HEALTHSOUTH REHABILITATION CORP, 424B1, 1994-06-24

HEALTHSOUTH REHABILITATION CORP
424B1, 1994-06-24
SPECIALTY OUTPATIENT FACILITIES, NEC

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<PAGE> 1

PROSPECTUS
5,800,000 SHARES
[LOGO] CAPSTONE CAPITAL CORPORATION
COMMON STOCK
---------------------

All of the shares (the "Shares") of Common Stock, $.001 par value per share
(the "Common Stock"), offered hereby (the "Offering") are being issued and sold
by Capstone Capital Corporation (the "Company"), which will invest in a
diversified portfolio of income-producing healthcare-related real estate.
Concurrently with the consummation of this Offering, the Company intends to
acquire an initial portfolio of 20 properties (the "Initial Properties") to be
leased and operated by five healthcare operators. The lessees will include
HEALTHSOUTH Rehabilitation Corporation ("HEALTHSOUTH"), OrNda HealthCorp
("OrNda"), Integrated Health Services, Inc. ("Integrated Health"), Quorum Health
Group, Inc. ("Quorum") and Surgical Health Corporation ("Surgical Health") or
their subsidiaries (the "Subsidiaries"). The Company expects to qualify as a
real estate investment trust ("REIT") under the Internal Revenue Code of 1986,
as amended (the "Code"), for the year ending December 31, 1994, and to pay
regular quarterly dividends of approximately 85% to 95% of its cash available
for distribution, beginning with a dividend for the quarter ending September 30,
1994. See "Distributions to Stockholders."

Prior to this Offering, there has been no public market for the Common
Stock. See "Underwriting" for information relating to the factors considered in
determining the initial public offering price. The Company's Common Stock has
been approved for listing on the New York Stock Exchange under the symbol "CCT."

See "Risk Factors" for certain factors relevant to an investment in the
Common Stock offered hereby, including the following:

- The Company is recently organized and has no operating history. Failure to
consummate the purchase of one or more properties could have an adverse
effect on the amount of distributions to stockholders.

- The ability of the lessees (the "Lessees") of the properties to be
acquired by the Company to make lease payments as and when due is
dependent in part upon no material adverse change in existing government
regulation and reimbursement in the healthcare industry and on the
financial condition of such Lessees and the Guarantors of such payments.

- The initial offering price for the Common Stock is not based upon the
market value of the Initial Properties, but was determined by dividing the
estimated dividend distributions by a minimum annual yield. There can be
no assurance that the market price of the Common Stock will not decline
below the initial offering price.

- While all of the Initial Properties have been appraised and are being
purchased by the Company at purchase prices not greater than the appraised
values, appraisals are only estimates of value and should not be relied
upon as a precise measure of realizable value.

- Risks associated with borrowing including the potential inability to
refinance indebtedness upon maturity, the effect of an increase in
interest rates on the Company's interest expense, if any, and the lack of
limitations in the Company's organizational documents on the amount of
indebtedness which the Company may incur.

- The Company will be taxed as a corporation if it fails to qualify as a
REIT. In order to qualify and to maintain the Company's qualification as a
REIT, direct and indirect beneficial ownership by any person or entity of
more than 9.8% in value of the outstanding Common Stock is restricted. See
"Description of Securities." This may have the effect of hindering
potential takeovers of the Company.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED
ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.

<TABLE>
<CAPTION>
======================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
THE PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................ $18.00 $1.14 $16.86
- ------------------------------------------------------------------------------------------------------
Total(3)............................. $104,400,000 $6,612,000 $97,788,000
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>

(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting offering expenses payable by the Company, estimated at
$1,296,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 870,000 additional Shares at the Price to the Public, less
Underwriting Discounts, solely to cover over-allotments, if any. See
"Underwriting." If such option is exercised in full, the total Price to the
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $120,060,000, $7,603,800 and $112,456,200, respectively.
------------------------

The Common Stock is being offered by the several Underwriters named herein,
subject to prior sale, when, as and if accepted by them and subject to certain
conditions. It is expected that the Common Stock offered hereby will be
available for delivery on or about June 30, 1994, at the offices of Smith Barney
Inc., 388 Greenwich Street, New York, New York 10013.
------------------------

SMITH BARNEY INC. J.C. BRADFORD & CO.

June 23, 1994
<PAGE> 2

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
---------------------

LOCATION OF INITIAL PROPERTIES

<TABLE>
<CAPTION>
INITIAL PROPERTY LOCATION FACILITY TYPE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. American Sports Medicine Institute Birmingham, AL Research Facility
2. Birmingham Medical Building I Birmingham, AL Ancillary Hospital Facility
3. Birmingham Medical Building II Birmingham, AL Ancillary Hospital Facility
4. One-7000 Building South Miami, FL Ancillary Hospital Facility
5. Larkin Medical Building South Miami, FL Ancillary Hospital Facility
6. Richmond Medical Building I Richmond, VA Ancillary Hospital Facility
7. Richmond Medical Building II Richmond, VA Ancillary Hospital Facility
8. Little Rock Little Rock, AR Outpatient Rehabilitation Facility
9. Coral Gables Coral Gables, FL Outpatient Rehabilitation Facility
10. Virginia Beach Virginia Beach, VA Outpatient Rehabilitation Facility
11. Midway Medical Plaza Los Angeles, CA Ancillary Hospital Facility
12. Mountain View Greensburg, PA Long-Term Care Facility
13. Gravois St. Louis, MO Sub-Acute Care Facility
14. Goodyear Clinic Gadsden, AL Ancillary Hospital Facility
15. Hamiter Building Gadsden, AL Ancillary Hospital Facility
16. Medical Building II Gadsden, AL Ancillary Hospital Facility
17. Desert Springs Las Vegas, NV Ancillary Hospital Facility
18. South County Medical Center St. Louis, MO Ambulatory Surgery Facility
19. Northlake Tucker, GA Ambulatory Surgery Facility
20. North Shore Evanston, IL Ambulatory Surgery Facility
</TABLE>
<PAGE> 3

TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
PROSPECTUS SUMMARY............................... 1
The Company.................................... 1
Risk Factors................................... 2
The Properties................................. 4
Investment Objectives.......................... 5
The Offering................................... 5
Use of Proceeds................................ 6
Distributions to Stockholders.................. 6
Summary Historical, Pro Forma and Estimated
Financial Information........................ 7
Tax Status of the Company...................... 8
RISK FACTORS..................................... 9
Lack of Operating History and Inexperience of
Management in Operating a REIT............... 9
Less Cash Available for Distribution from
Failure to Purchase or Delay in Purchasing
Initial Properties........................... 9
Reliance on Lessees and Guarantors............. 9
Lack of Industry Diversification............... 10
Specific Risks Relating to Healthcare
Facilities................................... 10
Determination of Initial Offering Price........ 11
Appraisals..................................... 12
Risks of Leverage and Default.................. 12
Consequences of Failure to Quality as a REIT... 12
Real Estate Investment Risks................... 13
Environmental Risks and Cost of Remediation.... 13
Antitakeover Effect of Ownership Limit and
Power to Issue Additional Shares............. 13
Maryland Business Combination Law.............. 14
Board May Change Investment Policies........... 14
Competition.................................... 14
Dependence on Key Personnel.................... 15
Conflicts of Interest.......................... 15
Dilution....................................... 15
Absence of Prior Public Market for Common
Stock; Effect of Interest Rates.............. 16
Risks for IRAs and Investors Subject to
ERISA........................................ 16
USE OF PROCEEDS.................................. 16
DISTRIBUTIONS TO STOCKHOLDERS.................... 17
DILUTION......................................... 18
CAPITALIZATION................................... 19
SELECTED HISTORICAL, PRO FORMA AND ESTIMATED
FINANCIAL INFORMATION.......................... 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............ 22
Overview....................................... 22
Results of Operations.......................... 22
Estimated Revenues Less Expenses............... 22
Liquidity and Capital Resources................ 22
BUSINESS......................................... 24
Initial Properties............................. 24
Description of Guarantors, Lessees and Initial
Properties................................... 25
HEALTHSOUTH Initial Properties................. 25
OrNda Initial Properties....................... 29
Integrated Health Initial Properties........... 29
Quorum Initial Properties...................... 31
Surgical Health Initial Properties............. 32
Acquisition of Initial Properties.............. 33

<CAPTION>
PAGE
-----
<S> <C>
Appraisals..................................... 34
Leases......................................... 34
Insurance...................................... 35
Medicaid, Medicare, Blue Cross and
Other Revenue................................ 35
Future Acquisitions of Healthcare Facilities... 36
Government Regulation and Recent
Developments................................. 37
Regulatory Compliance.......................... 39
Environmental Matters.......................... 39
Company Offices................................ 40
Legal Proceedings.............................. 40
INVESTMENT AND OTHER POLICIES.................... 40
Investment Policy.............................. 40
Other Policies................................. 43
MANAGEMENT....................................... 44
Directors and Executive Officers............... 44
Executive Compensation......................... 45
Compensation Committee Interlocks and Insider
Participation................................ 46
Deferred Compensation Plan..................... 46
1994 Stock Incentive Plan...................... 47
Retirement Plans............................... 47
Compensation of Directors...................... 47
Limitation of Liability and Indemnification.... 47
Insurance...................................... 48
Certain Transactions........................... 48
PRINCIPAL STOCKHOLDERS........................... 49
DESCRIPTION OF SECURITIES........................ 49
General........................................ 49
Common Stock................................... 49
Preferred Stock................................ 50
Power to Issue Additional Shares of Common
Stock and Preferred Stock.................... 50
Restrictions on Transfer....................... 51
Dividend Reinvestment Plan..................... 51
Shares Eligible For Future Sale................ 52
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
COMPANY'S CHARTER AND BYLAWS................... 52
Removal of Directors........................... 53
Business Combinations.......................... 53
Control Share Acquisitions..................... 53
Amendment to the Charter....................... 54
Dissolution of the Company..................... 54
Advance Notice of Director Nominations and New
Business..................................... 54
FEDERAL INCOME TAX CONSIDERATIONS................ 54
General........................................ 54
Taxation of the Company........................ 55
Taxation of Domestic Stockholders.............. 60
Taxation of Foreign Stockholders............... 61
Other Tax Consequences......................... 63
Dividend Reinvestment Plan..................... 64
ERISA CONSIDERATIONS............................. 64
UNDERWRITING..................................... 66
LEGAL MATTERS.................................... 67
EXPERTS.......................................... 67
AVAILABLE INFORMATION............................ 68
GLOSSARY......................................... 69
INDEX TO FINANCIAL STATEMENTS.................... F-1
</TABLE>

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PROSPECTUS SUMMARY

The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed descriptions and financial information and
statements appearing elsewhere in this Prospectus. Except as otherwise noted,
the information set forth in this Prospectus assumes (i) the acquisition of and
full payment for the 20 Initial Properties and (ii) no exercise of the
Underwriters' over-allotment option. As used herein, unless the context requires
otherwise, the term "Company" includes Capstone Capital Corporation, a Maryland
corporation, and its subsidiaries. For the definition of capitalized terms not
otherwise defined herein, including certain proper names of sellers of Initial
Properties, Lessees, Guarantors and related parties, see "Glossary."

THE COMPANY

The Company was recently organized to qualify as an indefinite life real
estate investment trust. The Company intends to invest in a diversified
portfolio of healthcare properties. Upon completion of this Offering, the
Company will acquire and lease back the 20 Initial Properties to five healthcare
operators. The Lessees will include HEALTHSOUTH, OrNda, Integrated Health,
Quorum and Surgical Health or their Subsidiaries.

The Initial Properties are located in ten states primarily in the
southeastern and western regions of the United States and represent a variety of
facility types in diverse healthcare industry segments. The Initial Properties
will be acquired for an aggregate purchase price of $115.4 million and will
provide annual Base Rent to the Company of approximately $12.8 million which
will result in estimated cash available for distribution of approximately $10.3
million and estimated revenues less expenses of approximately $8.8 million. All
of the Initial Properties have been appraised and will be purchased at prices
not greater than their respective appraised values. However, appraisals are only
estimates of value and should not be relied upon as a precise measure of
realizable value. All of the Leases are Triple Net Leases which require the
Lessees to pay all operating expenses, taxes, insurance and other costs. All of
the Leases provide for Additional Rent commencing after the first year. All of
the Leases have primary terms of 10 to 15 years and options to extend the term
at least 10 additional years. HEALTHSOUTH, Integrated Health, OrNda, Quorum and
Surgical Health are guarantors (the "Guarantors") of the obligations of their
respective Subsidiaries under the Leases. Each of the Guarantors has one or more
classes of publicly-traded debt or equity securities. The obligations under the
guarantees are not subordinated to any indebtedness of the Guarantors, but the
guarantees are unsecured and may be structurally subordinated to secured
indebtedness of the Guarantors to the extent of the assets securing such
indebtedness. In addition, the guarantees do not limit the Guarantors' ability
to incur additional secured indebtedness. The purchases of the Initial
Properties have closed into escrow and such Initial Properties will be released
from escrow as soon as practical after the closing of the Offering.

The Company's strategy is to become an important source of healthcare
facility capital by investing in a high quality portfolio of properties managed
by established operators, including long-term care, hospital management,
rehabilitation and alternate-site care companies. The Company intends to
diversify its portfolio by operator, geography, facility type and healthcare
industry segment. Its investment criteria emphasize management's evaluation
without specific standards of the creditworthiness of the lessee and any
guarantor, competitive position of the property, attractiveness of the industry
segment and fit with the Company's existing portfolio. For a discussion of the
factors the Company considers when determining creditworthiness, see
"Business -- Description of Guarantors, Lessees and Initial Properties." The
Company believes that there currently is significant demand for REIT financing
capital in the healthcare industry. In addition, the Company believes the
substantial healthcare industry experience and industry relationships of its
management and directors will help the Company identify, evaluate and complete
additional investments.

The Company has a $60 million line of credit (the "Bank Credit Facility")
from a consortium of banks led by NationsBank of Georgia, N.A. ("NationsBank")
with which to fund a portion of the purchase price for the Initial Properties
and to fund additional investments. The Company may enter into interest rate
swaps in order to mitigate the effect of a rising interest rate environment on
the cost of the Bank Credit Facility.

The Company will be self-administered and self-managed and will not engage
or pay a separate advisor.

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<PAGE> 6

RISK FACTORS

Prospective investors should consider carefully the matters discussed under
"Risk Factors" prior to making an investment decision regarding the Shares
offered hereby. Some of the significant considerations include:

- - Lack of Operating History and Inexperience of Management in Operating a
REIT. The Company has been recently organized and has no operating history.
The Company will be self-administered and therefore will not have a
third-party investment advisor. Management of the Company has not had prior
experience in operating a REIT.

- - Dependence on Lessees and Guarantors and Potential Reduction in Revenues. The
Company's revenues will be derived solely from rent under the Leases, and
therefore, any defaults under the Leases or the guarantees will result in
lower revenues and less cash available for distribution to the investors. The
obligations under the guarantees will be unsecured and may be structurally
subordinated to secured indebtedness of the Guarantors to the extent of the
assets securing such indebtedness. In addition, the guarantees do not limit
the Guarantors' ability to incur additional secured indebtedness. There is no
assurance that the Company will be able to renew its Leases upon their
expiration or that unfavorable economic, demographic or competitive conditions
or industry reform will not adversely affect the financial condition of the
Lessees and/or the Guarantors and, consequently, Lease revenues and the value
of the Company's investment in the Initial Properties.

- - Lack of Diversification. The Company intends to concentrate its investments
in healthcare-related properties and will be subject to the risks associated
with investing in a single industry.

- - Healthcare Industry Risks. The healthcare industry is highly regulated by
federal and state laws, licensing requirements, property inspections,
reimbursement policies, regulations concerning capital and other expenditures
and certification requirements. The failure of any Lessee to comply with such
laws, requirements and regulations could affect its ability to operate the
property or properties which it leases from the Company. New federal or state
laws or regulations may be enacted or promulgated which would have a material
adverse effect on the Lessees, and in turn on the Company. Additionally, the
uncertainty associated with current proposals for comprehensive national
healthcare reform may adversely affect the Lessees and the Guarantors, and in
turn, the Company.

- - Determination of Initial Offering Price. The initial public offering price of
the Common Stock has been determined by negotiations between the Company and
the Representatives of the Underwriters and may bear no relationship to the
price at which the Common Stock will trade after completion of the offering.
Furthermore the valuation of the Company is not based upon the current market
value of the Initial Properties. Rather, the initial public offering price for
the Common Stock was determined by dividing the estimated dividend
distributions to be paid to the purchasers of Common Stock in this Offering by
a minimum annual yield.

- - Appraisals. While all of the Initial Properties have been appraised and are
being purchased by the Company at purchase prices not greater than appraised
value, appraisals are only estimates of value and should not be relied upon as
a precise measure of realizable value. See "Business -- Appraisals."

- - Risks of Leverage and Default. Subject to any limitations on borrowings which
may be imposed under the Bank Credit Facility, the Company may borrow funds
and mortgage its properties in connection with the acquisition of the Initial
Properties, the acquisition of additional properties and for purposes of
funding other capital and operating expenditures. In addition, the Bank Credit
Facility bears interest at a variable rate, which exposes the Company to the
risks associated with the volatility in interest rates. If the Company
defaults on any loan secured by mortgages or other security interests on any
of its properties, the lenders may foreclose on such property and the Company
could lose its investment therein. Company policy prohibits the incurrence of
debt in excess of 50% of the Company's total capitalization.

- - Reduction in Dividends from Failure to Qualify as a REIT. If in any taxable
year the Company did not qualify as a REIT, it would be taxed as a corporation
and distributions to stockholders would not be deductible by the Company in
computing its taxable income. In addition, unless the Company were entitled to
relief under certain statutory provisions, the Company would also be
disqualified from treatment as a

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REIT for the four years following the year in which qualification was lost.
Failure to so qualify, even in one taxable year, could cause the Company to
dramatically reduce its dividends.

- - Environmental Risks and Cost of Remediation. Under various federal, state and
local environmental laws, ordinances and regulations, an owner of real
property, such as the Company, may be responsible for certain liabilities
relating to environmental risks, including the costs of remediation, which
could adversely affect the financial condition of the Company.

- - Development Projects. The Company may enter into build-to-suit type
agreements that by their terms require conversion to leases upon the
completion of the development of the property. Such activities, if undertaken,
might subject the Company to risks related to delays in construction, cost of
materials, financing availability, volatility in interest rates, labor
availability and other property development uncertainties.

- - Real Estate Investment Risks. Investments in the Initial Properties and any
additional properties in which the Company may invest in the future are
subject to risks, including illiquidity, typically associated with investments
in real estate.

- - Antitakeover Effect of Ownership Limit and Power to Issue Additional
Shares. In order to assist the Company in meeting certain tests applicable to
REITs with respect to the ownership of its capital stock, the Company's
Charter contains certain restrictions on the ownership and transfers of Common
Stock. The Company's Charter also authorizes the Board of Directors to
classify or reclassify any unissued shares of Common Stock or Preferred Stock.
These restrictions may deter acquisition of control of the Company by third
parties.

- - Change in Investment Policies. The Company's board of directors (the "Board
of Directors") may change the investment policies of the Company without
stockholder approval. Such policy changes may have adverse consequences to the
Company.

- - Competition. The Company competes for property acquisitions with, among
others, healthcare providers, other healthcare-related REITs, real estate
partnerships and financial institutions. The Company's properties will be
subject to competition from the properties of other healthcare providers.

- - Dependence on Key Personnel. The Company is dependent on its executive
officers, none of whom has entered into an employment agreement with the
Company.

- - Conflicts of Interest. Two of the nine directors of the Company are executive
officers and directors of HEALTHSOUTH. HEALTHSOUTH is a stockholder of the
Company and will be the lessee or guarantor of 10 of the Initial Properties to
be acquired from HEALTHSOUTH or its Subsidiaries (the "HEALTHSOUTH Initial
Properties"). Conflicts of interest exist in such directors' duties to holders
of the Company's Common Stock and to stockholders of HEALTHSOUTH. Two of the
nine directors of the Company are also directors of Integrated Health and
Surgical Health. Integrated Health and Surgical Health will be the Lessee or
Guarantor of two and three of the Initial Properties, respectively, to be
acquired from Integrated Health and Surgical Health or their respective
Subsidiaries. Conflicts of interest may arise in their duties to holders of
the Company's Common Stock and stockholders of Integrated Health and Surgical
Health, respectively.

- - Dilution. The purchasers of the Shares will experience an immediate dilution
in the net tangible book value per share of the Common Stock.

- - Absence of Prior Public Market for Common Stock; Effect of Interest
Rates. Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will
develop or be sustained in the future or that the market price of the Common
Stock will not decline below the initial public offering price. In addition,
since the market price of common stock of a publicly-traded REIT such as the
Company is determined in part by the attractiveness of the yield on such
common stock in relation to prevailing interest rates, an increase in interest
rates could adversely affect the market price of the Common Stock.

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THE PROPERTIES

The Initial Properties, which will not be subject to any previously
existing mortgage debt when acquired, are summarized in the following table by
Guarantor:

<TABLE>
<CAPTION>
INITIAL INITIAL PERCENTAGE
INITIAL PROPERTY PROPERTY LEASE OF
GUARANTOR NAME TYPE(1) TERM PURCHASE PRICE(2) PORTFOLIO(3)
- ---------------------------- ------------------------------------ -------- ------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
HEALTHSOUTH American Sports Medicine RF 15 $ 3,200,000 2.8%
Institute.........................
Birmingham Medical Building I....... AHF 15 4,700,000 4.1
Birmingham Medical Building II...... AHF 15 9,600,000 8.3
One-7000 Building................... AHF 15 13,250,000 11.5
Larkin Medical Building............. AHF 15 2,250,000 1.9
Richmond Medical Building I......... AHF 15 2,100,000 1.8
Richmond Medical Building II........ AHF 15 10,000,000 8.7
Little Rock......................... ORF 15 2,060,000 1.8
Coral Gables........................ ORF 15 2,300,000 2.0
Virginia Beach(4)................... ORF 15 1,460,000 1.2
------------------ ------
50,920,000 44.1
OrNda Midway Medical Plaza................ AHF 15 20,400,000 17.7
------------------ ------
20,400,000 17.7
Integrated Health Mountain View....................... LTCF 10 9,775,000 8.4
Gravois............................. SACF 10 8,500,000 7.4
------------------ ------
18,275,000 15.8
Quorum Goodyear Clinic..................... AHF 10 1,607,160 1.4
Hamiter Building.................... AHF 10 4,382,520 3.8
Medical Building II................. AHF 10 5,810,320 5.0
Desert Springs...................... AHF 10 4,700,000 4.1
------------------ ------
16,500,000 14.3
Surgical Health South County Medical Center(4)...... ASF 15 7,400,000 6.4
Northlake........................... ASF 13 1,040,000 0.9
North Shore......................... ASF 15 910,000 0.8
------------------ ------
9,350,000 8.1
------------------ ------
Total $115,445,000 100.0%
=============== ==========
</TABLE>

- ---------------

Ancillary hospital facilities, which are contiguous or adjacent to a
hospital, provide a variety of medical services such as diagnostic, outpatient
surgery and rehabilitation services, in addition to physician offices and
selected hospital support services. Outpatient rehabilitation facilities offer a
comprehensive range of rehabilitative healthcare services, including physical
therapy and occupational therapy, and focus predominantly on orthopaedic
injuries, sports injuries, work injuries, hand and upper extremity injuries,
back injuries and various neurological/neuromuscular conditions. Long-term care
facilities generally provide a variety of extended care and services to the
elderly. Sub-acute care facilities provide monitoring, specialized care and
comprehensive rehabilitative therapy required by sub-acute and medically complex
patients. Ambulatory surgery centers provide various surgical procedures,
typically on an outpatient basis.

The Company may fund the purchase of additional properties by future equity
or debt financing or by reinvestment of proceeds from the sale of properties.
The Company may incur indebtedness and mortgage its properties in furtherance of
its activities. There are no restrictions on the number of mortgages which may
be placed on a single property. The Company's present policy prohibits incurring
debt (secured or unsecured) in

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excess of 50% of its total capitalization. However, this debt limitation policy
can be changed by the Board of Directors without stockholder approval. Moreover,
there are no Bylaws or other provisions that require such limitation. The
Company will borrow approximately $20,228,000 under the Bank Credit Facility at
the closing of this Offering to fund the balance of the purchase price for the
Initial Properties, which will result in a debt-to-total capitalization ratio of
17.3%. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Investment and
Other Policies."

The Company has agreed to reimburse the actual costs incurred by Crescent
Capital Partners (the "Partnership") on behalf of the Company up to $1,675,000
from the proceeds of the Offering. Crescent Capital Partners is an Alabama
general partnership, the partners of which are Richard M. Scrushy, John W.
McRoberts and Michael D. Martin. These costs relate to the activities of the
Partnership prior to the formation of the Company, including organizing the
Company, negotiating the acquisitions of the Initial Properties, performing due
diligence investigation related to the Initial Properties, performing corporate
work in contemplation of the Offering, preparing the Registration Statement,
providing interim financing for and closing the acquisition of the Initial
Properties, employee compensation (including salaries of the executive
officers), travel and overhead. In addition, John W. McRoberts, Richard M.
Scrushy, Michael D. Martin and HEALTHSOUTH (the "Founding Stockholders")
purchased an aggregate of 180,000 shares for $.001 per share, which are valued
at $3,240,000 based upon the initial public offering price. See "Management --
Certain Transactions" for more detailed information relating to the amounts to
be received by affiliates of the Company upon completion of the Offering, and
"Principal Stockholders" with respect to the stock ownership of such persons.

The Company's principal executive offices are located at One Perimeter Park
South, Suite 335-S, Birmingham, Alabama 35243, and its telephone number is (205)
967-2092.

INVESTMENT OBJECTIVES

The Company will seek to generate stable and increasing distributions
through a self-administered portfolio management program that will allow the
Company to maintain diversity and expand the Company's healthcare properties
portfolio. The Company's investment objectives are: (i) to generate current
income for stockholders; (ii) to provide increased returns to stockholders
through the acquisition and development of additional properties, which may
require the use of additional debt or equity financing; (iii) to provide
stockholders with the opportunity to realize capital growth resulting from
appreciation, if any, in the residual values of properties acquired; and (iv) to
preserve and protect stockholders' capital. There can be no assurance that the
Company will be successful in meeting these objectives. See "Risk Factors" and
"Investment and Other Policies."

THE OFFERING

<TABLE>
<S> <C>
Common Stock to be offered...................................... 5,800,000 shares(1)
Common Stock to be outstanding after the Offering............... 5,980,000 shares(2)
New York Stock Exchange Symbol.................................. CCT
</TABLE>

- ---------------

(1) Does not include up to 870,000 shares of Common Stock, if any, that may be
purchased by the several Underwriters to cover over-allotments or 418,600
shares reserved for issuance pursuant to the Company's 1994 Stock Incentive
Plan. See "Management -- 1994 Stock Incentive Plan."
(2) Includes 180,000 shares (the "Founders' Shares"), sold in connection with
the organization of the Company to the Company's Founding Stockholders for
an aggregate of $180 on March 31, 1994, of which 82,656 shares are owned by
Richard M. Scrushy, 71,280 shares are owned by HEALTHSOUTH, 18,000 shares
are owned by John W. McRoberts and 8,064 shares are owned by Michael D.
Martin. Each Founding Stockholder paid $.001 per share for the Founders'
Shares. See "Dilution" and "Principal Stockholders."

5
<PAGE> 10

USE OF PROCEEDS

The net proceeds to the Company from the sale of the Shares offered hereby
are estimated to be approximately $96,492,000 after deduction of estimated
underwriting commissions and Offering expenses. The purchase price of the
Initial Properties, including net estimated acquisition expenses of
approximately $1,050,000, will be approximately $116,495,000. All of the net
proceeds will be applied against the purchase price of the Initial Properties.
The balance of the purchase price required for the Initial Properties will be
covered by borrowings of approximately $20,228,000 under the Bank Credit
Facility. The purchases of the Initial Properties have closed into escrow and
such Initial Properties will be released from escrow as soon as practical after
the closing of the Offering. See "Business -- Initial Properties."

DISTRIBUTIONS TO STOCKHOLDERS

The Company intends to make quarterly distributions to stockholders of
approximately 85% to 95% of its cash available for distribution (estimated to be
approximately $8,765,000 to $9,796,000). In any event, the Company intends to
pay annual amounts at least sufficient to satisfy the annual distribution
requirements imposed on REITs. In general, such REIT distribution requirements
provide that at least 95% of the Company's REIT taxable income must be
distributed annually to stockholders, which amount is estimated to be $1.23 per
share ($7,355,400). See "Federal Income Tax Considerations -- Taxation of the
Company." The Company expects to make distributions in excess of 95% of its REIT
taxable income. Payment of distributions, however, will be at the discretion of
the Company's Board of Directors at all times and will depend upon various
factors including the Company's financial condition, earnings, anticipated
investments, and other relevant factors. Under certain circumstances, it may be
necessary for the Company to borrow or liquidate investments to satisfy its REIT
distribution requirements. See "Federal Income Tax Considerations" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

Aggregate Base Rent under the Leases results in estimated cash available
for distribution of $1.72 per share after deducting estimated interest and
operating expenses. Such estimated cash available for distribution does not give
effect to any delay in the acquisition of or failure to acquire the Initial
Properties, to any payments of Additional Rent, to the acquisition of any
properties in addition to those identified in this Prospectus or the incurrence
of indebtedness in connection therewith. No assurance can be given that the
Initial Properties will perform as expected or that the estimated cash available
for distribution will be obtained. The Company estimates that approximately 12%
to 21% of the distributions that could have been made by the Company for the
twelve months ended March 31, 1994, represent return of capital for federal
income tax purposes and, therefore, would not be subject to current federal
income tax. Such nontaxable distributions would reduce a stockholder's tax basis
in its Common Stock and any gain or loss recognized on the subsequent sale of
such shares or upon liquidation of the Company would be increased or reduced
accordingly. Any distributions that exceed a stockholder's basis in its Common
Stock would be treated as gain from the sale or exchange of such Common Stock
for federal income tax purposes. See "Distributions to Stockholders" and "Pro
Forma Balance Sheet and Statements of Estimated Revenues Less Expenses."

For each of the first six quarters in which distributions are paid by the
Company, the Founding Stockholders have consented to contribute to the Company
the after-tax portion of any distributions paid to them for such quarter if (i)
the annualized distributions paid in such quarter do not equal or exceed $1.70
per share ($0.425 per share per quarter) or (ii) the aggregate distributions
paid in such quarter on the outstanding shares exceed 95% of the cash available
for distribution for the relevant quarterly period. The Company estimates that
the aggregate distributions payable to the Founding Stockholders will be
$264,600 (based on a distribution of 85% of estimated cash available for
distribution) and $295,200 (based on a distribution of 95% of estimated cash
available for distribution), subject to the Founding Stockholders' dividend
agreement.

6
<PAGE> 11

SUMMARY HISTORICAL, PRO FORMA AND ESTIMATED FINANCIAL INFORMATION

The following table sets forth financial information for the Company which
is derived from the Balance Sheet, the Pro Forma Balance Sheet and the
Statements of Estimated Revenues Less Expenses included elsewhere in this
Prospectus. The adjustments for the Offering assume that the Underwriters'
over-allotment option is not exercised.

Estimated revenues less expenses is presented for the year ended December
31, 1993, and the three months ended March 31, 1994, as if the Offering and the
acquisitions of the Initial Properties by the Company had occurred, and as if
the respective Leases had been in effect, at January 1, 1993. The pro forma
balance sheet data is presented as of March 31, 1994, as if the Offering and the
transfers of the Initial Properties to the Company had occurred, and as if the
respective Leases had been in effect, at that date. The pro forma and estimated
information incorporates certain assumptions that are included in the notes to
the Pro Forma Balance Sheet and Statements of Estimated Revenues Less Expenses
included elsewhere in this Prospectus. See "Selected Historical, Pro Forma and
Estimated Financial Information" and "Pro Forma Balance Sheet and Statements of
Estimated Revenues Less Expenses." The pro forma and estimated information does
not purport to represent what the actual financial position or results of
operations of the Company would have been as of or for the periods indicated nor
does it purport to represent any future financial position or results of
operations for any future period.

<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED MARCH 31, 1994
--------------------------------------- YEAR ENDED DECEMBER 31, 1993
AS ADJUSTED FOR THE -----------------------------
OFFERING AND THE AS ADJUSTED FOR THE OFFERING
ACQUISITION OF THE AND THE ACQUISITION OF THE
HISTORICAL(1) INITIAL PROPERTIES INITIAL PROPERTIES
------------- --------------------- -----------------------------
<S> <C> <C> <C>
ESTIMATED REVENUES LESS EXPENSES:
Revenues.............................. -- $ 3,478,586 $13,914,344
Interest expense...................... -- 359,667 1,438,669
Estimated revenues less expenses...... -- 2,194,626 8,778,504
Estimated revenues less expenses per
share.............................. -- $ 0.37 $ 1.47
Shares outstanding.................... 180,000 5,980,000 5,980,000
PRO FORMA BALANCE SHEET DATA:
Real estate properties, net........... -- $ 116,495,000
Total assets.......................... $ 180 116,720,000
Bank Credit Facility.................. -- 20,227,820
Total stockholders' equity............ 180 96,492,180
OTHER DATA:
Estimated cash available for
distribution(2).................... -- $ 2,577,983 $10,311,932
Estimated cash available for
distribution per share(2).......... -- $ 0.43 $ 1.72
</TABLE>

- ---------------

(1) The Company was incorporated on March 31, 1994.
(2) Estimated cash available for distribution is estimated revenues less
expenses plus depreciation, amortization and other non-cash items less
accrued rental income. Distributions in excess of net income generally
constitute a return of capital. Management considers cash available for
distribution to be an informative measure of the performance of an equity
REIT and consistent with measures used by analysts to evaluate equity REITs.
Cash available for distribution does not represent cash generated from
operating activities in accordance with generally accepted accounting
principles, is not necessarily indicative of cash available to fund cash
needs and should not be considered as an alternative to net income as an
indicator of the Company's operating performance or as an alternative to
cash flow as a measure of liquidity.

