UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended December 31, 2009
Commission
File Number 001-10315
HealthSouth
Corporation
(Exact
Name of Registrant as Specified in its Charter)
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Delaware
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63-0860407
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(State
or Other Jurisdiction of
Incorporation
or Organization)
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(I.R.S.
Employer
Identification
No.)
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3660
Grandview Parkway, Suite 200
Birmingham,
Alabama
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35243
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(Address
of Principal Executive Offices)
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(Zip
Code)
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(205) 967-7116
(Registrant’s
telephone number)
Securities
Registered Pursuant to Section 12(b) of the Act:
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Title of each class
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Name
of each exchange
on which registered
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Common
Stock, $0.01 par value
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New
York Stock Exchange
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Securities
Registered Pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer as defined in
Rule 405 of the Securities Act.
Yes x
No ¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
¨ No x
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 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 by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files). Yes o No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer x Accelerated
filer ¨ Non-Accelerated
filer ¨
Smaller
reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). Yes ¨ No x
The
aggregate market value of common stock held by non-affiliates of the registrant
as of the last business day of the registrant’s most recently completed second
fiscal quarter was approximately $1.6 billion. For purposes of the foregoing
calculation only, executive officers and directors of the registrant have been
deemed to be affiliates. There were 93,302,876 shares of common stock of the
registrant outstanding, net of treasury shares, as of February 12,
2010.
DOCUMENTS
INCORPORATED BY REFERENCE
The
definitive proxy statement relating to the registrant’s 2010 annual meeting of
stockholders is incorporated by reference in Part III to the extent described
therein.
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This
annual report contains historical information, as well as forward-looking
statements that involve known and unknown risks and relate to future events, our
business strategy, our future financial performance, or our projected business
results. In some cases, you can identify forward-looking statements by
terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,”
“believes,” “estimates,” “predicts,” “targets,” “potential,” or “continue” or
the negative of these terms or other comparable terminology. Such
forward-looking statements are necessarily estimates based upon current
information and involve a number of risks and uncertainties, many of which are
beyond our control. Actual events or results may differ materially from the
results anticipated in these forward-looking statements as a result of a variety
of factors. Any forward-looking statement is based on information current as of
the date of this report and speaks only as of the date on which such statement
is made. While it is impossible to identify all such factors, factors that could
cause actual results to differ materially from those estimated by us include,
but are not limited to, the following:
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each
of the factors discussed in Item 1A, Risk
Factors;
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uncertainties
and factors discussed elsewhere in this Form 10-K, in our other filings
from time to time with the SEC, or in materials incorporated therein by
reference;
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changes
or delays in, or suspension of, reimbursement for our services by
governmental or private payors, including our ability to obtain and retain
favorable arrangements with third-party
payors;
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changes
in the regulations of the healthcare industry at either or both of the
federal and state levels;
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our
ability to attract and retain nurses, therapists, and other healthcare
professionals in a highly competitive environment with often severe
staffing shortages and the impact on our labor expenses from potential
union activity and staffing
shortages;
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competitive
pressures in the healthcare industry and our response to those
pressures;
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our
ability to successfully access the credit markets on favorable terms;
and
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general
conditions in the economy and capital
markets.
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The
cautionary statements referred to in this section also should be considered in
connection with any subsequent written or oral forward-looking statements that
may be issued by us or persons acting on our behalf. We undertake no duty to
update these forward-looking statements, even though our situation may change in
the future. Furthermore, we cannot guarantee future results, events, levels of
activity, performance, or achievements.
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Business
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Overview
of the Company
General
HealthSouth
Corporation was organized as a Delaware corporation in February 1984. As used in
this report, the terms “HealthSouth,” “we,” “us,” “our,” and the “Company” refer
to HealthSouth Corporation and its consolidated subsidiaries, unless otherwise
stated or indicated by context. In addition, we use the term “HealthSouth
Corporation” to refer to HealthSouth Corporation alone wherever a distinction
between HealthSouth Corporation and its subsidiaries is required or aids in the
understanding of this filing. Our principal executive offices are located at
3660 Grandview Parkway, Birmingham, Alabama 35243, and the telephone number of
our principal executive offices is (205) 967-7116. In addition to the
discussion here, we encourage you to read Item 1A, Risk Factors, Item 2, Properties, and Item 7,
Management’s Discussion and
Analysis of Financial Condition and Results of Operations, which
highlight additional considerations about HealthSouth.
We are
the nation’s largest provider of inpatient rehabilitative healthcare services in
terms of revenues, number of hospitals, and patients treated and discharged. In
order to focus on this core business and to reduce the excessive amount of debt
incurred by the Company’s previous management, we completed a strategic
repositioning in 2007 when we divested our surgery centers, outpatient, and
diagnostic divisions. For a discussion of the divestitures, see Note 18,
Assets Held for Sale and
Results of Discontinued Operations, to the accompanying consolidated
financial statements. We operate 93 inpatient rehabilitation hospitals
(including 3 joint venture hospitals which we account for using the equity
method of accounting), 6 freestanding long-term acute care hospitals (“LTCHs”),
40 outpatient rehabilitation satellites (operated by our hospitals, including
one joint venture satellite), and 25 licensed, hospital-based home health
agencies. As of December 31, 2009, our inpatient rehabilitation hospitals
and LTCHs had 6,572 licensed beds. Our inpatient rehabilitation hospitals are
located in 26 states and Puerto Rico, with a concentration of hospitals in
Texas, Pennsylvania, Florida, Tennessee, Alabama, and Arizona. For additional
detail on our hospitals and selected operating data, see the table in Item 2,
Properties, and
Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations,
“Results of Operations.” In addition to HealthSouth hospitals, we manage six
inpatient rehabilitation units through management contracts.
Our
consolidated Net operating
revenues approximated $1.9 billion, $1.8 billion, and $1.7 billion for
the years ended December 31, 2009, 2008, and 2007, respectively. For 2009,
approximately 91% of our Net
operating revenues came from inpatient services and approximately 9% came
from outpatient services and other revenue sources (see Item 7, Management’s Discussion and Analysis
of Financial Condition and Results of Operations, “Results of
Operations”). During 2009, our inpatient rehabilitation hospitals treated and
discharged almost 113,000 patients.
Our
inpatient rehabilitation hospitals offer specialized rehabilitative care across
a wide array of diagnoses and deliver comprehensive, high-quality,
cost-effective patient care services. The majority of patients we serve
experience significant physical disabilities due to medical conditions, such as
strokes, hip fractures, head injury, spinal cord injury, and neurological
disorders, that are non-discretionary in nature and which require rehabilitative
healthcare services in an inpatient setting. Our team of highly skilled
physicians, nurses, and physical, occupational, and speech therapists utilize
the latest in equipment and techniques to return patients to home and work.
Patient care is provided by nursing and therapy staff as directed by a physician
order. Internal case managers monitor each patient’s progress and provide
documentation of patient status, achievement of goals, discharge planning, and
functional outcomes. Our inpatient rehabilitation hospitals provide a
comprehensive interdisciplinary clinical approach to treatment that leads to
what we believe is a higher level of care and superior outcomes. Our LTCHs
provide medical treatment to patients with chronic diseases and/or complex
medical conditions. In order for a hospital to qualify as an LTCH, Medicare
patients discharged from the hospital in any given cost reporting year must have
an average length-of-stay in excess of 25 days.
Competitive
Strengths
As the
nation’s largest provider of inpatient rehabilitative healthcare services and
with our business focused primarily on those services, we believe we
differentiate ourselves from our competitors in the following ways:
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People. We believe our
22,000 employees, in particular our highly skilled clinical staff, share a
steadfast commitment to providing outstanding rehabilitative care to
patients across the country. Because of the value and importance we
attribute to our clinical staff, we work very hard to reduce our turnover
rates. We also undertake significant efforts to ensure our clinical and
support staff maintains the education and training necessary to provide
the highest quality rehabilitative care in a cost-effective
manner.
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Quality. Our hospitals
provide a broad base of clinical experience from which we have developed
clinical best practices and protocols. We believe these clinical best
practices and protocols help ensure the delivery of consistently
high-quality rehabilitative healthcare services across all of our
hospitals.
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Efficiency and Cost
Effectiveness. Our size helps us provide inpatient rehabilitative
healthcare services on a cost-effective basis. Specifically, because of
our large number of inpatient hospitals, we can utilize proven staffing
models and take advantage of certain supply chain efficiencies. We have
also developed a program called “TeamWorks,” which is an
operations-focused initiative using identified “best practices” to reduce
inefficiencies and improve performance across a wide spectrum of
operational areas.
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Technology. As a market
leader in inpatient rehabilitation, we have devoted substantial effort and
expertise to leveraging rehabilitative technology. For example, we have
developed an innovative therapeutic device called the “AutoAmbulator,”
which can help advance the rehabilitative process for patients who
experience difficulty walking. Technology instituted in our facilities
allows us to effectively treat patients with a wide variety of significant
physical disabilities.
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Patients
and Demographic Trends
Demographic
trends, such as population aging, will affect long-term growth in healthcare
spending. While we treat patients of all ages, most of our patients are persons
65 and older. We believe the demand for inpatient rehabilitative healthcare
services will increase as the U.S. population ages and life expectancies
increase. In addition, the number of Medicare “compliant patients” (i.e., a
patient who qualifies for inpatient rehabilitative care under Medicare rules) is
expected to grow approximately 2% per year for the foreseeable future, creating
an attractive market. We believe these market factors align with our strengths
in and focus on inpatient rehabilitative care. Unlike many of our competitors
that may offer inpatient rehabilitation as one of many secondary services,
inpatient rehabilitation is our core business.
Strategy
As a
result of the significant credit market disruptions in late 2008 and the
continuing market volatility throughout 2009, we focused our 2009 strategy
on:
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strengthening
our balance sheet by reducing our long-term debt and improving our
leverage,
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providing
high-quality, cost-effective care,
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enhancing
the operations of our inpatient rehabilitation
hospitals,
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sustaining
discharge growth and increasing market share,
and
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expanding
our inpatient rehabilitation business with disciplined
development.
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During
2009, we reduced our total debt outstanding by approximately $151 million. Our
progress improving our leverage and liquidity was confirmed when Moody’s
upgraded our corporate credit rating to B2, allowing the spread on our term loan
to be reduced by 25 basis points effective June 10, 2009. Standard and Poor’s
moved our outlook to “positive” from “stable.” In addition to our debt
reduction, we improved our overall debt
profile
by refinancing senior notes, extending a portion of our term loan, and amending
other terms of our credit agreement. On October 23, 2009, we amended our credit
agreement to, among other things:
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convert
$300 million of outstanding term loans into a new class of term loans with
an extension of the maturity to September 2015 and a 150 basis point step
up in interest rate;
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permit
future extensions of all or a portion of the term loans, revolving credit
facility, and synthetic letter of credit commitments, subject to certain
restrictions;
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permit
issuance of senior notes, both secured, on a pari passu basis with
indebtedness incurred under our credit agreement, and unsecured;
and
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make
other changes, including increasing certain baskets under the restrictive
covenants, that are more consistent with our financial
position.
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On
December 15, 2009, we completed a refinancing transaction in which we issued
$290.0 million of 8.125% Senior Notes due 2020 and tendered for and redeemed the
remaining $329.6 million of our outstanding Floating Rate Senior Notes due 2014.
The refinancing transaction reduced debt, extended debt maturities, and reduced
floating interest rate exposure.
We do not
face near-term refinancing risk. Under our term loan facility, one tranche of
$452.0 million of outstanding principal matures in 2013, and the other tranche
of $299.3 million of outstanding principal matures in 2015. The majority of our
outstanding bonds, with a principal outstanding of $500.6 million, will not
mature until 2016, with another $290.0 million not due until 2020. Our revolving
credit facility, under which no amounts were outstanding as of December 31,
2009, does not expire until 2012. For a more detailed discussion of these
transactions, our debt profile, leverage and liquidity, see Item 1A, Risk Factors; Item 7,
Management’s Discussion and
Analysis of Financial Condition and Results of Operations, “Liquidity and
Capital Resources;” Note 2, Liquidity, to the
accompanying consolidated financial statements; and Note 8, Long-term Debt, to the
accompanying consolidated financial statements.
Our
development projects during 2009 included: opening a new, 40-bed freestanding
inpatient rehabilitation hospital in Mesa, Arizona in the third quarter;
beginning construction on our new, 40-bed inpatient rehabilitation hospital in
Loudoun County, Virginia; and announcing that our joint venture with Wellmont
Health System received a certificate of public need to open a new, 25-bed
inpatient rehabilitation hospital in Bristol, Virginia, on which we will begin
construction in early 2010. We expect operations to commence in those Virginia
locations in the second and third quarters of 2010, respectively. In addition,
we acquired an inpatient rehabilitation unit in Altoona, Pennsylvania through a
newly formed joint venture and relocated its operations to one of our hospitals
and acquired a 23-bed inpatient rehabilitation unit in Little Rock, Arkansas
through an existing joint venture in which we participate.
For 2010,
we will continue to focus on providing high-quality, cost-effective care and
finding efficiencies in our cost structure at both the corporate and operational
levels. We intend to continue to strengthen our balance sheet and reduce
leverage through improved operational performance. Our growth strategy in 2010
will focus on organic growth, including increasing the bed capacity in our
hospitals and pursuing disciplined development opportunities in new markets
through, for example, strategic joint ventures and potential acquisitions of
inpatient rehabilitation hospitals or units. We believe the changes made to our
credit agreement and debt profile in the fourth quarter of 2009 provide us with
greater flexibility to execute our business plan, including the growth
component. For additional discussion of our strategy and business outlook, see
Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations,
“Executive Overview.”
Employees
As of
December 31, 2009, we employed approximately 22,000 individuals, of whom
approximately 14,000 were full-time employees. We are subject to various state
and federal laws that regulate wages, hours, benefits, and other terms and
conditions relating to employment. Except for approximately 70 employees at one
inpatient rehabilitation hospital (about 17% of that hospital’s workforce), none
of our employees are represented by a labor union. We are not aware of any
current activities to organize our employees at other hospitals. We believe our
relationship with our employees is good. Like most healthcare providers, our
labor costs are rising faster than the
general
inflation rate. In some markets, the lack of availability of nurses and other
medical support personnel has become a significant operating issue to healthcare
providers. To address this challenge, we will continue to focus on improving our
retention, recruiting, compensation programs, and productivity. The shortage of
nurses and other medical support personnel, including physical therapists, may
require us to increase utilization of more expensive temporary
personnel.
Competition
The
inpatient rehabilitation industry is highly fragmented, and we have no single,
similar direct competitor. Our inpatient rehabilitation hospitals compete
primarily with rehabilitation units, many of which are within acute care
hospitals, and skilled nursing facilities in the markets we serve. Our LTCHs
compete with other LTCHs or, in some cases, rehabilitation hospitals and skilled
nursing facilities in the markets we serve. For a list of our markets by state,
see the table in Item 2, Properties. Several smaller
privately-held companies compete with us primarily in select geographic markets
in Texas and the West. In addition, there are public companies that own
primarily LTCHs but also own a small number of inpatient rehabilitation
facilities. There is one public company that manages the operations of inpatient
rehabilitation facilities and LTCHs as part of its business model. Because of
the attractiveness of the industry, other providers of post acute-care services
may also become competitors in the future. For example, over the past few years,
the number of nursing homes marketing themselves as rehabilitation providers has
increased. The
competitive factors in any given market include the quality of care and service
provided, the treatment outcomes achieved, and the presence of physician-owned
providers. Additionally, for a discussion regarding the effects of certificate
of need requirements on competition in some states, see the
“Regulation—Certificates of Need” section below.
We rely
significantly on our ability to attract, develop, and retain nurses, therapists,
and other clinical personnel for our hospitals. We compete for these
professionals with other healthcare companies, hospitals, and potential clients
and partners. In addition, physicians and others have opened inpatient
rehabilitation hospitals in direct competition with us, particularly in states
in which a certificate of need is not required to build a hospital, which has
occasionally made it more difficult and expensive to hire the necessary
personnel for our hospitals in those markets.
Healthcare
Reform
The
healthcare industry always has been a highly regulated industry, and the
inpatient rehabilitation segment is no exception. Successful healthcare
providers are those who provide high-quality care and have the capabilities to
adapt to changes in the regulatory environment. We believe we have the necessary
capabilities – scale, infrastructure, and management – to adapt and succeed in a
highly regulated industry, and we have a proven track record of being able to do
so.
President
Obama has identified healthcare reform as a major domestic priority, and
Congress is devoting considerable effort to drafting healthcare reform
legislation. At the time of this writing, no specific healthcare reform
legislation has been adopted, but the U.S. Senate and House of Representatives
have passed healthcare reform bills. The terms of those bills differ
significantly, and we are unable to predict what form final legislation will
take, if enacted. We have been, and will continue to be, actively engaged in the
legislative process to ensure that any healthcare reform adopted promotes our
goals of high-quality, cost-effective care.
Many
issues are being discussed within the context of healthcare reform, several of
which could have an impact on our business. The three issues with the greatest
potential impact are: (1) reducing annual adjustments to Medicare payment rates,
or “market basket updates,” to providers, (2) combining, or “bundling,” acute
care hospital and post-acute Medicare reimbursement at some point in the future,
and (3) creating an Independent Medicare Advisory Board.
With
respect to future reductions to market basket updates, and as previously noted,
while no specific healthcare legislation has been adopted at this time, the
healthcare reform bills that have been passed by both the U.S. Senate and House
include reductions to market basket updates. While we cannot be certain of the
net effect of these potential market basket reductions, or if they will be
enacted, we will be working with other providers, as well as other interested
parties, to help ensure they do not compromise our ability to provide
high-quality services to the patients we serve.
The
probability of enacting a “bundled” payment system is difficult to predict at
this time. The major healthcare reform bills being contemplated currently by
Congress include provisions to examine the feasibility of bundling, including
the potential for a voluntary bundling pilot program to test and evaluate
alternative payment methodologies. We will continue to work with the acute
hospital and post-acute care provider communities on this important
issue.
There has
also been discussion of establishing an Independent Medicare Advisory Board that
would be charged with presenting proposals to Congress to reduce Medicare
expenditures upon the occurrence of Medicare expenditures exceeding a certain
level. At this point, it is difficult to determine whether an Independent
Medicare Advisory Board will be enacted into law, and, if so, how it would
function. Similar to the reform issues discussed above, we will continue to work
with other providers, as well as other parties who have a vested interest, to
help ensure they do not compromise our ability to provide high-quality services
to the patients we serve.
Sources
of Revenues
We
receive payment for patient care services from the federal government (primarily
under the Medicare program), managed care plans and private insurers, and, to a
considerably lesser degree, state governments (under their respective Medicaid
or similar programs) and directly from patients. Revenues and receivables from
Medicare are significant to our operations. In addition, we receive relatively
small payments for non-patient care activities from various sources. The
following table identifies the sources and relative mix of our revenues for the
periods stated:
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For
the Year Ended December 31,
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2009
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2008
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2007
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Medicare
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67.9%
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67.2%
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67.8%
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Medicaid
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2.1%
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2.2%
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2.0%
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Workers’
compensation
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1.6%
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2.1%
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2.3%
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Managed
care and other discount plans
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23.1%
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22.4%
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20.5%
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Other
third-party payors
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2.7%
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3.5%
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4.0%
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Patients
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1.2%
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1.0%
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1.1%
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Other
income
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1.4%
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1.6%
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2.3%
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Total
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100.0%
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100.0%
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100.0%
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Our
hospitals offer discounts from established charges to certain group purchasers
of healthcare services that are included in “Managed care and other discount
plans” in the table above, including private insurance companies, employers,
health maintenance organizations (“HMOs”), preferred provider organizations
(“PPOs”) and other managed care plans. Medicare, through its Medicare Advantage
program, offers Medicare-eligible individuals an opportunity to participate in a
managed care plan. The Medicare Advantage revenues are also included in “Managed
care and other discount plans” in the table above.
Patients
are generally not responsible for the difference between established gross
charges and amounts reimbursed for such services under Medicare, Medicaid, and
other private insurance plans, HMOs, or PPOs but are responsible to the extent
of any exclusions, deductibles, copayments, or coinsurance features of their
coverage. The amount of such exclusions, deductibles, copayments, and
coinsurance has been increasing each year. Collection of amounts due from
individuals is typically more difficult than from governmental or third-party
payors.
Medicare
Reimbursement
Medicare
is a federal program that provides certain hospital and medical insurance
benefits to persons aged 65 and over, some disabled persons, and persons with
end-stage renal disease. Medicare, through statutes and regulations, establishes
reimbursement methodologies and rates for various types of healthcare facilities
and services, and, from time to time, these methodologies and rates can be
modified by the United States Congress or the United States Centers for Medicare
and Medicaid Services (“CMS”). In some instances, these modifications can have a
substantial impact on existing healthcare providers. In accordance with Medicare
laws and statutes, CMS makes annual adjustments to Medicare payment rates in
many prospective payment systems, including the inpatient rehabilitation
facility prospective payment system (the “IRF-PPS”) under what is commonly known
as a “market basket update.” Each year, the Medicare Payment Advisory Commission
(“MedPAC”), an independent
Congressional
agency that advises Congress on issues affecting Medicare, makes payment policy
recommendations to Congress for a variety of Medicare payment systems including
the IRF-PPS. However, Congress is not obligated to adopt MedPAC recommendations,
and, based on outcomes in previous years, there can be no assurance that
Congress will adopt MedPAC’s recommendations in a given year. In the case of the
IRF-PPS, unless Congress changes the law, CMS is required to adjust the payment
rates based on a market basket index, known as the rehabilitation, psychiatric,
and long-term care hospital market basket. The market basket update is designed
to reflect changes over time in the prices of an appropriate mix of goods and
services included in covered services provided by rehabilitation hospitals and
hospital-based inpatient rehabilitation units. The market basket uses data
furnished by the Bureau of Labor Statistics for price proxy purposes, primarily
in three categories: Producer Price Indexes, Consumer Price Indexes, and
Employment Cost Indexes. The Medicare, Medicaid and State Children’s Health
Insurance Program (SCHIP) Extension Act of 2007 (the “2007 Medicare Act”)
included an elimination of the IRF-PPS market basket adjustment for the period
from April 1, 2008 through September 30, 2009 causing a reduction in the pricing
of services eligible for Medicare reimbursement to a pricing level that existed
in the third quarter of 2007, or a Medicare pricing “roll-back,” which resulted
in a decrease in actual reimbursement dollars per discharge despite increases in
costs.
On August
7, 2009, CMS published in the federal register the fiscal year 2010 notice of
final rulemaking for the IRF-PPS. This rule contains Medicare pricing changes as
well as new coverage requirements, including requirements for preadmission
screening, post-admission evaluations, and individualized treatment planning
that emphasize the role of physicians in ordering and overseeing patient care.
The pricing changes are effective for Medicare discharges between October 1,
2009 and September 30, 2010 and include a 2.5% market basket update, which
is the first market basket update we have received in 18 months. We have
analyzed the other aspects of the CMS pricing changes and believe the remaining
pricing changes will have a neutral to slightly positive impact on our Net operating revenues. In
addition, the new rules include supplemental documentation requirements,
including submission of patient assessment data on Medicare Advantage patients.
The new coverage requirements under the rule apply to discharges occurring on or
after January 1, 2010. Prior to the new rule, our clinical and business models
incorporated many of the new requirements, so these changes have not resulted in
material modifications to the way we admit or treat patients. We have undertaken
efforts to educate and train our employees on compliance with these new
requirements, including producing a comprehensive compliance guide. Although
these new requirements have only been in effect for a short time, we believe we
are in compliance with them. If we experience unexpected difficulty in complying
with the new coverage requirements, the corresponding claims for our services
may be denied in whole or in part which could have an adverse effect on our
results of operations and cash flows.
Currently,
Congress is considering legislation that includes reductions in market basket
updates to the Medicare payment rates. See the “Healthcare Reform” section
above. We cannot predict the adjustments, if any, to Medicare payment rates that
Congress or CMS may make. Congress, MedPAC, and CMS will continue to address
reimbursement rates for a variety of healthcare settings. Any downward
adjustment to rates, or another pricing roll-back, for the types of facilities
we operate could have a material adverse effect on our business, financial
position, results of operations, and cash flows.
On
January 16, 2009, CMS approved final rules that require healthcare providers to
update and supplement diagnosis and procedure codes to the International
Classification of Diseases 10th
Edition, effective October 1, 2013, and make related changes to the formats used
for certain electronic transactions, effective January 1, 2012. At this time, we
cannot predict how these changes will affect us.
A basic
summary of current Medicare reimbursement in our primary service areas
follows:
Inpatient Rehabilitation
Hospitals. Our hospitals receive Medicare reimbursements under the
IRF-PPS. As discussed above, our hospitals receive fixed payment amounts per
discharge under the IRF-PPS based on certain rehabilitation impairment
categories established by the United States Department of Health and Human
Services. With the IRF-PPS, our hospitals retain the difference, if any, between
the fixed payment from Medicare and their operating costs. Thus, our hospitals
benefit from being high-quality, cost-effective providers.
Over the
last several years, changes in regulation governing inpatient rehabilitation
reimbursement have created a challenging operating environment for inpatient
rehabilitative healthcare services. Many of these changes have resulted in
limitations on, and in some cases, reductions in, the levels of payments to
healthcare providers. For example, on May 7, 2004, CMS issued a final rule,
known as the “75% Rule,” stipulating that to qualify as an
inpatient
rehabilitation hospital under the Medicare program a facility must show that a
certain percentage of its patients are treated for at least one of a specified
and limited list of medical conditions. Under the 75% Rule, any inpatient
rehabilitation hospital that failed to meet its requirements would be subject to
prospective reclassification as an acute care hospital, with lower acute care
payment rates for rehabilitative services.
On
December 29, 2007, the 2007 Medicare Act was signed, permanently setting
the compliance threshold at 60% instead of 75% and allowing hospitals to
continue using a patient’s secondary medical conditions, or “comorbidities,” to
determine whether a patient qualifies for inpatient rehabilitative care under
the rule. The long-term impact of the freeze at the 60% compliance threshold is
positive because it allowed patient volumes to stabilize. In 2009, increased
patient volumes resulting, we believe, from both our focus on standardizing
sales and marketing efforts and the fact that more patients now have access to
our high-quality, cost-effective inpatient rehabilitative healthcare services
offset the negative impact of the pricing roll-back that expired September 30,
2009.
Although
reductions or changes in reimbursement from governmental or third-party payors
and regulatory changes affecting our business represent the most significant
challenges to our business, our operations are also affected by coverage rules
and determinations. Medicare providers like us can be negatively affected by the
adoption of coverage policies, either at the national or local level, that
determine whether an item or service is covered and under what clinical
circumstances it is considered to be reasonable, necessary, and appropriate. The
new CMS coverage rules discussed above and effective as of January 1, 2010
require inpatient rehabilitation services to be ordered by a qualified
rehabilitation physician and be coordinated by an interdisciplinary team meeting
prescribed by the rules. The interdisciplinary team must meet weekly to review
patient status and make any needed adjustments to the individualized plan of
care. Qualified personnel must provide required rehabilitation nursing, physical
therapy, occupational therapy, speech-language pathology, social services,
psychological services, and prosthetic and orthotic services. CMS has also noted
that it is considering specific standards governing the use of group therapies.
For individual claims, Medicare contractors make coverage determinations
regarding medical necessity which can represent more restrictive interpretations
of the CMS coverage rules. We cannot predict how these new CMS coverage rules or
any new local coverage determinations will affect us.
On
December 8, 2003, The Medicare Modernization Act of 2003 authorized CMS to
conduct a demonstration program known as the Medicare Recovery Audit Contractor
(“RAC”) program. This demonstration was first initiated in three states
(California, Florida, and New York) and authorizes CMS to contract with private
companies to conduct claims and medical record audits. These audits are in
addition to those conducted by existing Medicare contractors, and the contracted
RACs are paid a percentage of the overpayments recovered. On December 20,
2006, the Tax Relief & Health Care Act of 2006 directed CMS to expand the
RAC program to the rest of the country by 2010. The new RACs were announced on
October 6, 2008, and the RACs began their audit processes in late 2009 for
providers in general. Among other changes in the permanent program, the new RACs
will receive claims data directly from Medicare contractors on a monthly or
quarterly basis and are authorized to review claims up to three years from the
date a claim was paid, beginning with claims filed on or after October 1, 2007.
We have undertaken significant efforts through training and education to ensure
compliance with coding and coverage rules. These RAC audits will initially focus
on coding errors. For several years, as part of our obligations under the
corporate integrity agreement with the Office of Inspector General of the United
States Department of Health and Human Services (the “HHS-OIG”), we have obtained
independent third-party reviews of our coding accuracy. Despite our belief that
our coding of patients is accurate, these RAC audits may lead to assertions that
we have been underpaid or overpaid by Medicare in some instances, require us to
incur additional costs to respond to requests for records and defend the
validity of payments, and ultimately require us to refund any amounts determined
to have been overpaid. We cannot predict when or how this new program will
affect us.
Outpatient Services.
Our outpatient services are primarily reimbursed under the physician fee
schedule. In late 2009, Congress provided for a two-month 0% update to the
calendar year 2010 physician fee schedule effective for January 1, 2010 through
February 28, 2010. If Congress does not again act to set aside implementation of
previously adopted reductions to the physician fee schedule, the outpatient
payment formula will decrease by approximately 21% beginning March 1, 2010. We
cannot predict what, if any, action Congress will take on the physician fee
schedule, and we cannot predict how future Congressional action or inaction on
the physician fee schedule will affect us.
Long-Term Acute Care
Hospitals. LTCHs provide medical treatment to patients with chronic
diseases and/or complex medical conditions. In order for a hospital to qualify
as an LTCH, Medicare patients discharged
from the
hospital in any given cost reporting year must have an average length-of-stay in
excess of 25 days, among other requirements. LTCHs are currently reimbursed
under a prospective payment system (“LTCH-PPS”) pursuant to which Medicare
classifies patients into distinct Medicare Severity diagnosis-related groups
(“MS-LTC-DRGs”) based upon specific clinical characteristics and expected
resource needs. There are adjustments to the Medicare payments based on
high-cost outliers, short-stay outliers, and other factors. A hospital that
fails to qualify as an LTCH will be reimbursed at what is generally a lower rate
under the acute care inpatient prospective payment system.
The 2007
Medicare Act, as amended by the American Recovery and Reinvestment Act of 2009
(“ARRA”), mandates significantly expanded medical necessity reviews for LTCH
patients but provides regulatory relief to LTCHs to ensure continued access to
current long-term acute care hospital services, while also imposing a moratorium
on the development of new long-term acute care hospitals during this period. In
particular, the 2007 Medicare Act, as amended, prevented CMS from implementing
its new payment reduction provision for short-stay outlier cases and its
extension of the 25% referral limitation threshold to all LTCHs, including
freestanding LTCHs like ours, that was included in the final CMS rule for rate
year 2008. The postponement of the short-stay outlier reductions and the
referral limitation threshold as it applies to five of our six freestanding
LTCHs expires June 30, 2010, and March 31, 2011 for the other, unless Congress
acts again. See “Regulation – Hospital Within Hospital Rules” section below for
a further discussion of this rule.
On August
27, 2009, CMS published in the federal register final regulations that updated
payment rates under the LTCH-PPS for rate year 2010, which are effective for
discharges occurring on or after October 1, 2009 through September 30, 2010 and
include a 2.5% market basket update less an adjustment of 0.5% to account for
changes in documentation and coding practices. These final regulations also
included an interim final rule implementing provisions of the ARRA discussed
above and making changes to the table of MS-LTC-DRG relative weights and other
payment provisions under the LTCH-PPS. These final regulations did not
materially impact our Net
operating revenues in 2009, nor is it expected to materially impact our
2010 Net operating
revenues.
Medicaid
Reimbursement
Medicaid
is a jointly administered and funded federal and state program that provides
hospital and medical benefits to qualifying individuals who are unable to afford
healthcare. As the Medicaid program is administered by the individual states
under the oversight of CMS in accordance with certain regulatory and statutory
guidelines, there are substantial differences in reimbursement methodologies and
coverage policies from state to state. Many states have experienced shortfalls
in their Medicaid budgets and are implementing significant cuts in Medicaid
reimbursement rates. Additionally, certain states control Medicaid expenditures
through restricting or eliminating coverage of certain services. Continuing
downward pressure on Medicaid payment rates could cause a decline in that
portion of our Net operating
revenues. However, for the year ended December 31, 2009, Medicaid
payments represented only 2.1% of our consolidated Net operating
revenues.
Managed
Care and Other Discount Plans
All of
our hospitals offer discounts from established charges to certain large group
purchasers of healthcare services, including Medicare Advantage, managed care
plans, private insurance companies, and third-party administrators. For further
discussion of Medicare Advantage, or “managed” Medicare, see Item 7, Management’s Discussion and Analysis
of Financial Condition and Results of Operations, “Results of
Operations.” Managed care contracts typically have terms of between one and
three years, although we have a number of managed care contracts that
automatically renew each year (with pre-defined rate increases) unless a party
elects to terminate the contract. While some of our contracts provide for annual
rate increases of three to five percent, we cannot provide any assurance we will
continue to receive increases. Our managed care staff focuses on establishing
and re-negotiating contracts that provide equitable reimbursement for the
services provided.
Cost
Reports
Because
of our participation in Medicare, Medicaid, and certain BCBS plans, we are
required to meet certain financial reporting requirements. Federal and, where
applicable, state regulations require the submission of annual cost reports
covering the revenue, costs, and expenses associated with the services provided
by our inpatient hospitals to Medicare beneficiaries and Medicaid
recipients.
Annual
cost reports required under the Medicare and Medicaid programs are subject to
routine audits, which may result in adjustments to the amounts ultimately
determined to be due HealthSouth under these reimbursement programs. These
audits are used for determining if any under- or over-payments were made to
these programs and to set payment levels for future years. The majority of our
revenues are derived from prospective payment system payments, and even if we
amend previously filed cost reports we do not expect the impact of those
amendments to materially affect our results of operations.
Regulation
The
healthcare industry in general is subject to significant federal, state, and
local regulation that affects our business activities by controlling the
reimbursement we receive for services provided, requiring licensure or
certification of our hospitals, regulating our relationships with physicians and
other referral sources, regulating the use of our properties, and controlling
our growth.
Most of
our facilities provide the medical, nursing, therapy, and ancillary services
required to comply with local, state, and federal regulations, as well as
accreditation standards of the Joint Commission (formerly known as the Joint
Commission on Accreditation of Healthcare Organizations) and, for some
facilities, the Commission on Accreditation of Rehabilitation
Facilities.
We
maintain a comprehensive compliance program that is designed to meet or exceed
applicable federal guidelines and industry standards. The program is intended to
monitor and raise awareness of various regulatory issues among employees and to
emphasize the importance of complying with governmental laws and regulations. As
part of the compliance program, we provide annual compliance training to our
employees and encourage all employees to report any violations to their
supervisor, or a toll-free telephone hotline.
Licensure
and Certification
Healthcare
facility construction and operation are subject to numerous federal, state, and
local regulations relating to the adequacy of medical care, equipment,
personnel, operating policies and procedures, acquisition and dispensing of
pharmaceuticals and controlled substances, maintenance of adequate records, fire
prevention, and compliance with building codes and environmental protection
laws. Our hospitals are subject to periodic inspection by governmental and
non-governmental certification authorities to ensure continued compliance with
the various standards necessary for facility licensure. All of our inpatient
hospitals are currently required to be licensed.
In
addition, hospitals must be “certified” by CMS to participate in the Medicare
program and generally must be certified by Medicaid state agencies to
participate in Medicaid programs. All of our inpatient hospitals participate in
(or are awaiting the assignment of a provider number to participate in) the
Medicare program. Our Medicare-certified hospitals undergo periodic on-site
surveys in order to maintain their certification.
Failure
to comply with applicable certification requirements may make our hospitals
ineligible for Medicare or Medicaid reimbursement. In addition, Medicare or
Medicaid may seek retroactive reimbursement from noncompliant facilities or
otherwise impose sanctions on noncompliant facilities. Non-governmental payors
often have the right to terminate provider contracts if a facility loses its
Medicare or Medicaid certification. We have developed operational systems to
oversee compliance with the various standards and requirements of the Medicare
program and have established ongoing quality assurance activities; however,
given the complex nature of governmental healthcare regulations, there can be no
assurance that Medicare, Medicaid, or other regulatory authorities will not
allege instances of noncompliance.
Certificates
of Need
In some
states where we operate, the construction or expansion of facilities, the
acquisition of existing facilities, or the introduction of new beds or services
may be subject to review by and prior approval of state regulatory agencies
under a “certificate of need” or “CON” law. As of December 31, 2009,
approximately 47% of our licensed beds are located in states that have CON laws.
CON laws often require a reviewing agency to determine the public need for
additional or expanded healthcare facilities and services. These laws generally
require approvals for capital expenditures involving inpatient rehabilitation
hospitals and LTCHs, if such capital expenditures exceed certain thresholds. In
addition, CON laws in some states require us to abide by certain charity
commitments as a
condition
for approving a certificate of need. Any time a certificate of need is required,
we must obtain it before acquiring, opening, reclassifying, or expanding a
healthcare facility or starting a new healthcare program.
We
potentially face opposition any time we initiate a certificate of need project
or seek to acquire an existing facility or certificate of need. This opposition
may arise either from competing national or regional companies or from local
hospitals or other providers which file competing applications or oppose the
proposed CON project. Opposition to our applications may delay or prevent our
future addition of beds or hospitals in given markets. The necessity for these
approvals serves as a barrier to entry and has the potential to limit
competition, including in markets where we hold a CON and a competitor is
seeking an approval. We have generally been successful in obtaining CONs or
similar approvals when required, although there can be no assurance we will
achieve similar success in the future.
False
Claims
The
federal False Claims Act prohibits the knowing presentation of a false claim to
the United States government, and provides for penalties equal to three times
the actual amount of any overpayments plus up to $11,000 per claim. In addition,
the False Claims Act allows private persons, known as “relators,” to file
complaints under seal and provides a period of time for the government to
investigate such complaints and determine whether to intervene in them and take
over the handling of all or part of such complaints. Because we perform
thousands of similar procedures a year for which we are reimbursed by Medicare
and other federal payors and there is a relatively long statute of limitations,
a billing error or cost reporting error could result in significant civil or
criminal penalties under the False Claims Act. Many states have also adopted
similar laws relating to state government payments for healthcare services. For
additional discussion, see Note 23, Contingencies and Other
Commitments, to the accompanying consolidated financial
statements.
Relationships
with Physicians and Other Providers
Anti-Kickback Law.
Various state and federal laws regulate relationships between providers of
healthcare services, including management or service contracts and investment
relationships. Among the most important of these restrictions is a federal
criminal law prohibiting the offer, payment, solicitation, or receipt of
remuneration by individuals or entities to induce referrals of patients for
services reimbursed under the Medicare or Medicaid programs (the “Anti-Kickback
Law”). In addition to federal criminal sanctions, including penalties of up to
$50,000 for each violation plus tripled damages for improper claims, violators
of the Anti-Kickback Law may be subject to exclusion from the Medicare and/or
Medicaid programs. In 1991, the HHS-OIG issued regulations describing
compensation arrangements that are not viewed as illegal remuneration under the
Anti-Kickback Law. Those regulations provide for certain safe harbors for
identified types of compensation arrangements that, if fully complied with,
assure participants in the particular arrangement that the HHS-OIG will not
treat that participation as a criminal offense under the Anti-Kickback Law or as
the basis for an exclusion from the Medicare and Medicaid programs or the
imposition of civil sanctions. Failure to fall within a safe harbor does not
constitute a violation of the Anti-Kickback Law, but the HHS-OIG has indicated
failure to fall within a safe harbor may subject an arrangement to increased
scrutiny. A violation, or even the assertion of, a violation of the
Anti-Kickback Law by us or one or more of our partnerships could have a material
adverse effect upon our business, financial position, results of operations, or
cash flows.
Some of
our rehabilitation hospitals are owned through joint ventures with institutional
healthcare providers that may be in a position to make or influence referrals to
our hospitals. In addition, we have a number of relationships with physicians
and other healthcare providers, including management or service contracts. Even
though some of these investment relationships and contractual relationships may
not meet all of the regulatory requirements to fall within the protection
offered by a relevant safe harbor, we do not believe we engage in activities
that violate the Anti-Kickback Law. However, there can be no assurance such
violations may not be asserted in the future, nor can there be any assurance
that our defense against any such assertion would be successful.
For
example, we have entered into agreements to manage many of our hospitals that
are owned by partnerships. Most of these agreements incorporate a
percentage-based management fee. Although there is a safe harbor for personal
services and management contracts, this safe harbor requires, among other
things, the aggregate compensation paid to the manager over the term of the
agreement be set in advance. Because our management fee may be based on a
percentage of revenues, the fee arrangement may not meet this requirement.
However, we believe
our
management arrangements satisfy the other requirements of the safe harbor for
personal services and management contracts and comply with the Anti-Kickback
Law.
Physician Self-Referral
Law. The federal law commonly known as the “Stark law” and CMS
regulations promulgated under the Stark law prohibit physicians from making
referrals for “designated health services” including inpatient and outpatient
hospital services, physical therapy, occupational therapy, or radiology
services, to an entity in which the physician (or an immediate family member)
has an investment interest or other financial relationship, subject to certain
exceptions. The Stark law also prohibits those entities from filing claims or
billing for those referred services. Violators of the Stark statute and
regulations may be subject to recoupments, civil monetary sanctions (up to
$15,000 for each violation and assessments equal to three times the value of
each prohibited service) and exclusion from any federal, state, or other
governmental healthcare programs. The statute also provides a penalty of up to
$100,000 for a circumvention scheme. There are statutory exceptions to the Stark
law for many of the customary financial arrangements between physicians and
providers, including personal services contracts and leases. However, in order
to be afforded protection by a Stark law exception, the financial arrangement
must comply with every requirement of the applicable exception.
CMS has
issued several phases of final regulations implementing the Stark law. While
these regulations help clarify the requirements of the exceptions to the Stark
law, it is unclear how the government will interpret many of these exceptions
for enforcement purposes. Recent changes to the regulations implementing the
Stark law further restrict the types of arrangements that facilities and
physicians may enter, including additional restrictions on certain leases,
percentage compensation arrangements, and agreements under which a hospital
purchases services “under arrangements.” We may be required to restructure or
unwind some of our arrangements because of these changes. Because many of these
laws and their implementing regulations are relatively new, we do not always
have the benefit of significant regulatory or judicial interpretation of these
laws and regulations. We attempt to structure our relationships to meet an
exception to the Stark law, but the regulations implementing the exceptions are
detailed and complex. Accordingly, we cannot assure that every relationship
complies fully with the Stark law.
Additionally,
no assurances can be given that any agency charged with enforcement of the Stark
law and regulations might not assert a violation under the Stark law, nor can
there be any assurance that our defense against any such assertion would be
successful or that new federal or state laws governing physician relationships,
or new interpretations of existing laws governing such relationships, might not
adversely affect relationships we have established with physicians or result in
the imposition of penalties on us or on particular HealthSouth hospitals. Even
the assertion of a violation could have a material adverse effect upon our
business, financial position, results of operations or cash flows.
HIPAA
The
Health Insurance Portability and Accountability Act of 1996, commonly known as
“HIPAA,” broadened the scope of certain fraud and abuse laws by adding several
criminal provisions for healthcare fraud offenses that apply to all health
benefit programs. HIPAA also added a prohibition against incentives intended to
influence decisions by Medicare beneficiaries as to the provider from which they
will receive services. In addition, HIPAA created new enforcement mechanisms to
combat fraud and abuse, including the Medicare Integrity Program, and an
incentive program under which individuals can receive up to $1,000 for providing
information on Medicare fraud and abuse that leads to the recovery of at least
$100 of Medicare funds. Penalties for violations of HIPAA include civil and
criminal monetary penalties.
HIPAA and
related HHS regulations contain certain administrative simplification provisions
that require the use of uniform electronic data transmission standards for
certain healthcare claims and payment transactions submitted or received
electronically. HIPAA regulations also regulate the use and disclosure of
individually identifiable health-related information, whether communicated
electronically, on paper, or orally. The regulations provide patients with
significant rights related to understanding and controlling how their health
information is used or disclosed and require healthcare providers to implement
administrative, physical, and technical practices to protect the security of
individually identifiable health information that is maintained or transmitted
electronically.
With the
enactment of the Health Information Technology for Economic and Clinical Health
(“HITECH”) Act as part of the ARRA, the privacy and security requirements of
HIPAA have been modified and expanded. The HITECH Act applies certain of the
HIPAA privacy and security requirements directly to business associates
of
covered
entities. The modifications to existing HIPAA requirements include: expanded
accounting requirements for electronic health records, tighter restrictions on
marketing and fundraising, and heightened penalties and enforcement associated
with noncompliance. Significantly, the HITECH Act also establishes new mandatory
federal requirements for notification of breaches of security involving
protected health information. HHS is responsible for enforcing the requirement
that covered entities notify individuals whose protected health information has
been improperly disclosed. In certain cases, notice of a breach is required to
be made to HHS and media outlets. The heightened penalties for noncompliance
range from $100 to $50,000 for single incidents to $25,000 to $1,500,000 for
multiple identical violations. In the event of violations due to willful neglect
that are not corrected within 30 days, penalties are not subject to a statutory
maximum.
In
addition, there are numerous legislative and regulatory initiatives at the
federal and state levels addressing patient privacy concerns. Facilities will
continue to remain subject to any federal or state privacy-related laws that are
more restrictive than the privacy regulations issued under HIPAA. These laws
vary and could impose additional penalties. Any actual or perceived violation of
these privacy-related laws, including HIPAA could have a material adverse effect
on our business, financial position, results of operations, and cash
flows.
Hospital
Within Hospital Rules
CMS has
enacted multiple regulations governing “hospital within hospital” arrangements
for inpatient rehabilitation hospitals and LTCHs. These regulations provide,
among other things, that if a long-term acute care “hospital within hospital”
has Medicare admissions from its host hospital that exceed a threshold of 25%
(or an adjusted percentage for certain rural or Metropolitan Statistical Area
dominant hospitals) of its Medicare discharges for its cost-reporting period,
the LTCH will receive an adjusted payment for its Medicare patients of the
lesser of (1) the otherwise full payment under the LTCH-PPS or (2) a
comparable payment that Medicare would pay under the acute care inpatient
prospective payment system. In determining whether an LTCH meets the 25%
threshold criterion, patients transferred from the host hospital that have
already qualified for outlier payments at that acute host would not count as
part of the host hospital’s allowable percentage. Cases admitted from the host
hospital before the LTCH crosses the 25% threshold will be paid under the
LTCH-PPS. Additionally, other excluded hospitals or units of a host hospital,
such as inpatient rehabilitation facilities and/or units, must meet certain
“hospital within hospital” requirements in order to maintain their excluded
status and not be subject to the acute care inpatient prospective payment
system.
On July
1, 2007, CMS regulations extended the 25% referral limitation applicable to
“hospital within hospital” locations to freestanding, satellite, and
grandfathered LTCHs. All of our LTCHs are freestanding. The 2007 Medicare Act
and the ARRA adopted in February 2009, together, modified and delayed
implementation of this extension of the rule and certain other portions of the
“hospital within hospital” rules applicable to cost report periods through June
30, 2010 for five of our six LTCHs and March 31, 2011 for the other. These
regulations did not materially impact our Net operating revenues in
2009. However, if Congress does not act to delay the implementation further this
year, these new program policies may materially impact our Net operating revenues in the
future. If postponed again this year, we cannot predict when or how these new
program policies will affect us in the future.
Available
Information
Our
website address is www.healthsouth.com.
We make available through our website the following documents, free of charge:
our annual reports (Form 10-K), our quarterly reports (Form 10-Q), our current
reports (Form 8-K), and any amendments we file or furnish with respect to any
such reports promptly after we electronically file such material with, or
furnish it to, the United States Securities and Exchange Commission. In addition
to the information that is available on our website, you may read and copy any
materials we file with or furnish to the SEC at the SEC’s Public Reference Room
at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC also maintains a website, www.sec.gov, which
includes reports, proxy and information statements, and other information
regarding us and other issuers that file electronically with the
SEC.
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Risk
Factors
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Our
business, operations, and financial position are subject to various risks. Some
of these risks are described below, and you should take such risks into account
in evaluating HealthSouth or any investment decision involving HealthSouth. This
section does not describe all risks that may be applicable to us, our industry,
or our business, and it is intended only as a summary of certain material risk
factors. More detailed information concerning other risk factors as well as
those described below is contained in other sections of this annual
report.
Reductions
or changes in reimbursement from government or third-party payors and other
legislative and regulatory changes affecting our industry could adversely affect
our operating results.
We derive
a substantial portion of our Net operating revenues from
the Medicare program. See Item 1, Business, “Sources of
Revenues,” for a table identifying the sources and relative payor mix of our
revenues. Historically, Congress and some state legislatures have periodically
proposed significant changes in regulations governing the healthcare system.
Many of these changes have resulted in limitations on and, in some cases,
significant reductions in the levels of payments to healthcare providers for
services under many government reimbursement programs. For the period from April
1, 2008 through September 30, 2009, the 2007 Medicare Act reduced the Medicare
reimbursement levels for inpatient rehabilitation hospitals to the levels
existing in the third quarter of 2007. The Centers for Medicare and Medicaid
Services (“CMS”) updated the fiscal year 2010 Medicare reimbursement rates for
inpatient rehabilitation facilities with a 2.5% market basket increase effective
October 1, 2009. However, there can be no assurance that future governmental
initiatives will not result in additional pricing roll-backs or freezes, either
generally or specifically targeted at the 2010 market basket
increase.
At the
time of this writing, the U.S. Senate and House of Representatives have passed
healthcare reform bills that differ significantly from each other. Both bills,
however, attempt to address the issues of increasing access to and affordability
of healthcare, increasing effectiveness of care, reducing inefficiencies and
costs, emphasizing preventive care, and enhancing the fiscal sustainability of
the federal healthcare programs. Several of the provisions of the bills could
have an impact on our business. We believe the three issues with the greatest
potential impact are: (1) reducing annual market basket updates to providers,
(2) combining, or “bundling,” of acute care hospital and post-acute Medicare
reimbursement at some point in the future, and (3) creating an Independent
Medicare Advisory Board.
Some
states in which we operate have also undertaken, or are considering, healthcare
reform initiatives that address similar issues. Currently, the matter of
healthcare reform continues to be debated by lawmakers, and we are unable to
provide guidance on what any final legislation will be. While many of the stated
goals of the reform initiatives are consistent with our own goal to provide care
that is high-quality and cost-effective, new legislation and regulatory
proposals may lower reimbursements, increase the cost of compliance, and
adversely affect our business. We cannot predict what healthcare initiatives, if
any, will be enacted and implemented, or the effect any future legislation or
regulation will have on us.
If we are
not able to maintain increased case volumes to offset any future pricing
roll-back or freeze or increased costs associated with new regulatory compliance
obligations, our operating results could be adversely affected. Our results
could be further adversely affected by other changes in laws or regulations
governing the Medicare program, as well as possible changes to or expansion of
the audit processes conducted by Medicare contractors or Medicare recovery audit
contractors. For additional discussion of healthcare reform and other factors
affecting reimbursement for our services, see Item 1, Business, “Healthcare Reform”
and “Sources of Revenues—Medicare Reimbursement.”
In
addition, there are increasing pressures from many third-party payors to control
healthcare costs and to reduce or limit increases in reimbursement rates for
medical services. Our relationships with managed care and non-governmental
third-party payors, such as health maintenance organizations and preferred
provider organizations, are generally governed by negotiated agreements. These
agreements set forth the amounts we are entitled to receive for our services. We
could be adversely affected in some of the markets where we operate if we are
unable to negotiate and maintain favorable agreements with third-party
payors.
Additionally,
our third-party payors may, from time to time, request audits of the amounts
paid, or to be paid, to us under our agreements with them. We could be adversely
affected in some of the markets where we
operate
if the auditing payor alleges that substantial overpayments were made to us due
to coding errors or lack of documentation to support medical necessity
determinations.
The
adoption of more restrictive Medicare coverage policies at the national or local
levels could have an adverse impact on our ability to obtain Medicare
reimbursement for inpatient rehabilitation services.
Medicare
providers also can be negatively affected by the adoption of coverage policies,
either at the national or local levels, describing whether an item or service is
covered and under what clinical circumstances it is considered to be reasonable,
necessary, and appropriate. In the absence of a national coverage determination,
Medicare contractors may specify more restrictive criteria than otherwise would
apply nationally. The Centers for Medicare and Medicaid Services is implementing
new inpatient rehabilitation hospital coverage criteria effective January 1,
2010 that will require existing local coverage policies to be updated for each
Medicare contractor. We cannot predict how the adoption of modified local
coverage determinations or other policies will affect us. For a discussion of
the new inpatient rehabilitation hospital coverage criteria effective January 1,
2010, see Item 1, Business, “Sources of
Revenue—Medicare Reimbursement—Inpatient Rehabilitation Services.”
Competition
for staffing, shortages of qualified personnel, and union activity may increase
our labor costs and reduce profitability.
Our
operations are dependent on the efforts, abilities, and experience of our
management and medical support personnel, such as physical therapists, nurses,
and other healthcare professionals. We compete with other healthcare providers
in recruiting and retaining qualified management and support personnel
responsible for the daily operations of each of our hospitals. In some markets,
the lack of availability of physical therapists, nurses, and other medical
support personnel has become a significant operating issue to healthcare
providers. This shortage may require us to continue to enhance wages and
benefits to recruit and retain qualified personnel or to hire more expensive
temporary personnel. We also depend on the available labor pool of semi-skilled
and unskilled employees in each of the markets in which we operate.
If our
labor costs increase, we may not be able to raise rates to offset these
increased costs. Because a significant percentage of our revenues consists of
fixed, prospective payments, our ability to pass along increased labor costs is
limited. Union activity is another factor that contributes to increased labor
costs. Various federal legislative proposals, including the proposed Employee
Free Choice Act or “card check” bill, would likely result in increased union
activity in general. We cannot, however, predict the form or effect of final
legislation, if any, that might promote union activity. Our failure to recruit
and retain qualified management, physical therapists, nurses, and other medical
support personnel, or to control our labor costs, could have a material adverse
effect on our business, financial position, results of operations, and cash
flows.
If
we fail to comply with the extensive laws and government regulations applicable
to healthcare providers, we could suffer penalties or be required to make
significant changes to our operations.
As a
healthcare provider, we are required to comply with extensive and complex laws
and regulations at the federal, state, and local government levels. These laws
and regulations relate to, among other things:
|
•
|
licensure,
certification, and accreditation,
|
|
•
|
coding
and billing for services,
|
|
•
|
requirements
of the 60% compliance threshold under the 2007 Medicare
Act,
|
|
•
|
relationships
with physicians and other referral sources, including physician
self-referral and anti-kickback
laws,
|
|
•
|
quality
of medical care,
|
|
•
|
use
and maintenance of medical supplies and
equipment,
|
|
•
|
maintenance
and security of medical records,
|
|
•
|
acquisition
and dispensing of pharmaceuticals and controlled substances,
and
|
|
•
|
disposal
of medical and hazardous waste.
|
In the
future, changes in these laws and regulations could subject our current or past
practices to allegations of impropriety or illegality or could require us to
make changes in our investment structure, hospitals, equipment, personnel,
services, capital expenditure programs, operating procedures, and contractual
arrangements.
Although
we have invested substantial time, effort, and expense in implementing internal
controls and procedures designed to ensure regulatory compliance, if we fail to
comply with applicable laws and regulations, we could be subjected to
liabilities, including (1) criminal penalties, (2) civil penalties, including
monetary penalties and the loss of our licenses to operate one or more of our
hospitals, and (3) exclusion or suspension of one or more of our hospitals from
participation in the Medicare, Medicaid, and other federal and state healthcare
programs. Substantial damages and other remedies assessed against us could have
a material adverse effect on our business, financial position, results of
operations, and cash flows.
Our
hospitals face national, regional, and local competition for patients from other
healthcare providers.
We
operate in a highly competitive industry. Although we are the nation’s largest
provider of inpatient rehabilitative healthcare services, in any particular
market we may encounter competition from local or national entities with longer
operating histories or other competitive advantages. There can be no assurance
that this competition, or other competition which we may encounter in the
future, will not adversely affect our business, financial position, results of
operations, or cash flows. In addition, weakening certificate of need laws in
some states could potentially increase competition in those states.
We
may have difficulty completing acquisitions, investments, or joint ventures
consistent with our growth strategy, or we may make investments or acquisitions
or enter into joint ventures that may be unsuccessful and could expose us to
unforeseen liabilities.
We intend
to selectively pursue strategic acquisitions of, investments in, and joint
ventures with rehabilitative healthcare providers and, in the longer term, with
other complementary post-acute healthcare operations. Acquisitions may involve
material cash expenditures, debt incurrence, additional operating losses,
amortization of certain intangible assets of acquired companies, dilutive
issuances of equity securities, and expenses that could affect our business,
financial position, results of operations and liquidity. Acquisitions,
investments, and joint ventures involve numerous risks, including:
|
•
|
limitations,
including competition to make acquisitions in certain markets, on our
ability to identify acquisitions that meet our target
criteria,
|
|
•
|
limitations,
including CMS and other regulatory approval requirements, on our ability
to complete such acquisitions on reasonable terms and
valuations,
|
|
•
|
limitations
in obtaining financing for acquisitions at a reasonable
cost,
|
|
•
|
difficulties
integrating acquired operations, personnel, and information systems, and
in realizing projected efficiencies and cost
savings,
|
|
•
|
entry
into markets in which we may have limited or no experience,
and
|
|
•
|
exposure
to undisclosed or unforeseen liabilities of acquired operations, including
liabilities for failure to comply with healthcare
laws.
|
We remain a defendant in a number of lawsuits, and may be subject to liability under qui tam cases, the outcome of which could have a material adverse effect on us.
Although
we have settled the major litigation pending against us, we remain a defendant
in a number of lawsuits, and the material lawsuits are discussed in Note 23,
Contingencies and Other
Commitments, to the accompanying consolidated financial statements.
Substantial damages and other remedies assessed against us could have a material
adverse effect on our business, financial position, results of operations, and
cash flows.
Our
indebtedness may impair our financial condition and prevent us from fulfilling
our obligations under our credit agreement and the indentures governing our
senior notes.
As of
December 31, 2009, we had approximately $1.6 billion of long-term debt
outstanding (including that portion of long-term debt classified as current and
excluding $101.3 million in capital leases). See Note 8, Long-term Debt, to the
accompanying consolidated financial statements. We are required to use a
substantial portion of our cash flow to service our debt. Our indebtedness could
have important consequences, including reducing availability of our cash flow to
fund working capital, capital expenditures, acquisitions, and certain other
general corporate purposes. It could also make us more vulnerable to adverse
changes in general economic, industry and competitive conditions, in government
regulation, and in our business by limiting our flexibility in planning for, and
making it more difficult for us to react quickly to, changing
conditions.
Our
credit agreement and the indentures governing our senior notes contain various
covenants. For additional discussion of our material debt covenants, see Note 8,
Long-term Debt, to the
accompanying consolidated financial statements. If we anticipated a potential
covenant violation, we would seek relief from our lenders and note holders,
which would have some cost to us, and such relief might not be on terms
favorable to those in our existing debt. A default due to violation of the
covenants contained within our credit agreement or senior note indentures could,
if not cured, require us to immediately repay all amounts then outstanding under
those debt instruments, together with accrued interest. If we were unable to pay
such amounts, the lenders under our credit agreement could proceed against the
collateral pledged to them. We have pledged substantially all of our assets to
the lenders under our credit agreement. See Note 8, Long-term Debt, to the
accompanying consolidated financial statements, and Item 2, Properties.
In
addition, our credit agreement requires us to satisfy specified financial
covenants. See Note 8, Long-term Debt, to the
accompanying consolidated financial statements. Events beyond our control,
including changes in general economic and business conditions, may affect our
ability to satisfy the financial covenants. Although we remained in compliance
with the financial covenants as of December 31, 2009, there can be no assurance
we will continue to be. A severe downturn in earnings or a rapid increase in
interest rates could impair our ability to comply with the financial covenants
contained in our credit agreement.
We are
also subject to numerous contingent liabilities, to prevailing economic
conditions, and to financial, business, and other factors beyond our control.
Although we expect to make scheduled interest payments and principal reductions,
we cannot assure you that changes in our business or other factors will not
occur that may have the effect of preventing us from satisfying obligations
under our debt agreements. Subject to specified limitations, our senior note
indentures and our credit agreement permit us and our subsidiaries to incur
material additional debt. If new debt is added to our current debt levels, the
risks described above could intensify.
Uncertainty
in the global credit markets could adversely affect our ability to carry out our
deleveraging and development objectives.
The
global credit markets experienced significant disruptions in 2008, and economic
conditions remained volatile throughout 2009, resulting in very sensitive credit
markets. Future market shocks could result in reductions in the availability of
certain types of debt financing, including access to revolving lines of credit.
Future business needs combined with market conditions at the time may cause us
to seek alternative sources of potentially less attractive financing and may
require us to adjust our business plan accordingly. A return to recent tight
credit markets would make additional financing more expensive and difficult to
obtain. The inability to obtain additional financing on favorable terms could
have a material adverse effect on our financial condition.
As a
result of credit market uncertainty, we also face potential exposure to
counterparties who may be unable to adequately service our needs, including the
ability of the lenders under our credit agreement to provide
liquidity
when needed. We monitor the financial strength of our depositories, creditors,
derivative counterparties, and insurance carriers using publicly available
information, as well as qualitative service experience inputs. We are generally
confident we will have access to our revolving credit facility.
We do not
face near-term refinancing risk. Less than $63 million of our long-term debt is
due before 2013. See Note 8, Long-term Debt, to the
accompanying consolidated financial statements. Under our term loan facility,
one tranche of $452.0 million of outstanding principal matures in 2013, and the
other outstanding tranche of $299.3 million of outstanding principal matures in
2015. The majority of our outstanding bonds will not mature until 2016, with
another $290.0 million not due until 2020. Our revolving credit facility, under
which no amounts were outstanding as of December 31, 2009, does not expire until
2012.
We
may not be able to fully utilize our federal net operating loss
carryforwards.
As of December 31, 2009, we had net
operating loss carryforwards (“NOLs”) of approximately $1.9 billion. These NOLs
may be used to offset future taxable income and thereby reduce our federal
income taxes otherwise payable. While we believe we will be able to use these
tax benefits before they expire over a period of twenty years, there can be no
assurance that in the future we will have sufficient taxable income to do so.
For further discussion of our NOLs, including the valuation allowance for them,
see Note 19, Income
Taxes, to the accompanying consolidated financial
statements.
Section
382 of the Internal Revenue Code imposes an annual limit on the ability of a
corporation that undergoes an “ownership change” to use its NOLs to reduce its
tax liability. An “ownership change” is generally defined as any change in
ownership of more than 50% by major holders of a corporation’s stock over a
three-year period. It is possible that future transactions, not all of which
would be under the Company’s control, could cause us to undergo an ownership
change as defined in Section 382. In that event, we would not be able to use our
pre-ownership-change NOLs in excess of the limitation imposed by Section 382. At
this time, we do not believe these limitations will affect our ability to use
any NOLs before they expire. However, no such assurances can be provided. If we
are unable to fully utilize our NOLs to offset taxable income generated in the
future, our results of operations and cash flows could be materially and
negatively impacted.
