
(In Thousands)
Non-competes $ 26,679 5 $ 98,569 $ 71,890 $ 10,836
Bond Issue costs 56,623 5 73,412 16,789 8,265
Other 16,080 3 19,255 3,175 2,688
-------- -------- -------- --------
Total $ 99,382 $191,236 $ 91,854 $ 21,789
======== ======== ======== ========
Estimated Amortization Expense
For the Year
2003 2004 2005 2006 2007
-------- -------- -------- -------- --------
(In Thousands)
Non-competes $ 10,055 $ 6,384 $ 4,259 $ 1,332 $ 563
Bond Issue costs 9,248 8,843 8,631 8,272 6,575
Other 5,120 3,067 2,283 2,173 1,593
-------- -------- -------- -------- --------
Total $ 24,423 $ 18,294 $ 15,173 $ 11,777 $ 8,731
======== ======== ======== ======== ========
The following table represents intangibles not to be amortized:
12/31/01 9/30/02
Carrying Disposed of Carrying
Amount Acquired Impaired through sale Amount
------------- ------------ ------------- ----------- -------------
(In Thousands)
Inpatient and Other Clinical Services $961,163 $37,038 ($20,459) ($16,476) $961,266
Ambulatory - Surgery Services 953,438 448 -- (708) 953,178
Ambulatory - Other Services 702,536 13,209 (94,583) (4) 621,158
Non-patient Care Services 13,393 3,237 -- -- 16,630
------------- ------------ ------------- ----------- -------------
Total $2,630,530 $53,932 ($115,042) ($17,188) $2,552,232
============= ============ ============= =========== =============
Page 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
We provide 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 September 30, 2002, we had
approximately 1,795 locations in 50 states, Puerto Rico, the United Kingdom,
Australia and Canada, including 1,331 outpatient rehabilitation locations, 118
inpatient rehabilitation facilities, four medical centers, 206 surgery centers
and 136 diagnostic centers.
FASB Statement ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information", 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) ambulatory - surgery services, (3) ambulatory -
other services and (4) non-patient care services. 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 ambulatory - surgery services segment
includes the operations of our ambulatory surgery facilities. The ambulatory -
other services segment includes the operations of our outpatient rehabilitation
facilities and outpatient diagnostic centers. The non-patient care services
segment includes the operations of our corporate office, general and
administrative costs, non-clinical subsidiaries and other operations that are
independent of our inpatient and ambulatory services segments. See Note 5 of
"Notes to Consolidated Financial Statements" for financial data for each of our
operating segments.
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. As
described below, a change in Medicare reimbursement policy relating to the
reimbursement for outpatient physical therapy and occupational therapy services
had a significant impact on our results of operations in the three months ended
September 30, 2002, and will continue to have a significant impact in the
foreseeable future. We cannot predict whether others 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.
Medicare reimbursement for inpatient rehabilitation services is
changing from a cost-based reimbursement system to a prospective payment system
("PPS"), with the phase-in of the PPS having begun January 1, 2002. We believe
we are well-positioned and well-prepared for the transition and that our
emphasis on cost-effective services means that the inpatient rehabilitation PPS
will have a positive effect on our results of operations. Our early experience
with payments under PPS has been consistent with our internal estimates.
However, because implementation of PPS has only recently begun, we cannot be
certain that the ultimate impact of the PPS transition will be consistent with
our current expectations. In addition, the climate for both governmental and
non-governmental reimbursement frequently changes, and future changes in
reimbursement rates could have a material effect on our financial condition or
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
Page 16
rehabilitation locations opened within the same market. New store outpatient
rehabilitation operations are measured on locations within new 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. In preparing these financial statements, we are required to make
estimates and judgments that affect the reported amounts of our assets,
liabilities, revenues and expenses. Those reported amounts could differ, in some
cases materially, if we made different estimates and judgments with respect to
particular items in our financial statements. We make such estimates and
judgments based on our historical experience and on assumptions that we believe
are reasonable under the circumstances in an effort to ensure that our financial
statements fairly reflect our financial condition and results of operations. We
describe some of the most important policies that we follow in making such
estimates and judgments below.
Revenues and Contractual Reserves
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 that are subject to final review and settlement by
appropriate authorities. We estimate contractual adjustments from
non-governmental third-party payors based on historical experience and the terms
of payor contracts. Our reimbursement from governmental third-party payors is
based upon cost reports, Medicare and Medicaid payment regulations 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. We estimate net realizable
amounts from governmental payors based on historical experience and
interpretations of such regulations and policies. In the event that final
reimbursement differs from our estimates, our actual revenues and net income,
and our accounts receivable, could vary from the amounts reported.