7
<PAGE> 12

TAX STATUS OF THE COMPANY

The Company intends to qualify and to make an election to be taxed as a
REIT under Section 856(c) of the Code, commencing with its taxable year ending
December 31, 1994. If the Company so qualifies and elects taxation as a REIT,
the Company generally will not be subject to federal income tax to the extent
that it distributes its REIT taxable income to stockholders. REITs are subject
to a number of organizational and operational requirements. If the Company fails
to qualify as a REIT in any taxable year, the Company will be subject to federal
income tax (including any alternative minimum tax) on its taxable income at
regular corporate rates. See "Risk Factors" and "Federal Income Tax
Considerations" for a more detailed discussion of the consequences of the
failure of the Company to qualify as a REIT. Even if the Company qualifies as a
REIT, the Company may be subject to state and local taxes on its income and
property and federal income and excise taxes on its undistributed income.

8
<PAGE> 13

RISK FACTORS

An investment in the Common Stock involves various risks. There can be no
assurance that the Company will achieve its investment objectives. In addition
to general investment risks and those factors set forth elsewhere in this
Prospectus, investors should consider the following factors before making a
decision to purchase Shares.

LACK OF OPERATING HISTORY AND INEXPERIENCE OF MANAGEMENT IN OPERATING A REIT

The Company has been recently organized and has no operating history. The
Company will be self-administered and therefore will not have a third-party
investment advisor. The Company's Board of Directors and executive officers will
have overall responsibility for management of the Company. Although certain of
the Company's officers and directors have extensive experience in the
acquisition, development, financing and leasing of real properties and certain
of the Company's directors have extensive experience in the operation of
healthcare facilities and publicly-owned corporations, no officer has prior
experience in the healthcare industry nor in operating a business in accordance
with the Code requirements for maintaining qualification as a REIT. Failure to
maintain REIT status would have an adverse effect on the Company's ability to
make anticipated distributions to stockholders. There can be no assurance that
the past experience of management will be appropriate to the business of the
Company. See "Management."

LESS CASH AVAILABLE FOR DISTRIBUTION FROM FAILURE TO PURCHASE OR DELAY IN
PURCHASING THE INITIAL PROPERTIES

The purchase of one or more of the Initial Properties may not be
consummated or may be delayed for various reasons, such as the occurrence of
significant casualty losses. If the acquisition of any of the Initial Properties
is not consummated prior to the closing date specified in the respective
Purchase Agreements, the seller of such Initial Property may not be obligated
thereafter to sell such Initial Property to the Company. The purchases of the
Initial Properties have closed into escrow, and the Initial Properties will be
released from escrow as soon as practical after the closing of the Offering,
except for the South County Medical Center facility, and the Virginia Beach
facility, which will be acquired as soon as practical after the receipt of
certain approvals. In the case of the South County Medical Center facility,
construction is substantially completed and a certificate of occupancy from the
proper authority is expected to be received in June 1994. As of May 25, 1994,
leases had been signed for over 93% of the rentable space in the South County
Medical Center and temporary certificates of occupancy have been issued as
present tenants move in. In the case of the Virginia Beach facility, approval of
the formation of a commercial condominium is expected to be obtained in June
1994. Pending identification and acquisition of alternative properties to
purchase, should the consummation of the purchase of any of the Initial
Properties not occur as and when planned, the funds intended for such
acquisition will be invested in accordance with the Company's investment
policies. The anticipated yield on such interim investments, if made, will be
substantially less than the expected return on the Initial Properties and the
other real estate investments that the Company will seek to make and less than
the anticipated level of distributions to the Company's stockholders.

In addition, if the purchase of any of the Initial Properties does not
occur, there can be no assurance that the terms of the Lease for any property
acquired in substitution for such Initial Properties will be as advantageous to
the Company as those pertaining to the property that was not acquired. If this
occurs, there may be an adverse effect on the Company's ability to make the
anticipated distributions to stockholders.

RELIANCE ON LESSEES AND GUARANTORS

The Company's revenues will be derived solely from rent under the Leases,
and therefore, any defaults under the Leases or the guarantees will result in
lower revenues and less cash available for distribution to the investors. The
obligations under the guarantees will be unsecured and may be structurally
subordinated to secured indebtedness of the Guarantors to the extent of the
assets securing such indebtedness. While the Company has not established any
definitive credit criteria, the Company has evaluated the creditworthiness of
the Lessees and Guarantors based upon a review of publicly available financial
and other information, due diligence review of the individual financial
statements and other non-financial information provided by the Lessees and
Guarantors, to the extent available, and other data customarily reviewed when a
company makes

9
<PAGE> 14

an acquisition or significant investment. The operating results of the Initial
Properties underlying the Company's investments will depend upon various factors
over which the Company will have no control and which may affect the present or
future cash flows of the Company. Those factors include general economic
conditions, changes in the supply of, or demand for, competing healthcare
facilities, changes in occupancy levels, the ability of the Lessees through rate
increases or otherwise to absorb increases in operating expenses and changes in
government regulations and zoning laws.

No assurance can be given that a Lessee will exercise any option to renew
its Lease upon the expiration of the initial term. In such an instance, the
Company may not be able to locate a qualified purchaser or a qualified
replacement tenant, as a result of which it would lose a source of revenue while
remaining responsible for the payment of its obligations.

LACK OF INDUSTRY DIVERSIFICATION

While the Company is authorized to invest in various types of
income-producing real estate, its current strategy is to acquire and hold, for
long-term investment, healthcare-related properties. Consequently, the Company
currently has chosen not to include assets selected to reduce risks associated
with an investment in real estate in the healthcare industry, and will be
subject to the risks associated with investments in a single industry.

SPECIFIC RISKS RELATING TO HEALTHCARE FACILITIES

Lessees' Reliance on Government Reimbursement. A significant portion of
the revenue of the Lessees and the Guarantors is derived from government
reimbursement programs, such as Medicare and Medicaid. While it varies with each
Lessee and Guarantor and changes from time to time, approximately one-third to
two-thirds of the revenue of each of the Lessees and the Guarantors is derived
from such programs. Although lease payments to the Company are not directly
linked to the level of government reimbursement, to the extent that changes in
these programs have a material adverse affect on the Lessees, such changes could
have an impact on their ability to make lease payments. The Medicare program is
highly regulated and subject to frequent and substantial changes. In recent
years, fundamental changes in the Medicare program (including the implementation
of a prospective payment system ("Prospective Payment System" or "PPS") in which
facilities are reimbursed generally a flat amount based on a patient's diagnosis
and not based on the facility's cost for inpatient services at medical surgical
hospitals) have resulted in reduced levels of payment for a substantial portion
of healthcare services. The Medicaid program is a federally-mandated, state-run
program providing benefits to low income and other eligible persons and is
funded through a combination of state and federal funding. The method of
reimbursement under Medicaid varies from state to state, but is typically based
on rates negotiated between the provider and the state, or is based on per diem
or per diagnosis rates similar to Medicare. Moreover, healthcare facilities have
experienced increasing pressures from private payors attempting to control
healthcare costs that have reduced reimbursement to levels approaching that of
government payors. See "Business -- Government Regulation."

Considerable uncertainties surround the future determination of payment
levels under government reimbursement programs. In addition, future budget
reductions in government financed programs could significantly reduce payments
made to Lessees and Guarantors, and there can be no assurance that future
payment rates will be sufficient to cover cost increases in providing services
to patients. Reductions in payments pursuant to government healthcare programs
could have an adverse impact on a Lessee's or Guarantor's financial condition
and, therefore, could adversely affect the ability of the Lessee or Guarantor to
make rental payments.

Impact of Reduced Occupancy Rates in Hospitals Adjacent to Ancillary
Hospital Facilities Being Acquired. Most of the hospitals adjacent to the
ancillary hospital facilities being acquired are substantially less than fully
occupied on an inpatient basis. Despite such occupancy rates, however, the
Company believes that operating cash flow produced by such hospitals will
adequately cover rental payments to the Company. See information regarding
annual coverage ratios under the caption "Business -- Initial Properties." If
the inpatient occupancy rate at such a hospital were to deteriorate to a level
at which operating cash flow would be insufficient to cover the rental payments
to the Company on the particular ancillary hospital facility, the Company would
have to rely upon the general credit of the Lessee or the related Guarantor.

10
<PAGE> 15

Healthcare Reform. The healthcare industry is undergoing significant
changes as third-party payors attempt to control the cost, utilization and
delivery of healthcare services. In addition, President Clinton and certain
members of Congress recently announced comprehensive healthcare reform proposals
which include such elements as universal coverage and the acquisition of
coverage through regional health alliances. Political and other cost-control
initiatives regarding the cost and delivery of healthcare are also currently
being considered, and reductions in payments to physicians or other changes in
reimbursement for healthcare services by other third-party payors could
materially adversely affect the financial condition of the tenants of some of
the Initial Properties. Substantially all of the tenants of the Initial
Properties are in the medical profession and the Company believes that such
tenants are dependent on payment for their services by third-party payors. No
assurance can be given whether or to what extent any of the healthcare proposals
will be enacted into law, or what effect any such proposals or subsequent
legislation, if any, or other changes regarding healthcare would have on the
financial condition of the tenants of the Initial Properties and their ability
to make lease payments or renew leases.

Proximity to Hospitals. Some of the Initial Properties are in close
proximity to one or more hospitals. The relocation or closure of a hospital
could make the Company's Initial Properties in such area less desirable to
doctors affiliated with such hospital and affect the Lessee's ability to renew
leases and attract new tenants.

Government Regulation of Healthcare Industry. The healthcare industry is
highly regulated by federal, state and local law, state and local licensing
requirements, facility inspections, reimbursement policies, regulations
concerning capital and other expenditures, certification requirements and other
laws, regulations and rules. The failure of any Lessee or sublessee to comply
with such laws, requirements and regulations could affect the Lessee's ability
to operate the Initial Property or Initial Properties which it leases from the
Company. For example, the certificate of need ("CON") for the Northlake facility
has been challenged in two related Georgia state court proceedings. See
"Business -- Surgical Health Initial Properties -- Northlake."

Potential Operator Loss of License or Certification. Healthcare operators
are subject to federal and state laws and regulations which govern financial and
other arrangements between healthcare providers. These laws prohibit certain
direct and indirect payments or fee-splitting arrangements between healthcare
providers that are designed to induce or encourage the referral of patients to,
or the recommendation of, a particular provider for medical products and
services. They also require compliance with a variety of safety, health and
other requirements relating to the conditions of the licensed facility and
quality of care provided. Possible sanctions for violation of these laws and
regulations include loss of license or certification and the imposition of civil
monetary and criminal penalties.

In certain circumstances, conviction of abusive or fraudulent behavior with
respect to one facility may subject other facilities under common control or
ownership to disqualification from participation in the Medicare and Medicaid
programs.

Because this area of the law currently is subject to intense scrutiny,
additional laws and regulations may be enacted which could require changes in
certain operations of the Lessees and sublessees of the Initial Properties. A
Lessee's loss of license or Medicare/Medicaid certification could result in the
Company having to obtain another Lessee for the affected Initial Property. No
assurances can be given that the Company could contract with such a Lessee on a
timely basis or on acceptable terms and a failure of the Company to do so could
have an adverse effect on the Company's revenues.

Limitations on Transfers and Alternative Uses of Initial
Properties. Transfers of operations of certain healthcare facilities are
subject to regulatory approvals not required for transfers of other types of
commercial operations and other types of real estate. In addition, certain of
the Initial Properties are special purpose facilities that may not be easily
adaptable to non-healthcare-related uses.

DETERMINATION OF INITIAL OFFERING PRICE

The initial public offering price has been determined through negotiations
between the Company and the Representatives of the Underwriters and may not be
indicative of the market price of the Common Stock after the Offering.
Furthermore the valuation of the Company is not based upon the current market
value of the Initial Properties. Rather, the initial public offering price for
the Common Stock was determined by dividing

11
<PAGE> 16

the estimated dividend distributions to be paid to the purchasers of Common
Stock in this Offering by a minimum annual yield. See "Underwriting" for a
description of the factors considered by the Company and the Underwriters in
setting the initial public offering price of the Common Stock. The market value
of the Common Stock could be substantially influenced by general market
conditions.

APPRAISALS

While all of the Initial Properties have been appraised and are being
purchased by the Company at purchase prices not greater than the appraised
value, appraisals are only estimates of value and should not be relied upon as a
precise measure of realizable value. Investors should exercise caution in
evaluating appraisal results. See "Business -- Appraisals."

RISKS OF LEVERAGE AND DEFAULT

The Company may incur indebtedness and mortgage its properties in
furtherance of its activities. The Company's present policy prohibits incurring
debt (secured or unsecured) in excess of 50% of total capitalization. However,
this limitation can be changed by the Board of Directors without stockholder
approval. Moveover, there are no Bylaws or other provisions which require such
limitation.

The Company may borrow funds and mortgage its properties in connection with
the acquisition of additional properties and for purposes of funding other
capital and operating expenditures, including expenditures relating to the
renovation, modification or expansion of Initial Properties. In addition, the
Company may be required to borrow money and/or mortgage its properties to fund
any cash shortfall in order to meet its cash distribution requirements if 95% of
the Company's REIT taxable income exceeds its cash available for distribution.
See "Investment and Other Policies." See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

Any borrowings, including borrowings under the Bank Credit Facility, as
well as the resulting interest expense and principal repayments therefrom, could
negatively affect the Company's cash available for distribution. The Bank Credit
Facility matures two years from the date of its closing. The Company intends to
renew the Bank Credit Facility or repay the outstanding balance at that time
with proceeds from a refinancing or from a sale of debt or equity securities.
There can be no assurances that NationsBank will agree to renew the Bank Credit
Facility on terms favorable to the Company or that the Company will be able to
obtain refinancing proceeds or proceeds from the sale of debt or equity
securities. If the Company defaults on any loan secured by mortgages the Company
may place on any of its properties, the lenders may foreclose on such property
and the Company could lose its investment therein. The degree of risk associated
with borrowings will increase if the Company borrows on terms involving a
variable interest rate or a "balloon" payment at maturity.

CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT

The Company intends at all times to elect and operate so as to qualify as a
REIT. If the Company qualifies as a REIT, it will generally be allowed a
deduction for dividends paid to its stockholders in computing its federal
taxable income. This treatment substantially eliminates the "double taxation" of
corporate earnings. If in any taxable year the Company did not qualify as a
REIT, it would be taxed as a corporation and distributions to stockholders would
not be deductible by the Company in computing taxable income. In addition,
unless the Company were entitled to relief under certain statutory provisions,
the Company would also be disqualified from electing treatment as a REIT for the
four succeeding years following the year in which qualification was lost.
Failure to so qualify, even in one taxable year, could cause the Company to
dramatically reduce its dividends.

12
<PAGE> 17

To qualify as a REIT, the Company will be required, among other things, to
distribute at least 95% of its REIT taxable income to stockholders each year. In
order to maintain status as a REIT, the Company must satisfy certain
requirements on a continuing basis, which requirements may substantially affect
day-to-day decision making by the Company. No assurance can be given that the
Company will at all times satisfy these tests. Possible timing differences
between receipt of income and payment of expenses, and the inclusion and
deduction of such amounts in determining taxable income, could require the
Company to reduce its dividends below the level necessary to maintain its
qualification as a REIT, which would adversely affect the Company's ability to
maintain REIT status. See "Federal Income Tax Considerations -- Taxation of the
Company."

Even if the Company qualifies as a REIT, certain transactions or other
events could result in the imposition of federal tax at rates ranging from four
percent to 100% on certain types of the Company's income or gains.

REAL ESTATE INVESTMENT RISKS

Illiquidity of Real Estate Investments. Investments in the Initial
Properties or properties in which the Company may invest in the future are
subject to risks typically associated with investments in real estate. Equity
investments in real estate are relatively illiquid, and, therefore, the ability
of the Company to vary its portfolio in response to changed conditions will be
limited.

Development Projects. The Company's investment policies permit it to enter
into build-to-suit type agreements that by their terms require conversion to
leases upon the completion of the development of the facility. The Initial
Properties do not include any development projects. Such activities, if
undertaken, might subject the Company to risks related to delays in
construction, cost of materials, financing availability, volatility in interest
rates, labor availability and other property development uncertainties.
Development projects are generally considered to involve greater risks than the
sale and lease-back of operating properties. See "Investment and Other
Policies -- Investment Policy." Although the Company will attempt to minimize
the risks associated with development activities, including obtaining additional
forms of security and collateral beyond that provided by the Leases, no
assurances can be given that such additional security will be effective.

ENVIRONMENTAL RISKS AND COST OF REMEDIATION

Under various federal, state and local environmental laws, ordinances and
regulations, an owner of real property (such as the Company will be) may be
liable for the costs of removal or remediation of certain hazardous or toxic
substances at, under or disposed of in connection with such property, as well as
certain other potential costs relating to hazardous or toxic substances
(including government fines and injuries to persons and adjacent property). Such
laws often impose liability without regard to whether the owner knew of, or was
responsible for, the presence or disposal of such substances and may be imposed
on the owner in connection with the activities of an operator of the property.
The cost of any required remediation, removal, fines or personal or property
damages and the owner's liability therefor could exceed the value of the
property and/or the aggregate assets of the owner. In addition, the presence of
such substances, or the failure to properly dispose of or remediate such
substances, may adversely affect the owner's ability to sell or rent such
property or to borrow using such property as collateral, which in turn would
reduce the Company's revenues and ability to make distributions.

Although the Purchase Agreements and the Leases require the seller or
Lessee, as the case may be, to indemnify the Company for certain environmental
liabilities with respect to the Initial Properties, the scope of such
obligations may be limited and there can be no assurances that any such seller
or Lessee will be able to fulfill its indemnification obligations. Nor can there
be any assurance that those indemnities will be sufficient to cover any
liability for any or all of the hazardous substances that may exist at the
Initial Properties. See "Business -- Environmental Matters."

ANTITAKEOVER EFFECT OF OWNERSHIP LIMIT AND POWER TO ISSUE ADDITIONAL SHARES

For the Company to qualify as a REIT under the Code in any taxable year, no
more than 50% in value of its outstanding stock may be owned directly, or
indirectly by attribution, by five or fewer individuals (as

13
<PAGE> 18

defined in the Code to include certain entities) at any time during the second
half of the Company's taxable year (other than during the first year for which
the Company elects to be treated as a REIT). In addition, the outstanding stock
must be owned by 100 or more persons during at least 335 days of a taxable year
of 12 months or during a proportional part of a shorter taxable year (other than
during the first year for which the Company elects to be treated as a REIT). See
"Federal Income Tax Considerations."

Because of the stock ownership requirements applicable to REITs, the
Company's charter (the "Charter") contains restrictions on transfer of its
stock. Such restrictions authorize the Company to refuse to transfer stock to
any person, if as a result of such transfer such person or entity would
beneficially own stock in excess of 9.8% in number or value of the outstanding
stock of the Company ("Excess Shares"). Such provisions may inhibit market
activity and the resulting opportunity for stockholders to realize a premium for
their Common Stock that might otherwise exist if a stockholder were attempting
to assemble a block of stock in excess of 9.8% in number or value of the
outstanding stock. Also, there can be no assurance that such provisions will in
fact enable the Company to meet the relevant REIT stock ownership requirements.

The Company's Charter authorizes the Board of Directors to cause the
Company to issue additional authorized but unissued shares of Common Stock or
preferred stock (the "Preferred Stock") and to classify or reclassify any
unissued shares of Common Stock or Preferred Stock and to set the preferences,
rights and other terms of such classified or unclassified shares. See
"Description of Securities." Although the Board of Directors has no such
intention at the present time, it could establish a series of Preferred Stock
that could, depending on the terms of such series, delay or impede a transaction
or a change of control of the Company that might involve a premium price for the
Common Stock or otherwise be in the best interest of the stockholders. The
Charter and Bylaws of the Company also contain other provisions that may delay
or impede a transaction or a change of control of the Company that might involve
a premium price for the Common Stock or otherwise be in the best interest of the
stockholders. See "Certain Provisions of Maryland Law and of the Company's
Charter and Bylaws -- Removal of Directors," "-- Control Share Acquisitions" and
"-- Advance Notice of Director Nominations."

MARYLAND BUSINESS COMBINATION LAW

Under the Maryland General Corporation Law ("MGCL"), certain "business
combinations" (including certain issuances of equity securities) between a
Maryland corporation and any person who owns ten percent or more of the voting
power of the corporation's shares (an "Interested Stockholder") or an affiliate
thereof are prohibited for five years after the most recent date on which the
Interested Stockholder becomes an Interested Stockholder. Thereafter, any such
business combination must be approved by two super-majority stockholder votes
unless, among other conditions, the corporation's common stockholders receive a
minimum price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its shares. See "Certain Provisions of Maryland Law and of the
Company's Charter and Bylaws -- Business Combinations."

BOARD MAY CHANGE INVESTMENT POLICIES

The Company's Board of Directors may change the investment policies of the
Company without stockholder approval. Such policy changes may have adverse
consequences on the Company.

COMPETITION

The Company will be competing for additional investments with, among other
investors, healthcare providers, other healthcare related REITs, real estate
partnerships and financial institutions. Certain of these investors may have
greater capital resources than the Company.

All of the Initial Properties operate in a competitive environment, and
patients and referral sources, including physicians, may change their
preferences for a healthcare facility from time to time. The Initial Properties
compete with other similar facilities in their various locations for the support
of the medical community. Additionally, other healthcare facilities in which the
Company may invest will likely compete with similar facilities for the support
of the medical community and the general public. Some significant

14
<PAGE> 19

competitive factors for the placing of physicians in ancillary hospital
facilities and patients in medical facilities include reputation, physical
appearance of the facilities, services offered, quality of care, family
preferences, physician services, location and price. See "Business."

DEPENDENCE ON KEY PERSONNEL

The Company is dependent on the efforts of its executive officers, Messrs.
McRoberts, Harlan and Kizer. The loss of the services of any one of these
individuals could have a material adverse effect on the performance of the
Company. The Company has not entered into any employment agreements with any of
its executive officers.

CONFLICTS OF INTEREST

A conflict of interest exists between the Company and HEALTHSOUTH with
respect to the sale of the HEALTHSOUTH Initial Properties to the Company and the
lease of the HEALTHSOUTH Initial Properties by the Company to HEALTHSOUTH and
Subsidiaries of HEALTHSOUTH. The acquisition price of each of the HEALTHSOUTH
Initial Properties has been determined based upon future rental income,
operating history, age, location and condition of the property and other
relevant factors, including appraisals. The appraised value of the HEALTHSOUTH
Initial Properties is approximately $54,070,000. The Company will pay
$50,920,000 in cash to HEALTHSOUTH and its Subsidiaries for the HEALTHSOUTH
Initial Properties. See "Business -- Appraisals."

Two of the nine directors of the Company are executive officers and
directors of HEALTHSOUTH. Conflicts of interest exist with respect to their
duties to Company stockholders and HEALTHSOUTH stockholders. There may from time
to time be disputes between the Company as landlord and HEALTHSOUTH and
Subsidiaries of HEALTHSOUTH as tenants with respect to maintenance, repairs,
defaults, and similar items. It is also possible that the Company will engage in
other transactions with HEALTHSOUTH or its Subsidiaries in addition to acquiring
and leasing the HEALTHSOUTH Initial Properties, such as purchasing additional
properties from HEALTHSOUTH or its Subsidiaries and leasing back all or a
portion of such additional properties. As a result, conflicts of interest
between the Company and HEALTHSOUTH may arise under certain circumstances.

Two of the nine directors of the Company are also directors of Integrated
Health and Surgical Health. A conflict of interest also exists between the
Company and Integrated Health and Surgical Health with respect to the sale to
the Company of certain of the Initial Properties owned by Integrated Health and
Surgical Health or their Subsidiaries, and the lease of those Initial Properties
from the Company to Integrated Health and Surgical Health or their Subsidiaries.
The acquisition prices of each of the Initial Properties acquired from
Integrated Health and Surgical Health or their Subsidiaries, have been
determined based upon future rental income, operating history, age, location and
condition of the property and other relevant factors, including appraisals. The
appraised values of the Initial Properties acquired from Integrated Health and
Surgical Health or their Subsidiaries, are $18,300,000 and $9,350,000,
respectively. The Company will pay $18,275,000 and $9,350,000 in cash for the
Initial Properties acquired from Integrated Health and Surgical Health or their
Subsidiaries, respectively.

The Company's Bylaws require that any transactions (including a property
acquisition) between the Company and any of its officers and directors or their
affiliates be approved by a majority of the directors not interested in such
transaction, including a majority of the Disinterested Directors and such
directors must conclude that the terms of the transaction are fair and
reasonable and are no less favorable than can be obtained from unaffiliated
third parties.

DILUTION

The purchasers of the Shares offered hereby will experience immediate
dilution of $1.893 per share in the net tangible book value ($1.813 per share
assuming full exercise of the Underwriters' over-allotment option).

15
<PAGE> 20

ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON STOCK; EFFECT OF INTEREST RATES

Prior to the Offering, there has been no public market for the Company's
Common Stock. There can be no assurance that an active trading market will
develop or be sustained following the Offering or that purchasers of the Common
Stock in the Offering will be able to liquidate their investments or to resell
such Common Stock at or above the initial offering price. In addition, since the
market price of common stock of a publicly-traded REIT such as the Company is
determined in part by the attractiveness of the yield on such common stock in
relation to prevailing interest rates, an increase in interest rates could
adversely affect the market price of the Common Stock. Moreover, numerous other
factors, such as government regulatory action and tax laws, could have a
significant impact on the future market price of the Common Stock.

RISKS FOR IRAS AND INVESTORS SUBJECT TO ERISA

Fiduciaries of individual retirement accounts or other pension, profit
sharing or employee benefit plans subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), should consider whether an
investment in Shares satisfies the diversification requirements of ERISA and
whether the investment is prudent in light of the possible limitations on the
marketability of the Shares. See "Employee Plans and Individual Retirement
Accounts." In addition, some or all of the distributions by a REIT to a tax-
exempt employee's pension fund that owns more than 10 percent in value of such
REIT may be treated as unrelated business taxable income ("UBTI") under the Code
if the REIT constitutes a "pension-held REIT" and if other conditions are met.
The Company does not expect that it will be a "pension-held REIT" for federal
income tax purposes. See "Federal Income Tax Considerations -- Taxation of
Domestic Stockholders -- Taxation of Tax Exempt Stockholders."

USE OF PROCEEDS

Any net proceeds from the exercise of the Underwriters' over-allotment
option will be invested in short-term investment grade instruments,
interest-bearing bank accounts or certificates of deposit, money market
securities, U.S. government securities and mortgage-backed securities guaranteed
by U.S. federal agencies, mortgage loans, mortgage participation and certain
other similar investments, pending their use. Such funds will be used, along
with funds available from the Bank Credit Facility, to acquire additional
properties consistent with the Company's investment policies.

The Company has agreed to reimburse, upon closing of the Offering, the
actual costs incurred by the Partnership on behalf of the Company up to
$1,675,000 from the proceeds of the Offering. These costs relate to organizing
the Company, negotiating the acquisitions of the Initial Properties, performing
due diligence related to the Initial Properties, performing corporate work in
contemplation of the Offering, preparing the Registration Statement and
providing interim financing for and closing the acquisition of the Initial
Properties, employee compensation, travel and overhead.

16
<PAGE> 21

DISTRIBUTIONS TO STOCKHOLDERS

The Company intends to make quarterly distributions to stockholders of
approximately 85% to 95% of its cash available for distribution (estimated to be
approximately $8,765,000 to $9,796,000). In any event, the Company expects to
pay an amount at least sufficient to satisfy the annual distribution
requirements of a REIT. In general, such requirements provide that at least 95%
of the Company's REIT taxable income must be distributed annually, which income
is estimated to be $1.23 per share ($7,355,400). See "Federal Income Tax
Considerations -- Taxation of the Company." The Company expects to make
distributions in excess of 95% of its REIT taxable income. Payment of
distributions, however, will be at the discretion of the Company's Board of
Directors at all times and will depend upon various factors including the
Company's financial condition, earnings, anticipated investments, and other
relevant factors. The distribution of 85% to 95% of cash available for
distribution could limit the Company's ability to acquire or develop additional
properties because less cash would be accumulated in the Company. Under certain
circumstances, it may be necessary for the Company to borrow or liquidate
investments to satisfy its distribution requirements as a REIT. See "Federal
Income Tax Considerations -- Taxation of the Company."

Aggregate Base Rent payable under the Leases, net of estimated interest
and operating expenses, will result in estimated cash available for distribution
of $1.72 per share. Estimated cash available for distribution is estimated
revenues less expenses plus depreciation, amortization and unfunded retirement
plan expense less accrued rent. Distributions in excess of net income generally
constitute a return of capital. Management considers cash available for
distribution to be an informative measure of the performance of an equity REIT
and consistent with measures used by analysts to evaluate equity REITs. Cash
available for distribution does not represent cash generated from operating
activities in accordance with generally accepted accounting principles, is not
necessarily indicative of cash available to fund cash needs and should not be
considered as an alternative to net income as an indicator of the Company's
operating performance or as an alternative to cash flow as a measure of
liquidity. See "Notes to Pro Forma Balance Sheet and Statements of Estimated
Revenues Less Expenses -- Other Data -- Estimated Cash Available for
Distribution."

Such estimated cash available for distribution does not give effect to any
delay in the acquisition of or failure to acquire the Initial Properties, to any
payments of Additional Rent, to the acquisition of any properties in addition to
those identified in this Prospectus or the incurrence of indebtedness in
connection therewith, or to the realization of proceeds on the sale or
disposition of Initial Properties. No assurance can be given that the properties
will perform as expected or the estimated cash available for distribution will
be obtained. It is estimated that approximately 12% to 21% of the distributions
that could have been made by the Company for the twelve months ended March 31,
1994, would represent return of capital for federal income tax purposes and,
therefore, would not be subject to current federal income tax. Such nontaxable
distributions would reduce a stockholder's tax basis in its Common Stock, and
any gain or loss recognized on the sale of such Common Stock or upon liquidation
of the Company would be increased or reduced accordingly. Any distributions that
exceed a stockholder's basis in its Common Stock would be treated as gain from
the sale or exchange of such Common Stock for federal income tax purposes. See
"Pro Forma Balance Sheet and Statements of Estimated Revenues Less Expenses."

Estimated cash available for distribution is expected to exceed the
Company's estimated taxable income due to non-cash deductions taken by the
Company for income tax purposes, primarily amortization and depreciation which
are estimated to be approximately $80,000 and $2,517,000, respectively.
Accordingly, certain distributions to stockholders may constitute a return of
capital which would not be subject to federal income tax, although such
distributions would lower the stockholder's basis in its Common Stock of the
Company, as described above. See "Federal Income Tax Considerations."

For each of the first six quarters in which distributions are paid by the
Company, the Founding Stockholders have consented to contribute to the Company
the after-tax portion of any distributions paid to them for such quarter if (i)
the annualized distributions paid in such quarter do not equal or exceed $1.70
per share ($0.425 per share per quarter) or (ii) the aggregate distributions
paid in such quarter on the outstanding shares exceeds 95% of the cash available
for distribution for the relevant quarterly period. The Company estimates that
the aggregate distributions payable to the Founding Stockholders will be
$264,600 (based on a distribution of 85% of estimated cash available for
distribution) and $295,200 (based on a distribution of 95% of estimated cash
available for distribution), subject to the Founding Stockholders' contribution
agreement.

17
<PAGE> 22

DILUTION

As of April 30, 1994, the Founding Stockholders (Richard M. Scrushy,
HEALTHSOUTH, John W. McRoberts, and Michael D. Martin) owned 180,000 shares of
Common Stock. The net tangible book value of the Common Stock immediately
subsequent to this Offering (based on the initial public offering price of
$18.00 per share, after deduction of estimated underwriting commissions and
Offering expenses) will be $16.107 per share, an increase of $16.106 from the
$.001 net tangible book value per share prior to the Offering(or a net tangible
book value per share of $16.187 and a per share increase of $16.186,
respectively, assuming full exercise of the Underwriters' overallotment option).
A $1.893 per share dilution will be experienced by the purchasers of shares in
this Offering (or $1.813 per share dilution assuming full exercise of the
Underwriters' over-allotment option).

The following table illustrates this dilution on a per share basis based on
the midpoint of the filing range and assuming no exercise of the Underwriters'
over allotment option:

<TABLE>
<S> <C> <C>
Initial public offering price per share............................ $ 18.00
Pro forma net tangible book value per share before the
offering...................................................... $ .001
Increase per share attributable to new investors................. 16.106
-------
Pro forma net tangible book value per share after the offering... 16.107
-------
Dilution per share to new investors................................ $ 1.893
=======
</TABLE>

The following table summarizes, as of April 30, 1994, after giving effect
to the sale of the shares of Common Stock offered hereby (i) the number and
percentage of shares of Common Stock purchased from the Company, (ii) the total
cash consideration for the Common Stock and (iii) the average price per share of
Common Stock paid by the public investors and the existing shareholders.

<TABLE>
<CAPTION>
TOTAL
CONSIDERATION
SHARES OWNED (IN MILLIONS)
-------------------- ----------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders....................... 180,000 3.0% $ .0 .0% $ .001
New investors............................... 5,800,000 97.0 104.4 100.0 18.00
--------- ------- ------ -------
Total............................. 5,980,000 100.0% $104.4 100.0%
======== ===== ====== =====
</TABLE>

As of the Effective Date of the Offering, the Company granted options to
purchase 260,000 shares of Common Stock at an exercise price equal to the
initial public offering price per share. The foregoing table assumes no exercise
of outstanding stock options. See "Management -- Stock Option Plan" and Note 5
to the Company's Balance Sheet.