If
we fail to comply with our Corporate Integrity Agreement, or if the HHS-OIG
determines we have violated federal laws governing kickbacks, false claims and
self-referrals, we could be subject to severe sanctions, including substantial
civil money penalties.
In
December 2004, we entered into a Corporate Integrity Agreement (the “CIA”) with
the Office of Inspector General of the United States Department of Health and
Human Services (the “HHS-OIG”) to promote our compliance with the requirements
of Medicare, Medicaid, and all other federal healthcare programs. We have also
entered into two addenda to this agreement. The CIA expired at the end of 2009,
subject to the HHS-OIG accepting and approving our annual report for 2009 that
we intend to submit in the first half of 2010. Under the agreement and addenda,
we are subject to certain administrative requirements and are subject to review
of certain Medicare cost reports and reimbursement claims by an Independent
Review Organization (see Note 22, Settlements, to the
accompanying consolidated financial statements).
We
believe we have complied with the requirements of the CIA on a timely basis, and
to date, there are no objections or unresolved comments from the HHS-OIG
relating to our annual reports. However, failure to meet our obligations under
the CIA could result in stipulated financial penalties or extension of the term
of the CIA. A determination by the HHS-OIG that we failed to comply with the
material terms of the CIA could lead to exclusion from further participation in
federal healthcare programs, including Medicare and Medicaid, which currently
account for a substantial portion of our revenues. Further, if the HHS-OIG
determines we have violated the anti-kickback laws, the False Claims Act, or the
federal Stark statute’s general prohibition on physician self-referrals, we may
be subject to significant civil monetary penalties and may be excluded from
further participation in federal healthcare programs. Any of these sanctions
would have a material adverse effect on our business, financial position,
results of operations, and cash flows.
|
Unresolved
Staff Comments
|
None.
Item 2. Properties
We
maintain our principal executive office at 3660 Grandview Parkway, Birmingham,
Alabama. We occupy those office premises under a long-term lease which expires
in 2018 and includes options for us, at our discretion, to renew the lease for
up to ten years in total beyond that date.
In
addition to our principal executive office, as of December 31, 2009, we
leased or owned through various consolidated entities 137 business locations to
support our operations. Our hospital leases, which represent the largest portion
of our rent expense, have average initial terms of 15 to 20 years. Most of our
leases contain one or more options to extend the lease period for up to five
additional years for each option. Our consolidated entities are generally
responsible for property taxes, property and casualty insurance, and routine
maintenance expenses, particularly in our leased hospitals. Other than our
principal executive offices, none of our other properties is materially
important.
18
The
following table sets forth information regarding our hospital properties as of
December 31, 2009:
|
|
Number
of Hospitals
|
||||||||
|
State
|
Licensed
Beds
|
Owned
|
Leased
|
Total
|
|||||
|
Alabama
*
|
371
|
|
1
|
5
|
|
6
|
|||
|
Arizona
|
315
|
|
1
|
5
|
|
6
|
|||
|
Arkansas
|
207
|
|
1
|
3
|
|
4
|
|||
|
California
|
108
|
|
1
|
1
|
|
2
|
|||
|
Colorado
|
64
|
|
-
|
1
|
|
1
|
|||
|
Florida
*
|
793
|
|
6
|
4
|
|
10
|
|||
|
Illinois
*
|
50
|
|
-
|
1
|
|
1
|
|||
|
Indiana
|
80
|
|
-
|
1
|
|
1
|
|||
|
Kansas
|
224
|
|
1
|
2
|
|
3
|
|||
|
Kentucky
*
|
80
|
|
-
|
2
|
|
2
|
|||
|
Louisiana
|
217
|
|
3
|
-
|
|
3
|
(1)
|
||
|
Maine
*
|
100
|
|
-
|
1
|
|
1
|
|||
|
Maryland
*
|
54
|
|
1
|
-
|
|
1
|
|||
|
Massachusetts
*
|
53
|
|
1
|
1
|
|
2
|
|||
|
Missouri
*
|
140
|
|
-
|
2
|
|
2
|
|||
|
Nevada
|
219
|
|
3
|
-
|
|
3
|
|||
|
New
Hampshire *
|
50
|
|
-
|
1
|
|
1
|
|||
|
New
Jersey *
|
229
|
|
1
|
2
|
|
3
|
|||
|
New
Mexico
|
87
|
|
1
|
-
|
|
1
|
|||
|
Pennsylvania
|
931
|
|
4
|
7
|
|
11
|
|||
|
Puerto
Rico *
|
72
|
|
-
|
2
|
|
2
|
|||
|
South
Carolina *
|
310
|
|
1
|
4
|
|
5
|
|||
|
Tennessee
*
|
370
|
|
3
|
3
|
|
6
|
|||
|
Texas
|
1,026
|
|
10
|
4
|
|
14
|
|||
|
Utah
|
84
|
1
|
-
|
1
|
|||||
|
Virginia
*
|
170
|
1
|
3
|
4
|
|||||
|
West
Virginia *
|
248
|
1
|
3
|
4
|
|||||
|
6,652
|
(2)
|
42
|
58
|
|
100
|
||||
| * | Certificate of Need State |
|
(1)
|
The
information for Louisiana includes the assets of Baton Rouge Rehab, Inc.,
including the related 80-bed hospital property, which were the subject of
a definitive sale agreement, dated December 31, 2009, and were classified
as assets held for sale as of December 31, 2009. The sale transaction
closed on January 29, 2010.
|
| (2) | Excludes 211 licensed beds associated with hospitals accounted for under the equity method of accounting. |
We and
those of our subsidiaries that are guarantors under our credit agreement have
pledged substantially all of our property as collateral to secure the
performance of our obligations under our credit agreement and, accordingly,
have agreed to enter into mortgages with respect to our current and future
acquired material real property (excluding real property subject to preexisting
liens and/or mortgages). For additional information about our credit agreement,
see Note 8, Long-term
Debt, to the accompanying consolidated financial statements.
Our
principal executive office, hospitals, and other properties are suitable for
their respective uses and are, in all material respects, adequate for our
present needs. Information regarding the utilization of our licensed beds and
other operating stats can be found in Item 7, Management’s Discussion and Analysis
of Financial Condition and Results of Operations. Our properties are
subject to various federal, state, and local statutes and ordinances regulating
their operation. Management does not believe compliance with such statutes and
ordinances will materially affect our business, financial position, results of
operations, or cash flows.
19
|
Legal
Proceedings
|
Information
relating to certain legal proceedings in which we are involved is included in
Note 22, Settlements, and
Note 23, Contingencies
and Other Commitments, to the accompanying consolidated financial
statements, each of which is incorporated herein by reference.
|
Submission
of Matters to a Vote of Security
Holders
|
None.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
Market
Information
Shares of
our common stock trade on the New York Stock Exchange under the ticker symbol
“HLS.” The following table sets forth the high and low sales prices per share
for our common stock as reported on the NYSE from January 1, 2008 through
December 31, 2009.
|
High
|
Low
|
|||||||
|
2008
|
||||||||
|
First
Quarter
|
$ | 21.70 | $ | 15.20 | ||||
|
Second
Quarter
|
20.20 | 16.56 | ||||||
|
Third
Quarter
|
19.98 | 15.01 | ||||||
|
Fourth
Quarter
|
18.36 | 7.20 | ||||||
|
2009
|
||||||||
|
First
Quarter
|
$ | 11.88 | $ | 6.71 | ||||
|
Second
Quarter
|
14.66 | 8.13 | ||||||
|
Third
Quarter
|
16.54 | 12.76 | ||||||
|
Fourth
Quarter
|
20.00 | 14.45 | ||||||
Holders
As of
February 12, 2010, there were 93,302,876 shares of HealthSouth common stock
issued and outstanding, net of treasury shares, held by approximately 5,305
holders of record.
Dividends
We have
never paid cash dividends on our common stock, and we do not anticipate paying
cash dividends on our common stock in the foreseeable future. In addition, the
terms of our credit agreement (see Note 8, Long-term Debt, to the
accompanying consolidated financial statements) restrict us from declaring or
paying cash dividends on our common stock unless: (1) we are not in default
under our credit agreement and (2) the amount of the dividend, when added to the
aggregate amount of certain other defined payments made during the same fiscal
year, does not exceed certain maximum thresholds. We currently anticipate that
future earnings will be retained to finance our operations and reduce debt.
However, our preferred stock generally provides for the payment of cash
dividends subject to certain limitations. See Note 11, Convertible Perpetual Preferred
Stock, to the accompanying consolidated financial
statements.
Recent
Sales of Unregistered Securities
The
information required by Item 701 of Regulation S-K was previously included
in our Current Report on Form 8-K filed on September 21, 2009.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
information required by Item 201(d) of Regulation S-K is provided under
Item 12, Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
Purchases
of Equity Securities
The
following table summarizes our repurchases of equity securities during the three
months ended December 31, 2009:
|
Period
|
Total
Number of Shares (or Units) Purchased (1)
|
Average
Price Paid per Share (or Unit)
|
Total
Number of Shares (or Units) Purchased as Part of Publicly Announced Plans
or Programs
|
Maximum Number
of Shares (or Units)
That May Yet
Be Purchased Under the Plans or Programs
|
||||||||||||
|
October
1 through
October
31, 2009
|
4,374 | $ | 17.36 | – | – | |||||||||||
|
November
1 through
November
30, 2009
|
– | – | – | – | ||||||||||||
|
December
1 through
December
31, 2009
|
– | – | – | – | ||||||||||||
|
Total
|
4,374 | 17.36 | – | – | ||||||||||||
| (1) | Shares in this column were tendered by an employee as payment of tax liability incident to the vesting of previously awarded shares of restricted stock. |
Company
Stock Performance
Set forth
below is a line graph comparing the total returns of our common stock, the
Standard & Poor’s 500 Index (“S&P 500”), the Morgan Stanley Health Care
Provider Index (“RXH”), an equal-dollar weighted index of 16 companies involved
in the business of hospital management and medical/nursing services, and the
S&P Health Care Services Select Industry Index (“SPSIHP”), an equal-weighted
index of at least 25 companies in healthcare services that are also part of the
S&P Total Market Index and rank in the top 90% of their relevant industry by
float-adjusted market capitalization. Going forward, SPSIHP will replace RXH as
our industry index for comparison purposes. We believe the SPSIHP is more
relevant to our investors because in 2009 our compensation committee selected
that index as a benchmark for our long-term incentive program and because we
believe the companies comprising that index represent a more comprehensive list
of healthcare providers. The graph assumes $100 invested on December 31,
2004 in our common stock and each of the indices. We did not pay dividends
during that time period and do not plan to pay dividends.
The
information contained in the performance graph shall not be deemed “soliciting
material” or to be “filed” with the SEC nor shall such information be deemed
incorporated by reference into any future filing under the Securities Act of
1933 or the Securities Exchange Act of 1934, except to the extent that we
specifically incorporate it by reference into such filing.
The
comparisons in the graph below are based upon historical data and are not
indicative of, nor intended to forecast, future performance of HealthSouth’s
common stock. Research Data Group, Inc. provided us with the data for the
indices presented below. We assume no responsibility for the accuracy of the
indices data, but we are not aware of any reason to doubt its
accuracy.
|
For
the Year Ended December 31,
|
||||||||||||
|
Base
|
||||||||||||
|
Period
|
Cumulative
Total Return
|
|||||||||||
|
Company/Index
Name
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
||||||
|
HealthSouth
Corporation
|
100.00
|
78.03
|
72.13
|
66.88
|
34.90
|
59.78
|
||||||
|
Standard
& Poor's 500 Index
|
100.00
|
104.91
|
121.48
|
128.16
|
80.74
|
102.11
|
||||||
|
S&P
Health Care Services Select Industry Index
|
100.00
|
132.37
|
139.27
|
218.29
|
181.42
|
255.29
|
||||||
|
Morgan
Stanley Health Care Provider Index
|
100.00
|
109.28
|
112.29
|
101.25
|
78.67
|
102.33
|
||||||
|
Selected
Financial Data
|
We
derived the selected historical consolidated financial data presented below for
the years ended December 31, 2009, 2008, and 2007 from our audited
consolidated financial statements and related notes included elsewhere in this
filing. We derived the selected historical consolidated financial data presented
below for the years ended December 31, 2006 and 2005, as adjusted for
discontinued operations and the reclassification of noncontrolling interests,
from our consolidated financial statements and related notes included in our
Form 10-K for the year ended December 31, 2006. You should refer to
Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations,
and the notes to the accompanying consolidated financial statements for
additional information regarding the financial data presented below, including
matters that might cause this data not to be indicative of our future financial
position or results of operations. In addition, you should note the following
information regarding the selected historical consolidated financial data
presented below:
|
•
|
Certain
previously reported financial results have been reclassified to conform to
the current year presentation. These reclassifications primarily relate to
operations reflected as discontinued operations and the retrospective
application of accounting guidance related to noncontrolling interests.
See the “Noncontrolling Interests in Consolidated Affiliates” section of
Note 1, Summary of
Significant Accounting Policies, and Note 18, Assets Held for Sale and
Results of Discontinued Operations, to the accompanying
consolidated financial statements for additional
information.
|
|
•
|
Depreciation and
amortization in 2008 includes the acceleration of approximately $10
million of depreciation associated with our corporate campus that was sold
in March 2008. See Note 5, Property and Equipment,
to the accompanying consolidated financial
statements.
|
|
•
|
The
impairment charges recorded in 2007, 2006, and 2005 primarily related to
the Digital Hospital, an incomplete 13-story building located on the
property we sold to Daniel Corporation in March 2008, and represented the
excess of costs incurred during the construction of the Digital Hospital
over the estimated fair market value of the property, including the
RiverPoint facility, a 60,000 square foot office building which shared the
construction site. The impairment of the Digital Hospital in each year was
determined using either its estimated fair value based on the estimated
net proceeds we expected to receive in a sale transaction or using a
weighted-average fair value approach that considered an alternative use
appraisal and other potential scenarios. See Note 5, Property and Equipment,
to the accompanying consolidated financial statements for additional
information.
|
|
•
|
During
2006, an Alabama Circuit Court issued a summary judgment against Richard
M. Scrushy, our former chairman and chief executive officer, on a claim
for restitution of incentive bonuses Mr. Scrushy received for years 1996
through 2002. Including pre-judgment interest, the court’s total award was
approximately $48 million. Based on this judgment, we recorded $47.8
million during 2006 as Recovery of amounts due from
Richard M. Scrushy, excluding approximately $5.0 million of
post-judgment interest recorded as interest
income.
|
On
December 8, 2006, we entered into an agreement with the derivative
plaintiffs’ attorneys to resolve the amounts owed to them as a result of the
award given to us under the claim for restitution of incentive bonuses Mr.
Scrushy received in previous years and the Securities Litigation Settlement (as
defined and discussed in Note 22, Settlements, to the
accompanying consolidated financial statements). Under this agreement, we agreed
to pay the derivative plaintiffs’ attorneys $32.5 million on an aggregate basis
for both claims. We paid approximately $11.5 million of this amount in 2006,
with the remainder paid in 2007, using amounts received from Mr. Scrushy in the
above referenced award.
|
•
|
In
2001 and 2002, we reserved approximately $38.0 million related to amounts
due from Meadowbrook Healthcare, Inc. (“Meadowbrook”), an entity formed by
one of our former chief financial officers related to net working capital
advances made to Meadowbrook in 2001 and 2002. In August 2005, we received
a payment of $37.9 million from Meadowbrook. This cash payment is included
as Recovery of amounts
due from Meadowbrook in our 2005 consolidated statement of
operations.
|
|
•
|
As
a result of the UBS Settlement, we recorded a $121.3 million gain in our
2008 consolidated statement of operations. For additional information, see
Note 22, Settlements, to the
accompanying consolidated financial
statements.
|
|
•
|
As
a result of a dispute and lease termination associated with Braintree
Rehabilitation Hospital in Braintree, Massachusetts and New England
Rehabilitation Hospital in Woburn, Massachusetts, we recorded a $30.5
million net gain on lease termination during 2005. This net gain is
included in Occupancy
costs in our 2005 consolidated statement of
operations.
|
|
•
|
Government, class action, and
related settlements expense includes amounts related to litigation
and settlements with various entities and individuals. In each year, this
line item primarily includes amounts associated with our securities
litigation settlement. In 2005, we recorded a $215.0 million charge, to be
paid in the form of common stock and common stock warrants, as Government, class action, and
related settlements expense under the then-proposed settlement with
the lead plaintiffs in the federal securities class actions and the
derivative litigation, as well as with our insurance carriers, to settle
claims filed against us, certain of our former directors and officers, and
certain other parties. In each year subsequent to 2005, we adjusted this
liability to reflect the fair market value of the common stock and
warrants underlying this settlement as of each reporting date. The common
stock and warrants associated with this settlement were issued in
September 2009.
|
|
•
|
For
additional information related to this line item, see Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations, and Note
22, Settlements,
and Note 23, Contingencies and Other
Commitments, to the accompanying consolidated financial
statements.
|
|
•
|
Professional fees –
accounting, tax, and legal includes fees arising from our prior
reporting and restatement issues. Specifically, these fees include legal
fees for litigation defense and support matters, tax preparation and
consulting fees for various tax projects, and fees for professional
services to support the preparation of our periodic reports filed with the
SEC (excluding 2009 and 2008). For additional information, see Item 7,
Management’s Discussion
and Analysis of Financial Condition and Results of Operations, and
Note 1, Summary of
Significant Accounting Policies, to the accompanying consolidated
financial statements.
|
|
•
|
As
stated throughout this report, we have been focused on reducing debt. As a
result of various recapitalization transactions and debt prepayments, we
have recorded net losses on early debt extinguishment. Specifically,
during 2006, we recorded a $365.6 million net loss on early extinguishment
of debt due to the completion of a private offering of senior notes in
June 2006 and a series of recapitalization transactions during the first
quarter of 2006. For additional information, see Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations, and Note
8, Long-term
Debt, to the accompanying consolidated financial
statements.
|
|
•
|
As
discussed in more detail in Note 9, Derivative Instruments,
to the accompanying consolidated financial statements, we maintain two
interest rate swaps that effectively convert the variable rate of our
credit agreement to a fixed interest rate. Fair value adjustments and
quarterly settlements for these swaps are included in the line item Loss on interest rate
swaps in the consolidated statements of
operations.
|
|
•
|
For
information related to our Provision for income tax
(benefit) expense, see Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations, and Note
19, Income Taxes,
to the accompanying consolidated financial
statements.
|
|
•
|
Our
Income from discontinued
operations, net of tax in 2007 included post-tax gains on the
divestitures of our surgery centers, outpatient, and diagnostic divisions.
For additional information, see Note 18, Assets Held for Sale and
Results of Discontinued Operations, to the accompanying
consolidated financial statements.
|
|
For
the Year Ended December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(As
Adjusted)
|
||||||||||||||||||||
|
(In
Millions, Except Per Share Data)
|
||||||||||||||||||||
|
Income
Statement Data:
|
||||||||||||||||||||
|
Net
operating revenues
|
$ | 1,911.1 | $ | 1,829.5 | $ | 1,723.5 | $ | 1,680.8 | $ | 1,719.8 | ||||||||||
|
Salaries
and benefits
|
948.8 | 928.2 | 857.5 | 813.0 | 800.9 | |||||||||||||||
|
Other
operating expenses
|
271.4 | 264.9 | 241.0 | 220.3 | 253.0 | |||||||||||||||
|
General
and administrative expenses
|
104.5 | 105.5 | 127.9 | 141.3 | 164.3 | |||||||||||||||
|
Supplies
|
112.4 | 108.2 | 99.6 | 99.7 | 101.5 | |||||||||||||||
|
Depreciation
and amortization
|
70.9 | 82.4 | 74.8 | 83.4 | 86.2 | |||||||||||||||
|
Impairment
of long-lived assets
|
- | 0.6 | 15.1 | 9.7 | 30.8 | |||||||||||||||
|
Recovery
of amounts due from Richard M. Scrushy
|
- | - | - | (47.8 | ) | - | ||||||||||||||
|
Recovery
of amounts due from Meadowbrook
|
- | - | - | - | (37.9 | ) | ||||||||||||||
|
Gain
on UBS Settlement
|
- | (121.3 | ) | - | - | - | ||||||||||||||
|
Occupancy
costs
|
47.6 | 48.8 | 51.4 | 53.3 | 10.6 | |||||||||||||||
|
Provision
for doubtful accounts
|
33.1 | 27.0 | 33.2 | 44.9 | 31.2 | |||||||||||||||
|
Loss
on disposal of assets
|
3.5 | 2.0 | 5.9 | 6.4 | 11.7 | |||||||||||||||
|
Government,
class action, and related settlements expense
|
36.7 | (67.2 | ) | (2.8 | ) | (4.8 | ) | 215.0 | ||||||||||||
|
Professional
fees—accounting, tax, and legal
|
8.8 | 44.4 | 51.6 | 161.4 | 169.1 | |||||||||||||||
|
Loss
on early extinguishment of debt
|
12.5 | 5.9 | 28.2 | 365.6 | - | |||||||||||||||
|
Interest
expense and amortization of debt discounts and fees
|
125.8 | 159.5 | 229.4 | 234.0 | 234.2 | |||||||||||||||
|
Other
income
|
(3.4 | ) | - | (15.5 | ) | (9.4 | ) | (16.6 | ) | |||||||||||
|
Loss
on interest rate swaps
|
19.6 | 55.7 | 30.4 | 10.5 | - | |||||||||||||||
|
Equity
in net income of nonconsolidated affiliates
|
(4.6 | ) | (10.6 | ) | (10.3 | ) | (8.7 | ) | (12.3 | ) | ||||||||||
|
Income
(loss) from continuing operations before income tax (benefit)
expense
|
123.5 | 195.5 | (93.9 | ) | (492.0 | ) | (321.9 | ) | ||||||||||||
|
Provision
for income tax (benefit) expense
|
(3.2 | ) | (70.1 | ) | (322.4 | ) | 22.4 | 19.6 | ||||||||||||
|
Income
(loss) from continuing operations
|
126.7 | 265.6 | 228.5 | (514.4 | ) | (341.5 | ) | |||||||||||||
|
Income
(loss) from discontinued operations, net of tax
|
2.1 | 16.2 | 490.2 | (16.9 | ) | (6.0 | ) | |||||||||||||
|
Net
income (loss)
|
128.8 | 281.8 | 718.7 | (531.3 | ) | (347.5 | ) | |||||||||||||
|
Less:
Net income attributable to noncontrolling interests
|
(34.0 | ) | (29.4 | ) | (65.3 | ) | (93.7 | ) | (98.5 | ) | ||||||||||
|
Net
income (loss) attributable to HealthSouth
|
94.8 | 252.4 | 653.4 | (625.0 | ) | (446.0 | ) | |||||||||||||
|
Less:
Convertible perpetual preferred stock dividends
|
(26.0 | ) | (26.0 | ) | (26.0 | ) | (22.2 | ) | - | |||||||||||
|
Net
income (loss) attributable to HealthSouth common
shareholders
|
$ | 68.8 | $ | 226.4 | $ | 627.4 | $ | (647.2 | ) | $ | (446.0 | ) | ||||||||
|
Weighted
average common shares outstanding:
|
||||||||||||||||||||
|
Basic
|
88.8 | 83.0 | 78.7 | 79.5 | 79.3 | |||||||||||||||
|
Diluted
|
103.3 | 96.4 | 92.0 | 90.3 | 79.6 | |||||||||||||||
|
Earnings
(loss) per common share:
|
||||||||||||||||||||
|
Basic:
|
||||||||||||||||||||
|
Income
(loss) from continuing operations attributable to HealthSouth
common shareholders
|
$ | 0.76 | $ | 2.53 | $ | 2.17 | $ | (7.08 | ) | $ | (4.83 | ) | ||||||||
|
Income
(loss) from discontinued operations, net of tax, attributable to
HealthSouth common shareholders
|
0.01 | 0.20 | 5.80 | (1.06 | ) | (0.79 | ) | |||||||||||||
|
Net
income (loss) attributable to HealthSouth common
shareholders
|
$ | 0.77 | $ | 2.73 | $ | 7.97 | $ | (8.14 | ) | $ | (5.62 | ) | ||||||||
|
Diluted:
|
||||||||||||||||||||
|
Income
(loss) from continuing operations attributable to HealthSouth
common shareholders
|
$ | 0.76 | $ | 2.45 | $ | 2.14 | $ | (7.08 | ) | $ | (4.83 | ) | ||||||||
|
Income
(loss) from discontinued operations, net of tax, attributable to
HealthSouth common shareholders
|
0.01 | 0.17 | 4.96 | (1.06 | ) | (0.79 | ) | |||||||||||||
|
Net
income (loss) attributable to HealthSouth common
shareholders
|
$ | 0.77 | $ | 2.62 | $ | 7.10 | $ | (8.14 | ) | $ | (5.62 | ) | ||||||||
|
Amounts
attributable to HealthSouth:
|
||||||||||||||||||||
|
Income
(loss) from continuing operations
|
$ | 93.3 | $ | 235.8 | $ | 197.1 | $ | (540.7 | ) | $ | (383.2 | ) | ||||||||
|
Income
(loss) from discontinued operations, net of tax
|
1.5 | 16.6 | 456.3 | (84.3 | ) | (62.8 | ) | |||||||||||||
|
Net
income (loss) attributable to HealthSouth
|
$ | 94.8 | $ | 252.4 | $ | 653.4 | $ | (625.0 | ) | $ | (446.0 | ) | ||||||||
|
As
of December 31,
|
|||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||
|
(As
Adjusted)
|
|||||||||
|
(In
Millions)
|
|||||||||
|
Balance
Sheet Data:
|
|||||||||
|
Working
capital (deficit)
|
34.8
|
(63.5)
|
(333.1)
|
(381.3)
|
(235.5)
|
||||
|
Total
assets
|
1,681.5
|
1,998.2
|
2,050.6
|
3,360.8
|
3,595.3
|
||||
|
Long-term
debt, including current portion
|
1,662.5
|
1,813.2
|
2,039.4
|
3,371.7
|
3,353.9
|
||||
|
Convertible
perpetual preferred stock
|
387.4
|
387.4
|
387.4
|
387.4
|
-
|
||||
|
HealthSouth
shareholders' deficit
|
(974.0)
|
(1,169.4)
|
(1,554.5)
|
(2,184.6)
|
(1,540.7)
|
||||
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) should be read in conjunction with the
accompanying consolidated financial statements and related notes. See
“Cautionary Statement Regarding Forward-Looking Statements” on page ii of this
report for a description of important factors that could cause actual results to
differ from expected results. See also Item 1A, Risk Factors.
This
MD&A is designed to provide the reader with information that will assist in
understanding our consolidated financial statements, the changes in certain key
items in those financial statements from year to year, and the primary factors
that accounted for those changes, as well as how certain accounting principles
affect our consolidated financial statements.
Executive
Overview
Our Business
We
operate inpatient rehabilitation hospitals and long-term acute care hospitals
(“LTCHs”) and provide treatment on both an inpatient and outpatient basis. As of
December 31, 2009, we operated 93 inpatient rehabilitation hospitals (including
3 hospitals that operate as joint ventures which we account for using the equity
method of accounting), 6 freestanding LTCHs, 40 outpatient rehabilitation
satellites (operated by our hospitals, including one joint venture satellite),
and 25 licensed, hospital-based home health agencies. In addition to HealthSouth
hospitals, we manage six inpatient rehabilitation units through management
contracts. Our inpatient hospitals are located in 26 states and Puerto Rico,
with a concentration of hospitals in Texas, Pennsylvania, Florida, Tennessee,
Alabama, and Arizona.
We are
the nation’s largest provider of inpatient rehabilitative healthcare services in
terms of revenues, number of hospitals, and patients treated and discharged. Our
inpatient rehabilitation hospitals offer specialized rehabilitative care across
a wide array of diagnoses and deliver comprehensive, high-quality,
cost-effective patient care services. The majority of patients we serve
experience significant physical disabilities due to medical conditions, such as
strokes, hip fractures, head injury, spinal cord injury, and neurological
disorders, that are non-discretionary in nature and which require rehabilitative
healthcare services in an inpatient setting. Our team of highly skilled
physicians, nurses, and physical, occupational, and speech therapists utilize
the latest in equipment and techniques to return patients to home and work.
Patient care is provided by nursing and therapy staff as directed by a physician
order. Internal case managers monitor each patient’s progress and provide
documentation of patient status, achievement of goals, discharge planning, and
functional outcomes. Our hospitals provide a comprehensive interdisciplinary
clinical approach to treatment that leads to what we believe is a higher level
of care and superior outcomes.
Net
patient revenue from our hospitals increased 5.6% from 2008 to 2009 due
primarily to a 5.4% year-over-year increase in inpatient discharges. Same store
discharges experienced growth of 4.8% from 2008 to 2009. Operating earnings (as
defined in Note 24, Quarterly
Data (Unaudited), to the accompanying consolidated financial
statements)
for 2009 and 2008 were $244.6 million and $386.8 million, respectively.
Operating earnings for the year ended December 31, 2008 included gains of $188.5
million associated with Government, class action, and
related settlements expense, including the Gain on UBS Settlement (see
Note 22, Settlements,
to the accompanyingconsolidated financial statements). Net cash provided by operating
activities was $406.1 million and $227.2 million for the years ended
December 31, 2009 and 2008, respectively. Cash flows during 2009 included $73.8
million related to the net cash proceeds from the UBS Settlement and the receipt
of $63.7 million in income tax refunds (see Note 19, Income Taxes, and Note 22,
Settlements, to the
accompanying consolidated financial statements). See the “Results of Operations”
section of this Item for additional information.
Throughout
2009, we focused our efforts on providing high-quality, cost-effective care,
enhancing the operations of our inpatient rehabilitation hospitals, sustaining
discharge growth, and growing our business organically through increased market
share and capacity expansions. The collapse of the credit markets in 2008
contributed to a tight credit market for most of 2009, requiring us to balance
pursuing development opportunities against our deleveraging priority. While
doing so, we reduced our total debt outstanding by approximately $151 million
and improved our overall debt profile by amending our credit agreement to extend
the maturity of a portion of our term loan facility and by refinancing a portion
of our outstanding senior notes, which also reduced our exposure to floating
interest rates. See this Item, “Liquidity and Capital Resources,” Note 2, Liquidity, and Note 8, Long-term Debt, to the
accompanying consolidated financial statements for additional
information.
As we
made strides in reducing our debt and saw some improvement in the credit
markets, we began to shift our strategy to pursuing disciplined development
opportunities. Our development projects in 2009 included: opening a new, 40-bed
freestanding inpatient rehabilitation hospital in Mesa, Arizona in the third
quarter of 2009; beginning construction on our new, 40-bed inpatient
rehabilitation hospital in Loudoun County, Virginia; and announcing that our
joint venture with Wellmont Health System received a certificate of need to open
a new, 25-bed inpatient rehabilitation hospital in Bristol, Virginia. We expect
operations to commence in those Virginia locations in the second and third
quarters of 2010, respectively. In addition, we acquired an inpatient
rehabilitation unit in Altoona, Pennsylvania through a newly formed joint
venture and relocated its operations to one of our hospitals and acquired,
effective January 1, 2010, a 23-bed inpatient rehabilitation unit in Little
Rock, Arkansas through an existing joint venture in which we
participate.
We
believe the demand for inpatient rehabilitative healthcare services will
increase as the U.S. population ages. In addition, the number of patients who
qualify for inpatient rehabilitative care under Medicare rules is expected to
grow approximately 2% per year for the foreseeable future, creating an
attractive market. We believe these market factors align with our strengths in,
and focus on, inpatient rehabilitative care. Unlike many of our competitors that
may offer inpatient rehabilitation as one of many secondary services, inpatient
rehabilitation is our core business.
Key Challenges
While we
met our operational goals in 2009, the following are some of the challenges we
are addressing:
|
•
|
Leverage and
Liquidity. Our primary sources of liquidity are cash on hand, cash
flows from operations (which were $406.1 million during the year ended
December 31, 2009, including $73.8 million in net cash proceeds related to
the UBS Settlement and the receipt of $63.7 million in income tax refunds,
as discussed below), and borrowings under our $400 million revolving
credit facility. As of December 31, 2009, we had $80.9 million in Cash and cash
equivalents. This amount excluded $67.8 million in Restricted cash and
$21.0 million of restricted marketable securities. As of December 31,
2009, no amounts were drawn on our revolving credit
facility.
|
While we
have improved our leverage and liquidity, further deleveraging is, and will
continue to be, a strategic focus. During the year ended December 31, 2009, we
reduced our total debt outstanding by approximately $151 million and increased
our Cash and cash
equivalents by approximately $49 million. During 2010, we will continue
to analyze our balance sheet, and we will use our available cash in a manner
that provides the most beneficial impact to our capital structure, including
further debt reduction and deleveraging. We believe our higher Adjusted
Consolidated EBITDA and our strong cash flows from operations will allow us to
continue to reduce our leverage.
For
additional information regarding our leverage and liquidity, see the “Liquidity
and Capital Resources” section of this Item and Note 2, Liquidity, and Note 8,
Long-term Debt, to the
accompanying consolidated financial statements. See Item 1A, Risk Factors, and
Note 1, Summary of
Significant Accounting
Policies, to the accompanying consolidated financial statements for a
discussion of risks and uncertainties facing us.
|
•
|
Highly Regulated
Industry. Over the last several years, changes in regulations
governing inpatient rehabilitation reimbursement have created challenges
for inpatient rehabilitative providers. Many of these changes have
resulted in limitations on, and in some cases, reductions in, the levels
of payments to healthcare providers. For example, and as reported
previously, while The Medicare, Medicaid and State Children’s Health
Insurance Program (SCHIP) Extension Act of 2007 signed on December 29,
2007 may have stabilized much of the volatility in patient volumes created
by setting the compliance threshold of the 75% Rule at 60%, it also
included a reduction in the pricing of services eligible for Medicare
reimbursement to a pricing level that existed in the third quarter of 2007
(the Medicare pricing “roll-back”). See Item 1, Business, “Sources of
Revenue,” for additional information. During the period of the Medicare
pricing roll-back, we incurred increased costs, including costs associated
with providing annual merit increases and benefits to our employees,
without a corresponding increase to our Medicare reimbursement. This
Medicare pricing roll-back expired on September 30,
2009.
|
On August
7, 2009, the Centers for Medicare and Medicaid Services (“CMS”) published in the
federal register the fiscal year 2010 notice of final rulemaking for inpatient
rehabilitation facilities under the prospective payment system (“IRF-PPS”). This
rule contains Medicare pricing changes as well as new coverage requirements. The
pricing changes are effective for Medicare discharges between October 1, 2009
and September 30, 2010 and include a 2.5% market basket update, which was the
first market basket update we had received in 18 months. However, as discussed
below, the various healthcare bills being discussed in Congress include
reductions to market basket updates for providers as a means of helping to pay
for healthcare reform. Accordingly, it is possible this market basket update
could be reduced by Congress. See Item 1, Business, “Sources of
Revenues,” for information related to market basket updates.
We have
analyzed the other aspects of the fiscal year 2010 final rule and believe the
remaining changes will have a neutral to slightly positive impact on our Net operating revenues. The
new coverage requirements under the rule apply to discharges occurring on or
after January 1, 2010. Prior to the new rule, our hospitals already operated
using many of the new requirements, so these changes have not resulted in
material modifications to our clinical or business models. Although these new
requirements have only been in effect for a short time, we believe we are in
compliance with them.
Additionally,
we are required to comply with extensive and complex laws and regulations at the
federal, state, and local government levels. These rules and regulations affect
our business activities by controlling the reimbursement we receive for services
provided, requiring licensure or certification of our hospitals, regulating our
relationships with physicians and other referral sources, regulating the use of
our properties, and controlling our growth. Ensuring continuous compliance with
these laws and regulations is an operating requirement for all healthcare
providers.
We have
invested substantial time, effort, and expense in implementing internal controls
and procedures designed to ensure regulatory compliance, and we are committed to
continued adherence to these guidelines. More specifically, because Medicare
comprises a significant portion of our Net operating revenues, it is
important for us to remain compliant with the laws and regulations governing the
Medicare program. If we were unable to remain compliant with these regulations,
our financial position, results of operations, and cash flows could be
materially, adversely impacted.
|
•
|
Potential Impact of
Healthcare Reform. Although President Obama has identified
healthcare reform as a major domestic priority, and Congress has devoted
considerable effort to drafting healthcare reform legislation, at the time
of this writing, no specific healthcare reform legislation has been
adopted. The future of healthcare reform appears uncertain at this time.
Many issues are being discussed within the context of healthcare reform,
several of which could have an impact on our business. The three issues
with the greatest potential impact are: (1) reducing annual market basket
updates to providers,
|
(2) combining, or"bundling," of acute
care hospital and post-acute Medicare reimbursement at some point in the future,
and (3) creating an Independent Medicare Advisory Board.
|
|
With
respect to future reductions to market basket updates, and as previously
noted, while no specific healthcare legislation has been adopted at this
time, the healthcare reform bills that have been passed by both the U.S.
Senate and the House of Representatives include some kind of reduction to
market basket updates. While we cannot be certain of the magnitude of
these potential market basket reductions, or if they will be enacted, we
will be working with other providers, as well as other interested parties,
to help ensure they do not compromise our ability to provide high-quality
services to the patients we serve.
|
The
probability of enacting a “bundled” payment system is difficult to predict at
this time. The major healthcare reform bills being contemplated currently by
Congress include provisions to examine the feasibility of bundling, including
the potential for a voluntary bundling pilot program to test and evaluate
alternative payment methodologies. We will continue to work with the acute
hospital and post-acute care provider communities on this important
issue.
There has
also been discussion of establishing an “Independent Medicare Advisory Board”
that would be charged with presenting proposals to Congress to reduce Medicare
expenditures upon the occurrence of Medicare expenditures exceeding a certain
level. At this point, it is difficult to determine whether this board will be
enacted into law, and, if so, how it would function. Similar to the reform
concerns discussed above, we will continue to work with other providers, as well
as other parties who have a vested interest, to help ensure they do not
compromise our ability to provide high-quality services to the patients we
serve.
|
•
|
Staffing. Our
operations are dependent on the efforts, abilities, and experience of our
medical personnel, such as physical therapists, occupational therapists,
speech pathologists, nurses, and other healthcare professionals. In some
markets, the lack of availability of medical personnel is an operating
issue facing all healthcare providers, although the weak economy has
mitigated this issue to some degree. We have refined our comprehensive
benefits package to remain competitive in this challenging staffing
environment while also being consistent with our goal of being a
high-quality, cost-effective provider of inpatient rehabilitative
services. As a result of our efforts, we are experiencing improved
retention rates and reduced turnover. Going forward, recruiting and
retaining qualified personnel for our hospitals will remain a high
priority for us.
|
We also
are monitoring efforts in Congress that could make it more difficult for
employees to avoid or reject labor organization. At this time, it is not clear
whether, when, or in what form, such legislation might be enacted into law, nor
are we able to predict the impact, if any, this legislation would have on our
business, if enacted.
Business
Outlook
As
previously noted, the inpatient rehabilitation sector of the healthcare industry
is an attractive market: the aging demographics of the U.S. population coupled
with an approximate 2% projected annual growth rate in the number of patients
who qualify for inpatient rehabilitative care under Medicare rules create a
favorable business environment for us. As the nation’s largest provider of
inpatient rehabilitative healthcare services, we believe we differentiate
ourselves from our competitors based on our broad base of clinical expertise,
the quality of our clinical outcomes, the application and leverage of
rehabilitative technology, and the standardization of best practices that result
in high-quality, cost-effective care for the patients we serve.
Our
ability to continue to create shareholder value in the near term will be
predicated on our ability to: (1) deleverage our balance sheet;
(2) provide high-quality, cost-effective care; (3) grow organically;
(4) pursue acquisitions on a disciplined, opportunistic basis; and
(5) adapt to regulatory changes affecting our industry.
During
the year ended December 31, 2009, we reduced our total debt outstanding by
approximately $151 million, and we believe our higher Adjusted Consolidated
EBITDA and our strong cash flows from operations will allow us to continue to
reduce our debt and leverage. Further, we believe we have adequate sources of
liquidity due
to our Cash and cash
equivalents and the availability of our revolving credit facility. In
addition, and as discussed in the “Liquidity and Capital Resources” section of
this Item, we do not face near-term refinancing risk.
We
believe our ability to continue to grow at a faster rate than the rest of the
industry is attributable to our higher level of care and is sustainable. In
addition, the majority of patients we serve have medical conditions, such as
strokes, hip fractures, and neurological disorders, that are non-discretionary
in nature and which require rehabilitative services in an inpatient
setting.
Healthcare
providers are under increasing pressure to control healthcare costs. We take
this challenge seriously and pride ourselves in our ability to provide
high-quality, cost-effective care. We will continue to focus on ensuring we
provide high-quality care and finding efficiencies in our cost structure at both
the corporate and operational levels in an effort to remain competitive. Our
largest costs are our Salaries
and benefits, and they represent our investment in our most valuable
resource: our employees. We continue to actively manage these expenses. We will
continue to monitor the labor market and will make any necessary adjustments to
remain competitive in this challenging environment while also being consistent
with our goal of being a high-quality, cost-effective provider of inpatient
rehabilitative services.
While
deleveraging will remain a priority, our deleveraging efforts in 2010 will focus
on growing Adjusted Consolidated EBITDA through organic growth and disciplined
expansion. Our organic growth will result from increasing our market share of
inpatient discharges, actively managing expenses, and pursuing capacity
expansions in existing hospitals to meet growing demand in certain markets.
During 2010, our Adjusted Consolidated EBITDA will also benefit from our 2009
development activities, as described above. In addition to organic growth, we
will pursue acquisitions, joint ventures, and market consolidations of inpatient
rehabilitation hospitals, and we will continue to look for appropriate markets
for de-novo sites. For any de-novo project we decide to pursue, we may work with
third parties willing to assume the majority of the financing risks associated
with these projects.
As
discussed previously, healthcare always has been a highly regulated industry,
and the inpatient rehabilitation segment is no exception. Successful healthcare
providers are those who provide high-quality care and have the capabilities to
adapt to changes in the regulatory environment. We believe we have the necessary
capabilities – scale, infrastructure, and management – to adapt and succeed in a
highly regulated industry, and we have a proven track record of being able to do
so. The healthcare reform proposals that are being discussed are fluid and
changing. However, we are confident, based on our track record, we will be able
to adapt to whatever changes may impact our industry.
In
summary, we believe the business outlook is positive. We will continue to
monitor the economic and regulatory climates and focus on initiatives designed
to control costs. We anticipate we will be able to continue to generate strong
cash flows that will be directed toward opportunistic, disciplined expansion and
growth of our inpatient business and debt reduction, which we believe will bring
long-term, sustainable growth and returns to our stockholders. Finally, we will
continue to work with the acute hospital and post-acute care provider
communities, as well as other interested parties, to bring positive healthcare
reform that rewards healthcare providers, like HealthSouth, that strive to
provide high-quality, cost-effective services to patients who need these
services.
Results
of Operations
During
2009, 2008, and 2007, we derived consolidated Net operating revenues from
the following payor sources:
|
For
the Year Ended December 31,
|
|||||
|
2009
|
2008
|
2007
|
|||
|
Medicare
|
67.9%
|
67.2%
|
67.8%
|
||
|
Medicaid
|
2.1%
|
2.2%
|
2.0%
|
||
|
Workers’
compensation
|
1.6%
|
2.1%
|
2.3%
|
||
|
Managed
care and other discount plans
|
23.1%
|
22.4%
|
20.5%
|
||
|
Other
third-party payors
|
2.7%
|
3.5%
|
4.0%
|
||
|
Patients
|
1.2%
|
1.0%
|
1.1%
|
||
|
Other
income
|
1.4%
|
1.6%
|
2.3%
|
||
|
Total
|
100.0%
|
100.0%
|
100.0%
|
||
Our payor
mix is weighted heavily towards Medicare. Our hospitals receive Medicare
reimbursements under IRF-PPS. Under IRF-PPS, our hospitals receive fixed payment
amounts per discharge based on certain rehabilitation impairment categories
established by the United States Department of Health and Human Services. With
IRF-PPS, our hospitals retain the difference, if any, between the fixed payment
from Medicare and their operating costs. Thus, our hospitals benefit from being
high-quality, low-cost providers. For additional information regarding Medicare
reimbursement, see the “Sources of Revenues” section of Item 1, Business.
Over the
past few years, we have experienced an increase in managed Medicare and private
fee-for-service plans that are included in the “managed care and other discount
plans” category in the above table. As part of the Balanced Budget Act of 1997,
Congress created a program of private, managed healthcare coverage for Medicare
beneficiaries. This program has been referred to as Medicare Part C, or
“Medicare Advantage.” The program offers beneficiaries a range of Medicare
coverage options by providing a choice between the traditional fee-for-service
program (under Medicare Parts A and B) or enrollment in a health maintenance
organization, preferred provider organization, point-of-service plan, provider
sponsored organization, or an insurance plan operated in conjunction with a
medical savings account. While we expect our payor mix will remain heavily
weighted towards traditional Medicare, we expect this increase of patients in
managed Medicare and private fee-for-service plans will continue. However, the
future of Medicare Advantage will be determined, ultimately, by Congress, and
any changes to Medicare Advantage may have an impact on this trend.
Under
IRF-PPS, hospitals are reimbursed on a “per discharge” basis. Thus, the number
of patient discharges is a key metric utilized by management to monitor and
evaluate our performance. The number of outpatient visits is also tracked in
order to measure the volume of outpatient activity each period.
Certain
financial results have been reclassified to conform to the current year
presentation. During 2009, we terminated the leases associated with certain
rental properties and reached an agreement to sell one of our hospitals to a
third party. As a result, we reclassified our consolidated balance sheet as of
December 31, 2008 to show the assets and liabilities of these facilities as
held for sale. We also reclassified our consolidated statements of operations
and consolidated statements of cash flows for the years ended December 31,
2008 and 2007 to include these properties and their results of operations as
discontinued operations.
As of
January 1, 2009, we reclassified our noncontrolling interests (formerly known as
“minority interests”) as a component of equity and now report net income and
comprehensive income attributable to our noncontrolling interests separately
from net income and comprehensive income attributable to
HealthSouth.
During
the preparation of our condensed consolidated financial statements for the
quarterly period ended June 30, 2009, we identified an error in our consolidated
financial statements as of and for the year ended December 31, 2008 and
prior periods and our condensed consolidated financial statements as of and for
the quarterly period ended March 31, 2009. We corrected this error in our
financial statements by adjusting Equity in net income of
nonconsolidated affiliates, which resulted in an understatement of both
our Income (loss) from
continuing operations before income tax benefit and our Net income of approximately
$4.5 million for the year ended December 31, 2009. This error related primarily
to an approximate $9.6 million overstatement of our investment in a
joint
venture hospital we account for using the equity method of accounting due to the
understatement of prior period income tax provisions of this joint venture
hospital and the adjustment of certain liabilities due to this joint venture
hospital. We also adjusted Other current liabilities by
approximately $4.7 million due to changes in amounts due to us for expenses paid
on behalf of this joint venture hospital. We do not believe these adjustments
are material to the consolidated financial statements as of December 31, 2009 or
to any prior years’ consolidated financial statements. As a result, we have not
restated any prior period amounts.
As
discussed in the “Results of Discontinued Operations” section of this Item and
Note 18, Assets Held for Sale
and Results of Discontinued Operations, to the accompanying consolidated
financial statements, we divested our surgery centers, outpatient, and
diagnostic divisions during 2007. Because we did not allocate corporate overhead
by division, our operating results for the year ended December 31, 2007 reflect
overhead costs associated with managing and providing shared services to these
divisions, through their respective dates of sale, even though these divisions
qualify as discontinued operations.
As
discussed in Note 8, Long-term Debt, to the
accompanying consolidated financial statements, due to the requirements under
our credit agreement to use the net proceeds from each divestiture to repay
obligations
outstanding
under our credit agreement, we allocated the interest expense on the debt that
was required to be repaid as a result of the divestiture transactions to
discontinued operations in 2007.
From 2007
through 2009, our consolidated results of operations were as
follows:
|
For
the Year Ended December 31,
|
Percentage
Change
|
|||||||||||||||||||
|
2009
|
2008
|
2007
|
2009
vs. 2008
|
2008
vs. 2007
|
||||||||||||||||
|
(As
Adjusted)
|
||||||||||||||||||||
|
(In
Millions)
|
||||||||||||||||||||
|
Net
operating revenues
|
$ | 1,911.1 | $ | 1,829.5 | $ | 1,723.5 | 4.5 | % | 6.2 | % | ||||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Salaries
and benefits
|
948.8 | 928.2 | 857.5 | 2.2 | % | 8.2 | % | |||||||||||||
|
Other
operating expenses
|
271.4 | 264.9 | 241.0 | 2.5 | % | 9.9 | % | |||||||||||||
|
General
and administrative expenses
|
104.5 | 105.5 | 127.9 | (0.9 | %) | (17.5 | %) | |||||||||||||
|
Supplies
|
112.4 | 108.2 | 99.6 | 3.9 | % | 8.6 | % | |||||||||||||
|
Depreciation
and amortization
|
70.9 | 82.4 | 74.8 | (14.0 | %) | 10.2 | % | |||||||||||||
|
Impairment
of long-lived assets
|
- | 0.6 | 15.1 | (100.0 | %) | (96.0 | %) | |||||||||||||
|
Gain
on UBS Settlement
|
- | (121.3 | ) | - | (100.0 | %) | N/A | |||||||||||||
|
Occupancy
costs
|
47.6 | 48.8 | 51.4 | (2.5 | %) | (5.1 | %) | |||||||||||||
|
Provision
for doubtful accounts
|
33.1 | 27.0 | 33.2 | 22.6 | % | (18.7 | %) | |||||||||||||
|
Loss
on disposal of assets
|
3.5 | 2.0 | 5.9 | 75.0 | % | (66.1 | %) | |||||||||||||
|
Government,
class action, and related settlements expense
|
36.7 | (67.2 | ) | (2.8 | ) | (154.6 | %) | 2,300.0 | % | |||||||||||
|
Professional
fees—accounting, tax, and legal
|
8.8 | 44.4 | 51.6 | (80.2 | %) | (14.0 | %) | |||||||||||||
|
Total
operating expenses
|
1,637.7 | 1,423.5 | 1,555.2 | 15.0 | % | (8.5 | %) | |||||||||||||
|
Loss
on early extinguishment of debt
|
12.5 | 5.9 | 28.2 | 111.9 | % | (79.1 | %) | |||||||||||||
|
Interest
expense and amortization of debt discounts and fees
|
125.8 | 159.5 | 229.4 | (21.1 | %) | (30.5 | %) | |||||||||||||
|
Other
income
|
(3.4 | ) | - | (15.5 | ) | N/A | (100.0 | %) | ||||||||||||
|
Loss
on interest rate swaps
|
19.6 | 55.7 | 30.4 | (64.8 | %) | 83.2 | % | |||||||||||||
|
Equity
in net income of nonconsolidated affiliates
|
(4.6 | ) | (10.6 | ) | (10.3 | ) | (56.6 | %) | 2.9 | % | ||||||||||
|
Income
(loss) from continuing operations before income tax
benefit
|
123.5 | 195.5 | (93.9 | ) | (36.8 | %) | (308.2 | %) | ||||||||||||
|
Provision
for income tax benefit
|
(3.2 | ) | (70.1 | ) | (322.4 | ) | (95.4 | %) | (78.3 | %) | ||||||||||
|
Income
from continuing operations
|
126.7 | 265.6 | 228.5 | (52.3 | %) | 16.2 | % | |||||||||||||
|
Income
from discontinued operations, net of tax
|
2.1 | 16.2 | 490.2 | (87.0 | %) | (96.7 | %) | |||||||||||||
|
Net
income
|
128.8 | 281.8 | 718.7 | (54.3 | %) | (60.8 | %) | |||||||||||||
|
Less:
Net income attributable to noncontrolling interests
|
(34.0 | ) | (29.4 | ) | (65.3 | ) | 15.6 | % | (55.0 | %) | ||||||||||
|
Net
income attributable to HealthSouth
|
$ | 94.8 | $ | 252.4 | $ | 653.4 | (62.4 | %) | (61.4 | %) | ||||||||||
Operating
Expenses as a % of Net Operating Revenues
|
For
the Year Ended December 31,
|
||||||||
|
2009
|
2008
|
2007
|
||||||
|
Salaries
and benefits
|
49.6%
|
50.7%
|
49.8%
|
|||||
|
Other
operating expenses
|
14.2%
|
14.5%
|
14.0%
|
|||||
|
General
and administrative expenses
|
5.5%
|
5.8%
|
7.4%
|
|||||
|
Supplies
|
5.9%
|
5.9%
|
5.8%
|
|||||
|
Depreciation
and amortization
|
3.7%
|
4.5%
|
4.3%
|
|||||
|
Impairment
of long-lived assets
|
0.0%
|
0.0%
|
0.9%
|
|||||
|
Gain
on UBS Settlement
|
0.0%
|
(6.6%
|
) |
0.0%
|
||||
|
Occupancy
costs
|
2.5%
|
2.7%
|
3.0%
|
|||||
|
Provision
for doubtful accounts
|
1.7%
|
1.5%
|
1.9%
|
|||||
|
Loss
on disposal of assets
|
0.2%
|
0.1%
|
0.3%
|
|||||
|
Government,
class action, and related settlements expense
|
1.9%
|
(3.7%
|
) |
(0.2%
|
) | |||
|
Professional
fees—accounting, tax, and legal
|
0.5%
|
2.4%
|
3.0%
|
|||||
|
Total
|
85.7%
|
77.8%
|
90.2%
|
|||||
Additional
information regarding our operating results for the years ended
December 31, 2009, 2008, and 2007 is as follows:
|
For
the Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In
Millions)
|
||||||||||||
|
Net
patient revenue—inpatient
|
$ | 1,743.4 | $ | 1,651.7 | $ | 1,535.9 | ||||||
|
Net
patient revenue—outpatient and other revenues
|
167.7 | 177.8 | 187.6 | |||||||||
|
Net
operating revenues
|
$ | 1,911.1 | $ | 1,829.5 | $ | 1,723.5 | ||||||
|
(Actual
Amounts)
|
||||||||||||
|
Discharges
|
112,975 | 107,184 | 100,161 | |||||||||
|
Outpatient
visits
|
1,122,545 | 1,218,926 | 1,308,101 | |||||||||
|
Average
length of stay
|
14.3
days
|
14.7
days
|
15.1
days
|
|||||||||
|
Occupancy
%
|
67.3% | 66.8% | 63.9% | |||||||||
|
#
of licensed beds
|
6,572 | 6,463 | 6,493 | |||||||||
|
Full-time
equivalents*
|
15,504 | 15,473 | 15,297 | |||||||||
|
|
*
|
Excludes
393, 410, and 565 full-time equivalents for the years ended
December 31, 2009, 2008, and 2007, respectively, who are considered
part of corporate overhead with their salaries and benefits included in
General and
administrative expenses in our consolidated statements of
operations. Full-time equivalents included in the above table represent
those who participate in or support the operations of our hospitals and
exclude an estimate of full-time equivalents related to contract
labor.
|
In the
discussion that follows, we use “same store” comparisons to explain the changes
in certain performance metrics and line items within our financial statements.
We calculate same store comparisons based on hospitals open throughout both the
full current period and throughout the full prior periods presented. These
comparisons include the financial results of market consolidation transactions
in existing markets, as it is difficult to determine, with precision, the
incremental impact of these transactions on our results of
operations.
Net
Operating Revenues
Our
consolidated Net operating
revenues consist primarily of revenues derived from patient care
services. Net operating
revenues also include other revenues generated from management and
administrative fees and other
non-patient
care services. These other revenues approximated 1.4%, 1.6%, and 2.3% of
consolidated Net operating
revenues for the years ended December 31, 2009, 2008, and 2007,
respectively.
Our Net operating revenues were
negatively impacted in 2009 and 2008 by the pricing roll-back that was part of
the 2007 Medicare Act, as discussed above. The pricing roll-back was effective
from April 1, 2008 until September 30, 2009. However, as reported previously,
the roll-out of our TeamWorks initiative in 2008 produced results that yielded
an increase in patient discharges in each quarter of 2008. During the latter
part of 2008 and early 2009, we implemented a sustainability module to ensure
the operational initiatives from the start-up phase of the TeamWorks project
remained embedded at our hospitals. This continued focus on the TeamWorks
initiative, coupled with the dedication and hard work of our employees, allowed
us to continue to generate discharge growth throughout 2009, in spite of the
difficult comparisons to 2008’s growth. This growth in discharges helped
mitigate the negative impact of the pricing roll-back.
Net
patient revenue from our hospitals was 5.6% higher in 2009 than 2008, and it was
7.5% higher in 2008 than 2007. The increase in each year was primarily
attributable to a 5.4% and 7.0%, respectively, year-over-year increase in
patient discharges. Same store discharges were 4.8% higher in 2009 than 2008 and
6.6% higher in 2008 than 2007. Net patient revenue per discharge increased in
both 2009 and 2008 due primarily to higher average acuity for the patients we
served. Net patient revenue from our hospitals in 2008 also benefitted from the
acquisition of a hospital in Vineland, New Jersey and two market consolidation
transactions in Texas.
Decreased
outpatient volumes in all periods presented resulted primarily from the closure
of outpatient satellites, but challenges in securing therapy staffing for these
outpatient satellites in certain markets and continued competition from
physicians offering physical therapy services within their own offices also
contributed to the decline. As of December 31, 2009, 2008, and 2007, we operated
40, 50, and 61 outpatient satellites, respectively, including one joint venture
satellite. Strong unit pricing and the closure of underperforming satellites
resulted in higher net patient revenue per visit in each year. We continuously
monitor the performance of our outpatient satellites and will take appropriate
action with respect to underperforming facilities, including
closure.
See this
Item, “Executive Overview – Key Challenges,” and Item 1, Business, “Healthcare
Reform,” for a discussion of potential future reductions to market basket
updates.
Salaries
and Benefits
Salaries and benefits
represent the most significant cost to us and represent an investment in our
most important asset: our employees. Salaries and benefits include
all amounts paid to full- and part-time employees who directly participate in or
support the operations of our hospitals, including all related costs of benefits
provided to employees. It also includes amounts paid for contract
labor.
We
actively manage the productive portion of our Salaries and benefits
utilizing certain metrics, including employees per occupied bed, or “EPOB.” This
metric is determined by dividing the number of full-time equivalents, including
an estimate of full-time equivalents from the utilization of contract labor, by
the number of occupied beds during each period. The number of occupied beds is
determined by multiplying the number of licensed beds by our occupancy
percentage. For the years ended December 31, 2009, 2008, and 2007, our EPOB was
3.53, 3.62, and 3.73, respectively, or a year-over-year improvement of 2.5% and
2.9% in 2009 and 2008, respectively.
Salaries and benefits were
49.6%, 50.7%, and 49.8% of Net
operating revenues in 2009, 2008, and 2007, respectively. The increase
from 2007 to 2008 was due primarily to non-productive factors such as annual
merit increases given to employees without an offsetting increase in our pricing
due to the Medicare pricing roll-back discussed above, enhanced benefits, and
training and orienting new employees needed as a result of additional volumes.
During late 2008, we addressed our comprehensive benefits package and made
refinements that allowed us, and will continue to allow us, to remain
competitive in this challenging staffing environment while also being consistent
with our goal of being a high-quality, low-cost provider of inpatient
rehabilitative services. Such refinements included, but were not limited to,
passing along a portion of the increased costs associated with medical plan
benefits to our employees and reducing certain aspects of our paid-time-off
program. Also, as a result of our recruiting and retention efforts, costs
associated with contract labor decreased in 2009. As a result, Salaries and benefits as a
percent of Net operating
revenues decreased from 2008 to 2009.
As it is
routine to provide merit increases to our employees on October 1 of each year,
which normally coincides with our annual Medicare pricing adjustment, we
provided an approximate 2.3% merit increase to our employees effective October
1, 2009.
Our
staffing priority is always to effectively treat our patients and to continue
achieving the excellence in clinical outcomes that differentiates us from our
competitors. We will continue to actively manage the productive component of our
Salaries and benefits,
and we will continue to focus on our recruiting and retention
efforts.
Other
Operating Expenses
Other operating expenses
include costs associated with managing and maintaining our hospitals. These
expenses include such items as contract services, utilities, insurance,
professional fees, and repairs and maintenance.
In 2008
and 2007, we experienced a reduction in self-insurance costs due to revised
actuarial estimates that resulted from current claims history and industry-wide
loss development trends. These reductions were primarily included in Other operating expenses in
our consolidated statements of operations for the years ended December 31, 2009,
2008, and 2007. See Note 10, Self-Insured Risks, to the
accompanying consolidated financial statements for additional
information.
Other operating expenses were
higher during 2009 than in 2008 primarily due to increased patient volumes and
the year-over-year impact of the reduction in self-insurance costs discussed
above. Other operating
expenses were higher during 2008 than in 2007 primarily due to increased
patient volumes, repairs and maintenance expenses associated with the
refurbishment of some of our aging hospitals, and costs associated with the
implementation of our TeamWorks initiative.
General
and Administrative Expenses
General and administrative
expenses primarily include administrative expenses such as information
technology services, corporate accounting, human resources, internal audit and
controls, and legal services that are managed from our corporate headquarters in
Birmingham, Alabama. These expenses also include all stock-based compensation
expenses.
As
discussed in the “Results of Discontinued Operations” section of this Item and
Note 18, Assets Held for Sale
and Results of Discontinued Operations, to the accompanying consolidated
financial statements, we divested our surgery centers, outpatient, and
diagnostic divisions during 2007. Because we did not allocate corporate overhead
by division, our operating results for the year ended December 31, 2007 reflect
overhead costs associated with managing and providing shared services to these
divisions, through their respective dates of sale, even though these divisions
qualify as discontinued operations.
General and administrative
expenses as a percent of Net operating revenues
decreased from 2008 to 2009 due primarily to a reduction in corporate-related,
full-time equivalents and moving certain processes “in-house” versus using
external consultants and other professionals.
Our General and administrative
expenses were lower in 2008 compared to 2007 due primarily to the
right-sizing of our corporate departments following the divestitures of our
surgery centers, outpatient, and diagnostic divisions. The reduction in General and administrative
expenses resulting from our divestiture transactions was partially offset
by rent expense associated with the sale of our corporate campus and subsequent
leasing of our corporate office space within the same property that was sold.
Supplies
Supplies expense includes all
costs associated with supplies used while providing patient care. These costs
include pharmaceuticals, food, needles, bandages, and other similar items. The
increase in Supplies
expense in each period was due primarily to an increase in the number of
patients treated.
Depreciation
and Amortization
Depreciation and amortization
for the year ended December 31, 2008 included a charge related to the
accelerated depreciation of our corporate campus so that the net book value of
the corporate campus equaled the net proceeds we received on the transaction’s
closing date. The change in Depreciation and amortization
in each year presented primarily resulted from this transaction. See Note 5,
Property and Equipment,
to the accompanying consolidated financial statements.
As we
continue to grow and expand our inpatient rehabilitation business, we expect our
depreciation and amortization charges to increase going forward.
Impairment
of Long-Lived Assets
During
2008, we recorded an impairment charge of $0.6 million. This charge represented
our write-down of certain long-lived assets associated with one of our hospitals
to their estimated fair value based on an offer we received from a third party
to acquire the assets.