Allowance for Doubtful Accounts
As with any healthcare provider, some of our accounts receivable will
ultimately prove uncollectible for various reasons, including the inability of
patients or third-party payors to satisfy their financial obligations to us. We
estimate allowances for doubtful accounts based on the specific agings and payor
classifications at each facility. Net accounts receivable includes only those
amounts we estimate to be collectible based on this evaluation. Unforeseen
factors, such as the insolvency of third-party payors, could cause our estimate
to be inaccurate and could cause our actual results and the amount of our
accounts receivable to vary from amounts reported in our financial statements.
Impairment of Goodwill
Many of our facilities came to us through acquisitions. 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
Page 17
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 of
facilities are generally grouped at a market level, which is the lowest level
for which there are identifiable cash flows. If we acquired the assets of the
facilities being tested as part of a purchase business combination, any goodwill
that arose as part of the transaction is included as part of the asset grouping.
In July 2001, the Financial Accounting Standards Board issued FASB
Statement ("SFAS") No. 142, "Goodwill and Other Intangibles". SFAS No. 142
requires the periodic testing of goodwill for impairment rather than a monthly
amortization of the balance. This testing takes place in two steps: (1) the
determination of the fair value of a reporting unit, and (2) the determination
of the implied fair value of the goodwill. We adopted SFAS No. 142 on January 1,
2002. We determined that if the policy had been in effect in the third quarter
of 2001, reported net income for that period would have increased by
$12,234,000, or $.03 per share (assuming dilution). In July 2002, we completed
the evaluation of goodwill at December 31, 2001 for impairment under SFAS No.
142 and we recognized a goodwill impairment of $83,165,000, net of tax of
$31,877,000. We utilized independent appraisers in conducting this evaluation.
The effects of this impairment are reflected as the cumulative effect of a
change in accounting principle in our results of operations for the nine months
ended September 30, 2002. As a result of some of the developments in our
business during the third quarter of 2002, which we discuss below, we will
be evaluating additional assets for impairment in the fourth quarter of 2002.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER 30, 2002
Our results of operations in the three months ended September 30, 2002
were significantly affected by a new policy of the Centers for Medicare and
Medicaid Services ("CMS"), the government agency that administers the Medicare
program, concerning Medicare reimbursement for outpatient physical therapy and
occupational therapy services, which went into effect July 1, 2002. Under the
new CMS policy, commonly referred to as "Transmittal 1753", providers of
outpatient therapy services are required to use the so-called "group therapy"
procedure code for billing Medicare when a therapist provides services to more
than one patient during a single time period, rather than using individual
procedure codes to reflect the specific services provided to the patients. The
group therapy code provides for significantly lower reimbursement to therapy
providers than do individual procedure codes. During the quarter, we announced
that we expected the impact of this change to reduce our pretax earnings by
approximately $175,000,000 per year, taking into account our estimates of
diminished Medicare revenue and diminished revenue from other payors who follow
Medicare payment policies. We also announced a proposed plan to effect a
tax-free separation of our surgery center division into a separate public
company, a plan which we determined to suspend after the end of the quarter. In
addition, during the quarter we were served with several lawsuits alleging
violations of the federal securities laws and state corporate laws, and we were
notified of a Securities and Exchange Commission investigation relating to our
August 27 announcement about the potential impact of Transmittal 1753 on our
business. See Item 1, "Legal Proceedings", in Part II of this Quarterly Report
on Form 10-Q.
As a result, in part, of the demands on management resources brought
about by these events, the confusion among our therapists on scheduling and
staffing requirements under the new Medicare policy, and the efforts of
competing providers to use the substantial adverse publicity surrounding these
events to divert business from our facilities, we saw a decline in volumes in
our outpatient rehabilitation line of business during the quarter. When compared
to the second quarter of 2002, we saw a decrease in reimbursement of
approximately $23,000,000 in our outpatient rehabilitation business, primarily
attributable to the impact of Transmittal 1753, and an additional $34,000,000
decrease in revenues in our outpatient rehabilitation business attributable to a
decline in patient volumes. We also saw an increase of about $39,000,000 in
operating unit expenses as compared to the second
Page 18
quarter, primarily attributable to field training for therapists in the new
Medicare policy, increased recruiting and labor costs, higher insurance premiums
and new market initiatives aimed at restoring patient volumes. These factors are
reflected in the detailed discussion of our operating results for the quarter
that follows.