18
<PAGE> 23

CAPITALIZATION

The following sets forth the historical capitalization of the Company as of
March 31, 1994, and as adjusted to give effect to the sale of the Shares offered
hereby and the acquisitions of the Initial Properties:

<TABLE>
<CAPTION>
AS ADJUSTED FOR
THE OFFERING AND
AT ACQUISITION OF
MARCH 31, THE INITIAL
1994 PROPERTIES
--------- ----------------
<S> <C> <C>
Indebtedness:
Bank Credit Facility(1)........................................ $ -- $ 20,227,820
--------- ----------------
Total indebtedness..................................... -- 20,227,820
Stockholders' equity:
Preferred stock, $.001 par value; 10,000,000 shares authorized;
none outstanding............................................ -- --
Common Stock, $.001 par value; 50,000,000 shares authorized;
180,000 issued and outstanding; 5,980,000 issued and
outstanding, as adjusted(2)(3).............................. 180 5,980
Additional paid-in capital..................................... -- 96,486,200
--------- ----------------
Total stockholders' equity............................. 180 96,492,180
--------- ----------------
Total capitalization................................... $ 180 $116,720,000
======= ============
</TABLE>

- ---------------

(1) For a description of the Bank Credit Facility, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources."
(2) Does not include up to 870,000 shares of Common Stock, if any, that may be
purchased by the Underwriters to cover over-allotments, or 418,600 shares
of Common Stock reserved for issuance pursuant to the Company's 1994 Stock
Incentive Plan. See "Management -- 1994 Stock Incentive Plan."
(3) Shares of Common Stock owned by a stockholder in excess of 9.8% in value of
the outstanding Common Stock may be converted by operation of law into
Excess Shares. See "Description of Securities -- Restrictions on Transfer."

19
<PAGE> 24

SELECTED HISTORICAL, PRO FORMA AND ESTIMATED FINANCIAL INFORMATION

Estimated revenues less expenses is presented for the year ended December
31, 1993, and the three months ended March 31, 1994, as if the Offering and the
acquisitions of the Initial Properties by the Company had occurred, and as if
the respective Leases had been in effect, at January 1, 1993. The pro forma
balance sheet data is presented as of March 31, 1994, as if the Offering and the
transfers of the Initial Properties to the Company had occurred, and as if the
respective Leases had been in effect, at that date. The pro forma and estimated
information incorporates certain assumptions that are included in the notes to
the Pro Forma Balance Sheet and Statements of Estimated Revenues Less Expenses
included elsewhere in this Prospectus. See "Pro Forma Balance Sheet and
Statements of Estimated Revenues Less Expenses." The pro forma and estimated
information does not purport to represent what the actual financial position or
results of operations of the Company would have been as of or for the periods
indicated nor does it purport to represent any future financial position or
results of operations for any future period.

- ---------------

Significant assumptions to the Pro Forma Balance Sheet and Statements of
Estimated Revenues Less Expenses are set forth below. This information should be
read in conjunction with the Notes to the Company's Pro Forma Balance Sheet and
Statements of Estimated Revenues Less Expenses beginning at page F-10.

- - Total rental income from the Initial Properties for the year ended December
31, 1993, is assumed to be $13,914,344, which represents Base Rent of
$12,770,601 and accrued rent of $1,143,743 from the Initial Properties under
the terms of the Leases. Total rental income from the Initial Properties for
the three months ended March 31, 1994, is assumed to be $3,478,586, which
represents Base Rent of $3,192,650 and accrued rent of $285,936 from the
Initial Properties under the terms of the Leases. Generally accepted

20
<PAGE> 25

accounting principles require that scheduled rent increases be recognized on a
straight-line basis over the term of the lease. Each Lease is a Triple Net Lease
and the Lessee is responsible thereunder, in addition to the rent, for all
operating expenses including taxes, assessments, ground rents, utility charges
and insurance premiums.

- - Depreciation of buildings and land improvements is calculated using the
straight-line method and useful remaining lives of approximately 40 years and
20 years, respectively. Amortization of organization costs is calculated using
the straight-line method over a five-year period. The Bank Credit Facility
financing commitment fee is amortized using the straight-line method over the
24-month life of the Bank Credit Facility.

- - Estimated first year operating costs of $1,100,000 ($275,000 for three months)
consist of compensation and related benefits, legal and accounting, travel,
rent and other operating costs. Annual interest expense is calculated at a
rate of 6.375% of the outstanding balance plus 0.375% of the unused portion of
the Bank Credit Facility.

- - Issuance of 5,800,000 shares of Common Stock for $104,400,000 at $18.00 per
share, less estimated underwriting discounts and commissions including the
advisory fee of $7,308,000.

- - Cost of the Initial Properties of $115,445,000.

- - Payment to the Partnership and its affiliates for reimbursement of actual
costs incurred related to providing interim financing ($375,000), negotiating
acquisition of the Initial Properties ($675,000), organizing the Company
($25,000), and preparing the Offering ($600,000).

- - Borrowings of $20,227,820 under the Bank Credit Facility obtained from a
consortium of banks led by NationsBank in the amount of $60 million to
finance, in part, the acquisition of the Initial Properties, the acquisition
of additional properties and for other general corporate purposes.

21
<PAGE> 26

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OVERVIEW

The Company was incorporated in Maryland on March 31, 1994, and intends to
make an election and qualify under the Code as a REIT commencing with its
taxable year ending December 31, 1994. Substantially all of the Company's
revenues are expected to be derived from: (i) Base and Additional Rents received
under Triple Net Leases of healthcare related real property facilities; (ii)
fees received in connection with property acquisitions and leasing transactions;
(iii) interest earned from the temporary investment of funds in short-term
instruments; and (iv) property dispositions effected from time to time in
accordance with requirements for maintaining status as a REIT. With respect to
Leases for the Initial Properties, Base Rent is the minimum annual rental
payment set forth in such Leases. All of such Leases also provide for Additional
Rent commencing after the first year based on either a set percentage increase
or on 67% to 100% of the percentage increase in the applicable consumer price
index, with annual increases generally limited to a maximum of 5%.

The Company will incur operating and administrative expenses including,
principally, compensation expense for its executive officers and other
employees, office rental and related occupancy costs and various expenses
incurred in the process of acquiring additional properties. The Company will be
self-administered and managed by its executive officers and staff, and will not
engage a separate advisor or pay an advisory fee for administrative or
investment services, although the Company will engage legal, accounting, tax and
financial advisors from time to time.

The Company also expects to leverage its portfolio of real estate equity
investments and will incur long and short-term indebtedness, and related
interest expense, from time to time. See "Risk Factors -- Risks of Leverage and
Defaults."

The Company intends to declare and pay dividends to its stockholders in
amounts not less than the amounts required to maintain REIT status under the
Code and, in general, in amounts exceeding taxable income. The Company's ability
to pay dividends will depend upon its cash available for distribution.

RESULTS OF OPERATIONS

The Company has had no operations prior to March 31, 1994, (the date of its
incorporation) through the date of this Prospectus. The Company's future results
of operations will depend upon the acquisition of the Initial Properties and
other properties and the terms of any subsequent investments the Company may
make.

ESTIMATED REVENUES LESS EXPENSES

For The Year Ended December 31, 1993

The Company estimates that after giving effect to the Offering and the
acquisition of the Initial Properties, revenues would have been $13,914,344 and
net income would have been $8,778,504 or $1.47 per share for the year ended
December 31, 1993. Depreciation, amortization and other non-cash expenses would
have been $2,677,171 and accrued rent would have been $1,143,743.

For The Three Months Ended March 31, 1994

The Company estimates that after giving effect to the Offering and the
acquisition of the Initial Properties, revenues would have been $3,478,586 and
net income would have been $2,194,626 or $0.37 per share for the three months
ended March 31, 1994. Depreciation, amortization and other non-cash expenses
would have been $669,293 and accrued rent would have been $285,936.

LIQUIDITY AND CAPITAL RESOURCES

Management believes that the net proceeds of this Offering along with the
Bank Credit Facility will be sufficient to consummate the purchase of the
Initial Properties and to reimburse the Partnership for expenses related to
organizing the Company, negotiating the acquisition of the Initial Properties,
performing due diligence investigation related to the Initial Properties,
performing corporate work in contemplation of the Offering, preparing the
Registration Statement and providing interim financing for and closing the
acquisition

22
<PAGE> 27

of the Initial Properties. Management believes the Company will have adequate
remaining credit under the Bank Credit Facility to meet its liquidity needs. See
"Business -- Initial Properties," "Investment and Other Policies," and Note 3 to
Pro Forma Balance Sheet and Statements of Estimated Revenues Less Expenses.

The Company may, under certain circumstances, borrow additional amounts in
connection with the renovation or expansion of its Initial Properties, the
acquisition of additional properties or, as necessary, to meet certain
distribution requirements imposed on REITs under the Code. See "Investment and
Other Policies." The Company may raise additional capital by issuing, in public
or private transactions, equity or debt securities, but the availability and
terms of any such issuance will depend upon market and other conditions. There
can be no assurance that such additional financing or capital will be available
on terms acceptable to the Company.

Under the terms of the Leases, the Lessees are responsible for all
operating expenses and taxes, including property and casualty insurance. See
"Business -- Initial Properties" and "Business -- The Leases." As a result of
these arrangements, the Company does not believe it will be responsible for any
major expenses in connection with the Initial Properties during the terms of the
respective Leases. The Company anticipates entering into similar leases with
respect to additional properties. After the terms of the respective Leases, or
in the event a Lessee is unable to meet its obligations, the Company anticipates
that any expenditures it might become responsible for in maintaining the Initial
Properties will be funded by cash from operations and, in the case of major
expenditures, possibly by borrowings. To the extent that unanticipated
expenditures or significant borrowings are required, the Company's cash
available for distribution and liquidity may be adversely affected. The Company
estimates that after giving effect to the Offering and the acquisition of the
Initial Properties, cash available for distribution for the year ended December
31, 1993, and for the three months ended March 31, 1994, would have been
$10,311,932 or $1.72 per Share and $2,577,983 or $0.43 per Share, respectively.

The Company has obtained from a consortium of banks led by NationsBank the
$60 million Bank Credit Facility to finance a portion of the purchase price for
the Initial Properties, the acquisition of additional properties and for other
general corporate purposes. The Bank Credit Facility closed on June 22, 1994,
with funds being advanced upon the closing of this Offering. See "Use of
Proceeds." Interest on borrowings under the Bank Credit Facility will be paid at
a rate chosen by the Company from either the base rate, which is the higher of
(i) the Federal Funds Rate plus 1/2 of 1%, or (ii) the NationsBank prime lending
rate, or LIBOR plus 1.75%. On May 27, 1994, the interest rate on the Bank Credit
Facility would have been 6.375% under the LIBOR option. In addition, the Company
will pay .375% per annum on the unused portion of funds available for borrowings
under the Bank Credit Facility. The Company will pay a commitment fee of
one-quarter of 1% of the committed amount at the closing of the Bank Credit
Facility. The Bank Credit Facilit will be available until the second anniversary
of the closing of the facility. The Bank Credit Facility is unsecured and
contains certain representations, warranties and financial and other covenants
customary in such loan agreements. The Bank Credit Facility will mature two
years from the date of its closing. The Company intends to renew the Bank Credit
Facility or to repay the outstanding balance at that time from the proceeds of a
refinancing or from the sale of debt or equity securities. There can be no
assurance that NationsBank will renew the Bank Credit Facility on terms
favorable to the Company or that the Company will be able to sell debt or equity
securities at that time. See "Risk Factors -- Risks of Leverage and Default."
The Company may enter into interest rate swaps in order to mitigate the effect
of a rising interest rate environment on the cost of the Bank Credit Facility.

Other than the purchase of the Initial Properties, the Company has no
commitments or understandings with respect to capital expenditures. There can be
no assurance that the Company will be able to purchase or lease additional
properties or to make mortgage loans to others on suitable terms.

Management believes that inflation should not have a materially adverse
effect on the operating expenses of the Company because such expenses are
relatively insignificant as a percentage of revenues. Because the Bank Credit
Facility provides for a variable interest rate, inflation could have a
materially adverse effect on the Company's interest expense if interest rates
increase substantially during any year, because Additional Rent under the Leases
would not be paid until the following year.

23
<PAGE> 28

BUSINESS

The Company was organized to invest, either directly or through
wholly-owned subsidiaries, in healthcare related properties located throughout
the United States. The Company has signed letters of intent to purchase the 20
Initial Properties located in 10 states. The Initial Properties will be leased
to 14 Lessees, which are HEALTHSOUTH, Integrated Health, OrNda, Quorum and
Surgical Health, or their Subsidiaries pursuant to long-term, Triple Net Leases
that will be guaranteed by the respective parent companies. The Initial
Properties consist of 11 ancillary hospital facilities, one research facility,
one long-term care facility, one sub-acute care facility, three ambulatory
surgery centers and three outpatient rehabilitation facilities.

INITIAL PROPERTIES

The following table sets forth certain information regarding the Initial
Properties.

<TABLE>
<CAPTION>
INITIAL INITIAL PERCENTAGE
PROPERTY LEASE PURCHASE OF ANNUAL BASE ANNUAL
GUARANTOR/INITIAL PROPERTY NAME TYPE(1) TERM PRICE(2) PORTFOLIO(3) RENT COVERAGE(4)
- ---------------------------------------- --------- -------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
HEALTHSOUTH
American Sports Medicine Institute.... RF 15 $ 3,200,000 2.8% $ 359,919
Birmingham Medical Building I......... AHF 15 4,700,000 4.1 528,664
Birmingham Medical Building II........ AHF 15 9,600,000 8.3 1,079,760
One-7000 Building..................... AHF 15 13,250,000 11.5 1,490,664
Larkin Medical Building............... AHF 15 2,250,000 1.9 253,093
Richmond Medical Building I........... AHF 15 2,100,000 1.8 236,237
Richmond Medical Building II.......... AHF 15 10,000,000 8.7 1,125,137
Little Rock........................... ORF 15 2,060,000 1.8 231,723
Coral Gables.......................... ORF 15 2,300,000 2.0 258,704
Virginia Beach(5)..................... ORF 15 1,460,000 1.2 164,300(6)
------------ -------- ----------- -----------
50,920,000 44.1 5,728,201 6.01x
ORNDA
Midway Medical Plaza.................. AHF 15 20,400,000 17.7 2,142,223 5.22x
------------ -------- ----------- -----------
20,400,000 17.7 2,142,223 5.22x
INTEGRATED HEALTH
Mountain View......................... LTCF 10 9,775,000 8.4 1,060,340
Gravois............................... SACF 10 8,500,000 7.4 922,287
------------ -------- ----------- -----------
18,275,000 15.8 1,982,627 1.59x
QUORUM
Goodyear Clinic....................... AHF 10 1,607,160 1.4 180,805
Hamiter Building...................... AHF 10 4,382,520 3.8 493,034
Gadsden Medical Building II........... AHF 10 5,810,320 5.0 653,661
Desert Springs........................ AHF 10 4,700,000 4.1 528,750
------------ -------- ----------- -----------
16,500,000 14.3 1,856,250 18.31x
SURGICAL HEALTH
South County Medical Center(5)(7)..... ASF 15 7,400,000 6.4 832,500 N/A(8)
Northlake............................. ASF 13 1,040,000 0.9 119,600(6) N/A(8)
North Shore........................... ASF 15 910,000 0.8 109,200 6.86x
------------ -------- ----------- -----------
9,350,000 8.1 1,061,300 N/A
------------ ---------- -----------
Total............................................... $115,445,000 100.0% $12,770,601
============ ======== ===========
</TABLE>

- ---------------

(1) RF means research facility, AHF means ancillary hospital facility, ORF means
outpatient rehabilitation facility, LTCF means long-term care facility, SACF
means sub-acute care facility and ASF means ambulatory surgery facility.
(2) Includes the purchase price for land, improvements and fixtures but does not
include estimated net capitalized acquisition costs, aggregating
approximately $1.05 million.
(3) Based upon purchase price.
(4) Annual coverage, which is a measure of the amount of cash available to pay
rent under the Leases, is calculated as Lessee's earnings before
depreciation, amortization, taxes, interest (only on debt to be repaid from
proceeds of the purchase price payable by the Company for the applicable
property) and certain non-cash intercompany charges divided by the Lessee's
Annual Base Rent. These coverages are derived from the financial information
for the most recent fiscal year of the Lessees provided to the Company by
the Lessees or Guarantors. In the case of the HEALTHSOUTH, Integrated Health
and Quorum facilities, the coverage is calculated on

24
<PAGE> 29

an aggregate basis because the properties are leased or guaranteed by the
same entity and have cross-default provisions. In the case of ancillary
hospital facilities, the coverage is calculated based upon the financial
information provided for the related hospital, the operator of which is
either the Lessee or the Guarantor of the Lease.
(5) Purchase is subject to the receipt of certain approvals, which are expected
to be received in June 1994.
(6) Excludes ground rent, which will be paid by the applicable Lessee as
sublessee under the land lease.
(7) Construction is substantially completed and a certificate of occupancy is
expected to be issued in June 1994. As of May 25, 1994, leases had been
signed for over 93% of the rentable space.
(8) Coverage ratios cannot be included for the South County Medical Center
facility or the Northlake facility due to the lack of operating history for
either facility.

DESCRIPTION OF GUARANTORS, LESSEES AND INITIAL PROPERTIES

The following is a description of each of the Guarantors and Lessees and
the Initial Properties to be acquired by the Company. Unless otherwise
indicated, all information is given as of December 31, 1993. All of the
Guarantors are subject to the reporting requirements of the SEC and are
obligated to file annual reports containing audited financial information and
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial information with the SEC. With respect to such companies,
the information provided is derived for the limited purposes of this Prospectus
from filings made with the SEC.

While the Company has not established any definitive credit criteria, the
Company has evaluated the creditworthiness of the Lessees and Guarantors based
upon a review of publicly available financial and other information, due
diligence review of the individual financial statements and other non-financial
information provided by the Lessees and Guarantors, to the extent available, and
other data customarily reviewed when a company makes an acquisition or
significant investment. While the Company believes the information has been
provided in good faith and has no reason to believe that any of such information
is inaccurate in any material respect, in most instances, the Company has not
and cannot make an independent investigation of such information.

HEALTHSOUTH INITIAL PROPERTIES

HEALTHSOUTH, headquartered in Birmingham, Alabama, is the nation's largest
provider of rehabilitative healthcare services. In its outpatient and inpatient
rehabilitation facilities, HEALTHSOUTH has established interdisciplinary
programs for the rehabilitation of patients experiencing disability due to a
wide variety of physical conditions, such as stroke, head injury, orthopaedic
problems, neuromuscular disease and sports-related injuries. HEALTHSOUTH's
rehabilitation services include physical therapy, sports medicine, work
hardening, neurorehabilitation, occupational therapy, respiratory therapy,
speech-language pathology and rehabilitation nursing. In addition to
rehabilitation services, HEALTHSOUTH's medical center facilities also provide
general and specialty medical and surgical healthcare services.

Effective December 31, 1993, HEALTHSOUTH acquired substantially all of the
assets of the rehabilitation services division of National Medical Enterprises,
Inc. ("NME"), consisting of 28 inpatient rehabilitation facilities and 45
outpatient rehabilitation locations. HEALTHSOUTH currently has 288 locations in
31 states, the District of Columbia and Ontario, Canada, including 172
outpatient rehabilitation centers (including 79 associated satellite clinics),
42 rehabilitation hospitals with 49 associated satellite clinics (including two
rehabilitation hospitals under construction), four medical centers and 21
locations providing other patient care services.

Six ancillary hospital facilities, one research facility and three
outpatient rehabilitation centers are being acquired from and will be leased to
HEALTHSOUTH or Subsidiaries of HEALTHSOUTH. See "Risk Factors -- Conflicts of
Interest." The Leases for the HEALTHSOUTH Initial Properties to Subsidiaries of
HEALTHSOUTH will be guaranteed by HEALTHSOUTH, whose shares are listed on the
New York Stock Exchange under the symbol HRC. As of December 31, 1992 and 1993,
and March 31, 1994, HEALTHSOUTH had assets of $641,799,000, $1,168,068,000 and
$1,238,771,000 and stockholders' equity of $290,132,000, $294,972,000 and
$313,127,000, respectively, and for the years ended December 31, 1992 and 1993
and for the three-month period ended March 31, 1994, had revenues of
$406,968,000, $482,304,000 and $231,296,000 and net income of $29,738,000,
$6,687,000 (after the one time charge of $49,742,000 related to the NME
transaction), and $12,123,000, respectively.

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<PAGE> 30

ANCILLARY HOSPITAL FACILITIES AND RESEARCH FACILITY

Upon completion of the Offering, the Company intends to acquire six
ancillary hospital facilities and one research facility from HEALTHSOUTH, all of
which are associated with three of the four medical centers owned and operated
by HEALTHSOUTH.

HEALTHSOUTH's four medical centers are located in three urban areas of the
country, one each in Birmingham, Alabama and Richmond, Virginia and two in the
Miami, Florida area. These facilities provide general and specialty medical and
surgical healthcare services, emphasizing orthopaedics, sports medicine and
rehabilitation. HEALTHSOUTH acquired the medical centers as an outgrowth of its
ambulatory rehabilitative healthcare services. Often, patients require medical
and surgical intervention prior to the initiation of their rehabilitative care.
In each of the markets in which HEALTHSOUTH has acquired a medical center,
HEALTHSOUTH had well-established relationships with the medical communities
servicing each facility. As a result of these relationships, HEALTHSOUTH was
able to respond to opportunities to enhance its capabilities to better serve the
patients and physicians in those markets. Because HEALTHSOUTH's facilities enjoy
a national and international reputation for orthopaedic surgery and sports
medicine, HEALTHSOUTH believes the level of service and continuum of care
offered by its medical centers enable them to compete successfully.

Initial Properties Associated with HEALTHSOUTH Medical Center -- Birmingham

HEALTHSOUTH Medical Center -- Birmingham is a 219-bed specialty medical
center located in Jefferson County, Alabama that was acquired in October 1989
and expanded and renovated in 1991. HEALTHSOUTH Medical Center concentrates on
orthopaedics, sports medicine, and rehabilitation. The Medical Center's primary
market is the Birmingham Metropolitan Statistical Area ("MSA"), which consists
of five counties with an estimated population of 1,000,000. The Birmingham MSA
is served by 18 acute-care hospitals with a total of 5,323 licensed beds.
HEALTHSOUTH Medical Center -- Birmingham draws patients locally and from across
the nation due to its nationally recognized expertise in the fields of
orthopaedics and sports medicine. The HEALTHSOUTH Medical Center -- Birmingham
campus consists of the hospital, ASMI, Birmingham Medical Building I and
Birmingham Medical Building II.

ASMI. The American Sports Medicine Institute ("ASMI"), a research facility
which was constructed in 1992, is a 27,800 net rentable square foot multi-story
facility located on 1.02 acres. The facility is adjacent to the HEALTHSOUTH
Medical Center -- Birmingham. ASMI is 90% occupied by a not-for-profit
corporation whose purpose is to conduct research and promote education in the
field of orthopaedics and sports medicine.

Birmingham Medical Building I. Birmingham Medical Building I, an ancillary
hospital facility which was constructed in 1981, is a 42,500 net rentable square
foot, multi-story commercial condominium situated on .92 acres. The building is
occupied primarily by physicians and physician practice groups that practice at
the Medical Center. The building is connected to the HEALTHSOUTH Medical
Center -- Birmingham and includes a six-story parking deck with spaces for
approximately 180 cars located adjacent to the building. The leases of two of
the current occupants of the building permit such occupants to purchase 6.46% of
the condominium units.

Birmingham Medical Building II. Birmingham Medical Building II, an
ancillary hospital facility constructed in 1991 as part of the renovation and
expansion of HEALTHSOUTH Medical Center -- Birmingham, is an 81,800 net rentable
square foot, multi-story ancillary hospital facility located on 2.5 acres. The
facility shares common areas with the HEALTHSOUTH Medical Center -- Birmingham,
and subject to approval by the appropriate governmental authority, the portions
occupied by each of Birmingham Medical Building II and the HEALTHSOUTH Medical
Center -- Birmingham will become separate condominiums. Tenants include Alabama
Sports Medicine and other physician practice groups, as well as HEALTHSOUTH
Rehabilitation Outpatient Center of Birmingham. All of the physicians located in
the facility practice at the HEALTHSOUTH Medical Center -- Birmingham.

26
<PAGE> 31

HEALTHSOUTH Medical Center, Inc., a Subsidiary of HEALTHSOUTH, will be the
sole Lessee of ASMI, Birmingham Medical Building I and Birmingham Medical
Building II, which will continue to be operated as integral parts of HEALTHSOUTH
Medical Center -- Birmingham. HEALTHSOUTH Medical Center, Inc. will lease the
three properties under a 15-year lease with three five-year renewal options. The
Base Rent per square foot (which does not include an allocation of rent for 180
structured parking spaces) will be $12.95, $12.45 and $13.20 for ASMI,
Birmingham Medical Building I and Birmingham Medical Building II, respectively.

Initial Properties Associated with HEALTHSOUTH Medical Center -- Richmond

HEALTHSOUTH Medical Center -- Richmond is a 200-licensed bed specialty
medical center located in Henrico County, Virginia that was acquired in 1991 and
concentrates on orthopaedics, sports medicine, and rehabilitation. The
hospital's primary market is the 9-county Richmond-Petersburg MSA which has an
estimated population of 825,000. There are 15 acute care hospitals serving the
Richmond MSA with a total of 4,183 licensed beds. The HEALTHSOUTH Medical
Center -- Richmond campus consists of the hospital, Richmond Medical Building I
and Richmond Medical Building II.

Richmond Medical Building I. Richmond Medical Building I, an ancillary
hospital facility constructed in 1977, is a 23,200 net rentable square foot,
multi-story facility located on 6.165 acres together with Richmond Medical
Building II. This facility is adjacent to HEALTHSOUTH Medical Center -- Richmond
and is occupied by physician groups that practice at the Medical Center.

Richmond Medical Building II. Richmond Medical Building II, an ancillary
hospital facility constructed in 1992 as part of the renovation and expansion of
HEALTHSOUTH Medical Center -- Richmond, is a 62,400 net rentable square foot,
multi-story facility with 60 structured parking spaces located on the 6.165
acres together with Richmond Medical Building I. The facility is adjacent to the
HEALTHSOUTH Medical Center -- Richmond and is occupied by physician groups that
practice at the Medical Center.

HEALTHSOUTH Virginia, Inc., a Subsidiary of HEALTHSOUTH, will be the sole
Lessee of Richmond Medical Building I and Richmond Medical Building II, which
will continue to be operated as integral parts of HEALTHSOUTH Medical
Center -- Richmond. HEALTHSOUTH of Virginia, Inc. will lease the two properties
under a 15-year lease (with three five-year renewal options). The Base Rent per
square foot (which does not include an allocation of rent for 60 structured
parking spaces) will be $10.18 and $18.04 for Richmond Medical Building I and
Richmond Medical Building II, respectively.

Initial Properties Associated with HEALTHSOUTH Larkin Hospital

HEALTHSOUTH Larkin Hospital located in South Miami, Dade County, Florida is
a 112-licensed bed specialty medical center acquired in February 1992. This
facility specializes in orthopaedics, sports medicine and rehabilitation. The
hospital's primary market is Dade County, Florida, which encompasses 26
municipalities with a population of approximately 2,000,000. There are 20 acute
care hospitals serving the Dade County area with a total of approximately 6,100
licensed beds. The HEALTHSOUTH Larkin Hospital campus consists of the hospital,
the One-7000 Building and Larkin Medical Building.

One-7000 Building. The One-7000 Building, an ancillary hospital facility
that was constructed in 1973, with a total renovation completed in 1990, is a
106,400 net rentable square foot, multi-story facility with 345 structured
parking spaces on 1.12 acres adjacent to HEALTHSOUTH Larkin Hospital. The
primary occupants are physician groups that practice at the adjacent HEALTHSOUTH
Larkin Hospital and nearby HEALTHSOUTH Doctors' Hospital.

Larkin Medical Building. The Larkin Medical Building, an ancillary
hospital facility that was constructed in 1970 and remodeled in 1980, is a
10,250 net rentable square foot, two-story facility on 1.072 acres. The facility
is located adjacent to HEALTHSOUTH Larkin Hospital and currently houses the
administrative and support staff offices of the hospital while the surplus land
is used for parking by the hospital's employees.

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<PAGE> 32

Because of a unity of title issue, the Company initially will acquire a
leasehold interest from Doctors' Hospital of South Miami, Ltd. a Subsidiary of
HEALTHSOUTH under a 30-year ground lease. The Company intends subsequently to
take appropriate legal action to obtain fee title.

HEALTHSOUTH will be the sole lessee and Doctors' Hospital of South Miami,
Ltd., a Subsidiary of HEALTHSOUTH, will be the sole sublessee of One-7000
Building and Larkin Medical Building, which will continue to be operated as
integral parts of HEALTHSOUTH Larkin Hospital. Doctors' Hospital of South Miami,
Ltd. will sublease the two properties under a 15-year lease with three five-year
renewal options. The Base Rent per square foot (which does not include an
allocation of rent for 345 structured parking spaces) will be $14.01 and $24.68
for One-7000 Building and Larkin Medical Building, respectively.

OUTPATIENT REHABILITATION FACILITIES

HEALTHSOUTH operates the largest group of affiliated proprietary outpatient
rehabilitation facilities in the United States. HEALTHSOUTH's outpatient
rehabilitation centers offer a comprehensive range of rehabilitative healthcare
services, including physical therapy and occupational therapy, that are tailored
to the individual patient's needs, focusing predominantly on orthopaedic
injuries, sports injuries, work injuries, hand and upper extremity injuries,
back injuries, and various neurological/neuromuscular conditions. As of December
31, 1993, HEALTHSOUTH provided outpatient rehabilitative healthcare services
through 93 outpatient centers and their 79 associated satellite clinics as well
as through the 49 satellite outpatient clinics associated with its inpatient
facilities. HEALTHSOUTH's outpatient rehabilitation services play a significant
role in the continuum of care because they provide hospital-level services, in
terms of intensity, quality and frequency, in a more cost efficient setting.

Coral Gables. Coral Gables, an outpatient rehabilitation facility
constructed in 1960 and completely renovated in 1986, is a 14,538 net rentable
square foot, two-story building located on 0.46 acres in Dade County, Florida.
Outpatient rehabilitation services include therapy for orthopaedic injuries,
neuromuscular disease, and programs for work hardening, neurorehabilitation,
occupational therapy, respiratory therapy, and speech-language pathology. The
facility's primary market is Dade County, Florida, which encompasses 26
municipalities, with a total population of approximately 2,000,000. The facility
will be purchased from and leased to HEALTHSOUTH, which will in turn sublease
the facility leased to HEALTHSOUTH Rehabilitation Center of Coral Gables Limited
Partnership, a Subsidiary of HEALTHSOUTH. The Base Rent per square foot will be
$17.80.

Little Rock. Little Rock, an outpatient rehabilitation facility
constructed in 1991, is an 11,963 net rentable square foot, one-story building
located on 1.6 acres in Pulaski County, Arkansas. Outpatient rehabilitation
services include therapy for orthopaedic injuries, strokes, head injuries, or
neuromuscular disease, and programs for work hardening, neurorehabilitation,
occupational therapy, respiratory therapy, and speech-language pathology. The
facility's primary market is the Greater Little Rock MSA encompassing a
four-county region with a population of approximately 500,000. The facility will
be purchased from and leased to HEALTHSOUTH, which will in turn sublease to
HEALTHSOUTH Rehabilitation Center of Little Rock, Ltd., a Subsidiary of
HEALTHSOUTH. The Base Rent per square foot will be $19.37.

Virginia Beach. Virginia Beach, an outpatient rehabilitation facility
constructed in 1993, is a 10,000 net rentable square foot, one-story building
that will become a unit in commercial condominium when it is formed, which is
expected to occur in June 1994. The facility is situated on 1.10 acres in
Lynnhaven Borough, Virginia. Outpatient rehabilitation services include therapy
for orthopaedic injuries, strokes, head injuries, or neuromuscular disease and
programs for work hardening, neurorehabilitation, occupational therapy,
respiratory therapy and speech-language pathology. The Virginia Beach facility's
primary market is the Tidewater region of Virginia which includes three counties
with population of approximately 1,400,000. The Virginia Beach facility is
located on real estate being ground leased from Holcar, Inc. ("Holcar"). The
Company will acquire the seller's leasehold interest in the facility through an
assumption of the existing ground lease of the commercial condominium unit,
between the seller, as tenant, and Holcar, as landlord. The Company will
sublease the outpatient rehabilitation facility to HEALTHSOUTH, which will in
turn sub-sublease to HEALTHSOUTH Rehabilitation Center of Virginia Beach Limited
Partnership, a Subsidiary of HEALTHSOUTH. The Base Rent per square foot will be
$16.43, exclusive of the ground rent, which will be paid by the Lessee as
sublessee under the ground lease.

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<PAGE> 33

ORNDA INITIAL PROPERTIES

OrNda, headquartered in Nashville, Tennessee, is a healthcare services
company that owns and operates acute care hospitals and related healthcare
facilities. American Healthcare Management, Inc. and Summit Health Ltd. were
merged into OrNda in April 1994. As a result of the mergers, OrNda, through its
subsidiaries and affiliated partnerships, owns or operates 44 acute care
hospitals with 7,712 licensed beds, including one managed for another, and two
under leases, and two psychiatric hospitals with 138 licensed beds. OrNda's
hospitals are located in California, Florida, Georgia, Indiana, Louisiana,
Mississippi, Missouri, Oregon, Nevada, Tennessee, Texas, West Virginia and
Wyoming. OrNda also owns 43% of Horizon Mental Health Services, Inc., which
operates one psychiatric hospital with 60 licensed beds and 53 specialty
psychiatric and chemical dependency units with 1,101 licensed beds. Subsequent
to the mergers, OrNda controls Health Choice Arizona, Inc., a Medicaid health
maintenance organization, which has an enrollment of approximately 21,000 in the
state of Arizona. OrNda also provides healthcare services through its majority-
owned subsidiary, Summit Care Corporation, which operates 20 skilled nursing
centers with 2,534 licensed beds and four retirement centers with 468 beds.