During
2007, we recognized long-lived asset impairment charges of $15.1 million.
Approximately $14.5 million of these charges related to the Digital Hospital (as
defined in Note 5, Property and Equipment, to
the accompanying consolidated financial statements). On June 1, 2007, we
entered into a sale agreement and wrote the Digital Hospital down by $14.5
million to its estimated fair value based on the estimated net proceeds we
expected to receive from this sale. This agreement to sell our corporate campus
was terminated on August 7, 2007, pursuant to an opt-out provision in the
agreement. As discussed in Note 5, Property and Equipment, to
the accompanying consolidated financial statements, we sold our corporate campus
on March 31, 2008.
Gain
on UBS Settlement
As
discussed in more detail in Note 22, Settlements, to the
accompanying consolidated financial statements, we entered into an agreement
with UBS Securities to settle litigation filed by the derivative plaintiffs on
the Company’s behalf. Under the settlement, $100.0 million in cash previously
paid into escrow by UBS Securities and its insurance carriers was released to
us, and we received a release of all claims by UBS Securities, including the
release and satisfaction of an approximate $31 million judgment in favor of an
affiliate of UBS Securities related to a loan guarantee.
Out of
the $100.0 million cash settlement proceeds received from UBS Securities and its
insurance carriers, we were obligated to pay $26.2 million in fees and expenses
to the derivative plaintiffs’ attorneys and are obligated to pay 25% of the net
proceeds, after deducting all of our costs and expenses in connection with the
derivative litigation, to the plaintiffs in the consolidated securities
litigation. See this Item, “Results of Operations – Government, Class Action,
and Related Settlements Expense” and “Results of Operations – Professional Fees
– Accounting, Tax, and Legal,” for additional information.
As a
result of this settlement, we recorded a $121.3 million gain in our consolidated
statement of operations for the year ended December 31, 2008.
This gain was comprised of the $100.0 million cash portion of the settlement
plus the principal portion of the above referenced loan guarantee.
Occupancy Costs
Occupancy costs include
amounts paid for rent associated with leased hospitals, including common area
maintenance and similar charges. These costs did not change significantly in the
periods presented.
Provision
for Doubtful Accounts
As
disclosed previously, we have experienced denials of certain diagnosis codes by
Medicare contractors based on medical necessity. We appeal most of these denials
and have experienced a strong success rate for claims that have completed the
appeals process. While our success rate is a positive reflection of the medical
necessity of the applicable patients, the appeal process can take in excess of
one year, and we cannot provide assurance as to the ongoing and future success
of our appeals. As such, we have made provisions against these receivables in
accordance with our accounting policy that necessarily considers the age of the
receivables under appeal as part of
our Provision for doubtful
accounts. The aging of these types of claims has resulted in an increase
in our Provision for doubtful
accounts as a percent of Net operating revenues during
2009.
During
the latter half of 2007, we began seeing the positive benefits from new
collections software installed in late 2006, as well as the standardization of
certain business office processes. The decrease in the Provision for doubtful
accounts as a percent of Net operating revenues from
2007 to 2008 primarily resulted from receiving a full year of benefits under the
new system and processes.
Loss
on Disposal of Assets
The Loss on disposal of assets in
each year presented primarily resulted from various equipment disposals
throughout each period. In 2009 and 2008, these losses also included the
write-off of certain assets as we updated, or “refreshed,” some of our
hospitals. For the year ended December 31, 2009, it also included losses
associated with our write-down of certain assets held for sale to their
estimated fair value based on offers we received from third parties to acquire
the assets. For additional information, see Note 15, Fair Value Measurements, to
the accompanying consolidated financial statements.
Government,
Class Action, and Related Settlements Expense
The
majority of the amounts recorded as Government, class action, and
related settlements expense in each period resulted from changes in the
fair value of our common stock and the associated common stock warrants
underlying our securities litigation settlement. Prior to the issuance of these
shares of common stock and common stock warrants on September 30, 2009, at each
period end, we adjusted our liability for this settlement based on the value of
our common stock and the associated common stock warrants. To the extent the
price of our common stock increased, we would increase our liability and record
losses. When the price of our common stock decreased, we would reduce our
liability and record gains. The final fair value adjusted related to these
shares and warrants was made in 2009 when we issued the underlying common stock
and common stock warrants. See Note 22, Settlements, to the
accompanying consolidated financial statements for additional
information.
Government, class action, and
related settlements expense for the year ended December 31, 2009 included
a $37.2 million increase in the liability associated with our securities
litigation settlement based on the value of our common stock and the associated
common stock warrants underlying this settlement. Government, class action, and
related settlements expense for 2009 also included a net gain of $0.5
million associated with certain settlements and other matters discussed in Note
22, Settlements, and
Note 23, Contingencies and
Other Commitments, to the accompanying consolidated financial
statements.
Government, class action, and
related settlements expense for the year ended December 31, 2008 included
an $85.2 million decrease in the liability associated with our securities
litigation settlement based on the value of our common stock and the associated
common stock warrants underlying this settlement. Government, class action, and
related settlements expense also included a net charge of $18.0 million
during 2008 for certain settlements and indemnification obligations. These
obligations primarily related to amounts owed to the derivative plaintiffs in
our securities litigation settlement as a result of the UBS Settlement discussed
in Note 22, Settlements, to the
accompanying consolidated financial statements. As discussed in that note, the
derivative plaintiffs are entitled to 25% of any net recoveries from judgments
obtained by us or on our behalf with respect to certain claims against Mr.
Scrushy, Ernst & Young LLP, and UBS Securities.
Government, class action, and
related settlements expense for the year ended December 31, 2007 included
a $24.0 million decrease in the liability associated with our securities
litigation settlement based on the value of our common stock and the associated
common stock warrants underlying this settlement. In addition, Government, class action, and
related settlements expense in 2007 included a charge of $14.2 million
associated with a final settlement with the Office of Inspector General of the
United States Department of Health and Human Services related to certain
self-disclosures. Government,
class action, and related settlements expense also included a net charge
of approximately $7.0 million during 2007 for certain settlements and other
settlement negotiations that were ongoing as of December 31, 2007.
For
additional information, see Note 22, Settlements, and
Note 23, Contingencies
and Other Commitments, to the accompanying consolidated financial
statements.
Professional
Fees—Accounting, Tax, and Legal
As
discussed in Note 23, Contingencies and Other
Commitments, to the accompanying consolidated financial statements, in
June 2009, a court ruled that Mr. Scrushy committed fraud and breached his
fiduciary duties during his time with HealthSouth. Based on this judgment, we
have no obligation to indemnify him for any litigation costs. Therefore, we
reversed the remainder of our accrual for his legal fees, which resulted in a
reduction in Professional fees
– accounting, tax, and legal of $6.5 million during the year ended
December 31, 2009.
Excluding
the reversal of accrued fees discussed above, Professional fees – accounting, tax,
and legal for the year ended December 31, 2009 related primarily to legal
and consulting fees for continued litigation defense and support matters arising
from prior reporting and restatement issues and income tax return preparation
and consulting fees for various tax projects related to our pursuit of our
remaining income tax refund claims.
Professional fees—accounting, tax,
and legal for the year ended December 31, 2008 related primarily to
legal fees for continued litigation defense and support matters arising from our
prior reporting and restatement issues and income tax return preparation and
consulting fees for various tax projects related to our pursuit of our remaining
income tax refund claims. Specifically, these fees included the $26.2 million of
fees and expenses awarded to the derivative plaintiffs’ attorneys as part of the
UBS Settlement discussed in Note 22, Settlements, to the
accompanying consolidated financial statements.
Professional fees—accounting, tax,
and legal for the year ended December 31, 2007 related primarily to
income tax consulting fees for various tax projects (including tax projects
associated with our filing of amended income tax returns for 1996 to 2003),
legal fees for continued litigation defense and support matters arising from our
prior reporting and restatement issues, and consulting fees associated with
support received during our divestiture activities.
See Note
22, Settlements, and
Note 23, Contingencies and
Other Commitments, to the accompanying consolidated financial statements
for a description of our continued litigation defense and support matters
arising from our prior reporting and restatement issues.
Loss
on Early Extinguishment of Debt
As
disclosed previously and throughout this report, during 2009, 2008, and 2007, we
used the net proceeds from various non-operating sources of cash, as well as
available cash, to pay down long-term debt. In addition, during 2009, we
completed a refinancing transaction in which we issued $290.0 million of 8.125%
Senior Notes due 2020 and used the net proceeds from this transaction, along
with cash on hand, to tender for and redeem all Floating Rate Senior Notes due
2014 outstanding at that time. The amounts included in Loss on early extinguishment of
debt in 2009 and 2008 are a result of these transactions.
Interest
Expense and Amortization of Debt Discounts and Fees
As
discussed in Note 9, Derivative Instruments, to
the accompanying consolidated financial statements, as well as in Item 7A, Quantitative and Qualitative
Disclosures about Market Risk, we have effectively converted $1.0 billion
of variable rate interest to a fixed rate via interest rate swaps that are not
designated as hedges. Because these swaps are not designated as hedges, the line
item Interest expense and
amortization of debt discounts and fees, benefits from lower interest
rates. However, lower rates generate increased payments on our interest rate
swaps and increase amounts included in the line item Loss on interest rate
swaps.
As
discussed earlier in this Item and in Note 8, Long-term Debt, to the
accompanying consolidated financial statements, due to the requirements under
our credit agreement to use the net proceeds from the 2007 divestitures of our
surgery centers, outpatient, and diagnostic divisions to repay obligations
outstanding under our credit agreement, we allocated interest expense on the
debt that was required to be repaid as a result of the divestiture transactions
to discontinued operations in 2007. The following table provides information
regarding our total Interest
expense and amortization of debt discounts and fees presented in our
consolidated statements of operations for both continuing and discontinued
operations:
|
For
the Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In
Millions)
|
||||||||||||
|
Continuing
operations:
|
||||||||||||
|
Interest
expense
|
$ | 119.2 | $ | 153.0 | $ | 221.6 | ||||||
|
Amortization
of debt discounts and fees
|
6.6 | 6.5 | 7.8 | |||||||||
|
Interest
expense and amortization of debt discounts and fees
|
125.8 | 159.5 | 229.4 | |||||||||
|
Interest
expense for discontinued operations
|
1.3 | 1.9 | 45.9 | |||||||||
|
Total
interest expense and amortization of debt discounts and
fees
|
$ | 127.1 | $ | 161.4 | $ | 275.3 | ||||||
The
discussion that follows related to Interest expense and amortization of
debt discounts and fees is based on total interest expense, including the
amounts allocated to discontinued operations.
Approximately
$17.4 million of the decrease in Interest expense and amortization of
debt discounts and fees from 2008 to 2009 was due to a decrease in our
average interest rate year over year. Our average interest rate was 7.0% during
2009 compared to an average rate of 8.0% during 2008. The remainder of the
decrease was due to lower average borrowings which resulted from the debt
reductions discussed in Note 2, Liquidity, and Note 8, Long-term Debt, to the
accompanying consolidated financial statements.
Approximately
$76.1 million of the decrease in Interest expense and amortization of
debt discounts and fees from 2007 to 2008 was due to lower average
borrowings which resulted from our use of the net proceeds from our divestiture
transactions and the majority of our federal income tax recovery in 2007 to
reduce debt, as well as the use of the proceeds from the sale of our corporate
campus, our equity offering, and an additional income tax refund received in
2008 to reduce total debt outstanding. The remainder of the decrease was due
primarily to a decrease in our average interest rate from 2007 to 2008. Our
average interest rate was 8.0% in 2008 compared to an average rate of 9.9% in
2007. Interest expense and
amortization of debt discounts and fees for 2008 also included the
reversal of $9.4 million of accrued interest related to the loan guarantee
discussed in Note 22, Settlements, “UBS Litigation
Settlement,” to the accompanying consolidated financial statements.
See also
Note 8, Long-term
Debt, to the accompanying consolidated financial statements.
Other
Income
Other income is primarily
comprised of interest income and gains and losses on sales of investments. In
2009 and 2008, Other
income included $1.4 million and $1.8 million, respectively, of
impairment charges associated with our marketable equity securities and certain
other cost method investments. See Note 3, Cash and Marketable
Securities, to the accompanying consolidated financial
statements.
During
2007, we sold our remaining investment in Source Medical to Source Medical and
recorded a gain on sale of approximately $8.6 million, which is included in
Other income. See
Note 21, Related Party
Transactions, to the accompanying consolidated financial statements for
more information on Source Medical. As a result of this transaction, we have no
further affiliation or material related-party contracts with Source
Medical.
Loss
on Interest Rate Swaps
Our Loss on interest rate swaps
in each year represents amounts recorded related to the fair value adjustments
and quarterly settlements recorded for our interest rate swaps that are not
designated as hedges. The net loss
recorded in each year presented represents the change in the market’s
expectations for interest rates over the
remaining
term of the swap agreements. To the extent the expected LIBOR rates increase, we
will record net gains. When expected LIBOR rates decrease, we will record net
losses.
During
the years ended December 31, 2009, 2008, and 2007, we had net cash
settlement (payments) receipts of ($42.2) million, ($20.7) million, and $3.2
million, respectively, with our counterparties. The net payment obligations on
our interest rate swaps reflect the difference between the fixed rate we pay
(5.2%) and the three-month LIBOR rate we receive. Three-month LIBOR declined
significantly in the first quarter of 2008 and again in the fourth quarter of
2008 leading to increases in our net payment obligations in 2008 and 2009. For
additional information regarding these interest rate swaps, see Note 9,
Derivative Instruments,
to the accompanying consolidated financial statements.
Equity
in Net Income of Nonconsolidated Affiliates
As
discussed above and in Note 1, Summary of Significant Accounting
Policies, to the accompanying consolidated financial statements, Equity in net income of
nonconsolidated affiliates for 2009 included an out-of-period adjustment
associated with a facility we account for using the equity method of accounting.
This adjustment created a charge of approximately $4.5 million for the year
ended December 31, 2009.
Income
(Loss) from Continuing Operations Before Income Tax Benefit
Our Income (loss) from continuing
operations before income tax benefit (“pre-tax income (loss) from
continuing operations”) for 2009, 2008, and 2007 included net losses (gains) of
$36.7 million, ($188.5) million, and ($2.8) million, respectively, related to
Government, class action, and
related settlements expense, including the gain on the UBS Settlement
(see Note 22, Settlements, to the
accompanying consolidated financial statements). Pre-tax income (loss) from
continuing operations for 2009, 2008, and 2007 also included $8.8 million, $44.4
million, and $51.6 million, respectively, of expenses associated with Professional fees – accounting, tax,
and legal, as discussed above. It also included losses of $19.6 million,
$55.7 million, and $30.4 million, respectively, associated with our interest
rate swaps that are not designated as hedges (see Note 9, Derivative Instruments, to
the accompanying consolidated financial statements).
Excluding
these items, the improvement in pre-tax income from continuing operations from
2008 to 2009 resulted from an increase in Net operating revenues, a
decrease in depreciation, and a decrease in interest expense. The improvement
from 2007 to 2008 resulted from an increase in Net operating revenues and a
decrease in interest expense.
Our
pre-tax loss from continuing operations for the year ended December 31, 2007
included an $8.6 million gain related to the sale of our remaining investment in
Source Medical (see Note 21, Related Party Transactions,
to the accompanying consolidated financial statements).
Provision
for Income Tax Benefit
As a
result of our adoption of authoritative guidance related to noncontrolling
interests, our effective tax rate is determined from earnings from continuing
operations before income tax which include net income attributable to
noncontrolling interests. See Note 1, Summary of Significant Accounting
Policies, “Reclassifications,” to the accompanying consolidated financial
statements.
The
change in our income tax benefit in each year presented was due primarily to the
recovery of federal income taxes and related interest in 2008 and 2007, as
discussed in Note 19, Income
Taxes, to the accompanying consolidated financial
statements.
Our Provision for income tax
benefit in 2009 included the following: (1) current income tax benefit of
$16.4 million primarily attributable to state income tax refunds received, or
expected to be received, offset by (2) current income tax expense of $9.1
million attributable to state income tax expense of subsidiaries which have
separate state filing requirements and federal income taxes for subsidiaries not
included in our federal consolidated income tax return and (3) deferred income
tax expense of $4.1 million attributable to increases in basis differences of
certain indefinite-lived liabilities and a decrease in our deferred tax
asset related to the alternative minimum tax refundable tax credit.
Net
Income Attributable to Noncontrolling Interests
Net income attributable to
noncontrolling interests represents the share of net income or loss
allocated to members or partners in our consolidated affiliates. Fluctuations in
these amounts are primarily driven by the financial performance of the
applicable hospital population each period.
Impact
of Inflation
The
impact of inflation on the Company will be primarily in the area of labor costs.
The healthcare industry is labor intensive. Wages and other expenses increase
during periods of inflation and when labor shortages occur in the marketplace.
While we believe the current economic climate may help to moderate wage
increases in the near term, there can be no guarantee we will not experience
increases in the cost of labor, as the need for clinical healthcare
professionals is expected to grow. In addition, suppliers pass along rising
costs to us in the form of higher prices. While we currently are able to
accommodate increased pricing related to supplies, especially pharmaceutical
costs, and other operating expenses, we cannot predict our ability to cover
future cost increases. Adherence to cost containment should allow us to manage
the effects of inflation on future operating results.
It should
be noted that we have little or no ability to pass on these increased costs
associated with providing services to Medicare and Medicaid patients due to
federal and state laws that establish fixed reimbursement rates.
Relationships
and Transactions with Related Parties
Related
party transactions are not material to our operations, and therefore, are not
presented as a separate discussion within this Item. When these relationships or
transactions were significant to our results of operations during the years
ended December 31, 2009, 2008, and 2007, information regarding the
relationship or transaction(s) have been included within this Item. For
additional information, see Note 21, Related Party Transactions,
to the accompanying consolidated financial statements.
Results
of Discontinued Operations
During
2009, we terminated the leases associated with certain rental properties and
reached an agreement to sell one of our hospitals to a third party. As a result,
we reclassified our consolidated balance sheet as of December 31, 2008 to
show the assets and liabilities of these facilities as held for sale. We also
reclassified our consolidated statements of operations and consolidated
statements of cash flows for the years ended December 31, 2008 and 2007 to
include these properties and their results of operations as discontinued
operations.
The
operating results of discontinued operations, by division and in total, are as
follows (in millions):
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
HealthSouth
Corporation:
|
||||||||||||
|
Net
operating revenues
|
$ | 9.8 | $ | 28.3 | $ | 53.1 | ||||||
|
Costs
and expenses
|
13.4 | 31.6 | 53.8 | |||||||||
|
Impairments
|
4.0 | 10.0 | - | |||||||||
|
Loss
from discontinued operations
|
(7.6 | ) | (13.3 | ) | (0.7 | ) | ||||||
|
(Loss)
gain on disposal of assets of discontinued operations
|
(0.4 | ) | (0.1 | ) | 1.6 | |||||||
|
Income
tax (expense) benefit
|
(0.1 | ) | (0.1 | ) | 0.2 | |||||||
|
(Loss)
income from discontinued operations, net of tax
|
$ | (8.1 | ) | $ | (13.5 | ) | $ | 1.1 | ||||
|
Surgery
Centers:
|
||||||||||||
|
Net
operating revenues
|
$ | 7.4 | $ | 10.7 | $ | 381.7 | ||||||
|
Costs
and expenses
|
3.9 | 6.6 | 324.5 | |||||||||
|
Impairments
|
- | 1.2 | 4.8 | |||||||||
|
Income
from discontinued operations
|
3.5 | 2.9 | 52.4 | |||||||||
|
Gain
on disposal of assets of discontinued operations
|
0.7 | 0.2 | 1.9 | |||||||||
|
Gain
on divestiture of division
|
13.4 | 19.3 | 314.9 | |||||||||
|
Income
tax benefit
|
0.4 | 3.8 | 18.4 | |||||||||
|
Income
from discontinued operations, net of tax
|
$ | 18.0 | $ | 26.2 | $ | 387.6 | ||||||
|
Other:
|
||||||||||||
|
Net
operating revenues
|
$ | 0.6 | $ | 2.7 | $ | 219.3 | ||||||
|
Costs
and expenses
|
8.5 | (2.0 | ) | 207.0 | ||||||||
|
Impairments
|
- | 0.6 | 33.4 | |||||||||
|
(Loss)
income from discontinued operations
|
(7.9 | ) | 4.1 | (21.1 | ) | |||||||
|
Gain
on disposal of assets of discontinued operations
|
0.1 | - | 1.6 | |||||||||
|
Net
(loss) gain on divestitures of divisions
|
- | (0.6 | ) | 137.0 | ||||||||
|
Income
tax expense
|
- | - | (16.0 | ) | ||||||||
|
(Loss)
income from discontinued operations, net of tax
|
$ | (7.8 | ) | $ | 3.5 | $ | 101.5 | |||||
|
Total:
|
||||||||||||
|
Net
operating revenues
|
$ | 17.8 | $ | 41.7 | $ | 654.1 | ||||||
|
Costs
and expenses
|
25.8 | 36.2 | 585.3 | |||||||||
|
Impairments
|
4.0 | 11.8 | 38.2 | |||||||||
|
(Loss)
income from discontinued operations
|
(12.0 | ) | (6.3 | ) | 30.6 | |||||||
|
Gain
on disposal of assets of discontinued operations
|
0.4 | 0.1 | 5.1 | |||||||||
|
Net
gain on divestitures of divisions
|
13.4 | 18.7 | 451.9 | |||||||||
|
Income
tax benefit
|
0.3 | 3.7 | 2.6 | |||||||||
|
Income
from discontinued operations, net of tax
|
$ | 2.1 | $ | 16.2 | $ | 490.2 | ||||||
As
discussed in Note 8, Long-term Debt, to the
accompanying consolidated financial statements, due to the requirements under
our credit agreement to use the net proceeds from the divestitures of our
surgery centers, outpatient, and diagnostic divisions to repay obligations
outstanding under our credit agreement, we allocated the interest expense on the
debt that was required to be repaid as a result of the divestiture transactions
to discontinued operations in 2007.
HealthSouth Corporation. Our
results of discontinued operations primarily included the operations of the
following hospitals: Union LTCH (closed in February 2007); Alexandria LTCH (sold
in May 2007); Winnfield LTCH (sold in August 2007); Terre Haute LTCH (closed in
August 2007); Dallas Medical Center (closed in October 2008); and our hospital
in Baton Rouge, Louisiana (sold in January 2010). These results also included
the operations of our electro-shock wave lithotripter units (sold in June 2007),
our gamma knife radiosurgery center in Texas
(lease expired in July 2008), and certain other properties (leases terminated in
the first quarter of 2009). The
decrease
in net operating revenues and costs and expenses in each period presented were
due primarily to the performance and eventual sale or closure of these
facilities and properties.
During
2009, we recorded an impairment charge of $4.0 million related to our hospital
in Baton Rouge, Louisiana that qualified to be reported as discontinued
operations in 2009 and was sold in January 2010. We determined the fair value of
the impaired long-lived assets at the hospital based on an offer from a third
party to purchase the assets. During 2008, we recorded impairment charges of
$10.0 million. The majority of these charges related to the Dallas Medical
Center. We determined the fair value of the impaired long-lived assets at the
hospital primarily based on the assets’ estimated fair value using valuation
techniques that included third-party appraisals and an evaluation of current
real estate market conditions in the applicable area.
Surgery Centers. We closed
the transaction to sell our surgery centers division to ASC Acquisition LLC
(“ASC”) on June 29, 2007, other than with respect to certain facilities in
Connecticut, Rhode Island, and Illinois for which approvals for the transfer to
ASC had not yet been received as of such date. In August and November 2007, we
received approval and transferred the applicable facilities in Connecticut and
Rhode Island, respectively, and in January 2008, we received approval for
the change in control of five of the six Illinois facilities. Approval for the
sixth Illinois facility was obtained in the fourth quarter of 2009. No portion
of the purchase price was withheld at closing pending the transfer of these
facilities.
As a
result of the transfer of the five Illinois facilities during the first quarter
of 2008, we recorded a gain on disposal of $19.3 million. An additional gain of
$13.4 million was recorded in the fourth quarter of 2009 when the final Illinois
facility was transferred to ASC. For additional information, see Note 18,
Assets Held for Sale and
Results of Discontinued Operations, to the accompanying consolidated
financial statements.
The
change in operating results for this division for all periods presented resulted
from the divestiture activity discussed above.
Other. Results of operations
in “other” primarily include the results of operations of our former outpatient
and diagnostic divisions. We sold our outpatient division to Select Medical in
2007. We closed the transaction to sell our diagnostic division to The Gores
Group in July 2007, other than with respect to one facility for which approval
for the transfer had not yet been received as of such date. During the first
quarter of 2008, we received approval for the transfer of the remaining facility
to The Gores Group. For additional information, see Note 18, Assets Held for Sale and Results of
Discontinued Operations, to the accompanying consolidated financial
statements.
The
change in operating results for these divisions for all periods presented
resulted from the divestiture activity discussed above. Amounts included in
income from discontinued operations for 2008 primarily related to the expiration
of a contingent liability associated with a prior contractual agreement
associated with our former outpatient division. See also Note 23, Contingencies and Other
Commitments, to the accompanying consolidated financial
statements.
During
the first quarter of 2007, we wrote the intangible assets and certain long-lived
assets of our diagnostic division down to their estimated fair value based on
the estimated net proceeds we expected to receive from the divestiture of the
division. This charge is included in impairments in the above results of
operations.
Liquidity
and Capital Resources
We
continue to improve our leverage and liquidity. Our progress was confirmed
during the second quarter of 2009 when Moody’s upgraded our corporate credit
rating to B2, allowing the spread on our term loan facility to be reduced by 25
basis points effective June 10, 2009. In addition, Standard and Poor’s moved our
outlook to “positive” from “stable.” During the year ended December 31, 2009, we
reduced our total debt outstanding by approximately $151 million and increased
our Cash and cash
equivalents by approximately $49 million. In addition to our debt
reduction, we improved our overall debt profile by refinancing senior notes,
extending a portion of our term loan facility, and amending other terms of our
credit agreement.
In
February 2009, we used our federal income tax refund for tax years 1995 through
1999 (see Note 19, Income
Taxes, to the accompanying consolidated financial statements) along with
available cash to reduce our term loan facility by $24.5 million and amounts
outstanding under our revolving credit facility to zero. In addition, we
used a
portion of the net proceeds from our settlement with UBS (see Note 22, Settlements, to the
accompanying
consolidated
financial statements) to redeem $36.4 million of our Floating Rate Senior Notes
due 2014. In December 2009, we completed a refinancing transaction in which we
issued $290.0 million of 8.125% Senior Notes due 2020 and tendered for and
redeemed the remaining $329.6 million of our outstanding Floating Rate Senior
Notes due 2014. The refinancing transaction reduced debt, extended debt
maturities, and reduced floating rate interest exposure. See Note 2, Liquidity, and Note 8, Long-term Debt, to the
accompanying consolidated financial statements for additional
information.
Our
primary sources of liquidity are cash on hand, cash flows from operations, and
borrowings under our revolving credit facility. As of December 31, 2009, we had
$80.9 million in Cash and cash
equivalents. This amount excludes $67.8 million in Restricted cash and $21.0
million of restricted marketable securities. Our restricted assets pertain to
obligations we have under partnership agreements and other arrangements,
primarily related to our captive insurance company. Cash and cash equivalents
increased during 2009 primarily due to strong operational cash flows as a result
of increased inpatient discharges and non-operating cash flows received in the
UBS Settlement (see Note 22, Settlement, to the
accompanying consolidated financial statements) and from income tax refunds (see
Note 19, Income
Taxes, to the accompanying consolidated financial statements). This
increase was also in spite of the use of cash for debt service, principal
prepayments, and costs associated with refinancing transactions. We continue to
analyze our capital structure, and we will use our available cash in a manner
that provides the most beneficial impact and return to our shareholders,
including development opportunities and deleveraging.
As of
December 31, 2009, we had all $400 million available to us under our revolving
credit facility. We monitor the financial strength of our depositories,
creditors, insurance carriers, and other counterparties using publicly available
information, as well as qualitative inputs. Based on our current borrowing
capacity and compliance with the financial covenants under our credit agreement,
we do not believe there is significant risk in our ability to make draws under
our revolving credit facility, if needed. However, no such assurances can be
provided. In addition, we anticipate cash flows from certain non-operating
sources, such as those related to certain legal matters discussed in Note 22,
Settlements, and Note
23, Contingencies and Other
Commitments, to the accompanying consolidated financial statements.
However, no assurances can be given as to whether or when such non-operating
cash flows will be received or as to the collectability of any amounts owed to
us.
We have
scheduled principal payments of $21.5 million and $20.8 million in 2010 and
2011, respectively, related to long-term debt obligations (see Note 8,
Long-term Debt, to the
accompanying consolidated financial statements). We do not face near-term
refinancing risk, as our revolving credit facility does not expire until 2012, a
portion of our term loan facility does not mature until 2013, with the remainder
maturing in 2015, and the majority of our bonds are not due until 2016 and
2020.
Our
credit agreement governs the vast majority of our senior secured borrowings and
contains financial covenants that include a leverage ratio and an interest
coverage ratio. As of December 31, 2009, we were in compliance with the
covenants under our credit agreement. If we anticipated a potential covenant
violation, we would seek relief from our lenders, which would have some cost to
us, and such relief might not be on terms favorable to those in our existing
credit agreement. Under such circumstances, there is also the potential our
lenders would not grant relief to us which, among other things, would depend on
the state of the credit markets at that time. However, we believe we have
reduced this risk by significantly lowering our senior secured leverage ratio
since the inception of our credit agreement.
See Item
1A, Risk Factors, and
Note 1, Summary of
Significant Accounting Policies, to the accompanying consolidated
financial statements for a discussion of risks and uncertainties facing us. See
also Note 2, Liquidity,
to the accompanying consolidated financial statements.
Sources
and Uses of Cash
As noted
above, our primary sources of liquidity are cash on hand, cash flows from
operations, and borrowings under our revolving credit facility. The following
table shows the cash flows provided by or used in operating, investing, and
financing activities for the years ended December 31, 2009, 2008, and 2007,
as well as the effect of exchange rates for those same years (in
millions):
|
For
the Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
cash provided by operating activities
|
$ | 406.1 | $ | 227.2 | $ | 230.6 | ||||||
|
Net
cash (used in) provided by investing activities
|
(133.0 | ) | (40.0 | ) | 1,184.5 | |||||||
|
Net
cash used in financing activities
|
(224.3 | ) | (176.0 | ) | (1,436.6 | ) | ||||||
|
Effect
of exchange rate changes on cash and cash
equivalents
|
- | 0.8 | 0.1 | |||||||||
|
Increase
(decrease) in cash and cash equivalents
|
$ | 48.8 | $ | 12.0 | $ | (21.4 | ) | |||||
2009 Compared to
2008
Operating activities. Net cash provided by operating
activities increased year over year due to the increase in Net operating revenues, as
discussed above, and a decrease in cash interest expense. Net cash provided by operating
activities for the year ended December 31, 2009 included $73.8 million in
net cash proceeds related to the UBS Settlement and the receipt of $63.7 million
in income tax refunds. See Note 22, Settlements, and Note 19,
Income Taxes, to the
accompanying consolidated financial statements.
Investing activities.
Decreased proceeds from asset disposals, increased payments associated with
interest rate swaps not designated as cash flow hedges, increased restricted
cash, and increased capital expenditures in 2009 caused the change in Net cash used in investing
activities year over year. Net cash used in investing
activities for the year ended December 31, 2008 included $53.9 million
from asset disposals, including our corporate campus. See Note 5, Property and Equipment, to
the accompanying consolidated financial statements.
Financing activities. Net
debt payments during the years ended December 31, 2009 and 2008 were $157.1
million and $252.2 million, respectively. Net debt payments during 2009
primarily resulted from the receipt of the net cash proceeds related to the UBS
Settlement and the receipt of income tax refunds discussed above. See also Note
8, Long-term Debt, for
a discussion of our 2009 refinancing transaction. Net debt payments during 2008
resulted primarily from the sale of our corporate campus and the net proceeds
from our June 2008 equity offering. Proceeds of $150.2 million related to our
June 2008 equity offering were included in financing activities for the year
ended December 31, 2008. For additional information, see Note 5, Property and Equipment, and
Note 12, Shareholders’
Deficit, to the accompanying consolidated financial
statements.
2008 Compared to
2007
Operating activities. Net cash provided by operating
activities in 2008 and 2007 included federal income tax refunds of
approximately $46 million and $440 million, respectively. If we exclude these
cash refunds in each year, our Net cash provided by (used in)
operating activities becomes $181.2 million and ($209.4) million,
respectively, or a year-over-year improvement of $390.6 million. Net cash provided by operating
activities increased year over year due to the increase in Net operating revenues, as
discussed above, a decrease in cash interest expense, and a decrease in cash
settlement payments related primarily to our Medicare Program Settlement
negotiated in 2004 and our SEC Settlement negotiated in 2005. For additional
information related to these settlements, see Note 22, Settlements, to the
accompanying consolidated financial statements.
Investing activities. The
decrease in Net cash provided
by investing activities was due to the cash proceeds received from the
divestitures of our surgery centers, outpatient, and diagnostic divisions during
2007. See this Item, “Results of Discontinued Operations,” and Note 18, Assets Held for Sale and Results of
Discontinued Operations, to the accompanying consolidated financial
statements. Net cash used in
investing activities for 2008 included $39.2 million in expenditures
associated with our development activities, including $6.4 million of capital
expenditures associated with land purchases for de novo projects and the
acquisition of intangible assets associated with market
consolidation
transactions. See Note 6, Goodwill and Other Intangible
Assets, to the accompanying consolidated financial
statements.
Financing activities. The
decrease in Net cash used in
financing activities was due to the use of the cash proceeds from the
divestitures of our surgery centers, outpatient, and diagnostic divisions to
reduce debt outstanding under our credit agreement during 2007. During 2008, we
made approximately $252.2 million of net debt payments. During 2007, we made
approximately $1.3 billion of net debt payments. The net debt payments made
during 2008 primarily resulted from the sale of our corporate campus in March
2008, the net proceeds from our June 2008 equity offering, and our federal
income tax recovery in October 2008. See Note 5, Property and Equipment, Note
12, Shareholders’
Deficit, and Note 19, Income Taxes, to the
accompanying consolidated financial statements.
Adjusted
Consolidated EBITDA
Management
continues to believe Adjusted Consolidated EBITDA as defined in our credit
agreement is a measure of our ability to service our debt and our ability to
make capital expenditures.
We use
Adjusted Consolidated EBITDA on a consolidated basis as a liquidity measure. We
believe this financial measure on a consolidated basis is important in analyzing
our liquidity because it is the key component of certain material covenants
contained within our credit agreement, which is discussed in more detail in
Note 8, Long-term
Debt, to the accompanying consolidated financial statements. These
covenants are material terms of the credit agreement, and the credit agreement
represents a substantial portion of our capitalization. Non-compliance with
these financial covenants under our credit agreement—our interest coverage ratio
and our leverage ratio—could result in our lenders requiring us to immediately
repay all amounts borrowed. If we anticipated a potential covenant violation, we
would seek relief from our lenders, which would have some cost to us, and such
relief might not be on terms favorable to those in our existing credit
agreement. In addition, if we cannot satisfy these financial covenants, we would
be prohibited under our credit agreement from engaging in certain activities,
such as incurring additional indebtedness, making certain payments, and
acquiring and disposing of assets. Consequently, Adjusted Consolidated EBITDA is
critical to our assessment of our liquidity.
In
general terms, the definition of Adjusted Consolidated EBITDA, per our credit
agreement, allows us to add back to or subtract from consolidated Net income unusual non-cash
or non-recurring items. These items include, but may not be limited to,
(1) amounts associated with government, class action, and related
settlements, (2) amounts related to discontinued operations and closed
locations, (3) charges in respect of professional fees for reconstruction
and restatement of financial statements, including fees paid to outside
professional firms for matters related to internal controls and legal fees for
continued litigation defense and support matters discussed in Note 22, Settlements, and
Note 23, Contingencies
and Other Commitments, to the accompanying consolidated financial
statements, (4) stock-based compensation expense, (5) net investment
and other income (including interest income), and (6) fees associated with
our divestiture activities. We reconcile Adjusted Consolidated EBITDA to Net income and to Net cash provided by operating
activities.
In
accordance with the credit agreement, we are allowed to add certain other items
to the calculation of Adjusted Consolidated EBITDA, and there may also be
certain other deductions required. This includes the interest income associated
with income tax recoveries, as discussed in Note 19, Income Taxes, to the
accompanying consolidated financial statements. In addition, we are allowed to
add non-recurring cash gains, such as the cash proceeds from the UBS Settlement
(see Note 22, Settlements, to the
accompanying consolidated financial statements) to the calculation of Adjusted
Consolidated EBITDA. As these adjustments may not be indicative of our ongoing
performance, they have been excluded from Adjusted Consolidated EBITDA presented
herein.
However,
Adjusted Consolidated EBITDA is not a measure of financial performance under
generally accepted accounting principles in the United States of America, and
the items excluded from Adjusted Consolidated EBITDA are significant components
in understanding and assessing financial performance. Therefore, Adjusted
Consolidated EBITDA should not be considered a substitute for Net income or cash flows from
operating, investing, or financing activities. Because Adjusted Consolidated
EBITDA is not a measurement determined in accordance with GAAP and is thus
susceptible to varying calculations, Adjusted Consolidated EBITDA, as presented,
may not be comparable to other similarly titled measures of other companies.
Revenues and expenses are measured in accordance with the policies and
procedures described in Note 1, Summary of Significant Accounting
Policies, to the accompanying consolidated financial
statements.
Our
Adjusted Consolidated EBITDA for the years ended December 31, 2009, 2008,
and 2007 was as follows (in millions):
Reconciliation
of Net Income to Adjusted Consolidated EBITDA
|
For
the Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
income
|
$ | 128.8 | $ | 281.8 | $ | 718.7 | ||||||
|
Income
from discontinued operations, net of tax, attributable to
HealthSouth
|
(1.5 | ) | (16.6 | ) | (456.3 | ) | ||||||
|
Provision
for income tax benefit
|
(3.2 | ) | (70.1 | ) | (322.4 | ) | ||||||
|
Loss
on interest rate swaps
|
19.6 | 55.7 | 30.4 | |||||||||
|
Interest
expense and amortization of debt discounts and fees
|
125.8 | 159.5 | 229.4 | |||||||||
|
Loss
on early extinguishment of debt
|
12.5 | 5.9 | 28.2 | |||||||||
|
Professional
fees—accounting, tax, and legal
|
8.8 | 44.4 | 51.6 | |||||||||
|
Government,
class action, and related settlements, including the gain on UBS
Settlement (2008)
|
36.7 | (188.5 | ) | (2.8 | ) | |||||||
|
Net
noncash loss on disposal of assets
|
3.5 | 2.0 | 5.9 | |||||||||
|
Depreciation
and amortization
|
70.9 | 82.4 | 74.8 | |||||||||
|
Impairment
charges, including investments
|
1.4 | 2.4 | 15.1 | |||||||||
|
Stock-based
compensation expense
|
13.4 | 11.7 | 10.6 | |||||||||
|
Net
income attributable to noncontrolling interests
|
(34.0 | ) | (29.4 | ) | (65.3 | ) | ||||||
|
Other
|
0.3 | - | 0.4 | |||||||||
|
Adjusted
Consolidated EBITDA
|
$ | 383.0 | $ | 341.2 | $ | 318.3 | ||||||
Reconciliation
of Adjusted Consolidated EBITDA to Net Cash Provided by Operating
Activities
|
For
the Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Adjusted
Consolidated EBITDA
|
$ | 383.0 | $ | 341.2 | $ | 318.3 | ||||||
|
Provision
for doubtful accounts
|
33.1 | 27.0 | 33.2 | |||||||||
|
Professional
fees—accounting, tax, and legal
|
(8.8 | ) | (44.4 | ) | (51.6 | ) | ||||||
|
Interest
expense and amortization of debt discounts and fees
|
(125.8 | ) | (159.5 | ) | (229.4 | ) | ||||||
|
(Gain)
loss on sale of investments
|
(0.8 | ) | 1.4 | (12.3 | ) | |||||||
|
UBS
Settlement proceeds, gross
|
100.0 | - | - | |||||||||
|
Equity
in net income of nonconsolidated affiliates
|
(4.6 | ) | (10.6 | ) | (10.3 | ) | ||||||
|
Net
income attributable to noncontrolling interests in continuing
operations
|
33.4 | 29.8 | 31.4 | |||||||||
|
Amortization
of debt discounts and fees
|
6.6 | 6.5 | 7.8 | |||||||||
|
Distributions
from nonconsolidated affiliates
|
8.6 | 10.9 | 5.3 | |||||||||
|
Current
portion of income tax benefit
|
7.3 | 73.8 | 330.4 | |||||||||
|
Change
in assets and liabilities
|
(0.8 | ) | (53.1 | ) | (8.0 | ) | ||||||
|
Change
in government, class action, and related settlements
liability
|
(11.2 | ) | (7.4 | ) | (171.4 | ) | ||||||
|
Other
operating cash (used in) provided by discontinued
operations
|
(13.5 | ) | 11.4 | (10.5 | ) | |||||||
|
Other
|
(0.4 | ) | 0.2 | (2.3 | ) | |||||||
|
Net
cash provided by operating activities
|
$ | 406.1 | $ | 227.2 | $ | 230.6 | ||||||
The
increase in Adjusted Consolidated EBITDA for each year presented was due
primarily to the increase in Net operating revenues
discussed above, as well as effective expense management. Adjusted Consolidated
EBITDA for the year ended December 31, 2007 included the $8.6 million gain
on the sale of our investment in Source Medical, as discussed
above.
Funding
Commitments
We have
scheduled principal payments of $21.5 million and $20.8 million in 2010 and
2011, respectively, related to long-term debt obligations. For additional
information about our long-term debt obligations, see Note 8, Long-term Debt, to the
accompanying consolidated financial statements.
Our
capital expenditures include costs associated with our hospital refresh program,
capacity expansions, de-novo projects, IT initiatives, and building and
equipment upgrades and purchases. During the year ended December 31, 2009,
we made capital expenditures of $72.2 million. During 2010, we expect to spend
approximately $110 million for capital expenditures. Actual amounts spent will
be dependent upon the timing of development projects. Approximately $60 million
of this budgeted amount is considered discretionary.
For a
discussion of risk factors related to our business and our industry, see
Item 1A, Risk
Factors, and Note 1, Summary of Significant Accounting
Policies, to the accompanying consolidated financial
statements.
Off-Balance
Sheet Arrangements
In
accordance with the definition under SEC rules, the following qualify as
off-balance sheet arrangements:
|
•
|
any
obligation under certain guarantees or
contracts;
|
|
•
|
a
retained or contingent interest in assets transferred to an unconsolidated
entity or similar entity or similar arrangement that serves as credit,
liquidity, or market risk support to that entity for such
assets;
|
|
•
|
any
obligation under certain derivative instruments;
and
|
|
•
|
any
obligation under a material variable interest held by the registrant in an
unconsolidated entity that provides financing, liquidity, market risk, or
credit risk support to the registrant, or engages in leasing, hedging, or
research and development services with the
registrant.
|
The
following discussion addresses each of the above items for the
Company.
We are
secondarily liable for certain lease obligations primarily associated with sold
facilities, including the sale of our surgery centers, outpatient, and
diagnostic divisions during 2007. As of December 31, 2009, we were
secondarily liable for 66 such guarantees. The remaining terms of these
guarantees range from one month to 114 months. If we were required to perform
under all such guarantees, the maximum amount we would be required to pay
approximated $48.0 million.
We have
not recorded a liability for these guarantees, as we do not believe it is
probable we will have to perform under these agreements. If we are required to
perform under these guarantees, we could potentially have recourse against the
purchaser for recovery of any amounts paid. In addition, the purchasers of our
surgery centers, outpatient, and diagnostic divisions have agreed to seek
releases from the lessors and vendors in favor of HealthSouth with respect to
the guarantee obligations associated with these divestitures. To the extent the
purchasers of these divisions are unable to obtain releases for HealthSouth, the
purchasers have agreed to indemnify HealthSouth for damages incurred under the
guarantee obligations, if any. For additional information regarding these
guarantees, see Note 13, Guarantees, to the
accompanying consolidated financial statements.
Also, as
discussed in Note 22, Settlements, to the
accompanying consolidated financial statements, our securities litigation
settlement agreement requires us to indemnify the settling insurance carriers,
to the extent permitted by law, for any amounts they are legally obligated to
pay to any non-settling defendants. As of December 31, 2009, we have not
recorded a liability regarding these indemnifications, as we do not believe it
is probable we will have to perform under the indemnification portion of these
settlement agreements, and any amount we would be required to pay is not
estimable at this time.
As of
December 31, 2009, we do not have any retained or contingent interest in
assets as defined above.
As of
December 31, 2009, we hold four derivative financial instruments. Two are
interest rate swaps that are not designated as hedging instruments. The first
was entered into in March 2006 to effectively convert the floating rate of a
portion of our credit agreement to a fixed rate in order to limit the
variability of interest-related
payments
caused by changes in LIBOR. The second was entered into in June 2009 as a mirror
offset to the first swap in order to reduce our effective fixed rate to total
debt ratio. The other two derivative instruments are forward-starting interest
rate swaps that are designated as cash flow hedges. We entered into these swaps
as a cash flow hedge of future interest payments on our term loan facility. See
Note 9, Derivative
Instruments, to the accompanying consolidated financial
statements.
As part
of our ongoing business, we do not participate in transactions that generate
relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities
(“SPEs”), which would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes. As of December 31, 2009, we are not involved in any
unconsolidated SPE transactions.
Contractual
Obligations
Our
consolidated contractual obligations as of December 31, 2009 are as follows
(in millions):
|
Total
|
2010
|
2011 – 2012 | 2013 – 2014 |
2015
and Thereafter
|
||||||||||||||||
|
Long-term
debt obligations:
|
||||||||||||||||||||
|
Long-term
debt, excluding revolving credit facility and capital lease
obligations (a)
|
$ | 1,561.2 | $ | 7.5 | $ | 16.9 | $ | 444.4 | $ | 1,092.4 | ||||||||||
|
Interest
on long-term debt (b)
|
728.2 | 103.8 | 206.9 | 185.7 | 231.8 | |||||||||||||||
|
Capital
lease obligations (c)
|
157.4 | 21.1 | 35.5 | 24.8 | 76.0 | |||||||||||||||
|
Operating
lease obligations (d)(e)
|
216.6 | 37.1 | 56.1 | 35.2 | 88.2 | |||||||||||||||
|
Purchase
obligations (e)(f)
|
32.5 | 24.2 | 6.1 | 2.2 | - | |||||||||||||||
|
Other
long-term liabilities (g)
|
3.5 | 0.3 | 0.4 | 0.4 | 2.4 | |||||||||||||||
|
Total
|
$ | 2,699.4 | $ | 194.0 | $ | 321.9 | $ | 692.7 | $ | 1,490.8 | ||||||||||
|
(a)
|
Included
in long-term debt are amounts owed on our bonds payable and other notes
payable. These borrowings are further explained in Note 8, Long-term Debt, to the
accompanying consolidated financial
statements.
|
|
(b)
|
Interest
on our fixed rate debt is presented using the stated interest rate.
Interest expense on our variable rate debt is estimated using the rate in
effect as of December 31, 2009. Interest related to capital lease
obligations is excluded from this line. Amounts exclude amortization of
debt discounts, amortization of loan fees, or fees for lines of credit
that would be included in interest expense in our consolidated statements
of operations. Amounts also exclude the impact of our interest rate
swaps.
|
|
(c)
|
Amounts
include interest portion of future minimum capital lease
payments.
|
|
(d)
|
We
lease many of our hospitals as well as other property and equipment under
operating leases in the normal course of business. Some of our hospital
leases require percentage rentals on patient revenues above specified
minimums and contain escalation clauses. The minimum lease payments do not
include contingent rental expense. Some lease agreements provide us with
the option to renew the lease or purchase the leased property. Our future
operating lease obligations would change if we exercised these renewal
options and if we entered into additional operating lease agreements. For
more information, see Note 5, Property and Equipment,
to the accompanying consolidated financial statements. In addition, as of
December 31, 2009, these amounts exclude $1.6 million of operating
lease obligations associated with facilities that are reported in
discontinued operations.
|
|
(e)
|
Future
operating lease obligations and purchase obligations are not recognized in
our consolidated balance sheet.
|
|
(f)
|
Purchase
obligations include agreements to purchase goods or services that are
enforceable and legally binding on HealthSouth and that specify all
significant terms, including: fixed or minimum quantities to be purchased;
fixed, minimum, or variable price provisions; and the approximate timing
of the transaction. Purchase
|
obligations exclude agreements that are cancelable without penalty. Our
purchase obligations primarily relate to software licensing and support, medical
supplies, certain equipment, and telecommunications.
|
(g)
|
Because
their future cash outflows are uncertain, the following noncurrent
liabilities are excluded from the table above: medical malpractice and
workers’ compensation risks, deferred income taxes, and our estimated
liability for unsettled litigation. For more information, see
Note 10, Self-Insured Risks,
Note 19, Income
Taxes, and Note 23, Contingencies and Other
Commitments, to the accompanying consolidated financial statements.
Also, at December 31, 2009 we had $50.9 million of total gross
unrecognized tax benefits. In addition, we had an accrual for related
interest income of $1.9 million as of December 31, 2009. We continue
to actively pursue the maximization of our remaining state income tax
refund claims. The process of resolving these tax matters with the
applicable taxing authorities will continue in 2010. At this time, we
cannot estimate a range of the reasonably possible change that may
occur.
|
Indemnifications
In the
ordinary course of business, HealthSouth enters into contractual arrangements
under which HealthSouth may agree to indemnify another party to such arrangement
from any losses incurred relating to the services they perform on behalf of
HealthSouth or for losses arising from certain events as defined within the
particular contract, which may include, for example, litigation or claims
relating to past performance. Such indemnification obligations may not be
subject to maximum loss clauses. See also Note 23, Contingencies and
Commitments, to the accompanying consolidated financial statements for
indemnification obligations alleged by Mr. Scrushy.
In
addition, in connection with the divestitures of our surgery centers,
outpatient, and diagnostic divisions, we have certain post-closing
indemnification obligations to the respective purchasers. These indemnification
obligations arose from liabilities not assumed by the purchasers, such as
certain types of litigation, any breach by us of the purchase agreements,
liabilities associated with assets that were excluded from the divestitures, and
other types of liabilities that are customary in transactions of these
types.
Critical
Accounting Policies
Our
discussion and analysis of our results of operations and liquidity and capital
resources are based on our consolidated financial statements which have been
prepared in accordance with GAAP. In connection with the preparation of our
consolidated financial statements, we are required to make assumptions and
estimates about future events, and apply judgment that affects the reported
amounts of assets, liabilities, revenue, expenses, and the related disclosures.
We base our assumptions, estimates, and judgments on historical experience,
current trends, and other factors we believe to be relevant at the time we
prepared our consolidated financial statements. On a regular basis, we review
the accounting policies, assumptions, estimates, and judgments to ensure our
consolidated financial statements are presented fairly and in accordance with
GAAP. However, because future events and their effects cannot be determined with
certainty, actual results could differ from our assumptions and estimates, and
such differences could be material.
Our
significant accounting policies are discussed in Note 1, Summary of Significant Accounting
Policies, to the accompanying consolidated financial statements. We
believe the following accounting policies are the most critical to aid in fully
understanding and evaluating our reported financial results, as they require
management’s most difficult, subjective, or complex judgments, resulting from
the need to make estimates about the effect of matters that are inherently
uncertain. We have reviewed these critical accounting policies and related
disclosures with the audit committee of our board of directors.
Revenue
Recognition
We
recognize net patient service revenues in the reporting period in which we
perform the service based on our current billing rates (i.e., gross charges),
less actual adjustments and estimated discounts for contractual allowances
(principally for patients covered by Medicare, Medicaid, and managed care and
other health plans). We record gross service charges in our accounting records
on an accrual basis using our established rates for the type of service provided
to the patient. We recognize an estimated contractual allowance to reduce gross
patient charges to the amount we estimate we will actually realize for the
service rendered based upon previously agreed to rates with a payor. Our patient
accounting system calculates contractual allowances on a patient-by-patient
basis based on the
rates in
effect for each primary third-party payor. Other factors that are considered and
could further influence the level of our reserves include the patient’s total
length of stay for in-house patients, the proportion of patients with secondary
insurance coverage and the level of reimbursement under that secondary coverage,
and the amount of charges that will be disallowed by payors. Such additional
factors are assumed to remain consistent with the experience for patients
discharged in similar time periods for the same payor classes, and additional
reserves are provided to account for these factors, accordingly. Payors include
federal and state agencies, including Medicare and Medicaid, managed care health
plans, commercial insurance companies, employers, and patients.
Management
continually reviews the contractual estimation process to consider and
incorporate updates to laws and regulations and the frequent changes in managed
care contractual terms that result from contract renegotiations and renewals. In
addition, laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. If actual results are not consistent with
our assumptions and judgments, we may be exposed to gains or losses that could
be material.
Due to
complexities involved in determining amounts ultimately due under reimbursement
arrangements with third-party payors, which are often subject to interpretation,
we may receive reimbursement for healthcare services authorized and provided
that is different from our estimates, and such differences could be material.
However, we continually review the amounts actually collected in subsequent
periods in order to determine the amounts by which our estimates differed.
Historically, such differences have not been material from either a quantitative
or qualitative perspective.
Allowance
for Doubtful Accounts
We
provide for accounts receivable that could become uncollectible by establishing
an allowance to reduce the carrying value of such receivables to their estimated
net realizable value.
The
collection of outstanding receivables from Medicare, managed care payors, other
third-party payors, and patients is our primary source of cash and is critical
to our operating performance. The primary collection risks relate to patient
accounts for which the primary insurance carrier has paid the amounts covered by
the applicable agreement, but patient responsibility amounts (deductibles and
co-payments) remain outstanding.
We
estimate our allowance for doubtful accounts based on the aging of our accounts
receivable, our historical collection experience for each type of payor, and
other relevant factors so that the remaining receivables, net of allowances, are
reflected at their estimated net realizable values. Accounts requiring
collection efforts are reviewed via system-generated work queues that
automatically stage (based on age and size of outstanding balance) accounts
requiring collection efforts for patient account representatives. Collection
efforts include contacting the applicable party (both in writing and by
telephone), providing information (both financial and clinical) to allow for
payment or to overturn payor decisions to deny payment, and arranging payment
plans with self-pay patients, among other techniques. When we determine that all
in-house efforts have been exhausted or that it is a more prudent use of
resources, accounts may be turned over to a collection agency. Accounts are
written off after all collection efforts (internal and external) have been
exhausted.
If actual
results are not consistent with our assumptions and judgments, we may be exposed
to gains or losses that could be material. However, we continually review the
amounts actually collected in subsequent periods in order to determine the
amounts by which our estimates differed. Historically, such differences have not
been material from either a quantitative or qualitative perspective. Adverse
changes in general economic conditions, business office operations, payor mix,
or trends in federal or state governmental and private employer healthcare
coverage could affect our collection of accounts receivable, financial position,
results of operations, and cash flows.
The table
below shows a summary aging of our net accounts receivable balance as of
December 31, 2009 and 2008. Information on the concentration of total patient
accounts receivable by payor class can be found in Note 1, Summary of Significant Accounting
Policies, “Accounts Receivable,” to the accompanying consolidated
financial statements.
|
As
of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In
Millions)
|
||||||||
|
0 –
30 Days
|
$ | 154.6 | $ | 159.4 | ||||
|
31
– 60 Days
|
19.3 | 24.1 | ||||||
|
61
– 90 Days
|
11.3 | 14.7 | ||||||
|
91
– 120 Days
|
6.6 | 10.2 | ||||||
|
120
+ Days
|
18.7 | 24.3 | ||||||
|
Patient
accounts receivable
|
210.5 | 232.7 | ||||||
|
Non-patient
accounts receivable
|
9.2 | 2.2 | ||||||
|
Accounts
receivable, net
|
$ | 219.7 | $ | 234.9 | ||||
Self-Insured
Risks
We are
self-insured for certain losses related to professional liability, general
liability, and workers’ compensation risks. Although we obtain third-party
insurance coverage to limit our exposure to these claims, a substantial
portion of our professional and general liability and workers’ compensation
risks are insured through a wholly owned insurance subsidiary. Obligations
covered by reinsurance contracts remain on the balance sheet as the subsidiary,
or its parent, as appropriate, remains liable to the extent reinsurers do not
meet their obligations. Our reserves and provisions for professional and general
liability and workers’ compensation risks are based upon actuarially determined
estimates calculated by third-party actuaries. The actuaries consider a number
of factors, including historical claims experience, exposure data, loss
development, and geography.
Periodically,
management reviews its assumptions and the valuations provided by third-party
actuaries to determine the adequacy of our self-insured liabilities. Changes to
the estimated reserve amounts are included in current operating results. All
reserves are undiscounted.
Our
self-insured liabilities contain uncertainties because management must make
assumptions and apply judgment to estimate the ultimate cost to settle reported
claims and claims incurred but not reported as of the balance sheet date. The
reserves for professional and general liability and workers’ compensation risks
cover approximately 1,000 individual claims as of December 31, 2009 and
estimates for unreported claims.
The time
period required to resolve these claims can vary depending upon the jurisdiction
and whether the claim is settled or litigated. The estimation of the timing of
payments beyond a year can vary significantly.
Due to
the considerable variability that is inherent in such estimates, there can be no
assurance the ultimate liability will not exceed management’s estimates. If
actual results are not consistent with our assumptions and judgments, we may be
exposed to gains or losses that could be material.
Long-lived
Assets
Long-lived
assets, such as property and equipment, are reviewed for impairment when events
or changes in circumstances indicate the carrying value of the assets contained
in our financial statements may not be recoverable. When evaluating long-lived
assets for potential impairment, we first compare the carrying value of the
asset to the asset’s estimated future cash flows (undiscounted and without
interest charges). If the estimated future cash flows are less than the carrying
value of the asset, we calculate an impairment loss. The impairment loss
calculation compares the carrying value of the asset to the asset’s estimated
fair value, which may be based on estimated future cash flows (discounted and
with interest charges), unless there is an offer to purchase such assets, which
would be the basis for determining fair value. We recognize an impairment loss
if the amount of the asset’s carrying value exceeds the asset’s estimated fair
value. If we recognize an impairment loss, the adjusted carrying amount of the
asset
will be its new cost basis. For a depreciable long-lived asset, the new cost
basis will be depreciated over the remaining useful life of the asset.
Restoration of a previously recognized impairment loss is
prohibited.
Our
impairment loss calculations require management to apply judgment in estimating
future cash flows and asset fair values, including forecasting useful lives of
the assets and selecting the discount rate that represents the risk inherent in
future cash flows. Using the impairment review methodology described herein, we
recorded long-lived asset impairment charges of $4.0 million in discontinued
operations during the year ended December 31, 2009. If actual results are
not consistent with our assumptions and judgments used in estimating future cash
flows and asset fair values, we may be exposed to additional impairment losses
that could be material to our results of operations.
Goodwill
and Other Intangible Assets
Goodwill
represents the excess of the purchase price over the fair value of the net
assets of acquired companies. We test goodwill for impairment using a fair value
approach, at the reporting unit level. We are required to test for impairment at
least annually, absent some triggering event that would accelerate an impairment
assessment. On an ongoing basis, absent any impairment indicators, we perform
our goodwill impairment testing as of October 1st of
each year.
We
determine the fair value of our reporting unit using generally accepted
valuation techniques including the income approach and the market approach. The
income approach includes the use of our reporting unit’s projected operating
results and cash flows that are discounted using a weighted-average cost of
capital that reflects market participant assumptions. The projected operating
results use management’s best estimates of economic and market conditions over
the forecasted period including assumptions for pricing and volume, operating
expenses, and capital
expenditures. Other significant estimates and assumptions include cost-saving
synergies and tax benefits that would accrue to a market participant under a
fair value methodology. We validate our estimates under the income approach by
reconciling the estimated fair value of our reporting unit determined under the
income approach to our market capitalization and estimated fair value determined
under the market approach. The market approach estimates fair value through the
use of observable inputs, including the Company’s stock price. Values from the
income approach and market approach are then evaluated and weighted to arrive at
the estimated aggregate fair value of the reporting unit.
We
performed our annual testing for goodwill impairment as of October 1, 2009,
using the methodology described herein, and determined no goodwill impairment
existed. If actual results are not consistent with our assumptions and
estimates, we may be exposed to goodwill impairment charges. However, at this
time, we believe our reporting unit is not at risk for any impairment
charges.
Our other
intangible assets consist of acquired certificates of need, licenses, noncompete
agreements, and market access assets. We amortize these assets over their
respective estimated useful lives, which typically range from 3 to 30 years. All
of our other intangible assets are amortized using the straight-line basis,
except for our market access assets, which are amortized using an accelerated
basis (see below). As of December 31, 2009, we do not have any intangible
assets with indefinite useful lives.
We
continue to review the carrying values of amortizable intangible assets whenever
facts and circumstances change in a manner that indicates their carrying values
may not be recoverable. The fair value of our other intangible assets is
determined using discounted cash flows and significant unobservable
inputs.
Our
market access assets are valued using discounted cash flows under the income
approach. The value of the market access assets is attributable to our ability
to gain access to and penetrate the former facility’s historical market patient
base. To determine this value, we first develop a debt-free net cash flow
forecast under various patient volume scenarios. The debt-free net cash flow is
then discounted back to present value using a discount factor, which includes an
adjustment for company-specific risk. We amortize these assets over 20 years
using an accelerated basis that reflects the pattern in which we believe the
economic benefits of the market access assets will be consumed.
Share-Based
Payments
All
share-based payments are required to be recognized in the financial statements
based on their grant-date fair value. For our stock options, the fair value is
estimated at the date of grant using a Black-Scholes option pricing model with
weighted-average assumptions for the activity under our stock plans. For our
restricted stock awards that contain a service condition and/or a performance
condition, fair value is based on our closing stock price on the grant date. We
use a Monte Carlo approach to the binomial model to measure fair value for
restricted stock that vests upon the achievement of a service condition and a
market condition. Inputs into the model include the historical price volatility
of our common stock, the historical volatility of the common stock of the
companies in the defined peer group, and the risk free interest rate. Utilizing
these inputs and potential future changes in stock prices, multiple trials are
run to determine the fair value.
Option
pricing model assumptions such as expected term, expected volatility, risk-free
interest rate, and expected dividends, impact the fair value estimate. Further,
the forfeiture rate impacts the amount of aggregate compensation expense
recorded in each year. These assumptions are subjective and generally require
significant analysis and judgment to develop. When estimating fair value, some
of the assumptions will be based on or determined from external data and other
assumptions may be derived from our historical experience with share-based
payment arrangements. The appropriate weight to place on historical experience
is a matter of judgment based on relevant facts and circumstances.
We
estimate our expected term through an analysis of actual, historical
post-vesting exercise, cancellation, and expiration behavior by our employees
and projected post-vesting activity of outstanding options. We currently
calculate volatility based on the historical volatility of our common stock over
the period commensurate with the expected life of the options, excluding a
distinct period of extreme volatility between 2002 and 2003. The risk-free
interest rate is the implied daily yield currently available on U.S. Treasury
issues with a remaining term closely approximating the expected term used as the
input to the Black-Scholes option pricing model. We have never paid cash
dividends on our common stock, and we do not anticipate paying cash dividends on
our common stock in the foreseeable
future. Therefore, we do not include a dividend payment as part of our pricing
model. We estimate forfeitures through an analysis of actual, historical
pre-vesting option forfeiture activity.