Our operations generated revenues of $1,093,785,000 for the quarter
ended September 30, 2002, an increase of $17,911,000, or 1.7%, as compared to
the same period in 2001. The increase in revenues is primarily attributable to
increases in pricing and volume in our inpatient rehabilitation and surgery
divisions. Same store revenues for the quarter ended September 30, 2002 were
$1,075,131,000, an increase of $28,949,000, or 2.8%, as compared to the same
period in 2001, excluding facilities in operation in 2001 but no longer in
operation in 2002. New store revenues were $18,654,000. Revenues generated from
patients under the Medicare and Medicaid programs respectively accounted for
37.4% and 2.2% of revenue for the third quarter of 2002, compared to 30.6% and
2.6% for the same period in 2001. The increase in Medicare revenues as a
percentage of total revenues is primarily attributable to the transition to PPS
of our inpatient rehabilitation facilities and the growth in inpatient
rehabilitation revenues during the period. Revenues from any other single
third-party payor were not significant in relation to our revenues. During the
third quarter of 2002, same store outpatient visits, inpatient discharges,
surgical cases and diagnostic cases increased (decreased) by (3.8)%, 10.0%, 5.8%
and 5.3%, respectively. Revenue per outpatient visit, inpatient discharge,
surgical case and diagnostic case for same store operations increased
(decreased) by (12.8)%, 4.4%, 1.6% and (2.7)%, respectively.
Operating unit expenses (expenses excluding corporate general and
administrative expenses, provision for doubtful accounts, depreciation and
amortization, interest expense and impairment charges) were $786,947,000, or
71.9% of revenues, for the quarter ended September 30, 2002, compared to 66.4%
of revenues for the third quarter of 2001. Same store operating expenses were
$775,581,000, or 72.1% of comparable revenue. New store operating expenses were
$11,366,000, or 60.9% of comparable revenue. The increase in operating expenses
as a percentage of revenues is attributable to the factors described in the
second paragraph above, combined with a decrease in revenues in our outpatient
rehabilitation business. Corporate general and administrative expenses increased
from $38,958,000 during the 2001 quarter to $55,125,000 during the 2002 quarter.
The increase in corporate general and administrative expenses is primarily
attributable to increased legal, accounting and professional fees relating to
the litigation described in the first paragraph above and the proposed tax-free
separation of our surgery center division, as well as corporate-level marketing
initiatives aimed at restoring patient volumes. The provision for doubtful
accounts was $23,898,000, or 2.2% of revenues, for the third quarter of 2002,
compared to $23,980,000, or 2.2% of revenues, for the same period in 2001.
Management believes that the allowance for doubtful accounts generated by this
provision is adequate to cover any uncollectible receivables.
In the third quarter of 2002 we recorded a pretax gain on the early
extinguishment of debt in the amount of $25,078,000, resulting from the
repurchase of over $444,000,000 of our public debt during the quarter.
Depreciation and amortization expense was $79,505,000 for the quarter
ended September 30, 2002, compared to $95,790,000 for the same period in 2001.
The decrease was primarily attributable to decreased amortization expense due to
our adoption of SFAS No. 142. Interest expense was $57,972,000 for the quarter
ended September 30, 2002, compared to $50,914,000 for the quarter ended
September 30, 2001. The increase is primarily attributable to an increase in our
fixed rate debt in 2002 as compared to our floating rate debt in the 2001
quarter. The interest rate on our floating rate debt was lower than that on our
fixed rate debt. For the third quarter of 2002, interest income was $1,938,000,
compared to $1,430,000 for the third quarter of 2001.
Income before income taxes and minority interests for the third quarter
of 2002 was $117,354,000, compared to income of $152,912,000 for the same period
in 2001. Minority interests decreased income before income taxes by $29,821,000
for the quarter ended September 30, 2002, compared to decreasing income before
income taxes by $22,127,000 for the third quarter of 2001. The provision for
income taxes for the third quarter of 2002 was $33,919,000, compared to a
provision of $51,659,000 for the same period in 2001. The effective tax rate was
38.75% for the quarter ended September 30, 2002 compared to 39.5% for the
quarter ended September 30, 2001. Net income for the third quarter of 2002 was
$53,614,000, compared to net income of $79,126,000 for the third quarter of
2001.