On April 19, 1994, Midway Medical Plaza was purchased by Midway Acquisition
Company, Inc. ("MACI"), an Alabama corporation all of the stock of which is
owned by Richard M. Scrushy, John W. McRoberts, and Michael D. Martin. MACI will
be merged into the Company on or before the Effective Date of the Offering
pursuant to the Merger Agreement. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Transactions." The
consideration for the Merger will be the cancellation or assumption by the
Company of the indebtedness incurred by MACI in the acquisition of Midway
Medical Plaza and the related parking facility. The Company will lease the
Midway ancillary hospital facility and a 755-space parking deck to a Subsidiary
of OrNda. The Lease will be guaranteed by OrNda, whose shares are traded on the
Nasdaq National Market System under the symbol ORND. As of August 31, 1992 and
1993, and February 28, 1994, OrNda had assets of $649,322,000, $830,564,000 and
$936,694,000, and stockholders' equity of $61,172,000, $78,287,000 and
$170,990,000, respectively, and for the years ended August 31, 1992 and 1993,
and for the six-month period ended February 28, 1994, had net revenues of
$501,770,000, $624,847,000 and $378,327,000, and net income (loss) of
($91,759,000), $770,000 and ($923,000), respectively.

Initial Properties Associated with Midway Hospital

Midway Hospital is licensed for 230 general acute care beds, including 206
medical/surgical beds and 24 ICU/CCU beds. Midway Hospital provides general
acute care and includes a Spine Center, Industrial and Occupational Medicine
Center and a center for treatment of AIDS patients. Midway Hospital is the third
largest hospital in the west Los Angeles area. There are six hospitals with a
combined 1,552 acute-care beds serving the west Los Angeles area. The Midway
Hospital campus consists of the hospital and the Midway Medical Plaza.

Midway Medical Plaza. Midway Medical Plaza, an ancillary hospital facility
which was constructed in 1985, is an 87,000 net rentable square foot,
multi-story facility on 0.59 acres. The related parking structure was
constructed in 1984 and contains 755 structured parking spaces on a 0.65 acre
parcel of land adjacent to both Midway Hospital and the Midway Medical Plaza in
Los Angeles County, California. Other than a pharmacy, the tenants of the Midway
facility are all physicians or physician groups that practice on the medical
staff of Midway Hospital.

A Subsidiary of OrNda will be the sole Lessee of the Midway facility which
will continue to be operated as an integral part of Midway Hospital. The Midway
facility will be leased under a 15-year lease with three five-year renewal
options. The Base Rent per square foot (which does not include an allocation of
rent for 755 structured parking spaces) will be $24.62.

INTEGRATED HEALTH INITIAL PROPERTIES

Integrated Health, formed in 1986, and headquartered in Owings Mills,
Maryland, is one of the nation's leading providers of long-term and sub-acute
healthcare services. Integrated Health's strategy is to use geriatric care
facilities as platforms to provide a wide variety of medical and rehabilitative
services more

29
<PAGE> 34

typically delivered in the acute care hospital setting. Integrated Health's
focus on providing sub-acute care is designed to address the fact that cost
containment measures implemented by private insurers and limitations on
government reimbursement of hospital costs have resulted in the discharge from
hospitals of many patients who continue to require sub-acute care. These
patients often cannot be effectively cared for in the home because of the
complex monitoring and specialized medical treatment required. Because geriatric
care facilities have lower capital and operating costs than acute care
hospitals, Integrated Health is able to offer these complex medical services at
a significantly lower cost than acute care hospitals.

On December 1, 1993, Integrated Health acquired substantially all of the
United States operations of Central Park Lodges, Inc., consisting of 30
geriatric care facilities, nine retirement facilities and divisions which
provide pharmacy, healthcare personnel, and support services through branch
locations.

Integrated Health provides sub-acute care through medical specialty units
("MSUs"), which are typically 20 to 75 bed specialty units with physical
identities, specialized medical technology and staff separate from the geriatric
care facilities in which they are located. MSUs are designed to provide
comprehensive medical services to patients who have been discharged from acute
care hospitals but who still require sub-acute or complex medical treatment.

The levels and quality of care provided in Integrated Health's MSUs are
similar to those provided in the hospital but at per diem treatment costs which
Integrated Health believes are generally 30% to 60% below the cost of such care
in acute care hospitals. Because of the high level of specialized care provided,
Integrated Health's MSUs generate substantially higher net revenue and operating
profit per patient day than traditional geriatric care services.

As of December 31, 1993, Integrated Health operated 97 geriatric care
facilities (66 owned or leased and 31 managed) and 60 MSUs located in 33 of
these facilities.

The Company will acquire and lease back one long-term care facility and one
sub-acute care facility from Subsidiaries of Integrated Health. The Leases will
be guaranteed by Integrated Health, whose shares are listed on the New York
Stock Exchange under the symbol IHS. As of December 31, 1992 and 1993, and March
31, 1994, Integrated Health had assets of $311,973,000, $767,664,000 and
$758,537,000, and stockholders' equity of $145,596,000, $209,338,000 and
$217,805,000, respectively, and for the years ended December 31, 1992 and 1993,
and for the three-month period ended March 31, 1994, had net revenues of
$195,262,000, $282,160,000 and $132,323,000 and net income of $9,141,000,
$15,471,000 and $6,394,000, respectively.

Gravois. Gravois, a sub-acute care facility constructed in 1966 with
additions and renovations in 1975, 1987 and 1993-94, is a 167-licensed bed
sub-acute care facility containing a 49,700 net rentable square foot,
multi-story building located on 5.2 acres in St. Louis County, Missouri.
Although the Gravois facility has historically been used as a skilled nursing
facility, Integrated Health recently divided the market between skilled nursing
care and sub-acute care, dedicating the Gravois facility as the sub-acute care
provider and the other Integrated Health facility, Integrated Health of St.
Louis at Big Bend Woods, as the skilled nursing provider. This change will
create more efficient operations at both facilities and should result in more
sub-acute care patients for the Gravois facility. The total population within a
ten mile radius of the facility is approximately 640,000 and the population 65
years and older within the ten mile radius is approximately 96,800. There are 36
additional facilities within a ten mile radius that provide various levels of
intermediate and long-term care.

Gravois Health Care, Inc., a Subsidiary of Integrated Health, will be the
sole Lessee of the Gravois facility pursuant to a ten-year lease with three
five-year renewal options. The Base Rent per square foot will be $18.55.

Mountain View. Mountain View, a long-term care facility constructed in
1971 and renovated in 1981, is a 137-licensed bed long-term care facility
containing 52,700 net rentable square feet in a multi-story building located on
8.2 acres in Unity Township, Pennsylvania, near Pittsburgh. Integrated Health
will provide a full range of services at the Mountain View facility, including
skilled nursing, complex care (post surgery, cancer, etc.), respiratory therapy
and physical therapy. The total population within a ten mile radius is
approximately

30
<PAGE> 35

166,500 and the population 65 years and older within a ten mile radius is
approximately 27,300. There are other skilled nursing care providers servicing
the market; however, entry into the market is regulated through Pennsylvania's
CON process. There are 25 additional facilities within a ten-mile radius that
provide various levels of intermediate and long-term care.

Mountain View Nursing Center, Inc., a Subsidiary of Integrated Health, will
be the sole Lessee of the Mountain View facility pursuant to a ten-year lease
with three five-year renewal options. The Base Rent per square foot will be
$20.11.

QUORUM INITIAL PROPERTIES

Quorum, headquartered in Brentwood, Tennessee, owns, operates, manages and
provides consultation services for acute care hospitals nationwide. Quorum is
the nation's largest manager of acute care hospitals, having over 250 management
contracts throughout the country. In December 1993, Quorum acquired Baptist
Hospital in Gadsden, Alabama, renamed Gadsden Regional Medical Center, ("GRMC"),
a 346 bed acute care hospital and in September 1993, Quorum acquired ten acute
care hospitals from Charter Medical Corporation, including the Desert Springs
Hospital, a 225 bed acute care hospital in Las Vegas, Nevada.

The Company will purchase and lease back four ancillary hospital facilities
from two subsidiaries of Quorum. The Leases will be guaranteed by Quorum whose
shares are traded on the Nasdaq National Market System under the symbol QHGI. As
of June 30, 1992 and 1993, and March 31, 1994, Quorum had assets of
$220,603,000, $275,037,000 and $663,648,000 and stockholders' equity of
$43,990,000, $79,561,000 and $172,584,000, respectively, and for the years ended
June 30, 1992 and 1993, and the nine months ended March 31, 1994, had net
revenues of $173,219,000, $343,132,000 and $454,466,000 and net income of
$4,048,000, $14,299,000 (including a $3,559,000 gain in 1992 realized from
cumulative effect of a change in accounting principles and a non-recurring loss
of $1,591,000 in 1993 realized from early extinguishment of debt), and
$25,736,000, respectively.

Initial Properties Associated with Gadsden Regional Medical Center

GRMC, located in Gadsden, Alabama, approximately 65 miles east of
Birmingham, is the leading hospital in a six-county area in northeast Alabama.
GRMC sits on a 23 acre campus which also contains a four story ancillary
hospital facility ("Hamiter Building"), a new five story ancillary hospital
facility ("Gadsden Medical Building II"), a cancer treatment center, a mental
health treatment center, a day care center as well as a single story primary
care clinic ("Goodyear Clinic").

GRMC is the dominant provider in the area of medical services such as
general, neurological, and cardiovascular surgery, obstetrics, gynecology,
pediatrics, orthopaedics and psychiatry. The medical staff is comprised of 155
physicians. A total of 30 specialties and sub-specialties are represented on the
staff.

Goodyear Clinic. The Goodyear Clinic, an ancillary hospital facility
constructed in 1977, is a 14,000 net rentable square foot, single-story building
located on 1.19 acres. The facility is operated as a primary care clinic for the
2,500 employees of the Goodyear Tire & Rubber Company ("Goodyear") plant located
less than a mile from the campus of GRMC. Three family practice physicians
employed by Goodyear provide care to the Goodyear employees at the clinic.

Hamiter Building. The Hamiter Building, an ancillary hospital facility
constructed in 1979, is a 38,200 net rentable square foot, four story building
located on 1.3 acres. The facility is connected to GRMC via an enclosed skywalk.
Tenants of the Hamiter Building facility are physician groups who practice on
the medical staff of GRMC.

Gadsden Medical Building II. Gadsden Medical Building II, an ancillary
hospital facility constructed in 1993, is a 50,600 net rentable square foot,
multi-story building located on 0.65-acres and is connected to GRMC via enclosed
skywalks and hallways. Tenants of the Gadsden Medical Building II facility are
physician groups who practice on the medical staff of GRMC.

QHG of Gadsden, Inc., a Subsidiary of Quorum, will be the sole Lessee of
Goodyear Clinic, Hamiter Building and Gadsden Medical Building II under a
ten-year lease with three five-year renewal options. The

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Base Rent per square foot will be $12.92 for each of the Goodyear Clinic,
Hamiter Building and Gadsden Medical Building II, respectively.

Initial Properties Associated with the Desert Springs Hospital

The Desert Springs facility is located adjacent to the 225-licensed bed
Desert Springs Hospital in the southern section of Las Vegas, approximately two
miles from the "Las Vegas Strip." The Las Vegas MSA has an estimated population
of 870,000. Desert Springs Hospital was established in 1971 and has grown to its
current operating capacity through its diversified and specialized product lines
and medical staff, including cardiac specialty services. There are eight acute
care hospitals serving the Las Vegas MSA with a total of 2,018 licensed beds.
The hospital sits on a 17.5-acre campus, which also contains the two-story
ancillary hospital facility which will be purchased by the Company.

Desert Springs. Desert Springs, an ancillary hospital facility constructed
in 1974, is a 26,700 net rentable square foot, multi-story building located on
3.53 acres in Clark County, Nevada. Current tenants of the facility include
physicians who practice on the medical staff of Desert Springs Hospital. Quorum
has current plans to develop a portion of the foregoing 3.34 acre tract that is
currently used as parking lots into a multi-level parking deck for use by the
Desert Springs Hospital as well as the Desert Springs ancillary hospital
facility. The Company will grant NC-DSH, Inc., a Subsidiary of Quorum
("NC-DSH"), an option to purchase such parking lots provided that certain
assurances are made with respect to construction of the parking deck and
availability of the deck to the ancillary hospital facility on an ongoing basis.

NC-DSH will be the sole Lessee of Desert Springs under a ten-year lease
with three five-year renewal options. The Base Rent per square foot is $19.80.

SURGICAL HEALTH INITIAL PROPERTIES

Surgical Health, headquartered in Atlanta, Georgia, and formed in 1991, is
a leading operator of freestanding outpatient surgery centers. Surgical Health's
surgery centers provide the facilities and medical support staff necessary for
physicians to perform on an outpatient basis non-emergency surgical procedures.
Surgical Health owns and operates a network of 30 freestanding surgery centers
in 11 states with an aggregate of 123 operating and procedures rooms and is
developing an additional eight surgery centers in three states. Based on
industry sources, Surgical Health believes that it is the third-largest operator
of freestanding outpatient surgery centers in the United States.

Surgical Health's strategy is to establish networks of high quality
freestanding surgical centers in selected markets. Surgical Health has
established regional networks in eight markets. This strategy is designed to
enhance Surgical Health's ability to contract with managed care companies,
enable Surgical Health to implement effective sale and marketing programs at
lower marginal costs and provide physicians and patients with increased
accessibility to its surgery centers. Surgical Health pursues a marketing
strategy of developing relationships with associations of prominent primary care
and specialist physicians in its market areas and utilizing these relationships
to establish affiliations with managed care companies. Surgical Health is also
exploring joint ventures with hospitals.

The Company will acquire three ambulatory surgery centers from Surgical
Health. Surgical Health will guarantee the Leases of the facilities leased to
Subsidiaries of Surgical Health. On June 22, 1994, Surgical Health's
registration statement with the SEC related to the issuance of $75 million
principal amount of senior subordinated notes was declared effective, and the
notes are listed on the New York Stock Exchange, subject to official notice of
issuance. As of December 31, 1992 and 1993, and March 31, 1994, Surgical Health
had assets of $94,157,000, $162,896,000 and $166,102,000 and stockholders'
equity of $21,046,000, $36,140,000 and $35,902,000, respectively, and for the
years ended December 31, 1992 and 1993, and the three-month period ended March
31, 1994, had net revenues of $36,561,000, $80,883,000 and $22,869,000 and net
income (loss) of $187,000, $3,909,000 and ($719,000) (after pre-tax merger costs
of $3,265,000), respectively.

South County Medical Center. The South County Medical Center facility is a
multi-story, ambulatory surgery center. Construction of the facility is
substantially completed and a certificate of occupancy is

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expected to be issued in June 1994. As of May 25, 1994, leases had been signed
for over 93% of the rentable space, and temporary certificates of occupancy have
been issued as present tenants move in. The facility, situated on approximately
10 acres of land in St. Louis County, Missouri, contains approximately 45,200
net rentable square feet, with Surgical Health's surgery center and related
activities occupying approximately 25,000 square feet. Physicians practicing the
following specialties use the four surgery suites at the facility: general
surgery, gastroenterology, orthopaedic, urology, ENT and gynecology. A
Subsidiary of HEALTHSOUTH will lease approximately 4,300 square feet to use as
an outpatient rehabilitation facility. The remaining space will be leased to
physicians. There are five other free-standing ambulatory surgery facilities and
21 hospitals in the St. Louis MSA.

Surgical Health will be the sole Lessee and Healthcare Real Estate Holdings
II, Inc., a Subsidiary of Surgical Health, will be the sole sublessee of South
County Medical Center under a 15-year lease with three five-year renewal
options. The Base Rent per square foot is $18.42.

Northlake. Northlake, an ambulatory surgery facility constructed in 1993,
is an 8,749 square foot, single-story facility located on approximately 2.16
acres in Dekalb County, Georgia. Physicians practicing the following specialties
are expected to use the four surgery suites located at the facility: general
surgery, podiatry, ophthalmology, ENT, gynecology and oral surgery. One of
Surgical Health's Subsidiaries will sublease the facility from the Company under
a 13 year sublease with two five-year renewal options, which will be guaranteed
by Surgical Health. The Northlake facility is located on real estate being
ground leased from J. T. Honea, Sr. and J. T. Honea, Jr. The Company will assume
the existing ground lease between the seller and the Honeas, including the right
of first refusal in favor of the seller, and will sublease the real property to
Surgical Health, which will sublease the facility to one of Surgical Health's
Subsidiaries. The Base Rent will be $13.67 per square foot, exclusive of ground
rent, which will be paid by the sublessee. There are 16 other free-standing
ambulatory surgery facilities and 22 hospitals in the Atlanta MSA.

The CON for the Northlake facility has been challenged by HCA Health
Services of Georgia, Inc., d/b/a/ Northlake Regional Medical Center in two
related Georgia state court proceedings on the basis that the Georgia State
Health Planning Agency did not have authority by statute or regulation to permit
the relocation of the facility without a new CON. Regulations have since been
proposed that would permit such a relocation which contain a grandfather
provision that would be applicable to the Northlake facility. If the proposed
regulations are not finally adopted as published or are challenged and held
invalid, or if Surgical Health does not prevail on the issue of whether the
facility was properly grandfathered from the CON requirements, Surgical Health
may be required to discontinue operation of the Northlake facility and apply for
a new CON. In such event the Company can require Surgical Health to substitute
one or more comparable properties for the Northlake facility.

North Shore. North Shore, an ambulatory surgery facility constructed in
1963, completely remodeled in 1988 and acquired in 1992 by Surgical Health, is a
5,100 net rentable square foot, single-story facility located on approximately
2.2 acres in Cook County, Illinois. Physicians practicing the following
specialties are expected to use the two surgery suites located at the facility:
general surgery, gastroenterology, urology, gynecology and orthopaedics. The
Company will lease the facility to Surgical Health and one of Surgical Health's
Subsidiaries will sublease the facility. The Base Rent per square foot will be
$21.41. There are 19 other ambulatory surgery facilities and 57 hospitals in the
Chicago MSA.

ACQUISITION OF INITIAL PROPERTIES

The Company has entered into Purchase Agreements to acquire the 20 Initial
Properties. The Purchase Agreements include customary representations and
warranties from each current owner of the particular Initial Property relating
to such matters as title (except for Surgical Health Initial Properties),
compliance with laws, condition of the properties and other similar items. The
warranties may be qualified to the best of the Sellers' knowledge and may not
afford the Company as much protection as unqualified warranties. The Company is
obtaining title insurance on all of the Initial Properties and believes that
such insurance is adequate to provide as much protection as unqualified
warranties.

The purchases of all of the Initial Properties have closed into escrow and
the Initial Properties will be released from escrow immediately after the
closing of the Offering except that the release from escrow of the South County
and Virginia Beach facilities is expected to occur as soon as possible following
the receipt of

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certain approvals with respect to each property, which are currently expected to
be received in June 1994. If the acquisition of any of the Initial Properties
does not occur by the date specified in the applicable Purchase Agreement, the
seller of such Initial Property will no longer be contractually bound to sell
such property to the Company. The Company has no reason to believe that it will
not be able to acquire the Initial Properties under the terms of the Purchase
Agreements. The consummation of the closings of the Initial Properties held in
escrow is contingent only upon the closing of the Offering no later than June
30, 1994.

The purchase price for each of the Initial Properties has been determined
by negotiation with the sellers after taking into consideration the rentals,
operating history, age and condition of each of the Initial Properties, and
other relevant factors, including appraisals. The applicable Disinterested
Directors have approved the purchase price and other terms relating to the
acquisition of each of the Initial Properties. In the opinion of management,
each of the Initial Properties is well maintained, in good repair, and suitable
for its intended use.

APPRAISALS

Current appraisals for each of the Initial Properties have been prepared
for the Company by Valuation Counselors Group, Inc. ("Valuation Counselors"), a
company unrelated to the Company or any of the sellers or Guarantors. All of the
appraisals have been prepared since September 29, 1993, and indicate that the
Initial Properties have an aggregate current fair market value of $120,540,000.
Each of the Initial Properties will be purchased at a purchase price not greater
than its appraised value. Reference is made to the appraisals submitted by
Valuation Counselors, which have been filed as exhibits to the Registration
Statement of which this Prospectus forms a part.

The appraised values of the Initial Properties represent a limited scope
analysis and were generally developed based on the "income" approach. The income
approach develops a going concern value of the Initial Properties by
capitalizing their projected operating income. The income approach normally
provides the most reliable value estimate for multi-tenant professional office
buildings. The value of the property is strongly related to the expected income
stream of the property. Although the buyers of professional office buildings are
usually owner/occupants, these buyers are generally aware of the property's cash
flow potential and its value from an investor's perspective. For this reason,
appraisers consider the income approach the best indicator of value for the
subject. Appraisals based upon the "liquidation" approach may produce values
lower than those produced by the income approach. The appraisals of the Initial
Properties were also not based on the "cost" and "sales comparison" approaches.
There can be no assurances that appraisals based on these other approaches would
be similar.

Valuation Counselors assumed the accuracy and correctness of operating
data, financial data and legal descriptions provided to it, however, no audit or
verification was undertaken by the appraiser in connection with its report. The
appraiser did not assume responsibility for matters of title.

Because the appraisals represent only an estimate of value, and are subject
to numerous assumptions, the appraisals do not purport to represent precise
measures of realizable value and should not be relied upon for purposes of
determining such value at any particular time. The appraisals assume that the
appraised facilities could be sold on an orderly basis under stable market
conditions. The estimate of the aggregate value of the appraised facilities is
the sum of the values determined for the individual facilities. No adjustment
was made with respect to a bulk sale of a group of facilities.

LEASES

The following description of the Leases does not purport to be complete,
but rather contains a general summary of certain provisions thereof. Reference
is made to the Leases filed with the SEC as exhibits to the Registration
Statement of which this Prospectus is a part, and the following summary is
qualified in its entirety by such reference.

Each Lease relates to a healthcare facility, comprised generally of the
land, buildings, other improvements and certain fixtures, for a use, in most
cases, restricted to the intended healthcare related use and for such other uses
as may be necessary in connection with or incidental to such use (the "Primary
Intended Use"). Generally, personal property is not being purchased or leased,
although the Company has been granted an option to purchase any personal
property necessary or appropriate for the operation of the Initial Properties

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for an amount equal to the then-current book value (original cost less
accumulated depreciation on the books of the Lessee). The Leases have initial
terms ranging from 10 to 15 years with one or more renewal terms exercisable by
the Lessee of at least 10 additional years. The Leases are subject to earlier
termination upon the occurrence of certain contingencies. Base Rent varies by
Lease, taking into consideration many factors, including the credit of the
Lessee, purchase price of the property, operating performance of the facility,
location, type and physical condition of the facility. All of the Leases provide
for Additional Rent commencing after the first year based on either a set
percentage increase or on 67% to 100% of the percentage increase in the
applicable consumer price index, with annual increases generally limited to a
maximum of 5%.

Each Lease is a Triple Net Lease and the Lessee is responsible thereunder,
in addition to Base Rent and any Additional Rent, for all additional charges,
including every fine, penalty, interest and cost which may be levied for
nonpayment or late payment thereof, all taxes, assessments, levies, fees, water
and sewer rents and charges, all governmental charges with respect to each of
the Initial Properties, all utility and other charges, including insurance
premiums, incurred in connection with the operation of the Initial Property and
including ground rent in the case of the Larkin Medical Building, Virginia Beach
and North Shore facilities.

Each Lessee is required, at its expense, to maintain its leased property in
good order and repair. The Company is not required to repair, rebuild or
maintain the Initial Properties. Under certain Leases, the Company must purchase
from the Lessees certain structural capital improvements and replacements made
by such Lessees.

Except for the Surgical Health Leases, the Leases also contain provisions
which generally permit the Lessees, under certain circumstances, to terminate
the Leases and to repurchase the leased property for a price equal to the
Minimum Repurchase Price (as defined in the Leases) or to substitute another
property or properties for the applicable Initial Property. These circumstances
include (i) the occurrence of certain damage to or destruction of one of the
Initial Properties, (ii) condemnation, and (iii) mutual agreement of the
parties. In addition, the Integrated Health Leases contain an option, commencing
at the end of the fifth year, to repurchase the leased property for a purchase
price equal to the Minimum Repurchase Price (as defined is the Leases). The
Lessees also have a right of first refusal to purchase the leased property
during the terms of the Leases and for a short period of time following the
expiration of the terms of the Leases on the same terms and conditions as the
Company may propose to sell one of the Initial Properties.

INSURANCE

The Company will require the Lessees to obtain title insurance with respect
to each of the Initial Properties in amounts equal to their respective purchase
prices, insuring that the Company holds title to each of the Initial Properties
free and clear of all liens and encumbrances, except those approved by the
Company. In the opinion of the management of the Company, the Initial Properties
will be adequately covered by comprehensive liability, fire, flood (if
available) and extended coverage with respect to the Initial Properties with
policy specifications and insured limits customarily carried for similar
properties. While the Company believes that its insurance coverage will be
adequate, there are certain types of losses which may either be uninsurable or
not economically insurable. Except with respect to the Midway facility, the
Company generally does not require the Lessees to carry earthquake insurance
with respect to its Initial Properties. This decision was based upon a number of
factors, including the structural design of the buildings and the general lack
of seismic activity in the areas where the Initial Properties are located.
Should an uninsured loss occur the Company could lose its investment in, and
anticipated profits and cash flow from, an Initial Property.

MEDICAID, MEDICARE, BLUE CROSS AND OTHER REVENUE

Payments for patient care earned by Lessees and sublessees are received
from the federal Medicare program, state Medicaid programs, private insurance
carriers, employers and Blue Cross plans, health maintenance organizations,
preferred provider arrangements and directly from patients. Medicare payments to
acute care hospitals for inpatient services are made pursuant to the Prospective
Payment System under which a hospital is paid a prospectively established rate
based on diagnosis. In general, Medicare payments for psychiatric care and
rehabilitative care are exempt from PPS and continue to be reimbursed on a cost
basis system.

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Under regulations effective November 1, 1991, the capital related costs of
PPS hospitals are to be reimbursed by the Medicare program on a prospective
basis, phased in over a ten-year transition period, eventually to be a set
federal rate. The effects of the new payment methodology on actual levels of
reimbursement cannot yet be predicted. Properties not subject to PPS will
continue to be reimbursed by Medicare for capital costs on a percentage of cost
basis. Payments from state Medicaid programs for acute care, rehabilitative and
psychiatric care are based on reasonable costs or are at fixed rates. Medicare
and Medicaid payments are generally below a facility's actual charge schedule
and in some cases payments are limited, delayed or reduced because of federal
and sometimes state budget deficits.

In recent years, fundamental changes in the Medicare program (including the
implementation of a PPS for inpatient services at medical surgical hospitals)
have resulted in reduced levels of payment for a substantial portion of
healthcare services. Moreover, healthcare facilities have experienced increasing
pressures from private payors attempting to control healthcare costs, that have
reduced reimbursement to levels approaching that of government payors.
Considerable uncertainties surround the future determination of payment levels
under the Medicare program for inpatient hospital services as well as outpatient
services.

Blue Cross payments in different states and areas are based on costs,
negotiated rates or retail rates. Payments from health maintenance organizations
and preferred provider organizations generally are negotiated, usually at a
discount from published charge schedules, which may take the form of a flat
payment per enrollee in the plan offered by such organizations.

FUTURE ACQUISITIONS OF HEALTHCARE FACILITIES

The Company's strategy is to become an important source of healthcare
facility capital by investing in a high quality portfolio of properties managed
by established operators including long-term care, hospital management,
rehabilitation and alternate-site care companies. The Company intends to
diversify its portfolio by operator, geography, facility type and healthcare
industry segment. Its investment criteria emphasize the creditworthiness of the
guarantor, competitive position of the property, attractiveness of the industry
segment, and fit with the Company's existing portfolio.

The Company will determine the creditworthiness of potential lessees and
guarantors based upon a review of publicly available financial and other
information, due diligence review of the individual financial statements and
other non-financial information provided by the potential lessees and
guarantors, to the extent available, and other data customarily reviewed when a
company makes an acquisition or significant investment. While the Company
believes such information will be provided in good faith, the Company will not
and cannot make an independent investigation of such information.

The Company believes that there currently is significant demand for REIT
financing capital in the healthcare industry. In addition, the Company believes
the substantial healthcare industry experience and numerous relationships of its
management and directors will help the Company identify, evaluate and complete
additional investments. Management believes that opportunities for property
acquisitions are currently particularly attractive because of the increasing
demand for alternate site and outpatient healthcare services, anticipated
capital requirements by the healthcare industry to fund these and other
properties, and the reduced supply of available financing from traditional
sources. Management also believes that there are opportunities to provide
development funding to established healthcare industry operators on a selective
basis.

The following are brief descriptions of the types of healthcare facilities
in which the Company will seek additional investment:

Ancillary Hospital Facilities and Acute Care Hospitals

Ancillary hospital facilities are generally not subject to separate
licensing requirements, although certain hospital ancillary services may be
subject to licensing, CON and other regulatory requirements in addition to those
applicable to acute care hospitals. The success of an ancillary hospital
facility is dependent on its proximity to a hospital. The Company may purchase
one or more hospital properties in the future. Acute care hospitals are subject
to extensive federal, state and local legislation and regulation. Acute care
hospitals undergo periodic inspections regarding standards of medical care,
equipment and hygiene as a condition of

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<PAGE> 41

licensure. Various licenses and permits also are required for narcotics,
laboratories, pharmacies, radioactive materials and certain equipment.
Accreditation by the Joint Commission on Accreditation of Healthcare
Organizations is generally required for participation in government sponsored
provider programs. Acute care hospitals are subject to and comply with various
forms of utilization review. In addition, under PPS, each state must have a
Professional Review Organization to carry out a federally mandated system of
review of Medicare patient admissions, treatment and discharges in acute care
hospitals. Medical and surgical services and practices are extensively
supervised by committees of staff doctors at each acute care hospital, and are
reviewed by each acute care hospital's local governing board and quality
assurance personnel. New regulations governing the control of disposal of
hazardous wastes may increase the costs of operating acute care facilities.

Physician Clinics

Physician clinics are subject to extensive federal, state, and local
legislation and regulation. Every state imposes licensing requirements on
individual physicians and on facilities and services operated by physicians. In
addition, federal and state laws regulate health maintenance organizations and
other managed care organizations with which the physician groups may have
contracts. Many states require regulatory approval, including CONs, before
establishing certain types of physician-directed clinics, offering certain
services or making expenditures in excess of statutory thresholds for healthcare
equipment, facilities, or programs. In connection with the expansion of existing
operations and the entry into new markets, physician clinics and affiliated
practice groups may become subject to compliance with additional regulation.

Ambulatory Surgery Centers

Ambulatory surgery centers are subject to extensive federal, state and
local legislation and regulation. Ambulatory surgery centers undergo periodic
inspections regarding standards of medical care, equipment and hygiene as a
condition of licensure. Many states require regulatory approval, including CONs,
before establishing certain types of healthcare facilities, offering certain
services or making expenditures in excess of statutory thresholds for healthcare
equipment, facilities or programs. License and certification standards vary by
jurisdiction and undergo periodic revision. In connection with the expansion of
existing operations and the entry into new markets, ambulatory surgery centers
may become subject to compliance with additional regulation.

Long-Term Care and Sub-Acute Care Facilities.

Long-term care and sub-acute care facilities are licensed by state
healthcare agencies, and are subject to extensive federal, state, and local
regulatory and inspection requirements. License, CON and certification standards
and requirements vary by jurisdiction and undergo periodic revision. These
requirements relate to, among other things, the quality of the nursing care, the
qualifications of administration personnel and nursing staff, the condition of
the long-term care facility and the adequacy of its equipment, and continuing
compliance with laws and regulations to the operation of the facilities.

GOVERNMENT REGULATION AND RECENT DEVELOPMENTS

The financial condition of Lessees or sublessees may be affected by changes
in the reimbursement, licensing and certification policies of federal, state and
local governments for healthcare related facilities. Certain of the Initial
Properties may also be affected by changes in accreditation standards or
procedures of accrediting agencies that are recognized by governments in the
certification process. In addition, expansion (including the addition of new
beds or services or acquisition of medical equipment) and occasionally the
discontinuation of services of healthcare facilities is generally subjected to
state regulatory approval through CON programs.

Rental arrangements are subject to federal and state laws and regulations
governing illegal rebates and kickbacks where co-investors are physicians or
others in a position to refer patients to the facilities. The effect of these
laws and regulations is generally to prohibit, through the imposition of
criminal and civil penalties (including program exclusion), payment arrangements
that are construed to include compensation for patient

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referrals. Although there can be no assurance that government enforcement
agencies' and courts' interpretations of these laws will be consistent with that
of the Company, the Company does not believe it or any of the Lessees or
sublessees of the Initial Properties has any Base Rent arrangements that do not
comply in all material respects with these laws. Legislative and regulatory
proposals may be enacted or adopted in the future that adversely affect
physicians and other healthcare providers that invest in healthcare facilities,
regardless of whether there is compensation for referrals, by limiting
reimbursement by the Medicare and Medicaid programs of otherwise covered
services, requiring disclosures of such interests, or imposing civil monetary
and criminal penalties for violations of proscriptions against referrals to such
facilities.

State CON statutes generally provide that, prior to the addition of new
beds, the construction of new facilities or the introduction of new services, a
state health planning designated agency ("SHPDA") must determine that a need
exists for those beds, facilities or services. The CON process is intended to
promote comprehensive healthcare planning, assist in providing high quality
healthcare at the lowest possible cost and avoid unnecessary duplication by
ensuring that only those healthcare facilities that are needed will be built.

Typically, the provider of services submits an application to the
appropriate SHPDA with information concerning the area and population to be
served, the anticipated demand for the facility or service to be provided, the
amount of capital expenditure, the estimated annual operating costs, the
relationship of the proposed facility or service to the overall state health
plan and the cost per patient day for the type of care contemplated. Whether the
CON is granted is based upon a finding of need by the SHPDA in accordance with
criteria set forth in CON statutes and state and regional health facilities
plans. If the proposed facility or service is found to be necessary and the
applicant to be the appropriate provider, the SHPDA will issue a CON containing
a maximum amount of expenditure and a specific time period for the holder of the
CON to implement the approved project.