If actual
results are not consistent with our assumptions and estimates, we may be exposed
to expense adjustments that could be material to our results of operations.
Compensation expense related to performance-based awards may vary each reporting
period based on changes in the expected achievement of performance
measures.
Income Taxes
We
account for income taxes using the asset and liability method. Under the asset
and liability method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. In addition, deferred tax assets are also recorded
with respect to net operating losses and other tax attribute carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to be
recovered or settled. Valuation allowances are established when realization of
the benefit of deferred tax assets is not deemed to be more likely than not. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
The
application of income tax law is inherently complex. Laws and regulations in
this area are voluminous and are often ambiguous. As such, we are required to
make many subjective assumptions and judgments regarding our income tax
exposures. Interpretations of and guidance surrounding income tax laws and
regulations change over time. As such, changes in our subjective assumptions and
judgments can materially affect amounts recognized in our consolidated financial
statements.
The
ultimate recovery of certain of our deferred tax assets is dependent on the
amount and timing of taxable income that we will ultimately generate in the
future and other factors. A high degree of judgment is required to determine the
extent that valuation allowances should be provided against deferred tax assets.
We have provided valuation allowances at December 31, 2009 aggregating
$892.7 million against such assets based on our current assessment of future
operating results and other factors.
We
continue to actively pursue the maximization of our remaining state income tax
refund claims. The actual amount of the refunds will not be finally determined
until all of the applicable taxing authorities have completed their review.
Although management believes its estimates and judgments related to these claims
are reasonable, depending on the ultimate resolution of these tax matters,
actual amounts recovered could differ from management’s estimates, and such
differences could be material.
Assessment
of Loss Contingencies
We have
legal and other contingencies that could result in significant losses upon the
ultimate resolution of such contingencies. We have provided for losses in
situations where we have concluded it is probable a loss has been or will be
incurred and the amount of the loss is reasonably estimable. A significant
amount of judgment is involved in determining whether a loss is probable and
reasonably estimable due to the uncertainty involved in determining the
likelihood of future events and estimating the financial statement impact of
such events. If further developments or resolution of a contingent matter are
not consistent with our assumptions and judgments, we may need to recognize a
significant charge in a future period related to an existing contingent
matter.
Recent
Accounting Pronouncements
For
information regarding recent accounting pronouncements, see Note 1, Summary of Significant Accounting
Policies, to the accompanying consolidated financial
statements.
|
Quantitative
and Qualitative Disclosures about Market
Risk
|
Our
primary exposure to market risk is to changes in interest rates on our long-term
debt. We use sensitivity analysis models to evaluate the impact of interest rate
changes on these items.
Changes
in interest rates have different impacts on the fixed and variable rate portions
of our debt portfolio. A change in interest rates impacts the net fair value of
our fixed rate debt but has no impact on interest expense or
cash
flows. Interest rate changes on variable rate debt impact our interest expense
and cash flows, but do not impact the net fair value of the underlying debt
instruments. Our fixed and variable rate debt (excluding capital lease
obligations and other notes payable) as of December 31, 2009 is shown in
the following table (in millions):
|
As
of December 31, 2009
|
||||||||||||||||
|
Carrying
Amount
|
%
of Total
|
Estimated
Fair Value
|
%
of Total
|
|||||||||||||
|
Fixed
rate debt
|
$ | 781.9 | 51.0 | % | $ | 829.0 | 53.7 | % | ||||||||
|
Variable
rate debt
|
751.3 | 49.0 | % | 714.5 | 46.3 | % | ||||||||||
|
Total
long-term debt
|
$ | 1,533.2 | 100.0 | % | $ | 1,543.5 | 100.0 | % | ||||||||
As
discussed in Note 9, Derivative Instruments, to
the accompanying consolidated financial statements, in March 2006, we entered
into an interest rate swap to effectively convert the floating rate of a portion
of our credit agreement to a fixed rate in order to limit the variability of
interest-related payments caused by changes in LIBOR. Under this interest rate
swap agreement, we pay a fixed rate of 5.2% on an amortizing notional principal
of $1.1 billion, while the counterparties to this interest rate swap agreement
pay a floating rate based on 3-month LIBOR. Per the underlying swap agreement,
the notional amount of this interest rate swap is scheduled to decrease from
$1.056 billion as of December 31, 2009 to $984 million in March
2010.
As also
discussed in Note 9, Derivative Instruments, to
the accompanying consolidated financial statements, in June 2009, we entered
into a receive-fixed swap as a mirror offset to $100.0 million of the $1.1
billion interest rate swap discussed above in order to reduce our effective
fixed rate to total debt ratio.
Our
variable-rate interest expense increases or decreases as interest rates change.
However, the net settlement payments or receipts on interest rate swaps
described above offset a majority of those changes. Because these swaps are not
designated as hedges, net settlements are included in the line item Loss on interest rate swaps
in the consolidated statements of operations and are not included in interest
expense.
Based on
the size of our variable rate debt as of December 31, 2009 and inclusive of the
impact of the net conversion of $1.0 billion of variable rate interest to a
fixed rate via interest rate swaps, as discussed above, a 1% increase in
interest rates would result in an incremental positive cash flow of
approximately $1.6 million over the next 12 months. Because our variable rate
debt and interest rate swaps are indexed to LIBOR, which was below 1% as of
December 31, 2009, our down-rate scenario assumes a 0% interest rate for the
next 12 months, which would result in an incremental negative cash flow of
approximately $0.4 million. A decrease in interest rates results in negative
cash flow due to our hedging position, the current low LIBOR rate, and the
assumption that LIBOR will not fall below 0%.
A 1%
increase in interest rates would result in an approximate $28.9 million decrease
in the estimated net fair value of our fixed rate debt, and a 1% decrease in
interest rates would result in an approximate $25.4 million increase in its
estimated net fair value.
We also
maintain two forward-starting interest rate swaps that are designated as cash
flow hedges. See Note 9, Derivative Instruments, to
the accompanying consolidated financial statements. There will be no cash flow
impact associated with these forward-starting swaps over the next 12 months
because net settlements do not begin until June 2011.
Foreign
operations, and the related market risks associated with foreign currencies, are
currently, and have been, insignificant to our financial position, results of
operations, and cash flows.
|
Financial
Statements and Supplementary Data
|
Our
consolidated financial statements and related notes are filed together with this
report. See the index to financial statements on page F-1 for a list of
financial statements filed with this report.
Item 9. Changes
in and Disagreements with Accountants and Financial Disclosure
None.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by this report, an evaluation was carried out by our
management, including our chief executive officer and principal financial
officer, of the effectiveness of our disclosure controls and procedures as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”). Our disclosure controls and procedures are
designed to ensure that information required to be disclosed in reports we file
or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission and that such information is accumulated and
communicated to our management, including our chief executive officer and
principal financial officer, to allow timely decisions regarding required
disclosures. Based on our evaluation, our chief executive officer and principal
financial officer concluded that, as of December 31, 2009, our disclosure
controls and procedures were effective.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act. Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles in the
United States of America (“GAAP”). Internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that receipts
and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a
material effect
on its
financial statements. Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions or that the
degree of compliance with the policies or procedures may
deteriorate.
Under the
supervision and with the participation of our management, including our chief
executive officer and principal financial officer, we conducted an assessment of
the effectiveness of our internal control over financial reporting as of
December 31, 2009. In making this assessment, management used the criteria
set forth in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, the COSO framework. Based on our evaluation,
our chief executive officer and principal financial officer concluded that, as
of December 31, 2009, our internal control over financial reporting was
effective.
The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2009 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which
appears herein.
Changes
in Internal Control Over Financial Reporting
There
were no changes in the Company’s internal controls over financial reporting that
occurred during the quarter ended December 31, 2009 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
|
Other
Information
|
None.
We expect
to file a definitive proxy statement relating to our 2010 Annual Meeting of
Stockholders (the “2010 Proxy Statement”) with the United States Securities and
Exchange Commission, pursuant to Regulation 14A, not later than 120 days after
the end of our most recent fiscal year. Accordingly, certain information
required by Part III has been omitted under General Instruction G(3) to Form
10-K. Only those sections of the 2010 Proxy Statement that specifically address
disclosure requirements of Items 10-14 below are incorporated by
reference.
|
Directors
and Executive Officers of the
Registrant
|
The
information required by Item 10 is hereby incorporated by reference from
our 2010 Proxy Statement under the captions “Items of Business Requiring Your
Vote - Proposal 1 – Election of Directors,” “Corporate Governance and Board
Structure,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Certain
Relationships and Related Transactions,” and “Executive Officers.”
|
Executive
Compensation
|
The
information required by Item 11 is hereby incorporated by reference from
our 2010 Proxy Statement under the captions “Corporate Governance and Board
Structure - Compensation of Directors,” “Compensation Committee Matters,” and
“Executive Compensation.”
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
The
information required by Item 12 is hereby incorporated by reference from
our 2010 Proxy Statement under the captions “Executive Compensation – Equity
Compensation Plans” and “Security Ownership of Certain Beneficial Owners and
Management.”
|
Certain
Relationships and Related
Transactions
|
The
information required by Item 13 is hereby incorporated by reference from
our 2010 Proxy Statement under the captions “Corporate Governance and Board
Structure – Director Independence” and “Certain Relationships and Related
Transactions.”
|
Principal
Accountant Fees and Services
|
The
information required by Item 14 is hereby incorporated by reference from
our 2010 Proxy Statement under the caption “Items of Business Requiring Your
Vote – Proposal 2 – Ratification of Appointment of Independent Registered Public
Accounting Firm - Principal Accountant Fees and Services.”
Financial
Statements
See the
accompanying index on page F-1 for a list of financial statements filed as part
of this report.
Financial
Statement Schedules
None.
Exhibits
The
exhibits required by Regulation S-K are set forth in the following list and are
filed by attachment to this annual report unless otherwise noted.
|
No.
|
Description
|
|
| 2.1 |
Stock
Purchase Agreement, dated January 27, 2007, by and between HealthSouth
Corporation and Select Medical Systems (incorporated by reference to
Exhibit 2.1 to HealthSouth’s Current Report on Form 8-K filed on January
30, 2007).
|
|
| 2.2 |
Letter
Agreement, dated May 1, 2007, by and between HealthSouth Corporation and
Select Medical Corporation (incorporated by reference to Exhibit 2.3 to
HealthSouth’s Quarterly Report on 10-Q filed on May 9,
2007).
|
|
| 2.3 |
Amended
and Restated Stock Purchase Agreement, dated as of March 25, 2007, by and
between HealthSouth Corporation and ASC Acquisition LLC (incorporated by
reference to Exhibit 2.1 to HealthSouth’s Quarterly Report on 10-Q filed
on August 8, 2007).
|
|
| 2.4 |
Stock
Purchase Agreement, dated April 19, 2007, by and between HealthSouth
Corporation and Diagnostic Health Holdings, Inc. (incorporated by
reference to Exhibit 2.4 to HealthSouth’s Annual Report on Form 10-K filed
on February 26, 2008).
|
|
| 3.1 |
Restated
Certificate of Incorporation of HealthSouth Corporation, as filed in the
Office of the Secretary of State of the State of Delaware on May 21,
1998.*
|
|
| 3.2 |
Certificate
of Amendment to the Restated Certificate of Incorporation of HealthSouth
Corporation, as filed in the Office of the Secretary of State of the State
of Delaware on October 25, 2006 (incorporated by reference to Exhibit 3.1
to HealthSouth’s Current Report on Form 8-K filed on October 31,
2006).
|
|
| 3.3 |
Amended
and Restated Bylaws of HealthSouth Corporation, effective as of October
30, 2009 (incorporated by reference to Exhibit 3.3 to HealthSouth’s
Quarterly Report on Form 10-Q filed on November 4,
2009).
|
|
| 3.4 |
Certificate
of Designations of 6.50% Series A Convertible Perpetual Preferred Stock,
as filed with the Secretary of State of the State of Delaware on March 7,
2006 (incorporated by reference to Exhibit 3.1 to HealthSouth’s Current
Report on Form 8-K filed on March 9, 2006).
|
|
| 4.1 |
Indenture,
dated as of June 14, 2006, among HealthSouth Corporation, the Subsidiary
Guarantors (as defined therein) and The Bank of Nova Scotia Trust Company
of New York, as trustee, relating to $625,000,000 aggregate principal
amount of 10.75% Senior Notes due 2016 (incorporated by reference to
Exhibit 4.2 to HealthSouth’s Current Report on Form 8-K filed on June 16,
2006).
|
|
| 4.2.1 |
Indenture,
dated as of September 28, 2001, between HealthSouth Corporation and
National City Bank, as trustee, relating to HealthSouth’s 8.375% Senior
Notes due 2011.*
|
| 4.2.2 |
Instrument
of Resignation, Appointment and Acceptance, dated as of April 9, 2003,
among HealthSouth Corporation, National City Bank, as resigning trustee,
and Wilmington Trust Company, as successor trustee, relating to
HealthSouth’s 8.375% Senior Notes due 2011.*
|
|
| 4.2.3 |
Amendment
to Indenture, dated as of August 27, 2003, to the Indenture dated as of
September 28, 2001 between HealthSouth Corporation and Wilmington Trust
Company, as successor trustee to National City Bank, relating to
HealthSouth’s 8.375% Senior Notes due 2011.*
|
|
| 4.2.4 |
Second
Supplemental Indenture, dated as of June 24, 2004, to the Indenture, dated
as of September 28, 2001, between HealthSouth Corporation and Wilmington
Trust Company, as successor trustee to National City Bank, relating to
HealthSouth’s 8.375% Senior Notes due 2011 (incorporated by reference to
Exhibit 99.4 to HealthSouth’s Current Report on Form 8-K filed on June 25,
2004).
|
|
| 4.2.5 |
Third
Supplemental Indenture, dated as of February 15, 2006, to the Indenture,
dated as of September 28, 2001, between HealthSouth Corporation and
Wilmington Trust Company, as successor trustee to National City Bank,
relating to HealthSouth’s 8.375% Senior Notes due 2011 (incorporated by
reference to Exhibit 4.6 to HealthSouth’s Current Report on Form 8-K filed
on February 17, 2006).
|
|
| 4.3.1 |
Indenture,
dated as of May 22, 2002, between HealthSouth Corporation and The Bank of
Nova Scotia Trust Company of New York, as trustee, relating to
HealthSouth’s 7.625% Senior Notes due 2012.*
|
|
| 4.3.2 |
Amendment
to Indenture, dated as of August 27, 2003, to the Indenture, dated as of
May 22, 2002, between HealthSouth Corporation and The Bank of Nova Scotia
Trust Company of New York, as trustee, relating to HealthSouth’s 7.625%
Senior Notes due 2012.*
|
|
| 4.3.3 |
First
Supplemental Indenture, dated as of June 24, 2004, to the Indenture, dated
as of May 22, 2002, between HealthSouth Corporation and The Bank of Nova
Scotia Trust Company of New York, as trustee, relating to HealthSouth’s
7.625% Senior Notes due 2012 (incorporated by reference to Exhibit 99.5 to
HealthSouth’s Current Report on Form 8-K filed on June 25,
2004).
|
|
| 4.3.4 |
Second
Supplemental Indenture, dated as of February 15, 2006, to the Indenture,
dated as of May 22, 2002, between HealthSouth Corporation and The Bank of
Nova Scotia Trust Company of New York, as trustee, relating to
HealthSouth’s 7.625% Senior Notes due 2012 (incorporated by reference to
Exhibit 4.5 to HealthSouth’s Current Report on Form 8-K filed on February
17, 2006).
|
|
| 4.4 |
Registration
Rights Agreement, dated February 28, 2006, between HealthSouth and the
purchasers party to the Securities Purchase Agreement, dated February 28,
2006, re: HealthSouth’s sale of 400,000 shares of 6.50% Series A
Convertible Perpetual Preferred Stock.**
|
|
| 4.5.1 |
Warrant
Agreement, dated as of January 16, 2004, between HealthSouth Corporation
and Wells Fargo Bank Northwest, N.A., as Warrant Agent (incorporated by
reference to Exhibit 10.2 to HealthSouth’s Current Report on Form 8-K
filed on January 20, 2004).
|
|
| 4.5.2 |
Registration
Rights Agreement, dated as of January 16, 2004, among HealthSouth
Corporation and the entities listed on the signature pages thereto as
Holders of Warrants and Transfer Restricted Securities (incorporated by
reference to Exhibit 10.3 to HealthSouth’s Current Report on Form 8-K
filed on January 20, 2004).
|
|
| 4.6 |
Warrant
Agreement, dated as of September 30, 2009, among HealthSouth
Corporation and Computershare Inc. and Computershare Trust Company,
N.A., jointly and severally as Warrant Agent (incorporated by
reference to Exhibit 4.1 to HealthSouth’s Registration Statement on
Form 8-A filed on October 1, 2009).
|
|
| 4.7.1 |
Indenture,
dated as of December 1, 2009, between HealthSouth Corporation and The
Bank of Nova Scotia Trust Company of New York, as trustee, relating to
HealthSouth’s 8.125% Senior Notes due
2020.
|
| 4.7.2 |
First
Supplemental Indenture, dated December 1, 2009, among HealthSouth
Corporation, the Subsidiary Guarantors (as defined therein) and The Bank
of Nova Scotia Trust Company of New York, as trustee relating to
HealthSouth’s 8.125% Senior Notes due 2020.
|
|
| 4.8 |
First
Supplemental Indenture, dated December 1, 2009, among HealthSouth
Corporation, the Subsidiary Guarantors (as defined therein) and The Bank
of Nova Scotia Trust Company of New York, as trustee, relating to the
Floating Rate Senior Notes due 2014 and the Indenture, dated as of June
14, 2006.
|
|
| 10.1 |
Stipulation
of Partial Settlement dated as of September 26, 2006, by and among
HealthSouth Corporation, the stockholder lead plaintiffs named therein,
the bondholder lead plaintiff named therein and the individual settling
defendants named therein (incorporated by reference to Exhibit 10.1 to
HealthSouth’s Current Report on Form 8-K filed on September 27,
2006).
|
|
| 10.2 |
Settlement
Agreement and Policy Release, dated as of September 25, 2006, by and among
HealthSouth Corporation, the settling individual defendants named therein
and the settling carriers named therein (incorporated by reference to
Exhibit 10.2 to HealthSouth’s Current Report on Form 8-K filed on
September 27, 2006).
|
|
| 10.3 |
Stipulation
of Settlement with Certain Individual Defendants dated as of September 25,
2006, by and among HealthSouth Corporation, plaintiffs named therein and
the individual settling defendants named therein (incorporated by
reference to Exhibit 10.3 to HealthSouth’s Current Report on Form 8-K
filed on September 27, 2006).
|
|
| 10.4.1 |
Amended
Class Action Settlement Agreement, dated March 6, 2006, with
representatives of the plaintiff class relating to the action consolidated
on July 2, 2003, captioned In Re HealthSouth Corp. ERISA
Litigation, No. CV-03-BE-1700 (N.D. Ala.) (incorporated by
reference to Exhibit 10.5.1 to HealthSouth’s Quarterly Report on Form 10-Q
filed on May 15, 2006).
|
|
| 10.4.2 |
First
Addendum to the Amended Class Action Settlement Agreement, dated April 11,
2006 (incorporated by reference to Exhibit 10.5.2 to HealthSouth’s
Quarterly Report on Form 10-Q filed on May 15, 2006).
|
|
| 10.4.3 |
Amended
Class Action Settlement Agreement, dated July 25, 2005, with
representatives of the plaintiff class relating to the action consolidated
on July 2, 2003, captioned In Re HealthSouth Corp. ERISA
Litigation, No. CV-03-BE-1700 (N.D. Ala.).*
|
|
| 10.5.1 |
HealthSouth
Corporation Amended and Restated 2004 Director Incentive Plan.**
+
|
|
| 10.5.2 |
Form
of Restricted Stock Unit Agreement (Amended and Restated 2004 Director
Incentive Plan).** +
|
|
| 10.6 |
HealthSouth
Corporation Amended and Restated Change in Control Benefits Plan
(incorporated by reference to Exhibit 10.11 to HealthSouth’s Annual Report
on Form 10-K filed on February 24, 2009).+
|
|
| 10.7.1 |
HealthSouth
Corporation 1995 Stock Option Plan, as amended.* +
|
|
| 10.7.2 |
Form
of Non-Qualified Stock Option Agreement (1995 Stock Option Plan).*
+
|
|
| 10.8.1 |
HealthSouth
Corporation 1997 Stock Option Plan.* +
|
|
| 10.8.2 |
Form
of Non-Qualified Stock Option Agreement (1997 Stock Option Plan).*
+
|
|
| 10.9.1 |
HealthSouth
Corporation 2002 Non-Executive Stock Option Plan.* +
|
|
| 10.9.2 |
Form
of Non-Qualified Stock Option Agreement (2002 Non-Executive Stock Option
Plan).* +
|
| 10.10 |
Description
of the HealthSouth Corporation Senior Management Compensation Recoupment
Policy (incorporated by reference to Item 5, Other Matters, in
HealthSouth’s Quarterly Report on Form 10-Q filed on November 4,
2009).+
|
|
| 10.11 |
Description
of the HealthSouth Corporation Senior Management Bonus and Long-Term
Incentive Plans (incorporated by reference to the section captioned
“Executive Compensation – Compensation Discussion and Analysis – Elements
of Executive Compensation” in HealthSouth’s Definitive Proxy Statement on
Schedule 14A filed on April 2, 2009).+
|
|
| 10.12 |
HealthSouth
Corporation Executive Deferred Compensation Plan.*+
|
|
| 10.13 |
HealthSouth
Corporation Second Amended and Restated Executive Severance Plan
(incorporated by reference to Exhibit 10.19 to HealthSouth’s Annual Report
on Form 10-K filed on February 24, 2009).+
|
|
| 10.14 |
Letter
of Understanding, dated as of October 31, 2007, between HealthSouth
Corporation and Jay Grinney (incorporated by reference to Exhibit 10.1 to
HealthSouth’s Current Report on Form 8-K filed on November 6,
2007).+
|
|
| 10.15 |
HealthSouth
Corporation 2005 Equity Incentive Plan (incorporated by reference to
Exhibit 10 to HealthSouth’s Current Report on Form 8-K, filed on November
21, 2005).+
|
|
| 10.16 |
Form
of Non-Qualified Stock Option Agreement (2005 Equity Incentive
Plan).**+
|
|
| 10.17.1 |
HealthSouth
Corporation 2008 Equity Incentive Plan (incorporated by reference to
Appendix A to HealthSouth’s Definitive Proxy Statement on Schedule 14A
filed on March 27, 2008).+
|
|
| 10.17.2 |
Form
of Non-Qualified Stock Option Agreement (2008 Equity Incentive
Plan)(incorporated by reference to Exhibit 10.28.2 to HealthSouth’s Annual
Report on Form 10-K filed on February 24, 2009). +
|
|
| 10.17.3 |
Form
of Restricted Stock Agreement (2008 Equity Incentive Plan)(incorporated by
reference to Exhibit 10.28.3 to HealthSouth’s Annual Report on Form 10-K
filed on February 24, 2009).+
|
|
| 10.17.4 |
Form
of Performance Share Unit Award (2008 Equity Incentive Plan)(incorporated
by reference to Exhibit 10.28.4 to HealthSouth’s Annual Report on Form
10-K filed on February 24, 2009).+
|
|
| 10.18 |
HealthSouth
Corporation Nonqualified 401(k) Plan (incorporated by reference to Exhibit
99 to HealthSouth’s Current Report on Form 8-K filed on February 6,
2008).+
|
|
| 10.19 |
HealthSouth
Corporation Directors’ Deferred Stock Investment Plan (incorporated by
reference to Exhibit 10.30 to HealthSouth’s Annual Report on Form 10-K
filed on February 24, 2009).+
|
|
| 10.20 |
Written
description of the annual compensation arrangement for non-employee
directors of HealthSouth Corporation (incorporated by reference to the
section captioned “Corporate Governance and Board Structure – Compensation
of Directors” in HealthSouth’s Definitive Proxy Statement on Schedule 14A,
filed on April 2, 2009).+
|
|
| 10.21 |
Form
of Indemnity Agreement entered into between HealthSouth Corporation and
the directors of HealthSouth.* +
|
|
| 10.22 |
Form
of letter agreement with former directors.* +
|
|
| 10.23 |
Settlement
Agreement, dated as of December 30, 2004, by and among HealthSouth
Corporation, the United States of America, acting through the entities
named therein and certain other parties named therein (incorporated by
reference to Exhibit 10.1 to HealthSouth’s Current Report on Form 8-K
filed on January 5, 2005).
|
| 10.24 |
Administrative
Settlement Agreement, dated as of December 30, 2004, by and among the
United States Department of Health and Human Services acting through the
Centers for Medicare & Medicaid Services and its officers and agents,
including, but not limited to, its fiscal intermediaries, and HealthSouth
Corporation (incorporated by reference to Exhibit 10.3 to HealthSouth’s
Current Report on Form 8-K filed on January 5, 2005).
|
|
| 10.25.1 |
Corporate
Integrity Agreement, dated as of December 30, 2004, by and among the
Office of Inspector General of the Department of Health and Human Services
and HealthSouth Corporation (incorporated by reference to Exhibit 10.2 to
HealthSouth’s Current Report on Form 8-K filed on January 5,
2005).
|
|
| 10.25.2 |
First
Addendum to the Corporate Integrity Agreement, dated as of October 27,
2006, by and among the Office of Inspector General of the Department of
Health and Human Services and HealthSouth Corporation (incorporated by
reference to Exhibit 10.33.2 to HealthSouth’s Annual Report on Form 10-K
filed on February 24, 2009).
|
|
| 10.25.3 |
Second
Addendum to the Corporate Integrity Agreement, dated as of December 14,
2007, by and among the Office of Inspector General of the Department of
Health and Human Services and HealthSouth Corporation (incorporated by
reference to Exhibit 10.33.3 to HealthSouth’s Annual Report on Form 10-K
filed on February 24, 2009).
|
|
| 10.26.1 |
Amendment
No. 2, dated as of October 23, 2009, to the Credit Agreement, dated March
10, 2006, among HealthSouth Corporation, the lenders party thereto,
JPMorgan Chase Bank, N.A., as the administrative agent and the collateral
agent, and the other parties thereto, attaching
and effecting the Amended and Restated Credit Agreement, by and among
HealthSouth, the lenders party thereto, JPMorgan Chase Bank, N.A., as the
administrative agent and the collateral agent, Citicorp North America,
Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as
co-syndication agents; and Deutsche Bank Securities Inc., Goldman Sachs
Credit Partners L.P. and Wachovia Bank, National Association, as
co-documentation agents (incorporated by reference to Exhibit 10.1 to
HealthSouth’s Current Report on Form 8-K filed on October 27,
2009).
|
|
| 10.26.2 |
Collateral
and Guarantee Agreement, dated as of March 10, 2006, by and among
HealthSouth, certain of the Company’s subsidiaries and JPMorgan Chase
Bank, N.A., as collateral agent (incorporated by reference to Exhibit 10.2
to HealthSouth’s Current Report on Form 8-K filed on March 16,
2006).
|
|
| 10.27.1 |
Partial
Final Judgment And Order of Dismissal With Prejudice of In re: HealthSouth
Corporation Securities Litigation, dated as of January 11, 2007
(incorporated by reference to Exhibit 99.2 to HealthSouth’s Current Report
on Form 8-K filed on January 12, 2007).
|
|
| 10.27.2 |
Order
and Final Judgment Pursuant To A.R.C.P. Rule 54(b) Approving Pro Tanto
Settlement With Certain Defendants, dated as of January 11, 2007
(incorporated by reference to Exhibit 99.3 to HealthSouth’s Current Report
on Form 8-K filed on January 12, 2007).
|
|
| 10.28.1 |
Purchase
and Sale Agreement, dated January 22, 2008, by and between HealthSouth
Corporation and Daniel Realty Company, LLC (incorporated by reference to
Exhibit 10.1 to HealthSouth’s Quarterly Report on Form 10-Q filed on May
7, 2008).
|
|
| 10.28.2 |
First
Amendment to Purchase and Sale Agreement, dated January 22, 2008, by and
between HealthSouth Corporation and Daniel Realty Company, LLC
(incorporated by reference to Exhibit 10.2 to HealthSouth’s Quarterly
Report on Form 10-Q filed on May 7, 2008).
|
|
| 10.28.3 |
Second
Amendment to Purchase and Sale Agreement, dated February 13, 2008, by and
between HealthSouth Corporation and Daniel Realty Company, LLC
(incorporated by reference to Exhibit 10.3 to HealthSouth’s Quarterly
Report on Form 10-Q filed on May 7,
2008).
|
| 10.28.4 |
Third
Amendment to Purchase and Sale Agreement, dated March 31, 2008, by and
between HealthSouth Corporation and LAKD Associates, LLC (successor by
assignment to Daniel Realty Company, LLC) (incorporated by reference to
Exhibit 10.4 to HealthSouth’s Quarterly Report on Form 10-Q filed on May
7, 2008).
|
|
| 10.28.5 |
Lease
between LAKD HQ, LLC and HealthSouth Corporation, dated March 31, 2008,
for corporate office space (incorporated by reference to Exhibit 10.5 to
HealthSouth’s Quarterly Report on Form 10-Q filed on May 7,
2008).
|
|
| 10.29.1 |
Stipulation
of Settlement with UBS Securities LLC (incorporated by reference to
Exhibit 99.2 to HealthSouth’s Current Report on Form 8-K filed on January
20, 2009).
|
|
| 10.29.2 |
Settlement
Agreement and Stipulation regarding Fees, dated as of January 13, 2009
(incorporated by reference to Exhibit 99.3 to HealthSouth’s Current Report
on Form 8-K filed on January 20, 2009).
|
|
| 10.30 |
Restrictive
Covenant Agreement, dated November 23, 2009, by and between HealthSouth
Corporation and John L. Workman (incorporated by reference to Exhibit 10.1
to HealthSouth’s Current Report on Form 8-K filed on November 23,
2009).+
|
|
| 12 |
Computation
of Ratios.
|
|
| 21 |
Subsidiaries
of HealthSouth Corporation.
|
|
| 23 |
Consent
of PricewaterhouseCoopers LLP, Independent Registered Public Accounting
Firm.
|
|
| 24 |
Power
of Attorney.
|
|
| 31.1 |
Certification
of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
| 31.2 |
Certification
of Principal Financial Officer required by Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
| 32.1 |
Certification
of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
| 32.2 |
Certification
of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
*
Incorporated by reference to HealthSouth’s Annual Report on Form 10-K filed with
the SEC on June 27, 2005.
**
Incorporated by reference to HealthSouth’s Annual Report on Form 10-K filed with
the SEC on March 29, 2006.
+
Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
| HEALTHSOUTH CORPORATION | |||
|
|
By:
|
/s/ JAY GRINNEY | |
| Name: Jay Grinney | |||
|
Title:
President and Chief Executive Officer
Date: February 23, 2010
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Signature
|
Capacity
|
Date
|
| /s/ JAY GRINNEY | President and Chief Executive Officer and Director | February 23, 2010 |
|
Jay
Grinney
|
|
|
| /s/ Edmund Fay | Senior Vice President and Treasurer | February 23, 2010 |
|
Edmund
Fay
|
(principal
financial officer)
|
|
| /s/ Andrew L. Price | Chief Accounting Officer | February 23, 2010 |
|
Andrew
L. Price
|
(principal
accounting officer)
|
|
| JON F. HANSON* | Chairman of the Board of Directors | February 23, 2010 |
|
Jon
F. Hanson
|
|
|
| EDWARD A. BLECHSCHMIDT* | Director | February 23, 2010 |
|
Edward
A. Blechschmidt
|
||
| JOHN W. CHIDSEY* | Director | February 23, 2010 |
|
John
W. Chidsey
|
||
| DONALD L. CORRELL* | Director | February 23, 2010 |
|
Donald
L. Correll
|
||
| YVONNE M. CURL* | Director | February 23, 2010 |
|
Yvonne
M. Curl
|
||
| CHARLES M. ELSON* | Director | February 23, 2010 |
|
Charles
M. Elson
|
||
| LEO I. HIGDON, JR.* | Director | February 23, 2010 |
|
Leo
I. Higdon, Jr.
|
||
| JOHN E. MAUPIN, JR.* | Director | February 23, 2010 |
|
John
E. Maupin, Jr.
|
|
|
| L. EDWARD SHAW, JR.* | Director | February 23, 2010 |
|
L.
Edward Shaw, Jr.
|
|
*By:
|
/s/ JOHN P. WHITTINGTON |
|
|
| John P. Whittington |
|
||
| Attorney-in-Fact | |||
To the
Board of Directors and Shareholders of HealthSouth Corporation:
In our
opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of shareholders' deficit and
comprehensive income (loss) and of cash flows present fairly, in all material
respects, the financial position of HealthSouth Corporation and its subsidiaries
at December 31, 2009 and 2008, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2009 in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible for these
financial statements, for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in Management's Report on Internal Control over
Financial Reporting appearing under Item 9A. Our responsibility is to express
opinions on these financial statements and on the Company's internal control
over financial reporting based on our integrated audits. We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
As
discussed in Note 1 to the consolidated financial statements, the Company
changed the manner in which it accounts for non-controlling interests in 2009
and the manner in which it accounts for nonperformance risk in derivatives in
2008. As discussed in Note 19 to the consolidated financial statements, the
Company changed the manner in which it accounts for uncertain tax positions in
2007.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
PricewaterhouseCoopers
LLP
Birmingham,
Alabama
February
23, 2010
Consolidated
Statements of Operations
|
For
the Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(As
Adjusted)
|
||||||||||||
|
(In
Millions, Except Per Share Data)
|
||||||||||||
|
Net
operating revenues
|
$ | 1,911.1 | $ | 1,829.5 | $ | 1,723.5 | ||||||
|
Operating
expenses:
|
||||||||||||
|
Salaries
and benefits
|
948.8 | 928.2 | 857.5 | |||||||||
|
Other
operating expenses
|
271.4 | 264.9 | 241.0 | |||||||||
|
General
and administrative expenses
|
104.5 | 105.5 | 127.9 | |||||||||
|
Supplies
|
112.4 | 108.2 | 99.6 | |||||||||
|
Depreciation
and amortization
|
70.9 | 82.4 | 74.8 | |||||||||
|
Impairment
of long-lived assets
|
- | 0.6 | 15.1 | |||||||||
|
Gain
on UBS Settlement
|
- | (121.3 | ) | - | ||||||||
|
Occupancy
costs
|
47.6 | 48.8 | 51.4 | |||||||||
|
Provision
for doubtful accounts
|
33.1 | 27.0 | 33.2 | |||||||||
|
Loss
on disposal of assets
|
3.5 | 2.0 | 5.9 | |||||||||
|
Government,
class action, and related settlements expense
|
36.7 | (67.2 | ) | (2.8 | ) | |||||||
|
Professional
fees—accounting, tax, and legal
|
8.8 | 44.4 | 51.6 | |||||||||
|
Total
operating expenses
|
1,637.7 | 1,423.5 | 1,555.2 | |||||||||
|
Loss
on early extinguishment of debt
|
12.5 | 5.9 | 28.2 | |||||||||
|
Interest
expense and amortization of debt discounts and fees
|
125.8 | 159.5 | 229.4 | |||||||||
|
Other
income
|
(3.4 | ) | - | (15.5 | ) | |||||||
|
Loss
on interest rate swaps
|
19.6 | 55.7 | 30.4 | |||||||||
|
Equity
in net income of nonconsolidated affiliates
|
(4.6 | ) | (10.6 | ) | (10.3 | ) | ||||||
|
Income
(loss) from continuing operations before income tax
benefit
|
123.5 | 195.5 | (93.9 | ) | ||||||||
|
Provision
for income tax benefit
|
(3.2 | ) | (70.1 | ) | (322.4 | ) | ||||||
|
Income
from continuing operations
|
126.7 | 265.6 | 228.5 | |||||||||
|
Income
from discontinued operations, net of tax
|
2.1 | 16.2 | 490.2 | |||||||||
|
Net
income
|
128.8 | 281.8 | 718.7 | |||||||||
|
Less:
Net income attributable to noncontrolling interests
|
(34.0 | ) | (29.4 | ) | (65.3 | ) | ||||||
|
Net
income attributable to HealthSouth
|
94.8 | 252.4 | 653.4 | |||||||||
|
Less:
Convertible perpetual preferred stock dividends
|
(26.0 | ) | (26.0 | ) | (26.0 | ) | ||||||
|
Net
income attributable to HealthSouth common shareholders
|
$ | 68.8 | $ | 226.4 | $ | 627.4 | ||||||
|
Weighted
average common shares outstanding:
|
||||||||||||
|
Basic
|
88.8 | 83.0 | 78.7 | |||||||||
|
Diluted
|
103.3 | 96.4 | 92.0 | |||||||||
|
Earnings
per common share:
|
||||||||||||
|
Basic:
|
||||||||||||
|
Income
from continuing operations attributable to HealthSouth common
shareholders
|
$ | 0.76 | $ | 2.53 | $ | 2.17 | ||||||
|
Income
from discontinued operations, net of tax, attributable to
HealthSouth common shareholders
|
0.01 | 0.20 | 5.80 | |||||||||
|
Net
income per share attributable to HealthSouth common
shareholders
|
$ | 0.77 | $ | 2.73 | $ | 7.97 | ||||||
|
Diluted:
|
||||||||||||
|
Income
from continuing operations attributable to HealthSouth common
shareholders
|
$ | 0.76 | $ | 2.45 | $ | 2.14 | ||||||
|
Income
from discontinued operations, net of tax, attributable to
HealthSouth common shareholders
|
0.01 | 0.17 | 4.96 | |||||||||
|
Net
income per share attributable to HealthSouth common
shareholders
|
$ | 0.77 | $ | 2.62 | $ | 7.10 | ||||||
|
Amounts
attributable to HealthSouth:
|
||||||||||||
|
Income
from continuing operations
|
$ | 93.3 | $ | 235.8 | $ | 197.1 | ||||||
|
Income
from discontinued operations, net of tax
|
1.5 | 16.6 | 456.3 | |||||||||
|
Net
income attributable to HealthSouth
|
$ | 94.8 | $ | 252.4 | $ | 653.4 | ||||||
The
accompanying notes to consolidated financial statements are an integral part of
these statements.
Consolidated
Balance Sheets
|
As
of December 31,
|
|||||||||
|
2009
|
2008
|
||||||||
|
(As
Adjusted)
|
|||||||||
|
(In
Millions, Except Share Data)
|
|||||||||
|
Assets
|
|||||||||
|
Current
assets:
|
|||||||||
|
Cash
and cash equivalents
|
$ | 80.9 | $ | 32.1 | |||||
|
Restricted
cash
|
67.8 | 154.0 | |||||||
|
Restricted
marketable securities
|
2.7 | 20.3 | |||||||
|
Accounts
receivable, net of allowance for doubtful accounts of $33.1
in 2009; $30.9 in 2008
|
219.7 | 234.9 | |||||||
|
Prepaid
expenses and other current assets
|
54.9 | 58.6 | |||||||
|
Insurance
recoveries receivable
|
- | 182.8 | |||||||
|
Total
current assets
|
426.0 | 682.7 | |||||||
|
Property
and equipment, net
|
664.8 | 662.1 | |||||||
|
Goodwill
|
416.4 | 414.7 | |||||||
|
Intangible
assets, net
|
37.4 | 42.4 | |||||||
|
Investments
in and advances to nonconsolidated affiliates
|
29.3 | 36.7 | |||||||
|
Income
tax refund receivable
|
10.0 | 55.9 | |||||||
|
Other
long-term assets
|
97.6 | 103.7 | |||||||
|
Total
assets
|
$ | 1,681.5 | $ | 1,998.2 | |||||
|
Liabilities
and Shareholders’ Deficit
|
|||||||||
|
Current
liabilities
|
|||||||||
|
Current
portion of long-term debt
|
$ | 21.5 | $ | 23.6 | |||||
|
Accounts
payable
|
50.2 | 45.5 | |||||||
|
Accrued
payroll
|
77.9 | 89.8 | |||||||
|
Refunds
due patients and other third-party payors
|
53.0 | 48.8 | |||||||
|
Other
current liabilities
|
182.0 | 270.0 | |||||||
|
Government,
class action, and related settlements
|
6.6 | 268.5 | |||||||
|
Total
current liabilities
|
391.2 | 746.2 | |||||||
|
Long-term
debt, net of current portion
|
1,641.0 | 1,789.6 | |||||||
|
Self-insured
risks
|
100.0 | 108.6 | |||||||
|
Other
long-term liabilities
|
59.5 | 53.6 | |||||||
| 2,191.7 | 2,698.0 | ||||||||
|
Commitments
and contingencies
|
|||||||||
|
Convertible
perpetual preferred stock, $.10 par value; 1,500,000 shares
authorized; 400,000 shares issued in 2009 and 2008; liquidation
preference of $1,000 per share
|
387.4 | 387.4 | |||||||
|
Shareholders’
deficit:
|
|||||||||
|
HealthSouth
shareholders' deficit:
|
|||||||||
|
Common
stock, $.01 par value; 200,000,000 shares authorized; issued:
97,238,725 in 2009; 96,890,924 in 2008
|
1.0 | 1.0 | |||||||
|
Capital
in excess of par value
|
2,879.9 | 2,956.5 | |||||||
|
Accumulated
deficit
|
(3,717.4 | ) | (3,812.2 | ) | |||||
|
Accumulated
other comprehensive loss
|
- | (3.2 | ) | ||||||
|
Treasury
stock, at cost (3,957,047 shares in 2009 and 8,872,121 shares in
2008)
|
(137.5 | ) | (311.5 | ) | |||||
|
Total
HealthSouth shareholders’ deficit
|
(974.0 | ) | (1,169.4 | ) | |||||
|
Noncontrolling
interests
|
76.4 | 82.2 | |||||||
|
Total
shareholders' deficit
|
(897.6 | ) | (1,087.2 | ) | |||||
|
Total
liabilities and shareholders’ deficit
|
$ | 1,681.5 | $ | 1,998.2 | |||||
The
accompanying notes to consolidated financial statements are an integral part of
these balance sheets.
F-4
HealthSouth
Corporation and Subsidiaries
Consolidated
Statements of Comprehensive Income
|
For
the Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(As
Adjusted)
|
||||||||||||
|
(In
Millions)
|
||||||||||||
|
Net
income
|
$ | 128.8 | $ | 281.8 | $ | 718.7 | ||||||
|
Other
comprehensive income (loss), net of tax:
|
||||||||||||
|
Net
change in foreign currency translation adjustment
|
- | 0.7 | 0.1 | |||||||||
|
Net
change in unrealized gain (loss) on available-for-sale
securities:
|
||||||||||||
|
Unrealized
net holding gain (loss) arising during the period
|
1.3 | (1.5 | ) | 1.3 | ||||||||
|
Reclassifications
to net income
|
1.6 | (1.4 | ) | (3.8 | ) | |||||||
|
Net
change in unrealized gain (loss) on forward-starting interest rate
swaps:
|
||||||||||||
|
Unrealized
net holding gain (loss) arising during the period
|
0.1 | (0.2 | ) | - | ||||||||
|
Reclassifications
to net income
|
0.2 | - | - | |||||||||
|
Other
comprehensive income (loss), net of tax
|
3.2 | (2.4 | ) | (2.4 | ) | |||||||
|
Comprehensive
income
|
132.0 | 279.4 | 716.3 | |||||||||
|
Comprehensive
income attributable to noncontrolling interests
|
(34.0 | ) | (29.4 | ) | (65.3 | ) | ||||||
|
Comprehensive
income attributable to HealthSouth
|
$ | 98.0 | $ | 250.0 | $ | 651.0 | ||||||
The
accompanying notes to consolidated financial statements are an integral part of
these statements.
F-5
HealthSouth
Corporation and Subsidiaries
Consolidated Statements
of Shareholders' Deficit
|
(In
Millions)
|
||||||||||||||||||||||||||||
|
HealthSouth
Common Shareholders
|
||||||||||||||||||||||||||||
|
Number
of Common Shares Outstanding
|
Common
Stock
|
Capital
in Excess of Par Value
|
Accumulated
Deficit
|
Accumulated
Other Comprehensive (Loss) Income
|
Treasury
Stock
|
Noncontrolling
Interests
|
Total
|
Comprehensive
Income
|
||||||||||||||||||||
|
Balance
at beginning of period
|
88.0 | $ | 1.0 | $ | 2,956.5 | $ | (3,812.2 | ) | $ | (3.2 | ) | $ | (311.5 | ) | $ | 82.2 | $ | (1,087.2 | ) | |||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||
|
Net
income
|
- | - | - | 94.8 | - | - | 34.0 | 128.8 | $ | 128.8 | ||||||||||||||||||
|
Other
comprehensive income, net of tax
|
- | - | - | - | 3.2 | - | - | 3.2 | 3.2 | |||||||||||||||||||
|
Comprehensive
income
|
$ | 132.0 | ||||||||||||||||||||||||||
|
Common
stock issued under Securities Litigation Settlement
|
5.0 | - | (63.5 | ) | - | - | 175.3 | - | 111.8 | |||||||||||||||||||
|
Dividends
declared on convertible perpetual preferred stock
|
- | - | (26.0 | ) | - | - | - | - | (26.0 | ) | ||||||||||||||||||
|
Stock-based
compensation
|
- | - | 13.4 | - | - | - | - | 13.4 | ||||||||||||||||||||
|
Distributions
declared
|
- | - | - | - | - | - | (34.6 | ) | (34.6 | ) | ||||||||||||||||||
|
Other
|
0.3 | - | (0.5 | ) | - | - | (1.3 | ) | (5.2 | ) | (7.0 | ) | ||||||||||||||||
|
Balance
at end of period
|
93.3 | $ | 1.0 | $ | 2,879.9 | $ | (3,717.4 | ) | $ | - | $ | (137.5 | ) | $ | 76.4 | $ | (897.6 | ) | ||||||||||
|
For
the Year Ended December 31, 2008
|
||||||||||||||||||||||||||||
|
(As
Adjusted)
|
||||||||||||||||||||||||||||
|
(In
Millions)
|
||||||||||||||||||||||||||||
|
HealthSouth
Common Shareholders
|
||||||||||||||||||||||||||||
|
Number
of Common Shares Outstanding
|
Common Stock
|
Capital
in Excess of Par Value
|
Accumulated Deficit
|
Accumulated
Other Comprehensive Loss
|
Treasury
Stock
|
Noncontrolling
Interests
|
Total
|
Comprehensive
Income
|
||||||||||||||||||||
|
Balance
at beginning of period
|
78.7 | $ | 0.9 | $ | 2,820.4 | $ | (4,064.6 | ) | $ | (0.8 | ) | $ | (310.4 | ) | $ | 97.2 | $ | (1,457.3 | ) | |||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||
|
Net
income
|
- | - | - | 252.4 | - | - | 29.4 | 281.8 | $ | 281.8 | ||||||||||||||||||
|
Other
comprehensive loss , net of tax
|
- | - | - | - | (2.4 | ) | - | - | (2.4 | ) | (2.4 | ) | ||||||||||||||||
|
Comprehensive
income
|
$ | 279.4 | ||||||||||||||||||||||||||
|
Issuance
of common stock
|
8.8 | 0.1 | 150.1 | - | - | - | - | 150.2 | ||||||||||||||||||||
|
Dividends
declared on convertible perpetual preferred stock
|
- | - | (26.0 | ) | - | - | - | - | (26.0 | ) | ||||||||||||||||||
|
Stock-based
compensation
|
- | - | 11.7 | - | - | - | - | 11.7 | ||||||||||||||||||||
|
Distribution
declared
|
- | - | - | - | - | - | (32.5 | ) | (32.5 | ) | ||||||||||||||||||
|
Settlements
with partners
|
- | - | - | - | - | - | 4.2 | 4.2 | ||||||||||||||||||||
|
Government,
class action, and related settlements
|
- | - | - | - | - | - | (9.4 | ) | (9.4 | ) | ||||||||||||||||||
|
Transfer
of surgery centers to ASC
|
- | - | - | - | - | - | (6.8 | ) | (6.8 | ) | ||||||||||||||||||
|
Other
|
0.5 | - | 0.3 | - | - | (1.1 | ) | 0.1 | (0.7 | ) | ||||||||||||||||||
|
Balance
at end of period
|
88.0 | $ | 1.0 | $ | 2,956.5 | $ | (3,812.2 | ) | $ | (3.2 | ) | $ | (311.5 | ) | $ | 82.2 | $ | (1,087.2 | ) | |||||||||
HealthSouth
Corporation and Subsidiaries
Consolidated Statements
of Shareholders' Deficit (Continued)
|
For
the Year Ended December 31, 2007
|
|||||||||||||||||||||||||||||||
|
(As
Adjusted)
|
|||||||||||||||||||||||||||||||
|
(In
Millions)
|
|||||||||||||||||||||||||||||||
|
HealthSouth
Common Shareholders
|
|||||||||||||||||||||||||||||||
|
Number
of Common Shares Outstanding
|
Common
Stock
|
Capital
in Excess of Par Value
|
Accumulated
Deficit
|
Accumulated
Other Comprehensive Income (Loss)
|
Treasury
Stock
|
Notes
Receivable from Shareholders, Officers, and Management
Employees
|
Noncontrolling
Interests
|
Total
|
Comprehensive
Income
|
||||||||||||||||||||||
|
Balance
at beginning of period
|
78.7 | $ | 0.9 | $ | 2,849.5 | $ | (4,713.8 | ) | $ | 1.6 | $ | (322.7 | ) | $ | (0.1 | ) | $ | 271.1 | $ | (1,913.5 | ) | ||||||||||
|
Comprehensive
income:
|
|||||||||||||||||||||||||||||||
|
Net
income
|
- | - | - | 653.4 | - | - | - | 65.3 | 718.7 | $ | 718.7 | ||||||||||||||||||||
|
Other
comprehensive loss , net of tax
|
- | - | - | - | (2.4 | ) | - | - | - | (2.4 | ) | (2.4 | ) | ||||||||||||||||||
|
Comprehensive
income
|
$ | 716.3 | |||||||||||||||||||||||||||||
|
Adoption
of accounting guidance for unrecognized tax benefits
|
- | - | - | (4.2 | ) | - | - | - | - | (4.2 | ) | ||||||||||||||||||||
|
Dividends
declared on convertible perpetual preferred stock
|
- | - | (26.0 | ) | - | - | - | - | - | (26.0 | ) | ||||||||||||||||||||
|
Stock-based
compensation
|
- | - | 8.9 | - | - | - | - | - | 8.9 | ||||||||||||||||||||||
|
Retirement
of treasury stock
|
- | - | (14.8 | ) | - | - | 14.8 | - | - | - | |||||||||||||||||||||
|
Distributions
declared- continuing operations
|
- | - | - | - | - | - | - | (20.9 | ) | (20.9 | ) | ||||||||||||||||||||
|
Distributions
declared- discontinued operations
|
- | - | - | - | - | - | - | (22.3 | ) | (22.3 | ) | ||||||||||||||||||||
|
Net
investment in consolidated affiliates that became equity method
affiliates
|
- | - | - | - | - | - | - | (9.3 | ) | (9.3 | ) | ||||||||||||||||||||
|
Settlements
with partners
|
- | - | - | - | - | - | - | 2.7 | 2.7 | ||||||||||||||||||||||
|
Government,
class action, and related settlements- continuing
operations
|
- | - | - | - | - | - | - | (6.6 | ) | (6.6 | ) | ||||||||||||||||||||
|
Government,
class action, and related settlements- discontinued
operations
|
- | - | - | - | - | - | - | (9.2 | ) | (9.2 | ) | ||||||||||||||||||||
|
Divestitures
of surgery centers, outpatient, and diagnostic divisions
|
- | - | - | - | - | - | - | (172.6 | ) | (172.6 | ) | ||||||||||||||||||||
|
Other
|
- | - | 2.8 | - | - | (2.5 | ) | 0.1 | (1.0 | ) | (0.6 | ) | |||||||||||||||||||
|
Balance
at end of period
|
78.7 | $ | 0.9 | $ | 2,820.4 | $ | (4,064.6 | ) | $ | (0.8 | ) | $ | (310.4 | ) | $ | - | $ | 97.2 | $ | (1,457.3 | ) | ||||||||||
The
accompanying notes to consolidated financial statements are an integral part of
these statements.
F-7
HealthSouth
Corporation and Subsidiaries
Consolidated Statements
of Cash Flows
|
For
the Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(As
Adjusted)
|
||||||||||||
|
(In
Millions)
|
||||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | 128.8 | $ | 281.8 | $ | 718.7 | ||||||
|
Income
from discontinued operations
|
(2.1 | ) | (16.2 | ) | (490.2 | ) | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities—
|
||||||||||||
|
Provision
for doubtful accounts
|
33.1 | 27.0 | 33.2 | |||||||||
|
Provision
for government, class action, and related settlements
|
36.7 | (90.6 | ) | (2.8 | ) | |||||||
|
UBS
Settlement proceeds, gross
|
100.0 | (97.9 | ) | - | ||||||||
|
Depreciation
and amortization
|
70.9 | 82.4 | 74.8 | |||||||||
|
Amortization
of debt issue costs, debt discounts, and fees
|
6.6 | 6.5 | 7.8 | |||||||||
|
Impairment
of long-lived assets
|
- | 0.6 | 15.1 | |||||||||
|
Realized
(gain) loss on sale of investments
|
(0.8 | ) | 1.4 | (12.3 | ) | |||||||
|
Loss
on disposal of assets
|
3.5 | 2.0 | 5.9 | |||||||||
|
Loss
on early extinguishment of debt
|
12.5 | 5.9 | 28.2 | |||||||||
|
Loss
on interest rate swaps
|
19.6 | 55.7 | 30.4 | |||||||||
|
Equity
in net income of nonconsolidated affiliates
|
(4.6 | ) | (10.6 | ) | (10.3 | ) | ||||||
|
Distributions
from nonconsolidated affiliates
|
8.6 | 10.9 | 5.3 | |||||||||
|
Stock-based
compensation
|
13.4 | 11.7 | 8.9 | |||||||||
|
Deferred
tax provision
|
4.1 | 3.7 | 8.0 | |||||||||
|
Other
|
1.3 | 2.0 | (0.2 | ) | ||||||||
|
(Increase)
decrease in assets—
|
||||||||||||
|
Accounts
receivable
|
(17.8 | ) | (45.0 | ) | (38.8 | ) | ||||||
|
Prepaid
expenses and other assets
|
3.7 | 7.5 | 39.5 | |||||||||
|
Income
tax refund receivable
|
45.9 | (3.4 | ) | 162.1 | ||||||||
|
Increase
(decrease) in liabilities—
|
||||||||||||
|
Accounts
payable
|
4.8 | (4.2 | ) | (18.0 | ) | |||||||
|
Accrued
payroll
|
(12.4 | ) | 9.0 | (5.8 | ) | |||||||
|
Accrued
fees and expenses for derivative plaintiffs' attorneys in UBS
Settlement
|
(26.2 | ) | - | - | ||||||||
|
Other
liabilities
|
(1.4 | ) | 2.9 | (83.3 | ) | |||||||
|
Refunds
due patients and other third-party payors
|
4.2 | (2.5 | ) | (41.0 | ) | |||||||
|
Self-insured
risks
|
(1.6 | ) | (17.4 | ) | (22.7 | ) | ||||||
|
Government,
class action, and related settlements
|
(11.2 | ) | (7.4 | ) | (171.4 | ) | ||||||
|
Net
cash (used in) provided by operating activities of discontinued
operations
|
(13.5 | ) | 11.4 | (10.5 | ) | |||||||
|
Total
adjustments
|
279.4 | (38.4 | ) | 2.1 | ||||||||
|
Net
cash provided by operating activities
|
406.1 | 227.2 | 230.6 | |||||||||
HealthSouth
Corporation and Subsidiaries
Consolidated Statements
of Cash Flows (Continued)
|
For
the Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(As
Adjusted)
|
||||||||||||
|
(In
Millions)
|
||||||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Capital
expenditures
|
(72.2 | ) | (55.7 | ) | (38.6 | ) | ||||||
|
Acquisition
of business, net of assets acquired
|
- | (14.6 | ) | - | ||||||||
|
Acquisition
of intangible assets
|
(0.4 | ) | (18.2 | ) | (0.1 | ) | ||||||
|
Proceeds
from disposal of assets
|
3.9 | 53.9 | 0.7 | |||||||||
|
Proceeds
from sale of restricted marketable securities
|
5.0 | 8.1 | 66.4 | |||||||||
|
Proceeds
from sale of investments
|
0.6 | 4.3 | - | |||||||||
|
Purchase
of restricted marketable securities
|
(3.8 | ) | (4.8 | ) | (23.0 | ) | ||||||
|
Net
change in restricted cash
|
(11.7 | ) | 7.5 | (3.3 | ) | |||||||
|
Net
settlements on interest rate swaps
|
(42.2 | ) | (20.7 | ) | 3.2 | |||||||
|
Net
investment in interest rate swap
|
(6.4 | ) | - | - | ||||||||
|
Other
|
(5.3 | ) | 0.6 | 0.1 | ||||||||
|
Net
cash (used in) provided by investing activities of discontinued
operations—
|
||||||||||||
|
Proceeds
from divestitures of divisions
|
- | - | 1,169.8 | |||||||||
|
Other
investing activities of discontinued operations
|
(0.5 | ) | (0.4 | ) | 9.3 | |||||||
|
Net
cash (used in) provided by investing activities
|
(133.0 | ) | (40.0 | ) | 1,184.5 | |||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Checks
in excess of bank balance
|
- | (11.4 | ) | 8.7 | ||||||||
|
Principal
borrowings on notes
|
15.5 | - | 12.5 | |||||||||
|
Proceeds
from bond issuance
|
290.0 | - | - | |||||||||
|
Principal
payments on debt, including pre-payments
|
(409.2 | ) | (204.8 | ) | (1,238.9 | ) | ||||||
|
Borrowings
on revolving credit facility
|
10.0 | 128.0 | 397.0 | |||||||||
|
Payments
on revolving credit facility
|
(50.0 | ) | (163.0 | ) | (492.0 | ) | ||||||
|
Principal
payments under capital lease obligations
|
(13.4 | ) | (12.4 | ) | (11.0 | ) | ||||||
|
Issuance
of common stock
|
- | 150.2 | - | |||||||||
|
Dividends
paid on convertible perpetual preferred stock
|
(26.0 | ) | (26.0 | ) | (26.0 | ) | ||||||
|
Debt
amendment and issuance costs
|
(10.6 | ) | - | (11.2 | ) | |||||||
|
Distributions
paid to noncontrolling interests of consolidated
affiliates
|
(32.7 | ) | (33.4 | ) | (23.4 | ) | ||||||
|
Other
|
0.8 | 0.6 | 0.6 | |||||||||
|
Net
cash provided by (used in) financing activities of discontinued
operations
|
1.3 | (3.8 | ) | (52.9 | ) | |||||||
|
Net
cash used in financing activities
|
(224.3 | ) | (176.0 | ) | (1,436.6 | ) | ||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
- | 0.8 | 0.1 | |||||||||
|
Increase
(decrease) in cash and cash equivalents
|
48.8 | 12.0 | (21.4 | ) | ||||||||
|
Cash
and cash equivalents at beginning of year
|
32.1 | 19.8 | 27.2 | |||||||||
|
Cash
and cash equivalents of divisions and facilities held for sale at beginning of year
|
0.1 | 0.4 | 14.4 | |||||||||
|
Less:
Cash and cash equivalents of divisions and facilities held for sale at end of year
|
(0.1 | ) | (0.1 | ) | (0.4 | ) | ||||||
|
Cash
and cash equivalents at end of year
|
$ | 80.9 | $ | 32.1 | $ | 19.8 | ||||||
(Continued)
HealthSouth
Corporation and Subsidiaries
Consolidated Statements
of Cash Flows (Continued)
|
For
the Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(As
Adjusted)
|
||||||||||||
|
(In
Millions)
|
||||||||||||
|
Supplemental
cash flow information:
|
||||||||||||
|
Cash
(paid) received during the year for—
|
||||||||||||
|
Interest
|
$ | (121.3 | ) | $ | (158.5 | ) | $ | (306.1 | ) | |||
|
Income
tax refunds
|
63.7 | 90.4 | 457.4 | |||||||||
|
Income
tax payments
|
(10.5 | ) | (17.1 | ) | (19.2 | ) | ||||||
|
Supplemental
schedule of noncash investing and financing activities:
|
||||||||||||
|
Acquisition
of business:
|
||||||||||||
|
Fair
value of assets acquired
|
$ | - | $ | 18.1 | $ | - | ||||||
|
Goodwill
|
- | 8.6 | - | |||||||||
|
Fair
value of capital lease obligation assumed
|
- | (11.0 | ) | - | ||||||||
|
Fair
value of other liabilities assumed
|
- | (1.3 | ) | - | ||||||||
|
Noncompete
agreement
|
- | 0.2 | - | |||||||||
|
Net
cash paid for acquisition
|
$ | - | $ | 14.6 | $ | - | ||||||
|
Insurance
recoveries receivable
|
$ | - | $ | 47.2 | $ | - | ||||||
|
Retirement
of treasury stock
|
- | - | 14.8 | |||||||||
|
Property
and equipment acquired through capital leases
|
- | 11.2 | - | |||||||||
|
Securities
Litigation Settlement
|
294.6 | - | - | |||||||||
|
Adoption
of accounting guidance for unrecognized tax benefits
|
- | - | 4.2 | |||||||||
|
Other,
net
|
0.3 | 1.3 | 5.8 | |||||||||
The
accompanying notes to consolidated financial statements are an integral part of
these statements.
F-10
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Organization
and Description of Business—
HealthSouth
Corporation, incorporated in Delaware in 1984, including its subsidiaries, is
the largest provider of inpatient rehabilitative healthcare services in the
United States. We operate inpatient rehabilitation hospitals and long-term acute
care hospitals (“LTCHs”) and provide treatment on both an inpatient and
outpatient basis. References herein to “HealthSouth,” the “Company,” “we,”
“our,” or “us” refer to HealthSouth Corporation and its subsidiaries unless
otherwise stated or indicated by context.
As of
December 31, 2009, we operated 93 inpatient rehabilitation hospitals
(including 3 joint venture hospitals which we account for using the equity
method of accounting). We are the sole owner of 65 of these hospitals. We retain
50% to 97.5% ownership in the remaining 28 jointly owned hospitals. Our
inpatient rehabilitation hospitals are located in 26 states and Puerto Rico,
with a concentration of hospitals in Texas, Pennsylvania, Florida, Tennessee,
Alabama, and Arizona. As of December 31, 2009, we also operated 6 freestanding
LTCHs, 5 of which we own and one of which is a joint venture in which we have
retained an 80% ownership interest. We also had 40 outpatient rehabilitation
satellites operated by our hospitals, including one joint venture satellite. We
also provide home health services through 25 licensed, hospital-based home
health agencies. In addition to HealthSouth hospitals, we manage 6 inpatient
rehabilitation units through management contracts.