Page 19
SEGMENT-BY-SEGMENT
On a segment-by-segment basis, our results of operations for the
quarter may be summarized as follows:
Inpatient and Other Clinical Services. Revenues in this segment
increased over 8% in comparison with the corresponding quarter in 2001. This
increase resulted primarily from increased Medicare patient volumes in our
inpatient rehabilitation facilities and pricing increases due to the
implementation of inpatient rehabilitation PPS, in contrast to the cost-based
Medicare reimbursement previously received in our inpatient rehabilitation
facilities. Our profitability in this segment has also increased over the
corresponding period last year, as a result of increased Medicare revenues and
cost-containment initiatives.
Ambulatory - Surgery Services. Revenues in this segment increased 8% in
comparison with the corresponding quarter in 2001. This increase resulted
primarily from our ninth consecutive quarter of same store volume growth and
pricing increases in comparison to the 2001 quarter. This volume growth was, in
turn, attributable in large part to our success in adding new surgeon partners
in our surgery centers as a result of our syndication initiatives. Our
profitability in this segment has also increased over the corresponding period
last year, as a result of increased revenues and stable levels of variable
costs.
Ambulatory - Other Services. This segment encompasses the operations of
our outpatient rehabilitation and diagnostic imaging facilities. For the reasons
discussed at the beginning of this section, revenues and volumes in our
outpatient rehabilitation facilities both declined in comparison to the
corresponding quarter in 2001. Revenues, volumes and pricing in our diagnostic
imaging facilities were all essentially unchanged from the 2001 quarter, making
those operations essentially neutral to the performance of this segment in the
2002 quarter. The profitability of this segment declined from 2001 as a result
of the diminished performance of our outpatient rehabilitation facilities, for
the reasons discussed above. Future profitability trends for this segment will
depend in significant part on our ability to successfully respond to the
reimbursement changes in our outpatient rehabilitation facilities and restore
patient volumes in those facilities.
RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 2002
Our operations generated revenues of $3,387,243,000 for the nine months
ended September 30, 2002, an increase of $121,919,000, or 3.7%, as compared to
the nine months ended September 30, 2001. Same store revenues were
$3,322,196,000, an increase of $202,576,000, or 6.5%, as compared to the same
period in 2001, excluding facilities in operation in 2001 but no longer in
operation in 2002. New store revenues were $65,047,000. Revenues generated from
patients under the Medicare and Medicaid programs respectively accounted for
35.3% and 2.5% of revenue for the first nine months of 2002, compared to 30.5%
and 2.6% for the same period in 2001. Revenues from any other single third-party
payor were not significant in relation to our revenues. During the first nine
months of 2002, same store outpatient visits, inpatient discharges, surgical
cases and diagnostic cases increased by 3.6%, 6.5%, 5.7% and 5.0%, respectively.
Revenue per outpatient visit, inpatient discharge, surgical case and diagnostic
case for same store operations increased (decreased) by (1.0)%, 5.6%, 1.9% and
(1.6)%, respectively.
Operating unit expenses (expenses excluding corporate general and
administrative expenses, provision for doubtful accounts, depreciation and
amortization, interest expense and impairment charges) were $2,270,760,000, or
67.0% of revenues, for the nine months ended September 30, 2002, compared to
66.6% of revenues for the first nine months of 2001. Same store operating
expenses were $2,225,381,000, or 67.0% of comparable revenue. New store
operating expenses were $45,379,000, or 69.8% of comparable revenue. Net income
for the nine months ended September 30, 2002, was $135,704,000, compared to
$134,489,000 for the same period in 2001.
Page 20
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, we had working capital of $1,176,846,000,
including cash and marketable securities of $390,441,000. Working capital at
December 31, 2001, was $1,377,459,000, including cash and marketable securities
of $278,456,000. For the first nine months of 2002, cash provided by operating
activities was $595,782,000, compared to $408,684,000 for the same period in
2001. The increase is primarily attributable to a significant reduction of
accounts payable in the first quarter of 2001 and reductions in prepaids and
other current assets in 2002. Additions to property, plant and equipment and
acquisitions accounted for $560,425,000 and $16,907,000, respectively, during
the first nine months of 2002. Those same investing activities accounted for
$287,535,000 and $5,031,000, respectively, in the same period in 2001. Because
of the favorable results we have seen in the early transition to inpatient
rehabilitation PPS, we have incurred additional capital expenditures in the
first nine months of 2002 in connection with expansion activities at some of our
facilities and accelerated development activities. Additionally, we incurred
capital expenditures totaling $207,109,000 in the second quarter of 2002 in
connection with the purchase of various facilities and properties previously
held under tax retention operating leases, as described below. Financing
activities provided $178,229,000 and used $87,053,000 during the first nine
months of 2002 and 2001, respectively. Net borrowings on long-term debt for the
first nine months of 2002 were $209,942,000, versus net principal payments of
$103,657,000 for the first nine months of 2001.