Licensure and certification are separate, but related, regulatory
activities. The former is usually a state or local requirement and the latter is
a federal requirement. In almost all instances, licensure and certification will
follow specific standards and requirements that are set forth in readily
available public documents. Compliance with the requirements is monitored by
annual on-site inspections by representatives of various government agencies.
The Gravois facility and the Mountain View facility are currently required to be
licensed. All of the hospitals affiliated with the ancillary hospital facilities
have obtained all necessary CONs and are fully accredited. All of the Initial
Properties, Lessees and any hospitals owned by the Lessees and their
Subsidiaries have obtained CONs, where applicable. However, the CON approval for
the Northlake facility is being contested. See "-- Surgical Health Initial
Properties -- Northlake."

Loss by a facility of its ability to participate in government sponsored
programs because of licensing, certification or accreditation deficiencies or
because of program exclusion resulting from violations of law would have adverse
effects on its revenues.

In December 1992, the American Medical Association modified its ethical
position on physician referrals to facilities in which they have an ownership
interest. Generally, physicians are prohibited from making referrals to
facilities in which they have an ownership interest unless they provide services
at the facility (such as surgeons at surgery centers and physicians with staff
privileges at hospitals). A narrow exception to this rule is permitted when a
facility is clearly needed in a community and alternative financing is not
available if certain strict conditions are satisfied. While it is generally
believed that these regulations are not intended to affect physician ownership
in large, publicly-traded companies such as the Company, physicians considering
an investment to the Company should be aware of the existence of these ethical
considerations and consider the potential applicability to the proposed
investment.

In recent years, a number of proposals have been introduced in Congress
that would reform various aspects of the healthcare system, including
malpractice reform, universal access to healthcare, global budgeting of public
and private healthcare spending. Medicare payment reform and establishment of
national health or single payor insurance programs financed by the federal
government. Legislation introduced in Congress known as "The Managed Competition
Act of 1992" would have, if enacted, (i) provided tax incentives to employers
who provide basic healthcare benefits coverage for their employees, but would
limit deductions for providing additional benefits; (ii) provided universal
access to coverage through varying levels

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of direct government subsidies for individuals with incomes below 200% of the
poverty level; (iii) incorporated insurance reform and malpractice reform to
reduce costs; and (iv) encouraged through tax incentives the establishment of
accountable health plans consisting of providers and insurance companies that
compete on the basis of offering high quality, low cost healthcare.

President Clinton and certain members of Congress have proposed plans for
healthcare reform. Although elements of the Managed Competition Act, along with
other health reform initiatives, are being considered, no assurance can be given
as to what elements will be included in the President's or other comprehensive
national healthcare reform package, whether such proposal will be enacted into
law, or what effect such proposals would have on the operations of Initial
Properties.

REGULATORY COMPLIANCE

The Company believes that healthcare regulations will continue to change
and, therefore, regularly monitors developments in healthcare law. There can be
no assurance that all facilities to be subject to Leases can remain in
compliance with applicable law.

ENVIRONMENTAL MATTERS

Under various federal, state and local environmental laws, ordinances and
regulations, an owner of real property may be liable for the costs of removal or
remediation of certain hazardous or toxic substances at, under or disposed of in
connection with such property, as well as certain other potential costs relating
to hazardous or toxic substances (including fines and injuries to persons and
adjacent property). Most, if not all, of these laws, ordinances and regulations
contain stringent enforcement provisions including,but not limited to, the
authority to impose substantial administrative, civil and criminal fines and
penalties upon violators. Such laws often impose liability without regard to
whether the owner knew of, or was responsible for, the presence or disposal of
such substances and may be imposed on the owner in connection with the
activities of an operator of the property. The cost of any required remediation,
removal, fines or personal or property damages and the owner's liability
therefor could exceed the value of the property and/or the aggregate assets of
the owner. In addition, the presence of such substances, or the failure to
properly dispose of or remediate such substances, may adversely affect the
owner's ability to sell or lease such property or to borrow using such property
as collateral.

Operations at the Initial Properties have been and will continue to be
subject to numerous federal, state, and local environmental laws, ordinances and
regulations, including those relating to the generation, segregation, handling,
packaging and disposal of medical wastes as well as facility siting,
construction, occupational training and safety, disposal of non-medical wastes,
underground storage tanks and ash emissions from incinerators. Operations of
nuclear medicine departments at some of the Initial Properties also involve the
use and handling, and subsequent disposal of, radioactive isotopes and similar
materials, activities which are closely regulated by the Nuclear Regulatory
Commission and state regulatory agencies. In addition, several of the Initial
Properties were built prior to the time prohibitions on the use of asbestos in
building construction were enacted and other such facilities may be acquired by
the Company in the future.

The Company has had Phase I environmental audits conducted on all of the
Initial Properties. The audits determined that none of the Initial Properties
contained indications of environmental concerns with the exception of the
presence of non-friable asbestos in eight of the Initial Properties and a small
amount of friable asbestos in three of those properties. Phase I environmental
audits involve preliminary reviews of title and uses of real property with
little or no sampling, except in the case of the suspected presence of asbestos
or lead paint, and should not be relied upon as the final determination of the
absence of environmental concerns. The environmental audits recommended that
operations and maintenance programs be implemented at the properties containing
asbestos. These programs are being implemented, and the costs will be paid by
the Lessees under the Leases. Remedial action was also taken with respect to one
of the Initial Properties containing friable asbestos at the cost of the owner.
Any remedial action taken in the future with respect to other Initial Properties
containing asbestos are required to be paid by the Lessees under the Leases. In
addition, all of the Purchase Agreements and Leases contain indemnification
provisions relating to environ-

39
<PAGE> 44

mental liabilities or conditions, although there can be no assurances that the
seller will be able to fulfill its indemnification obligations. Moreover, the
scope of such indemnification obligations may be limited and there can be no
assurances that such indemnification obligations will apply to all environmental
costs or liabilities incurred by the Company. The Leases do not give the Company
control over the operations of the Lessees, nor will the Company monitor the
Lessees with respect to environmental matters.

No assurance can be given that the provisions of either the Purchase
Agreements or the Leases will fully protect the Company or that any prior owner,
Lessee or future lessee of a Initial Property did not and will not create
environmental conditions not known to the Company. However, the Company is not
aware of any such condition or liability that would have a material adverse
effect on the Company's earnings, expenditures or continuing operations.

COMPANY OFFICES

The Company's headquarters are located in offices at One Perimeter Park
South, Suite 335-S, Birmingham, Alabama 35243, which are leased by the Company
from an unaffiliated party on a month-to-month basis. Annual rent is $7,755.00.
The office lease covers approximately 1,500 square feet at rent of $5.17 per
square foot. The Company expects to enter into a new long-term lease for office
space at market rate.

LEGAL PROCEEDINGS

On June 16, 1993, Mr. Gerald Chandler filed a lawsuit in the Circuit Court
for Jefferson County, Alabama, against Richard M. Scrushy, Larry R. House,
Michael D. Martin and a to-be-formed REIT, seeking damages arising out of the
defendants' alleged breaches of alleged verbal agreements to employ Mr. Chandler
in some capacity in a to-be-formed REIT. Mr. Chandler is seeking monetary
damages. The Company is of the opinion that this lawsuit is without merit and
will not have a material adverse effect on the Company and is defending the
lawsuit vigorously.

INVESTMENT AND OTHER POLICIES

The following is a summary of the Company's investment policy and policies
with respect to certain other activities.

INVESTMENT POLICY

The Company's investment objectives are to (i) generate current income for
stockholders, (ii) provide increased returns to stockholders through the
acquisition and development of additional properties, which may require the use
of additional debt or equity financing, (iii) provide the opportunity to realize
capital growth resulting from appreciation, if any, in the residual values of
any properties acquired and (iv) preserve and protect stockholders' capital.
There can be no assurance that any of these objectives will be realized.

The Bylaws of the Company permit the Board of Directors with the consent of
a majority of the Executive Committee, but without the approval of the
stockholders, to alter the Company's investment policies if they determine in
the future that such a change is in the best interests of the Company and its

40
<PAGE> 45

stockholders. The methods of implementing the Company's investment policies may
vary as new investment and financing techniques are developed.

The Company intends to invest in real property, principally for the
production of income, although the prospect for capital appreciation is a factor
that will be considered in making such investments. The Company's present policy
is not to have any single property or lease account for more than 20% of either
its assets or annualized rental revenue. There are no limitations on the number
or amount of mortgages that may be placed on any single property, but the
Company's present policy prohibits aggregate debt (secured or unsecured) in
excess of 50% of the Company's total capitalization. The Company intends to
close all of the Initial Properties in escrow on or before the Effective Date of
the Offering and to release the Initial Properties from escrow immediately after
the closing of this Offering, except for the South County Medical Center
facility which will be purchased after the completion of its construction and
the issuance by the proper authority of a certificate of occupancy. Thereafter,
the Company intends to seek growth through the acquisition of additional
income-producing projects developed by third parties. The Company will
concentrate on investments in healthcare-related facilities, including acute
care hospitals, rehabilitation hospitals, physician clinics, ambulatory surgery
centers, clinical laboratories, ancillary hospital facilities, long-term care
facilities, and medical centers, but may also consider opportunities in other
kinds of income-producing real property. Management has no present intention to
invest in properties unrelated to the healthcare industry.

The Company may acquire additional income-producing properties, expand and
improve its properties or sell such properties when, in the opinion of the
Company, circumstances warrant. The Company may also participate with other
entities in property ownership, through joint ventures or other types of
co-ownership, so long as the Company is the controlling party in any such
venture. While the Company presently intends to acquire equity investments in
real estate, it may, in its discretion, invest in mortgages and other types of
interests in real estate. The Company may also invest in securities of concerns
engaged in real estate activities or securities of other issuers, either for
investment purposes or for the purpose of exercising control, subject to
limitations on such investments necessary for REIT qualification. The Company
has the authority but has no present plans to invest in mortgages, to make loans
to other persons, or to underwrite the securities of other issuers. The Company
has the authority to invest in securities of other issuers but has no present
plans to do so. Except for the policy that no one property may account for more
than 20% of the Company's assets or annualized rental revenue, there is no limit
to the percentage of assets that may be invested in securities or interests in
real estate.

The Company may enter into build-to-suit type agreements that by their
terms require conversion to leases upon the completion of the development of the
facility. During the term of the development of the facility, funds will be
advanced pursuant to requests made by the developer in accordance with the terms
and conditions of the applicable development agreement. Simultaneously with the
commencement of the development of a facility, the Company will enter into a
lease with the developer. The Base Rent under such a lease will be established
at a specified rate or at a specified number of basis points over an agreed-upon
United States treasury security's yield in effect at the time of certified
substantial completion of the facility.

The Company's development program will generally include a variety of
additional forms of security and collateral beyond that provided by the Leases,
such as irrevocable letters of credit from financial institutions, payment and
performance completion bonds or completion guarantees. In addition, prior to any
advance of funds by the Company under a development agreement, the developer
generally must provide: (i) satisfactory evidence in the form of an endorsement
to the Company's title insurance policy that no intervening liens have been
placed on the property since the date of the Company's previous advance; (ii) a
certificate executed by the architect-of record that indicates that all
construction work completed on the facility conforms with the requirements of
the plans, specifications, and any change orders previously approved by the
Company; (iii) a certificate executed by the general contractor or construction
manager that all work requested for reimbursement has been completed; and (iv)
satisfactory evidence that the funds remaining unadvanced are sufficient for the
payment of all costs necessary for the completion of the facility in accordance
with the terms and provisions of the agreement. As a further safeguard during
the development period, the Company will generally retain a percentage of
construction costs incurred until it has received satisfactory evidence that the
facility has been substantially completed in accordance with the applicable
plans, specifications, and approved

41
<PAGE> 46

change-orders, and the period during which liens may be perfected with respect
to any work performed, or labor or materials supplied, in connection with the
construction of the facility has expired. The Company anticipates that it will
also monitor the progress of the development of each facility and the accuracy
of the developer's requests for funds by having a third-party inspector perform
monthly on-site inspections.

In evaluating potential investments, the Company will consider such factors
as: (i) the geographic area, type of property and demographic profile; (ii) the
location, construction quality, condition and design of the property; (iii) the
current and anticipated cash available for distribution and its adequacy to meet
operational needs and lease obligations and to provide a competitive market
return on equity to the Company's investors; (iv) the potential for capital
appreciation, if any; (v) the growth, tax and regulatory environment of the
communities in which the properties are located; (vi) the occupancy and demand
for similar health facilities in the same or nearby communities; (vii) an
adequate mix of private and government sponsored patients; (viii) any potential
alternative uses of the facilities; (ix) prospects for liquidity through
financing or refinancing; (x) industry segment and operator diversification; and
(xi) the suitability of the potential investments in light of maintaining REIT
status.

In making future investments, the Company intends to focus on established,
creditworthy potential lessees which meet the Company's standards for quality
and experience of management. In order to determine creditworthiness of
potential lessees, the Company will review historical and prospective financial
information of the lessee, together with appropriate financial information of
any guarantor. Factors considered in connection with such financial review with
respect to the lessee and any guarantor will include the net worth,
profitability and cash flow, debt position, and the ability of the lessee and
any guarantor to provide additional credit enhancements.

The Company will actively seek to maintain diversification of its
investments in terms of geographic location, lessee and facility types, although
investments are not limited (as to percentage of assets or otherwise) to any
geographic area or any specific type of property. A fundamental investment
objective of the Company will be to obtain contractual Base Rent escalations
under long-term, noncancellable, Triple Net Leases and to obtain credit
enhancements based upon the credit of the Lessee or its parent.

Management of the Company will conduct market research and analysis for all
potential investments. Management also will review the value of the property,
the interest rates and debt service coverage requirements of any debt to be
assumed and the anticipated sources of repayment for the investment. There are
no limitations on the percentage of the Company's total assets that may be
invested in any one property or joint venture or other investment. The Board of
Directors may establish limitations as it deems appropriate from time to time
without a vote of the stockholders of the Company. No limits have been set on
the number of properties in which the Company will seek to invest, or on the
concentration of investment in any one property or any one city or state.

The Company may determine to finance acquisitions through the exchange of
properties or the issuance of shares of its capital stock to others, if such
transactions otherwise satisfy the Company's investment criteria. The Company
also has authority to repurchase or otherwise reacquire its Common Stock or any
other securities and may determine to do so in the future.

To the extent that the Company's Board of Directors determines to obtain
additional capital, the Company may raise such capital through additional equity
offerings, debt financings or retention of cash available for distribution
(subject to provisions of the Code concerning the taxability of undistributed
income of REITs), or a combination of these methods. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and " -- Other Policies" below.

The Company expects to hold its properties as long-term investments and has
no maximum period for retention of each investment. To the extent that the
Company holds its properties for long periods, it may not have sufficient funds
available to acquire additional properties unless such funds are available
through the Bank Credit Facility or other borrowings, or are raised through
additional equity or debt financing, including debt incurred by mortgaging
existing properties.

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<PAGE> 47

The Company may invest its cash in certain short-term investment grade
instruments. Such investments may be in interest-bearing bank accounts,
certificates of deposit, money-market securities, United States government
securities, mortgage-backed securities guaranteed by the Government National
Mortgage Association, mortgages insured by the Federal Housing Administration or
guaranteed by the Veterans Administration, mortgage loans, mortgage loan
participation and certain other similar investments. The Company's ability to
make certain of these investments may be limited by tax considerations.

The Company may sell a property if such property has significantly
appreciated in value. The Company anticipates that the value of the properties
that it intends to acquire will appreciate over the term of its ownership.
Appreciation of the properties is dependent upon many factors, including: (i)
growth of the healthcare industry in general, which in turn is dependent upon a
rising demand for healthcare services, (ii) availability of financial resources
to pay for increased healthcare services, and (iii) supply of healthcare
facilities within the geographical area of the Company's properties which is
available to satisfy the demand for such facilities. Supply and demand for
healthcare facilities within the geographical area of the Company's properties
is dependent, among other considerations, upon (i) availability of capital for
construction of new healthcare facilities; (ii) competing healthcare facilities;
and (iii) population growth and the demographic composition thereof. The
Company, in employing its investment criteria, has selected properties for
acquisition with respect to which it believes there is reasonable likelihood for
appreciation based upon the foregoing considerations.

In the event the Company sells or otherwise disposes of any of its
properties, the Board of Directors will determine whether and to what extent the
Company will acquire additional properties or distribute the proceeds to the
stockholders.

OTHER POLICIES

The Company may incur indebtedness when, in the opinion of the Board of
Directors, it is advisable to do so subject to the limitation described in
" -- Investment Policy" and limitations imposed by financing as described under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The Company has obtained from a
consortium of banks led by NationsBank the $60 million Bank Credit Facility,
which will be used to purchase the Initial Properties, acquire additional
properties and for general corporate purposes. The Company may from time to time
negotiate lines of credit or arrange for other short-term borrowings from banks
or otherwise. The Company may also arrange for long-term borrowings from public
offerings, banks or other institutional investors. Such borrowings may be for
general corporate purposes, to improve or expand existing properties, to acquire
additional properties or to fund any shortfall of cash necessary to meet its
cash distribution requirements that could arise if its taxable income exceeds it
cash available for distribution.

In addition, the Company may incur mortgage indebtedness on real estate
which it owns. Where terms are deemed favorable, the Company may invest in
properties subject to existing mortgages, deeds of trust or similar liens on the
properties. The Company also may obtain non-recourse or other mortgage financing
for unleveraged properties in which it has invested or may refinance properties
acquired on a leveraged basis. There is no limitation on the number or amount of
mortgages which may be placed on any one property, although the Company's policy
is not to incur indebtedness in excess of 50% of its total capitalization.

The Company has no present intention to issue senior securities; however,
its Charter authorizes the Board of Directors to classify or reclassify any
unissued shares of stock, including the right to issue up to 10,000,000 shares
of preferred stock in series, and the Company may in the future issue senior
securities to raise equity or debt capital, to acquire real estate or other
assets or in connection with a merger or other business acquisition or for any
other corporate purposes. The Company may repurchase or otherwise reacquire its
own shares, although it may not issue stock that is redeemable at the option of
the holder.

The Company intends to hold the properties it acquires for long-term
investment. The Company will seek to sell the properties it owns when management
determines that the continued ownership no longer meets its then current
criteria or where a higher yield would be achieved through another investment.
Proceeds from the sale of properties may be used by the Company to acquire
additional investments.

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<PAGE> 48

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company are:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ------------------------------------------
<S> <C> <C>
John W. McRoberts(1)(3) 41 President, Chief Executive Officer and
Director
William C. Harlan 43 Senior Vice President and Head of
Acquisitions
Andrew L. Kizer 37 Vice President, Chief Financial Officer,
Secretary and Treasurer
Richard M. Scrushy(1)(3) 41 Chairman of the Board
Michael D. Martin(1)(3) 33 Director
Robert N. Elkins(2) 51 Director
William B. Luttrell(2) 49 Director
Eric R. Hanson(3) 39 Director
Larry D. Striplin, Jr.(2) 64 Director
W. Barry Morton(1) 56 Director
George E. Bogle(2) 56 Director
</TABLE>

- ---------------

(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee

Officers are appointed by and serve at the discretion of the Board of
Directors. All current officers were appointed on March 31, 1994. The officers
will devote substantially all of their full business time to the business and
affairs of the Company.

Mr. McRoberts was a senior officer of AmSouth Bank N.A., headquartered in
Birmingham, Alabama, prior to becoming a co-founder, President and Chief
Executive Officer of the Company. He was employed by AmSouth Bank from 1977 to
1993 and most recently was head of Corporate Banking for the Birmingham area.
Mr. McRoberts' responsibilities at AmSouth also included oversight of the bank's
entire healthcare lending portfolio and the Birmingham based real estate lending
portfolio.

Mr. Harlan was a senior officer of SouthTrust Bank, N.A., headquartered in
Birmingham, Alabama, prior to becoming employed by the Company. He was employed
by SouthTrust Bank from 1976 to 1993 and was most recently head of the bank's
healthcare lending area. Mr. Harlan serves on the advisory board of Carraway
Medical Center, Inc.

Mr. Kizer, a CPA, was a senior manager with KPMG Peat Marwick in their
Birmingham office prior to becoming employed by the Company. Mr. Kizer was
employed by KPMG Peat Marwick from 1984 to 1993. Prior to that time he was
employed by Arthur Andersen in their Birmingham office.

Mr. Scrushy is Chairman, President and Chief Executive Officer of
HEALTHSOUTH Rehabilitation Corporation and is a co-founder of the Company. Prior
to founding HEALTHSOUTH in 1983, Mr. Scrushy served as a Vice President of
Lifemark Corporation, a NYSE listed company. He also serves on the Board of
Directors of Surgical Health Corporation, Integrated Health Services, Inc.,
Diagnostic Health Corporation, MedPartners, Inc., Caretenders Healthcorp and
Scandipharm, Inc.

Mr. Martin, is Senior Vice President and Treasurer of HEALTHSOUTH
Rehabilitation Corporation and a co-founder of the Company. Prior to joining
HEALTHSOUTH in 1989, he had been employed by AmSouth Bank N.A. since 1982. At
the time of his departure from AmSouth Bank, Mr. Martin was Vice President and
served in a corporate lending function. Mr. Martin serves on the Board of
Directors of Caretenders Healthcorp.

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<PAGE> 49

Mr. Elkins has served as Chairman and Chief Executive Officer of Integrated
Health Services, Inc., since March 1986. Prior to his founding Integrated
Health, Mr. Elkins served as a co-founder and Vice President of Continental Care
Centers, Inc., an operator of long-term healthcare facilities.

Mr. Luttrell has been President and Chief Executive Officer of Surgical
Health Corporation, a privately held company that operates outpatient surgery
centers throughout the country, since its inception in April 1991. Prior to
co-founding Surgical Health Corporation, Mr. Luttrell was Chief Executive
Officer and a member of the Board of FLR Health Resources, a national healthcare
consulting company. From 1981 through 1987, Mr. Luttrell was associated with
Surgical Care Affiliates, Inc., a publicly held company that operates surgery
centers in partnership with physicians and hospitals.

Mr. Hanson is Chairman and Chief Executive Officer of U.S. Strategies
Corp., a national public affairs and development company specializing in
healthcare and urban affairs. Mr. Hanson founded U.S. Strategies Corp. in 1984
and has served U.S. Strategies Corp. in his current capacity since that time.

Mr. Striplin is President and Chief Executive Officer of Circle "S"
Industries, a holding company with headquarters in Selma, Alabama. Among the
Circle "S" companies are Nelson/Brantley Glass Company, DISCO Aluminum Products,
American Fine Wire, Clearview Properties, Aim Leasing Company. Mr. Striplin
serves on the boards of directors of Omega Pharmaceuticals, Inc. and
MedPartners, Inc.

Mr. Morton is President and Chief Executive Officer of The Robins & Morton
Group, a Birmingham-based construction company that specializes in the
construction of hospitals and related healthcare facilities throughout the
southeast. Mr. Morton has served in his current capacity since 1982 and has been
affiliated with The Robins & Morton Group his entire career.

Mr. Bogle is Chairman and Chief Executive Officer of USA Health Holding,
Inc. USA Health Holding, Inc. is the parent of USA Health Network, the nation's
largest preferred provider organization; USA Workers Insurance Network (WIN),
the nation's largest workers compensation network; and USA Transnet, the
nation's largest trauma and transplant network. Mr. Bogle founded USA Health
Network in 1984.

A director holds office until the next annual meeting and until his
successor is elected and qualified. A director may be removed from office with
or without cause only at a meeting of the stockholders called for that purpose
by the affirmative vote of the holders of not less than two-thirds of the shares
then outstanding and entitled to vote on the election of directors.

The Company's Bylaws provide that a majority of the Company's directors not
interested in a transaction, including a majority of the Disinterested
Directors, is required to approve any transactions between the Company and any
of its officers, directors, or their affiliates. The Company's Bylaws do not
otherwise limit transactions between the Company and interested persons. No
family relationship exists among the officers and directors.

EXECUTIVE COMPENSATION

The Company was organized on March 31, 1994, and has had no operations
since that time.

The Company has agreed to reimburse the Partnership up to $1,675,000 upon
closing of the Offering for actual costs related to organizing the Company,
negotiating the Initial Property acquisitions, performing due diligence
investigations related to the Initial Properties, performing corporate work in
contemplation of the Offering, preparing the Registration Statement and
providing interim financing for and closing the acquisition of the Initial
Properties. These costs include certain costs related to performing property due
diligence, certain property closing and financing costs, employee compensation,
travel and overhead. These costs include salaries of executive officers from
January 1, 1994, through June 30, 1994, to John W. McRoberts ($100,000), William
C. Harlan ($50,000), and Andrew L. Kizer ($35,000). All other amounts paid in
connection with pre-formation activities were paid by the Partnership to
unaffiliated third parties for services rendered on behalf of the Company.

45
<PAGE> 50

The following table sets forth certain summary information concerning the
annual base salaries to be paid to the Company's chief executive officer and the
two other executive officers of the Company for 1994:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
-------------------- --------------
PRINCIPAL BASE STOCK
NAME POSITION YEAR SALARY($)(1) BONUS OPTIONS (#)(3)
- -------------------------- ---------------------------------- ---- ------------ ----- --------------
<S> <C> <C> <C> <C> <C>
John W. McRoberts......... President and Chief Executive 1994 $200,000 (2) 125,000
Officer
William C. Harlan......... Senior Vice President and 1994 100,000 (2) 85,000
Head of Acquisitions
Andrew L. Kizer........... Vice President and 1994 80,000 (2) 50,000
Chief Financial Officer
</TABLE>

- ---------------

(1) Annualized for year ended December 31, 1994.
(2) Annual bonuses will be determined by the Compensation Committee of the
Company's Board of Directors.
(3) Options to purchase a total of 260,000 shares of Common Stock have been
granted to executive officers of the Company at the initial public offering
price. See "Management -- 1994 Stock Incentive Plan."

<TABLE>
<CAPTION>
OPTIONS GRANTED IN FISCAL YEAR 1994
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------ VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
TOTAL OF SHARE PRICE
OPTIONS APPRECIATION FOR
GRANTED TO EXERCISE OR OPTION PERIOD
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR ($/SH) DATE 5% 10%
- -------------------------- ------- ------------ ----------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John W. McRoberts......... 125,000 48% $ 18.00 June 22, 2004 $1,415,013 $3,585,920
William C. Harlan......... 85,000 33 18.00 June 22, 2004 962,208 2,438,426
Andrew L. Kizer........... 50,000 19 18.00 June 22, 2004 566,005 1,434,368
</TABLE>

The Company intends to adopt and implement a bonus arrangement for its
executive officers to be administered by the Compensation Committee.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Compensation Committee of the Company's Board of
Directors are Richard M. Scrushy, John W. McRoberts, Michael D. Martin and Eric
R. Hanson. There are no interlocks among the members of the Compensation
Committee. Richard M. Scrushy is Chairman of the Board, President and Chief
Executive Officer of HEALTHSOUTH. Although John W. McRoberts serves on the
Company's Compensation Committee, he does not participate in any decisions
regarding his own compensation as an executive officer.

DEFERRED COMPENSATION PLAN

The Company intends to adopt a Deferred Compensation Plan (the "Plan"),
pursuant to which eligible participants may elect to defer and invest a portion
of their compensation. The Company intends to match a portion of the deferred
amount. The amounts credited to a participant's account will be credited with
the results of a selected investment option, which are expected to include funds
primarily investing in debt issued by the United States Government, equity
securities, or a combination or debt and equity securities. All amounts in an
account of a participant will be fully vested at all times and may be withdrawn
by a participant 30 days following such participant's termination of employment.
The participant will be able to request that his benefits be paid as a single
lump sum or over a period of between three and ten years as specified by the
participant. The Plan will be administered by a committee consisting of three or
more persons selected by the

46
<PAGE> 51

Compensation Committee of the Board of Directors. The Plan committee will have
broad powers to interpret and administer the Plan, including designating
participants and investment options.

1994 STOCK INCENTIVE PLAN

The Board of Directors has adopted the 1994 Stock Incentive Plan (the
"Stock Incentive Plan"). After the closing of the Offering, the Stock Incentive
Plan will be administered by the Stock Option Committee appointed by the Board
of Directors.

The Company may issue incentive awards for up to 418,600 of its outstanding
shares of Common Stock under the Stock Incentive Plan. Under the Stock Incentive
Plan, the Stock Option Committee appointed by the Board of Directors may grant
to employees and members of the Board of Directors of the Company or its
subsidiaries or affiliates stock awards or non-transferable options to purchase
Shares of the Company's Common Stock for terms not longer than ten years, at
prices to be determined by the Board of Directors or the Stock Option Committee,
which may not be less than 95% of the fair market value of the Common Stock on
the date of grant. Options granted under the Stock Incentive Plan may be subject
to other conditions set by the Stock Option Committee, may be exercised by
payment of cash, shares valued at fair market value, or, at the option of the
Stock Option Committee, by a note secured by shares. Unless terminated earlier,
the Stock Incentive Plan will terminate in 2004.

Options to purchase a total of 260,000 shares of Common Stock have been
granted to executive officers of the Company at the initial public offering
price.

RETIREMENT PLANS

The Company intends to adopt a retirement plan for its executive officers
pursuant to which an eligible executive may receive upon normal retirement
(defined to be when the participant reaches age 65 and has completed five years
of service with the Company) certain benefits based on average earnings and
years of service. The plan will be unfunded and will be paid from earnings of
the Company. All three of the Company's executive officers will be eligible
participants.

COMPENSATION OF DIRECTORS

No officer who is a member of the Board receives compensation for serving
on the Board. Each other member of the Board receives annual compensation of
$5,000 for serving on the Board, plus a fee of $1,000 for each Board and
committee meeting attended, except that only one fee will be paid in the event
that more than one such meeting is held on a single day. All directors receive
reimbursement of travel expenses incurred in attending Board and committee
meetings.

LIMITATION OF LIABILITY AND INDEMNIFICATION

The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (i) actual receipt of an improper benefit or profit in money,
property or services or (ii) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter of the
Company contains such a provision which limits such liability to the maximum
extent permitted by the MGCL.

The Charter of the Company authorizes it to obligate itself to indemnify
and to pay or reimburse expenses in advance of final disposition of a proceeding
to directors, officers, employees and agents of the Company to the fullest
extent permitted by Maryland law. The Bylaws of the Company obligate it to
indemnify and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (a) any present or former director or officer who
is made a party to the proceeding by reason of his service in that capacity or
(b) any individual who, while a director of the Company and at the request of
the Company, serves or has served another corporation, partnership, joint
venture, trust, employee benefit plan or any other

47
<PAGE> 52

enterprise as a director, officer, partner or trustee of such corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise and
who is made a party to the proceeding by reason of his service in that capacity.
The Bylaws also permit the Company to indemnify and advance expenses to any
person who served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a predecessor of
the Company.

The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's charter does not) to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation. In
addition, the MGCL requires the Company, as a condition to advancing expenses,
to obtain (a) a written affirmation by the director or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification by
the Company as authorized by the Bylaws and (b) a written statement by or on his
behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met.

Indemnification of the Company's directors and officers is subject to
certain limitations where claims of securities laws violations are involved.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "Securities Act"), may be permitted to directors and
officers of the Company pursuant to the foregoing provisions or otherwise, the
Company has been advised that, in the opinion of the SEC, such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In addition, indemnification may be limited by state securities
laws.

INSURANCE

The Company expects to maintain appropriate liability insurance and
casualty insurance on the Company's office premises.

CERTAIN TRANSACTIONS

Ten of the Initial Properties will be purchased by the Company from and
leased to HEALTHSOUTH or its Subsidiaries, and the Leases for such Initial
Properties leased to HEALTHSOUTH's Subsidiaries will be guaranteed by
HEALTHSOUTH. The Company believes that the terms of the purchases from
HEALTHSOUTH are as favorable as those which the Company could have obtained from
unaffiliated parties. Richard M. Scrushy and Michael D. Martin, directors of the
Company, are officers, directors and/or stockholders of HEALTHSOUTH.

Two of the Initial Properties will be purchased by the Company from and
leased to Subsidiaries of Integrated Health, and such Leases will be guaranteed
by Integrated Health. The Company believes that the terms of the purchases from
Integrated health are as favorable as those which the Company could have
obtained from unaffiliated parties. Robert N. Elkins, a director of the Company,
is Chairman, Chief Executive Officer and a stockholder of Integrated Health, and
Richard M. Scrushy, Chairman of the Board of the Company, is a director of
Integrated Health.

Three of the Initial Properties will be purchased by the Company from and
leased to Surgical Health and subleased to Subsidiaries of Surgical Health. The
Company believes that the terms of the purchases from Surgical Health are as
favorable as those which the Company could have obtained from unaffiliated
parties. William B. Luttrell, a director of the Company, is Chairman, President,
Chief Executive Officer and a

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stockholder of Surgical Health, and Richard M. Scrushy, Chairman of the Board of
the Company, is a director of Surgical Health.

The Midway facility was acquired on April 19, 1994, by MACI, an Alabama
corporation all of the stock of which is owned by Richard M. Scrushy, John W.
McRoberts and Michael D. Martin. MACI will be acquired by the Company pursuant
to the terms of the Merger Agreement. The consideration to be paid for MACI is
the assumption of the indebtedness incurred by MACI to purchase the Midway
facility.

The Company has agreed to reimburse the actual costs incurred by the
Partnership on behalf of the Company up to $1,675,000 upon closing of the
Offering. These costs relate to organizing the Company, negotiating the Initial
Property acquisitions, performing due diligence related to the Initial
Properties, performing corporate work in contemplation of the Offering,
preparing the Registration Statement and providing interim financing for and
closing the acquisition of the Initial Properties. These costs include certain
costs related to performing property due diligence, certain property closing and
financing costs, employee compensation, travel and overhead. These
reimbursements will be paid from the proceeds of the Offering.