Subsequent
events have been evaluated through February 23, 2010, which represents the
issuance date of these consolidated financial statements.
Reclassifications—
During
2009, we terminated the leases associated with certain rental properties and
reached an agreement to sell one of our hospitals to a third party. As a result,
we reclassified our consolidated balance sheet as of December 31, 2008 to
show the assets and liabilities of these facilities as held for sale. We also
reclassified our consolidated statements of operations and consolidated
statements of cash flows for the years ended December 31, 2008 and 2007 to
include these properties and their results of operations as discontinued
operations.
As of
January 1, 2009, we reclassified our noncontrolling interests (formerly known as
“minority interests”) as a component of equity and now report net income and
comprehensive income attributable to our noncontrolling interests separately
from net income and comprehensive income attributable to HealthSouth. See the
“Noncontrolling Interests in Consolidated Affiliates” section of this note for
additional information.
Out-of-Period
Adjustments—
During
the preparation of our condensed consolidated financial statements for the
quarterly period ended June 30, 2009, we identified an error in our consolidated
financial statements as of and for the year ended December 31, 2008 and
prior periods and our condensed consolidated financial statements as of and for
the quarterly period ended March 31, 2009. We corrected this error in our
financial statements by adjusting Equity in net income of
nonconsolidated affiliates, which resulted in an understatement of both
our Income (loss) from
continuing operations before income tax benefit and our Net income of approximately
$4.5 million for the year ended December 31, 2009.
This error related primarily to an approximate $9.6 million overstatement of our
investment in a joint venture hospital we account for using the equity method of
accounting due to the understatement of prior period income tax provisions of
this joint venture hospital and the adjustment of certain liabilities due to
this joint venture hospital. We also adjusted Other current liabilities by
approximately $4.7 million due to changes in amounts due to us for expenses paid
on behalf of this joint venture hospital. We do not believe these adjustments
are material to the consolidated financial statements as of December 31, 2009 or
to any prior years’ consolidated financial statements. As a result, we have not
restated any prior period amounts.
Basis
of Presentation and Consolidation—
The
accompanying consolidated financial statements of HealthSouth and its
subsidiaries were prepared in accordance with generally accepted accounting
principles in the United States of America and include the assets,
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
liabilities,
revenues, and expenses of all wholly owned subsidiaries, majority-owned
subsidiaries over which we exercise control, and, when applicable, entities in
which we have a controlling financial interest.
We use
the equity method to account for our investments in entities we do not control,
but where we have the ability to exercise significant influence over operating
and financial policies. Consolidated net income attributable to HealthSouth
includes our share of the net earnings of these entities. The difference between
consolidation and the equity method impacts certain of our financial ratios
because of the presentation of the detailed line items reported in the
consolidated financial statements for consolidated entities compared to a one
line presentation of equity method investments.
We use
the cost method to account for our investments in entities we do not control and
for which we do not have the ability to exercise significant influence over
operating and financial policies. In accordance with the cost method, these
investments are recorded at the lower of cost or fair value, as
appropriate.
We also
consider the guidance for consolidating variable interest entities.
We
eliminate from our financial results all significant intercompany accounts and
transactions.
Use
of Estimates and Assumptions—
The
preparation of our consolidated financial statements in conformity with GAAP
requires the use of estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements, and the reported amounts
of revenues and expenses during the reporting periods. Significant estimates and
assumptions are used for, but not limited to: (1) allowance for contractual
revenue adjustments; (2) allowance for doubtful accounts; (3) asset
impairments, including goodwill; (4) depreciable lives of assets;
(5) useful lives of intangible assets; (6) economic lives and fair
value of leased assets; (7) income tax valuation allowances; (8) uncertain
tax positions; (9) fair value of stock options; (10) fair value of interest
rate swaps; (11) reserves for professional, workers’ compensation, and
comprehensive general insurance liability risks; and (12) contingency and
litigation reserves. Future events and their effects cannot be predicted with
certainty; accordingly, our accounting estimates require the exercise of
judgment. The accounting estimates used in the preparation of our consolidated
financial statements will change as new events occur, as more experience is
acquired, as additional information is obtained, and as our operating
environment changes. We evaluate and update our assumptions and estimates on an
ongoing basis and may employ outside experts to assist in our evaluation, as
considered necessary. Actual results could differ from those
estimates.
Risks
and Uncertainties—
As a
healthcare provider, we are required to comply with extensive and complex laws
and regulations at the federal, state, and local government levels. These laws
and regulations relate to, among other things:
|
•
|
licensure,
certification, and accreditation,
|
|
•
|
coding
and billing for services,
|
|
•
|
requirements
of the 60% compliance threshold under The Medicare, Medicaid and State
Children’s Health Insurance Program (SCHIP) Extension Act of 2007 (the
“2007 Medicare Act”),
|
|
•
|
relationships
with physicians and other referral sources, including physician
self-referral and anti-kickback
laws,
|
|
•
|
quality
of medical care,
|
|
•
|
use
and maintenance of medical supplies and
equipment,
|
|
•
|
maintenance
and security of medical records,
|
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
|
•
|
acquisition
and dispensing of pharmaceuticals and controlled substances,
and
|
|
•
|
disposal
of medical and hazardous waste.
|
In the
future, changes in these laws and regulations could subject our current or past
practices to allegations of impropriety or illegality or could require us to
make changes in our investment structure, hospitals, equipment, personnel,
services, capital expenditure programs, operating procedures, and contractual
arrangements.
If we
fail to comply with applicable laws and regulations, we could be subjected to
liabilities, including (1) criminal penalties, (2) civil penalties,
including monetary penalties and the loss of our licenses to operate one or more
of our hospitals, and (3) exclusion or suspension of one or more of our
hospitals from participation in the Medicare, Medicaid, and other federal and
state healthcare programs. Substantial damages and other remedies assessed
against us could have a material adverse effect on our business, financial
position, results of operation, and cash flows.
Historically,
the United States Congress and some state legislatures have periodically
proposed significant changes in regulations governing the healthcare system.
Many of these changes have resulted in limitations on and, in some cases,
significant reductions in the levels of payments to healthcare providers for
services under many government reimbursement programs. Because we receive a
significant percentage of our revenues from Medicare, such changes in
legislation might have a material adverse effect on our financial position,
results of operations, and cash flows, if any such changes were to
occur.
For
example, for the period from April 1, 2008 through September 30, 2009, the 2007
Medicare Act reduced the Medicare reimbursement levels for inpatient
rehabilitation hospitals to the levels existing in the third quarter of 2007.
The Centers for Medicare and Medicaid Services ("CMS") updated the fiscal year
2010 Medicare reimbursement rates for inpatient rehabilitation facilities with a
2.5% market basket increase effective October 1, 2009. However, there can be no
assurance that future governmental initiatives will not result in additional
pricing roll-backs or freezes, either generally or specifically targeted at the
2010 market basket increase.
On
December 8, 2003, The Medicare Modernization Act of 2003 authorized CMS to
conduct a demonstration program known as the Medicare Recovery Audit Contractor
(“RAC”) program. This demonstration was first initiated in three states
(California, Florida, and New York) and authorizes CMS to contract with private
companies to conduct claims and medical record audits. These audits are in
addition to those conducted by existing Medicare contractors, and the contracted
RACs are paid a percentage of the overpayments recovered. On December 20,
2006, the Tax Relief & Health Care Act of 2006 directed CMS to expand the
RAC program to the rest of the country by 2010. The new RACs were announced on
October 6, 2008, and the RACs began their audit processes in late 2009 for
providers in general. Among other changes in the permanent program, the new RACs
will receive claims data directly from Medicare contractors on a monthly or
quarterly basis and are authorized to review claims up to three years from the
date a claim was paid, beginning with claims filed on or after October 1, 2007.
We cannot predict when or how this program will affect us.
As
discussed in Note 23, Contingencies and Other
Commitments, we are a party to a number of lawsuits. We cannot predict
the outcome of litigation filed against us. Substantial damages or other
monetary remedies assessed against us could have a material adverse effect on
our business, financial position, results of operations, and cash
flows.
Revenue
Recognition—
Revenues
consist primarily of net patient service revenues that are recorded based upon
established billing rates less allowances for contractual adjustments. Revenues
are recorded during the period the healthcare services are provided, based upon
the estimated amounts due from the patients and third-party payors, including
federal and state agencies (under the Medicare and Medicaid programs), managed
care health plans, commercial insurance companies, and employers. Estimates of
contractual allowances under third-party payor arrangements are based upon the
payment terms specified in the related contractual agreements. Third-party payor
contractual payment terms are generally based upon predetermined rates per
diagnosis, per diem rates, or discounted fee-for-service rates. Other operating
revenues, which include revenues from cafeteria, gift shop, rental income, and
management and
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
administrative
fees, approximated 1.4%, 1.6%, and 2.3% of Net operating revenues for
the years ended December 31, 2009, 2008, and 2007,
respectively.
Laws and
regulations governing the Medicare and Medicaid programs are complex, subject to
interpretation, and are routinely modified for provider reimbursement. All
healthcare providers participating in the Medicare and Medicaid programs are
required to meet certain financial reporting requirements. Federal regulations
require submission of annual cost reports covering medical costs and expenses
associated with the services provided by each hospital to program beneficiaries.
Annual cost reports required under the Medicare and Medicaid programs are
subject to routine audits, which may result in adjustments to the amounts
ultimately determined to be due to HealthSouth under these reimbursement
programs. These audits often require several years to reach the final
determination of amounts earned under the programs. As a result, there is at
least a reasonable possibility that recorded estimates will change by a material
amount in the near term.
CMS has
been granted authority to suspend payments, in whole or in part, to Medicare
providers if CMS possesses reliable information that an overpayment, fraud, or
willful misrepresentation exists. If CMS suspects payments are being made as the
result of fraud or misrepresentation, CMS may suspend payment at any time
without providing us with prior notice. The initial suspension period is limited
to 180 days. However, the payment suspension period can be extended almost
indefinitely if the matter is under investigation by the United States
Department of Health and Human Services Office of Inspector General or the
United States Department of Justice. Therefore, we are unable to predict if or
when we may be subject to a suspension of payments by the Medicare and/or
Medicaid programs, the possible length of the suspension period, or the
potential cash flow impact of a payment suspension. Any such suspension would
adversely impact our financial position, results of operations, and cash
flows.
We
provide care to patients who are financially unable to pay for the healthcare
services they receive, and because we do not pursue collection of amounts
determined to qualify as charity care, such amounts are not recorded as
revenues.
Cash
and Cash Equivalents—
Cash and cash equivalents
include highly liquid investments with maturities of three months or less when
purchased. Carrying values of Cash and cash equivalents
approximate fair value due to the short-term nature of these
instruments.
We
maintain amounts on deposit with various financial institutions, which may, at
times, exceed federally insured limits. However, management periodically
evaluates the credit-worthiness of those institutions, and we have not
experienced any losses on such deposits.
Marketable
Securities—
We record
all equity securities with readily determinable fair values and for which we do
not exercise significant influence as available-for-sale securities. We carry
the available-for-sale securities at fair value and report unrealized holding
gains or losses, net of income taxes, in Accumulated other comprehensive
loss, which is a separate component of shareholders’ deficit. We
recognize realized gains and losses in our consolidated statements of operations
using the specific identification method.
Unrealized
losses are charged against earnings when a decline in fair value is determined
to be other than temporary. Management reviews several factors to determine
whether a loss is other than temporary, such as the length of time a security is
in an unrealized loss position, the extent to which fair value is less than
cost, the financial condition and near term prospects of the issuer, and our
ability and intent to hold the security for a period of time sufficient to allow
for any anticipated recovery in fair value.
Accounts
Receivable—
HealthSouth
reports accounts receivable at estimated net realizable amounts from services
rendered from federal and state agencies (under the Medicare and Medicaid
programs), managed care health plans, commercial insurance companies, workers’
compensation programs, employers, and patients. Our accounts receivable
are
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
geographically
dispersed, but a significant portion of our revenues are concentrated by type of
payors. The concentration of net patient service accounts receivable by payor
class, as a percentage of total net patient service accounts receivable as of
the end of each of the reporting periods, is as follows:
|
As
of December 31,
|
|||
|
2009
|
2008
|
||
|
Medicare
|
55.5%
|
55.8%
|
|
|
Medicaid
|
3.3%
|
3.6%
|
|
|
Workers’
compensation
|
3.2%
|
3.5%
|
|
|
Managed
care and other discount plans
|
31.5%
|
32.1%
|
|
|
Other
third-party payors
|
4.7%
|
3.6%
|
|
|
Patients
|
1.8%
|
1.4%
|
|
|
100.0%
|
100.0%
|
||
During
the years ended December 31, 2009, 2008, and 2007, approximately 67.9%,
67.2%, and 67.8%, respectively, of our Net operating revenues
related to patients participating in the Medicare program. While revenues and
accounts receivable from the Medicare program are significant to our operations,
we do not believe there are significant credit risks associated with this
government agency. Because Medicare traditionally pays claims faster than our
other third-party payors, the percentage of our Medicare charges in accounts
receivable is less than the percentage of our Medicare revenues. HealthSouth
does not believe there are any other significant concentrations of revenues from
any particular payor that would subject it to any significant credit risks in
the collection of its accounts receivable.
Net
accounts receivable include only those amounts we estimate we will collect.
Additions to the allowance for doubtful accounts are made by means of the Provision for doubtful
accounts. We write off uncollectible accounts (after exhausting
collection efforts) against the allowance for doubtful accounts. Subsequent
recoveries are recorded via the Provision for doubtful
accounts.
Property and
Equipment—
We report
land, buildings, improvements, and equipment at cost, net of accumulated
depreciation and amortization and any asset impairments. We report assets under
capital lease obligations at the lower of fair value or the present value of the
aggregate future minimum lease payments at the beginning of the lease term. We
depreciate our assets using the straight-line method over the shorter of the
estimated useful life of the assets or life of the lease term, excluding any
lease renewals, unless the lease renewals are reasonably assured. Useful lives
are generally as follows:
|
Years
|
|
|
Buildings
|
15
to 30
|
|
Leasehold
improvements
|
2
to 15
|
|
Furniture,
fixtures, and equipment
|
3
to 10
|
|
Assets
under capital lease obligations:
|
|
|
Real
estate
|
15
to 20
|
|
Equipment
|
3
to 5
|
Maintenance
and repairs of property and equipment are expensed as incurred. We capitalize
replacements and betterments that increase the estimated useful life of an
asset. We capitalize interest expense on major construction and development
projects while in progress.
We retain
fully depreciated assets in property and accumulated depreciation accounts until
we remove them from service. In the case of sale, retirement, or disposal, the
asset cost and related accumulated depreciation balances are removed from the
respective accounts, and the resulting net amount, less any proceeds, is
included as a component of income from continuing operations in the consolidated
statements of operations. However, if the sale,
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
retirement,
or disposal involves a discontinued operation, the resulting net amount, less
any proceeds, is included in the results of discontinued
operations.
We
account for operating leases by recognizing escalated rents, including any rent
holidays, on a straight-line basis over the term of the lease for those lease
agreements where we receive the right to control the use of the entire leased
property at the beginning of the lease term.
Goodwill
and Other Intangible Assets—
We test
goodwill for impairment using a fair value approach. We are required to test for
impairment at least annually, absent some triggering event that would require an
impairment assessment. Absent any impairment indicators, we perform our goodwill
impairment testing as of October 1st of each year.
We
recognize an impairment charge for any amount by which the carrying amount of
goodwill exceeds its implied fair value. We present a goodwill impairment charge
as a separate line item within income from continuing operations in the
consolidated statements of operations, unless the goodwill impairment is
associated with a discontinued operation. In that case, we include the goodwill
impairment charge, on a net-of-tax basis, within the results of discontinued
operations.
We
determine the fair value of our reporting unit as of the testing date using
discounted projected operating results and cash flows. This approach includes
many assumptions related to pricing and volume, operating expenses, capital
expenditures, discount factors, tax rates, etc. Changes in economic and
operating conditions impacting these assumptions could result in goodwill
impairment in future periods. We reconcile the estimated fair value of our
reporting unit to our market capitalization. When we dispose of a hospital,
goodwill is allocated to the gain or loss on disposition using the relative fair
value methodology.
We
amortize the cost of intangible assets with finite useful lives over their
respective estimated useful lives to their estimated residual value. As of
December 31, 2009, none of our finite useful lived intangible assets has an
estimated residual value. We also review these assets for impairment whenever
events or changes in circumstances indicate we may not be able to recover the
asset’s carrying amount. As of December 31, 2009, we do not have any
intangible assets with indefinite useful lives. The range of estimated useful
lives and the amortization basis for our other intangible assets are as
follows:
|
Estimated
Useful Life and Amortization Basis
|
||
|
Certificates
of need
|
13
to 30 years using straight-line basis
|
|
|
Licenses
|
10
to 20 years using straight-line basis
|
|
|
Noncompete
agreements
|
3
to 18 years using straight-line basis
|
|
|
Market
access assets
|
20
years using accelerated basis
|
Our market access assets are valued
using discounted cash flows under the income approach. The value of the market
access assets is attributable to our ability to gain access to and penetrate an
acquired facility's historical market patient base. To determine this value, we
first develop a debt-free net cash flow forecast under various patient volume
scenarios. The debt-free net cash flow is then discounted back to present value
using a discount factor, which includes an adjustment for company-specific risk.
As noted in the above table, we amortize these assets over 20 years using an
accelerated basis that reflects the pattern in which we believe the economic
benefits of the market access will be consumed.
Impairment
of Long-Lived Assets and Other Intangible Assets—
We assess
the recoverability of long-lived assets (excluding goodwill) and identifiable
acquired intangible assets with finite useful lives, whenever events or changes
in circumstances indicate we may not be able to recover the asset’s carrying
amount. We measure the recoverability of assets to be held and used by a
comparison of the carrying amount of the asset to the expected net future cash
flows to be generated by that asset, or, for identifiable intangibles with
finite useful lives, by determining whether the amortization of the intangible
asset balance over its remaining life can be recovered through undiscounted
future cash flows. The amount of impairment of identifiable
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
intangible
assets with finite useful lives, if any, to be recognized is measured based on
projected discounted future cash flows. We measure the amount of impairment of
other long-lived assets (excluding goodwill) as the amount by which the carrying
value of the asset exceeds the fair market value of the asset, which is
generally determined based on projected discounted future cash flows or
appraised values. We present an impairment charge as a separate line item within
income from continuing operations in our consolidated statements of operations,
unless the impairment is associated with a discontinued operation. In that case,
we include the impairment charge, on a net-of-tax basis, within the results of
discontinued operations. We classify long-lived assets to be disposed of other
than by sale as held and used until they are disposed. We report long-lived
assets to be disposed of by sale as held for sale and recognize those assets in
the balance sheet at the lower of carrying amount or fair value less cost to
sell, and we cease depreciation.
Investments
in and Advances to Nonconsolidated Affiliates—
Investments
in entities we do not control but in which we have the ability to exercise
significant influence over the operating and financial policies of the investee
are accounted for under the equity method. Equity method investments are
recorded at original cost and adjusted periodically to recognize our
proportionate share of the investees’ net income or losses after the date of
investment, additional contributions made, dividends or distributions received,
and impairment losses resulting from adjustments to net realizable value. We
record equity method losses in excess of the carrying amount of an investment
when we guarantee obligations or we are otherwise committed to provide further
financial support to the affiliate.
We use
the cost method to account for equity investments for which the equity
securities do not have readily determinable fair values and for which we do not
have the ability to exercise significant influence. Under the cost method of
accounting, private equity investments are carried at cost and are adjusted only
for other-than-temporary declines in fair value, additional investments, or
distributions deemed to be a return of capital.
Management
periodically assesses the recoverability of our equity method and cost method
investments and equity method goodwill for impairment. We consider all available
information, including the recoverability of the investment, the earnings and
near-term prospects of the affiliate, factors related to the industry,
conditions of the affiliate, and our ability, if any, to influence the
management of the affiliate. We assess fair value based on valuation
methodologies, as appropriate, including discounted cash flows, estimates of
sales proceeds, and external appraisals, as appropriate. If an investment or
equity method goodwill is considered to be impaired and the decline in value is
other than temporary, we record an appropriate write-down.
Common
Stock Warrants—
In January 2004, we repaid our
then-outstanding 3.25% Convertible Debentures using the net proceeds of a loan
arranged by Credit Suisse First Boston. In connection with this transaction, we
issued warrants to the lender to purchase two million shares of our common
stock. We accounted for this extinguishment of debt by separately computing the
amounts attributable to the debt and the purchase warrants and giving accounting
recognition to each component. We based our allocation to each component on the
relative market value of the two components at the time of issuance. The portion
allocable to the warrants was accounted for as additional paid-in capital. See
Note 20, Earnings per Common
Share.
See also Note 12, Shareholders’ Deficit, for
information related to common stock warrants issued under our Securities
Litigation Settlement.
Financing
Costs—
We amortize financing costs using the
effective interest method over the life of the related debt. The related expense
is included in Interest
expense and amortization of debt discounts and fees in our consolidated
statements of operations.
We accrete discounts and amortize
premiums using the effective interest method over the life of the related debt,
and we report discounts or premiums as a direct deduction from, or addition to,
the face amount of the financing. The related income or expense is included in
Interest expense and
amortization of debt discounts and fees in our consolidated statements of
operations.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Fair
Value Measurements—
Fair value is an exit price,
representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. As
such, fair value is a market-based measurement that should be determined based
on assumptions that market participants would use in pricing an asset or
liability. The basis for these assumptions establishes a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair value as
follows:
|
•
|
Level 1 – Observable
inputs such as quoted prices in active
markets;
|
|
•
|
Level 2 – Inputs, other
than the quoted prices in active markets, that are observable either
directly or indirectly; and
|
|
•
|
Level 3 – Unobservable
inputs in which there is little or no market data, which require the
reporting entity to develop its own
assumptions.
|
Assets
and liabilities measured at fair value are based on one or more of three
valuation techniques. The three valuation techniques are as
follows:
|
•
|
Market approach –
Prices and other relevant information generated by market transactions
involving identical or comparable assets or
liabilities;
|
|
•
|
Cost approach – Amount
that would be required to replace the service capacity of an asset (i.e.,
replacement cost); and
|
|
•
|
Income approach –
Techniques to convert future amounts to a single present amount based on
market expectations (including present value techniques, option-pricing
models, and lattice models).
|
Our financial instruments consist
mainly of cash and cash equivalents, restricted cash, restricted marketable
securities, accounts receivable, accounts payable, letters of credit, long-term
debt, and interest rate swap agreements. The carrying amounts of cash and cash
equivalents, restricted cash, accounts receivable, and accounts payable
approximate fair value because of the short-term maturity of these instruments.
The fair value of our letters of credit is deemed to be the amount of payment
guaranteed on our behalf by third-party financial institutions. We determine the
fair value of our long-term debt using quoted market prices, when available, or
discounted cash flows based on various factors, including maturity schedules,
call features, and current market rates.
On a recurring basis, we are required
to measure our available-for-sale restricted and nonrestricted marketable
securities and our interest rate swaps at fair value. The fair values of our
available-for-sale restricted and nonrestricted marketable securities are
determined based on quoted market prices in active markets. The fair value of
our interest rate swaps is determined using the present value of the fixed leg
and floating leg of each swap. The value of the fixed leg is the present value
of the known fixed coupon payments discounted at the rates implied by the
LIBOR-swap curve adjusted for the credit spreads applicable to the debt of the
party in a liability position. This adjustment is meant to capture the price of
transferring the liability to a similarly-rated counterparty. The value of the
floating leg is the present value of the floating coupon payments which are
derived from the forward LIBOR-swap rates and discounted at the same rates as
the fixed leg.
On a nonrecurring basis, we are
required to measure property and equipment, goodwill, other intangible assets,
investments in nonconsolidated affiliates, and assets and liabilities of
discontinued operations at fair value. Generally, assets are recorded at fair
value on a nonrecurring basis as a result of impairment charges or similar
adjustments made to the carrying value of the applicable assets. The fair value
of our property and equipment is determined using discounted cash flows and
significant unobservable inputs, unless there is an offer to purchase such
assets, which would be the basis for determining fair value. The fair value of
our intangible assets, excluding goodwill, is determined using discounted cash
flows and significant unobservable inputs. The fair value of our investments in
nonconsolidated affiliates is determined using quoted prices in private markets,
discounted cash flows or earnings, or market multiples derived from a set of
comparables. The fair value of our assets and liabilities of discontinued
operations is determined using discounted cash flows and significant
unobservable inputs unless there is an offer to purchase such assets and
liabilities, which would be the basis for determining fair value. The
fair
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
value of
our goodwill is determined using discounted projected operating results and cash
flows, which involve significant unobservable inputs. Goodwill is tested for
impairment as of October 1st of
each year, absent any impairment indicators.
Derivative
Instruments—
Each of
our derivative instruments is recorded on the balance sheet at its fair value.
Changes in the fair values of our existing derivatives are recorded each period
in current earnings or in other comprehensive income, depending on their
designations as hedging or trading swaps.
As of
December 31, 2009, we hold four derivative instruments. Two are interest
rate swaps that are not designated as hedging instruments. Therefore, all
changes in the fair value of these interest rate swaps are reported in current
period earnings on the line entitled Loss on interest rate swaps
in our consolidated statements of operations. Net cash settlements on these
interest rate swaps are included in investing activities in our consolidated
statements of cash flows.
The other
two derivative instruments are forward-starting interest rate swaps that are
designated as cash flow hedges. Therefore, the effective portion of changes in
the fair value of these cash flow hedges is deferred as a component of other
comprehensive income and will be reclassified into earnings as part of interest
expense in the same period in which the forecasted transaction impacts earnings.
The ineffective portion, if any, is reported in earnings as part of other
income. Net cash settlements on these interest rate swaps that are designated as
cash flow hedges will be included in operating activities in our consolidated
statements of cash flows.
For
additional information regarding these interest rate swaps, see Note 9, Derivative
Instruments.
Refunds
due Patients and Other Third-Party Payors—
Refunds due patients and other
third-party payors consist primarily of estimates of potential
overpayments received from our patients and other third-party payors. In
instances where we are unable to locate and reimburse the party due the refund,
these amounts may become subject to escheat property laws and consequently
payable to various jurisdictions or reportable to a federal agency.
During
2005, we completed a substantive reconstruction process so that we could prepare
consolidated financial statements as of and for the years ended
December 31, 2004, 2003, and 2002 and restate our previously issued
financial statements for the years ended December 31, 2001 and 2000. As of
December 31, 2009 and 2008, approximately $42.8 million and $43.5 million,
respectively, of amounts included in Refunds due patients and other
third-party payors represent an estimate of potential overpayments that
originated in periods prior to December 31, 2004. These amounts were
originally estimated during our reconstruction process based on collection
history and other available patient receipt data. We continue to review these
estimates based on updated information with respect to third-party
confirmations, settlement agreements, and developments in regulations and
rulings. During 2009, 2008, and 2007, this process resulted in a reduction to
Refunds due patients and other
third-party payors of approximately $0.7 million, $2.9 million, and $41.2
million, respectively, all of which are included in Income from discontinued operations,
net of tax in our consolidated statements of operations. We are
negotiating the settlement of these amounts with third-party payors in various
jurisdictions. The result of these ongoing settlement negotiations may impact
the carrying value of these liabilities.
As
of December 31, 2009 and 2008, approximately $34.6 million and $35.3 million,
respectively, of the amount recorded as Refunds due patients and other
third-party payors represents balances associated with our divested
surgery centers, outpatient, and diagnostic divisions. These liabilities
remained with HealthSouth after each transaction closed, and, therefore, are not
reported as liabilities held for sale in our consolidated balance
sheets.
Noncontrolling
Interests in Consolidated Affiliates—
The
consolidated financial statements include all assets, liabilities, revenues, and
expenses of less-than-100%-owned affiliates we control. Accordingly, we have
recorded noncontrolling interests in the earnings and equity of such entities.
We record adjustments to noncontrolling interests for the allocable portion of
income or loss to which the noncontrolling interests holders are entitled based
upon their portion of the subsidiaries they own. Distributions
to holders of noncontrolling interests are adjusted to the respective
noncontrolling interests holders’ balance.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Prior to
January 1, 2009, we suspended allocation of losses to noncontrolling interests
holders when the noncontrolling interests balance for a particular
noncontrolling interests holder was reduced to zero and the noncontrolling
interests holder did not have an obligation to fund such losses. Any excess loss
above the noncontrolling interests holders’ balance was not charged to
noncontrolling interests but rather was recognized by us until the affiliate
began earning income again. We resumed adjusting noncontrolling interests for
the subsequent profits earned by a subsidiary only after the cumulative income
exceeded the previously unrecorded losses. Effective January 1, 2009, we
continue to allocate losses to noncontrolling interests holders even if such
allocation results in a deficit noncontrolling interests balance.
Convertible
Perpetual Preferred Stock—
Our Convertible perpetual preferred
stock contains fundamental change provisions that allow the holder to
require us to redeem the preferred stock for cash if certain events occur. As
redemption under these provisions is not solely within our control, we have
classified our Convertible
perpetual preferred stock as temporary equity.
Because our Convertible perpetual preferred
stock is indexed to, and potentially settled in, our common stock, we
also examined whether the embedded conversion option in our Convertible perpetual preferred
stock should be bifurcated. Based on our analysis, we determined
bifurcation is not necessary.
We use the if-converted method to
include our Convertible
perpetual preferred stock in our computation of diluted earnings per
share.
Stock-Based
Compensation—
HealthSouth has various shareholder-
and non-shareholder-approved stock-based compensation plans that provide for the
granting of stock-based compensation to certain employees and directors. All
share-based payments to employees, including grants of employee stock options,
are recognized in the financial statements based on their estimated grant-date
fair value and amortized on a straight-line basis over the applicable requisite
service period.
Litigation
Reserves—
We accrue for loss contingencies
associated with outstanding litigation for which management has determined it is
probable a loss contingency exists and the amount of loss can be reasonably
estimated. If the accrued amount associated with a loss contingency is greater
than $5.0 million, we also accrue estimated future legal fees associated with
the loss contingency. This requires management to estimate the amount of legal
fees that will be incurred in the defense of the litigation. These estimates are
based on our expectations of the scope, length to complete, and complexity of
the claims. In the future, additional adjustments may be recorded as the scope,
length, or complexity of outstanding litigation changes.
Advertising
Costs—
We expense costs of print, radio,
television, and other advertisements as incurred. Advertising expenses, included
in Other operating
expenses within the accompanying consolidated statements of operations,
approximated $5.0 million in 2009, $5.4 million in 2008, and $4.1 million in
2007.
Professional
Fees—Accounting, Tax, and Legal—
As discussed in Note 23, Contingencies and Other
Commitments, in June 2009, a court ruled that Richard M. Scrushy, our
former chairman and chief executive officer, committed fraud and breached his
fiduciary duties during his time with HealthSouth. Based on this judgment, we
have no obligation to indemnify him for any litigation costs. Therefore, we
reversed the remainder of this accrual for his legal fees during the second
quarter of 2009, which resulted in a reduction in Professional fees – accounting, tax,
and legal of $6.5 million during the year ended December 31,
2009.
Excluding the reversal of accrued fees
discussed above, Professional
fees – accounting, tax, and legal for the years ended December 31, 2009,
2008, and 2007 related primarily to legal and consulting fees for continued
litigation defense and support matters arising from prior reporting and
restatement issues and income tax return preparation and consulting fees for
various tax projects related to our pursuit of our remaining income tax refund
claims. Professional fees –
accounting, tax, and legal in 2008 specifically included the $26.2
million of fees and
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
expenses
awarded to the derivative plaintiffs’ attorneys as part of the UBS Settlement
discussed in Note 22, Settlements. In 2007, Professional fees – accounting, tax,
and legal also included consulting fees associated with support received
during our divestiture activities.
See Note 22, Settlements, and Note 23,
Contingencies and Other
Commitments, for a description of our continued litigation defense and
support matters arising from our prior reporting and restatement
issues.
Income
Taxes—
We provide for income taxes using the
asset and liability method. This approach recognizes
the amount of federal, state, and local taxes payable or refundable for the
current year, as well as deferred tax assets and liabilities for the future tax
consequence of events recognized in the consolidated financial statements and
income tax returns. Deferred income tax assets and liabilities are adjusted to
recognize the effects of changes in tax laws or enacted tax rates. A valuation
allowance is required when it is more likely than not that some portion of the
deferred tax assets will not be realized. Realization is dependent on generating
sufficient future taxable income.
We evaluate our tax positions and
establish assets and liabilities in accordance with the applicable accounting
guidance on uncertainty in income taxes. We review these tax uncertainties in
light of changing facts and circumstances, such as the progress of tax audits,
and adjust them accordingly.
HealthSouth and its corporate
subsidiaries file a consolidated federal income tax return. Some subsidiaries
consolidated for financial reporting purposes are not part of the consolidated
group for federal income tax purposes and file separate federal income tax
returns. State income tax returns are filed on a separate, combined, or
consolidated basis in accordance with relevant state laws and regulations.
Partnerships, limited liability partnerships, limited liability companies, and
other pass-through entities that we consolidate or account for using the equity
method of accounting file separate federal and state income tax returns. We
include the allocable portion of each pass-through entity’s income or loss in
our federal income tax return. We allocate the remaining income or loss of each
pass-through entity to the other partners or members who are responsible for
their portion of the taxes.
Assets
Held for Sale and Results of Discontinued Operations—
Components of an entity that have been
disposed of or are classified as held for sale and have operations and cash
flows that can be clearly distinguished from the rest of the entity are reported
as assets held for sale and discontinued operations. In the period a component
of an entity has been disposed of or classified as held for sale, we reclassify
the results of operations for current and prior periods into a single caption
titled Income from
discontinued operations, net of tax. In addition, we classify the assets
and liabilities of those components as current and noncurrent assets and
liabilities within Prepaid
expenses and other current assets, Other long-term assets, Other current liabilities,
and Other long-term
liabilities in our consolidated balance sheets. We also classify cash
flows related to discontinued operations as one line item within each category
of cash flows in our consolidated statements of cash flows.
Earnings
per Common Share—
The calculation of earnings per common
share is based on the weighted-average number of our common shares outstanding
during the applicable period. The calculation for diluted earnings per common
share recognizes the effect of all potential dilutive common shares that were
outstanding during the respective periods, unless their impact would be
antidilutive.
Treasury
Stock—
Shares of common stock repurchased by
us are recorded at cost as treasury stock. When shares are reissued, we use an
average cost method to determine cost. The difference between the cost of the
shares and the reissuance price is added to or deducted from additional
paid-in-capital. We account for the retirement of treasury stock as a reduction
of retained earnings. However, due to our Accumulated deficit, the
retirement of treasury stock is currently recorded as a reduction of Capital in excess of par
value.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Foreign
Currency Translation—
The financial statements of foreign
subsidiaries whose functional currency is not the U.S. dollar have been
translated to U.S. dollars. Foreign currency assets and liabilities are
remeasured into U.S. dollars at the end-of-period exchange rates. Revenues and
expenses are translated at average exchange rates in effect during each period,
except for those expenses related to balance sheet amounts, which are translated
at historical exchange rates. Gains and losses from foreign currency
translations are reported as a component of Accumulated other comprehensive loss
within shareholders’ deficit. Exchange gains and losses from foreign
currency transactions are recognized in the consolidated statements of
operations and historically have not been material. We divested our
international operations in October 2006.
Comprehensive
Income—
Comprehensive income is
comprised of Net
income, changes in unrealized gains or losses on available-for-sale
securities, the effective portion of changes in the fair value of interest rate
swaps that are designated as cash flow hedges, and foreign currency translation
adjustments and is included in the consolidated statements of comprehensive
income.
Recent Accounting
Pronouncements—
In April 2009, the Financial Accounting
Standards Board updated the other-than-temporary impairment guidance in GAAP for
debt securities to make the guidance more operational and to improve the
presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements. This guidance was effective for
interim and annual reporting periods ended after June 15, 2009, with early
adoption permitted. HealthSouth elected to adopt this amended guidance in the
first quarter of 2009. While its adoption did not have a material impact on our
financial position, results of operations, or cash flows, it does require
interim disclosures related to our available-for-sale equity securities. See
Note 3, Cash and Marketable
Securities.
In April 2009, the FASB also issued
updated guidance on disclosures about fair value of financial instruments. This
guidance requires disclosures about fair value of financial instruments for
interim reporting periods of publicly traded companies as well as in annual
financial statements and was effective for interim reporting periods ended after
June 15, 2009, with early adoption permitted. HealthSouth elected to adopt this
amended guidance in the first quarter of 2009. Its adoption resulted in
additional interim disclosures only. See Note 15, Fair Value
Measurements.
In May 2009, the FASB issued
authoritative guidance on subsequent events to establish general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. This
guidance was effective for interim or annual financial periods ended after June
15, 2009. Our adoption of this guidance resulted only in additional disclosure
regarding the date through which subsequent events have been evaluated in each
set of interim or annual financial statements and had no impact on our financial
position, results of operations, or cash flows.
In June 2009, the FASB established the
FASB Accounting Standards Codification as the single authoritative source for
GAAP. The Codification was effective for financial statements that cover interim
and annual periods ended after September 15, 2009. While not intended to change
GAAP, the Codification significantly changed the way in which the accounting
literature is organized. Because the Codification completely replaced existing
standards, it affected the way GAAP is referenced by companies in their
financial statements and accounting policies. Our adoption and our use of the
Codification beginning in the third quarter of 2009 did not have an impact on
our financial position, results of operations, or cash flows.
We do not
believe any other recently issued, but not yet effective, accounting standards
will have a material effect on our consolidated financial position, results of
operations, or cash flows.
2. Liquidity:
We
continue to improve our leverage and liquidity. During the year ended
December 31, 2009, we reduced our total debt by approximately $151 million
and increased our Cash and
cash equivalents by approximately $49 million.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
In
February 2009, we used our federal income tax refund for tax years 1995 through
1999 (see Note 19, Income
Taxes) along with available cash to reduce our term loan facility by
$24.5 million and amounts outstanding under our revolving credit facility to
zero. In addition, we used a portion of the net proceeds from our settlement
with UBS (see Note 22, Settlements) to redeem $36.4
million of our Floating Rate Senior Notes due 2014. In December 2009, we
completed a refinancing transaction in which we issued $290.0 million of 8.125%
Senior Notes due 2020 and tendered for and redeemed the remaining $329.6 million
of our outstanding Floating Rate Senior Notes due 2014. The refinancing
transaction reduced debt, extended debt maturities, and reduced floating rate
interest exposure. See Note 8, Long-term Debt, for
additional information.
As of
December 31, 2009, we had $80.9 million in Cash and cash equivalents.
This amount excludes $67.8 million in Restricted cash and $21.0
million of restricted marketable securities. Our restricted assets pertain to obligations
we have under partnership agreements and other arrangements, primarily related
to our captive insurance company.
We have
scheduled principal payments of $21.5 million and $20.8 million in 2010 and
2011, respectively, related to long-term debt obligations. We do not face
near-term refinancing risk, as our revolving credit facility, under which no
amounts were drawn as of December 31, 2009, does not expire until 2012, a
portion of our term loan facility does not mature until 2013, with the remainder
maturing in 2015, and the majority of our bonds are not due until 2016 and 2020.
See Note 8, Long-term
Debt, for additional information.
Our
credit agreement governs the vast majority of our senior secured borrowings and
contains financial covenants that include a leverage ratio and an interest
coverage ratio. As of December 31, 2009, we were in compliance with the
covenants under our credit agreement. If we anticipated a potential covenant
violation, we would seek relief from our lenders, which would have some cost to
us, and such relief might not be on terms favorable to those in our existing
credit agreement. Under such circumstances, there is also the potential our
lenders would not grant relief to us which, among other things, would depend on
the state of the credit markets at that time. However, we believe we have
reduced this risk by significantly lowering our senior secured leverage ratio
since the inception of our credit agreement.
Our
primary sources of liquidity are cash on hand, cash flows from operations, and
borrowings under our revolving credit facility. We monitor the financial
strength of our depositories, creditors, insurance carriers, and other
counterparties using publicly available information, as well as qualitative
inputs. Based on our current borrowing capacity and compliance with the
financial covenants under our credit agreement, we do not believe there is
significant risk in our ability to make draws under our revolving credit
facility, if needed. However, no such assurances can be provided. We continue to
analyze our capital structure, and we will use our available cash in a manner
that provides the most beneficial impact and return to our shareholders,
including development opportunities and deleveraging.
See Note
1, Summary of Significant
Accounting Policies, for a discussion of risks and uncertainties facing
us. Changes in our business or other factors may occur that might have a
material adverse impact on our financial position, results of operations, and
cash flows.
3. Cash
and Marketable Securities:
The
components of our investments as of December 31, 2009 are as follows (in
millions):
|
Cash
& Cash Equivalents
|
Restricted
Cash
|
Restricted
Marketable Securities
|
Total
|
|||||||||||||
|
Cash
|
$ | 80.9 | $ | 67.8 | $ | - | $ | 148.7 | ||||||||
|
Equity
securities
|
- | - | 21.0 | 21.0 | ||||||||||||
|
Total
|
$ | 80.9 | $ | 67.8 | $ | 21.0 | $ | 169.7 | ||||||||
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
The
components of our investments as of December 31, 2008 are as follows (in
millions):
|
Cash
& Cash Equivalents
|
Restricted
Cash
|
Restricted
Marketable Securities
|
Total
|
|||||||||||||
|
Cash
|
$ | 32.1 | $ | 154.0 | $ | - | $ | 186.1 | ||||||||
|
Equity
securities
|
- | - | 20.3 | 20.3 | ||||||||||||
|
Total
|
$ | 32.1 | $ | 154.0 | $ | 20.3 | $ | 206.4 | ||||||||
Restricted
Cash—
As of December 31, 2009 and 2008,
Restricted cash
consisted of the following (in millions):
|
As
of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Escrow
related to UBS Settlement
|
$ | - | $ | 97.9 | ||||
|
Affiliate
cash
|
31.9 | 33.4 | ||||||
|
Self-insured
captive funds
|
33.7 | 20.4 | ||||||
|
Paid-loss
deposit funds
|
2.2 | 2.3 | ||||||
|
Total
restricted cash
|
$ | 67.8 | $ | 154.0 | ||||
Amounts
in escrow related to the UBS Settlement represented cash that was transferred to
us in December 2008 from UBS Securities, LLC (“UBS Securities”) and its
insurance carriers and held in escrow pending the court’s implementation of the
final court order. See Note 22, Settlements, for additional
information.
Affiliate
cash represents cash accounts maintained by partnerships in which we participate
where one or more external partners requested, and we agreed, that the
partnership’s cash not be commingled with other corporate cash accounts and be
used only to fund the operations of those partnerships. Self-insured captive
funds represent cash held at our wholly owned insurance captive, HCS, Ltd., as
discussed in Note 10, Self-Insured Risks. These
funds are committed to pay third-party administrators for claims incurred and
are restricted by insurance regulations and requirements. These funds cannot be
used for purposes outside HCS without the permission of the Cayman Islands
Monetary Authority. Paid loss deposit funds represent cash held by third-party
administrators to fund expenses and other payments related to
claims.
The
classification of restricted cash held by HCS as current or noncurrent depends
on the classification of the corresponding claims liability. As of December 31,
2009 and 2008, all restricted cash was current.
Marketable
Securities—
Restricted
marketable securities at both balance sheet dates represent restricted assets
held at HCS. As discussed previously, HCS handles professional liability,
workers’ compensation, and other insurance claims on behalf of HealthSouth.
These funds are committed for payment of claims incurred, and the classification
of these marketable securities as current or noncurrent depends on the
classification of the corresponding claims liability. As of December 31, 2009,
$18.3 million of restricted marketable securities are included in Other long-term assets in our
consolidated balance sheet.
A summary
of our restricted marketable securities as of December 31, 2009 is as follows
(in millions):
|
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Fair
Value
|
|||||||||||||
|
Equity
securities
|
$ | 19.6 | $ | 1.5 | $ | (0.1 | ) | $ | 21.0 | |||||||
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
A summary
of our restricted marketable securities as of December 31, 2008 is as follows
(in millions):
|
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Fair
Value
|
|||||||||||||
|
Equity
securities
|
$ | 21.9 | $ | 0.4 | $ | (2.0 | ) | $ | 20.3 | |||||||
Cost in
the above tables includes adjustments made to the cost basis of our equity
securities for other-than-temporary impairments. During the years ended December
31, 2009 and 2008, we recorded $0.8 million and $1.0 million, respectively, of
impairment charges related to our restricted marketable securities. These
impairment charges are included in Other income in our
consolidated statements of operations.
Investing
information related to our restricted marketable securities is as follows (in
millions):
|
For
the Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Proceeds
from sales of restricted available-for-sale
securities
|
$ | 5.0 | $ | 8.1 | $ | 66.4 | ||||||
|
Gross
realized gains
|
$ | 0.9 | $ | 0.2 | $ | 4.1 | ||||||
|
Gross
realized losses
|
$ | (1.3 | ) | $ | (1.5 | ) | $ | (0.4 | ) | |||
The
following table shows the fair value and gross unrealized losses of our
marketable securities with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by the length of time that
individual securities have been in a continuous unrealized loss position, at
December 31, 2009 and 2008 (in millions):
|
As
of December 31,
2009
|
As
of December 31, 2008
|
|||||||
|
Less
than 12 months:
|
||||||||
|
Fair
value
|
$ | 0.2 | $ | 15.5 | ||||
|
Gross
unrealized losses
|
$ | - | $ | (1.9 | ) | |||
|
12
months or greater:
|
||||||||
|
Fair
value
|
$ | 0.2 | $ | 0.1 | ||||
|
Gross
unrealized losses
|
$ | (0.1 | ) | $ | (0.1 | ) | ||
|
Total:
|
||||||||
|
Fair
value
|
$ | 0.4 | $ | 15.6 | ||||
|
Gross
unrealized losses
|
$ | (0.1 | ) | $ | (2.0 | ) | ||
Our
portfolio of marketable securities is comprised of numerous individual equity
securities and mutual funds across a variety of industries. For our marketable
securities with unrealized losses that are not deemed to be
other-than-temporarily impaired, we examined the severity and duration of the
impairments in relation to the cost of the individual investments. We also
considered the industry in which each investment is held and the near-term
prospects for a recovery in each specific industry. Based on our evaluation and
our ability and intent to hold these investments for a reasonable period of time
sufficient for a potential recovery of fair value, we do not believe these
investments are other-than-temporarily impaired at December 31,
2009.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
4. Accounts
Receivable:
Accounts
receivable consists of the following (in millions):
|
As
of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Patient
accounts receivable
|
$ | 243.6 | $ | 263.6 | ||||
|
Less:
Allowance for doubtful accounts
|
(33.1 | ) | (30.9 | ) | ||||
|
Patient
accounts receivable, net
|
210.5 | 232.7 | ||||||
|
Other
accounts receivable
|
9.2 | 2.2 | ||||||
|
Accounts
receivable, net
|
$ | 219.7 | $ | 234.9 | ||||
At
December 31, 2009 and 2008, our allowance for doubtful accounts represented
approximately 13.6% and 11.7%, respectively, of the total patient due accounts
receivable balance.
The
following is the activity related to our allowance for doubtful accounts (in
millions):
|
For the Year Ended December
31,
|
Balance
at Beginning of Period
|
Additions
and Charges to Expense
|
Deductions
and Accounts Written Off
|
Balance
at End of Period
|
||||||||||||
|
2009
|
$ | 30.9 | $ | 33.1 | $ | (30.9 | ) | $ | 33.1 | |||||||
|
2008
|
$ | 37.4 | $ | 27.0 | $ | (33.5 | ) | $ | 30.9 | |||||||
|
2007
|
$ | 35.1 | $ | 33.2 | $ | (30.9 | ) | $ | 37.4 | |||||||
5. Property
and Equipment:
Property
and equipment consists of the following (in millions):
|
As
of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Land
|
$ | 66.5 | $ | 65.8 | ||||
|
Buildings
|
904.6 | 873.9 | ||||||
|
Leasehold
improvements
|
35.5 | 29.0 | ||||||
|
Furniture,
fixtures, and equipment
|
353.2 | 339.0 | ||||||
| 1,359.8 | 1,307.7 | |||||||
|
Less:
Accumulated depreciation and amortization
|
(709.7 | ) | (657.3 | ) | ||||
| 650.1 | 650.4 | |||||||
|
Construction
in progress
|
14.7 | 11.7 | ||||||
|
Property
and equipment, net
|
$ | 664.8 | $ | 662.1 | ||||
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Information
related to fully depreciated assets and assets under capital lease obligations
is as follows (in millions):
|
As
of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Fully
depreciated assets
|
$ | 238.7 | $ | 230.4 | ||||
|
Assets
under capital lease obligations:
|
||||||||
|
Buildings
|
$ | 201.7 | $ | 201.7 | ||||
|
Equipment
|
0.2 | 0.2 | ||||||
| 201.9 | 201.9 | |||||||
|
Accumulated
amortization
|
(119.8 | ) | (107.5 | ) | ||||
|
Assets
under capital lease obligations, net
|
$ | 82.1 | $ | 94.4 | ||||
The
amount of depreciation expense, amortization expense relating to assets under
capital lease obligations, and rent expense under operating leases is as follows
(in millions):
|
For
the Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Depreciation
expense
|
$ | 51.6 | $ | 65.3 | $ | 59.2 | ||||||
|
Amortization
expense
|
$ | 12.3 | $ | 12.0 | $ | 11.4 | ||||||
|
Rent
expense:
|
||||||||||||
|
Minimum
rent payments
|
$ | 35.4 | $ | 37.7 | $ | 38.3 | ||||||
|
Contingent
and other rents
|
27.7 | 25.7 | 26.2 | |||||||||
|
Other
|
4.5 | 4.1 | 4.3 | |||||||||
|
Total
rent expense
|
$ | 67.6 | $ | 67.5 | $ | 68.8 | ||||||
No
material amounts of interest were capitalized on construction projects during
2009, 2008, or 2007.
Corporate
Campus—
In
January 2008, we entered into an agreement with Daniel Corporation
(“Daniel”), a Birmingham, Alabama-based full-service real estate organization,
pursuant to which Daniel acquired our corporate campus, including the Digital
Hospital, an incomplete 13-story building located on the property, for a
purchase price of $43.5 million in cash. This transaction closed on March 31,
2008. As part of this transaction, we entered into a lease for office space
within the property that was sold. The net proceeds from this transaction were
used to reduce debt.
We
reviewed the depreciation estimates of our corporate campus based on the revised
salvage value of the campus due to the expected sale transaction. During the
first quarter of 2008, we accelerated the depreciation of our corporate campus
by approximately $11.0 million so that the net book value of the corporate
campus equaled the estimated net proceeds expected to be received on the
transaction’s closing date. The year-over-year impact of this acceleration of
depreciation approximated $10.0 million.
The sale
agreement includes a deferred purchase price component related to the Digital
Hospital. If Daniel sells, or otherwise monetizes its interest in, the Digital
Hospital for cash consideration to a third party, we are entitled to 40% of the
net profit, if any and as defined in the sale agreement, realized by Daniel. In
September 2008, Daniel Corporation announced it had reached an agreement with
Trinity Medical Center (“Trinity”) pursuant to which Trinity will acquire the
Digital Hospital. The purchase price of this transaction has not been made
public, and the transaction is subject to Trinity receiving approval for a
certificate of need (“CON”) from the applicable state board of Alabama. While
the CON hearing has been completed, the administrative law judge has not ruled,
and there remains opposition to the potential approval of Trinity’s CON request.
Therefore, no assurances can be given as to whether or when any such cash flows
related to the deferred purchase price component of our agreement with Daniel
will be received, if any, if Daniel is able to realize a net profit on its
transaction with Trinity.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Leases—
We lease
certain land, buildings, and equipment under non-cancelable operating leases
generally expiring at various dates through 2022. We also lease certain
buildings and equipment under capital leases generally expiring at various dates
through 2027. Operating leases generally have 3- to 15-year terms, with one or
more renewal options, with terms to be negotiated at the time of renewal.
Various facility leases include provisions for rent escalation to recognize
increased operating costs or require the Company to pay certain maintenance and
utility costs. Contingent rents are included in rent expense in the year
incurred.
Some
facilities are subleased to other parties. Rental income from subleases
approximated $5.2 million, $6.3 million, and $7.0 million for the years ended
December 31, 2009, 2008, and 2007, respectively. Total expected future
minimum rentals under these noncancelable subleases approximated $19.1 million
as of December 31, 2009.
Certain
leases contain annual escalation clauses based on changes in the Consumer Price
Index while others have fixed escalation terms. The excess of cumulative rent
expense (recognized on a straight-line basis) over cumulative
rent payments made on leases with fixed escalation terms is recognized as
straight-line rental accrual and is included in Other long-term liabilities
in the accompanying consolidated balance sheets, as follows (in
millions):
|
As
of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Straight-line
rental accrual
|
$ | 8.6 | $ | 8.8 | ||||
Future
minimum lease payments at December 31, 2009, for those leases having an
initial or remaining non-cancelable lease term in excess of one year, are as
follows (in millions):
|
Year Ending December 31,
|
Operating
Leases
|
Capital
Lease Obligations
|
Total
|
|||||||||
|
2010
|
$ | 37.1 | $ | 21.1 | $ | 58.2 | ||||||
|
2011
|
31.1 | 19.1 | 50.2 | |||||||||
|
2012
|
25.0 | 16.4 | 41.4 | |||||||||
|
2013
|
20.3 | 14.5 | 34.8 | |||||||||
|
2014
|
14.9 | 10.3 | 25.2 | |||||||||
|
2015
and thereafter
|
88.2 | 76.0 | 164.2 | |||||||||
| $ | 216.6 | 157.4 | $ | 374.0 | ||||||||
|
Less:
Interest portion
|
(56.1 | ) | ||||||||||
|
Obligations
under capital leases
|
$ | 101.3 | ||||||||||
Asset
Impairments—
During 2007, we recognized long-lived
asset impairment charges of $15.1 million. Approximately $14.5 million of these
charges related to the Digital Hospital. On June 1, 2007, we entered into an
agreement with an investment fund sponsored by Trammell Crow Company (“Trammell
Crow”) pursuant to which Trammell Crow agreed to acquire our corporate campus
for a purchase price of approximately $60 million, subject to certain
adjustments. We wrote the Digital Hospital down by $14.5 million to its
estimated fair value based on the estimated net proceeds we expected to receive
from this sale. The agreement to sell our corporate campus to Trammell Crow was
terminated on August 7, 2007, pursuant to an opt-out provision in the agreement,
which Trammell Crow exercised.
6. Goodwill
and Other Intangible Assets:
Goodwill represents the
unallocated excess of purchase price over the fair value of identifiable assets
and liabilities acquired in business combinations. Other finite-lived
intangibles consist primarily of certificates of need, licenses, noncompete
agreements, and market access assets.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
The
following table shows changes in the carrying amount of Goodwill for the years ended
December 31, 2009, 2008, and 2007 (in millions):
|
Amount
|
||||
|
Goodwill
as of December 31, 2006
|
$ | 406.1 | ||
| - | ||||
|
Goodwill
as of December 31, 2007
|
406.1 | |||
|
Acquisition
|
8.6 | |||
|
Goodwill
as of December 31, 2008
|
414.7 | |||
|
Acquisition
of interest in joint venture entity
|
2.6 | |||
|
Allocation
to discontinued operations related to expected sale of
hospital
|
(0.9 | ) | ||
|
Goodwill
as of December 31, 2009
|
$ | 416.4 | ||
Goodwill increased in 2008 as
a result of our acquisition of The Rehabilitation Hospital of South Jersey.
Goodwill increased in
2009 as a result of a joint venture acquisition of an inpatient rehabilitation
unit in Altoona, Pennsylvania. See also Note 18, Assets Held for Sale and Results of
Discontinued Operations.
We
performed impairment reviews as of October 1, 2009, 2008, and 2007 and
concluded that no Goodwill impairment
existed.
The
following table provides information regarding our other intangible assets (in
millions):
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
|
||||||||||
|
Certificates
of need:
|
||||||||||||
|
2009
|
$ | 6.2 | $ | (1.9 | ) | $ | 4.3 | |||||
|
2008
|
5.8 | (1.7 | ) | 4.1 | ||||||||
|
Licenses:
|
||||||||||||
|
2009
|
$ | 49.8 | $ | (36.9 | ) | $ | 12.9 | |||||
|
2008
|
49.8 | (34.5 | ) | 15.3 | ||||||||
|
Noncompete
agreements:
|
||||||||||||
|
2009
|
$ | 18.8 | $ | (9.3 | ) | $ | 9.5 | |||||
|
2008
|
17.0 | (6.7 | ) | 10.3 | ||||||||
|
Market
access assets:
|
||||||||||||
|
2009
|
$ | 13.2 | $ | (2.5 | ) | $ | 10.7 | |||||
|
2008
|
13.2 | (0.5 | ) | 12.7 | ||||||||
|
Total
intangible assets:
|
||||||||||||
|
2009
|
$ | 88.0 | $ | (50.6 | ) | $ | 37.4 | |||||
|
2008
|
85.8 | (43.4 | ) | 42.4 | ||||||||
Amortization
expense for other intangible assets is as follows (in millions):
|
For
the Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Amortization
expense
|
$ | 7.0 | $ | 5.1 | $ | 4.2 | ||||||
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Total
estimated amortization expense for our other intangible assets for the next five
years is as follows (in millions):
|
Year Ending December 31,
|
Estimated
Amortization Expense
|
|||
|
2010
|
$ | 6.7 | ||
|
2011
|
6.2 | |||
|
2012
|
3.9 | |||
|
2013
|
3.8 | |||
|
2014
|
2.9 | |||
7. Investments
in and Advances to Nonconsolidated Affiliates:
Investments in and advances to
nonconsolidated affiliates as of December 31, 2009 represents our
investment in 16 partially owned subsidiaries, of which 11 are general or
limited partnerships, limited liability companies, or joint ventures in which
HealthSouth or one of our subsidiaries is a general or limited partner, managing
member, member, or venturer, as applicable. We do not control these affiliates
but have the ability to exercise significant influence over the operating and
financial policies of certain of these affiliates. Our ownership percentages in
these affiliates range from 4% to 51%. We account for these investments using
the cost and equity methods of accounting. Our investments consist of the
following (in millions):
|
As
of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Equity
method investments:
|
||||||||
|
Capital
contributions
|
$ | 7.2 | $ | 10.2 | ||||
|
Cumulative
share of income
|
77.9 | 73.3 | ||||||
|
Cumulative
share of distributions
|
(59.0 | ) | (50.4 | ) | ||||
| 26.1 | 33.1 | |||||||
|
Cost
method investments:
|
||||||||
|
Capital
contributions, net of distributions and impairments
|
3.2 | 3.6 | ||||||
|
Total
investments in and advances to nonconsolidated affiliates
|
$ | 29.3 | $ | 36.7 | ||||
The
following summarizes the combined assets, liabilities, and equity and the
combined results of operations of our equity method affiliates (on a 100% basis,
in millions):
|
As
of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Assets—
|
||||||||
|
Current
|
$ | 17.3 | $ | 19.1 | ||||
|
Noncurrent
|
71.7 | 72.8 | ||||||
|
Total
assets
|
$ | 89.0 | $ | 91.9 | ||||
|
Liabilities
and equity—
|
||||||||
|
Current
liabilities
|
$ | 7.2 | $ | 5.9 | ||||
|
Noncurrent
liabilities
|
7.8 | 7.7 | ||||||
|
Partners’
capital and shareholders’ equity—
|
||||||||
|
HealthSouth
|
26.1 | 33.1 | ||||||
|
Outside
partners
|
47.9 | 45.2 | ||||||
|
Total
liabilities and equity
|
$ | 89.0 | $ | 91.9 | ||||
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Condensed
statements of operations (in millions):
|
For
the Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
operating revenues
|
$ | 73.1 | $ | 68.8 | $ | 65.7 | ||||||
|
Operating
expenses
|
(47.2 | ) | (44.7 | ) | (42.2 | ) | ||||||
|
Income
from continuing operations, net of tax
|
20.5 | 19.4 | 18.8 | |||||||||
|
Net
income
|
20.5 | 19.4 | 18.8 | |||||||||
See Note
1, Summary of Significant
Accounting Policies, "Out-of-Period Adjustments." See also Note 21,
Related Party
Transactions, for a discussion of our former investment in Source Medical
Solutions, Inc.
8. Long-term
Debt:
Our
long-term debt outstanding consists of the following (in millions):
|
As
of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Advances
under $400 million revolving credit facility
|
$ | - | $ | 40.0 | ||||
|
Term
loan facility
|
751.3 | 783.6 | ||||||
|
Bonds
payable—
|
||||||||
|
Floating
Rate Senior Notes due 2014
|
- | 366.0 | ||||||
|
10.75%
Senior Notes due 2016
|
494.9 | 494.3 | ||||||
|
8.125%
Senior Notes due 2020
|
285.2 | - | ||||||
|
Other
bonds payable
|
1.8 | 1.8 | ||||||
|
Other
notes payable
|
28.0 | 12.8 | ||||||
|
Capital
lease obligations
|
101.3 | 114.7 | ||||||
| 1,662.5 | 1,813.2 | |||||||
|
Less:
Current portion
|
(21.5 | ) | (23.6 | ) | ||||
|
Long-term
debt, net of current portion
|
$ | 1,641.0 | $ | 1,789.6 | ||||
The
following chart shows scheduled principal payments due on long-term debt for the
next five years and thereafter (in millions):
|
Year Ending December 31,
|
Face
Amount
|
Net
Amount
|
||||||
|
2010
|
$ | 21.5 | $ | 21.5 | ||||
|
2011
|
20.8 | 20.8 | ||||||
|
2012
|
20.2 | 20.2 | ||||||
|
2013
|
451.5 | 451.5 | ||||||
|
2014
|
9.4 | 9.4 | ||||||
|
Thereafter
|
1,149.6 | 1,139.1 | ||||||
|
Total
|
$ | 1,673.0 | $ | 1,662.5 | ||||
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
As
discussed in Note 18, Assets
Held for Sale and Results of Discontinued Operations, during 2007, we
divested our surgery centers, outpatient, and diagnostic divisions. Due to the
requirements under our credit agreement to use the net proceeds from each
divestiture to repay obligations outstanding under our credit agreement, we
allocated the interest expense on the debt that was required to be repaid as a
result of the divestiture transactions to discontinued operations. The following
table provides information regarding our total Interest expense and amortization of
debt discounts and fees presented in our consolidated statements of
operations for both continuing and discontinued operations (in
millions):
|
For
the Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Continuing
operations:
|
||||||||||||
|
Interest
expense
|
$ | 119.2 | $ | 153.0 | $ | 221.6 | ||||||
|
Amortization
of debt discounts and fees
|
6.6 | 6.5 | 7.8 | |||||||||
|
Interest
expense and amortization of debt discounts and fees
|
125.8 | 159.5 | 229.4 | |||||||||
|
Interest
expense for discontinued operations
|
1.3 | 1.9 | 45.9 | |||||||||
|
Total
interest expense and amortization of debt discounts and
fees
|
$ | 127.1 | $ | 161.4 | $ | 275.3 | ||||||
Senior
Secured Credit Agreement—
In March
2006, we entered into a credit agreement with a consortium of financial
institutions. The credit agreement includes (1) a $400 million revolving
credit facility, with a revolving letter of credit subfacility and swingline
loan subfacility, (2) a $100 million synthetic letter of credit facility,
and (3) a term loan facility that had an original principal of $2.05
billion. We used the proceeds from this transaction to repay prior indebtedness
and to pay fees and expenses related to this transaction.