The table below summarizes our repurchases of outstanding long-term debt
obligations in the third quarter of 2002.
Outstanding Principal Outstanding
June 30, 2002 Repurchased September 30, 2002
---------------- ---------------- -------------------
(In thousands)
3.25% Convertible Subordinated
Debentures due 2003 $567,750 $213,600 $354,150
6.875% Senior Notes due 2005 250,000 5,000 245,000
7-3/8% Senior Notes due 2006 200,000 19,700 180,300
7.0% Senior Notes due 2008 250,000 -- 250,000
10-3/4% Senior Subordinated Notes
due 2008 350,000 30,740 319,260
8-1/2% Senior Notes due 2008 375,000 32,000 343,000
8-3/8% Senior Notes due 2011 400,000 52,300 347,700
7-5/8% Senior Notes due 2012 1,000,000 91,300 908,700 (1)
---------------- ---------------- -------------------
$3,392,750 $444,640 $2,948,110
================ ================ ===================
(1) Amount differs from the amount shown in Note 2 by $22,950,000. In August
2002, we terminated two interest rate swap agreements and recognized proceeds of
$22,950,000, which will be amortized over the remaining term of the notes
and which is included in the $931,650,000 balance shown in Note 2.
We also used cash to repurchase approximately $5,974,000 in common stock during
the third quarter of 2002.
Net accounts receivable were $1,028,562,000 at September 30, 2002,
compared to $940,414,000 at December 31, 2001. The number of days of average
quarterly revenues in ending receivables at September 30, 2002, was 86.5,
compared to 77.6 days of average quarterly revenues in ending receivables at
December 31, 2001. This increase was primarily attributable to a decline in
revenues in the third quarter of 2002 and a diversion of management attention
resulting from the events discussed under "Results of Operations--Three Months
Ended September 30, 2002", above. The concentration of net accounts receivable
from patients, third-party payors, insurance companies and others at September
30, 2002, is consistent with the related concentration of revenues for the
period then ended.
On June 14, 2002, we entered into a five-year, $1,250,000,000 revolving
credit facility (the "2002 Credit Agreement"), which replaced our previous
primary credit facility. Interest on the 2002 Credit Agreement is paid based on
LIBOR plus a predetermined margin or a base rate. We are required to pay a fee
based on the unused portion of the revolving credit facility ranging from .275%
to .500% depending on our debt ratings. The principal amount is
Page 21
payable in full on June 14, 2007. We have provided a negative pledge on all
assets under the 2002 Credit Agreement. At September 30, 2002, we had drawn
$150,000,000 under the 2002 Credit Agreement.
During 1995 and 1998, we entered into two tax retention operating lease
agreements structured through financial institutions for our corporate
headquarters building and for nine of our rehabilitation hospitals. In December
2001, we entered into a seven-and-one-half year operating lease agreement to
provide for the financing of our replacement medical center in Birmingham,
Alabama. On May 29, 2002, we exercised our option to purchase the properties
financed under these leases. The total purchase price of these properties was
approximately $207,109,000.
The table below sets forth certain information concerning amounts due
with respect to our long-term debt and various other commitments as of September
30, 2002:
Due Due Due Due 2007
Total 2002 2003-2004 2005-2006 and beyond
-------------------------------------------------------------------------------
(In thousands)
Long-Term Debt $ 3,173,525 $ 4,604 $ 370,274 $ 439,743 $ 2,358,904
Capital Lease Obligations 21,422 1,545 8,598 5,027 6,252
Noncompete Obligations 16,864 3,065 10,627 3,172 --
Operating Leases 1,161,973 59,026 341,463 219,033 542,451
--------- ------ ------- ------- -------
Total Obligations $ 4,373,784 $68,240 $ 730,962 $ 666,975 $ 2,907,607
Since the end of the quarter, we have used approximately $9,912,000 in
available cash to repurchase approximately $10,000,000 in principal amount of
our outstanding debt securities.