PRINCIPAL STOCKHOLDERS

The following table sets forth the anticipated ownership of shares of the
Company's Common Stock by certain officers and directors of the Company upon the
closing of this Offering:

<TABLE>
<CAPTION>
PERCENT OF STOCK OWNED
SHARES ----------------------
NAME AND ADDRESS BENEFICIALLY PRIOR TO AFTER
OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ----------------------------------------------------------- ------------ -------- -----------
<S> <C> <C> <C>
Richard M. Scrushy......................................... 82,656 45.92% 1.38%
HEALTHSOUTH................................................ 71,280 39.60 1.19
John W. McRoberts.......................................... 18,000 10.00 .30
Michael D. Martin.......................................... 8,064 4.48 .13
------------ -------- -----
Total...................................................... 180,000 100.00% 3.00%
========== ======= ==========
</TABLE>

DESCRIPTION OF SECURITIES

The summary of the terms of the stock of the Company set forth below does
not purport to be complete and is subject to and qualified in its entirety by
reference to the Charter and Bylaws of the Company, copies of which are exhibits
to the Registration Statement of which this Prospectus is a part. See
"Additional Information."

GENERAL

The Charter of the Company provides that the Company may issue up to
60,000,000 shares of stock, consisting of 50,000,000 shares of Common Stock and
10,000,000 shares of Preferred Stock, par value $.001 per share. As of March 31,
1994, 180,000 shares of Common Stock were issued and outstanding and held by
four record holders and no shares of Preferred Stock were outstanding. Under
Maryland law, stockholders generally are not liable for the corporation's debts
or obligations.

COMMON STOCK

Subject to the preferential rights of any other shares or series of stock
and to the provisions of the Charter regarding Excess Shares, holders of shares
of Common Stock will be entitled to receive dividends on such stock as the Board
of Directors may declare out of assets legally available for the payment of
dividends. Upon issuance, the Common Stock will be fully paid and nonassessable
and have no preferences or conversion, exchange, or preemptive rights. In the
event of any liquidation, dissolution, or winding-up of the Company, the holders
of shares of Common Stock are entitled to share ratably in any of the Company's
assets remaining after the satisfaction of all obligations and liabilities of
the Company and after required distributions to holders

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<PAGE> 54

of Preferred Stock, if any. The Common Stock is subject to restrictions on
transfer under certain circumstances. See "-- Restrictions on Transfer."

Subject to the provisions of the Charter regarding Excess Shares, each
share of Common Stock will be entitled to one vote on all matters voted upon by
the holders of Common Stock. Holders of Shares will have no cumulative voting
rights. The Company's Bylaws provide that the President, Chief Executive
Officer, or a majority of the Board may call a special meeting and the Secretary
of the Company must call a special meeting of stockholders upon written request
of stockholders entitled to cast at least 25% of all votes entitled to be cast
at the meeting.

Pursuant to the MGCL, a corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary course of
business unless approved by the affirmative vote of stockholders holding at
least two thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be cast
on the matter) is set forth in the corporation's charter. The Charter of the
Company contains no such provision. As permitted by the MGCL, the Charter of the
Company provides that the affirmative vote of the holders of at least ninety
percent of the "voting stock" of the Company, voting together as a single class,
shall be required to repeal or amend any provision relating to removal of
directors, the limit on ownership and Excess Shares, amendment of the Charter
and limitation of liability and indemnification of directors and officers.

The Charter authorizes the Board of Directors to reclassify any unissued
shares of Common Stock into other series of stock and to establish the number of
shares in each series and to fix the designation, conversion or other rights,
voting powers, restrictions, limitations as to distributions, preferences,
qualifications or terms or conditions of redemption of such shares of each such
series.

The transfer agent and registrar for the Company's Common Stock is AmSouth
Bank N.A.

The Company's Common Stock has been approved for listing on the New York
Stock Exchange. Prior to this Offering, there has been no market for the Common
Stock.

PREFERRED STOCK

The Board of Directors is empowered by the Company's Charter to issue from
time to time one or more classes or series of Preferred Stock and to classify or
reclassify any shares of unissued stock without stockholder approval. The Board
of Directors may determine the relative rights, preferences and privileges of
each class or series of Preferred Stock so issued. Because the Board of
Directors has the power to establish the preferences and rights of each class or
series of Preferred Stock, it may afford the holders in any series or class of
Preferred Stock preferences, powers and rights, voting or otherwise, senior to
the rights of holders of Common Stock. The issuance of Preferred Stock could
have the effect of delaying or preventing a change in control of the Company.
The Board of Directors has no present plans to issue any shares of Preferred
Stock.

POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK

The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common Stock or Preferred Stock and
to classify or reclassify unissued shares of Common Stock or Preferred Stock and
thereafter to cause the Company to issue such classified or reclassified shares
of stock will provide the Company with increased flexibility in structuring
possible future financings and acquisitions and in meeting other needs which
might arise. The additional classes or series, as well as the Common Stock, will
be available for issuance without further action by the Company's stockholders,
unless such action is required by applicable law or the rules of any stock
exchange or automated quotation system on which the Company's securities may be
listed or traded. Although the Board of Directors has no intention at the
present time of doing so, it could authorize the Company to issue a class or
series that could, depending upon the terms of such class or series, delay or
impede a transaction or a change of control of the Company

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<PAGE> 55

that might involve a premium price for the Common Stock or otherwise be in the
best interests of the stockholders.

RESTRICTIONS ON TRANSFER

For the Company to qualify as a REIT under the Code in any taxable year
after the first year of its election to be treated as a REIT, (i) not more than
50% in value of its outstanding Stock (as defined below) may be owned, directly
or indirectly (after application of certain complex attribution rules), by five
or fewer individuals at any time during the last half of its taxable year, and
(ii) its Stock must be beneficially owned by 100 or more persons during at least
335 days of a taxable year of 12 months or during a proportionate part of a
shorter taxable year.

In connection with the foregoing, if the Board of Directors shall, at any
time and in good faith, believe that direct or indirect ownership (as determined
under applicable federal tax attribution rules) of at least 9.8% or more in
number or value of the outstanding Common Stock and/or Preferred Stock
(collectively, the "Stock") has or may become concentrated in the hands of one
beneficial owner, the Board of Directors has the power to refuse to transfer or
issue Stock to a person whose acquisition of such Stock would cause a beneficial
holder to hold in excess of 9.8% in number or value of the outstanding Stock.
Further, any transfer of Stock that would create a beneficial owner of more than
9.8% in number or value of the outstanding Stock shall be deemed null and void,
and the intended transferee shall be deemed never to have had an interest
therein.

If at any time there is a transfer in violation of such restrictions, the
Excess Shares shall be deemed automatically to have been converted into a class
separate and distinct from the class or series from which converted and from any
other class of Excess Shares, each such class being designated "Excess Shares of
[Name of Stockholder]." Excess Shares shall be issued and outstanding but shall
have no voting rights. No dividends shall be paid with respect to Excess Shares.
The Company shall have the right to redeem Excess Shares for the lesser of the
amount paid by the intended transferee for the Excess Shares or the market
price. The market price for any Stock so purchased, shall be equal to (i) the
average daily per share closing sales price of a share of Stock of the class of
the Company from which such Excess Share was converted, if then listed on a
national securities exchange or on the National Association of Securities
Dealers Automated Quotation National Market System or (ii) if such shares are
not so listed, the market price shall be the mean between the average per share
closing bid prices and asked prices, in each case during the 30 day period
ending on the business day prior to the redemption date. If no such closing
sales prices or quotations are available, the purchase price shall be the price
determined by the Board of Directors in good faith.

DIVIDEND REINVESTMENT PLAN

The Company intends to adopt a Dividend Reinvestment Plan to provide
registered owners of the Company's Common Stock with a simple and convenient
method of investing dividends and other distributions paid in cash ("dividends")
in additional shares of the Company's Common Stock at a 5% discount from current
market value and without payment of any brokerage commission or service charge.
Since such additional shares of Common Stock will be purchased from the Company,
the Company will receive additional funds which will be used for its general
corporate purposes.

Participating stockholders ("Participants") may have cash dividends on all
or a portion of their shares of Common Stock automatically reinvested in
additional shares of the Company's Common Stock ("Plan Shares"). Participants'
funds will be fully invested because the Dividend Reinvestment Plan permits
fractions of shares to be credited to a Participant's account. Dividends on such
fractions, as well as on whole shares, will be reinvested in additional shares,
and such shares will be credited to a Participant's account. Participants will
avoid the need for safe keeping of stock certificates for Plan Shares credited
to their accounts under the Dividend Reinvestment Plan.

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<PAGE> 56

Regular statements reflecting all current activity, including purchases and
latest balances and, if applicable, amounts withheld in conformity with any
United States federal income tax requirements, will simplify Participants'
recordkeeping.

Implementation of the Dividend Reinvestment Plan will commence upon
compliance with applicable federal and state securities laws.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to the Offering there has not been any public market for securities
of the Company. No prediction can be made as to the effect, if any, that market
sales of Common Stock or the availability of Common Stock for sale will have on
the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of Common Stock of the Company in the public market could
adversely affect the prevailing market prices.

Upon completion of this Offering, a total of 5,980,000 shares of Common
Stock will be outstanding, assuming no exercise of options under the Stock
Incentive Plan to purchase shares of Common Stock. The 5,800,000 Shares sold in
this Offering will be freely tradeable without restriction or further
registration under the Securities Act, except (i) for shares purchased by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act and (ii) for shares governed by the Excess Share provisions. See
"-- Restrictions on Transfer."

The remaining 180,000 shares are deemed "Restricted Shares" under Rule 144
in that they were originally issued and sold by the Company in private
transactions in reliance upon exemptions from the registration requirements of
the Securities Act. An aggregate of 180,000 shares held by existing stockholders
are subject to "lock-up agreements" under which the holders of such shares have
agreed not to sell or otherwise dispose of any of their shares without the prior
written consent of the Representatives of the Underwriters for 180 days after
the date of this Prospectus. After the expiration of these "lock-up agreements,"
certain of the shares subject to such agreements will be eligible for sale in
the public market subject to volume limitations, holding period requirements and
other requirements of Rule 144 promulgated by the SEC under the Securities Act.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
Restricted Shares for at least two years from the later of the date such
Restricted Shares were acquired from the Company and (if applicable) the date
they were acquired from an affiliate, is entitled to sell within any three-month
period a number of shares that does not exceed the greater of one percent of the
then outstanding shares of the Common Stock (59,800 shares based on the number
of shares to be outstanding after this Offering) or the average weekly trading
volume in the public market during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain requirements as to the manner
and notice of sale and the availability of public information concerning the
Company. In addition, a person who is not deemed to have been an affiliate of
the Company at any time during the three months preceding a sale, and who has
beneficially owned the Shares proposed to be sold for at least three years,
would be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above.

The Company has reserved 418,600 shares of Common Stock to be outstanding
from time to time for issuance pursuant to grants under its Stock Incentive
Plan. See "Management -- 1994 Stock Incentive Plan." Options to purchase a total
of 260,000 shares of Common Stock have been granted to executive officers of the
Company at the initial public offering price.

CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S CHARTER AND BYLAWS

The following paragraphs summarize certain provisions of Maryland law and
the Company's Charter and Bylaws. The summary does not purport to be complete
and is subject to and qualified in its entirety by reference to Maryland law and
the Company's Charter and Bylaws for complete information.

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<PAGE> 57

REMOVAL OF DIRECTORS

The Charter provides that a director may be removed with or without cause
only by the affirmative vote of the holders of not less than two-thirds of the
shares then outstanding and entitled to vote in the election of directors. This
provision, when coupled with the provision in the Bylaws authorizing the Board
of Directors to fill vacant directorships, may preclude stockholders from
removing incumbent directors except upon a substantial affirmative vote and
filling the vacancies created by such removal with their own nominees.

BUSINESS COMBINATIONS

Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting power
of the corporation's shares or an affiliate of the corporation who, at any time
within the two-year period prior to the date in question, was the beneficial
owner of 10% or more of the voting power of the then-outstanding voting stock of
the corporation (an "Interested Stockholder") or an affiliate thereof, are
prohibited for five years after the most recent date on which the Interested
Stockholder becomes an Interested Stockholder. Thereafter, any such business
combination must be recommended by the Board of Directors of such corporation
and approved by the affirmative vote of at least (i) 80% of the vote entitled to
be cast by holders of outstanding voting shares of the corporation and (ii)
two-thirds of the votes entitled to be cast by holders of outstanding voting
shares of the corporation other than shares held by the Interested Stockholder
with whom (or with whose affiliate) the business combination is to be effected,
unless, among other conditions, the corporation's stockholders receive a minimum
price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its shares. These provisions of Maryland law do not apply,
however, to business combinations that are approved or exempted by the Board of
Directors of the corporation prior to the time that the Interested Stockholder
becomes an Interested Stockholder.

CONTROL SHARE ACQUISITIONS

The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror or by officers or directors who
are employees of the corporation. "Control Shares" are voting shares of stock
which, if aggregated with all other shares of stock previously acquired by the
acquiror, or in respect of which the acquiror is able to exercise or direct the
exercise of voting power (except solely by virtue of a revocable proxy), would
entitle the acquiror to exercise voting power in electing directors within one
of the following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority, or (iii) a majority
of all voting power. Control shares do not include shares the acquiring person
is then entitled to vote as a result of having previously obtained stockholder
approval. A "Control share acquisition" means the acquisition of control shares,
subject to certain exceptions.

A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Directors to call a special meeting of stockholders to
be held within 50 days of demand to consider the voting rights of the shares. If
no request for a meeting is made, the corporation may itself present the
question at any stockholders meeting.

If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholder meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of

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such appraisal rights may not be less than the highest price per share paid by
the acquiror in the control share acquisition.

The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws of
the corporation.

The business combination statute and the control share acquisition statute
could have the effect of discouraging offers to acquire the Company and of
increasing the difficulty of consummating any such offer.

AMENDMENT TO THE CHARTER

Certain provisions of the Company's Charter, including the provisions
governing removal of directors and limits on ownership and Excess Shares, may be
amended only by the affirmative vote of the holders of not less than 90% of all
of the votes entitled to be cast on the matter.

DISSOLUTION OF THE COMPANY

The dissolution of the Company must be approved by the affirmative vote of
the holders of not less than two-thirds of all of the votes entitled to be cast
on the matter.

ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS

The Bylaws of the Company provide that with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors may
be made only (i) by the Board of Directors, or (ii) by a stockholder who is
entitled to vote at the meeting and has complied with the advance notice
procedures set forth in the Bylaws. The Bylaws further provide that with respect
to special meetings of stockholders, only the business specified in the
Company's notice of meeting may be brought before the meeting of stockholders.

The provisions in the Bylaws for removal of directors, the business
combination and control share acquisition provisions of the MGCL, and the
advance notice provisions of the Bylaws could have the effect of discouraging a
takeover or other transaction in which holders of some, or a majority, of the
shares of Common Stock might receive a premium for their shares over the then
prevailing market price or which such holders might believe to be otherwise in
their best interests.

FEDERAL INCOME TAX CONSIDERATIONS

GENERAL

The following discussion summarizes the material federal income tax
considerations to the Company and a prospective holder of Common Stock. Based
upon representations of the Company with respect to certain facts set forth
herein, Sirote & Permutt, P.C., which has acted as tax counsel to the Company in
connection with the formation of the Company and the Company's election to be
taxed as a REIT commencing with its taxable year ending December 31, 1994, is of
the opinion that the following discussion fairly summarizes the material federal
income tax considerations to the Company and a holder of Common Shares. This
discussion and such opinion are based on current law. The following discussion
is not exhaustive of all possible tax considerations. This summary does not give
a detailed discussion of any state, local or foreign tax considerations, nor
does it discuss all of the aspects of federal income taxation that may be
relevant to a prospective stockholder in light of his or her particular
circumstances or, unless otherwise indicated, to certain types of stockholders
(including insurance companies, tax-exempt entities, financial institutions or
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States) who are subject to special treatment under the
Federal income tax laws.

PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE
URGED TO CONSULT WITH THEIR OWN TAX ADVISORS AS TO THE SPECIFIC

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FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES RELATING TO THE
PURCHASE, OWNERSHIP AND DISPOSITION OF SUCH SHARES OF COMMON STOCK.

TAXATION OF THE COMPANY

The Company intends to elect and to qualify as a REIT for federal income
tax purposes under Sections 856 through 860 of the Code (the "REIT Provisions of
the Code"), commencing with its taxable year ending December 31, 1994. The
Company believes that, commencing with such taxable year, it will be organized
and will operate in such a manner as to qualify for taxation as a REIT under the
Code, and the Company intends to continue to operate in such a manner. No
assurance can be given, however, that the Company will operate in a manner so as
to qualify or remain qualified as an REIT. It should be noted that the Code,
rules, regulations, and administrative and judicial interpretations are all
subject to change (possibly on a retroactive basis).

In the opinion of Sirote & Permutt, P.C., upon consummation of the
Offering, the Company will be organized in conformity with the requirements for
qualification as a REIT and its proposed method of operation as described in
this Prospectus will permit it to meet the requirements for qualification and
taxation as a REIT under the Code. This opinion is based on various assumptions
relating to the organization and operation of the Company and is conditioned
upon certain representations made by the Company as to certain relevant factual
matters, including matters related to the organization and expected manner of
operation of the Company. Qualification of the Company as a REIT will depend
upon its ability to meet, through actual annual operating results, the various
qualification tests imposed under the Code, as discussed below. Sirote &
Permutt, P.C. will not review compliance with these tests on a continuing basis.
The Company will receive an opinion of Sirote & Permutt, P.C. that it has been
organized in conformity with the requirements for REIT status under the Code and
that its proposed ownership and method of operations, as described in this
Prospectus, will enable it to meet the requirements for qualification and
taxation as a REIT under the Code. Such opinion will be based upon a review of
the Leases in place before the Offering, representations and opinions as to
reasonable values, and other matters set forth in the opinion. Such opinion
assumes, although no assurance can be given, that the actual results of the
Company's operations for any one taxable year will satisfy such requirements.
See " -- Failure to Qualify" below.

In brief, if certain detailed conditions imposed by the REIT Provisions of
the Code are met, entities such as the Company that invest primarily in real
estate and that otherwise would be treated for federal income tax purposes as
corporations subject to regular corporate income tax are generally not taxed at
the corporate level on their "REIT taxable income" that is distributed to
stockholders. This treatment substantially eliminates the "double taxation" (at
both the corporate and stockholder level) that generally results from the use of
corporate investment vehicles.

If the Company were to fail to qualify as a REIT in any year, however, it
would be subject to federal income tax at regular corporate income tax rates as
if it were a domestic corporation, and its stockholders would be taxed in the
same manner as stockholders of regular corporations. In this event, the Company
could be subject to potentially significant tax liabilities, and, therefore, the
amount of cash available for distribution to its stockholders would be reduced.

General. If the Company qualifies for taxation as a REIT, it generally
will not be subject to federal income tax on that portion of its ordinary income
or capital gain that is currently distributed to stockholders. The Company will
be subject to federal income tax, however, as follows: First, the Company will
be taxed at regular corporate rates on any undistributed "REIT taxable income,"
including undistributed net capital gains. Second, under certain circumstances,
the Company may be subject to the "alternative minimum tax" on its items of tax
preference, if any. Third, if the Company has net income from the sale or other
disposition of foreclosure property that is held primarily for sale to customers
in the ordinary course of business or other nonqualifying income from
foreclosure property, it will be subject to tax on such income at the highest
corporate rate. Fourth, any net income that the Company has from prohibited
transactions (which are, in general, certain sales or other dispositions of
property other than foreclosure property held primarily for sale to customers in
the ordinary course of business) will be subject to a 100% tax. Fifth, if the
Company was to fail

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<PAGE> 60

to satisfy either the 75% or 95% gross income tests (as discussed below), and
nonetheless maintain its qualification as a REIT because certain other
requirements have been met, it would be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% gross income tests, multiplied by a fraction intended to reflect the
Company's profitability. Sixth, if the Company fails to distribute during each
year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from preceding periods, then the Company would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. Seventh, provided certain federal tax elections
are made, if, during the 10-year period commencing on the day on which assets
having a net unrealized built-in gain are acquired by the Company from a C
corporation in a transaction in which the Company inherits the tax basis in such
assets from the C corporation, the Company recognizes a gain from the
disposition of all or a portion of such assets, then the Company will be subject
to tax at the highest regular corporate rate on the excess, if any, of the fair
market value over the adjusted basis of any such asset disposed of determined as
of the beginning of the relevant 10 year period.

Requirements for Qualification as a REIT. To qualify as a REIT for a
taxable year under the Code, the Company must elect or have in effect an
election to be so treated and must meet other requirements, all of which are
summarized below, including percentage tests relating to the sources of its
gross income, the nature of the Company's assets, and the distribution of its
income to stockholders. Such election, if properly made and assuming continuing
compliance with the qualification tests described herein, will continue in
effect for subsequent years.

The Code defines a REIT as a corporation, trust or association: (1) which
is managed by one or more trustees or directors; (2) the beneficial ownership of
which is evidenced by transferable shares or by transferable certificates of
beneficial interest; (3) which would be taxable, but for the REIT Provisions of
the Code, as an association taxable as a domestic corporation; (4) which is
neither a financial institution nor an insurance company subject to certain
provisions of the Code; (5) the beneficial ownership of which is held by 100 or
more persons, determined without reference to any rules of attribution (the
share ownership test); (6) which is not closely held as determined under the
personal holding company stock ownership test of Section 542(a) (as applied with
certain modifications); and (7) which meets certain other tests, described
below, regarding the nature of its income and assets. The Code provides that
conditions (1) through (4), inclusive, must be met during the entire taxable
year and that condition (5) must be met during at least 335 days of a taxable
year of 12 months, or during a proportionate part of a taxable year of less than
12 months. By reason of condition (6) above, the Company will fail to qualify as
a REIT for a taxable year if at any time during the last half of such year more
than 50% in value of its outstanding stock is owned directly or indirectly by
five or fewer individuals (the five or fewer test). For purposes of the five or
fewer test, any stock held by a qualified trust described in Section 401(a) of
the Code will be treated as if the stock is held directly by the beneficiaries
of the trust in proportion to their actual interest in the trust rather than as
held by the trust. The five or fewer test and the share ownership test do not
apply to the first taxable year for which an election is made to be treated as a
REIT. Prior to the consummation of the Offering, the Company will not satisfy
the five or fewer or share ownership tests of conditions (5) and (6) above. The
Company anticipates issuing sufficient Shares pursuant to the Offering to allow
it to satisfy the share ownership test and the five or fewer test. In addition,
the Company's Charter will provide restrictions regarding the transfer of Common
Stock that are intended to assist the Company in continuing to satisfy the share
ownership test and the five or fewer test described in (5) and (6) above. See
"Description of Securities -- Restrictions on Transfer."

In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. The Company will have a calendar year taxable
year.

If a REIT owns a qualified REIT subsidiary, the Code provides that the
qualified REIT subsidiary is disregarded for federal income tax purposes, and
all assets, liabilities, and items of income, deduction and credit of the
qualified REIT subsidiary are treated as assets, liabilities and such items of
the REIT itself. A qualified REIT subsidiary is a corporation all of the
outstanding capital stock of which has been owned by the REIT from the
commencement of such subsidiary corporation's existence.

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Gross Income Tests. There are three separate percentage tests relating to
the sources of the Company's gross income that must be satisfied annually.

1. The 75% Test. At least 75% of the Company's gross income from the
taxable year must be "qualifying income." Qualifying income generally includes
(i) rents from real property (except as modified below); (ii) interest on
obligations collateralized by mortgages on, or interest in real property; (iii)
gains from the sale or other disposition of interests in real property and real
estate mortgages, other than gain from property held primarily for sale to
customers in the ordinary course of the Company's trade or business ("dealer
property"); (iv) dividends or other distributions on shares in other REITS, as
well as gain from the sale of such shares; (v) abatements and refunds of real
property taxes; (vi) income from the operation, and gain from the sale of
property reduced to possession following a lessee's default under the terms of a
lease or, of property acquired at or in lieu of a foreclosure of the mortgage
collateralized by such property ("foreclosure property"); (vii) commitment fees
received for agreeing to make loans collateralized by mortgages on real property
or to purchase or lease real property; and (viii) certain qualified temporary
investment income attributable to the investment of new capital received by the
Company in exchange for its shares (including the Shares issued pursuant to the
Offering) during the one-year period following the receipt of such new capital.

2. The 95% Test. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of the Company's gross income for the taxable
year must be derived from the above-described qualifying income, or from
dividends, interest or gains from the sale or disposition of stock or other
securities that are not dealer property. Dividends and interest on any
obligations not collateralized by an interest in real property are included for
purposes of the 95% test, but not for purposes of the 75% test. Similarly, any
payments made to the Company by a financial institution pursuant to a rate
protection agreement that hedges variable rate indebtedness incurred by the
Company to acquire or carry real estate assets will be included as qualifying
income for purposes of the 95% gross income test, but not for purposes of the
75% test.

For purposes of determining whether the Company complies with the 75% and
95% income tests, gross income does not include income from prohibited
transactions. A "prohibited transaction" is a sale of dealer property, excluding
sales of foreclosure property and certain sales of dealer property exempted from
the prohibited transaction tax by virtue of a limited safe harbor rule.

In order to qualify as rents from real property, the amount of rent
received generally must not be determined on the income or profits of any
person, but may be based on a fixed percentage or percentages of receipts or
sales. The Code also provides that rents will not qualify as rents from real
property, in satisfying the gross income tests, if the REIT owns 10% or more of
the tenant, whether directly or pursuant to certain attribution rules. The
Company intends to lease property only under circumstances such that
substantially all rents from such property would qualify as rents from real
property. Although it is possible that a tenant could sublease space to a
sublessee in which the REIT is deemed to own directly or indirectly 10% or more
of the tenant, the Company believes that as a result of the provisions in the
Articles of Incorporation limiting ownership to 9.8% such occurrence would be
unlikely. Application of the 10% ownership rule is, however, dependent upon
complex attribution rules provided in the Code and circumstances beyond the
control of the Company. Ownership, directly or by attribution, by an
unaffiliated third party of more than 10% of the Company's Common Stock and more
than 10% of the stock of any lessee or sublessee would result in a violation of
the rule.

In order to qualify as interest on obligations secured by mortgages on real
property, the amount of interest received generally must not be determined on
the income or profits of any person, but may be based on a fixed percentage or
percentages of receipts or sales.

In addition, the Company must not manage its properties or furnish or
render services to the tenants of its properties, except through an independent
contractor from whom the Company derives no income. There is an exception to
this rule permitting a REIT to perform directly certain customary tenant
services which are "reasonable and customary" in the geographic area in which
the services are performed. The Company anticipates that any services provided
for tenants will meet this requirement.

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If rent attributable to personal property leased in connection with a lease
of real property is greater than 15% of the total rent received under the lease,
then the portion of rent attributable to such personal property will not qualify
as rents from real property. Generally, this 15% test is applied separately to
each lease. The portion of rental income treated as attributable to personal
property is determined according to the ratio of the tax basis of the personal
property to the total tax basis of the property which is rented. The
determination of what fixtures and other property constitute personal property
for federal tax purposes is difficult and imprecise. The Company does not
believe that it will have 15% in value of any of its real properties classified
as personalty. If however, rent payments do not qualify, for reasons discussed
above, as rents from real property for purposes of Section 856 of the Code, it
will be more difficult for the Company to meet the 95% or 75% gross income
tests.

The Company may temporarily invest its working capital in short-term
investments, including shares in other REITs or interests in REMICs. Although
the Company will use its best efforts to ensure that its income generated by
these investments will be of a type which satisfies the 75% and 95% gross income
tests, there can be no assurance in this regard (see the discussion above of the
new capital rule under the 75% gross income test). Moreover, the Company may
realize short-term capital gain upon sale or exchange of such investments, and
such short-term capital gain would be subject to the limitations imposed by the
30% gross income test. The Company generally expects to meet the 75% and 95%
gross income tests through the rental of the property it acquires.

If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. It is not
possible, however, to know whether the Company would be entitled to the benefit
of these relief provisions as the application of the relief provisions is
dependent on future facts and circumstances. If these relief provisions apply, a
special tax generally equal to 100% is imposed upon the net income attributable
to the greater of the amount by which the Company failed the 75% or 95% gross
income tests, multiplied by a fraction intended to reflect the Company's
profitability.

3. The 30% test. Not more than 30% of the Company's gross income for each
taxable year may be derived from the sale or other disposition of (i) stock or
securities held for less than one year, (ii) dealer property that is not
foreclosure property, and (iii) real property held for fewer than four years
(apart from involuntary conversions and sales of foreclosure property).

Asset Tests. At the close of each quarter of the Company's taxable year,
it must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must consist of real estate
assets (including interests in real property and interests in mortgages on real
property as well as its allocable share of real estate assets held by joint
ventures or partnerships in which the Company participates, if any), cash, cash
items and government securities. Second, not more than 25% of the Company's
total assets may be represented by securities other than those includible in the
75% asset class. Finally, of the investments included in the 25% asset class,
the value of any one issuer's securities owned by the Company may not exceed 5%
of the value of the Company's total assets, and the Company may not own more
than 10% of any one issuer's outstanding voting securities. The Company may own
100% of another corporation, however, if it is a qualified REIT subsidiary.
Under that circumstance, the qualified REIT subsidiary is ignored and the
assets, income, gain, loss and other attributes are treated as being owned or
generated directly by the Company for federal income tax purposes. The Company
has one or more wholly-owned REIT subsidiaries.

If the Company meets the Asset Tests described above at the close of any
quarter, it will not lose its REIT status merely because of a change in the
value of its assets in a subsequent quarter unless, subject to a 30 day grace
period ending after the close of such subsequent quarter, such change exists
immediately after the acquisition of any security or other property and is
wholly or partly the result of such an acquisition during such quarter. The
Company intends to maintain adequate records of the value of its assets to
maintain compliance with the Asset Tests.

Annual Distribution Requirements. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its stockholders in an amount equal to or greater than the excess of (A) the sum
of (i) 95% of the Company's real estate investment trust taxable income
(computed without regard to the dividends paid deduction and the Company's net
capital gain) and (ii) 95%

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of the net income, if any, (after tax) from foreclosure property, over (B) the
sum of certain non-cash income (from certain imputed rental income and income
from transactions inadvertently failing to qualify as like-kind exchanges). To
the extent that the Company does not distribute all of its net long-term capital
gain and all of its real estate investment trust taxable income, it will be
subject to tax thereon. In addition, the Company will be subject to a 4% excise
tax to the extent it fails within a calendar year to make required distributions
to its stockholders of 85% of its ordinary income and 95% of its capital gain
net income plus the excess, if any, of the grossed up required distribution for
the preceding calendar year over the amount treated as distributed for such
preceding calendar year. For this purpose, "grossed up required distribution"
for any calendar year is the sum of the taxable income of the Company for the
taxable year (without regard to the deduction for dividends paid) and all
amounts from earlier years that are not treated as having been distributed under
the provision. Dividends declared in the last quarter of the year (October,
November or December) and paid during the following January, will be treated as
having been paid and received on December 31.

It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirements due to
timing differences between actual receipt of income and actual payment of
deductible expenses or dividends on the one hand and the inclusion of such
income and deduction of such expenses or dividends in arriving at real estate
investment trust taxable income of the Company on the other hand. The problem of
inadequate cash to make required distributions could also occur as a result of
the repayment in cash of principal amounts due on the Company's outstanding
debt, particularly in the case of balloon repayments or as a result of capital
losses on short-term investments of working capital. Therefore, the Company
might find it necessary to arrange for short-term, or possibly long-term,
borrowing or new equity financing. If the Company were unable to arrange such
borrowing or financing as might be necessary to provide funds for required
distributions, its REIT status could be jeopardized.

Under certain circumstances, the Company may be able to rectify a failure
to meet the annual REIT distribution requirements for a taxable year by paying
deficiency dividends to stockholders within a specified period.

Share Ownership Test. As described above, the Company's Common Stock must
be held by a minimum of 100 persons for at least approximately 92% of the days
in each taxable year subsequent to 1994. In addition, at all times during the
second half of each taxable year subsequent to 1994, no more than 50% in value
of the shares of beneficial interest of the Company may be owned, directly or
indirectly, and by applying certain constructive ownership rules, by five or
fewer individuals. In order to ensure compliance with this test, the Company has
placed certain restrictions on the transfer of the Common Stock to prevent
further concentration of share ownership. Moreover, to evidence compliance with
these requirements, the Company must maintain records which disclose the actual
ownership of its outstanding Common Stock. In fulfilling its obligations to
maintain records, the Company must and will demand written statements each year
from the record holders of designated percentages of its Common Stock disclosing
the actual owners of such Common Stock. A list of those persons failing or
refusing to comply with such demand must be maintained as a part of the
Company's records. A stockholder failing or refusing to comply with the
Company's written demand must submit with his tax returns a similar statement
disclosing the actual ownership of Common Stock and certain other information.
In addition, the Company's declaration of trust provides restrictions regarding
the transfer of its shares that are intended to assist the Company in continuing
to satisfy the share ownership requirements.

Other REIT Issues. With respect to property acquired from and leased back
to the same or an affiliated party of a lessee, the IRS could assert that the
Company realized prepaid rental income in the year of purchase to the extent
that the value of the leased property exceeds the purchase price paid by the
Company for that property. In litigated cases involving sale-leasebacks which
have considered this issue, courts have concluded that buyers have realized
prepaid rent where both parties acknowledged that the purported purchase price
for the property was substantially less than fair market value and the purported
rents were substantially less than the fair market rentals. Because of the lack
of clear precedent and the inherently factual nature of the inquiry, complete
assurance cannot be given that the IRS could not successfully assert the
existence of prepaid rental income. The value of and fair market rent for
properties involved in sale-leasebacks are inherently factual matters and always
subject to challenge.