Loans
under the credit agreement bear interest at a rate of, at our option,
(1) LIBOR, adjusted for statutory reserve requirements or (2) the
higher of (a) the federal funds rate plus 0.5% and (b) JPMorgan Chase
Bank, N.A.’s (“JPMorgan”) prime rate, in each case, plus an applicable margin
that varies depending upon our leverage ratio. We are also subject to a
commitment fee of 0.5% per annum on the daily amount of the unutilized
commitments under the revolving credit facility.
Since
March 2006, the credit agreement has been amended two times:
|
·
|
In
March 2007, the credit agreement was amended to lower the applicable
margin and modify certain other covenants, which included gaining the
appropriate lender approvals required for our 2007 divestiture
activities.
|
|
·
|
In
October 2009, the credit agreement was amended to extend the maturity of a
portion of the loans under the credit agreement and to amend certain other
provisions. Other amendments allow us to issue senior secured and
unsecured notes in the bond market and increase amounts we can spend for
acquisitions and selected debt
repurchases.
|
Pursuant
to a collateral and guarantee agreement (the “Collateral and Guarantee
Agreement”), dated as of March 10, 2006, between us, our subsidiaries
defined therein (collectively, the “Subsidiary Guarantors”) and JPMorgan, our
obligations under the credit agreement are (1) secured by substantially all
of our assets and the
assets of the
Subsidiary Guarantors and (2) guaranteed by the Subsidiary Guarantors. In
addition to the Collateral and Guarantee Agreement, we and the Subsidiary
Guarantors entered into mortgages with respect to certain of our material real
property (excluding real property subject to preexisting liens and/or mortgages)
in connection with the credit agreement. Our obligations under the credit
agreement are secured by the real property subject to such
mortgages.
The credit agreement contains affirmative and negative covenants and
default and acceleration provisions, including a minimum interest coverage ratio
and a maximum leverage ratio that changes over time.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Revolving
Credit Facility—
As of
December 31, 2009, no amounts were drawn under the revolving credit facility and
no amounts were being utilized under the revolving letter of credit subfacility.
If any amounts had been drawn as of that date, they would have accrued interest
at 2.75% over LIBOR at the time of the last interest reset. As of December 31,
2008, $40.0 million was drawn under the revolving credit facility with an
interest rate of 4.2%. Amounts drawn as of December 31, 2008 exclude $52.7
million utilized under the revolving letter of credit subfacility that had been
drawn for general corporate purposes. The revolving credit facility expires in
March 2012.
Synthetic
Letter of Credit Facility—
The March
2007 amendment to the credit agreement reduced the applicable participation rate
on the $100 million synthetic letter of credit facility to 2.5% (formerly
3.25%). The participation rate was further reduced to 2.25% in 2009 when we
received a credit rating upgrade. As of December 31, 2009 and 2008, $95.2
million and $100.0 million, respectively, were utilized under the synthetic
letter of credit facility. The letters of credit under the synthetic letter of
credit facility are being used in the ordinary course of business to secure
workers’ compensation and other insurance coverages and for general corporate
purposes. The synthetic letter of credit facility expires in March
2012.
Term
Loan Facility—
The term
loan facility amortizes in quarterly installments equal to 0.25% of the
principal outstanding, with the balance payable upon the final maturity. The
October 2009 amendment to the credit agreement provided an extension of the
maturity of a $300.0 million tranche of the term loan facility from March 2013
to September 2015 in exchange for a higher interest rate spread on that portion
of the loan. The extended portion of the loan now accrues interest at a rate of
LIBOR plus 3.75%. A credit rating upgrade in 2009 resulted in a reduction in the
spread on the non-extended portion of the term loan facility from 2.5% to
2.25%.
At
December 31, 2009, our interest rate under the $300 million extended portion of
the term loan facility was 4.0%, while our interest rate for the remainder of
the term loan facility was 2.5%. Our interest rate under the term loan facility
was 4.7% at December 31, 2008.
Private
Offering of $1.0 Billion of Senior Notes—
On
June 14, 2006, we completed a private offering of $1.0 billion aggregate
principal amount of senior notes, which included $375.0 million in aggregate
principal amount of floating rate senior notes due 2014 (the “Floating Rate
Notes”) at par and $625.0 million aggregate principal amount of 10.75% senior
notes due 2016 (the “2016 Notes”) at 98.505% of par (collectively, the “Senior
Notes”). We used the net proceeds from the private offering of the Senior Notes,
along with cash on hand, to repay prior indebtedness.
The
Senior Notes were issued pursuant to separate indentures dated June 14,
2006 (each an “indenture” and together, the “Indentures”) among HealthSouth, the
Subsidiary Guarantors (as defined in the Indentures), and The Bank of Nova
Scotia Trust Company of New York, as trustee (the “Trustee”). Pursuant to the
terms of the Indentures, the Senior Notes are senior unsecured obligations of
HealthSouth and will rank equally with our senior indebtedness, senior to any of
our subordinated indebtedness, and effectively junior to our secured
indebtedness to the extent of the value of the collateral securing such
indebtedness. Our obligations under the Senior Notes are jointly and severally
guaranteed by all of our existing and future subsidiaries that guarantee
(1) borrowings under our credit agreement or (2) certain of our
debt.
Interest
payments on the Senior Notes commenced on December 15, 2006 and are payable
in arrears on June 15 and December 15 of each year. We pay interest on
overdue principal at the rate of 1.0% per annum in excess of the applicable
rates described below and will pay interest on overdue installments of interest
at such higher rate to the extent lawful.
As
discussed more below, in December 2009, we completed a refinancing transaction
in which we issued $290.0 million of 8.125% Senior Notes due 2020 and tendered
for and redeemed the remaining $329.6 million of our Floating Rate Notes that
were outstanding at that time.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Floating
Rate Notes—
On
November 16, 2009, we commenced a tender offer to purchase for cash all of the
outstanding Floating Rate Notes, with an aggregate principal outstanding of
$329.6 million at that time. We also solicited consents to amend the indenture
governing these notes to eliminate or make less restrictive substantially all of
the restrictive covenants and eliminate certain other provisions contained
within the indenture. The tender offer expired on December 14, 2009. Pursuant to
our offer, we received tenders and consents for approximately $313 million in
aggregate principal amount of the Floating Rate Notes. The total consideration
paid of approximately $333 million represented the principal amount of the
Floating Rate Notes tendered, accrued and unpaid interest thereon, and the
related early tender premium. The remaining aggregate principal amount of
approximately $17 million that was outstanding when the tender offer and consent
solicitation expired was redeemed for 103.0% along with accrued and unpaid
interest thereon. Total consideration paid in connection with the redemption
approximated $18 million.
The
Floating Rate Notes were to mature on June 15, 2014 and bore interest at a
per annum rate, reset semiannually, of LIBOR plus 6.0%. At the time of the
refinancing, our interest rate was 7.2%. Our interest rate as of
December 31, 2008 was 8.3%.
2016
Notes—
The 2016
Notes mature on June 15, 2016 and bear interest at a per annum rate of
10.75%. Due to discounts and financing costs, the effective interest rate on the
2016 Notes is 11.2%.
On or
after June 15, 2011, we will be entitled, at our option, to redeem all or a
portion of the 2016 Notes upon not less than 30 nor more than 60 days’ notice,
at the redemption prices, plus accrued interest to the redemption date (subject
to the right of holders of the 2016 Notes of record on the relevant record date
to receive interest due on the relevant interest payment date), if redeemed
during the twelve-month period commencing on June 15 of the years set forth
below:
|
Period
|
Redemption
Price*
|
|
2011
|
105.375%
|
|
2012
|
103.583%
|
|
2013
|
101.792%
|
|
2014
and thereafter
|
100.000%
|
|
*
Expressed in percentage of principal amount
|
Upon the
occurrence of a change in control (as defined in the applicable indenture), each
holder of the 2016 Notes may require us to repurchase all or a portion of the
notes in cash at a price equal to 101% of the principal amount of the 2016 Notes
to be repurchased, plus accrued and unpaid interest.
The 2016
Notes contain covenants and default and acceleration provisions that, among
other things, limit our and certain of our subsidiaries’ ability to
(1) incur additional debt, (2) make certain restricted payments,
(3) consummate specified asset sales, (4) incur liens, and
(5) merge or consolidate with another person.
8.125%
Senior Notes Due 2020—
As discussed above, in December 2009,
we completed a refinancing transaction in which we issued $290.0 million of
8.125% Senior Notes due 2020 (the “2020 Notes”) at 98.327% of par. We used the
net proceeds from this transaction along with cash on hand to tender for and
redeem all Floating Rate Notes outstanding at that time. Due to discounts and
financing costs, the effective interest rate on the 2020 Notes is 8.5%. Interest
is payable semiannually in arrears on February 15 and August 15 of each year,
beginning in February 2010. The 2020 Notes are jointly and severally guaranteed
on a senior unsecured basis by all of our existing and future subsidiaries that
guarantee borrowings
under our credit agreement or the 2016 Notes. The 2020 Notes are senior
unsecured obligations of HealthSouth and will rank equally with our senior
indebtedness, senior to any of our subordinated indebtedness, and effectively
junior to our secured indebtedness to the extent the value of the collateral
securing such indebtedness.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
We may
redeem the notes, in whole or in part, at any time on or after February 15,
2015, at the redemption prices set forth below:
|
Period
|
Redemption
Price*
|
|
2015
|
104.063%
|
|
2016
|
102.708%
|
|
2017
|
101.354%
|
|
2018
and thereafter
|
100.000%
|
|
*
Expressed in percentage of principal amount
|
Prior to
February 15, 2013, we may redeem up to 35% of the aggregate principal amount of
the 2020 Notes with the net cash proceeds of certain equity offerings, at a
redemption price equal to 108.125% of their principal amount, plus accrued and
unpaid interest thereon, if at least 65% of the aggregate principal amount of
the notes remains outstanding after giving effect to such redemption. In
addition, at any time prior to February 15, 2015, we may at our option redeem
all or a portion of the notes, at a redemption price equal to 100% of principal
amount plus a “make-whole” premium, plus accrued and unpaid interest thereon, if
any, to the redemption date.
Upon the
occurrence of a change in control (as defined in the applicable indenture), each
holder of the 2020 Notes may require us to repurchase such holder’s notes at a
cash purchase price equal to 101% of their principal amount, plus accrued and
unpaid interest. However, subject to certain exceptions, our credit agreement
limits our ability to repurchase the 2020 Notes prior to their
maturity.
The 2020
Notes contain covenants and default and acceleration provisions, that, among
other things, limit our and certain of our subsidiaries’ ability to
(1) incur additional debt, (2) make certain restricted payments, (3)
consummate specified asset sales, (4) incur liens, and (5) merge or consolidate
with another person.
Other
Bonds Payable—
On
September 28, 2001, we issued $400 million in 8.375% Senior Notes (the “8.375%
Senior Notes”), substantially all of which have been tendered or redeemed as
part of prior recapitalization transactions. As of December 31, 2009 and 2008,
$0.3 million of these notes remained outstanding. Due to discounts and financing
costs, the effective interest rate on the 8.375% Senior Notes is 8.4%, with
interest payable on April 1 and October 1 of each year. The 8.375%
Senior Notes mature on October 1, 2011 and are unsecured and unsubordinated. We
used the net proceeds from the issuance of the 8.375% Senior Notes to pay down
indebtedness outstanding under our then-existing credit facilities.
On
May 17, 2002, we issued $1 billion in 7.625% Senior Notes due 2012 at 99.3%
of par value (the “7.625% Senior Notes”), substantially all of which have been
tendered or redeemed as part of prior recapitalization transactions. As of
December 31, 2009 and 2008, $1.5 million of these notes remained outstanding.
Due to discounts and financing costs, the effective interest rate on the 7.625%
Senior Notes is 7.6%, with interest payable on June 1 and December 1
of each year. The 7.625% Senior Notes mature on June 1, 2012 and are unsecured
and unsubordinated. We used the net proceeds from the issuance of the 7.625%
Senior Notes to pay down indebtedness outstanding under our then-existing credit
facilities and for other corporate purposes.
Other
Notes Payable—
We have
two, 15-year notes payable agreements outstanding, both of which were used to
finance real estate projects. The interest rates of these notes are 8.1% and
11.2%.
Capital
Lease Obligations—
We engage
in a significant number of leasing transactions including real estate, medical
equipment, computer equipment, and other equipment utilized in operations.
Leases meeting certain accounting criteria have been recorded as an asset and
liability at the lower of fair value or the net present value of the aggregate
future
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
minimum
lease payments at the inception of the lease. Interest rates used in computing
the net present value of the lease payments generally ranged from 6.6% to 12.2%
based on our incremental borrowing rate at the inception of the lease. Our
leasing transactions include arrangements for equipment with major equipment
finance companies and manufacturers who retain ownership in the equipment during
the term of the lease and with a variety of both small and large real estate
owners.
9. Derivative
Instruments
Interest
Rate Swaps Not Designated as Hedging Instruments—
In March
2006, we entered into an interest rate swap to effectively convert the floating
rate of a portion of our credit agreement to a fixed rate in order to limit the
variability of interest-related payments caused by changes in LIBOR. Under this
interest rate swap agreement, we pay a fixed rate of 5.2% on an amortizing
notional principal of $1.056 billion, while the counterparties to this agreement
pay a floating rate based on 3-month LIBOR, which was 0.3% and 2.2% at December
10, 2009 and 2008, which was the most recent interest rate set date at each
respective year end. The termination date of this swap is March 10, 2011. The
fair market value of this swap as of December 31, 2009 and 2008 was ($54.8)
million and ($78.2) million, respectively, and is included in Other current liabilities in
our consolidated balance sheets. The notional principal of this swap is
scheduled to decrease to approximately $984 million in March 2010.
In June
2009, we entered into a receive-fixed swap as a mirror offset to $100.0 million
of the $1.1 billion interest rate swap discussed above in order to reduce our
effective fixed rate to total debt ratio. Under this interest rate swap
agreement, we pay a variable rate based on 3-month LIBOR, while the counterparty
to this agreement pays a fixed rate of 5.2% on a notional principal of $100.0
million. Net settlements commenced in September 2009 and are made quarterly on
the same settlement schedule as the $1.1 billion interest rate swap discussed
above. The termination date of this swap is March 10, 2011. Our initial net
investment in this swap was $6.4 million. The fair market value of this swap as
of December 31, 2009 was $5.6 million. Of this amount, $4.7 million is included
in Prepaid expenses and other
current assets with the remainder included in Other long-term assets in our
consolidated balance sheet.
These
interest rate swaps are not designated as hedges. Therefore, changes in the fair
value of these interest rate swaps are included in current-period earnings as
Loss on interest rate
swaps.
During
the years ended December 31, 2009, 2008, and 2007, we had net cash settlement
(payments) receipts of ($42.2) million, ($20.7) million, and $3.2 million,
respectively, with our counterparties. Net settlement payments or receipts on
these swaps are included in the line item Loss on interest rate swaps
in our consolidated statements of operations.
Forward-Starting
Interest Rate Swaps Designated as Cash Flow Hedges—
In
December 2008, we entered into a $100 million forward-starting interest rate
swap as a cash flow hedge of future interest payments on our term loan facility.
Under this swap agreement, we will pay a fixed rate of 2.6% while the
counterparty will pay a floating rate based on 3-month LIBOR. Net settlements
will commence on June 10, 2011. The termination date of this swap is
December 12, 2012. The fair market value of this swap as of December 31, 2009
and 2008 was $0.4 million and ($0.2) million, respectively, and is included in
Other long-term assets
and Other current
liabilities, respectively, in our consolidated balance
sheets.
In March
2009, we entered into an additional $100 million forward-starting interest rate
swap as a cash flow hedge of future interest payments on our term loan facility.
Under this swap agreement, we will pay a fixed rate of 2.9% while the
counterparty will pay a floating rate based on 3-month LIBOR. Net settlements
will commence on June 10,
2011. The termination date of this swap is September 12, 2012. The fair market
value of this swap as of December 31, 2009 was ($0.3) million and is included in
Other current
liabilities in our consolidated balance sheet.
Both
forward-starting swaps are designated as cash flow hedges and are accounted for
under the policies described in Note 1, Summary of Significant Accounting
Policies. The effective portion of changes in the fair value
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
of these
cash flow hedges is deferred as a component of other comprehensive income and is
reclassified into earnings as part of interest expense in the same period in
which the forecasted transaction impacts earnings.
See also
Note 15, Fair Value
Measurements.
10. Self-Insured
Risks:
We insure
a substantial portion of our professional liability, general liability, and
workers’ compensation risks through a self-insured retention program (“SIR”)
underwritten by our consolidated wholly owned offshore captive insurance
subsidiary, HCS, Ltd., which we fund via regularly scheduled premium payments.
HCS is an independent insurance company licensed by the Cayman Island Monetary
Authority. We use HCS to fund part of our first layer of insurance coverage up
to $24 million. Risks in excess of specified limits per claim and in excess of
our aggregate SIR amount are covered by unrelated commercial
carriers.
Reserves
for professional liability, general liability, and workers’ compensation risks
were $137.5 million and $146.9 million at December 31, 2009 and 2008,
respectively. The current portion of this reserve, $37.5 million and $38.3
million, at December 31, 2009 and 2008, respectively, is included in Other current liabilities in
our consolidated balance sheets. Expenses or (income) related to retained
professional and general liability risks were $13.6 million, $6.7 million, and
($1.7) million for the years ended December 31, 2009, 2008, and 2007,
respectively. Of these amounts, $13.6 million, $6.7 million, and ($1.6) million,
respectively, are classified in Other operating expenses in
our consolidated statements of operations, with the remainder included in General and administrative
expenses. Expenses associated with retained workers’ compensation risks
were $13.9 million, $7.7 million, and $4.7 million for the years ended
December 31, 2009, 2008, and 2007, respectively. Of these amounts, $13.6
million, $7.5 million, and $4.4 million, respectively, are classified in Salaries and benefits in our
consolidated statements of operations, with the remainder included in General and administrative
expenses. See below for additional information related to estimated
ultimate losses recorded in 2009, 2008, and 2007.
We also
maintain excess loss contracts with insurers and reinsurers for professional,
general liability, and workers’ compensation risks. Expenses associated with
professional and general liability excess loss contracts were $3.1 million, $3.4
million, and $4.0 million for the years ended December 31, 2009, 2008, and
2007, respectively, and are classified in Other operating expenses in
our consolidated statements of operations. Expenses associated with workers’
compensation excess loss contracts were $3.4 million, $0.7 million, and $5.5
million for the years ended December 31, 2009, 2008, and 2007,
respectively. Of these amounts, $3.3 million, $0.7 million, and $5.4 million,
respectively, are classified in Salaries and benefits in our
consolidated statements of operations, with the remainder included in General and administrative
expenses.
Provisions
for these risks are based upon actuarially determined estimates. Loss and loss
expense reserves represent the unpaid portion of the estimated ultimate net cost
of all reported and unreported losses incurred through the respective
consolidated balance sheet dates. The reserves for unpaid losses and loss
expenses are estimated using individual case-basis valuations and actuarial
analyses. Those estimates are subject to the effects of trends in loss severity
and frequency. The estimates are continually reviewed and adjustments are
recorded as experience develops or new information becomes known. The changes to
the estimated ultimate loss amounts are included in current operating results.
During 2009, 2008, and 2007, we reduced our estimated ultimate losses relating
to prior loss periods by $3.8 million, $19.4 million, and $22.3 million,
respectively, due to favorable claim experience and industry-wide loss
development trends.
The
reserves for these self-insured risks cover approximately 1,000 individual
claims at December 31, 2009 and 2008, and estimates for potential
unreported claims. The time period required to resolve these claims can vary
depending upon the jurisdiction and whether the claim is settled or litigated.
During 2009, 2008, and 2007, $26.8 million, $28.3 million, and $33.4 million,
respectively, of payments (net of reinsurance recoveries of $1.2 million, $3.3
million, and $9.4 million, respectively) were made for liability claims. The
estimation of the timing of payments beyond a year can vary significantly.
Although considerable variability is inherent in reserve estimates, management
believes the reserves for losses and loss expenses are adequate; however, there
can be no assurance the ultimate liability will not exceed management’s
estimates.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
The
obligations covered by excess contracts remain on the balance sheet, as the
subsidiary or parent remains liable to the extent the excess carriers do not
meet their obligations under the insurance contracts. Amounts receivable under
the excess contracts were $21.5 million and $24.6 million at December 31,
2009 and 2008, respectively. Of these amounts, $5.4 million and $6.1 million are
included in Prepaid expenses
and other current assets in our consolidated balance sheets as of
December 31, 2009 and 2008, respectively, with the remainder included in
Other long-term
assets.
11. Convertible
Perpetual Preferred Stock:
On
March 7, 2006, we completed the sale of 400,000 shares of our 6.50% Series
A Convertible Perpetual Preferred Stock. The preferred stock has an initial
liquidation preference of $1,000 per share of preferred stock, which is
contingently subject to accretion. Holders of the preferred stock are entitled
to receive, when and if declared by our board of directors, cash dividends at
the rate of 6.50% per annum on the accreted liquidation preference per
share, payable quarterly in arrears. Dividends on the preferred stock are
cumulative. Each holder of preferred stock has one vote for each share held by
the holder on all matters voted upon by the holders of our common
stock.
The
preferred stock is convertible, at the option of the holder, at any time into
shares of our common stock at an initial conversion price of $30.50 per share,
which is equal to an initial conversion rate of approximately 32.7869 shares of
common stock per share of preferred stock, subject to specified adjustments. On
or after July 20, 2011, we may cause the shares of preferred stock to be
automatically converted into shares of our common stock at the conversion rate
then in effect if the closing sale price of our common stock for 20 trading days
within a period of 30 consecutive trading days ending on the trading day before
the date we give the notice of forced conversion exceeds 150% of the conversion
price of the preferred stock. If we are subject to a fundamental change, as
defined in the certificate of designation of the preferred stock, each holder of
shares of preferred stock has the right, subject to certain limitations, to
require us to purchase with cash any or all of its shares of preferred stock at
a purchase price equal to 100% of the accreted liquidation preference, plus any
accrued and unpaid dividends to the date of purchase. In addition, if holders of
the preferred stock elect to convert shares of preferred stock in connection
with certain fundamental changes, we will in certain circumstances increase the
conversion rate for such shares of preferred stock. As redemption of the
preferred stock is contingent upon the occurrence of a fundamental change, and
since we do not deem a fundamental change probable of occurring, accretion of
our Convertible perpetual
preferred stock is not necessary.
We
declared $26.0 million in dividends on our preferred stock in each of the three
years ended December 31, 2009. As of December 31, 2009 and 2008,
accrued dividends of $6.5 million were included in Other current liabilities on
our balance sheets. These accrued dividends were paid in January 2010 and
2009, respectively.
12. Shareholders’
Deficit:
Issuance
of Shares and Warrants Associated with Class Action Securities
Litigation—
On September 30, 2009, we issued 5.0
million shares of common stock and 8.2 million common stock warrants in full
satisfaction of our obligation to do so under the Consolidated Securities Action
settlement. For additional information, see Note 20, Earnings per Common Share,
and Note 22, Settlements.
Equity
Offering—
On June
27, 2008, HealthSouth finalized the issuance and sale of 8.8 million shares of
its common stock to J.P. Morgan Securities Inc. for net proceeds of
approximately $150 million. The Company used the net proceeds of the offering
primarily for redemption and repayment of short-term and long-term
borrowings.
Retirement
of Scrushy Shares—
In
November 2006, we received 723,921 shares of our common stock with a market
value of approximately $14.8 million from Mr. Scrushy in partial payment for a
summary judgment against Mr. Scrushy on a claim for the restitution of incentive
bonuses Mr. Scrushy received for years 1996 through 2002. On November 1,
2007, our board of directors approved the retirement of these
shares.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
13. Guarantees:
Primarily
in conjunction with the sale of certain facilities, including the sale of our
surgery centers, outpatient, and diagnostic divisions during 2007, HealthSouth
assigned, or remained as a guarantor on, the leases of certain properties and
equipment to certain purchasers and, as a condition of the lease, agreed to act
as a guarantor of the purchaser’s performance on the lease. Should the purchaser
fail to pay the obligations due on these leases or contracts, the lessor or
vendor would have contractual recourse against us.
As of
December 31, 2009, we were secondarily liable for 66 such guarantees. The
remaining terms of these guarantees ranged from one month to 114 months. If we
were required to perform under all such guarantees, the maximum amount we would
be required to pay approximated $48.0 million.
We have
not recorded a liability for these guarantees, as we do not believe it is
probable we will have to perform under these agreements. If we are required to
perform under these guarantees, we could potentially have recourse against the
purchaser for recovery of any amounts paid. In addition, the purchasers of our
surgery centers, outpatient, and diagnostic divisions have agreed to seek
releases from the lessors and vendors in favor of HealthSouth with respect to
the guarantee obligations associated with these divestitures. To the extent the
purchasers of these divisions are unable to obtain releases for HealthSouth, the
purchasers have agreed to indemnify HealthSouth for damages incurred under the
guarantee obligations, if any. These guarantees are not secured by any assets
under the agreements.
14. Accumulated
Other Comprehensive Loss:
Accumulated other comprehensive
loss, net of income tax effect, consists of the following (in
millions):
|
As
of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Unrealized
loss on available-for-sale securities
|
$ | (0.1 | ) | $ | (3.0 | ) | ||
|
Unrealized
gain (loss) on interest rate swaps
|
0.1 | (0.2 | ) | |||||
|
Total
|
$ | - | $ | (3.2 | ) | |||
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
15. Fair
Value Measurements:
Our
financial assets and liabilities that are measured at fair value on a recurring
basis are as follows (in millions):
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||
| As of December 31, 2009 |
Fair
Value
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
Significant
Other Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
Valuation
Technique (1)
|
|||||||||||||||
| Current portion of restricted marketable securities | $ | 2.7 | $ | 2.7 | $ | - | $ | - | M | |||||||||||
|
Prepaid
expenses and other current assets:
|
||||||||||||||||||||
| June 2009 trading swap | 4.7 | - | 4.7 | - | I | |||||||||||||||
| Other long-term assets: | ||||||||||||||||||||
| Restricted marketable securities | 18.3 | 18.3 | - | - | M | |||||||||||||||
| December 2008 forward-starting swap | 0.4 | - | 0.4 | - | I | |||||||||||||||
| June 2009 trading swap | 0.9 | - | 0.9 | - | I | |||||||||||||||
| Other current liabilities: | ||||||||||||||||||||
| March 2006 trading swap | (54.8 | ) | - | (54.8 | ) | - | I | |||||||||||||
| March 2009 forward-starting swap | (0.3 | ) | - | (0.3 | ) | - | I | |||||||||||||
| As of December 31, 2008 | ||||||||||||||||||||
| Current portion of restricted marketable securities | $ | 20.3 | $ | 20.3 | $ | - | $ | - | M | |||||||||||
| Prepaid expenses and other current assets: | ||||||||||||||||||||
| Marketable securities | 0.2 | 0.2 | - | - | M | |||||||||||||||
| Other current liabilities: | ||||||||||||||||||||
| March 2006 trading swap | (78.2 | ) | - | (78.2 | ) | - | I | |||||||||||||
| December 2008 forward-starting swap | (0.2 | ) | - | (0.2 | ) | - | I | |||||||||||||
| Government, class action, and related settlements: | ||||||||||||||||||||
| Securities Litigation Settlement liability - common stock | (55.1 | ) | (55.1 | ) | - | - | M | |||||||||||||
| Securities Litigation Settlement liability - common stock warrants | (19.5 | ) | - | (19.5 | ) | - | I |
|
(1)
|
The
three valuation techniques are: market approach (M), cost
approach (C), and income
approach (I).
|
Assets
measured at fair value on a nonrecurring basis are as follows (in
millions):
|
Fair
Value Measurements at Reporting
|
||||||||||||||||||||
|
Date
Using
|
Total
Losses
|
|||||||||||||||||||
|
Net
Carrying
Value
as of
December 31,
2009
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
Significant
Other Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
Year
Ended
December 31,
2009
|
||||||||||||||||
|
Investments
in and advances to nonconsolidated affiliates
|
$ | 1.7 | $ | - | $ | - | $ | 1.7 | $ | 0.3 | ||||||||||
|
Other
long-term assets:
|
||||||||||||||||||||
|
Assets
held for sale
|
14.2 | - | 14.2 | - | 0.9 | |||||||||||||||
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
The above
losses represent our write-down of certain assets to their estimated fair value
based on offers we received from third parties to acquire the assets or other
market conditions. The loss related to Investments in and advances to
nonconsolidated affiliates is included in Other income in our
consolidated statement of operations for the year ended December 31, 2009. The
losses related to assets held for sale are included in Loss on disposal of assets in
our consolidated statement of operations for the year ended December 31,
2009.
The loss associated with Investments in and advances to
nonconsolidated affiliates resulted from an other-than-temporary
impairment of an investment accounted for using the cost method of accounting.
The investment was valued using its published net asset value discounted due to
recent market fluctuations, the illiquid nature of the investment, and proposed
changes to the investment’s structure. More specifically, and because we elected
a liquidation option with regard to this investment, we discounted the net asset
value of our holdings to account for anticipated sales of assets within this
investment at prices lower than the currently stated net asset
value.
In
addition, during the year ended December 31, 2008, we recorded an impairment
charge of $0.6 million. This charge represented our write-down of certain
long-lived assets associated with one of our hospitals to their estimated fair
value based on an offer we received from a third party to acquire the assets.
During the year ended December 31, 2007, we recorded impairment charges of
$15.1 million, related to our long-lived assets. Approximately
$14.5 million of these charges related to the Digital Hospital (as defined
in Note 5, Property and
Equipment). During 2007, we wrote the Digital Hospital down by $14.5
million to its estimated fair value based on an offer we had received from a
third party to acquire our corporate campus and the estimated net proceeds we
expected to receive from this potential sale transaction. During the years ended
December 31, 2009, 2008, and 2007, we recorded impairment charges of $4.0
million, $11.8 million, and $38.2 million, respectively, as part of our results
of discontinued operations. See Note 18, Assets Held for Sale and Results of
Discontinued Operations.
As
discussed in Note 1, Summary
of Significant Accounting Policies, “Fair Value Measurements,” the
carrying value equals fair value for our financial instruments that are not
included in the table below and are classified as current in our consolidated
balance sheets. The carrying amounts and estimated fair values for all of our
other financial instruments are presented in the following table (in
millions):
|
As
of December 31, 2009
|
As
of December 31, 2008
|
|||||||||||||||
|
Carrying
Amount
|
Estimated
Fair Value
|
Carrying
Amount
|
Estimated
Fair Value
|
|||||||||||||
|
Interest
rate swap agreements:
|
||||||||||||||||
|
March
2006 trading swap
|
$ | (54.8 | ) | $ | (54.8 | ) | $ | (78.2 | ) | $ | (78.2 | ) | ||||
|
December
2008 forward-starting swap
|
0.4 | 0.4 | (0.2 | ) | (0.2 | ) | ||||||||||
|
March
2009 forward-starting swap
|
(0.3 | ) | (0.3 | ) | - | - | ||||||||||
|
June
2009 trading swap
|
5.6 | 5.6 | - | - | ||||||||||||
|
Long-term
debt:
|
||||||||||||||||
|
Advances
under $400 million revolving credit facility
|
- | - | 40.0 | 28.4 | ||||||||||||
|
Term
loan facility
|
751.3 | 714.5 | 783.6 | 597.5 | ||||||||||||
|
Floating
Rate Senior Notes due 2014
|
- | - | 366.0 | 292.1 | ||||||||||||
|
10.75%
Senior Notes due 2016
|
494.9 | 542.5 | 494.3 | 459.0 | ||||||||||||
|
8.125%
Senior Notes due 2020
|
285.2 | 284.7 | - | - | ||||||||||||
|
Other
bonds payable
|
1.8 | 1.8 | 1.8 | 1.8 | ||||||||||||
|
Other
notes payable
|
28.0 | 28.0 | 12.8 | 12.8 | ||||||||||||
|
Financial
commitments:
|
||||||||||||||||
|
Letters
of credit
|
- | 95.2 | - | 152.7 | ||||||||||||
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
16. Stock-Based
Compensation:
The
Company has awarded employee stock-based compensation in the form of stock
options and restricted stock awards under the terms of compensation plans
designed to align employee and executive interests to those of our
stockholders.
All
employee stock-based compensation awarded in 2009 was issued under the 2008
Equity Incentive Plan, a stockholder-approved plan that provides for grants of
nonqualified stock options or incentive stock options, restricted stock, stock
appreciation rights, performance shares or performance units, dividend
equivalents, restricted stock units (“RSUs”), or other stock-based awards. The
terms of the 2008 Equity Incentive Plan make available up to 6,000,000 shares of
common stock to be granted. As of December 31, 2009, the number of shares of
stock reserved and available for grant under this plan is 5,236,864
shares.
Historically,
we have also issued stock-based compensation out of the following plans which
expired in 2008: the 1995, 1997, and 1999 Stock Option Plans, the 1998
Restricted Stock Plan, the Key Executive Incentive Program, and the 2005 Equity
Incentive Plan. As of December 31, 2009, we also had 1,200,300 shares available
to issue under the 2002 Stock Option Plan; however, with the approval of the
2008 Equity Incentive Plan discussed above, we do not intend to issue any
additional options from this plan.
Stock
Options—
As of
December 31, 2009, we had outstanding options from the 1995, 1997, 1999,
and 2002 Stock Option Plans as well as the 2005 and 2008 Equity Incentive Plans.
Under these plans, officers and employees are given the right to purchase shares
of HealthSouth common stock at a fixed grant price determined on the day the
options are granted. These plans provide for the granting of both nonqualified
stock options and incentive stock options. The terms and conditions of the
options, including exercise prices and the periods in which options are
exercisable, are generally at the discretion of the compensation committee of
our board of directors. However, no options are exercisable beyond approximately
ten years from the date of grant. Granted options vest over the awards’
requisite service periods, which is generally three years.
The fair
values of the options granted during the years ended December 31, 2009,
2008, and 2007 have been estimated at the grant date using the Black-Scholes
option-pricing model with the following weighted-average
assumptions:
|
For
the Year Ended December 31,
|
|||||||
|
2009
|
2008
|
2007
|
|||||
|
Expected
volatility
|
45.0
|
% |
39.5
|
% |
42.0
|
% | |
|
Risk-free
interest rate
|
2.7
|
% |
3.2
|
% |
4.5
|
% | |
|
Expected
life (years)
|
6.5
|
6.4
|
4.6
|
||||
|
Dividend
yield
|
0.0
|
% |
0.0
|
% |
0.0
|
% | |
The
Black-Scholes option-pricing model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly
subjective assumptions, including the expected stock price volatility. We
estimate our expected term through an analysis of actual, historical
post-vesting exercise, cancellation, and expiration behavior by our employees
and projected post-vesting activity of outstanding options. We calculate
volatility based on the historical volatility of our common stock over the
period commensurate with the expected life of the options, excluding a distinct
period of extreme volatility between 2002 and 2003. The risk-free interest rate
is the implied daily yield currently available on U.S. Treasury issues with a
remaining term closely approximating the expected term used as the input to the
Black-Scholes option-pricing model. We do not pay a dividend, and we do not
include a dividend payment as part of our pricing model. We estimate forfeitures
through an analysis of actual, historical pre-vesting option forfeiture
activity. Under the Black-Scholes option-pricing model, the weighted-average
fair value per share of employee stock options granted during the years ended
December 31, 2009, 2008, and 2007 was $4.64, $7.22, and $9.46,
respectively.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
A summary
of our stock option activity and related information is as follows:
|
Shares
(In
Thousands)
|
Weighted-
Average Exercise Price per Share
|
Remaining
Life (Years)
|
Aggregate
Intrinsic Value
(In
Millions)
|
|||||||||||||
|
Outstanding,
December 31, 2008
|
2,352 | $ | 25.46 | |||||||||||||
|
Granted
|
404 | 9.57 | ||||||||||||||
|
Exercised
|
- | - | ||||||||||||||
|
Forfeitures
|
(130 | ) | 13.21 | |||||||||||||
|
Expirations
|
(112 | ) | 40.23 | |||||||||||||
|
Outstanding,
December 31, 2009
|
2,514 | 22.88 | 6.1 | $ | 3.8 | |||||||||||
|
Exercisable,
December 31, 2009
|
1,833 | 25.89 | 5.2 | 0.3 | ||||||||||||
We
recognized approximately $3.5 million, $5.0 million, and $7.7 million of
compensation expense related to our stock options for the years ended December
31, 2009, 2008, and 2007, respectively. As of December 31,2009,
there was $2.7 million of unrecognized compensation cost related to unvested
stock options. This cost is expected to be recognized over a weighted-average
period of 19 months.
Restricted
Stock—
We
previously issued restricted common stock to senior management of HealthSouth
under the 1998 Restricted Stock Plan, Key Executive Incentive Program, and 2005
Equity Incentive Plan.
Historically,
restricted stock awards contained only a service requirement and generally
vested over a three-year requisite service period. However, in 2007, we also
issued restricted common stock with vesting requirements that included a market
condition and a service condition. The restricted stock awards granted in 2008
and in 2009 included service-based awards, performance-based awards (that also
included a service requirement), and market condition awards (that also included
a service requirement). For awards with a service and/or performance
requirement, the fair value of the award is determined by the closing price of
our common stock on the grant date. For awards with a market condition, the fair
value of the awards is determined using a lattice model.
A summary
of our issued restricted stock awards is as follows (share information in
thousands):
|
Shares
|
Weighted-Average
Grant Date Fair Value
|
|||||||
|
Nonvested
shares at December 31, 2008
|
557 | $ | 17.27 | |||||
|
Granted
|
348 | 7.85 | ||||||
|
Vested
|
(170 | ) | 19.20 | |||||
|
Forfeited
|
(51 | ) | 14.70 | |||||
|
Nonvested
shares at December 31, 2009
|
684 | 12.20 | ||||||
The
weighted-average grant date fair value of restricted stock granted during the
years ended December 31, 2008 and 2007 was $16.34 and $19.65 per share,
respectively. We recognized approximately $9.1 million, $5.9 million, and $2.1
million of compensation expense related to our restricted stock awards for the
years ended December 31, 2009, 2008, and 2007, respectively. As of
December 31, 2009, there was $13.8 million of unrecognized compensation
expense related to unvested restricted stock. We expect to recognize this
expense over the next 26 months. The remaining unrecognized compensation expense
for the performance-based awards may vary each reporting period based on changes
in the expected achievement of performance measures.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Non-Employee
Stock-Based Compensation Plans—
We
maintained the 2004 Director Incentive Plan, as amended and restated, to provide
incentives to our non-employee members of our board of directors. Up to 400,000
shares were available to be granted pursuant to the 2004 Director Incentive Plan
through the award of shares of unrestricted common stock, restricted stock,
and/or RSUs. The 2004 Director Incentive Plan expired during 2008. During the
first quarter of 2009, we issued RSUs out of the 2008 Equity Incentive Plan to
our non-employee members of our board of directors. Restricted stock awards are
subject to a three-year graded vesting period, while the RSUs are fully vested
when awarded.
During
the years ended December 31, 2009, 2008, and 2007, we issued 103,185,
49,788, and 35,528 RSUs, respectively, with a fair value of $7.85, $16.27, and
$22.80, respectively, per unit. We recognized approximately $0.8 million of
compensation expense upon their issuance in 2009, 2008, and 2007. There was no
unrecognized compensation related to unvested shares as of December 31,
2009. As of December 31, 2009, 215,621 RSUs were outstanding.
17. Employee
Benefit Plans:
Substantially
all HealthSouth employees are eligible to enroll in HealthSouth sponsored
healthcare plans, including coverage for medical and dental benefits. Our
primary healthcare plans are national plans administered by third-party
administrators. We are self-insured for these plans. During 2009, 2008, and
2007, costs associated with these plans, net of amounts paid by
employees, approximated $62.6 million, $62.3 million, and $57.0 million,
respectively.
The
HealthSouth Retirement Investment Plan is a qualified 401(k) savings plan. The
plan allows eligible employees to contribute up to 100% of their pay on a
pre-tax basis into their individual retirement account in the plan subject to
the normal maximum limits set annually by the Internal Revenue Service. During
2007, HealthSouth’s employer matching contribution was 50% of the first 4% of
each participant’s elective deferrals. Effective January 1, 2008,
HealthSouth’s employer matching contribution increased to 50% of the first 6% of
each participant’s elective deferrals. All contributions to the plan are in the
form of cash. Employees who are at least 21 years of age are eligible to
participate in the plan. Prior to January 1, 2008, employer contributions vested
gradually over a six-year service period. Effective January 1, 2008, employer
contributions vest 100% after three years of service. Participants are always
fully vested in their own contributions.
Employer
contributions to the HealthSouth Retirement Investment Plan approximated $13.0
million, $14.0 million, and $9.3 million in 2009, 2008, and 2007,
respectively. In 2009 and 2007, approximately $1.3 million and $3.0 million,
respectively, from the plan’s forfeiture account was used to fund the matching
contributions in accordance with the terms of the plan.
Senior
Management Bonus Program—
In 2009,
2008, and 2007, we adopted a Senior Management Bonus Program to reward senior
management for performance based on a combination of corporate goals or regional
goals and individual goals. The corporate goals were dependent upon the Company
meeting pre-determined financial goals. The regional goals were determined in
accordance with the specific plans agreed upon between each region and our board
of directors as part of our routine budgeting and financial planning process.
The individual goals, which were weighted according to importance, were
determined between each participant and his or her immediate supervisor. The
program applied to persons who joined the Company in, or were promoted to,
senior management positions. In 2010, we expect to pay approximately $13.9
million under the program for the year ended December 31, 2009. In February
2009, we paid approximately $9.9 million under the program for the year ended
December 31, 2008. In February 2008, we paid approximately $8.0 million
under the program for the year ended December 31, 2007.
18. Assets
Held for Sale and Results of Discontinued Operations:
During
2009, we terminated the leases associated with certain rental properties and
reached an agreement to sell one of our hospitals to a third party. As a result,
we reclassified our consolidated balance sheet as of December 31, 2008 to show
the assets and liabilities of these facilities as held for sale. We also
reclassified our
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
consolidated statements of operations and consolidated statements of cash
flows for the years ended December 31, 2008 and 2007 to include these
properties and their results of operations as discontinued operations.
The
operating results of discontinued operations, including the allocation of $43.3
million of interest expense for the year ended December 31, 2007 (as
discussed in Note 8, Long-term Debt), are as
follows (in millions):
|
For
the Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
operating revenues
|
$ | 17.8 | $ | 41.7 | $ | 654.1 | ||||||
|
Costs
and expenses
|
25.8 | 36.2 | 585.3 | |||||||||
|
Impairments
|
4.0 | 11.8 | 38.2 | |||||||||
|
(Loss)
income from discontinued operations
|
(12.0 | ) | (6.3 | ) | 30.6 | |||||||
|
Gain
on disposal of assets of discontinued operations
|
0.4 | 0.1 | 5.1 | |||||||||
|
Gain
on divestitures of divisions
|
13.4 | 18.7 | 451.9 | |||||||||
|
Income
tax benefit
|
0.3 | 3.7 | 2.6 | |||||||||
|
Income
from discontinued operations, net of tax
|
$ | 2.1 | $ | 16.2 | $ | 490.2 | ||||||
As
discussed in Note 23, Contingencies and Other
Commitments, we have recorded charges related to settlements with certain
of our current and former subsidiary partnerships related to the restatement of
their historical financial statements. The portion of these charges that is
attributable to partnerships of our divested surgery centers division has been
included in our results of discontinued operations. See also Note 23, Contingencies and Other
Commitments, for information related to our former outpatient
division.
As
discussed in Note 10, Self-Insured Risks, we insure
a substantial portion of our professional liability, general liability, and
workers’ compensation risks through a self-insured retention program
underwritten by HCS. Expenses for retained professional and general liability
risks and workers’ compensation risks associated with our surgery centers,
outpatient, and diagnostic divisions have been included in our results of
discontinued operations.
During
2009, we recorded an impairment charge of $4.0 million. This charge related to
the hospital that qualified to be reported as discontinued operations during
2009 and was sold in January 2010. We determined the fair value of the impaired
long-lived assets at the hospital based on an offer from a third-party to
purchase the assets. During 2008, we recorded impairment charges of $11.8
million. The majority of these charges related to the hospital that was closed
during 2008. We determined the fair value of the impaired long-lived assets at
the hospital primarily based on the assets’ estimated fair value using valuation
techniques that included third-party appraisals and an evaluation of current
real estate market conditions in the applicable area. See the "Diagnostic
Division" section of this note for discussion of the majority of the 2007
impairment charges.
The
income tax benefit of our results of discontinued operations for the year ended
December 31, 2007 is comprised primarily of (1) $61.8 million related to the
reversal upon sale of deferred tax liabilities arising from indefinite-lived
intangible assets of our surgery centers division and (2) $59.2 million of
expense attributable to the utilization of the 2007 loss from continuing
operations.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Assets
and liabilities held for sale consist of the following (in
millions):
|
As
of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Assets:
|
||||||||
|
Current
assets
|
$ | 1.4 | $ | 3.8 | ||||
|
Long-term
assets
|
14.2 | 37.1 | ||||||
|
Total
assets
|
$ | 15.6 | $ | 40.9 | ||||
|
Liabilities:
|
||||||||
|
Current
liabilities
|
$ | 4.2 | $ | 37.5 | ||||
|
Long-term
liabilities
|
1.3 | 4.7 | ||||||
|
Total
long-term liabilities
|
$ | 5.5 | $ | 42.2 | ||||
As of December 31, 2008, assets and
liabilities held for sale in the above table primarily relate to the one surgery
facility that was awaiting transfer to ASC, as defined and discussed below. As
of December 31, 2009, assets and liabilities held for sale primarily relate to
our hospital that was sold in January 2010.
Current
assets and long-term assets in the above table are included in Prepaid expenses and other current
assets and Other
long-term assets, respectively, in our consolidated balance sheets.
Current liabilities and long-term liabilities in the above table are included in
Other current
liabilities and Other
long-term liabilities, respectively, in our consolidated balance
sheets.
As
discussed in Note 1, Summary of Significant Accounting
Policies, as of December 31, 2009 and 2008, Refunds due patients and other
third-party payors consists of approximately $42.8 million and $43.5
million, respectively, of refunds and overpayments that originated prior to
December 31, 2004. Of this amount, approximately $34.6 million and $35.3
million, respectively, represent liabilities associated with our former surgery
centers, outpatient, and diagnostic divisions. These liabilities remained with
HealthSouth after the closing of each transaction, and therefore, are not
considered liabilities held for sale. We continue to negotiate the settlement of
these amounts with third-party payors in various jurisdictions.
Surgery
Centers Division—
The
transaction to sell our surgery centers division to ASC Acquisition LLC ("ASC"),
a Delaware limited liability company and newly formed affiliate of TPG Partners
V, L.P., a private investment partnership, closed on June 29, 2007,
other than with respect to certain facilities in Connecticut, Rhode Island, and
Illinois for which approvals for the transfer to ASC had not yet been received
as of such date. The purchase price consisted of cash consideration of $920
million, subject to certain adjustments, and a contingent option to acquire up
to a 5% equity interest in the new company. The net cash proceeds received at
closing, after deducting deal and separation costs, purchase price adjustments,
and approximately $15.5 million of debt assumed by ASC, approximated $860.7
million.
As noted
above, the closing of the sale of the surgery centers division occurred on
June 29, 2007, other than with respect to certain facilities for which
approvals for the transfer to ASC had not yet been received as of such date. In
connection with the closing, HealthSouth and ASC agreed, among other things,
that HealthSouth would retain its ownership interest in certain surgery centers
until regulatory approvals for the transfer of such surgery centers to ASC were
received. In that regard, ASC would manage the operations of such surgery
centers until such approvals had been received, and HealthSouth and ASC entered
into arrangements designed to place them in approximately the same economic
position, whether positive or negative, they would have occupied had all
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
regulatory
approvals been received prior to closing. Upon receipt of such approvals,
HealthSouth’s ownership interest in such facilities would be transferred to ASC.
No portion of the purchase price was withheld at closing pending the transfer of
these facilities.
In August
and November 2007, we received approval for the transfer of the applicable
facilities in Connecticut and Rhode Island, respectively. In the first quarter
of 2008, we received approval for the change in control of five of the six
Illinois facilities. Approval for the sixth Illinois facility was obtained in
the fourth quarter of 2009.
During
2007, we also reached an agreement with certain of our remaining partners to
sell an additional facility to ASC. This facility was an opt-out partnership at
the time the original transaction closed with ASC. After deducting deal and
separation costs, we received approximately $16.2 million of net cash proceeds
in conjunction with the sale of this facility.
The
assets and liabilities for the surgery centers division as of December 31, 2008
included the assets and liabilities associated with the facility that had not
been transferred as of that date. As of December 31, 2008, we had deferred $26.5
million of cash proceeds received at closing associated with this facility. The
results of operations of this facility are reported in discontinued operations
through its fourth quarter 2009 transfer date.
The
operating results of the surgery centers division included in discontinued
operations consist of the following (in millions):
|
For
the Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
operating revenues
|
$ | 7.4 | $ | 10.7 | $ | 381.7 | ||||||
|
Costs
and expenses
|
3.9 | 6.6 | 324.5 | |||||||||
|
Impairments
|
- | 1.2 | 4.8 | |||||||||
|
Income
from discontinued operations
|
3.5 | 2.9 | 52.4 | |||||||||
|
Gain
on disposal of assets of discontinued operations
|
0.7 | 0.2 | 1.9 | |||||||||
|
Gain
on divestiture of division
|
13.4 | 19.3 | 314.9 | |||||||||
|
Income
tax benefit
|
0.4 | 3.8 | 18.4 | |||||||||
|
Income
from discontinued operations, net of tax
|
$ | 18.0 | $ | 26.2 | $ | 387.6 | ||||||
As a
result of the disposition of our surgery centers division, we recorded a $376.3
million post-tax gain on disposal during the year ended December 31, 2007.
During 2008, we recorded a $19.3 million post-tax gain on disposal associated
with the five Illinois facilities that were transferred during the year. We
recorded an additional post-tax gain of $13.4 million for the facility that was
transferred to ASC during the fourth quarter of 2009.
Outpatient
Division—
The
transaction to sell our outpatient rehabilitation division to Select Medical
Corporation, a privately owned operator of specialty hospitals and outpatient
rehabilitation facilities, closed on May 1, 2007, other than with respect
to certain facilities for which approvals for the transfer to Select Medical had
not yet been received as of such date. In connection with the closing of the
sale of this division, we entered into a letter agreement with Select Medical
whereby we agreed, among other things, we would retain certain outpatient
facilities until certain state regulatory approvals for the transfer of such
facilities to Select Medical were received. In that regard, we entered into
agreements with Select Medical whereby Select Medical managed certain operations
of the applicable facilities until such approvals were received. Approximately
$24 million of the $245 million purchase price was withheld pending the transfer
of these facilities. The net cash proceeds received at closing, after deducting
deal and separation costs, purchase price adjustments, and approximately $3.2
million of debt assumed by Select Medical, approximated $200.4 million.
Subsequent to closing, we received approval and transferred the remaining
facilities to Select Medical, and we received additional sale proceeds in
November 2007.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
The
operating results of the outpatient division included in discontinued operations
consist of the following (in millions):
|
For
the Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
operating revenues
|
$ | 0.5 | $ | 1.6 | $ | 127.3 | ||||||
|
Costs
and expenses
|
7.7 | (4.6 | ) | 110.2 | ||||||||
|
Impairments
|
- | - | 0.2 | |||||||||
|
(Loss)
income from discontinued operations
|
(7.2 | ) | 6.2 | 16.9 | ||||||||
|
Loss
on disposal of assets of discontinued operations
|
- | - | (1.3 | ) | ||||||||
|
Gain
on divestiture of division
|
- | - | 145.3 | |||||||||
|
Income
tax expense
|
- | - | (16.0 | ) | ||||||||
|
(Loss)
income from discontinued operations, net of tax
|
$ | (7.2 | ) | $ | 6.2 | $ | 144.9 | |||||
Amounts
included in income from discontinued operations of our outpatient division for
the year ended December 31, 2008 primarily relate to the expiration of a
contingent liability associated with a prior contractual agreement associated
with the division. See also Note 23, Contingencies and Other
Commitments.
As a
result of the disposition of our outpatient division, we recorded a $145.7
million post-tax gain on disposal during the year ended December 31,
2007.
Diagnostic
Division—
During
2007, we entered into an agreement with The Gores Group, a private equity firm,
to sell our diagnostic division for approximately $47.5 million, subject to
certain adjustments. This transaction closed on July 31, 2007, other than
with respect to one facility for which approval for the transfer had not yet
been received as of such date. The net cash proceeds received at closing, after
deducting deal and separation costs and purchase price adjustments, approximated
$39.7 million. During the first quarter of 2008, we received approval for the
transfer of the remaining facility to The Gores Group.
The
operating results of the diagnostic division included in discontinued operations
consist of the following (in millions):
|
For
the Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
operating revenues
|
$ | 0.1 | $ | 1.1 | $ | 92.0 | ||||||
|
Costs
and expenses
|
0.8 | 2.6 | 96.8 | |||||||||
|
Impairments
|
- | 0.6 | 33.2 | |||||||||
|
Loss
from discontinued operations
|
(0.7 | ) | (2.1 | ) | (38.0 | ) | ||||||
|
Gain
on disposal of assets of discontinued operations
|
0.1 | - | 2.9 | |||||||||
|
Loss
on divestiture of division
|
- | (0.6 | ) | (8.3 | ) | |||||||
|
Loss
from discontinued operations, net of tax
|
$ | (0.6 | ) | $ | (2.7 | ) | $ | (43.4 | ) | |||
During
the first quarter of 2007, we wrote the intangible assets and certain long-lived
assets of our diagnostic division down to their estimated fair value based on
the estimated net proceeds to be received from the divestiture of the division.
This charge is included in impairments in the above results of operations of our
diagnostic division. As a result of the disposition of our diagnostic division,
we recorded an approximate $8.3 million post-tax loss on disposal during the
year ended December 31, 2007. This loss primarily resulted from working
capital adjustments based on the final balance sheet. During 2008, we recorded
an approximate $0.6 million post-tax loss on disposal associated with the
remaining facility that received approval for the transfer to The Gores Group
during 2008.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
19. Income
Taxes:
HealthSouth
is subject to U.S. federal, state, and local income taxes. Our Income (loss) from continuing
operations before income tax benefit is as follows (in
millions):
|
For
the Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Income
(loss) from continuing operations before income tax
benefit
|
$ | 123.5 | $ | 195.5 | $ | (93.9 | ) | |||||
The
significant components of the Provision for income tax benefit
related to continuing operations are as follows (in
millions):
|
For
the Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 1.8 | $ | (7.6 | ) | $ | (300.2 | ) | ||||
|
State
and local
|
(9.1 | ) | (66.2 | ) | (30.2 | ) | ||||||
|
Total
current benefit
|
(7.3 | ) | (73.8 | ) | (330.4 | ) | ||||||
|
Deferred:
|
||||||||||||
|
Federal
|
3.0 | 2.7 | 5.5 | |||||||||
|
State
and local
|
1.1 | 1.0 | 2.5 | |||||||||
|
Total
deferred expense
|
4.1 | 3.7 | 8.0 | |||||||||
|
Total
income tax benefit related to continuing operations
|
$ | (3.2 | ) | $ | (70.1 | ) | $ | (322.4 | ) | |||
During
2009, we received total net state income tax refunds of $12.4 million, including
associated interest, the majority of which related to amended returns filed for
the years 1995 through 2004. During 2009, we also received total net federal
income tax refunds of $40.8 million, the majority of which related to an
additional tax refund claim with the IRS for tax years 1995 through 1999, as
discussed below.
During
2008, we received total net state income tax refunds of $26.2 million, including
associated interest, the majority of which related to amended returns filed for
the years 1996 through 1999. During 2008, we also received $47.1 million of net
federal income tax refunds. In 2008, we settled all federal income tax issues
outstanding with the IRS for the tax years 2000 through 2003. In October 2008,
we received a total cash refund of approximately $46 million, including $33
million of federal income tax refunds and $13 million of associated interest.
Approximately $33 million of this federal income tax recovery was used to pay
down long-term debt.
During
2008, we also settled an additional income tax refund claim with the IRS for tax
years 1995 through 1999 which resulted in a federal income tax refund of
approximately $42 million, including $24.5 million of federal income tax refunds
and $17.5 million of associated interest. We received the majority of this cash
refund in February 2009 and used it to pay down long-term debt. Therefore, we
classified this refund in long-term assets in the line entitled Income tax refund receivable
in our consolidated balance sheet as of December 31, 2008.
During
2007, we received total net income tax refunds of $438.2 million, the majority
of which related to our settlement of federal income taxes with the IRS. In the
third quarter of 2007, we settled certain federal income tax issues outstanding
with the IRS for the tax years 1996 through 1999, and the Joint Committee
reviewed and approved the associated tax refunds due to the Company. In October
2007, we received a total cash refund of approximately $440 million, including
$296 million of federal income tax refunds and $144 million of associated
interest. Approximately $405 million of this federal income tax recovery was
used to pay down long-term debt in 2007.
A
reconciliation of differences between the federal income tax at statutory rates
and our actual income tax benefit on our income (loss) from continuing
operations, which include federal, state, and other income taxes, is presented
below. Our adoption of the authoritative guidance relating to noncontrolling
interests (see Note 1,
Summary of
Significant Accounting Policies, “Reclassifications”) had no effect on
the total income tax expense reported in our consolidated statements of
operations or on income tax amounts recorded on our balance sheets, including
deferred income taxes.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
|
For
the Year Ended December 31,
|
|||||||
|
2009
|
2008
|
2007
|
|||||
|
Tax
expense (benefit) at statutory rate
|
35.0%
|
35.0%
|
(35.0%
|
) | |||
|
Increase
(decrease) in tax rate resulting from:
|
|||||||
|
State
income taxes, net of federal tax benefit
|
3.5%
|
4.9%
|
(9.2%
|
) | |||
|
Indefinite-lived
assets
|
1.3%
|
2.0%
|
6.3%
|
||||
|
Interest,
net
|
(1.0%
|
) |
(8.8%
|
) |
(135.3%
|
) | |
|
Settlement
of tax claims
|
(6.0%
|
) |
(34.4%
|
) |
(162.6%
|
) | |
|
Decrease
in valuation allowance
|
(42.7%
|
) |
(38.7%
|
) |
(33.2%
|
) | |
|
Noncontrolling
interests
|
9.3%
|
5.3%
|
24.3%
|
||||
|
Other,
net
|
(2.0%
|
) |
(1.2%
|
) |
1.4%
|
||
|
Income
tax benefit
|
(2.6%
|
) |
(35.9%
|
) |
(343.3%
|
) | |
The
income tax expense (benefit) at the statutory rate is the expected tax expense
(benefit) resulting from the income (loss) due to continuing operations. The
income tax benefit in 2009 primarily resulted from the decrease in the valuation
allowance and refunds of state income taxes, including interest. The income tax
benefit in 2008 primarily resulted from our settlement of federal income taxes,
including interest, refunds of state income taxes, including interest, and the
decrease in the valuation allowance. Our income tax benefit in 2007 primarily
resulted from our settlement of federal income taxes, including interest, for
the years 1996 through 1999 in excess of the estimated amounts previously
accrued, as discussed above.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Deferred
income taxes recognize the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
amounts used for income tax purposes and the impact of available net operating
loss (“NOL”) carryforwards. The significant components of HealthSouth’s deferred
tax assets and liabilities are as follows (in millions):
|
As
of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Deferred
income tax assets:
|
||||||||
|
Net
operating loss
|
$ | 769.8 | $ | 798.2 | ||||
|
Allowance
for doubtful accounts
|
15.3 | 47.6 | ||||||
|
Accrual
for government, class action, and related settlements
|
2.6 | 29.8 | ||||||
|
Insurance
reserve
|
31.7 | 38.7 | ||||||
|
Other
accruals
|
15.0 | 15.3 | ||||||
|
Property,
net
|
32.5 | 33.1 | ||||||
|
Intangibles
|
6.8 | 3.1 | ||||||
|
Alternative
minimum tax
|
13.7 | 15.3 | ||||||
|
Stock-based
compensation
|
17.4 | 13.3 | ||||||
|
Total
deferred income tax assets
|
904.8 | 994.4 | ||||||
|
Less:
Valuation allowance
|
(892.7 | ) | (969.6 | ) | ||||
|
Net
deferred income tax assets
|
12.1 | 24.8 | ||||||
|
Deferred
income tax liabilities:
|
||||||||
|
Indefinite-lived
intangibles
|
(32.8 | ) | (31.5 | ) | ||||
|
Carrying
value of partnerships
|
(10.1 | ) | (20.1 | ) | ||||
|
Other
|
(1.9 | ) | (2.1 | ) | ||||
|
Total
deferred income tax liabilities
|
(44.8 | ) | (53.7 | ) | ||||
|
Net
deferred income tax liabilities
|
(32.7 | ) | (28.9 | ) | ||||
|
Less:
Current deferred tax assets
|
0.5 | 0.8 | ||||||
|
Noncurrent
deferred tax liabilities
|
$ | (33.2 | ) | $ | (29.7 | ) | ||
Current
deferred tax assets as of December 31, 2009 and 2008 are included in Prepaid expenses and other current
assets in our consolidated balance sheets. Noncurrent deferred tax
liabilities as of December 31, 2009 and 2008 are included in Other long-term liabilities
in our consolidated balance sheets.
We reduce
our deferred income tax assets by a valuation allowance if, based on the weight
of the available evidence, it is more likely than not that all or a portion of a
deferred tax asset will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences are deductible. We based our
decision to establish a valuation allowance primarily on negative evidence of
cumulative losses in recent years. After consideration of all evidence, both
positive and negative, management concluded it is more likely than not we will
not realize a portion of our deferred tax assets. Consequently, a valuation
allowance of $892.7 million and $969.6 million is necessary as of
December 31, 2009 and 2008, respectively. No valuation allowance has been
provided on deferred tax assets attributable to subsidiaries not included within
the federal consolidated group.
For the
years ended December 31, 2009, 2008, and 2007, the net decreases in our
valuation allowance were $76.9 million, $89.0 million, and $162.1 million,
respectively. The decrease in the valuation allowance for 2009 relates primarily
to a decrease in gross deferred tax assets resulting from the issuance of the
common stock and common stock warrants underlying the securities litigation
settlement (see Note 22, Settlements), the write-off
of bad debts, and the utilization of net operating losses. The decrease in the
valuation allowance for 2008 relates primarily to the decrease in gross deferred
tax assets caused by the sale of our corporate campus (see Note 5, Property and Equipment). The
decrease in the valuation allowance for 2007 relates primarily to decreases in
deferred tax assets arising from the divestitures of our surgery centers and
outpatient divisions (see Note 18, Assets Held for Sale and Results of
Discontinued Operations). This decrease was offset, in part, by an
increase in net operating losses as a result of 2007 operations.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
At
December 31, 2009, we had unused federal and state net operating loss
carryforwards of approximately $1.8 billion ($624.5 million tax effected) and
$145.3 million (tax effected), respectively. Such losses expire in various
amounts at varying times through 2029. A valuation allowance is being taken
against our net deferred tax assets, exclusive of indefinite-lived intangibles,
including substantially all of these loss carryforwards.