We have been advised by the trustee under the indenture governing our
7-5/8% Senior Notes due 2012 that some bondholders have suggested that the
provisions of such indenture relating to transactions with affiliates required
us to provide certain documentation in connection with our acquisition of stock
from our Chairman of the Board in satisfaction of an outstanding loan. While we
do not necessarily believe that such provisions were intended to apply to the
transaction, we have advised the trustee of our intention to provide such
documentation to it.
While the rates of interest payable under our principal credit facility
vary depending in part on our debt ratings, we have no credit or lease
agreements which provide for the acceleration of maturities or the termination
of such agreements based upon any change in our debt ratings.
As part of our corporate strategy, we are continually evaluating
opportunities for strategic acquisitions and divestitures. We intend to pursue
the acquisition or development of additional healthcare operations and other
businesses providing complementary services. 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 $125,000,000 on maintenance and expansion of our
existing facilities and approximately $300,000,000 to $325,000,000 on
development activities. Of those amounts, we currently expect that approximately
65% will be required for our inpatient and other clinical services segment
(including the construction of our replacement medical center facility in
Birmingham, Alabama), approximately 25% for our ambulatory - surgery services
segment and approximately 15% for our ambulatory - other services segment. We
believe that existing cash, cash flow from operations, and borrowings under
existing credit facilities will be sufficient to satisfy our estimated cash
requirements for the next twelve months and for the reasonably foreseeable
future.
Inflation in recent years has not had a significant effect on our
business, and is not expected to adversely affect us in the future unless it
increases significantly.
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 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 our actual results will not differ
materially from the results anticipated in such
Page 22
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 strategic
initiatives, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 $1,074,000 at September 30,
2002, 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.
Upon application of the proceeds from the sale of our 7-5/8% Notes, all
of our long-term indebtedness was subject to fixed rates of interest. In May
2002, we entered into two interest rate swap arrangements in order to improve
our mix of fixed and variable rate exposure. Each swap has a notional amount of
$250,000,000 and matures 120 months from the date of the original transaction.
The notional amounts are used to measure interest to be paid or received and do
not represent an amount of exposure to credit loss. In these arrangements, we
pay the counterparties a variable rate of interest tied to six-month LIBOR
rates, and the counterparties pay us a fixed rate of interest on the notional
amount. The variable rates paid by us under these swaps are reset every six
months. Thus, these interest rate swaps have the effect of converting
$500,000,000 of our fixed-rate debt into variable-rate debt through their
maturity dates of June 2012. In August 2002, we terminated both of these
interest rate swap arrangements. We realized $22,950,000 in proceeds from the
termination, which will be amortized over the remaining term of the agreement.
During the third quarter of 2002, we repurchased approximately
$444,000,000 in principal of our fixed rate debt securities. We recognized a
$25,078,000 gain on early extinguishment of debt, before taxes, on the debt
repurchases. We repurchased these securities at a weighted average discount of
approximately 7%.
With respect to our interest-bearing liabilities, approximately
$150,000,000 in long-term debt at September 30, 2002 is subject to variable
rates of interest, while the remaining balance in long-term debt of
$3,061,811,000 is subject to fixed rates of interest (see Note 2 of "Notes to
Consolidated Financial Statements" for further description). This compares to
$540,000,000 in long-term debt subject to variable rates of interest and
$2,486,947,000 in long-term debt subject to fixed rates of interest at December
31, 2001. The fair value of our total long-term debt, based on discounted cash
flow analyses, approximates its carrying value at September 30, 2002 and
December 31, 2001 except for our 3.25% Convertible Subordinated Debentures due
2003, 6.875% Senior Notes due 2005, 7.0% Senior Notes due 2008, 10-3/4% Senior
Notes due 2008, 8-1/2% Senior Notes due 2008, 8-3/8% Senior Notes due 2011,
7-3/8% Senior Notes due 2006 and 7-5/8% Senior Notes due 2012. The fair value of
the 3.25% Convertible Debentures was approximately $326,039,000 and $541,974,000
at September 30, 2002 and December 31, 2001, respectively. The fair value of the
6.875% Senior Notes was approximately $181,913,000 and $250,191,000 at September
30, 2002 and December 31, 2001, respectively. The fair value of the 7% Senior
Notes was approximately $168,125,000 and $243,713,000 at September 30, 2002 and
December 31, 2001, respectively. The fair value of the 10-3/4% Senior Notes was
approximately $222,684,000 and $386,365,000 at September 30, 2002 and December
31, 2001, respectively. The fair value of the 8-1/2% Senior Notes was
approximately $258,965,000 and $392,231,000 at September 30, 2002 and December
31, 2001, respectively. The fair value of the 8-3/8% Senior
Page 23
Notes was approximately $255,560,000 and $414,940,000 at September 30, 2002 and
December 31, 2001, respectively. The fair value of the 7-3/8% Senior Notes was
approximately $136,127,000 and $201,350,000 at September 30, 2002 and December
31, 2001, respectively. The fair value of the 7-5/8% Senior Notes was
approximately $645,177,000 at September 30, 2002. Based on a hypothetical 1%
increase in interest rates, the potential losses in future annual pre-tax
earnings would be approximately $1,500,000. 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.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-14(c) under the
Securities Exchange Act of 1934). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective in timely alerting them to material
information relating to us (including our consolidated subsidiaries) required to
be included in our periodic Securities and Exchange Commission filings. There
have been no significant changes in internal controls or in other factors that
could significantly affect these controls subsequent to the date of our most
recent evaluation.