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Subject to a safe harbor exception for annual sales of up to seven
properties (or properties with a basis of up to 10% of the REIT's assets) that
have been held for four years, gain from the sale of a property held for sale to
customers in the ordinary course of business is subject to a 100% tax. The
simultaneous exercise of rights of first refusal granted to certain Lessees or
other events could result in sales of properties by the Company that exceed this
safe harbor. However, the Company believes that in such event, it will not have
held such properties for sale to customers in the ordinary course of business.

Depreciation of Initial Properties. For tax purposes, the Company's real
property generally is expected to be depreciated over 40 years and 20 years for
buildings and land improvements, respectively, utilizing the straight-line
method of depreciation. Personal property is expected to be depreciated over
seven years utilizing the straight-line method of depreciation.

Failure to Qualify. If the Company fails to qualify for taxation as an REIT
in any taxable year and the relief provisions do not apply, the Company will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to stockholders in any year in
which the Company fails to qualify will not be deductible by the Company, nor
will they be required to be made. In such event, to the extent of current or
accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income, and, subject to certain limitations in the Code,
corporate distributees may be eligible for the dividends received deduction.
Failure to qualify and to maintain qualification as a REIT would force the
Company to significantly reduce its distributions and possibly incur substantial
indebtedness or liquidate substantial investments in order to pay the resulting
corporate taxes. In addition, the Company, once having obtained REIT status and
having lost such status, would not be eligible to elect REIT status for the four
subsequent taxable years, unless its failure to maintain its qualification was
due to reasonable cause and not willful neglect, and certain other requirements
were satisfied. In order to elect again to be taxed as a REIT, the Company would
be required to distribute all of its earnings and profits accumulated in any
non-REIT taxable year.

TAXATION OF DOMESTIC STOCKHOLDERS

Taxation of Taxable Domestic Stockholders. As long as the Company
qualifies as a REIT, distributions other than capital gain dividends (including
reinvestments pursuant to the Company's dividend reinvestment plan, if any) made
to the Company's taxable domestic stockholders out of current or accumulated
earnings and profits will be taken into account by them as ordinary income, and
corporate stockholders will not be eligible for the dividends received
deduction. Distributions that are designated as capital gain dividends will be
taxed as long-term capital gains to the extent they do not exceed the Company's
actual net capital gain for the taxable year, although corporate stockholders
may be required to treat up to 20% of any such capital gain dividend as ordinary
income. Distributions in excess of current or accumulated earnings and profits
will not be taxable to a stockholder to the extent that they do not exceed the
adjusted basis of a stockholder's shares of Common Stock, but will reduce the
basis of such stockholder's shares of Common Stock. To the extent that such
distributions exceed the adjusted basis of a stockholder's shares of Common
Stock, they will be included in income as long-term capital gain (or short-term
capital gain if the shares of Common Stock have been held for not more than one
year) assuming the shares of Common Stock are a capital asset in the hands of
the stockholder. Stockholders may not include, in their respective income tax
returns, any net operating losses or capital losses of the Company.

Dividends declared by the Company in the last quarter of the calendar year
(October through December) to stockholders of record on a date in such quarter,
shall be treated as both paid by the Company and received by such stockholders
on December 31 of such year, provided that the Company actually pays such
dividends during January of the following calendar year.

In general, any gain or loss recognized by a stockholder on the sale or
other taxable disposition of shares of Common Stock will be treated as capital
gain or loss, provided the shares are a capital asset in the hands of the
seller. In general, any loss upon a sale or exchange of shares of Common Stock
by a stockholder who has held such shares for not more than six months (after
applying certain rules), will be treated as a long-term

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capital loss to the extent of distributions from the Company required to be
treated by such stockholder as long-term gain.

Tax preference and other items which are treated differently for regular
and alternative minimum tax purposes are to be allocated between a REIT and its
stockholders under regulations which are to be prescribed. It is likely that
these regulations would require tax preference items to be allocated to the
Company's stockholders with respect to any accelerated depreciation claimed by
the Company.

Backup Withholding. Under certain circumstances, taxable domestic
stockholders may be subject to backup withholding at the rate of 31% imposed for
payments of interest, dividends and payments of gross proceeds by brokers. This
withholding applies only if a stockholder, among other things, (i) fails to
furnish the Company with his taxpayer identification number certified under
penalties of perjury, (ii) furnishes the Company an incorrect taxpayer
identification number, (iii) fails properly to report interest or dividends from
any source or (iv) under certain circumstances fails to provide the Company or
his securities broker with a certified statement, under penalties of perjury,
that he or she is not subject to backup withholding. Stockholders should consult
their tax advisors as to their qualification for exemption from withholding and
the procedure for obtaining such an exemption. Finally, United States persons
are required to certify their United States status in order to receive dividends
without the withholding imposed by the Foreign Investment in Real Property Tax
Act of 1980 ("FIRPTA").

The Company will report to its stockholders and the IRS the amount of
dividends paid or deemed paid during each calendar year, and the amount of tax
withheld, if any.

Taxation of Tax-Exempt Stockholders. As a general rule, amounts
distributed by a REIT to a tax-exempt entity do not constitute unrelated
business taxable income ("UBTI") and thus distributions by the Company to a
stockholder that is a tax-exempt entity should not constitute UBTI, provided
that the tax-exempt entity has not financed the acquisition of Common Stock with
"acquisition indebtedness" within the meaning of the Code and the shares of
Common Stock are not otherwise used in an unrelated trade or business of the
tax-exempt entity. If a REIT constitutes a "pension-held REIT" in a taxable
year, distributions by such REIT to a tax-exempt employee's pension trust that
owns more than 10% of the REIT may be treated as UBTI in an amount equal to the
percentage of gross income of the REIT that is derived from an "unrelated trade
or business" (determined as if the REIT were a pension trust and subject to
certain de minimus rules) divided by the gross income of the REIT for the year
in which the dividends are paid. This rule only applies, however, if (i) the
percentage of the gross income derived from the REIT for the year in which the
dividends are paid is at least five percent, (ii) the REIT qualifies as a REIT
only because the pension trust is not treated as a single individual for
purposes of the "five-or-fewer" rule (see " -- Taxation of the
Company -- Requirements for Qualification as a REIT)") and (iii) (A) one pension
trust owns more than 25% of the value of the REIT, or, (B) a group of pension
trusts individually holding more than 10 percent of the value of the REIT
collectively own more than 50 percent of the value of the REIT. The Company does
not expect that it will constitute a "pension-held REIT" in part because the
ownership limits in the Company's Charter (assuming no waiver of such limits by
the Board of Directors) would prevent such a pension trust from acquiring Common
Stock in excess of the Ownership Limit.

TAXATION OF FOREIGN STOCKHOLDERS

The following is a discussion of certain anticipated U.S. federal income
and estate tax consequences of the ownership and disposition of Common Stock
applicable to Non-U.S. Holders of such shares. A "Non-U.S. Holder" is any person
other than (i) a citizen or resident of the United States, (ii) a corporation or
partnership created or organized in the United States or under the laws of the
United States or of any state thereof, or (iii) an estate or trust whose income
is includible in gross income for U.S. federal income tax purposes regardless of
its source. The discussion is based on current law and is for general
information only. The discussion addresses only certain and not all aspects of
U.S. federal income and estate taxation.

Distributions from the Company

Ordinary Dividends. The portion of dividends received by Non-U.S. Holders
payable out of the Company's earnings and profits which are not attributable to
capital gains of the Company and which are not

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effectively connected with a U.S. trade or business of the Non-U.S. Holder will
be subject to U.S. withholding tax at the rate of 30% (unless reduced by
treaty). In general, Non-U.S. Holders will not be considered engaged in a U.S.
trade or business solely as a result of their ownership of Common Stock. In
cases where the dividend income from a Non-U.S. Holder's investment in Common
Shares is (or is treated as) effectively connected with the Non-U.S. Holder's
conduct of a U.S. trade or business, the Non-U.S. Holder generally will be
subject to U.S. tax at graduated rates, in the same manner as U.S. stockholders
are taxed with respect to such dividends (and may also be subject to the 30%
branch profits tax in the case of a Non-U.S. Holder that is a foreign
corporation).

To determine the applicability of a tax treaty providing for a lower rate
of withholding, dividends paid to an address in a foreign country are presumed
under current Treasury Regulations to be paid to a resident of that country.
Treasury regulations proposed in 1984 which have not been finally adopted,
however, would require Non-U.S. Holders to file certain forms to obtain the
benefit of any applicable tax treaty providing for a lower rate of withholding
tax on dividends. Such forms would contain the holder's name and address and
other pertinent information, to be certified by such holder under penalties of
perjury, and an official statement by the competent authority (as defined in the
applicable treaty) in the foreign country attesting to the holder's status a
resident thereof.

Non-Dividend Distributions. Distributions by the Company which do not
represent dividends paid out of the current and accumulated earnings and profits
of the Company will not be subject to a Non-U.S. Holder withholding tax. If it
cannot be determined at the time a distribution is made whether or not such
distribution will be in excess of current and accumulated earnings and profits,
the distribution will be subject to withholding at the rate applicable to
dividends. The Non-U.S. Holder may seek a refund of such amounts from the IRS,
however, if it is subsequently determined that such distribution was, in fact,
in excess of current and accumulated earnings and profits of the Company.

Capital Gain Dividends. Under FIRPTA, a distribution made by the Company
to a Non-U.S. Holder, to the extent attributable to gains from dispositions of
United States Real Property Interests ("USRPIs") such as the Initial Properties
beneficially owned by the Company ("USRPI Capital Gains"), will be considered
effectively connected with a U.S. trade or business of the Non-U.S. Holder and
subject to U.S. income tax at the rate applicable to U.S. individuals or
corporations, without regard to whether such distribution is designated as a
capital gain dividend. In addition, the Company will be required to withhold tax
equal to 35% of the amount of dividends to the extent such dividends constitute
USRPI Capital Gains. Distributions subject to FIRPTA may also be subject to a
30% branch profits tax in the hands of a foreign corporate stockholder that is
not entitled to treaty exemption.

Dispositions of Common Stock

Unless the Common Shares constitute a USRPI, a sale of Common Stock by a
Non-U.S. Holder generally will not be subject to U.S. taxation under FIRPTA. The
Common Stock will not constitute a USRPI if the Company is a "domestically
controlled REIT." A domestically controlled REIT is a REIT in which, at all
times during a specified testing period, less than 50% in value of its shares is
held directly or indirectly by Non-U.S. Holders. It is currently anticipated
that the Company will be a domestically controlled REIT, and therefore that the
sale of Common Shares will not be subject to taxation under FIRPTA. Because the
Common Stock will be publicly traded, however, no assurance can be given the
Company will continue to be a domestically controlled REIT.

If the Company does not constitute a domestically controlled REIT, a
Non-U.S. Holder's sale of Common Stock generally will still not be subject to
tax under FIRPTA as a sale of a USRPI provided that (i) the Company's Common
Stock are "regularly traded" (as defined by applicable Treasury Regulations) on
an established securities market (e.g., the NYSE, on which the Common Stock will
be listed) and (ii) the selling Non-U.S. Holder held 5% or less of the Company's
outstanding Common Stock at all times during a specified testing period.

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If gain on the sale of Common Stock were subject to taxation under FIRPTA,
the Non-U.S. Holder would be subject to the same treatment as a U.S. stockholder
with respect to such gain (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals)
and the purchaser of Common Stock could be required to withhold 10% of the
purchase price and remit such amount to the IRS.

Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-U.S. Holder in two cases: (i) if the Non-U.S. Holder's
investment in Common Stock is effectively connected with a U.S. trade or
business conducted by such Non-U.S. Holder, the Non-U.S. Holder will be subject
to the same treatment as a U.S. stockholder with respect to such gain, or (ii)
if the Non-U.S. Holder is a nonresident alien individual who was present in the
United States for 183 days or more during the taxable year and has a "tax home"
in the United States, the nonresident alien individual will be subject to a 30%
tax on the individual's capital gain.

Estate Tax

Common Stock owned or treated as owned by an individual who is not a
citizen or resident (as specially defined for U.S. federal estate tax purposes)
of the United States at the time of death will be includible in the individual's
gross estate for U.S. federal estate tax purposes, unless an applicable estate
tax treaty provides otherwise. Such individual's estate may be subject to U.S.
federal estate tax on the property includible in the estate for U.S. federal
estate tax purposes.

Information Reporting and Backup Withholding

The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends (including any capital gain dividends) paid to, and the tax
withheld with respect to, each Non-U.S. Holder. These reporting requirements
apply regardless of whether withholding was reduced or eliminated by an
applicable tax treaty. Copies of these returns may also be made available under
the provisions of a specific treaty or agreement with the tax authorities in the
country in which the Non-U.S. Holder resides.

U.S. backup withholding (which generally is imposed at the rate of 31% on
certain payments to persons that fail to furnish the information required under
the U.S. information reporting requirements) and information reporting will
generally not apply to dividends (including any capital gain dividends) paid on
Common Stock to a Non-U.S. Holder at an address outside the United States.

The payment of the proceeds from the disposition of Common Stock to or
through a U.S. office of a broker will be subject to information reporting and
backup withholding unless the owner, under penalties of perjury, certifies,
among other things, its status as a Non-U.S. Holder, or otherwise establishes an
exemption. The payment of the proceeds from the disposition of Common Stock to
or through a non-U.S. office of a non-U.S. broker generally will not be subject
to backup withholding and information reporting except as noted below. In the
case of a payment of proceeds from the disposition of Common Stock to or through
a non-U.S. office of a broker which is (i) a U.S. person, (ii) a "controlled
foreign corporation" for U.S. federal income tax purposes, or (iii) a foreign
person 50% or more of whose gross income for certain periods is derived from a
U.S. trade or business unless the broker has documented that such holder is a
Non-U.S. Holder and certain other conditions are met.

Backup withholding with respect to foreign stockholders is not an
additional tax. Rather, the amount of any backup withholding with respect to a
payment to a Non-U.S. Holder will be allowed as a credit against any United
States federal income tax liability of such Non-U.S. Holder. If withholding
results in an overpayment of taxes, a refund may be obtained provided that the
required information is furnished to the IRS.

OTHER TAX CONSEQUENCES

The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment

63
<PAGE> 68

of the Company and its stockholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective stockholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in the Common Stock of the Company.

The Company will report to its stockholders and the IRS the amount of
dividends paid or deemed paid during each calendar year, and the amount of tax
withheld, if any.

There may be other federal, state, local or foreign income, or estate and
gift tax considerations applicable to the circumstances of a particular
investor. Stockholders should consult their own tax advisors with respect to
such matters.

DIVIDEND REINVESTMENT PLAN

Stockholders participating in any dividend reinvestment plan adopted by the
Company will be deemed to have received the gross amount of any cash
distributions which would have been paid by the Company to such stockholders had
they not elected to participate. These deemed distributions will be treated as
actual distributions from the Company to the participating stockholders and will
retain the character and tax effects applicable to distributions from the
Company generally. See " -- Taxation of Taxable Domestic Stockholders" and
" -- Taxation of Foreign Stockholders." Participants in the dividend
reinvestment plan are subject to Federal income tax on the amount of the deemed
distributions to the extent that such distributions represent dividends or
gains, even though they receive no cash. Shares of Common Stock received under
the plan will have a holding period beginning with the day after purchase, and a
tax basis equal to their cost (which is the gross amount of the deemed
distribution).

ERISA CONSIDERATIONS

The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the
prohibited transaction provisions of Section 4975 of the Code that may be
relevant to prospective investors. This discussion does not purport to deal with
all aspects of ERISA or the Code that may be relevant to particular investors in
light of their particular circumstances. A PROSPECTIVE INVESTOR THAT IS AN
EMPLOYEE BENEFIT PLAN SUBJECT TO ERISA, A TAX-QUALIFIED RETIREMENT PLAN, AN IRA,
OR A GOVERNMENTAL, CHURCH, OR OTHER PLAN THAT IS EXEMPT FROM ERISA IS ADVISED TO
CONSULT ITS OWN LEGAL ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING
UNDER APPLICABLE PROVISIONS OF ERISA, THE CODE, AND STATE LAW WITH RESPECT TO
THE PURCHASE, OWNERSHIP, OR SALE OF THE COMMON STOCK BY SUCH PLAN OR IRA.

A fiduciary of a pension, profit-sharing, or other employee benefit plan
(an "Employee Plan") subject to ERISA should consider fiduciary standards under
ERISA in the context of the Employee Plan's particular circumstances before
authorizing an investment of all or any portion of such Employee Plan's assets
in the Shares. Among other factors, such fiduciary should consider (i) whether
the investment satisfies the prudence requirements of Section 404(a)(1)(B) of
ERISA, (ii) whether the investment satisfies the diversification requirements of
Section 404(a)(1)(C) of ERISA and (iii) whether the investment is in accordance
with the documents and instruments governing the plan as required by Section
404(a)(1)(D) of ERISA. In addition, persons who control the investments of
individual retirement accounts ("IRAs") should consider that IRAs may only make
investments that are authorized by the appropriate governing documents and under
applicable state law.

In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA, and the corresponding provisions of the
Code, prohibit a wide range of transactions involving the assets of an Employee
Plan or IRA and persons who have certain specified relationships to the Employee
Plan or IRA ("parties in interest" within the meaning of ERISA or "disqualified
persons" within the meaning of the Code). Such transactions are treated as
"prohibited transactions" under Section 406 of ERISA and Section 408(e)(2) of
the Code and excise taxes are imposed upon such persons by Section 4975 of the
Code. Thus, a fiduciary of an Employee Plan or a person making the investment
decision for an IRA should consider

64
<PAGE> 69

whether the acquisition or the continued holding of the Shares might constitute
or give rise to a direct or indirect non-exempt prohibited transaction.

The Department of Labor (the "DOL") has issued final regulations (the "DOL
Regulations") as to what constitutes assets of an employee benefit plan under
ERISA. Under the DOL Regulations, if an Employee Plan or IRA acquires an equity
interest in an entity, which interest is neither a publicly offered security nor
a security issued by an investment company registered under the Investment
Company Act of 1940, as amended, the Employee Plan's or IRA's assets would
include, for purposes of the fiduciary responsibility provisions of ERISA, both
the equity interest and an undivided interest in each of the entity's underlying
assets unless certain specified exceptions apply. The DOL Regulations define a
publicly-offered security as a security that is "widely held," "freely
transferable" and either (i) part of a class of securities registered under
Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), or (ii) sold pursuant to an effective registration statement under
the Securities Act, if the class of securities of which such security is a part
is registered under the 1934 Act within 120 days after the end of the fiscal
year of the issuer during which the offering occurs. The Shares will be sold
pursuant to an effective registration statement under the Securities Act and
will be registered under the 1934 Act.

The DOL Regulations provide that a security is widely held only if it is
part of a class of securities that is owned by 100 or more investors independent
of the Company and of one another. A security will not fail to be widely held
because the number of independent investors falls below 100 subsequent to the
Offering as a result of events beyond the Company's control. The Company expects
the Common Stock to be "widely held" upon completion of the Offering.

The DOL Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The DOL Regulations further provide that when
a security is part of the Offering in which the minimum investment is $10,000 or
less, as is the case with this offering, certain restrictions ordinarily will
not, alone or in combination, affect the finding that such securities are freely
transferable. Employee Plan and IRA fiduciaries should be aware that the
Company's Articles of Incorporation contain certain restrictions on any transfer
of Shares that would create a beneficial owner of more than 9.8% in value of the
Company's outstanding Common Stock. See "Description of Securities --
Restrictions on Transfer." While the Company believes that such a restriction
is generally permitted under the DOL Regulations and is not likely to result
in the failure of the Common Stock to be freely transferable, the DOL
Regulations only establish a presumption in favor of the finding of free
transferability, and, therefore, no assurance can be given that the DOL and the
Treasury Department will not reach a contrary conclusion.

Assuming that the Common Stock will be widely held, the Company believes
that the Common Stock will be publicly offered securities for purposes of the
DOL Regulations and that the assets of the Company will not be deemed to be plan
assets of any Employee Plan or IRA that invests in the Common Stock.

Employee Plans and IRAs and their fiduciaries are strongly urged to consult
with their advisors before acquiring Common Stock of the Company.

65
<PAGE> 70

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below have severally agreed to purchase from the Company, and
the Company has agreed to sell to them, the following respective numbers of
Shares at the initial public offering price less the underwriting discounts set
forth on the cover of this Prospectus.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------------------------------------- ----------------
<S> <C>
Smith Barney Inc......................... 2,403,000
J.C. Bradford & Co....................... 802,000
Advest, Inc. ............................ 30,000
Robert W. Baird & Co. Incorporated....... 30,000
William Blair & Company.................. 60,000
Brean Murray, Foster Securities Inc. .... 15,000
Alex. Brown & Sons Incorporated.......... 90,000
CS First Boston Corporation.............. 90,000
The Chicago Corporation.................. 30,000
Cowen & Company.......................... 60,000
Crowell, Weedon & Co. ................... 30,000
Dain Bosworth Incorporated............... 60,000
Dillon, Read & Co. Inc. ................. 90,000
Doft & Co., Inc. ........................ 30,000
Dominick & Dominick, Incorporated........ 30,000
Donaldson, Lufkin & Jenrette
Securities Corporation................. 90,000
A.G. Edwards & Sons, Inc. ............... 90,000
Equitable Securities Corporation ........ 30,000
Fahnestock & Co. Inc. ................... 15,000
Ferris, Baker Watts, Incorporated........ 15,000
First Albany Corporation................. 30,000
First of Michigan Corporation............ 30,000
Interstate/Johnson Lane Corporation...... 30,000
Janney Montgomery Scott Inc. ............ 30,000
Edward D. Jones & Co. ................... 30,000
Kemper Securities, Inc. ................. 60,000
C. L. King & Associates, Inc. ........... 15,000
Ladenburg, Thalmann & Co. Inc. .......... 30,000
Lazard Freres & Co. ..................... 90,000
Legg Mason Wood Walker, Incorporated..... 60,000
McDonald & Company Securities, Inc. ..... 30,000

<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------------------------------------- ----------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................... 90,000
Mesirow Financial, Inc. ................. 15,000
Montgomery Securities.................... 90,000
Neuberger & Berman....................... 30,000
The Ohio Company......................... 30,000
Oppenheimer & Co., Inc. ................. 90,000
PaineWebber Incorporated................. 90,000
Parker/Hunter Incorporated............... 15,000
Pauli & Company, Incorporated............ 15,000
Pennsylvania Merchant Group Ltd.......... 15,000
Piper Jaffray Inc. ...................... 60,000
Principal/Eppler, Guerin & Turner,
Inc. .................................. 30,000
Prudential Securities Incorporated....... 90,000
Pryor, McClendon, Counts & Co., Inc. .... 15,000
Ragen MacKenzie Incorporated............. 15,000
Rauscher Pierce Refsnes, Inc. ........... 30,000
Raymond James & Associates, Inc. ........ 60,000
The Robinson-Humphrey Company, Inc. ..... 60,000
Roney & Co. ............................. 30,000
Salomon Brothers Inc .................... 90,000
Scott & Stringfellow, Inc. .............. 30,000
The Seidler Companies Incorporated....... 15,000
Spencer Trask Securities Incorporated.... 15,000
Sterne, Agee & Leach, Inc. .............. 15,000
Stifel, Nicolaus & Company,
Incorporated........................... 30,000
Sutro & Co. Incorporated................. 30,000
Van Kasper & Company..................... 15,000
H.G. Wellington & Co., Inc. ............. 15,000
Wertheim Schroder & Co. Inc.............. 90,000
Wheat, First Securities, Inc. ........... 60,000
----------------
Total............................ 5,800,000
============
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Shares offered hereby are
subject to approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all the
Shares offered hereby (other than those covered by the over-allotment option
described below) if any of such Shares are taken.

The Company has been advised by Smith Barney Inc. ("Smith Barney") and J.C.
Bradford & Co. (the "Representatives") that the Underwriters propose to offer
the Shares to the public at the initial public offering price set forth on the
cover of this Prospectus and to certain dealers at such price, less a concession
not in excess of $.65 per share. The Underwriters may allow, and such dealers
may re-allow, a concession not in excess of $.10 per share to certain other
dealers. After the initial public offering, the public offering price and other
selling terms may be changed by the Representatives.

The Company has granted to the Underwriters an option, exercisable not
later than 30 calendar days from the date of this Prospectus, to purchase up to
870,000 additional shares at the same price per share as the Company receives
for the shares that the Underwriters have agreed to purchase. To the extent that
the Underwriters exercise such option to purchase up to a total of 870,000
shares, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage thereof that the number of shares to be
purchased by it shown in the above table bears to the total number of shares
shown in the above table, and the Company will be obligated, pursuant to the
option, to sell such shares to the Underwriters. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
the

66
<PAGE> 71

shares offered hereby. If purchased, the Underwriters will sell such additional
870,000 shares on the same terms as those on which the shares are being offered.

The Company will pay an advisory fee equal to 0.67% of the gross proceeds
of the Offering (including any exercise of the Underwriters' over-allotment
option) to Smith Barney for advisory services in connection with the evaluation,
analysis and structuring of the Company's formation and the Offering.

The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.

The Company has agreed, and shall cause each officer, director and existing
stockholder of the Company to agree that, without the prior written consent of
the Representatives, such person will not register, offer, sell, contract to
sell, grant any option to purchase or otherwise dispose of any Shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, or warrants to purchase Common Stock, for a period of 180 days,
subject to certain exceptions set forth in the Underwriting Agreement.

Smith Barney has engaged and may in the future engage in investment banking
services for certain affiliates of the Company.

Prior to this Offering there has been no established public market for the
Common Stock. Consequently, the offering price has been determined by
negotiation between the Company and the Representatives. Among the factors
considered in such negotiations were the number of shares to be offered, the
projected revenues to the Company under the Leases and the expected cash
available to the Company for distribution to its stockholders, the current
yields and prices of publicly traded securities believed to be somewhat
comparable to the Company, prevailing market conditions and other factors deemed
relevant.

The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.

LEGAL MATTERS

The validity of the Shares offered hereby will be passed upon for the
Company by Sirote & Permutt, P.C. of Birmingham, Alabama. In rendering such
opinion, Sirote & Permutt, P.C. will rely upon the opinion of Ballard Spahr
Andrews & Ingersoll as to certain matters of Maryland law. Sirote & Permutt,
P.C. has represented HEALTHSOUTH on matters unrelated to the Offering. Both the
Company and HEALTHSOUTH have consented to this arrangement. Skadden, Arps,
Slate, Meagher & Flom, New York, N.Y., will pass upon certain legal matters
relating to the Offering for the Underwriters.

EXPERTS

The balance sheet of Capstone Capital Corporation at March 31, 1994,
included herein and in the registration statement has been included herein and
in the registration statement in reliance upon the report of KPMG Peat Marwick,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.

The consolidated financial statements of HEALTHSOUTH Rehabilitation
Corporation and Subsidiaries appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young, independent auditors, to the
extent indicated in their reports thereon also appearing elsewhere herein and in
the Registration Statement. Such consolidated financial statements have been
included herein in reliance on their reports given on the authority of such firm
as experts in accounting and auditing.

The combined financial statements of Selected Rehabilitation Hospitals of
National Medical Enterprises as of May 31, 1992 and 1993, and for each of the
years in the three-year period ended May 31, 1993, have been included herein and
in the Registration Statement in reliance upon the report of KPMG Peat Marwick,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.

67
<PAGE> 72

The valuation appraisals of the Initial Properties referenced in this
Prospectus have been performed by Valuation Counselors, an independent appraisal
firm, as indicated in their reports with respect thereto and are included as
Exhibits to this Registration Statement upon reliance on the authority of said
firm as experts in giving said reports.

AVAILABLE INFORMATION

The Company has filed with the SEC a Registration Statement under the
Securities Act with respect to the Shares offered by this Prospectus, which
includes this Prospectus plus additional information. The Company will also file
reports, proxy statements and other information with the SEC under the 1934 Act.
Such reports, proxy statements and other information can be inspected and copied
at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices located
in Room 1204, Everett McKinley Dirksen Building, 219 South Dearborn Street,
Chicago, Illinois 60605, and 14th Floor, 75 Park Place, New York, New York
10007. Copies of these materials can be obtained from the Public Reference
Section of the SEC, Washington, D.C. 20549, at prescribed rates.

The Company will also furnish to its stockholders annual reports containing
audited financial statements and quarterly reports for the first three quarters
of each fiscal year containing unaudited financial information.

68
<PAGE> 73

GLOSSARY

The following are definitions of certain terms used in this Prospectus.
Unless the context otherwise requires, the following terms shall have the
meanings set forth below for the purposes of this Prospectus:

"Additional Rent" means increases to the Base Rent commencing after
the first year based on either a set percentage increase or on 67% to 100%
of the percentage increase in the applicable consumer price index, with
annual increases generally limited to a maximum of 5%.

"AHF" means ancillary hospital facility.

"AmSouth" means AmSouth Bank N.A.

"ASF" means ambulatory surgery facility.

"ASMI" means American Sports Medicine Institute.

"Bank Credit Facility" means the $60 million line of credit from a
consortium of banks led by NationsBank to be used to fund a portion of the
purchase price for the Initial Properties, to fund the acquisition of
additional properties and for general corporate purposes.

"Base Rent" means the minimum annual rental payment payable by each
Lessee as set forth in its respective Lease.

"Bylaws" means the Bylaws of the Company.

"Charter" means the Articles of Incorporation of the Company, as
amended.

"Code" means the Internal Revenue Code of 1986, as amended.

"Common Stock" means the common stock, par value $.001 per share, of
the Company.

"Company" means Capstone Capital Corporation, a Maryland corporation,
and one or more of its subsidiaries or, as the context may require,
Capstone Capital Corporation only.

"CON" means certificate of need.

"CPI" means the Consumer Price Index.

"Disinterested Director" means any member of the Company's Board of
Directors who is not affiliated with any seller of properties to the
Company. For this purpose, an "affiliate" of the Company shall mean a
person who is an officer, director or employee of a seller or who
beneficially owns 5% or more of any class of equity securities of a seller
or of any entity that controls, is controlled by or is under common control
with a seller, or a member of whose immediate family has one of the
foregoing relationships with a seller.

"Dividend Reinvestment Plan" means the Company's plan pursuant to
which holders of its Common Stock may elect to reinvest dividends
automatically in additional shares of Common Stock.

"Effective Date" means the date that the SEC executes an order
declaring the Registration Statement effective under the Securities Act.

"Excess Shares" means those shares owned beneficially (under the
applicable rules and regulations of the Commission) by any stockholder of
the Company in excess of 9.8% in value of the Company's outstanding stock.

"Guarantor" means each of HEALTHSOUTH, Integrated Health, Quorum,
Surgical Health and OrNda.

"HEALTHSOUTH" means HEALTHSOUTH Rehabilitation Corporation.

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<PAGE> 74

"HEALTHSOUTH Initial Properties" means each property identified in
this Prospectus owned by HEALTHSOUTH or one or more of its Subsidiaries
with respect to which the Company expects to enter into a definitive
Purchase Agreement.

"Initial Properties" means the 20 properties identified in this
Prospectus with respect to which the Company expects to enter into a
definitive Purchase Agreement or the Merger Agreement as soon as practical.

"Integrated Health" means Integrated Health Systems, Inc.

"IRS" means the United States Internal Revenue Service.

"Lease" means the agreement to be entered into by each Lessee to lease
one or more Initial Properties, or a portion thereof, from the Company.

"Lessee" means an entity leasing one or more Initial Properties from
the Company.

"LTCF" means long-term care facility.

"MACI" means Midway Acquisition Company, Inc.

"Merger Agreement" means the Agreement and Plan of Merger between MACI
and the Company, dated May 27, 1994.

"MGCL" means the Maryland General Corporation Law.

"NationsBank" means NationsBank of Georgia, N.A.

"Offering" means the transaction by which the Shares of the Company
are offered and sold pursuant to this Prospectus.

"ORF" means outpatient rehabilitation facility.

"OrNda" means OrNda HealthCorp.

"Partnership" means Crescent Capital Partners, an Alabama general
partnership.

"PPS" means the Medicare prospective payment system.

"Prospectus" means the prospectus that will be issued in connection
with the Offering.

"Purchase Agreement" means each agreement, including the Merger
Agreement, relating to the acquisition by the Company of one or more of the
Initial Properties.

"Quorum" means Quorum Health Group, Inc.

"Registration Statement" means the Company's Form S-11 Registration
Statement under the Securities Act of 1933.

"REIT" means a real estate investment trust as defined pursuant to
Sections 856 through 860 of the Code.

"Representatives" means Smith Barney Inc. and J.C. Bradford & Co. as
representatives of the Underwriters.

"RF" means research facility.

"SACF" means sub-acute care facility.

"SEC" means the Securities and Exchange Commission.

"Securities Act" means the Securities Act of 1933, as amended.

"Shares" means the shares of Common Stock being offered by this
Prospectus.

"SHPDA" means a state health planning and development agency.

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<PAGE> 75

"Stock Incentive Plan" means the Company's 1994 Stock Incentive Plan.

"Subsidiary" means a wholly-owned corporate subsidiary of the
Guarantors and a limited partnership, the general partner of which is one
of the Guarantors or one of its wholly-owned corporate subsidiaries.

"Surgical Health" means Surgical Health Corporation.

"Treasury Regulations" means the income tax regulations promulgated
under the Code.

"Triple Net Lease" means a lease pursuant to which the lessee pays all
operating expenses, taxes, assessments, ground rents, water, sewer or other
rents and charges, excises, tax levies, fees and all other governmental
charges, utility charges and insurance premiums.

"UBTI" means unrelated business taxable income as defined in Section
512(a) of the Code.

"Underwriters" means the underwriters named in this Prospectus.

"Underwriting Agreement" means the Underwriting Agreement between the
Company and the Underwriters.