Our
utilization of NOLs could be subject to the Internal Revenue Code Section 382
(“Section 382”) limitation and may be limited in the event of certain cumulative
changes in ownership interests of significant shareholders over a three-year
period in excess of 50%. Section 382 imposes an annual limitation on the use of
these losses to an amount equal to the value of a company at the time of an
ownership change multiplied by the long-term tax exempt rate. At this time, we
do not believe these limitations will limit our ability to use any NOLs before
they expire. However, no such assurances can be provided.
On
January 1, 2007, we adopted new accounting guidance related to the accounting
for uncertainty in income taxes. The adoption of this guidance resulted in a
$4.2 million increase to reserves for uncertain tax positions and was accounted
for as an addition to Accumulated deficit as of
January 1, 2007. Including the cumulative effect increase to the reserves
for uncertain tax positions, as of January 1, 2007, we had $267.4 million of
total gross unrecognized tax benefits, of which $247.0 million would affect our
effective tax rate if recognized. The amount of the unrecognized tax benefits
changed significantly during the year ended December 31, 2007 due to the
settlement with the IRS for the tax years 1996 through 1999, as discussed
above.
As of
December 31, 2007, total remaining gross unrecognized tax benefits were $138.2
million, all of which would affect our effective tax rate if recognized. Total
accrued interest expense related to unrecognized tax benefits was $11.7 million
as of December 31, 2007. The amount of unrecognized tax benefits changed during
2008 due to the settlement of state income tax refund claims with certain states
for tax years 1996 through 1999, the settlement with the IRS for tax years 2000
through 2003, the filings of amended income tax returns for tax years 1995
through 1999 with the IRS, non-unitary state claims for tax years 2000 through
2003, and the running of the statute of limitations on certain state claims.
Total remaining gross unrecognized tax benefits were $61.1 million as of
December 31, 2008, all of which would affect our effective tax rate if
recognized. Total accrued interest expense related to unrecognized tax benefits
as of December 31, 2008 was $2.9 million. The amount of unrecognized tax
benefits changed during 2009 due to the settlement of state income tax refund
claims with certain states for tax years 1995 through 2004 and the running of
the statute of limitations on certain state issues related to the 2005 tax year.
Total remaining gross unrecognized tax benefits were $50.9 million as of
December 31, 2009, all of which would affect our effective tax rate if
recognized. Total accrued interest expense related to unrecognized tax benefits
as of December 31, 2009 was $1.9 million.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
A
reconciliation of the beginning and ending liability for unrecognized tax
benefits is as follows (in millions):
|
Gross
Unrecognized Income Tax Benefits
|
Accrued
Interest and Penalties
|
|||||||
|
Balance
at January 1, 2007
|
$ | 267.4 | $ | 9.8 | ||||
|
Gross
amount of increases in unrecognized tax benefits related to prior
periods
|
33.6 | 3.5 | ||||||
|
Gross
amount of decreases in unrecognized tax benefits related to prior
periods
|
(26.0 | ) | (1.6 | ) | ||||
|
Gross
amount of increases in unrecognized tax benefits related to the
current period
|
0.1 | - | ||||||
|
Decreases
in unrecognized tax benefits relating to settlements with taxing
authorities
|
(134.2 | ) | - | |||||
|
Reductions
to unrecognized tax benefits as a result of a lapse of the
applicable statute of limitations
|
(2.7 | ) | - | |||||
|
Balance
at December 31, 2007
|
138.2 | 11.7 | ||||||
|
Gross
amount of increases in unrecognized tax benefits related to prior
periods
|
4.0 | 0.5 | ||||||
|
Decreases
in unrecognized tax benefits relating to settlements with taxing
authorities
|
(78.8 | ) | (7.2 | ) | ||||
|
Reductions
to unrecognized tax benefits as a result of a lapse of the
applicable statute of limitations
|
(2.3 | ) | (2.1 | ) | ||||
|
Balance
at December 31, 2008
|
61.1 | 2.9 | ||||||
|
Gross
amount of increases in unrecognized tax benefits related to prior
periods
|
0.1 | 0.1 | ||||||
|
Increases
in unrecognized tax benefits relating to settlements with taxing
authorities
|
2.7 | - | ||||||
|
Decreases
in unrecognized tax benefits relating to settlements with taxing
authorities
|
(8.5 | ) | - | |||||
|
Reductions
to unrecognized tax benefits as a result of a lapse of the
applicable statute of limitations
|
(4.5 | ) | (1.1 | ) | ||||
|
Balance
at December 31, 2009
|
$ | 50.9 | $ | 1.9 | ||||
Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. For the years ended December 31, 2009, 2008, and 2007, we recorded $2.3 million, $22.7 million, and $127.0 million of interest income, respectively, as part of our income tax provision. In 2009, this interest income related to amended state income tax returns. In 2008 and 2007, virtually all of this interest income related to the filing of amended federal income tax returns and ultimate resolution of the federal income tax issues described above. Total accrued interest income was $0.3 million and $17.5 million as of December 31, 2009 and 2008, respectively.
HealthSouth
and its subsidiaries’ federal and state income tax returns are periodically
examined by various regulatory taxing authorities. In connection with such
examinations, we have settled federal income tax examinations with the IRS for
all tax years through 2004. In April 2009, the IRS initiated an audit of the
2005 to 2007 tax years. The IRS has indicated it expects to finalize its audits
of 2005 and 2006 in the first quarter of 2010. At this time, we do not expect
any changes from the IRS that would result in significant additional income tax
expense or benefit.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
For
the tax years that remain open under the applicable statutes of limitations,
amounts related to these unrecognized tax benefits have been considered by
management in its estimate of our potential net recovery of prior years’ income
taxes. However, at this time, we cannot estimate a range of the reasonably
possible change that may occur.
We
continue to actively pursue the maximization of our remaining state income tax
refund claims. The process of resolving these tax matters with the applicable
taxing authorities will continue in 2010. Although management believes its
estimates and judgments related to these claims are reasonable, depending on the
ultimate resolution of these tax matters, actual amounts recovered could differ
from management’s estimates, and such differences could be
material.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
20. Earnings
per Common Share:
The
calculation of earnings per common share is based on the weighted-average number
of our common shares outstanding during the applicable period. The calculation
for diluted earnings per common share recognizes the effect of all dilutive
potential common shares that were outstanding during the respective periods,
unless their impact would be antidilutive. The following table sets forth the
computation of basic and diluted earnings per common share (in millions, except
per share amounts):
|
For
the Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Basic:
|
||||||||||||
|
Numerator:
|
||||||||||||
|
Income
from continuing operations
|
$ | 126.7 | $ | 265.6 | $ | 228.5 | ||||||
|
Less:
Net income attributable to noncontrolling interests included in
continuing operations
|
(33.4 | ) | (29.8 | ) | (31.4 | ) | ||||||
|
Less:
Convertible perpetual preferred stock dividends
|
(26.0 | ) | (26.0 | ) | (26.0 | ) | ||||||
|
Income
from continuing operations attributable to HealthSouth common
shareholders
|
67.3 | 209.8 | 171.1 | |||||||||
|
Income
from discontinued operations, net of tax, attributable to
HealthSouth common shareholders
|
1.5 | 16.6 | 456.3 | |||||||||
|
Net
income attributable to HealthSouth common
shareholders
|
$ | 68.8 | $ | 226.4 | $ | 627.4 | ||||||
|
Denominator:
|
||||||||||||
|
Basic
weighted average common shares outstanding
|
88.8 | 83.0 | 78.7 | |||||||||
|
Basic
earnings per common share:
|
||||||||||||
|
Income
from continuing operations attributable to HealthSouth common
shareholders
|
$ | 0.76 | $ | 2.53 | $ | 2.17 | ||||||
|
Income
from discontinued operations, net of tax, attributable to
HealthSouth common shareholders
|
0.01 | 0.20 | 5.80 | |||||||||
|
Net
income per share attributable to HealthSouth common
shareholders
|
$ | 0.77 | $ | 2.73 | $ | 7.97 | ||||||
|
Diluted:
|
||||||||||||
|
Numerator:
|
||||||||||||
|
Income
from continuing operations
|
$ | 126.7 | $ | 265.6 | $ | 228.5 | ||||||
|
Less:
Net income attributable to noncontrolling interests included in
continuing operations
|
(33.4 | ) | (29.8 | ) | (31.4 | ) | ||||||
|
Income
from continuing operations attributable to HealthSouth common
shareholders
|
93.3 | 235.8 | 197.1 | |||||||||
|
Income
from discontinued operations, net of tax, attributable to
HealthSouth common shareholders
|
1.5 | 16.6 | 456.3 | |||||||||
|
Net
income attributable to HealthSouth common
shareholders
|
$ | 94.8 | $ | 252.4 | $ | 653.4 | ||||||
|
Denominator:
|
||||||||||||
|
Diluted
weighted average common shares outstanding
|
103.3 | 96.4 | 92.0 | |||||||||
|
Diluted
earnings per common share:
|
||||||||||||
|
Income
from continuing operations attributable to HealthSouth common
shareholders
|
$ | 0.76 | $ | 2.45 | $ | 2.14 | ||||||
|
Income
from discontinued operations, net of tax, attributable to
HealthSouth common shareholders
|
0.01 | 0.17 | 4.96 | |||||||||
|
Net
income per share attributable to HealthSouth common
shareholders
|
$ | 0.77 | $ | 2.62 | $ | 7.10 | ||||||
Diluted
earnings per share report the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common
stock. These potential shares include dilutive stock options, restricted stock
awards, restricted stock units, and convertible perpetual preferred stock. For
the years ended
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
December 31,
2009, 2008, and 2007, the number of potential shares approximated
14.5 million, 13.4 million, and 13.3 million, respectively. For the years
ended December 31, 2009, 2008, and 2007, approximately 13.1 million of the
potential shares relates to our Convertible perpetual preferred
stock. For the year ended December 31, 2009, adding back the
dividends for the Convertible
perpetual preferred stock to our Income from continuing operations
attributable to HealthSouth common shareholders causes a per share
increase when calculating diluted earnings per common share resulting in an
antidilutive per share amount. Therefore, basic and diluted earnings per common
share are the same for the year ended December 31,
2009.
Options
to purchase approximately 2.3 million shares of common stock were
outstanding as of December 31, 2009 and 2008, but were not included in the
computation of diluted weighted-average shares because to do so would have been
antidilutive.
In
January 2004, we repaid our then-outstanding 3.25% Convertible Debentures using
the net proceeds of a loan arranged by Credit Suisse First Boston. In connection
with this transaction, we issued warrants to the lender to purchase two million
shares of our common stock. Each warrant has a term of ten years from the date
of issuance and an exercise price of $32.50 per share. The warrants were not
assumed exercised for dilutive shares outstanding because they were antidilutive
in the periods presented.
As
described in Note 12, Shareholders’ Deficit, we
finalized the issuance and sale of 8.8 million shares of our common stock to
J.P. Morgan Securities Inc. on June 27, 2008.
On
September 30, 2009, we issued 5.0 million shares of common stock and 8.2 million
common stock warrants in full satisfaction of our obligation to do so under the
Consolidated Securities Action settlement. Each warrant has a term of
approximately seven years from the date of issuance and an exercise price of
$41.40 per share. The warrants were not assumed exercised for dilutive shares
outstanding because they were antidilutive in the periods presented. For
additional information, see Note 22, Settlements.
21. Related
Party Transactions:
In April
2001, we established Source Medical to continue development and allow commercial
marketing of a wireless clinical documentation system originally developed by
HealthSouth. This proprietary software was referred to internally as “HCAP” and
was later marketed by Source Medical under the name “TherapySource.” At the time
of our initial investment, certain of our directors, executive officers, and
employees also purchased shares of Source Medical’s common stock.
During
2007, we sold our remaining investment in Source Medical to Source Medical and
recorded a gain on sale of approximately $8.6 million. This gain is included in
Other income in our
consolidated statement of operations for the year ended December 31, 2007.
As a result of this transaction, we have no further affiliation or material
related party contracts with Source Medical.
22. Settlements:
Medicare
Program Settlement—
The
2004 Civil DOJ Settlement—
On
January 23, 2002, the United States intervened in four lawsuits filed
against us under the federal civil False Claims Act. These so-called “qui tam” (i.e. whistleblower)
lawsuits were transferred to the Western District of Texas and were consolidated
under the caption United
States ex rel. Devage v. HealthSouth Corp., et al.,
No. SA-98-CA-0372-DWS (W.D. Tex. San Antonio). On April 10, 2003, the
United States informed us it was expanding its investigation to review whether
fraudulent accounting practices affected our previously submitted Medicare cost
reports.
On
December 30, 2004, we entered into a global settlement agreement (the
“Settlement Agreement”) with the United States. This settlement was comprised of
(1) the claims consolidated in the Devage case, which related to
claims for reimbursement for outpatient physical therapy services rendered to
Medicare, the TRICARE Management
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Activity,
or United States Department of Labor (the “DOL”) beneficiaries, (2) the
submission of claims to Medicare for costs relating to our allegedly improper
accounting practices, (3) the submission of other unallowable costs
included in our Medicare Home Office Cost Statements and in our individual
provider cost reports, and (4) certain other conduct (collectively, the
“Covered Conduct”). The parties to this global settlement include us and the
United States acting through the civil division of the United States Department
of Justice (the “DOJ”), the Office of Inspector General of the United States
Department of Health And Human Services (the “HHS-OIG”), the DOL through the
Employment Standards Administration’s Office of Workers’ Compensation Programs,
Division of Federal Employees’ Compensation (“OWCP-DFEC”), TRICARE, and certain
other individuals and entities which had filed civil suits against us and/or our
affiliates (those other individuals and entities, the “Relators”).
Pursuant
to the Settlement Agreement, we agreed to make cash payments to the United
States in the aggregate amount of $325 million, plus accrued interest from
November 4, 2004 at an annual rate of 4.125%. The United States agreed, in
turn, to pay the Relators the portion of the settlement amount due to the
Relators pursuant to the terms of the Settlement Agreement. We made the final
payments and completed our financial obligation under the settlement in
2007.
The
Settlement Agreement provides for our release by the United States from any
civil or administrative monetary claim the United States had or may have had
relating to Covered Conduct that occurred on or before December 31, 2002
(with the exception of Covered Conduct for certain outlier payments, for which
the release date is extended to September 30, 2003). The Settlement
Agreement also provides for our release by the Relators from all claims based
upon any transaction or incident occurring prior to December 30, 2004,
including all claims that have been or could have been asserted in each
Relator’s civil action, and from any civil monetary claim the United States had
or may have had for the Covered Conduct that is pled in each Relator’s civil
action.
The
Settlement Agreement also provides for the release of HealthSouth by the HHS-OIG
and OWCP-DFEC, and the agreement by the HHS-OIG and OWCP-DFEC to refrain from
instituting, directing, or maintaining any administrative action seeking
exclusion from Medicare, Medicaid, the FECA program, the TRICARE program, and
other federal healthcare programs, as applicable, for the Covered
Conduct.
The
2007 Referral Source Settlement—
On
December 14, 2007, we agreed to a final settlement with the DOJ relating to
certain self-disclosures which we made to the HHS-OIG in 2004 and 2005 regarding
our relationship with certain physicians. Under the terms of the settlement, we
paid, in two installments, a total of $14.2 million to the United States. This
charge was included in Government, class action, and
related settlements expense in our 2007 consolidated statement of
operations. As of December 31, 2007, we owed $7.1 million under this settlement.
This amount was included in Government, class action, and
related settlements in our consolidated balance sheet. This amount was
paid in March 2008.
The
December 2004 Corporate Integrity Agreement—
On
December 30, 2004, we entered into a new corporate integrity agreement (the
“CIA”) with the HHS-OIG. This new CIA has an effective date of January 1,
2005 and a term of five years from that effective date. The CIA expires at the
end of 2009, subject to the HHS-OIG accepting and approving our annual report
for 2009 that we will submit in the first half of 2010. The CIA incorporates a
number of compliance program changes already implemented by us and requires,
among other things, that we:
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form
an executive compliance committee (made up of our chief compliance officer
and other executive management members), which shall participate in the
formulation and implementation of HealthSouth’s compliance
program;
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require
certain independent contractors to abide by our Standards of Business
Conduct;
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provide
general compliance training to all HealthSouth personnel as well as
specialized training to personnel responsible for billing, coding, and
cost reporting relating to federal healthcare
programs;
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HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
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report
and return overpayments received from federal healthcare
programs;
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notify
the HHS-OIG of any new investigations or legal proceedings initiated by a
governmental entity involving an allegation of fraud or criminal conduct
against HealthSouth;
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notify
the HHS-OIG of the purchase, sale, closure, establishment, or relocation
of facilities furnishing items or services that are reimbursed under
federal healthcare programs; and
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submit
annual reports to the HHS-OIG regarding our compliance with the
CIA.
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The CIA
also requires that we engage an Independent Review Organization (“IRO”) to
assist us in assessing and evaluating: (1) our billing, coding, and cost
reporting practices with respect to our inpatient rehabilitation hospitals,
(2) our billing and coding practices for outpatient items and services
furnished by outpatient departments of our inpatient hospitals; and
(3) certain other obligations pursuant to the CIA and the Settlement
Agreement. We engaged PricewaterhouseCoopers LLP to serve as our
IRO.
We
entered into a first addendum to our CIA which requires additional compliance
training and annual audits of billing practices relating to prosthetic and
orthotic devices. The addendum has a term of three years and will run
concurrently with our existing five-year CIA. On December 14, 2007, in
connection with the DOJ settlement described above relating to certain
self-disclosures made to the HHS-OIG, we entered into a second addendum to our
CIA, which requires additional compliance training and annual audits related to
arrangements with referral sources. This addendum also runs concurrently with
our existing five-year CIA.
On April
30, 2009, we submitted the annual report required by the CIA, which included a
report by our IRO, to the HHS-OIG detailing our performance of the requirements
of the CIA in 2008. We believe we have complied with the requirements of the CIA
on a timely basis, and to date, there are no objections or unresolved comments
from the HHS-OIG relating to our annual reports. Failure to meet our obligations
under our CIA could result in stipulated financial penalties or extension of the
term of the CIA. Failure to comply with material terms, however, could lead to
exclusion from further participation in federal healthcare programs, including
Medicare and Medicaid, which currently account for a substantial portion of our
revenues.
SEC
Settlement—
On
June 6, 2005, the SEC approved a settlement (the “SEC Settlement”) with us
relating to the action filed by the SEC on March 19, 2003 captioned SEC v. HealthSouth Corporation and
Richard M. Scrushy, No. CV-03-J-0615-S (N.D. Ala.) (the “SEC
Litigation”). That lawsuit alleged that HealthSouth and Mr. Scrushy violated
and/or aided and abetted violations of the antifraud, reporting,
books-and-records, and internal controls provisions of the federal securities
laws. Specifically, the complaint alleged that we overstated earnings by at
least $1.4 billion and that this overstatement occurred because Mr. Scrushy
insisted we meet or exceed earnings expectations established by Wall Street
analysts.
Under the
terms of the SEC Settlement, we agreed, without admitting or denying the SEC’s
allegations, to be enjoined from future violations of certain provisions of the
securities laws. We also agreed to, among other things, pay a $100 million civil
penalty and disgorgement of $100 to the SEC in the following installments:
$12,500,100 by October 15, 2005, $12.5 million by April 15, 2006,
$25.0 million by October 15, 2006; $25.0 million by April 15, 2007,
and $25.0 million by October 15, 2007. We made all payments under the SEC
Settlement in accordance with the above schedule. The plan for distribution of
the fund created by our payments under the SEC Settlement (the “Disgorgement
Fund”) is discussed below in this Note in connection with the settlement fund
relating to the Consolidated Securities Action at “Securities Litigation
Settlement.”
The SEC
Settlement also provides that we must treat the amounts ordered to be paid as
civil penalties paid to the government for all purposes, including all tax
purposes, and that we will not be able to be reimbursed or indemnified for such
payments through insurance or any other source, or use such payments to set off
or reduce any award of compensatory damages to plaintiffs in related securities
litigation pending against us.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
In
addition to the payments described above, we have complied with all other
obligations under the SEC Settlement.
In
connection with the SEC Settlement, we consented to the entry of a final
judgment in the SEC Litigation by the United States District Court for the
Northern District of Alabama, Southern Division, to implement the terms of the
SEC Settlement.
Securities
Litigation Settlement—
On
June 24, 2003, the United States District Court for the Northern District
of Alabama consolidated a number of separate securities lawsuits filed against
us under the caption In re
HealthSouth Corp. Securities Litigation, Master Consolidation File No.
CV-03-BE-1500-S (the “Consolidated Securities Action”), which the court divided
into two subclasses:
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Complaints
based on purchases of our common stock were grouped under the caption
In re HealthSouth Corp.
Stockholder Litigation, Consolidated Case No. CV-03-BE-1501-S (the
“Stockholder Securities Action”), which was further divided into
complaints based on purchases of our common stock in the open market
(grouped under the caption In re HealthSouth Corp.
Stockholder Litigation, Consolidated Case No. CV-03-BE-1501-S)
and claims based on the receipt of our common stock in mergers (grouped
under the caption HealthSouth Merger
Cases, Consolidated Case No. CV-98-2777-S). Although the plaintiffs
in the HealthSouth
Merger Cases have separate counsel and have filed separate claims,
the HealthSouth Merger
Cases are otherwise consolidated with the Stockholder Securities
Action for all purposes.
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Complaints
based on purchases of our debt securities were grouped under the caption
In re HealthSouth Corp.
Bondholder Litigation, Consolidated Case No. CV-03-BE-1502-S (the
“Bondholder Securities Action”).
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On
January 8, 2004, the plaintiffs in the Consolidated Securities Action filed
a consolidated class action complaint. The complaint named us as a defendant, as
well as more than 30 of our former employees, officers and directors, the
underwriters of our debt securities, and our former auditor. The complaint
alleged, among other things, (1) that we 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, (2) that from
January 14, 2002 through August 27, 2002, we 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, and (3) that Mr. Scrushy
instructed certain former senior officers and accounting personnel to materially
inflate our earnings to match Wall Street analysts’ expectations, and that
senior officers of HealthSouth and other members of a self-described “family”
held meetings to discuss the means by which our earnings could be inflated and
that some of the individual defendants sold shares of our common stock during
the purported class period. The Consolidated Securities Action complaint
asserted claims under Sections 11, 12(a)(2) and 15 of the Securities Act of
1933, as amended, and claims under Sections 10(b), 14(a), 20(a) and 20A of the
Securities Exchange Act of 1934, as amended.
On
February 22, 2006, we announced we had reached a preliminary agreement in
principle with the lead plaintiffs in the Stockholder Securities Action, the
Bondholder Securities Action, and the derivative litigation, as well as with our
insurance carriers, to settle claims filed in those actions against us and many
of our former directors and officers. On September 26, 2006, the plaintiffs
in the Stockholder Securities Action and the Bondholder Securities Action,
HealthSouth, and certain individual former HealthSouth employees and board
members entered into and filed a stipulation of partial settlement of this
litigation. We also entered into definitive agreements with the lead plaintiffs
in these actions and the derivative actions, as well as certain of our insurance
carriers, to settle the litigation. These settlement agreements memorialized the
terms contained in the preliminary agreement in principle entered into in
February 2006. On September 28, 2006, the United States District Court
entered an order preliminarily approving the stipulation and settlement.
Following a period to allow class members to opt out of the
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
settlement
and for objections to the settlement to be lodged, the Court held a hearing on
January 8, 2007 and determined the proposed settlement was fair, reasonable and
adequate to the class members and that it should receive final approval. An
order approving the settlement was entered on January 11, 2007. Individual
class members representing approximately 205,000 shares of common stock and one
bondholder with a face value of $1.5 million elected to be excluded from
the settlement. The order approving the settlement bars claims by the
non-settling defendants arising out of or relating to the Stockholder Securities
Action, the Bondholder Securities Action, and the derivative litigation but does
not prevent other security holders excluded from the settlement from asserting
claims directly against us.
Under the
settlement agreements, federal securities and fraud claims brought in the
Consolidated Securities Action against us and certain of our former directors
and officers were settled in exchange for aggregate consideration of $445
million, consisting of HealthSouth common stock and warrants valued at $215
million and cash payments by HealthSouth’s insurance carriers of $230 million.
In addition, the settlement agreements provided that the plaintiffs in the
Stockholder Securities Action and the Bondholder Securities Action will receive
25% of any net recoveries from any judgments obtained by us or on our behalf
with respect to certain claims against Mr. Scrushy (excluding the $48 million
judgment against Mr. Scrushy on January 3, 2006, as discussed in Note
23, Contingencies and Other
Commitments), Ernst & Young LLP, our former auditor, and UBS
Securities, our former primary investment bank, each of which after this
settlement remained a defendant in the derivative actions as well as the
Consolidated Securities Action. The settlement agreements were subject to the
satisfaction of a number of conditions, including final approval of the United
States District Court and the approval of bar orders in the Consolidated
Securities Action and the derivative litigation by the United States District
Court and the Alabama Circuit Court that would, among other things, preclude
certain claims by the non-settling co-defendants against HealthSouth and the
insurance carriers relating to matters covered by the settlement agreements. As
more fully described in Note 23, Contingencies and Other
Commitments, that approval was obtained on January 11, 2007. The
settlement agreements also required HealthSouth to indemnify the settling
insurance carriers, to the extent permitted by law, for any amounts they are
legally obligated to pay to any non-settling defendants. As of December 31,
2009, we have not recorded a liability regarding these indemnifications, as we
do not believe it is probable we will have to perform under the indemnification
portion of these settlement agreements and any amount we would be required to
pay is not estimable at this time.
The fund
of common stock, warrants, and cash created by settlement of the Consolidated
Securities Action (the “Settlement Fund”) and the Disgorgement Fund were the
subject of a joint order entered in the United States District Court for the
Northern District of Alabama on October 3, 2007. The order approved the
form and manner of notice, to be provided to potential claimants of the
Settlement Fund and the Disgorgement Fund, regarding the proposed plan of
allocation in the Consolidated Securities Action and the distribution plan under
the SEC Settlement. Pursuant to the order, eligible claimants could have filed
objections to the plan of allocation in the Consolidated Securities Action or
the distribution plan under the SEC Settlement on or before December 15,
2007. On February 7, 2008, the court held a joint fairness hearing
approving the plan of allocation.
Despite
approval of the Consolidated Securities Action settlement, there are class
members who have elected to opt out of the settlement and pursue claims
individually. In addition, AIG Global Investment
Corporation, which failed to opt out of the class settlement on a timely basis,
requested that the court allow it to opt out despite missing the district
court’s deadline. In an order dated January 11, 2007, the court denied
AIG’s request for an expansion of time to opt out. On April 17, 2007, AIG filed
a notice of appeal with the Eleventh Circuit Court of Appeals. The appeal was
consolidated with the appeal by Mr. Scrushy of one provision in the bar order in
the Consolidated Securities Action settlement. On June 17, 2009, the Eleventh
Circuit Court of Appeals rejected the two appeals and affirmed the district
court’s approval of the settlement. The opportunity for Mr. Scrushy and AIG to
seek review of the June 17, 2009 decision by the Eleventh Circuit Court of
Appeals lapsed on September 15, 2009. Accordingly, on September 30, 2009, we
issued an aggregate of 5,023,732 shares of common stock and 8,151,265 warrants
to purchase our common stock in full satisfaction of our obligation to do so
under the Consolidated Securities Action settlement. Pursuant to the
Consolidated Securities Action settlement, the process for final distribution of
the cash and securities to qualified claimants is being handled by counsel for
the plaintiffs and the court approved administrator of the settlement
funds.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
In
connection with the Consolidated Securities Action settlement, we recorded a
charge of $215.0 million as Government, class action, and
related settlements expense in our 2005 consolidated statement of
operations. During each quarter subsequent to the initial recording of this
liability, we reduced or increased our liability for this settlement based on
the value of our common stock and the associated common stock warrants
underlying the settlement. During 2008 and 2007, we reduced our liability for
this settlement by $85.2 million and $24.0 million, respectively, based on the
value of our common stock and the associated common stock warrants at year end.
The corresponding liability of $74.6 million as of December 31, 2008 is
included in Government, class
action, and related settlements in our consolidated balance sheet. When
the underlying common stock and warrants were issued on September 30, 2009, the
corresponding liability included in Government, class action, and
related settlements was $111.8 million. As a result of the issuance,
there is no corresponding liability included in our balance sheet as of
December 31, 2009.
In
addition, in order to state the total liability related to the securities
litigation settlement at the aggregate value of the consideration to be
exchanged for the securities to be issued by us and the cash to be paid by the
insurers, our consolidated balance sheet as of December 31, 2007 included a
$230.0 million liability in Government, class action, and
related settlements. The related receivable from our insurers in the
amount of $230.0 million was also included in our consolidated balance sheet as
of December 31, 2007 as Insurance recoveries
receivable. During 2008, the United States District Court for the
Northern District of Alabama issued three court orders awarding attorneys’ fees
and expenses to the stockholder plaintiffs’ lead counsel, bondholder plaintiffs’
counsel, and merger subclass counsel. During 2008, we reduced our liability and
corresponding receivable by approximately $47.2 million, which represents the
funds disbursed per these court orders. As a result of the issuance of the
common stock and warrants described above, our consolidated balance sheet as of
December 31, 2009 does not include this liability or corresponding
receivable.
UBS
Litigation Settlement—
In August
2003, claims on behalf of HealthSouth were brought in the Tucker derivative litigation
(described below in Note 23, Contingencies and Other
Commitments, “Derivative Litigation”) against various UBS entities,
alleging that from at least 1998 through 2002, when those entities served as our
investment bankers, they breached their duties of care, suppressed information,
and aided and abetted in the ongoing fraud. As a result of the UBS defendants’
representation that UBS Securities is the proper defendant for all claims
asserted in the complaint, UBS Securities became the named defendant in Tucker. The claims alleged
that while the UBS entities were our fiduciaries, they became part of a
conspiracy to artificially inflate the market price of our stock. The complaint
sought compensatory and punitive damages, disgorgement of fees received from us
by UBS entities, and attorneys’ fees and costs. On August 3, 2005, UBS
Securities filed counterclaims against us. Those claims included fraud,
misrepresentation, negligence, breach of contract, and indemnity against us for
allegedly providing UBS Securities with materially false information concerning
our financial condition to induce UBS Securities to provide investment banking
services. UBS Securities’ counterclaims sought compensatory and punitive damages
and a judgment declaring that we were liable for any losses, costs, or fees
incurred by UBS Securities in connection with its defense of actions relating to
the services UBS Securities provided to us. In August 2006, we and the
plaintiffs in Tucker
agreed to jointly prosecute the claims against UBS Securities in state
court.
Additionally,
on September 6, 2007, UBS AG filed an action against us in the Supreme
Court of the State of New York, captioned UBS AG, Stamford Branch v.
HealthSouth Corporation, Index No. 602993/07, based on the terms of
a credit agreement with MedCenterDirect.com (“MCD”) (the “New York action”).
Prior to ceasing operations in 2003, MCD provided certain services to us
relating to the purchase of equipment and supplies. We also previously owned
20.2% of MCD’s equity securities. During 2003, UBS AG called its loan to MCD. In
the New York action, UBS AG alleged we were the guarantor of the loan and sought
recovery of the approximately $20 million principal of its loan to MCD and
associated interest. However, UBS Securities filed an Answer and Counterclaim in
the Tucker derivative
litigation admitting that it funded the $20 million loan to MCD. On
October 1, 2007, we removed UBS AG’s case from New York state court to
federal court in the Southern District of New York, which assigned it Case
No. 07 cv 8490. On January 18, 2008, we filed a motion alleging, among
other claims, that the loan by UBS AG to MCD was part of a scheme between our
former disloyal officers, including Mr. Scrushy, and UBS entities to siphon
money from HealthSouth. On April 7, 2008, UBS Securities amended
its
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
counterclaim
in the Tucker
derivative litigation so as to add claims against HealthSouth for breach of the
MCD credit agreement.
In the
New York action, the court issued an order on June 6, 2008 granting UBS
AG’s motion for summary judgment and denying HealthSouth’s motion to dismiss or
stay. Following the entry of an initial judgment in the incorrect amount, the
court entered an amended judgment on June 16, 2008 in the amount of
approximately $30.3 million in favor of UBS AG and against HealthSouth.
HealthSouth moved the court to waive the requirement of a bond for security
pending appeal, but in an order issued June 17, 2008, the court refused. On
June 30, 2008, however, upon agreement of the parties, the court authorized
HealthSouth to issue a letter of credit in the amount of approximately $33.6
million (i.e., 111% of the amended judgment) in lieu of a bond. HealthSouth
filed its notice of appeal to the U.S. Court of Appeals for the Second Circuit
on July 7, 2008. As described below, as part of the agreement with UBS
Securities in the Tucker derivative litigation,
this appeal was dismissed and the judgment was satisfied and
released.
On
January 13, 2009, the Circuit Court of Jefferson County, Alabama entered an
order approving the agreement with UBS Securities to settle litigation filed by
the derivative plaintiffs on HealthSouth’s behalf in the Tucker derivative litigation
(the “UBS Settlement”) under which we received $100.0 million in cash and a
release of all claims by the UBS entities, including the release and
satisfaction of the judgment in favor of UBS AG in the New York action. That
order also awarded to the derivative plaintiffs’ attorneys fees and expenses of
$26.2 million to be paid from the $100.0 million in cash we received. As of
December 31, 2008, Restricted
cash in the accompanying consolidated balance sheet included $97.9
million related to the UBS Settlement. The remaining $2.1 million was funded by
the applicable insurance carrier in January 2009. UBS Securities and its
insurance carriers transferred these amounts to an escrow account designated and
controlled by us. These funds were released from escrow in 2009. Pursuant to the
Consolidated Securities Action settlement, as discussed above in “Securities
Litigation Settlement,”
we are obligated to pay 25% of the net settlement proceeds, after deducting all
of our costs and expenses in connection with the Tucker derivative litigation
including fees and expenses of the derivative counsel and our counsel, to the
plaintiffs in the Consolidated Securities Action. The UBS Settlement does not
affect our claims against any other defendants in the Tucker derivative litigation,
or against HealthSouth’s former independent auditor, Ernst & Young, which
remain pending in arbitration.
As a
result of the UBS Settlement, we recorded a $121.3 million gain in our 2008
consolidated statement of operations. This gain is comprised of the $100.0
million cash portion of the settlement plus the principal portion of the loan
guarantee. The approximate $9.4 million gain associated with the reversal of the
accrued interest on this loan is included in Interest expense and amortization of
debt discounts and fees in our 2008 consolidated statement of operations.
The $26.2 million owed to the derivative plaintiffs’ attorneys is included in
Other current
liabilities in our consolidated balance sheet as of December 31, 2008,
with the corresponding charge included in Professional fees – accounting, tax,
and legal in our 2008 consolidated statement of operations. We paid that
amount to the derivative plaintiffs’ attorneys in 2009. An estimate of the 25%
of the net settlement proceeds to be paid to the plaintiffs in the Consolidated
Securities Action is included in Other current liabilities in
our consolidated balance sheets as of December 31, 2009 and December
31, 2008, with the corresponding charge included in Government, class action, and
related settlements expense in our 2008 consolidated statement of
operations.
Capstone
Litigation Settlement—
In August
2002, claims on behalf of HealthSouth were brought in the Tucker derivative litigation
(described below in Note 23, Contingencies and Other
Commitments, “Derivative Litigation,”) against Capstone Capital
Corporation, now known as HR Acquisition I Corp., alleging misrepresentations,
conspiracy, and aiding and abetting the breach of fiduciary duties by certain of
our former executives. In particular, the claims pursued against Capstone relate
to the sale and leaseback of 14 properties that we initially owned. On May
8, 2009, the Circuit Court of Jefferson County, Alabama entered an order
approving a settlement agreement among us, the derivative plaintiffs and
Capstone (the “Capstone Settlement”). Under the settlement, all claims against
Capstone in the Tucker
litigation were released, and we and Capstone agreed to, among other things,
restructure four leases on terms more favorable and beneficial to us and remove
us as guarantor on three other properties. Under the settlement, we also paid
$1.2 million in fees and expenses to the derivative plaintiffs’ attorneys, and
Capstone reimbursed us for half of those fees and expenses.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Amounts
recorded during the year ended December 31, 2009 related to the Capstone
Settlement did not have a material effect on our financial position, results of
operations, or cash flows. The Capstone Settlement does not release our claims
against any other defendants in the Tucker derivative litigation,
or against our former independent auditor, Ernst & Young, which remain
pending in arbitration.
Lloyd
Noland Foundation Litigation Settlement—
We were
named as a defendant in two related lawsuits arising from our operation of the
former Lloyd Noland Hospital, later renamed HealthSouth Metro West Hospital,
styled The Lloyd Noland
Foundation, Inc. v. Tenet Healthcare Corp. v. HealthSouth Corporation,
Case No. 2:01-cv-0437-KOB in the United States District for the Northern
District of Alabama (the “Federal Case”), filed February 16, 2001, and The Lloyd Noland Foundation v.
HealthSouth Corporation, Case No. CV-2004-1638 in the Circuit Court for
Jefferson County, Alabama, Bessemer Division (the “Bessemer Case”), filed in
Jefferson County on August 27, 2004, and transferred to the Jefferson County,
Bessemer Division on December 1, 2004. Tenet Healthcare Corporation
asserted third-party indemnity claims against us in the Federal Case on July 3,
2001. The cases involved a contractual dispute arising from agreements entered
into in 1996 and 1999, one of which included a provision for our indemnification
of Tenet for any liability it may have to The Lloyd Noland Foundation (the
“Foundation”) under the other agreement.
On
December 19, 2008, following a jury trial in the Federal Case, the court
entered a judgment against Tenet in favor of the Foundation for $7.7 million in
damages. Pursuant to a prior ruling by the federal trial court, we would be
obligated to indemnify Tenet for $5.1 million of those damages, plus Tenet’s and
certain of the Foundation’s reasonable attorneys’ fees and expenses to be
determined by the court. An estimate of this total obligation was included in
Government, class action, and
related settlements in our consolidated balance sheet as of December 31,
2008, with the related changes included in Government, class action, and
related settlements expense in our 2008 consolidated statement of
operations.
On May
15, 2009, we entered into an agreement with Tenet and the Foundation to settle
both the Federal Case and the Bessemer Case. Under the terms of the confidential
settlement agreement, those cases were jointly dismissed with prejudice. This
settlement did not have a material impact on our financial position, results of
operations, or cash flows.
Insurance
Coverage Litigation Settlement—
In 2003,
approximately 14 insurance companies filed complaints in state and federal
courts in Alabama, Delaware, and Georgia alleging the insurance policies issued
by those companies to us and/or some of our directors and officers should be
rescinded on grounds of fraudulent inducement. The complaints also sought a
declaration that we and/or some of our current and former directors and officers
are not covered under various insurance policies. These lawsuits challenged the
majority of our director and officer liability policies, including our primary
director and officer liability policy in effect for the claims at issue. Actions
filed by insurance companies in the United States District Court for the
Northern District of Alabama were consolidated for pretrial and discovery
purposes under the caption In
re HealthSouth Corp. Insurance Litigation, Consolidated Case
No. CV-03-BE-1139-S. Four lawsuits filed by insurance companies in the
Circuit Court of Jefferson County, Alabama were consolidated with the Tucker derivative litigation
for discovery and other pretrial purposes. See Note 23, Contingencies and Other
Commitments, “Derivative Litigation.” Cases related to insurance coverage
that were filed in Georgia and Delaware have been dismissed. We filed
counterclaims against a number of the plaintiffs in these cases alleging, among
other things, bad faith for wrongful failure to provide coverage.
On
September 26, 2006, in connection with the settlement of the Consolidated
Securities Action and derivative litigation, we executed a settlement agreement
with the insurers that is substantively consistent with the preliminary
agreement in principle reached in February 2006. The settlement agreement also
requires HealthSouth to indemnify the settling insurance carriers, to the extent
permitted by law, for any amounts they are legally obligated to pay to any
non-settling defendants. As a result of the settlement, the consolidated
insurance litigation pending in the United States District Court for the
Northern District of Alabama has been dismissed without prejudice. The four
insurance actions filed in the Circuit Court of Jefferson County have been
placed on the Court’s
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
administrative
docket and are due to be dismissed as a result of the Eleventh Circuit Court of
Appeals denial of Mr. Scrushy’s appeal of one provision of the bar order
relating to the settlement.
23. Contingencies
and Other Commitments:
We
operate in a highly regulated and litigious industry. As a result, various
lawsuits, claims, and legal and regulatory proceedings have been and can be
expected to be instituted or asserted against us. The resolution of any such
lawsuits, claims, or legal and regulatory proceedings could materially and
adversely affect our financial position, results of operations, and cash flows
in a given period.
Securities
Litigation—
See Note
22, Settlements,
“Securities Litigation Settlement,” for a discussion of the settlement
entered into with the lead plaintiffs in certain securities
actions.
On
November 24, 2004, an individual securities fraud action captioned Burke v. HealthSouth Corp., et
al., 04-B-2451 (OES), was filed in the United States District Court of
Colorado against us, some of our former directors and officers, and our former
auditor. The complaint makes allegations similar to those in the Consolidated
Securities Action, as defined in Note 22, Settlements, “Securities
Litigation Settlement,” and asserts claims under the federal securities laws and
Colorado state law based on the plaintiff’s alleged receipt of unexercised
options and the plaintiff’s open-market purchases of our stock. By order dated
May 3, 2005, the action was transferred to the United States District Court
for the Northern District of Alabama, where it remains pending. The plaintiff in
this case has not opted out of the Consolidated Securities Action settlement
discussed in Note 22, Settlements, “Securities
Litigation Settlement.” Although the deadline for opting out in the Consolidated
Securities Action has passed, if the Burke action resumes, we will
continue to vigorously defend ourselves in this case. However, based on the
stage of litigation, and review of the current facts and circumstances, we are
unable to determine an amount of loss or range of possible loss that might
result from an adverse judgment or a settlement of this case should litigation
continue or whether any resultant liability would have a material adverse effect
on our financial position, results of operations, or cash flows.
Derivative
Litigation—
All
lawsuits purporting to be derivative complaints filed in the Circuit Court of
Jefferson County, Alabama since 2002 have been consolidated and stayed in favor
of the first-filed action captioned Tucker v. Scrushy,
CV-02-5212, filed August 28, 2002. Derivative lawsuits in other
jurisdictions have been stayed. The Tucker complaint named as
defendants a number of our former officers and directors. Tucker also asserted claims
on our behalf against Ernst & Young and UBS entities, as well as
against MedCenterDirect.com, Capstone, and G.G. Enterprises. When originally
filed, the primary allegations in the Tucker case involved
self-dealing by Mr. Scrushy and other insiders through transactions with various
entities allegedly controlled by Mr. Scrushy. The complaint was amended
four times to add additional defendants and include claims of accounting fraud,
improper Medicare billing practices, and additional self-dealing
transactions.
On
January 13, 2009, the Circuit Court of Jefferson County, Alabama approved the
agreement among us, the derivative plaintiffs, and UBS Securities to settle the
claims against and by UBS Securities in the Tucker litigation. On May 8,
2009, the Circuit Court of Jefferson County, Alabama approved the agreement
among us, the derivative plaintiffs, and Capstone to settle the claims against
Capstone in the Tucker
litigation. On June 18, 2009, the court found Mr. Scrushy liable for, and
awarded us, $2.9 billion in damages as a result of breaches of fiduciary duty
and fraud he perpetrated from 1996 to 2003. On July 24, 2009, Mr. Scrushy
filed a notice of appeal of the trial court’s decision. No assurances can be
given as to whether or when any amounts will be received from Mr. Scrushy, nor
can we provide any assurances as to the collectability of any amounts owed from
Mr. Scrushy. Therefore, no amounts related to this award are included in our
consolidated financial statements. The Tucker derivative litigation
and the related settlements to date are more fully described in Note 22, Settlements.
The
settlements with UBS Securities and Capstone do not release our claims against
any other defendants in the Tucker litigation, or against
our former independent auditor, Ernst & Young, which remain pending
in
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
arbitration.
The Tucker derivative
claims against Ernst & Young and other defendants listed above remain
pending and have moved through fact discovery on an expedited schedule that was
coordinated with the federal securities claims by our former stockholders and
bondholders against Mr. Scrushy, Ernst & Young, and UBS. We are no
longer a party in the federal securities claims action described in Note 22,
Settlements,
“Securities Litigation Settlement,” by our former stockholders and bondholders
against Mr. Scrushy, Ernst & Young, and UBS and are not a party to or
beneficiary of any settlements between the plaintiffs and the remaining
defendants.
Litigation
By and Against Richard M. Scrushy—
On
December 9, 2005, Mr. Scrushy filed a complaint in the Circuit Court
of Jefferson County, Alabama, captioned Scrushy v. HealthSouth,
CV-05-7364. The complaint alleged that, as a result of Mr. Scrushy’s
removal from the position of chief executive officer in March 2003, we owed him
“in excess of $70 million” pursuant to an employment agreement dated as of
September 17, 2002. On December 28, 2005, we counterclaimed against Mr.
Scrushy, asserting claims for breaches of fiduciary duty and fraud arising out
of Mr. Scrushy’s tenure with us, and seeking compensatory damages, punitive
damages, and disgorgement of wrongfully obtained benefits. We also asserted that
any employment agreements with Mr. Scrushy should be void and unenforceable. On
July 7, 2009, we filed a motion for summary judgment on all claims by Mr.
Scrushy based upon the Tucker court’s June 18, 2009
ruling that Mr. Scrushy’s employment agreements are void and rescinded. We
understand that the court does not intend to rule on this motion at the present
time.
On June
18, 2009, the Circuit Court of Jefferson County, Alabama ruled on our derivative
claims against Mr. Scrushy presented during a non-jury trial held May 11 to May
26, 2009. The court held Mr. Scrushy responsible for fraud and breach of
fiduciary duties and awarded us $2.9 billion in damages. On July 24, 2009, Mr.
Scrushy filed a notice of appeal of the trial court’s decision, and we expect
briefing of the appeal in the Supreme Court of Alabama to be completed in the
first half of 2010. At this time, we cannot predict when and to what extent this
judgment can be collected. We will pursue collection aggressively and to the
fullest extent permitted by law. We, in coordination with derivative plaintiffs’
counsel, are attempting to locate, in order to collect the judgment, Mr.
Scrushy’s current assets and other assets we believe were improperly disposed.
Part of this effort is a fraudulent transfer complaint filed on July 2, 2009
against Mr. Scrushy and a number of related entities by derivative plaintiffs
for the benefit of HealthSouth in the Circuit Court of Jefferson County,
Alabama, captioned Tucker v.
Scrushy et al., CV-09-902145. In that same case, on August 26, 2009, Mr.
Scrushy’s wife, Leslie Scrushy, filed a counterclaim against the plaintiffs and
HealthSouth seeking a declaration that certain personal property belongs to her
or her children and not to Mr. Scrushy. HealthSouth filed an answer in this case
on September 24, 2009, denying Mrs. Scrushy’s entitlement to the relief she
seeks. While these proceedings continue, some of Mr. Scrushy’s assets have been
seized and sold at auction pursuant to the state law procedure for collection of
a judgment. Other assets will likewise be sold from time to time. We do not
anticipate that any of his assets, or the proceeds from their sale, will be
distributed to us or any other party until the final disposition of Mr.
Scrushy’s appeal of the verdict. We are obligated to pay 35% of any recovery
from Mr. Scrushy along with reasonable out-of-pocket expenses to the attorneys
for the derivative shareholder plaintiffs. Under the Consolidated Securities
Action settlement, we must also pay the federal plaintiffs 25% of any net
recovery from Mr. Scrushy. After payment of these obligations and other amounts
related to professional fees and expenses, we expect our recovery to be between
40% and 45% of any amounts collected.
In March
2009, Mr. Scrushy filed an arbitration demand claiming that we are obligated
under a separate indemnification agreement to indemnify him for certain costs
associated with litigation and to advance to him his attorneys’ fees and costs.
On May 14, 2009, the arbitrator ruled that we should deposit certain funds for
attorneys’ fees in escrow until after a ruling in the Tucker litigation. As a
result of the Tucker
court’s June 18, 2009
ruling that Mr. Scrushy committed fraud and breached his fiduciary duties, the
arbitrator allowed us to withdraw all funds from the escrow. Any future
obligation to pay such fees would be tied to the success of his appeal of the
June 18, 2009 ruling. As of December 31, 2008, we included an estimate of those
legal fees in Other current
liabilities in our consolidated balance sheet. As a result of the court
ruling that Mr. Scrushy committed fraud and breached his fiduciary duties, we
have no obligation to indemnify him for any litigation costs. Therefore, we
removed this accrual from our balance sheet and recorded an approximate $6.5
million gain in Professional
fees – accounting, tax, and legal during the year ended December 31,
2009.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Litigation
By and Against Former Independent Auditor—
In March
2003, claims on behalf of HealthSouth were brought in the Tucker derivative litigation
against Ernst & Young, alleging that from 1996 through 2002, when Ernst
& Young served as our independent auditor, Ernst & Young acted
recklessly and with gross negligence in performing its duties, and specifically
that Ernst & Young failed to perform reviews and audits of our financial
statements with due professional care as required by law and by its contractual
agreements with us. The claims further allege Ernst & Young either knew of
or, in the exercise of due care, should have discovered and investigated the
fraudulent and improper accounting practices being directed by certain officers
and employees, and should have reported them to our board of directors and the
Audit Committee. The claims seek compensatory and punitive damages, disgorgement
of fees received from us by Ernst & Young, and attorneys’ fees and costs. On
March 18, 2005, Ernst & Young filed a lawsuit captioned Ernst & Young LLP v.
HealthSouth Corp., CV-05-1618, in the Circuit Court of Jefferson County,
Alabama. The complaint asserts that the filing of the claims against us was for
the purpose of suspending any statute of limitations applicable to those claims.
The complaint alleges we provided Ernst & Young with fraudulent
management representation letters, financial statements, invoices, bank
reconciliations, and journal entries in an effort to conceal accounting fraud.
Ernst & Young claims that as a result of our actions, Ernst &
Young’s reputation has been injured and it has and will incur damages, expense,
and legal fees. On April 1, 2005, we answered Ernst & Young’s
claims and asserted counterclaims related or identical to those asserted in the
Tucker action. Upon
Ernst & Young’s motion, the Alabama state court referred
Ernst & Young’s claims and our counterclaims to arbitration pursuant to
a clause in the engagement agreements between HealthSouth and Ernst & Young.
On July 12, 2006, we and the derivative plaintiffs filed an arbitration
demand on behalf of HealthSouth against Ernst & Young. On
August 7, 2006, Ernst & Young filed an answering statement and
counterclaim in the arbitration reasserting the claims made in state court. In
August 2006, we and the derivative plaintiffs agreed to jointly prosecute the
claims against Ernst & Young in arbitration.
We are
vigorously pursuing our claims against Ernst & Young and defending the
claims against us. The three-person arbitration panel that will adjudicate the
claims and counterclaims in arbitration has been selected under rules of the
American Arbitration Association (the “AAA”). The arbitration process has begun.
However, pursuant to an order of the AAA panel, all aspects of the arbitration
are confidential. Accordingly, we will not discuss the arbitration until there
is a resolution. Based on the stage of litigation, and review of the current
facts and circumstances, it is not possible to estimate the amount of loss, if
any, or range of possible loss that might result from an adverse judgment or a
settlement of this case.
Certain
Regulatory Actions—
The False
Claims Act, 18 U.S.C. § 287, allows private citizens, called “relators,” to
institute civil proceedings alleging violations of the False Claims Act. These
qui tam cases are
generally sealed by the court at the time of filing. The only parties privy to
the information contained in the complaint are the relator, the federal
government, and the presiding court. It is possible that qui tam lawsuits have been
filed against us and that we are unaware of such filings or have been ordered by
the presiding court not to discuss or disclose the filing of such lawsuits. We
may be subject to liability under one or more undisclosed qui tam cases brought
pursuant to the False Claims Act.
General
Medicine Action—
On
August 16, 2004, General Medicine, P.C. filed a lawsuit against us
captioned General Medicine,
P.C. v. HealthSouth Corp. seeking the recovery of allegedly fraudulent
transfers involving assets of Horizon/CMS Healthcare Corporation, a former
subsidiary of HealthSouth. The lawsuit was filed in the Circuit Court of Shelby
County, Alabama, but was transferred to the Circuit Court of Jefferson County,
Alabama on February 28, 2005, where it was assigned case number CV-05-1483
(the “Alabama Action”).
The
underlying claim against Horizon/CMS originates from a services contract entered
into in 1995 between General Medicine and Horizon/CMS whereby General Medicine
agreed to provide medical director services to skilled nursing facilities owned
by Horizon/CMS for a term of three years. Horizon/CMS terminated the agreement
six months after it was executed, and General Medicine then initiated a lawsuit
in the United States District Court for the Eastern District of Michigan in 1996
(the “Michigan Action”). General Medicine’s complaint
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
in the
Michigan Action alleged that Horizon/CMS breached the services contract by
wrongfully terminating General Medicine. We acquired Horizon/CMS in 1997 and
sold it to Meadowbrook Healthcare, Inc. in 2001 pursuant to a stock purchase
agreement. In 2004, Meadowbrook consented to the entry of a final judgment in
the Michigan Action in the amount of $376 million (the “Consent Judgment”) in
favor of General Medicine against Horizon/CMS for the alleged wrongful
termination of the contract with General Medicine. We were not a party to the
Michigan Action or the settlement negotiated by Meadowbrook. The settlement
agreement which was the basis for the Consent Judgment provided that Meadowbrook
would pay only $0.3 million to General Medicine to settle the Michigan Action.
The settlement agreement further provided that General Medicine would seek to
recover the remaining balance of the Consent Judgment solely from
us.
The
complaint filed by General Medicine against us in the Alabama Action alleged
that while Horizon/CMS was our wholly owned subsidiary and General Medicine was
an existing creditor of Horizon/CMS, we caused Horizon/CMS to transfer its
assets to us for less than a reasonably equivalent value or, in the alternative,
with the actual intent to defraud creditors of Horizon/CMS, including General
Medicine, in violation of the Alabama Uniform Fraudulent Transfer Act. General
Medicine’s complaint requested relief including recovery of the unpaid amount of
the Consent Judgment, the avoidance of the subject transfers of assets,
attachment of the assets transferred to us, appointment of a receiver over the
transferred properties, and a monetary judgment for the value of properties
transferred. On September 2, 2008, General Medicine filed an amended complaint
which alleged that we should be held liable for the Consent Judgment under two
new theories: fraud and alter ego. Specifically, General Medicine alleged in its
amended complaint that we, while Horizon’s parent from 1997 to 2001, failed to
observe corporate formalities in its operation and ownership of Horizon, misused
its control of Horizon, stripped assets from Horizon, and engaged in other
conduct which amounted to a fraud on Horizon’s creditors, including General
Medicine.
In the
Alabama Action, we filed an answer to General Medicine’s complaint, as amended,
denying liability to General Medicine. We have also asserted counterclaims
against General Medicine for fraud, injurious falsehood, tortious interference
with business relations, conspiracy, unjust enrichment, and other causes of
action. In our counterclaims, we alleged the Consent Judgment is the product of
fraud, collusion and bad faith by General Medicine and Meadowbrook and, further,
that these parties were guilty of a conspiracy to manufacture a lawsuit against
HealthSouth in favor of General Medicine. The Alabama Action has now entered the
discovery stage but is stayed subject to the outcome of the pending motions in
the Michigan Action discussed below. We intend to vigorously defend ourselves
against General Medicine’s claim and to vigorously prosecute our counterclaims
against General Medicine.
In the
Michigan Action, we filed a motion on October 17, 2008 asking the court to set
aside the Consent Judgment on grounds that it was the product of fraud on the
court and collusion by the parties. On May 21, 2009, the court granted our
motion to set aside the Consent Judgment on grounds that it was the product of
fraud on the court. In its order setting aside the Consent Judgment, the court
directed General Medicine and Horizon/CMS to confer with each other and the
court’s case manager to determine what further proceedings are appropriate in
the Michigan Action. On June 17, 2009, Horizon/CMS filed a motion for
clarification requesting the court rule that Horizon/CMS has fully complied with
its obligations under the settlement agreement and is therefore not required to
participate in any further proceedings. On June 17, 2009, we filed a motion to
intervene in the Michigan Action for the limited purpose of protecting our
interests. We also filed a motion to dismiss the Michigan Action as settled and
as a sanction for General Medicine’s fraud on the court. On July 21, 2009,
General Medicine filed a motion to compel Horizon/CMS to enter into a new
consent judgment in favor of General Medicine. At this time, we do not know when
the court will rule on the matters pending before it.
Based on
the stage of litigation, and review of the current facts and circumstances, it
is not possible to estimate the amount of loss or range of possible loss that
might result from an adverse judgment or settlement of this case.
United HealthCare
Services Litigation—
On March
19, 2009, United HealthCare Services, Inc. and certain affiliates filed an
initial arbitration demand with the AAA against us relating to disputes over
therapy service claims paid from 1997 through 2003.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
United
alleges that during that period we submitted fraudulent claims, or claims
otherwise in breach of various provider agreements, for reimbursement of therapy
services for patients insured under plans provided or administered by United.
United requests an accounting and seeks compensatory damages in excess of $10
million, punitive damages, interest, and attorneys’ fees.
On April
14, 2009, we filed an action in Circuit Court in Jefferson County, Alabama,
captioned HealthSouth Corp. v.
United Healthcare Services, Inc., CV-2009-901288, seeking a declaratory
judgment that we are not required to arbitrate the claims alleged in United’s
arbitration demand, seeking an order enjoining the AAA arbitration, and
reserving our claims against United for underpayment and breach of contract. We
assert that the AAA lacks jurisdiction to arbitrate these claims because we did
not agree to arbitration and because, among other reasons, United’s arbitration
demand disregards the conditions precedent to arbitration and other terms
contained in the provider agreements upon which United relies, seeks damages
expressly excluded from arbitration, and violates state insurance laws which
prohibit United from seeking to recoup claims many years after they were
submitted and paid. United has not yet answered our complaint, but on May 18,
2009, United filed a motion with the court to compel arbitration of the claims
presented in their AAA arbitration demand. On January 4, 2010, we filed a second
amended complaint adding an additional declaratory judgment count against all
defendants and, in response, United filed a second amended motion to compel
arbitration on January 15, 2010. On February 12, 2010, the court heard oral
argument on United’s motion to compel arbitration. At this time, we do not know
when the court will rule on the matters pending before it.
On May 1,
2009, we filed with AAA our answer requesting that the AAA arbitration be stayed
pending the outcome of our action filed in Circuit Court in Jefferson County,
challenging, as a preliminary matter, the AAA’s jurisdiction to arbitrate the
claims alleged by United, denying the claims asserted by United, raising
defenses and asserting counterclaims including breaches of contract, breach of
implied covenant of good faith and fair dealing. In connection with our
counterclaim, we are seeking restitution for, among other things, United’s
wrongful recoupment and underpayment of paid claims submitted and compensatory
damages in excess of $10 million, together with interest and the costs, fees and
expenses of arbitration.
On May
16, 2009, United filed with AAA an amended arbitration demand adding certain
Select Medical Corporation subsidiaries as named respondents, which, with one
exception, are successors to HealthSouth entities that signed one or more of the
provider agreements at issue in United’s demand. Pursuant to the Stock Purchase
Agreement between us and Select, we are obligated to defend and indemnify Select
and its affiliates named in United’s amended arbitration demand. See Note 18,
Assets Held for Sale and
Results of Discontinued Operations, and the “Other Matters” section of
this note. On June 11, 2009, answers were filed with AAA on behalf of all
HealthSouth and Select respondents. These answers reiterated the denials,
defenses, jurisdictional objections and challenges, and counterclaims previously
asserted in our initial answer. The Select entities did not assert any
counterclaims. AAA has indicated it will request that the parties file
contentions regarding the specific locales the parties believe would be
appropriate to hear any arbitrations and from where any potential arbitration
panels may be selected. Should the arbitration proceed, we intend to vigorously
defend ourselves.
We intend
to vigorously defend ourselves against United’s claims and to vigorously
prosecute our counterclaims against United. Although we continue to believe in
the merit of our claims and counterclaims and the lack of merit in United’s, we
have included an estimate of this potential liability in our results of
discontinued operations for the year ended December 31, 2009, as this claim
relates primarily to our former outpatient division. We consider this estimate
to be adequate for these liability risks. However, there can be no assurance the
ultimate liability, if any, will not exceed our estimate.
Other
Litigation—
We have
been named as a defendant in a lawsuit brought by individuals in the Circuit
Court of Jefferson County, Alabama, Nichols v. HealthSouth Corp.,
CV-03-2023, filed March 28, 2003. The plaintiffs alleged that we, some of
our former officers, and our former auditor engaged in a scheme to overstate and
misrepresent our earnings and financial position. The plaintiffs sought
compensatory and punitive damages. This case was consolidated with the Tucker case for discovery and
other pretrial purposes. The plaintiffs are subject to the Consolidated
Securities Action settlement discussed in Note 22, Settlements, “Securities
Litigation Settlement,” and thereby foreclosed from
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
pursuing
these state court actions based on purchases made during the class period unless
they opted out of that settlement. The Nichols lawsuit asserts
claims on behalf of a number of plaintiffs, all but three of whom opted out of
the settlement. John Kapoor, who claimed to have purchased over 900,000 shares
of stock, attempted to opt-out, but his attempt was deemed invalid by the court.
Mr. Kapoor has not challenged this determination. The remaining Nichols plaintiffs that opted
out of the settlement claimed losses of approximately $5.4 million. The Nichols lawsuit is currently
stayed in the Circuit Court. On January 12, 2009, the plaintiffs in the case
filed a motion to lift the stay which the court subsequently denied. We intend
to vigorously defend ourselves in these cases. Based on the stage of litigation,
and review of the current facts and circumstances, it is not possible to
estimate the amount of loss, if any, or range of possible loss that might result
from an adverse judgment or a settlement of these cases.
Other
Matters—
It is our
obligation as a participant in Medicare and other federal healthcare programs to
routinely conduct audits and reviews of the accuracy of our billing systems and
other regulatory compliance matters. As a result of these reviews, we have made,
and will continue to make, disclosures to the HHS-OIG relating to amounts we
suspect represent over-payments from these programs, whether due to inaccurate
billing or otherwise. Some of these disclosures have resulted in, or may result
in, HealthSouth refunding amounts to Medicare or other federal healthcare
programs. See Note 22, Settlements, “Medicare
Program Settlement - The 2004 Civil DOJ Settlement” and “Medicare Program
Settlement - The December 2004 Corporate Integrity Agreement.”
We are
undergoing an audit of unclaimed property which is being conducted by Kelmar
Associates, LLC for three states for the years 1996 through 2004. We do
not have sufficient information from the auditors to date to estimate any
liability that may result from this audit.
We also
face certain financial risks and challenges relating to our 2007 divestiture
transactions (see Note 18, Assets Held for Sale and Results of
Discontinued Operations) following their closing. These include
indemnification obligations, which in the aggregate could have a material
adverse effect on our financial position, results of operations, and cash
flows.
Other
Commitments—
We are a
party to service and other contracts in connection with conducting our business.