Page 24
PART II -- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
1998 Securities Litigation
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. The court held a hearing on the plaintiffs' motion for class
certification on April 23, 2002, and requested further briefing on various
issues. Those issues have now been briefed, and we are awaiting the court's
ruling on class certification, although we do not know when the court will issue
its ruling. 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 25
Qui Tam/False Claims Act Litigation
As previously disclosed, beginning in late December 2001, the United
States Department of Justice filed notices of partial intervention in so-called
"qui tam" complaints filed against us by private parties under the federal False
Claims Act in United States District Courts in Alabama, Florida, New York and
Texas. In each case, the Department did not file a complaint in intervention at
the time it filed its notice of intervention, and sought and received additional
time to file such a complaint. After various motions and procedural actions in
the underlying cases, on May 23, 2002, the Department served us with a complaint
in intervention in the Texas case, which is styled United States ex rel. James
J. Devage v. HEALTHSOUTH Corporation, Civil Action No. SA-98-CA-0372-FB, United
States District Court for the Western District of Texas. The complaint alleges
that we submitted false claims for reimbursement under Medicare and other
federal healthcare programs and federal employee benefit plans in connection
with certain physical therapy services provided at our outpatient rehabilitation
centers. The complaint does not specify the damages claimed by the Department.
The relator has indicated that he is not pursuing any claims other than those in
which the Department has intervened. The Alabama, Florida and New York cases
have, to the extent not dismissed, been transferred to the Texas court. After
resolving various procedural issues among the Department and the various qui tam
relators, the court entered a scheduling order requiring us to file responsive
pleadings by November 30, 2002. As we have previously noted, we believe that our
practices during the period purportedly covered by the complaint were consistent
with accepted clinical standards and practices in physical therapy and with
existing Medicare regulations. Accordingly, we expect to vigorously defend
against the claims asserted in the Department's complaint. However, because of
the preliminary status of this litigation, it is not possible to predict at this
time the outcome or effect of this litigation or the length of time it will take
to resolve this litigation.
2002 Securities and Derivative Litigation
We and some of our officers and directors were served with various
lawsuits filed beginning August 28, 2002 purporting to be class actions under
the federal securities laws. These lawsuits were filed following a decline in
our stock price after a public announcement we made on August 27, 2002,
concerning our current assessment of the impact on our business of changes in
Medicare reimbursement policy for outpatient physical therapy and occupational
therapy. To date, approximately 18 such suits have filed in the United States
District Court for the Northern District of Alabama. Those suits have been
consolidated for administrative purposes under the case style In re HEALTHSOUTH
Corporation 2002 Securities Litigation, Consolidated File No. CV-02-BE-2105-S.
In general, the complaints allege that, during the period January 14, 2002
through August 27, 2002, the defendants misrepresented or failed to disclose
certain material facts concerning our business and financial condition and the
impact of the changes in Medicare reimbursement for outpatient therapy services
on our operations in order to artificially inflate the price of our common
stock, and that some of the individual defendants 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.
We filed answers, motions to dismiss and motions for judgment on the
pleadings in the individual cases. On November 6, 2002, the court stayed
consideration of such motions and any other dispositive matters until a
determination of lead counsel in the consolidated cases. The court set a status
conference for January 3, 2003, and indicated that it would hear from interested
parties on the selection of lead counsel at that time. 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.
Additionally, beginning August 28, 2002, we and some of our officers
and directors (along with third parties in one case) were served with lawsuits
purporting to be derivative actions on behalf of HEALTHSOUTH. Four of such
lawsuits were filed in the Circuit Court of Jefferson County Alabama (Tucker v.
Scrushy, et al., CV-02-5212; Klein v. Chamberlin, et al., CV-02-5662; Lebovitz
v. Scrushy, et al., CV-02-6006; and Crooks v. Scrushy, et al., CV-02-6268), two
of such lawsuits were filed in the Delaware Chancery Court (Biondi v. Scrushy,
et al., C.A. No. 19896NC, and Bachand v. Scrushy, et al., C.A. No. 19968NC), and
one of such lawsuits was filed in the United States District Court for the
Northern District of Alabama (Vredenburg v. Scrushy, et al., CV-02-C-2565-S). We
have not yet been served with this last suit. While the specific allegations
vary, in general these cases involve the same allegations as are raised in the
federal cases described above and allege that
Page 26
certain of our directors and officers breached their fiduciary duties to
HEALTHSOUTH and engaged in other allegedly tortuous conduct. Because these cases
all purport to assert claims derivatively on behalf of HEALTHSOUTH, we have
established a Special Litigation Committee of our Board of Directors to
investigate the allegations made in them and determine what, if any, of the
claims asserted should appropriately be pursued on behalf of HEALTHSOUTH. We are
seeking to have the relevant courts stay further proceedings in these actions
pending the determinations of the Special Litigation Committee. Subject to the
determinations of the Special Litigation Committee, 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 AND USE OF PROCEEDS.
(c) Recent Sales of Unregistered Securities
We had no unregistered sales of equity securities during the
three months ended September 30, 2002.
Page 27
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 September 30, 2002, we filed (i)
a Current Report on Form 8-K dated August 14, 2002, furnishing
under Item 9 the text of (A) the statements under oath filed
by our principal executive officer and principal financial
officer with the SEC pursuant to SEC Order 4-460 and (B) the
certifications required by our Chief Executive Officer and
Chief Financial Officer under 18 U.S.C. ss. 1350; and (ii) a
Current Report on Form 8-K dated August 27, 2002, reporting
under Item 5 the text of a press release announcing the
provision approval by our Board of Directors for the
separation of our surgery center operations into a new public
company, certain related management changes and our current
assessment of the potential adverse impact of changes in
Medicare reimbursement for outpatient therapy services.
No other items of Part II are applicable to the Registrant for the
period covered by this Quarterly Report on Form 10-Q.
Page 28
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: November 14, 2002 WILLIAM T. OWENS
--------------------------------------
William T. Owens
President and
Chief Executive Officer
Date: November 14, 2002 MALCOLM E. McVAY
--------------------------------------
Malcolm E. McVay
Executive Vice President,
Chief Financial Officer and Treasurer
Page 29
CERTIFICATIONS
I, William T. Owens, the principal executive officer of HEALTHSOUTH Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of HEALTHSOUTH
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002.
WILLIAM T. OWENS
----------------------------
William T. Owens
President and
Chief Executive Officer
HEALTHSOUTH Corporation
Page 30
I, Malcolm E. McVay, the principal financial officer of HEALTHSOUTH Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of HEALTHSOUTH
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002.
MALCOLM E. McVAY
----------------------------
Malcolm E. McVay
Executive Vice President and
Chief Financial Officer
HEALTHSOUTH Corporation
Page 31
The undersigned, in his capacity as Chief Executive Officer of
HEALTHSOUTH Corporation (the "Company"), hereby certifies as follows with
respect to the Company's Quarterly Report on Form 10-Q for the three months
ended September 30, 2002 (the "Report"):
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934 (15 U.S.C. ss. 78m or 78o(d)); and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
This certification is given by the undersigned pursuant to 18 U.S.C.
ss. 1350.
DATED: November 14, 2002.
WILLIAM T. OWENS
----------------------------
William T. Owens
President and
Chief Executive Officer
HEALTHSOUTH Corporation
The undersigned, in his capacity as Chief Financial Officer of
HEALTHSOUTH Corporation (the "Company"), hereby certifies as follows with
respect to the Company's Quarterly Report on Form 10-Q for the three months
ended September 30, 2002 (the "Report"):
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934 (15 U.S.C. ss. 78m or 78o(d)); and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
This certification is given by the undersigned pursuant to 18 U.S.C.
ss. 1350.
DATED: November 14, 2002.
MALCOLM E. McVAY
---------------------------------
Malcolm E. McVay
Executive Vice President and
Chief Financial Officer
HEALTHSOUTH Corporation
Page 32