Minimum amounts due under these agreements are $24.2 million in 2010, $3.7
million in 2011, $2.4 million in 2012, $1.2 million in 2013, and $1.0 million in
2014. These contracts primarily relate to software licensing and support,
telecommunications, certain equipment, and medical supplies.
We also
have commitments under severance agreements with former employees. Payments
under these agreements approximate $0.3 million in 2010, $0.2 million in 2011,
$0.2 million in 2012, $0.2 million in 2013, $0.2 million in 2014, and $2.4
million thereafter.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
24. Quarterly
Data (Unaudited):
|
2009
|
||||||||||||||||||||
|
First(a)
|
Second(a)
|
Third(a)
|
Fourth
|
Total
|
||||||||||||||||
|
(In
Millions, Except Per Share Data)
|
||||||||||||||||||||
|
Net
operating revenues
|
$ | 472.9 | $ | 481.6 | $ | 470.4 | $ | 486.2 | $ | 1,911.1 | ||||||||||
|
Operating
earnings(b)
|
86.9 | 25.7 | 61.0 | 71.0 | 244.6 | |||||||||||||||
|
Income
from continuing operations
|
56.2 | 2.3 | 33.9 | 34.3 | 126.7 | |||||||||||||||
|
(Loss)
income from discontinued operations, net of tax
|
(2.7 | ) | 1.3 | (9.1 | ) | 12.6 | 2.1 | |||||||||||||
|
Net
income
|
53.5 | 3.6 | 24.8 | 46.9 | 128.8 | |||||||||||||||
|
Net
income attributable to noncontrolling interests
|
(8.6 | ) | (9.1 | ) | (8.0 | ) | (8.3 | ) | (34.0 | ) | ||||||||||
|
Net
income (loss) attributable to HealthSouth
|
$ | 44.9 | $ | (5.5 | ) | $ | 16.8 | $ | 38.6 | $ | 94.8 | |||||||||
|
Basic
and diluted earnings per common share:
|
||||||||||||||||||||
|
Income
(loss) from continuing operations attributable to HealthSouth
common shareholders
|
$ | 0.47 | $ | (0.15 | ) | $ | 0.22 | $ | 0.22 | $ | 0.76 | |||||||||
|
(Loss)
income from discontinued operations, net of tax, attributable to
HealthSouth common shareholders
|
(0.03 | ) | 0.01 | (0.10 | ) | 0.13 | 0.01 | |||||||||||||
|
Net
income (loss) per share attributable to HealthSouthcommon
shareholders
|
$ | 0.44 | $ | (0.14 | ) | $ | 0.12 | $ | 0.35 | $ | 0.77 | |||||||||
| 2008 | ||||||||||||||||||||
|
First(a)
|
Second(a)
|
Third(a)
|
Fourth(a)
|
Total
|
||||||||||||||||
|
(In
Millions, Except Per Share Data)
|
||||||||||||||||||||
|
Net
operating revenues
|
$ | 461.8 | $ | 454.1 | $ | 452.8 | $ | 460.8 | $ | 1,829.5 | ||||||||||
|
Operating
earnings(b)
|
88.4 | 66.4 | 37.4 | 194.6 | 386.8 | |||||||||||||||
|
Income
from continuing operations
|
12.3 | 56.6 | 15.7 | 181.0 | 265.6 | |||||||||||||||
|
Income
(loss) from discontinued operations, net of tax,
|
14.1 | (4.2 | ) | (2.9 | ) | 9.2 | 16.2 | |||||||||||||
|
Net
income
|
26.4 | 52.4 | 12.8 | 190.2 | 281.8 | |||||||||||||||
|
Net
income attributable to noncontrolling interests
|
(6.6 | ) | (8.3 | ) | (6.2 | ) | (8.3 | ) | (29.4 | ) | ||||||||||
|
Net
income attributable to HealthSouth
|
$ | 19.8 | $ | 44.1 | $ | 6.6 | $ | 181.9 | $ | 252.4 | ||||||||||
|
Basic
nd diluted earnings per common share:
|
||||||||||||||||||||
|
Basic:(c)
|
||||||||||||||||||||
|
(Loss)
income from continuing operations attributable to HealthSouth
common shareholders
|
$ | (0.02 | ) | $ | 0.52 | $ | 0.04 | $ | 1.91 | $ | 2.53 | |||||||||
|
Income
(loss) from discontinued operations, net of tax, attributable to
HealthSouth common shareholders
|
0.19 | (0.05 | ) | (0.04 | ) | 0.10 | 0.20 | |||||||||||||
|
Net
income per share attributable to HealthSouth common
shareholders
|
$ | 0.17 | $ | 0.47 | $ | 0.00 | $ | 2.01 | $ | 2.73 | ||||||||||
|
Diluted:(d)
|
||||||||||||||||||||
|
(Loss)
income from continuing operations attributable to HealthSouth
common shareholders
|
$ | (0.02 | ) | $ | 0.52 | $ | 0.04 | $ | 1.72 | $ | 2.45 | |||||||||
|
Income
(loss) from discontinued operations, net
|
||||||||||||||||||||
|
Income
(loss) from discontinued operations, net of tax, attributable to
HealthSouth common shareholders
|
0.19 | (0.05 | ) | (0.04 | ) | 0.09 | 0.17 | |||||||||||||
|
Net
income per share attributable to HealthSouth common
shareholders
|
$ | 0.17 | $ | 0.47 | $ | 0.00 | $ | 1.81 | $ | 2.62 | ||||||||||
|
(a)
|
Amounts
are presented using facilities identified as of December 31, 2009 that met
the requirements to be reported as discontinued
operations.
|
|
(b)
|
We
define operating earnings as income from continuing operations
attributable to HealthSouth before (1) loss on early extinguishment
of debt; (2) interest expense and amortization of debt discounts and
fees; (3) other income; (4) loss on interest rate swaps, and
(5) income tax expense or benefit
..
|
|
(c)
|
Basic
per share amounts may not sum due to the weighted average common shares
outstanding each quarter compared to the weighted average common shares
outstanding during the entire year.
|
|
(d)
|
Total
diluted earnings per common share will not sum due to antidilution in the
quarters ended March 31, 2008, June 30, 2008, and September 30,
2008.
|
25. Condensed
Consolidating Financial Information:
The accompanying condensed consolidating financial information has
been prepared and presented pursuant to SEC Regulation S-X, Rule 3-10,
“Financial Statements of Guarantors and Issuers of Guaranteed Securities
Registered or Being Registered.” Each of the subsidiary guarantors is 100% owned
by HealthSouth, and
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
all
guarantees are full and unconditional and joint and several. HealthSouth’s
investments in its consolidated subsidiaries, as well as guarantor subsidiaries’
investments in non-guarantor subsidiaries and non-guarantor subsidiaries’
investments in guarantor subsidiaries, are presented under the equity method of
accounting.
As
described in Note 8, Long-term Debt, the terms of
our credit agreement restrict us from declaring or paying cash dividends on our
common stock unless: (1) we are not in default under our credit agreement
and (2) the amount of the dividend, when added to the aggregate amount of
certain other defined payments made during the same fiscal year, does not exceed
certain maximum thresholds. However, as described in Note 11, Convertible Perpetual Preferred
Stock, our preferred stock generally provides for the payment of cash
dividends, subject to certain limitations.
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Condensed
Consolidating Statement of Operations
|
For
the Year Ended December 31, 2009
|
||||||||||||||||||||
|
HealthSouth
Corporation
|
Guarantor
Subsidiaries
|
Non
Guarantor Subsidiaries
|
Eliminating
Entries
|
HealthSouth
Consolidated
|
||||||||||||||||
|
(In
Millions)
|
||||||||||||||||||||
|
Net
operating revenues
|
$ | 77.6 | $ | 1,330.9 | $ | 539.8 | $ | (37.2 | ) | $ | 1,911.1 | |||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Salaries
and benefits
|
50.9 | 644.7 | 265.5 | (12.3 | ) | 948.8 | ||||||||||||||
|
Other
operating expenses
|
21.5 | 181.8 | 83.5 | (15.4 | ) | 271.4 | ||||||||||||||
|
General
and administrative expenses
|
104.5 | - | - | - | 104.5 | |||||||||||||||
|
Supplies
|
6.5 | 76.9 | 29.0 | - | 112.4 | |||||||||||||||
|
Depreciation
and amortization
|
8.9 | 47.7 | 14.3 | - | 70.9 | |||||||||||||||
|
Occupancy
costs
|
3.9 | 35.9 | 17.1 | (9.3 | ) | 47.6 | ||||||||||||||
|
Provision
for doubtful accounts
|
2.5 | 22.2 | 8.4 | - | 33.1 | |||||||||||||||
|
Loss
on disposal of assets
|
- | 3.4 | 0.1 | - | 3.5 | |||||||||||||||
|
Government,
class action, and related settlements expense
|
36.7 | - | - | - | 36.7 | |||||||||||||||
|
Professional
fees—accounting, tax, and legal
|
8.8 | - | - | - | 8.8 | |||||||||||||||
|
Total
operating expenses
|
244.2 | 1,012.6 | 417.9 | (37.0 | ) | 1,637.7 | ||||||||||||||
|
Loss
on early extinguishment of debt
|
12.5 | - | - | - | 12.5 | |||||||||||||||
|
Interest
expense and amortization of debt discounts and fees
|
114.5 | 8.6 | 3.1 | (0.4 | ) | 125.8 | ||||||||||||||
|
Other
expense (income)
|
0.7 | (0.4 | ) | (4.1 | ) | 0.4 | (3.4 | ) | ||||||||||||
|
Loss
on interest rate swaps
|
19.6 | - | - | - | 19.6 | |||||||||||||||
|
Equity
in net income of nonconsolidated affiliates
|
(1.9 | ) | (2.5 | ) | (0.2 | ) | - | (4.6 | ) | |||||||||||
|
Equity
in net income of consolidated affiliates—
|
||||||||||||||||||||
|
Gain
on sale of consolidated affiliate
|
(13.4 | ) | - | - | 13.4 | - | ||||||||||||||
|
Income
from operations of consolidated affiliates
|
(165.6 | ) | (13.3 | ) | (3.2 | ) | 182.1 | - | ||||||||||||
|
Management
fees
|
(84.5 | ) | 65.5 | 19.0 | - | - | ||||||||||||||
|
(Loss)
income from continuing operations before income tax (benefit)
expense
|
(48.5 | ) | 260.4 | 107.3 | (195.7 | ) | 123.5 | |||||||||||||
|
Provision
for income tax (benefit) expense
|
(153.1 | ) | 120.8 | 29.1 | - | (3.2 | ) | |||||||||||||
|
Income
from continuing operations
|
104.6 | 139.6 | 78.2 | (195.7 | ) | 126.7 | ||||||||||||||
|
(Loss)
income from discontinued operations, net of income tax
benefit
|
(9.8 | ) | (3.3 | ) | 1.6 | 13.6 | 2.1 | |||||||||||||
|
Net
Income
|
94.8 | 136.3 | 79.8 | (182.1 | ) | 128.8 | ||||||||||||||
|
Less:
Net income attributable to noncontrolling interests
|
- | - | (34.0 | ) | - | (34.0 | ) | |||||||||||||
|
Net
income attributable to
HealthSouth
|
$ | 94.8 | $ | 136.3 | $ | 45.8 | $ | (182.1 | ) | $ | 94.8 | |||||||||
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Condensed
Consolidating Statement of Operations
|
For
the Year Ended December 31, 2008
|
||||||||||||||||||||
|
HealthSouth
Corporation
|
Guarantor
Subsidiaries
|
Non
Guarantor Subsidiaries
|
Eliminating
Entries
|
HealthSouth
Consolidated
|
||||||||||||||||
|
(In
Millions)
|
||||||||||||||||||||
|
Net
operating revenues
|
$ | 78.3 | $ | 1,274.5 | $ | 503.8 | $ | (27.1 | ) | $ | 1,829.5 | |||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Salaries
and benefits
|
50.1 | 633.4 | 252.8 | (8.1 | ) | 928.2 | ||||||||||||||
|
Other
operating expenses
|
19.3 | 180.4 | 75.0 | (9.8 | ) | 264.9 | ||||||||||||||
|
General
and administrative expenses
|
105.5 | - | - | - | 105.5 | |||||||||||||||
|
Supplies
|
6.9 | 73.4 | 27.9 | - | 108.2 | |||||||||||||||
|
Depreciation
and amortization
|
22.4 | 45.1 | 14.9 | - | 82.4 | |||||||||||||||
|
Impairment
of long-lived assets
|
- | 0.6 | - | - | 0.6 | |||||||||||||||
|
Gain
on UBS Settlement
|
(121.3 | ) | - | - | - | (121.3 | ) | |||||||||||||
|
Occupancy
costs
|
3.8 | 37.2 | 16.6 | (8.8 | ) | 48.8 | ||||||||||||||
|
Provision
for doubtful accounts
|
1.1 | 20.6 | 5.3 | - | 27.0 | |||||||||||||||
|
(Gain)
loss on disposal of assets
|
(0.2 | ) | 2.0 | 0.2 | - | 2.0 | ||||||||||||||
|
Government,
class action, and related settlements expense
|
(68.4 | ) | (0.2 | ) | 1.4 | - | (67.2 | ) | ||||||||||||
|
Professional
fees—accounting, tax, and legal
|
44.4 | - | - | - | 44.4 | |||||||||||||||
|
Total
operating expenses
|
63.6 | 992.5 | 394.1 | (26.7 | ) | 1,423.5 | ||||||||||||||
|
Loss
on early extinguishment of debt
|
5.9 | - | - | - | 5.9 | |||||||||||||||
|
Interest
expense and amortization of debt discounts and fees
|
147.8 | 8.6 | 4.2 | (1.1 | ) | 159.5 | ||||||||||||||
|
Other
expense (income)
|
1.4 | (0.3 | ) | (2.2 | ) | 1.1 | - | |||||||||||||
|
Loss
on interest rate swap
|
55.7 | - | - | - | 55.7 | |||||||||||||||
|
Equity
in net income of nonconsolidated affiliates
|
(2.4 | ) | (7.9 | ) | (0.3 | ) | - | (10.6 | ) | |||||||||||
|
Equity
in net income of consolidated affiliates—
|
||||||||||||||||||||
|
Gain
on sale of consolidated affiliates
|
(18.8 | ) | - | - | 18.8 | - | ||||||||||||||
|
Income
from operations of
|
||||||||||||||||||||
|
Income
from operations of consolidated affiliates
|
(138.4 | ) | (16.4 | ) | (1.8 | ) | 156.6 | - | ||||||||||||
|
Management
fees
|
(83.1 | ) | 63.5 | 19.6 | - | - | ||||||||||||||
|
Income
from continuing operations before income tax (benefit)
expense
|
46.6 | 234.5 | 90.2 | (175.8 | ) | 195.5 | ||||||||||||||
|
Provision
for income tax (benefit) expense
|
(206.2 | ) | 111.1 | 25.0 | - | (70.1 | ) | |||||||||||||
|
Income
from continuing operations
|
252.8 | 123.4 | 65.2 | (175.8 | ) | 265.6 | ||||||||||||||
|
(Loss)
income from discontinued operations, net of income tax
benefit
|
(0.4 | ) | (7.1 | ) | 4.6 | 19.1 | 16.2 | |||||||||||||
|
Net
Income
|
252.4 | 116.3 | 69.8 | (156.7 | ) | 281.8 | ||||||||||||||
|
Less:
Net income attributable to noncontrolling interests
|
- | - | (29.4 | ) | - | (29.4 | ) | |||||||||||||
|
Net
income attributable to
HealthSouth
|
$ | 252.4 | $ | 116.3 | $ | 40.4 | $ | (156.7 | ) | $ | 252.4 | |||||||||
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Condensed
Consolidating Statement of Operations
|
For
the Year Ended December 31, 2007
|
||||||||||||||||||||
|
HealthSouth
Corporation
|
Guarantor
Subsidiaries
|
Non
Guarantor Subsidiaries
|
Eliminating
Entries
|
HealthSouth
Consolidated
|
||||||||||||||||
|
(In
Millions)
|
||||||||||||||||||||
|
Net
operating revenues
|
$ | 81.1 | $ | 1,179.8 | $ | 492.5 | $ | (29.9 | ) | $ | 1,723.5 | |||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Salaries
and benefits
|
49.8 | 581.9 | 231.4 | (5.6 | ) | 857.5 | ||||||||||||||
|
Other
operating expenses
|
25.9 | 161.5 | 64.9 | (11.3 | ) | 241.0 | ||||||||||||||
|
General
and administrative expenses
|
127.9 | - | - | - | 127.9 | |||||||||||||||
|
Supplies
|
6.7 | 68.0 | 24.9 | - | 99.6 | |||||||||||||||
|
Depreciation
and amortization
|
17.6 | 41.0 | 16.2 | - | 74.8 | |||||||||||||||
|
Impairment
of long-lived assets
|
15.0 | 0.1 | - | - | 15.1 | |||||||||||||||
|
Occupancy
costs
|
1.7 | 41.0 | 16.2 | (7.5 | ) | 51.4 | ||||||||||||||
|
Provision
for doubtful accounts
|
3.4 | 21.9 | 7.9 | - | 33.2 | |||||||||||||||
|
Loss
(gain) on disposal of assets
|
3.7 | 3.0 | (0.8 | ) | - | 5.9 | ||||||||||||||
|
Government,
class action, and related settlements expense
|
(2.4 | ) | (0.4 | ) | - | - | (2.8 | ) | ||||||||||||
|
Professional
fees—accounting, tax, and legal
|
51.1 | 0.5 | - | - | 51.6 | |||||||||||||||
|
Total
operating expenses
|
300.4 | 918.5 | 360.7 | (24.4 | ) | 1,555.2 | ||||||||||||||
|
Loss
on early extinguishment of debt
|
28.2 | - | - | - | 28.2 | |||||||||||||||
|
Interest
expense and amortization of debt discounts and fees
|
219.5 | 8.0 | 4.1 | (2.2 | ) | 229.4 | ||||||||||||||
|
Other
income
|
(8.4 | ) | (0.2 | ) | (9.1 | ) | 2.2 | (15.5 | ) | |||||||||||
|
Loss
on interest rate swap
|
30.4 | - | - | - | 30.4 | |||||||||||||||
|
Equity
in net income of nonconsolidated affiliates
|
(2.5 | ) | (7.6 | ) | (0.2 | ) | - | (10.3 | ) | |||||||||||
|
Equity
in net income of consolidated affiliates—
|
||||||||||||||||||||
|
Gain
on sale of consolidated affiliates
|
(451.9 | ) | - | - | 451.9 | - | ||||||||||||||
|
(Income)
loss from operations of consolidated affiliates
|
(143.9 | ) | 22.0 | (0.5 | ) | 122.4 | - | |||||||||||||
|
Management
fees
|
(99.6 | ) | 58.4 | 41.2 | - | - | ||||||||||||||
|
Income
from continuing operations before income tax (benefit)
expense
|
208.9 | 180.7 | 96.3 | (579.8 | ) | (93.9 | ) | |||||||||||||
|
Provision
for income tax (benefit) expense
|
(444.3 | ) | 88.7 | 33.2 | - | (322.4 | ) | |||||||||||||
|
Income
from continuing operations
|
653.2 | 92.0 | 63.1 | (579.8 | ) | 228.5 | ||||||||||||||
|
Income
from discontinued operations, net of income tax
benefit
|
0.2 | 16.6 | 16.1 | 457.3 | 490.2 | |||||||||||||||
|
Net
Income
|
653.4 | 108.6 | 79.2 | (122.5 | ) | 718.7 | ||||||||||||||
|
Less:
Net income attributable to noncontrolling interests
|
- | - | (65.3 | ) | - | (65.3 | ) | |||||||||||||
|
Net
income attributable to
HealthSouth
|
$ | 653.4 | $ | 108.6 | $ | 13.9 | $ | (122.5 | ) | $ | 653.4 | |||||||||
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Condensed
Consolidating Balance Sheet
|
As
of December 31, 2009
|
||||||||||||||||||||
|
HealthSouth
Corporation
|
Guarantor
Subsidiaries
|
Non
Guarantor Subsidiaries
|
Eliminating
Entries
|
HealthSouth
Consolidated
|
||||||||||||||||
|
(In
Millions)
|
||||||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Current
assets:
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 76.2 | $ | 1.8 | $ | 2.9 | $ | - | $ | 80.9 | ||||||||||
|
Restricted
cash
|
2.3 | - | 65.5 | - | 67.8 | |||||||||||||||
|
Restricted
marketable securities
|
- | - | 2.7 | - | 2.7 | |||||||||||||||
|
Accounts
receivable, net
|
10.1 | 146.2 | 63.4 | - | 219.7 | |||||||||||||||
|
Prepaid
expenses and other current assets
|
35.2 | 63.2 | 45.0 | (88.5 | ) | 54.9 | ||||||||||||||
|
Total
current assets
|
123.8 | 211.2 | 179.5 | (88.5 | ) | 426.0 | ||||||||||||||
|
Property
and equipment, net
|
40.1 | 479.2 | 145.5 | - | 664.8 | |||||||||||||||
|
Goodwill
|
- | 266.1 | 150.3 | - | 416.4 | |||||||||||||||
|
Intangible
assets, net
|
0.4 | 29.8 | 7.2 | - | 37.4 | |||||||||||||||
|
Investments
in and advances to nonconsolidated affiliates
|
3.0 | 22.4 | 3.9 | - | 29.3 | |||||||||||||||
|
Income
tax refund receivable
|
10.0 | - | - | - | 10.0 | |||||||||||||||
|
Other
long-term assets
|
55.5 | 217.8 | 70.6 | (246.3 | ) | 97.6 | ||||||||||||||
|
Intercompany
receivable
|
1,052.4 | - | - | (1,052.4 | ) | - | ||||||||||||||
|
Total
assets
|
$ | 1,285.2 | $ | 1,226.5 | $ | 557.0 | $ | (1,387.2 | ) | $ | 1,681.5 | |||||||||
|
Liabilities
and Shareholders’ (Deficit) Equity
|
||||||||||||||||||||
|
Current
liabilities:
|
||||||||||||||||||||
|
Current
portion of long-term debt
|
$ | 9.7 | $ | 10.0 | $ | 1.8 | $ | - | $ | 21.5 | ||||||||||
|
Accounts
payable
|
12.5 | 27.9 | 9.8 | - | 50.2 | |||||||||||||||
|
Accrued
expenses and other current liabilities
|
207.2 | 48.9 | 56.8 | - | 312.9 | |||||||||||||||
|
Government,
class action, and related settlements
|
6.6 | - | - | - | 6.6 | |||||||||||||||
|
Total
current liabilities
|
236.0 | 86.8 | 68.4 | - | 391.2 | |||||||||||||||
|
Long-term
debt, net of current portion
|
1,552.9 | 86.1 | 27.0 | (25.0 | ) | 1,641.0 | ||||||||||||||
|
Other
long-term liabilities
|
82.9 | 11.3 | 69.5 | (4.2 | ) | 159.5 | ||||||||||||||
|
Intercompany
payable
|
- | 377.7 | 1,469.1 | (1,846.8 | ) | - | ||||||||||||||
| 1,871.8 | 561.9 | 1,634.0 | (1,876.0 | ) | 2,191.7 | |||||||||||||||
|
Commitments
and contingencies
|
||||||||||||||||||||
|
Convertible
perpetual preferred stock
|
387.4 | - | - | - | 387.4 | |||||||||||||||
|
Shareholders'
(deficit) equity
|
||||||||||||||||||||
|
HealthSouth
shareholders' (deficit) equity
|
(974.0 | ) | 664.6 | (1,153.4 | ) | 488.8 | (974.0 | ) | ||||||||||||
|
Noncontrolling
interests
|
- | - | 76.4 | - | 76.4 | |||||||||||||||
|
Total
shareholders' (deficit) equity
|
(974.0 | ) | 664.6 | (1,077.0 | ) | 488.8 | (897.6 | ) | ||||||||||||
|
Total liabilities and
shareholders' (deficit)
equity
|
$ | 1,285.2 | $ | 1,226.5 | $ | 557.0 | $ | (1,387.2 | ) | $ | 1,681.5 | |||||||||
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Condensed
Consolidating Balance Sheet
|
As
of December 31, 2008
|
||||||||||||||||||||
|
HealthSouth
Corporation
|
Guarantor
Subsidiaries
|
Non
Guarantor Subsidiaries
|
Eliminating
Entries
|
HealthSouth
Consolidated
|
||||||||||||||||
|
(In
Millions)
|
||||||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Current
assets:
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 23.1 | $ | 0.9 | $ | 8.1 | $ | - | $ | 32.1 | ||||||||||
|
Restricted
cash
|
100.2 | - | 53.8 | - | 154.0 | |||||||||||||||
|
Restricted
marketable securities
|
- | - | 20.3 | - | 20.3 | |||||||||||||||
|
Accounts
receivable, net
|
11.3 | 161.3 | 62.3 | - | 234.9 | |||||||||||||||
|
Prepaid
expense and other current assets
|
37.6 | 63.9 | 45.6 | (88.5 | ) | 58.6 | ||||||||||||||
|
Insurance
recoveries receivable
|
182.8 | - | - | - | 182.8 | |||||||||||||||
|
Total
current assets
|
355.0 | 226.1 | 190.1 | (88.5 | ) | 682.7 | ||||||||||||||
|
Property
and equipment, net
|
42.0 | 465.4 | 154.7 | - | 662.1 | |||||||||||||||
|
Goodwill
|
- | 267.0 | 147.7 | - | 414.7 | |||||||||||||||
|
Intangible
assets, net
|
- | 34.8 | 7.6 | - | 42.4 | |||||||||||||||
|
Investments
in and advances to nonconsolidated affiliates
|
2.8 | 29.6 | 4.3 | - | 36.7 | |||||||||||||||
|
Income
tax refund receivable
|
55.9 | - | - | - | 55.9 | |||||||||||||||
|
Other
long-term assets
|
57.9 | 219.9 | 77.9 | (252.0 | ) | 103.7 | ||||||||||||||
|
Intercompany
receivable
|
1,095.3 | - | - | (1,095.3 | ) | - | ||||||||||||||
|
Total
assets
|
$ | 1,608.9 | $ | 1,242.8 | $ | 582.3 | $ | (1,435.8 | ) | $ | 1,998.2 | |||||||||
|
Liabilities
and Shareholders’ (Deficit) Equity
|
||||||||||||||||||||
|
Current
liabilities:
|
||||||||||||||||||||
|
Current
portion of long-term debt
|
$ | 10.2 | $ | 11.8 | $ | 1.6 | $ | - | $ | 23.6 | ||||||||||
|
Accounts
payable
|
11.6 | 24.8 | 9.1 | - | 45.5 | |||||||||||||||
|
Accrued
expenses and other current liabilities
|
300.9 | 62.2 | 55.5 | (10.0 | ) | 408.6 | ||||||||||||||
|
Government,
class action, and related settlements
|
268.5 | - | - | - | 268.5 | |||||||||||||||
|
Total
current liabilities
|
591.2 | 98.8 | 66.2 | (10.0 | ) | 746.2 | ||||||||||||||
|
Long-term
debt, net of current portion
|
1,706.5 | 83.3 | 28.8 | (29.0 | ) | 1,789.6 | ||||||||||||||
|
Other
long-term liabilities
|
93.2 | 12.1 | 62.8 | (5.9 | ) | 162.2 | ||||||||||||||
|
Intercompany
payable
|
- | 474.5 | 1,526.7 | (2,001.2 | ) | - | ||||||||||||||
| 2,390.9 | 668.7 | 1,684.5 | (2,046.1 | ) | 2,698.0 | |||||||||||||||
|
Commitments
and contingencies
|
||||||||||||||||||||
|
Convertible
perpetual preferred stock
|
387.4 | - | - | - | 387.4 | |||||||||||||||
|
Shareholders'
(deficit) equity
|
||||||||||||||||||||
|
HealthSouth
shareholders' (deficit) equity
|
(1,169.4 | ) | 574.1 | (1,184.4 | ) | 610.3 | (1,169.4 | ) | ||||||||||||
|
Noncontrolling
interests
|
- | - | 82.2 | - | 82.2 | |||||||||||||||
|
Total
shareholders' (deficit) equity
|
(1,169.4 | ) | 574.1 | (1,102.2 | ) | 610.3 | (1,087.2 | ) | ||||||||||||
|
Total liabilities and
shareholders' (deficit)
equity
|
$ | 1,608.9 | $ | 1,242.8 | $ | 582.3 | $ | (1,435.8 | ) | $ | 1,998.2 | |||||||||
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Condensed
Consolidating Statement of Cash Flows
|
For
the Year Ended December 31, 2009
|
||||||||||||||||||||
|
HealthSouth
Corporation
|
Guarantor
Subsidiaries
|
Non
Guarantor Subsidiaries
|
Eliminating
Entries
|
HealthSouth
Consolidated
|
||||||||||||||||
|
(In
Millions)
|
||||||||||||||||||||
|
Net
cash provided by operating activities
|
$ | 261.5 | $ | 203.0 | $ | 117.8 | $ | (176.2 | ) | $ | 406.1 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||||||||||
|
Capital
expenditures
|
(11.1 | ) | (53.4 | ) | (7.7 | ) | - | (72.2 | ) | |||||||||||
|
Acquisition
of intangible assets
|
(0.4 | ) | - | - | - | (0.4 | ) | |||||||||||||
|
Proceeds
from disposal of assets
|
- | 3.9 | - | - | 3.9 | |||||||||||||||
|
Proceeds
from sale of restricted marketable securities
|
- | - | 5.0 | - | 5.0 | |||||||||||||||
|
Proceeds
from sale of investments
|
0.6 | - | - | - | 0.6 | |||||||||||||||
|
Purchase
of restricted investments
|
- | - | (3.8 | ) | - | (3.8 | ) | |||||||||||||
|
Net
change in restricted cash
|
- | - | (11.7 | ) | - | (11.7 | ) | |||||||||||||
|
Net
settlements on interest rate swap
|
(42.2 | ) | - | - | - | (42.2 | ) | |||||||||||||
|
Net
investment in interest rate swap
|
(6.4 | ) | - | - | - | (6.4 | ) | |||||||||||||
|
Other
|
(1.3 | ) | (2.0 | ) | (2.0 | ) | - | (5.3 | ) | |||||||||||
|
Net
cash provided by (used in) investing activities of discontinued
operations
|
0.1 | (0.6 | ) | - | - | (0.5 | ) | |||||||||||||
|
Net
cash used in investing activities
|
(60.7 | ) | (52.1 | ) | (20.2 | ) | - | (133.0 | ) | |||||||||||
|
Cash
flows from financing activities:
|
||||||||||||||||||||
|
Principal
borrowings on notes
|
- | 15.5 | - | - | 15.5 | |||||||||||||||
|
Proceeds
from bond issuance
|
290.0 | - | - | - | 290.0 | |||||||||||||||
|
Principal
payments on debt, including pre-payments
|
(413.0 | ) | (0.2 | ) | - | 4.0 | (409.2 | ) | ||||||||||||
|
Borrowings
on revolving credit facility
|
10.0 | - | - | - | 10.0 | |||||||||||||||
|
Payments
on revolving credit facility
|
(50.0 | ) | - | - | - | (50.0 | ) | |||||||||||||
|
Principal
payments under capital lease obligations
|
(0.5 | ) | (11.2 | ) | (1.7 | ) | - | (13.4 | ) | |||||||||||
|
Issuance
of common stock
|
- | - | - | - | - | |||||||||||||||
|
Dividends
paid on convertible perpetual preferred stock
|
(26.0 | ) | - | - | - | (26.0 | ) | |||||||||||||
|
Debt
issuance costs
|
(10.6 | ) | - | - | - | (10.6 | ) | |||||||||||||
|
Distributions
to noncontrolling interests of consolidated
affiliates
|
- | - | (32.7 | ) | - | (32.7 | ) | |||||||||||||
|
Other
|
- | - | 0.8 | - | 0.8 | |||||||||||||||
|
Change
in intercompany advances
|
52.9 | (154.1 | ) | (71.0 | ) | 172.2 | - | |||||||||||||
|
Net
cash (used in) provided by financing activities of discontinued
operations
|
(0.5 | ) | - | 1.8 | - | 1.3 | ||||||||||||||
|
Net
cash used in financing activities
|
(147.7 | ) | (150.0 | ) | (102.8 | ) | 176.2 | (224.3 | ) | |||||||||||
|
Effect
of exchange rate on cash and cash
equivalents
|
- | - | - | - | - | |||||||||||||||
|
Increase
(decrease) in cash and cash equivalents
|
53.1 | 0.9 | (5.2 | ) | - | 48.8 | ||||||||||||||
|
Cash
and cash equivalents at beginning
of year
|
23.1 | 0.9 | 8.1 | - | 32.1 | |||||||||||||||
|
Cash
and cash equivalents of divisions
and facilities held for sale at beginning of
year
|
- | 0.1 | - | - | 0.1 | |||||||||||||||
|
Less:
Cash and cash equivalents of
divisions and
facilities held for sale at end of year
|
- | (0.1 | ) | - | - | (0.1 | ) | |||||||||||||
|
Cash
and cash equivalents at end of year
|
$ | 76.2 | $ | 1.8 | $ | 2.9 | $ | - | $ | 80.9 | ||||||||||
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Condensed
Consolidating Statement of Cash Flows
|
For
the Year Ended December 31, 2008
|
||||||||||||||||||||
|
HealthSouth
Corporation
|
Guarantor
Subsidiaries
|
Non
Guarantor Subsidiaries
|
Eliminating
Entries
|
HealthSouth
Consolidated
|
||||||||||||||||
|
(In
Millions)
|
||||||||||||||||||||
|
Net
cash provided by operating activities
|
$ | 106.8 | $ | 169.6 | $ | 114.8 | $ | (164.0 | ) | $ | 227.2 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||||||||||
|
Capital
expenditures
|
(20.4 | ) | (27.1 | ) | (8.2 | ) | - | (55.7 | ) | |||||||||||
|
Acquisition
of business, net of assets acquired
|
- | (14.6 | ) | - | - | (14.6 | ) | |||||||||||||
|
Acquisition
of intangible assets
|
- | (18.2 | ) | - | - | (18.2 | ) | |||||||||||||
|
Proceeds
from disposal of assets
|
43.9 | 6.7 | 3.3 | - | 53.9 | |||||||||||||||
|
Proceeds
from sale of restricted marketable securities
|
- | - | 8.1 | - | 8.1 | |||||||||||||||
|
Proceeds
from sale of investments
|
- | - | 4.3 | - | 4.3 | |||||||||||||||
|
Purchase
of restricted investments
|
- | - | (4.8 | ) | - | (4.8 | ) | |||||||||||||
|
Net
change in restricted cash
|
0.2 | - | 7.3 | - | 7.5 | |||||||||||||||
|
Net
settlements on interest rate swap
|
(20.7 | ) | - | - | - | (20.7 | ) | |||||||||||||
|
Other
|
- | - | 0.6 | - | 0.6 | |||||||||||||||
|
Net
cash (used in) provided by investing activities of discontinued
operations
|
- | (0.6 | ) | 0.2 | - | (0.4 | ) | |||||||||||||
|
Net
cash provided by (used in) investing activities
|
3.0 | (53.8 | ) | 10.8 | - | (40.0 | ) | |||||||||||||
|
Cash
flows from financing activities:
|
||||||||||||||||||||
|
Check
in excess of bank balance
|
(16.7 | ) | - | - | 5.3 | (11.4 | ) | |||||||||||||
|
Principal
payments on debt, including pre-payments
|
(211.6 | ) | (0.7 | ) | (3.6 | ) | 11.1 | (204.8 | ) | |||||||||||
|
Borrowings
on revolving credit facility
|
128.0 | - | - | - | 128.0 | |||||||||||||||
|
Payments
on revolving credit facility
|
(163.0 | ) | - | - | - | (163.0 | ) | |||||||||||||
|
Principal
payments under capital lease obligations
|
(0.2 | ) | (10.7 | ) | (1.5 | ) | - | (12.4 | ) | |||||||||||
|
Issuance
of common stock
|
150.2 | - | - | - | 150.2 | |||||||||||||||
|
Dividends
paid on convertible perpetual preferred stock
|
(26.0 | ) | - | - | - | (26.0 | ) | |||||||||||||
|
Distributions
to noncontrolling interests of consolidated
affiliates
|
- | - | (33.4 | ) | - | (33.4 | ) | |||||||||||||
|
Other
|
(0.2 | ) | - | 0.8 | - | 0.6 | ||||||||||||||
|
Change
in intercompany advances
|
53.1 | (117.3 | ) | (88.7 | ) | 152.9 | - | |||||||||||||
|
Net
cash used in financing activities of discontinued
operations
|
(2.4 | ) | - | (1.4 | ) | - | (3.8 | ) | ||||||||||||
|
Net
cash used in financing activities
|
(88.8 | ) | (128.7 | ) | (127.8 | ) | 169.3 | (176.0 | ) | |||||||||||
|
Effect
of exchange rate on cash and cash
equivalents
|
- | - | 0.8 | - | 0.8 | |||||||||||||||
|
Increase
(decrease) in cash and cash
|
||||||||||||||||||||
|
Increase
(decrease) in cash and cash equivalents
|
21.0 | (12.9 | ) | (1.4 | ) | 5.3 | 12.0 | |||||||||||||
|
Cash
and cash equivalents at beginning
of year
|
2.1 | 13.9 | 9.1 | (5.3 | ) | 19.8 | ||||||||||||||
|
Cash
and cash equivalents of divisions
and facilities held for sale at beginning of
year
|
- | - | 0.4 | - | 0.4 | |||||||||||||||
|
Less:
Cash and cash equivalents of divisions and facilities held for sale at end of
year
|
- | (0.1 | ) | - | - | (0.1 | ) | |||||||||||||
|
Cash
and cash equivalents at end of year
|
$ | 23.1 | $ | 0.9 | $ | 8.1 | $ | - | $ | 32.1 | ||||||||||
HealthSouth
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Condensed
Consolidating Statement of Cash Flows
|
For
the Year Ended December 31, 2007
|
||||||||||||||||||||
|
HealthSouth
Corporation
|
Guarantor
Subsidiaries
|
Non
Guarantor Subsidiaries
|
Eliminating
Entries
|
HealthSouth
Consolidated
|
||||||||||||||||
|
(In
Millions)
|
||||||||||||||||||||
|
Net
cash (used in) provided by operating activities
|
$ | (477.6 | ) | $ | 111.8 | $ | 531.6 | $ | 64.8 | $ | 230.6 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||||||||||
|
Capital
expenditures
|
(5.3 | ) | (13.5 | ) | (19.8 | ) | - | (38.6 | ) | |||||||||||
|
Proceeds
from sale of restricted marketable securities
|
- | - | 66.4 | - | 66.4 | |||||||||||||||
|
Purchase
of restricted investments
|
- | - | (23.0 | ) | - | (23.0 | ) | |||||||||||||
|
Net
change in restricted cash
|
0.5 | - | (3.8 | ) | - | (3.3 | ) | |||||||||||||
|
Proceeds
from divestiture of divisions
|
1,169.8 | - | - | (1,169.8 | ) | - | ||||||||||||||
|
Other
|
3.6 | 0.1 | 0.2 | - | 3.9 | |||||||||||||||
|
Net
cash provided by (used in) investing activities of discontinued
operations—
|
||||||||||||||||||||
|
Proceeds
from divestitures ofdivisions
|
- | - | - | 1,169.8 | 1,169.8 | |||||||||||||||
|
Other
investing activities of discontinued operations
|
0.7 | (6.5 | ) | 15.1 | - | 9.3 | ||||||||||||||
|
Net
cash provided by (used in) investing activities
|
1,169.3 | (19.9 | ) | 35.1 | - | 1,184.5 | ||||||||||||||
|
Cash
flows from financing activities:
|
||||||||||||||||||||
|
Check
in excess of bank balance
|
14.0 | - | - | (5.3 | ) | 8.7 | ||||||||||||||
|
Principal
borrowings on notes
|
- | 12.5 | - | - | 12.5 | |||||||||||||||
|
Principal
payments on debt, including pre-payments
|
(1,235.2 | ) | (0.4 | ) | (0.2 | ) | (3.1 | ) | (1,238.9 | ) | ||||||||||
|
Borrowings
on revolving credit facility
|
397.0 | - | - | - | 397.0 | |||||||||||||||
|
Payments
on revolving credit facility
|
(492.0 | ) | - | - | - | (492.0 | ) | |||||||||||||
|
Principal
payments under capital lease obligations
|
(0.2 | ) | (9.4 | ) | (1.4 | ) | - | (11.0 | ) | |||||||||||
|
Dividends
paid on convertible perpetual preferred stock
|
(26.0 | ) | - | - | - | (26.0 | ) | |||||||||||||
|
Debt
amendment and issuance costs
|
(11.2 | ) | - | - | - | (11.2 | ) | |||||||||||||
|
Distributions
paid to noncontrolling interests of consolidated
affiliates
|
- | - | (23.4 | ) | - | (23.4 | ) | |||||||||||||
|
Other
|
0.6 | - | - | - | 0.6 | |||||||||||||||
|
Change
in intercompany advances
|
655.0 | (83.5 | ) | (509.8 | ) | (61.7 | ) | - | ||||||||||||
|
Net
cash used in financing activities ofdiscontinued
operations
|
(11.9 | ) | (0.3 | ) | (40.7 | ) | - | (52.9 | ) | |||||||||||
|
Net
cash used in financing activities
|
(709.9 | ) | (81.1 | ) | (575.5 | ) | (70.1 | ) | (1,436.6 | ) | ||||||||||
|
Effect
of exchange rate changes on cash
and cash equivalents
|
- | - | 0.1 | - | 0.1 | |||||||||||||||
|
(Decrease)
increase in cash and cash equivalents
|
(18.2 | ) | 10.8 | (8.7 | ) | (5.3 | ) | (21.4 | ) | |||||||||||
|
Cash
and cash equivalents at beginning
of year
|
17.5 | 3.1 | 6.6 | - | 27.2 | |||||||||||||||
|
Cash
and cash equivalents of divisions
and facilities held for sale at beginning of
year
|
2.8 | - | 11.6 | - | 14.4 | |||||||||||||||
|
Less:
Cash and cash equivalents of divisions and facilities held for sale at end of
year
|
- | - | (0.4 | ) | - | (0.4 | ) | |||||||||||||
|
Cash
and cash equivalents at end of year
|
$ | 2.1 | $ | 13.9 | $ | 9.1 | $ | (5.3 | ) | $ | 19.8 | |||||||||
EXHIBIT
LIST
|
No.
|
Description
|
|
| 2.1 |
Stock
Purchase Agreement, dated January 27, 2007, by and between HealthSouth
Corporation and Select Medical Systems (incorporated by reference to
Exhibit 2.1 to HealthSouth’s Current Report on Form 8-K filed on January
30, 2007).
|
|
| 2.2 |
Letter
Agreement, dated May 1, 2007, by and between HealthSouth Corporation and
Select Medical Corporation (incorporated by reference to Exhibit 2.3 to
HealthSouth’s Quarterly Report on 10-Q filed on May 9,
2007).
|
|
| 2.3 |
Amended
and Restated Stock Purchase Agreement, dated as of March 25, 2007, by and
between HealthSouth Corporation and ASC Acquisition LLC (incorporated by
reference to Exhibit 2.1 to HealthSouth’s Quarterly Report on 10-Q filed
on August 8, 2007).
|
|
| 2.4 |
Stock
Purchase Agreement, dated April 19, 2007, by and between HealthSouth
Corporation and Diagnostic Health Holdings, Inc. (incorporated by
reference to Exhibit 2.4 to HealthSouth’s Annual Report on Form 10-K filed
on February 26, 2008).
|
|
| 3.1 |
Restated
Certificate of Incorporation of HealthSouth Corporation, as filed in the
Office of the Secretary of State of the State of Delaware on May 21,
1998.*
|
|
| 3.2 |
Certificate
of Amendment to the Restated Certificate of Incorporation of HealthSouth
Corporation, as filed in the Office of the Secretary of State of the State
of Delaware on October 25, 2006 (incorporated by reference to Exhibit 3.1
to HealthSouth’s Current Report on Form 8-K filed on October 31,
2006).
|
|
| 3.3 |
Amended
and Restated Bylaws of HealthSouth Corporation, effective as of October
30, 2009 (incorporated by reference to Exhibit 3.3 to HealthSouth’s
Quarterly Report on Form 10-Q filed on November 4,
2009).
|
|
| 3.4 |
Certificate
of Designations of 6.50% Series A Convertible Perpetual Preferred Stock,
as filed with the Secretary of State of the State of Delaware on March 7,
2006 (incorporated by reference to Exhibit 3.1 to HealthSouth’s Current
Report on Form 8-K filed on March 9, 2006).
|
|
| 4.1 |
Indenture,
dated as of June 14, 2006, among HealthSouth Corporation, the Subsidiary
Guarantors (as defined therein) and The Bank of Nova Scotia Trust Company
of New York, as trustee, relating to $625,000,000 aggregate principal
amount of 10.75% Senior Notes due 2016 (incorporated by reference to
Exhibit 4.2 to HealthSouth’s Current Report on Form 8-K filed on June 16,
2006).
|
|
| 4.2.1 |
Indenture,
dated as of September 28, 2001, between HealthSouth Corporation and
National City Bank, as trustee, relating to HealthSouth’s 8.375% Senior
Notes due 2011.*
|
|
| 4.2.2 |
Instrument
of Resignation, Appointment and Acceptance, dated as of April 9, 2003,
among HealthSouth Corporation, National City Bank, as resigning trustee,
and Wilmington Trust Company, as successor trustee, relating to
HealthSouth’s 8.375% Senior Notes due 2011.*
|
|
| 4.2.3 |
Amendment
to Indenture, dated as of August 27, 2003, to the Indenture dated as of
September 28, 2001 between HealthSouth Corporation and Wilmington Trust
Company, as successor trustee to National City Bank, relating to
HealthSouth’s 8.375% Senior Notes due 2011.*
|
|
| 4.2.4 |
Second
Supplemental Indenture, dated as of June 24, 2004, to the Indenture, dated
as of September 28, 2001, between HealthSouth Corporation and Wilmington
Trust Company, as successor trustee to National City Bank, relating to
HealthSouth’s 8.375% Senior Notes due 2011 (incorporated by reference to
Exhibit 99.4 to HealthSouth’s Current Report on Form 8-K filed on June 25,
2004).
|
| 4.2.5 |
Third
Supplemental Indenture, dated as of February 15, 2006, to the Indenture,
dated as of September 28, 2001, between HealthSouth Corporation and
Wilmington Trust Company, as successor trustee to National City Bank,
relating to HealthSouth’s 8.375% Senior Notes due 2011 (incorporated by
reference to Exhibit 4.6 to HealthSouth’s Current Report on Form 8-K filed
on February 17, 2006).
|
|
| 4.3.1 |
Indenture,
dated as of May 22, 2002, between HealthSouth Corporation and The Bank of
Nova Scotia Trust Company of New York, as trustee, relating to
HealthSouth’s 7.625% Senior Notes due 2012.*
|
|
| 4.3.2 |
Amendment
to Indenture, dated as of August 27, 2003, to the Indenture, dated as of
May 22, 2002, between HealthSouth Corporation and The Bank of Nova Scotia
Trust Company of New York, as trustee, relating to HealthSouth’s 7.625%
Senior Notes due 2012.*
|
|
| 4.3.3 |
First
Supplemental Indenture, dated as of June 24, 2004, to the Indenture, dated
as of May 22, 2002, between HealthSouth Corporation and The Bank of Nova
Scotia Trust Company of New York, as trustee, relating to HealthSouth’s
7.625% Senior Notes due 2012 (incorporated by reference to Exhibit 99.5 to
HealthSouth’s Current Report on Form 8-K filed on June 25,
2004).
|
|
| 4.3.4 |
Second
Supplemental Indenture, dated as of February 15, 2006, to the Indenture,
dated as of May 22, 2002, between HealthSouth Corporation and The Bank of
Nova Scotia Trust Company of New York, as trustee, relating to
HealthSouth’s 7.625% Senior Notes due 2012 (incorporated by reference to
Exhibit 4.5 to HealthSouth’s Current Report on Form 8-K filed on February
17, 2006).
|
|
| 4.4 |
Registration
Rights Agreement, dated February 28, 2006, between HealthSouth and the
purchasers party to the Securities Purchase Agreement, dated February 28,
2006, re: HealthSouth’s sale of 400,000 shares of 6.50% Series A
Convertible Perpetual Preferred Stock.**
|
|
| 4.5.1 |
Warrant
Agreement, dated as of January 16, 2004, between HealthSouth Corporation
and Wells Fargo Bank Northwest, N.A., as Warrant Agent (incorporated by
reference to Exhibit 10.2 to HealthSouth’s Current Report on Form 8-K
filed on January 20, 2004).
|
|
| 4.5.2 |
Registration
Rights Agreement, dated as of January 16, 2004, among HealthSouth
Corporation and the entities listed on the signature pages thereto as
Holders of Warrants and Transfer Restricted Securities (incorporated by
reference to Exhibit 10.3 to HealthSouth’s Current Report on Form 8-K
filed on January 20, 2004).
|
|
| 4.6 |
Warrant
Agreement, dated as of September 30, 2009, among HealthSouth
Corporation and Computershare Inc. and Computershare Trust Company,
N.A., jointly and severally as Warrant Agent (incorporated by
reference to Exhibit 4.1 to HealthSouth’s Registration Statement on
Form 8-A filed on October 1, 2009).
|
|
| 4.7.1 |
Indenture,
dated as of December 1, 2009, between HealthSouth Corporation and The
Bank of Nova Scotia Trust Company of New York, as trustee, relating to
HealthSouth’s 8.125% Senior Notes due 2020.
|
|
| 4.7.2 |
First
Supplemental Indenture, dated December 1, 2009, among HealthSouth
Corporation, the Subsidiary Guarantors (as defined therein) and The Bank
of Nova Scotia Trust Company of New York, as trustee relating to
HealthSouth’s 8.125% Senior Notes due 2020.
|
|
| 4.8 |
First
Supplemental Indenture, dated December 1, 2009, among HealthSouth
Corporation, the Subsidiary Guarantors (as defined therein) and The Bank
of Nova Scotia Trust Company of New York, as trustee, relating to the
Floating Rate Senior Notes due 2014 and the Indenture, dated as of June
14, 2006.
|
|
| 10.1 |
Stipulation
of Partial Settlement dated as of September 26, 2006, by and among
HealthSouth Corporation, the stockholder lead plaintiffs named therein,
the bondholder lead plaintiff named therein and the individual settling
defendants named therein (incorporated by reference to Exhibit 10.1 to
HealthSouth’s Current Report on Form 8-K filed on September 27,
2006).
|
| 10.2 |
Settlement
Agreement and Policy Release, dated as of September 25, 2006, by and among
HealthSouth Corporation, the settling individual defendants named therein
and the settling carriers named therein (incorporated by reference to
Exhibit 10.2 to HealthSouth’s Current Report on Form 8-K filed on
September 27, 2006).
|
|
| 10.3 |
Stipulation
of Settlement with Certain Individual Defendants dated as of September 25,
2006, by and among HealthSouth Corporation, plaintiffs named therein and
the individual settling defendants named therein (incorporated by
reference to Exhibit 10.3 to HealthSouth’s Current Report on Form 8-K
filed on September 27, 2006).
|
|
| 10.4.1 |
Amended
Class Action Settlement Agreement, dated March 6, 2006, with
representatives of the plaintiff class relating to the action consolidated
on July 2, 2003, captioned In Re HealthSouth Corp. ERISA
Litigation, No. CV-03-BE-1700 (N.D. Ala.) (incorporated by
reference to Exhibit 10.5.1 to HealthSouth’s Quarterly Report on Form 10-Q
filed on May 15, 2006).
|
|
| 10.4.2 |
First
Addendum to the Amended Class Action Settlement Agreement, dated April 11,
2006 (incorporated by reference to Exhibit 10.5.2 to HealthSouth’s
Quarterly Report on Form 10-Q filed on May 15, 2006).
|
|
| 10.4.3 |
Amended
Class Action Settlement Agreement, dated July 25, 2005, with
representatives of the plaintiff class relating to the action consolidated
on July 2, 2003, captioned In Re HealthSouth Corp. ERISA
Litigation, No. CV-03-BE-1700 (N.D. Ala.).*
|
|
| 10.5.1 |
HealthSouth
Corporation Amended and Restated 2004 Director Incentive Plan.**
+
|
|
| 10.5.2 |
Form
of Restricted Stock Unit Agreement (Amended and Restated 2004 Director
Incentive Plan).** +
|
|
| 10.6 |
HealthSouth
Corporation Amended and Restated Change in Control Benefits Plan
(incorporated by reference to Exhibit 10.11 to HealthSouth’s Annual Report
on Form 10-K filed on February 24, 2009).+
|
|
| 10.7.1 |
HealthSouth
Corporation 1995 Stock Option Plan, as amended.* +
|
|
| 10.7.2 |
Form
of Non-Qualified Stock Option Agreement (1995 Stock Option Plan).*
+
|
|
| 10.8.1 |
HealthSouth
Corporation 1997 Stock Option Plan.* +
|
|
| 10.8.2 |
Form
of Non-Qualified Stock Option Agreement (1997 Stock Option Plan).*
+
|
|
| 10.9.1 |
HealthSouth
Corporation 2002 Non-Executive Stock Option Plan.* +
|
|
| 10.9.2 |
Form
of Non-Qualified Stock Option Agreement (2002 Non-Executive Stock Option
Plan).* +
|
|
| 10.10 |
Description
of the HealthSouth Corporation Senior Management Compensation Recoupment
Policy (incorporated by reference to HealthSouth’s Quarterly Report on
Form 10-Q filed on November 4, 2009).+
|
|
| 10.11 |
Description
of the HealthSouth Corporation Senior Management Bonus and Long-Term
Incentive Plans (incorporated by reference to the section captioned
“Executive Compensation – Compensation Discussion and Analysis – Elements
of Executive Compensation” in HealthSouth’s Definitive Proxy Statement on
Schedule 14A filed on April 2, 2009).+
|
|
| 10.12 |
HealthSouth
Corporation Executive Deferred Compensation Plan.*+
|
|
| 10.13 |
HealthSouth
Corporation Second Amended and Restated Executive Severance Plan
(incorporated by reference to Exhibit 10.19 to HealthSouth’s Annual Report
on Form 10-K filed on February 24,
2009).+
|
| 10.14 |
Letter
of Understanding, dated as of October 31, 2007, between HealthSouth
Corporation and Jay Grinney (incorporated by reference to Exhibit 10.1 to
HealthSouth’s Current Report on Form 8-K filed on November 6,
2007).+
|
|
| 10.15 |
HealthSouth
Corporation 2005 Equity Incentive Plan (incorporated by reference to
Exhibit 10 to HealthSouth’s Current Report on Form 8-K, filed on November
21, 2005).+
|
|
| 10.16 |
Form
of Non-Qualified Stock Option Agreement (2005 Equity Incentive
Plan).**+
|
|
| 10.17.1 |
HealthSouth
Corporation 2008 Equity Incentive Plan (incorporated by reference to
Appendix A to HealthSouth’s Definitive Proxy Statement on Schedule 14A
filed on March 27, 2008).+
|
|
| 10.17.2 |
Form
of Non-Qualified Stock Option Agreement (2008 Equity Incentive
Plan)(incorporated by reference to Exhibit 10.28.2 to HealthSouth’s Annual
Report on Form 10-K filed on February 24, 2009). +
|
|
| 10.17.3 |
Form
of Restricted Stock Agreement (2008 Equity Incentive Plan)(incorporated by
reference to Exhibit 10.28.3 to HealthSouth’s Annual Report on Form 10-K
filed on February 24, 2009).+
|
|
| 10.17.4 |
Form
of Performance Share Unit Award (2008 Equity Incentive Plan)(incorporated
by reference to Exhibit 10.28.4 to HealthSouth’s Annual Report on Form
10-K filed on February 24, 2009).+
|
|
| 10.18 |
HealthSouth
Corporation Nonqualified 401(k) Plan (incorporated by reference to Exhibit
99 to HealthSouth’s Current Report on Form 8-K filed on February 6,
2008).+
|
|
| 10.19 |
HealthSouth
Corporation Directors’ Deferred Stock Investment Plan (incorporated by
reference to Exhibit 10.30 to HealthSouth’s Annual Report on Form 10-K
filed on February 24, 2009).+
|
|
| 10.20 |
Written
description of the annual compensation arrangement for non-employee
directors of HealthSouth Corporation (incorporated by reference to the
section captioned “Corporate Governance and Board Structure – Compensation
of Directors” in HealthSouth’s Definitive Proxy Statement on Schedule 14A,
filed on April 2, 2009).+
|
|
| 10.21 |
Form
of Indemnity Agreement entered into between HealthSouth Corporation and
the directors of HealthSouth.* +
|
|
| 10.22 |
Form
of letter agreement with former directors.* +
|
|
| 10.23 |
Settlement
Agreement, dated as of December 30, 2004, by and among HealthSouth
Corporation, the United States of America, acting through the entities
named therein and certain other parties named therein (incorporated by
reference to Exhibit 10.1 to HealthSouth’s Current Report on Form 8-K
filed on January 5, 2005).
|
|
| 10.24 |
Administrative
Settlement Agreement, dated as of December 30, 2004, by and among the
United States Department of Health and Human Services acting through the
Centers for Medicare & Medicaid Services and its officers and agents,
including, but not limited to, its fiscal intermediaries, and HealthSouth
Corporation (incorporated by reference to Exhibit 10.3 to HealthSouth’s
Current Report on Form 8-K filed on January 5, 2005).
|
|
| 10.25.1 |
Corporate
Integrity Agreement, dated as of December 30, 2004, by and among the
Office of Inspector General of the Department of Health and Human Services
and HealthSouth Corporation (incorporated by reference to Exhibit 10.2 to
HealthSouth’s Current Report on Form 8-K filed on January 5,
2005).
|
|
| 10.25.2 |
First
Addendum to the Corporate Integrity Agreement, dated as of October 27,
2006, by and among the Office of Inspector General of the Department of
Health and Human Services and HealthSouth Corporation (incorporated by
reference to Exhibit 10.33.2 to HealthSouth’s Annual Report on Form 10-K
filed on February 24, 2009).
|
| 10.25.3 |
Second
Addendum to the Corporate Integrity Agreement, dated as of December 14,
2007, by and among the Office of Inspector General of the Department of
Health and Human Services and HealthSouth Corporation (incorporated by
reference to Exhibit 10.33.3 to HealthSouth’s Annual Report on Form 10-K
filed on February 24, 2009).
|
|
| 10.26.1 |
Amendment
No. 2, dated as of October 23, 2009, to the Credit Agreement, dated March
10, 2006, among HealthSouth Corporation, the lenders party thereto,
JPMorgan Chase Bank, N.A., as the administrative agent and the collateral
agent, and the other parties thereto, attaching
and effecting the Amended and Restated Credit Agreement, by and among
HealthSouth, the lenders party thereto, JPMorgan Chase Bank, N.A., as the
administrative agent and the collateral agent, Citicorp North America,
Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as
co-syndication agents; and Deutsche Bank Securities Inc., Goldman Sachs
Credit Partners L.P. and Wachovia Bank, National Association, as
co-documentation agents (incorporated by reference to Exhibit 10.1 to
HealthSouth’s Current Report on Form 8-K filed on October 27,
2009).
|
|
| 10.26.2 |
Collateral
and Guarantee Agreement, dated as of March 10, 2006, by and among
HealthSouth, certain of the Company’s subsidiaries and JPMorgan Chase
Bank, N.A., as collateral agent (incorporated by reference to Exhibit 10.2
to HealthSouth’s Current Report on Form 8-K filed on March 16,
2006).
|
|
| 10.27.1 |
Partial
Final Judgment And Order of Dismissal With Prejudice of In re: HealthSouth
Corporation Securities Litigation, dated as of January 11, 2007
(incorporated by reference to Exhibit 99.2 to HealthSouth’s Current Report
on Form 8-K filed on January 12, 2007).
|
|
| 10.27.2 |
Order
and Final Judgment Pursuant To A.R.C.P. Rule 54(b) Approving Pro Tanto
Settlement With Certain Defendants, dated as of January 11, 2007
(incorporated by reference to Exhibit 99.3 to HealthSouth’s Current Report
on Form 8-K filed on January 12, 2007).
|
|
| 10.28.1 |
Purchase
and Sale Agreement, dated January 22, 2008, by and between HealthSouth
Corporation and Daniel Realty Company, LLC (incorporated by reference to
Exhibit 10.1 to HealthSouth’s Quarterly Report on Form 10-Q filed on May
7, 2008).
|
|
| 10.28.2 |
First
Amendment to Purchase and Sale Agreement, dated January 22, 2008, by and
between HealthSouth Corporation and Daniel Realty Company, LLC
(incorporated by reference to Exhibit 10.2 to HealthSouth’s Quarterly
Report on Form 10-Q filed on May 7, 2008).
|
|
| 10.28.3 |
Second
Amendment to Purchase and Sale Agreement, dated February 13, 2008, by and
between HealthSouth Corporation and Daniel Realty Company, LLC
(incorporated by reference to Exhibit 10.3 to HealthSouth’s Quarterly
Report on Form 10-Q filed on May 7, 2008).
|
|
| 10.28.4 |
Third
Amendment to Purchase and Sale Agreement, dated March 31, 2008, by and
between HealthSouth Corporation and LAKD Associates, LLC (successor by
assignment to Daniel Realty Company, LLC) (incorporated by reference to
Exhibit 10.4 to HealthSouth’s Quarterly Report on Form 10-Q filed on May
7, 2008).
|
|
| 10.28.5 |
Lease
between LAKD HQ, LLC and HealthSouth Corporation, dated March 31, 2008,
for corporate office space (incorporated by reference to Exhibit 10.5 to
HealthSouth’s Quarterly Report on Form 10-Q filed on May 7,
2008).
|
|
| 10.29.1 |
Stipulation
of Settlement with UBS Securities LLC (incorporated by reference to
Exhibit 99.2 to HealthSouth’s Current Report on Form 8-K filed on January
20, 2009).
|
|
| 10.29.2 |
Settlement
Agreement and Stipulation regarding Fees, dated as of January 13, 2009
(incorporated by reference to Exhibit 99.3 to HealthSouth’s Current Report
on Form 8-K filed on January 20, 2009).
|
|
| 10.30 |
Restrictive
Covenant Agreement, dated November 23, 2009, by and between HealthSouth
Corporation and John L. Workman (incorporated by reference to Exhibit 10.1
to HealthSouth’s Current Report on Form 8-K filed on November 23,
2009).+
|
| 12 |
Computation
of Ratios.
|
|
| 21 |
Subsidiaries
of HealthSouth Corporation.
|
|
| 23 |
Consent
of PricewaterhouseCoopers LLP, Independent Registered Public Accounting
Firm.
|
|
| 24 |
Power
of Attorney.
|
|
| 31.1 |
Certification
of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
| 31.2 |
Certification
of Principal Financial Officer required by Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
| 32.1 |
Certification
of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
| 32.2 |
Certification
of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
*
Incorporated by reference to HealthSouth’s Annual Report on Form 10-K filed with
the SEC on June 27, 2005.
**
Incorporated by reference to HealthSouth’s Annual Report on Form 10-K filed with
the SEC on March 29, 2006.
+
Management contract or compensatory plan or
arrangement.