71
<PAGE> 76

[THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE> 77

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
CAPSTONE CAPITAL CORPORATION
Report of Independent Auditors.................................................... F-2
Balance Sheet as of March 31, 1994................................................ F-3
Notes to Balance Sheet............................................................ F-4
Pro Forma Balance Sheet and Statements of Estimated Revenues Less Expenses........ F-6
Notes to Pro Forma Balance Sheet and Statements of Estimated Revenues Less
Expenses....................................................................... F-10
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
Report of Ernst & Young, Independent Auditors..................................... F-12
Consolidated Balance Sheets as of December 31, 1992 and 1993...................... F-13
Consolidated Statements of Income for the Years Ended December 31, 1991, 1992
and 1993....................................................................... F-14
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1991, 1992 and 1993............................................................ F-15
Consolidated Statements of Cash Flows for the Years Ended December 31, 1991, 1992
and 1993....................................................................... F-16
Notes to Consolidated Financial Statements........................................ F-17
Consolidated Balance Sheets as of December 31, 1993 and March 31, 1994............ F-28
Consolidated Statements of Income as of the Three Months Ended March 31, 1993
and 1994....................................................................... F-29
Consolidated Statements of Cash Flows as of the Three Months Ended March 31, 1993
and 1994....................................................................... F-30
Notes to Consolidated Financial Statements........................................ F-31
SELECTED REHABILITATION HOSPITALS OF NATIONAL MEDICAL ENTERPRISES, INC.
Report of Independent Auditors.................................................... F-33
Combined Balance Sheets as of May 31, 1992 and 1993............................... F-34
Combined Statements of Income for the Years Ended May 31, 1991, 1992 and 1993..... F-35
Combined Statements of Owners' Equity for the Years Ended May 31, 1991, 1992 and
1993........................................................................... F-36
Combined Statements of Cash Flows for the Years Ended May 31, 1991, 1992 and
1993........................................................................... F-37
Notes to Combined Financial Statements............................................ F-38
Combined Condensed Interim Balance Sheet as of November 30, 1993.................. F-44
Combined Condensed Interim Statements of Income for the Six Months Ended November
30, 1992 and 1993.............................................................. F-45
Combined Condensed Interim Statements of Cash Flows for the Six Months Ended
November 30, 1992 and 1993..................................................... F-46
Note to Combined Condensed Interim Financial Statements........................... F-47
Pro Forma Financial Information for the Year Ended December 31, 1993.............. F-48
Pro Forma Condensed Combined Income Statement as of Year Ended December 31,
1993........................................................................... F-49
Notes to Pro Forma Condensed Combined Income Statement............................ F-50
</TABLE>

F-1
<PAGE> 78

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Capstone Capital Corporation:

We have audited the accompanying balance sheet of Capstone Capital
Corporation as of March 31, 1994. This balance sheet is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.

In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Capstone Capital Corporation at
March 31, 1994, in conformity with generally accepted accounting principles.

KPMG PEAT MARWICK

Birmingham, Alabama
April 6, 1994, except for
Note 6 which is as
of June 20, 1994

F-2
<PAGE> 79

CAPSTONE CAPITAL CORPORATION

BALANCE SHEET
MARCH 31, 1994

<TABLE>
<S> <C>
ASSETS
Cash.................................................................. $180
====
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; 10,000,000 shares authorized; none
issued or outstanding............................................... $ --
Common stock, $.001 par value; 50,000,000 shares authorized; 180,000
issued and outstanding.............................................. 180
----
Total stockholders' equity.................................. $180
====
</TABLE>

F-3
<PAGE> 80

CAPSTONE CAPITAL CORPORATION

NOTES TO BALANCE SHEET
MARCH 31, 1994

(1) ORGANIZATION

Capstone Capital Corporation (the "Company") was incorporated in the State
of Maryland on March 31, 1994 and issued a total of 180,000 shares of common
stock to the Company's chairman, its president, one of its directors, and
HEALTHSOUTH Rehabilitation Corporation ("HEALTHSOUTH") for total consideration
of $180. The chairman of the Company and one of its directors are executive
officers of HEALTHSOUTH. The Company is in the process of an initial public
offering pursuant to which it plans to issue approximately 5,800,000 additional
shares of common stock (the "Offering"). The 180,000 shares issued upon
incorporation (the "Founders' Shares") will constitute approximately 3 percent
of the outstanding shares immediately after consummation of the Offering.

The Company has had no operations. Upon consummation of the Offering, the
Company intends to begin operations by purchasing a diversified portfolio of
healthcare properties and leasing the properties back to the healthcare
operators.

(2) FEDERAL INCOME TAXES

At the earliest possible date, the Company intends to qualify as a real
estate investment trust under the Internal Revenue Code and, accordingly, will
not be subject to federal income taxes on amounts distributed to stockholders
provided it distributes at least 95 percent of its real estate investment trust
taxable income and meets certain other conditions. The Company may, however, be
subject to state or local taxation in various state or local jurisdictions.

(3) PLANNED TRANSACTIONS

The Company plans to use the Offering proceeds and borrowings under a bank
credit facility to purchase 20 healthcare properties for $115,445,000. Ten of
the properties will be acquired from HEALTHSOUTH for $50,920,000 and five of the
properties will be acquired for $27,625,000 from two companies whose chairmen
are directors of the Company.

The Company has agreed to reimburse actual costs incurred on its behalf by
Crescent Capital Partners and its affiliates upon consummation of the Offering.
The actual costs incurred relate to organizing the Company, negotiating property
acquisitions, performing due diligence related to the properties, performing
corporate work in contemplation of the Offering, preparing the registration
statement and providing interim financing for the acquisition of the properties.
This amount is estimated to be approximately $1,675,000 and will only be payable
upon the closing of the Offering and will be paid from the proceeds of the
Offering. The Company's chairman, its president and one of its directors are the
partners in Crescent Capital Partners.

(4) STOCKHOLDERS' EQUITY

For each of the first six quarters in which dividends are paid by the
Company, the founders have consented to contribute to the Company the after-tax
portion of any dividends distributed to them for such quarter if (i) the
annualized dividends paid in such quarter do not equal or exceed $1.70 per Share
($0.425 per Share per quarter) or (ii) the aggregate dividends paid in such
quarter on the outstanding Shares exceed 95% of the cash available for
distribution for the relevant quarterly period.

The Company intends to adopt a dividend reinvestment plan.

F-4
<PAGE> 81

CAPSTONE CAPITAL CORPORATION

NOTES TO BALANCE SHEET -- (CONTINUED)
MARCH 31, 1994

(5) EMPLOYEE BENEFITS

The Company's board of directors intends to adopt a deferred compensation
plan, a retirement plan for executive officers and has adopted a stock incentive
plan. The Company has reserved 418,600 shares of common stock for issuance under
the stock incentive plan. As of the effective date of the Offering, the Company
intends to grant options to purchase 260,000 shares of common stock.

(6) SUBSEQUENT EVENTS

On June 20, 1994, the Company changed its name from Capstone Capital Trust,
Inc. to Capstone Capital Corporation.

On May 27, 1994, the Company obtained a written commitment, subject to
certain customary terms and conditions, from a consortium of banks for a $60
million credit facility. The facility is expected to be funded upon the closing
of the Offering. Interest on borrowings under the facility will be paid at a
rate chosen by the Company from either the base rate, which is the higher of (i)
the Federal Funds Rate plus 1/2 of 1% or (ii) the lead bank's prime lending
rate, or LIBOR plus 1.75%. In addition, the Company will pay .375% per annum on
the unused portion of funds available for borrowings under the facility. The
facility will be unsecured and will mature two years from the date of its
closing. On May 27, 1994, LIBOR was 4.625% and the lead bank's prime lending
rate was 7.25%.

F-5
<PAGE> 82

CAPSTONE CAPITAL CORPORATION

PRO FORMA BALANCE SHEET AND STATEMENTS
OF ESTIMATED REVENUES LESS EXPENSES

The following pro forma balance sheet is based on the balance sheet of the
Company included elsewhere in the Prospectus, adjusted to give effect to the
Offering and the application of the proceeds therefrom.

The pro forma balance sheet as of March 31, 1994 gives effect to the
Offering and the acquisition of the Initial Properties, as if they had occurred,
and the respective Leases as if they had been in effect, on March 31, 1994. The
statements of estimated revenues less expenses for the year ended December 31,
1993, and for the three months ended March 31, 1994, give effect to the Offering
and the acquisition of the Initial Properties as if they had occurred, and the
respective Leases as if they had been in effect, on January 1, 1993. The pro
forma adjustments and estimates are based upon available information and certain
assumptions that management believes are reasonable. The pro forma balance sheet
and statements of estimated revenues less expenses do not purport to represent
what the Company's financial position or results of operations and cash
available for distribution would actually have been if the transactions had
occurred on March 31, 1994 or January 1, 1993 or to project the Company's
financial position or results of operations for any future period. Differences
would result from, among other things, delays in the acquisition of the Initial
Properties and changes in interest rates.

The pro forma balance sheet and statements of estimated revenues less
expenses should be read in conjunction with the balance sheet of the Company and
related notes thereto, and other financial information pertaining to the
Company, including "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," included elsewhere in this
Prospectus.

F-6
<PAGE> 83

CAPSTONE CAPITAL CORPORATION

PRO FORMA BALANCE SHEET
MARCH 31, 1994

<TABLE>
<CAPTION>
ADJUSTMENTS
RELATED TO THE AS ADJUSTED FOR
OFFERING AND THE OFFERING AND
ACQUISITION OF THE ACQUISITION OF THE
HISTORICAL INITIAL PROPERTIES INITIAL PROPERTIES
---------- ------------------ ------------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents......................... $180 $ 97,092,000(1) $ 50,000
(115,445,000)(2)
(1,675,000)(3)
20,227,820(4)
(150,000)(5)
Real estate property.............................. -- 115,445,000(2) 116,495,000(6)
375,000(3)
675,000(3)
Bank credit facility commitment fee............... -- 150,000(5) 150,000
Organization costs................................ -- 25,000(3) 25,000
---------- ------------------ ------------------
Total assets............................ $180 $ 116,719,820 $116,720,000
======= ============= =============
LIABILITIES
Bank credit facility.............................. $ -- $ 20,227,820(4) $ 20,227,820
---------- ------------------ ------------------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value, 10,000,000
shares authorized; none outstanding............. -- -- --
Common stock, $.001 par value, 50,000,000 shares
authorized; 180,000 issued and outstanding;
5,980,000 issued and outstanding, as adjusted... 180 5,800(1) 5,980
Additional paid-in-capital........................ 97,086,200(1) 96,486,200
(600,000)(3)
---------- ------------------ ------------------
Total stockholders' equity.............. 180 96,492,000 96,492,180
---------- ------------------ ------------------
Total liabilities and stockholders'
equity................................ $180 $ 116,719,820 $116,720,000
======= ============= =============
</TABLE>

See notes to pro forma balance sheet and statements of estimated revenues less
expenses.

F-7
<PAGE> 84

CAPSTONE CAPITAL CORPORATION

STATEMENT OF ESTIMATED REVENUES LESS EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1993

<TABLE>
<CAPTION>
ADJUSTMENTS
RELATED TO THE AS ADJUSTED FOR
OFFERING AND THE OFFERING AND
ACQUISITION OF THE ACQUISITION OF THE
HISTORICAL INITIAL PROPERTIES INITIAL PROPERTIES
---------- ------------------ ------------------
<S> <C> <C> <C>
Estimated revenues:
Rental income.................................. -- $ 12,770,601(7) $ 13,914,344
1,143,743(8)
Estimated expenses:
Interest....................................... -- 1,438,669(10) 1,438,669
Depreciation................................... 2,517,171(9) 2,517,171
Amortization of organization costs............. 5,000(9) 5,000
Amortization of financing commitment fee....... 75,000(9) 75,000
Operating and administrative expenses.......... -- 1,100,000(10) 1,100,000
---------- ------------------ ------------------
Total expenses................................... -- 5,135,840 5,135,840
---------- ------------------ ------------------
Estimated revenues less expenses................. -- $ 8,778,504 $ 8,778,504
========= ============= =============
Estimated revenues less expenses per share....... -- $ 1.47
========= =============
Shares outstanding............................... -- 5,980,000
========= =============
</TABLE>

See notes to pro forma balance sheet and statements of estimated revenues less
expenses

F-8
<PAGE> 85

CAPSTONE CAPITAL CORPORATION

STATEMENT OF ESTIMATED REVENUES LESS EXPENSES
FOR THE THREE MONTHS ENDED MARCH 31, 1994

<TABLE>
<CAPTION>
ADJUSTMENTS
RELATED TO THE AS ADJUSTED FOR
OFFERING AND THE OFFERING AND
ACQUISITION OF THE ACQUISITION OF THE
HISTORICAL INITIAL PROPERTIES INITIAL PROPERTIES
---------- ------------------ ------------------
<S> <C> <C> <C>
Estimated revenues:
Rental income..................................... -- $3,192,650(7) $3,478,586
285,936(8)
Estimated expenses:
Interest.......................................... -- 359,667(10) 359,667
Depreciation...................................... -- 629,293(9) 629,293
Amortization of organization costs................ -- 1,250(9) 1,250
Amortization of financing commitment fee.......... -- 18,750(9) 18,750
Operating and administrative expenses............. -- 275,000(10) 275,000
---------- ------------------ ------------------
Total expenses...................................... -- 1,283,960 1,283,960
---------- ------------------ ------------------
Estimated revenues less expenses.................... -- $2,194,626 $2,194,626
======= ============= =============
Estimated revenues less expenses per share.......... -- $ 0.37
======= =============
Shares outstanding.................................. 180,000 5,980,000
======= =============
</TABLE>

See notes to pro forma balance sheet and statements of estimated revenues less
expenses

F-9
<PAGE> 86

CAPSTONE CAPITAL CORPORATION

NOTES TO PRO FORMA BALANCE SHEET
AND STATEMENTS OF ESTIMATED REVENUES LESS EXPENSES

(1) Issuance of 5,800,000 Shares of Common Stock for $104,400,000 at $18.00 per
share, less underwriting discount and advisory fee of $7,308,000.

(2) Cost of the Initial Properties of $115,445,000.

(3) Payment to Crescent Capital Partners for reimbursement of actual costs
incurred related to providing interim financing ($375,000), negotiating
Initial Property acquisitions ($675,000), organizing the Company ($25,000),
and preparing the Offering ($600,000).

(4) Borrowings of $20,227,820 under the Bank Credit Facility to maintain cash
and cash equivalents of $50,000.

(5) Payment of Bank Credit Facility commitment fee of $150,000.

(6) The aggregate cost of the real estate properties consists of the following:

<TABLE>
<S> <C>
Buildings........................... $ 97,731,814
Land improvements................... 1,477,517
Land................................ 17,285,669
--------------
Total cost................ $116,495,000
==============
</TABLE>

(7) Rental income from the Initial Properties for the year ended December 31,
1993 is assumed to be $12,770,601 ($3,192,650 for the three months ended
March 31, 1994), which represents Base Rent (assuming no Additional Rent)
from the Initial Properties under the terms of the Leases. Each Lease is a
Triple Net Lease and the Lessee is responsible thereunder, in addition to
the rent, for all operating expenses including taxes, assessments, ground
rents, utility charges and insurance premiums.

(8) Certain of the leases provide for scheduled annual rent increases.
Generally accepted accounting principles require that these rent increases
be recognized on a straight-line basis over the term of the lease. The
additional rental income recognized in this manner is assumed to be
$1,143,743 for the year ended December 31, 1993 ($285,936 for the three
months ended March 31, 1994).

(9) Depreciation of buildings and land improvements is calculated using the
straight-line method and useful remaining lives of approximately 40 years
and 20 years, respectively. Amortization of organization costs is
calculated using the straight-line method over a five-year period. The Bank
Credit Facility commitment fee is amortized using the straight-line method
over the 24-month life of the related facility.

<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, 1994 DECEMBER 31, 1993
-------------------- -----------------
<S> <C> <C>
Depreciation:
Buildings................................ $610,824 $ 2,443,295
Land improvements........................ 18,469 73,876
----------- -----------------
Total depreciation......................... 629,293 2,517,171
================ =============
</TABLE>

(10) Operating and administrative expenses of $1,100,000 for the year ended
December 31, 1993 ($275,000 for the three months ended March 31, 1994)
consist of compensation and related benefits, professional fees, travel,
rent, interest expense calculated at a rate of 6.375% of the outstanding
balance of the Bank Credit Facility plus 0.375% of the unused portion of
the Bank Credit Facility, and other costs. A 1/8% fluctuation in the
interest rate would change the interest expense by $6,321 for the three
months ended March 31, 1994, and $25,285 for the year ended December 31,
1993.

F-10
<PAGE> 87

CAPSTONE CAPITAL CORPORATION

NOTES TO PRO FORMA BALANCE SHEET
AND STATEMENTS OF ESTIMATED REVENUES LESS EXPENSES -- (CONTINUED)

OTHER DATA -- ESTIMATED CASH AVAILABLE FOR DISTRIBUTION

Estimated cash available for distribution is estimated revenues less
expenses plus depreciation, amortization and unfunded retirement plan expense
less accrued rent. Distributions in excess of net income generally constitute a
return of capital. Management considers cash available for distribution to be an
informative measure of the performance of an equity REIT and consistent with
measures used by analysts to evaluate equity REITs. Cash available for
distribution does not represent cash generated from operating activities in
accordance with generally accepted accounting principles, is not necessarily
indicative of cash available to fund cash needs and should not be considered as
an alternative to net income as an indicator of the Company's operating
performance or as an alternative to cash flow as a measure of liquidity.

<TABLE>
<CAPTION>
AS ADJUSTED
FOR THE
OFFERING AND
ACQUISITION OF
THE INITIAL
PROPERTIES
--------------
TWELVE MONTHS
ENDED
MARCH 31, 1994
--------------
<S> <C>
Estimated cash available for distribution:
Estimated revenues less expenses(A).......................... $ 8,778,504
Accrued rent income (non-cash income) (See Note 8)........... (1,143,743)
Depreciation (See Note 9).................................... 2,517,171
Amortization of organization costs (See Note 9).............. 5,000
Amortization of financing commitment fee (See Note 9)........ 75,000
Unfunded retirement plan (non-cash expense)(B)............... 80,000
--------------
Estimated cash available for distribution.................... $ 10,311,932
===========
Estimated cash available for distribution per share.......... $ 1.72
===========
Estimated cash distribution based on 85% of cash available
for distribution.......................................... $ 8,765,142
===========
Estimated cash distribution per share based on 85% of cash
available for distribution................................ $ 1.47
===========
Estimated cash distribution based on 95% of cash available
for distribution.......................................... $ 9,796,335
===========
Estimated cash distribution per share based on 95% of cash
available for distribution................................ $ 1.64
===========
Shares outstanding........................................... 5,980,000
===========
</TABLE>

- ---------------

(A) See Statements of Estimated Revenues Less Expenses and Notes 9 and 10.
(B) This amount is the Company's estimate of the accrual for the expense under
an unfunded deferred compensation plan that the Company expects to adopt
after the Offering. Amounts accrued under the plan will be funded by long
term installment payments, life insurance or shares of the Company's Common
Stock.

F-11
<PAGE> 88

REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS

The Board of Directors
HEALTHSOUTH Rehabilitation Corporation

We have audited the accompanying consolidated balance sheets of HEALTHSOUTH
Rehabilitation Corporation and Subsidiaries as of December 31, 1992 and 1993,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1993. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of HEALTHSOUTH
Rehabilitation Corporation and Subsidiaries at December 31, 1992 and 1993, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1993, in conformity with
generally accepted accounting principles.

ERNST & YOUNG

Birmingham, Alabama
February 28, 1994,
except for Note 9, as to which the date is
May 24, 1994

F-12
<PAGE> 89

HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1992 1993
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 2)................................. $ 70,842 $ 53,470
Other marketable securities (Note 2)............................... 15,074 8,968
Accounts receivable, net of allowances for doubtful accounts and
contractual adjustments of $42,820,000 in 1992 and $104,323,000
in 1993......................................................... 94,381 143,807
Inventories........................................................ 10,800 20,783
Prepaid expenses and other current assets.......................... 21,444 34,682
-------- ----------
Total current assets....................................... 212,541 261,710
Other assets:
Loans to officers.................................................. 1,111 1,488
Other (Note 3)..................................................... 11,092 21,244
-------- ----------
12,203 22,732
Property, plant and equipment, net (Note 4).......................... 335,058 708,205
Intangible assets, net (Note 5)...................................... 81,997 175,421
-------- ----------
Total assets............................................... $641,799 $1,168,068
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 19,972 $ 41,200
Salaries and wages payable......................................... 8,084 21,442
Accrued interest payable and other liabilities..................... 11,452 22,606
Current portion of long-term debt (Note 6)......................... 2,907 4,859
-------- ----------
Total current liabilities.................................. 42,415 90,107
Long-term debt (Note 6).............................................. 299,508 779,690
Deferred income taxes................................................ 12,050 5,098
Other long-term liabilities.......................................... 49 --
Minority interests-limited partnerships.............................. (2,355) (1,799)
Commitments and contingent liabilities (Note 11)
Stockholders' equity:
Preferred Stock, $.10 par value -- 1,500,000 shares authorized;
issued and outstanding -- none.................................. -- --
Common Stock, $.01 par value -- 50,000,000 shares authorized;
issued and outstanding -- 28,823,000 in 1992 and 29,026,000 in
1993............................................................ 288 290
Additional paid-in capital......................................... 241,093 243,229
Retained earnings.................................................. 68,393 70,648
Treasury stock, at cost (20,000 shares)............................ -- (263)
Receivable from Employee Stock Ownership Plan (Note 12)............ (19,642) (18,932)
-------- ----------
Total stockholders' equity................................. 290,132 294,972
-------- ----------
Total liabilities and stockholders' equity................. $641,799 $1,168,068
======== =========
</TABLE>

See accompanying notes.

F-13
<PAGE> 90

HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1991 1992 1993
-------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues....................................................... $225,485 $406,968 $482,304
Operating expenses:
Operating units.............................................. 157,654 303,604 348,912
Corporate general and administrative......................... 7,947 10,245 14,020
Provision for doubtful accounts................................ 5,298 11,000 12,680
Depreciation and amortization.................................. 14,718 25,485 36,494
Interest expense............................................... 9,912 10,836 12,683
Interest income................................................ (5,483) (4,340) (3,173)
NME Selected Hospitals Acquisition related expense (Note 9).... -- -- 49,742
Terminated merger expense (Note 14)............................ -- 3,665 --
-------- -------- --------
190,046 360,495 471,358
-------- -------- --------
Income before income taxes and minority interests.............. 35,439 46,473 10,946
Provision for income taxes..................................... 11,500 15,333 4,069
-------- -------- --------
23,939 31,140 6,877
Minority interests............................................. 1,568 1,402 190
-------- -------- --------
Net income..................................................... $ 22,371 $ 29,738 $ 6,687
======== ======== ========
Weighted average common and common equivalent shares
outstanding.................................................. 25,905 29,887 29,858
======== ======== ========
Net income per common and common equivalent share.............. $ .86 $ 1.00 $ .22
======== ======== ========
Net income per common share-assuming full dilution............. $ .83 $ N/A $ N/A
======== ======== ========
</TABLE>

See accompanying notes.

F-14
<PAGE> 91

HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON COMMON PAID-IN RETAINED TREASURY RECEIVABLE STOCKHOLDERS'
SHARES STOCK CAPITAL EARNINGS STOCK FROM ESOP EQUITY
------ ------ ---------- --------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1990... 12,713 $127.1 $100,442.7 $27,331.2 $ -- $ -- $ 127,901.0
Proceeds from issuance of
common shares at $32.00 per
share........................ 2,300 23.0 69,581.3 -- -- -- 69,604.3
Conversion of subordinated
debentures................... 3,081 30.8 50,159.2 -- -- -- 50,190.0
Issuance of shares in
connection with stock
split........................ 9,348 93.5 (93.5) -- -- -- --
Proceeds from exercise of
options...................... 602 6.0 5,761.8 -- -- -- 5,767.8
Income tax benefits related to
incentive Stock Options...... -- -- 4,373.1 -- -- -- 4,373.1
Common shares exchanged in the
exercise of options.......... -- -- (11.9) -- -- -- (11.9)
Loan to Employee Stock
Ownership Plan............... -- -- -- -- -- (10,000.0) (10,000.0)
Purchase of limited partnership
units........................ -- -- -- (854.2) -- -- (854.2)
Net income..................... -- -- -- 22,371.0 -- -- 22,371.0
------ ------ ---------- --------- -------- ---------- -------------
BALANCE AT DECEMBER 31, 1991... 28,044 280.4 230,212.7 48,848.0 -- (10,000.0) 269.341.1
Proceeds from exercise of
options...................... 762 7.6 6,648.6 -- -- -- 6,656.2
Income tax benefits related to
Incentive Stock Options...... -- -- 3,827.7 -- -- -- 3,827.7
Common shares exchanged in the
exercise of options.......... (4 ) -- (95.6) -- -- -- (95.6)
Loan to Employee Stock
Ownership Plan............... -- -- -- -- -- (10,000.0) (10,000.0)
Reduction in Receivable from
Employee Stock Ownership
Plan......................... -- -- -- -- -- 358.0 358.0
Purchase of limited partnership
units........................ 21 .2 499.8 (10,193.4) -- -- (9,693.4)
Net income..................... -- -- -- 29,738.0 -- -- 29,738.0
------ ------ ---------- --------- -------- ---------- -------------
BALANCE AT DECEMBER 31, 1992... 28,823 288.2 241,093.2 68,392.6 -- (19,642.0) 290,132.0
Proceeds from exercise of
options...................... 203 $ 2.0 $ 1,709.6 $ -- $ -- $ -- $ 1,711.6
Income tax benefits related to
Incentive Stock Options...... -- -- 425.7 -- -- -- 425.7
Reduction in Receivable from
Employee Stock Ownership
Plan......................... -- -- -- -- -- 710.1 710.1
Purchase of limited partnership
units........................ -- -- -- (4,431.7) -- -- (4,431.7)
Purchase of treasury stock..... (20 ) -- -- -- (263.0 ) -- (263.0)
Net income..................... -- -- -- 6,687.1 -- -- 6,687.1
------ ------ ---------- --------- -------- ---------- -------------
BALANCE AT DECEMBER 31, 1993... 29,006 $290.2 $243,228.5 $70,648.0 $(263.0 ) $(18,931.9) $ 294,971.8
======== ======== ========== ========= ======== ========== ============
</TABLE>

See accompanying notes

F-15
<PAGE> 92

HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1991 1992 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................................ $ 22,371 $ 29,738 $ 6,687
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization....................................... 14,718 25,485 36,494
Provision for doubtful accounts..................................... 5,298 11,000 12,680
NME Selected Hospitals Acquisition related expense.................. -- -- 49,742
Income applicable to minority interests of limited partnerships..... 1,568 1,402 190
Provision (benefit) for deferred income taxes....................... 3,168 4,695 (6,611)
Provision for deferred revenue from contractual agencies............ (109) (279) (49)
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable................................................. (15,216) (31,007) (19,545)
Inventories, prepaid expenses and other current assets.............. (7,860) (11,749) (14,317)
Accounts payable and accrued expenses............................... 6,144 5,784 (12,928)
--------- --------- ---------
Net cash provided by operating activities............................. 30,082 35,069 52,343
INVESTING ACTIVITIES
Purchases of property, plant and equipment............................ (71,974) (86,240) (110,800)
Additions to intangible assets, net of effects of acquisitions........ (8,270) (24,976) (38,190)
Assets obtained through acquisitions, net of liabilities assumed...... (41,693) (41,343) (385,077)
Changes in other assets............................................... (648) 1,834 (4,868)
Proceeds received on sale of other marketable securities.............. 11,286 14,041 12,106
Investments in other marketable securities............................ (26,339) (4,945) (6,000)
--------- --------- ---------
Net cash used in investing activities................................. (137,638) (141,629) (532,829)
FINANCING ACTIVITIES
Proceeds from borrowings.............................................. 102,158 169,800 482,710
Principal payments on long-term debt and leases....................... (35,524) (58,890) (17,687)
Proceeds from exercise of options..................................... 5,756 6,561 1,711
Proceeds from issuance of common stock................................ 69,604 -- --
Purchase of treasury stock............................................ -- -- (263)
Loans to Employee Stock Ownership Plan................................ (10,000) (10,000) --
Reduction in Receivable from Employee Stock Ownership Plan............ -- 358 710
Proceeds from investment by minority interests........................ 547 971 614
Purchase of limited partnership interests............................. (993) (11,495) (3,784)
Payment of cash distributions to limited partners..................... (3,146) (2,833) (897)
--------- --------- ---------
Net cash provided by financing activities............................. 128,402 94,472 463,114
--------- --------- ---------
Increase (decrease) in cash and cash equivalents...................... 20,846 (12,088) (17,372)
Cash and cash equivalents at beginning of year........................ 62,084 82,930 70,842
--------- --------- ---------
Cash and cash equivalents at end of year.............................. $ 82,930 $ 70,842 $ 53,470
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest............................................................ $ 12,205 $ 12,469 $ 11,049
Income taxes........................................................ 6,701 9,201 15,608
</TABLE>

NON-CASH FINANCING ACTIVITIES:

The holders of the Company's $52,000,000 in aggregate principal amount of
7 3/4% Convertible Subordinated Debentures Due 2014 surrendered the Debentures
for conversion into 3,081,446 shares (on a pre-split basis) of the Company's
common stock on various dates during 1991.

During 1991 the Company had a three-for-two stock split on its common
stock, which was effected in the form of a fifty percent stock dividend.

The Company received a tax benefit from the disqualifying disposition of
incentive stock options of $4,373,000, $3,828,000 and $426,000 for the years
ended December 31, 1991, 1992, and 1993, respectively.

See accompanying notes.

F-16
<PAGE> 93

HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993

1. SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies followed by HEALTHSOUTH Rehabilitation
Corporation and its subsidiaries (the Company) are presented as an integral part
of the consolidated financial statements.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of HEALTHSOUTH
Rehabilitation Corporation (HEALTHSOUTH) and its wholly-owned subsidiaries, as
well as its limited partnerships (see Note 8). All significant intercompany
accounts and transactions have been eliminated in consolidation.

HEALTHSOUTH Rehabilitation Corporation is engaged in the business of
providing comprehensive rehabilitative and clinical healthcare services on an
inpatient and outpatient basis.

MARKETABLE SECURITIES

Marketable securities are stated at cost, which approximates market,
adjusted for amortization of premium and accretion of discount. The adjusted
cost of the specific security sold method is used to compute gain or loss on the
sale of securities.

ACCOUNTS RECEIVABLE AND THIRD-PARTY REIMBURSEMENT ACTIVITIES

Receivables from patients, insurance companies and third-party contractual
insured accounts (Medicare and Medicaid) are based on payment agreements which
generally result in the Company collecting an amount different from the
established rates. Final determination of the settlement is subject to review by
appropriate authorities. Adequate allowances are provided for doubtful accounts
and contractual adjustments. Uncollectible accounts are written off against the
allowance for doubtful accounts after adequate collection efforts are made. Net
accounts receivable include only those amounts estimated by management to be
collectible.

The concentration of net accounts receivable from third-party contractual
payors and others, as a percentage of total net accounts receivable, was as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1992 1993
---- ----
<S> <C> <C>
Medicare.................................................. 34% 31%
Medicaid.................................................. 2% 4%
Other..................................................... 64% 65%
---- ----
100% 100%
==== ====
</TABLE>

INVENTORIES

Inventories are stated at the lower of cost or market using the specific
identification method.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost. Upon sale or retirement
of property, plant or equipment, the cost and related accumulated depreciation
are eliminated from the respective account and the resulting gain or loss is
included in the results of operations.

Interest cost incurred during the construction of a facility is
capitalized. The Company incurred interest of $11,880,000, $12,815,000 and
$15,067,000 of which $1,968,000, $1,979,000 and $2,384,000 was capitalized
during 1991, 1992 and 1993, respectively.

F-17
<PAGE> 94

HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the assets or the term of the lease, as
appropriate. The estimated useful life of buildings is 30-40 years and the
general range of useful lives for leasehold improvements, furniture, fixtures
and equipment is 10-15 years.

INTANGIBLE ASSETS

Cost in excess of net asset value of purchased facilities is amortized over
20 to 40 years using the straight-line method. Organization and start-up costs
incurred prior to opening a new facility and partnership formation costs are
deferred and amortized on a straight-line basis over a period of 36 months.
Organization, partnership formation and start-up costs for a project that is
subsequently abandoned are charged to operations in that period. Debt issue
costs are amortized over the term of the debt. Noncompete agreements are
amortized using the straight-line method over the term of the agreements.

MINORITY INTERESTS

The equity of minority investors in limited partnerships of the Company is
reported on the balance sheet as minority interests. Minority interests reported
in the income statement reflect the respective shares of income or loss of the
limited partnerships attributable to the minority investors, the effect of which
is removed from the results of operations of the Company.

REVENUES

Revenues include net patient service revenues and other operating revenues.
Net patient service revenues are reported at the estimated net realizable
amounts from patients, third-party payors and others for services rendered,
including estimated retroactive adjustments under reimbursement agreements with
third-party payors.

INCOME PER COMMON AND COMMON EQUIVALENT SHARE

Income per common and common equivalent share is computed based on the
weighted average number of common shares and common equivalent shares
outstanding during the periods. Common equivalent shares include dilutive
employees' stock options, less the number of treasury shares assumed to be
purchased from the proceeds using the average market price of the Company's
common stock. Fully diluted earnings per share (based on 27,855,000 shares in
1991) assumes conversion of the 7 3/4% Convertible Subordinated Debentures Due
2014 issued in May 1989. The debentures were converted to common stock in 1991.

RECLASSIFICATIONS

Certain amounts in the 1991 and 1992 Consolidated Financial Statements have
been reclassified to conform with the 1993 presentation. Such reclassifications
had no material effect on the previously reported financial position, net income
or cash flows of the Company.

IMPAIRMENT OF ASSETS

Long-lived assets, such as property, plant and equipment and identifiable
intangible assets are reviewed for impairment losses when certain impairment
indicators exist. If an impairment exists, the related asset is adjusted to the
lower of book value or estimated future undiscounted cash flows from the use and
eventual disposal of the asset.

F-18
<PAGE> 95

HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. CASH, CASH EQUIVALENTS AND OTHER MARKETABLE SECURITIES (INCLUDING FUNDS
SUBJECT TO WITHDRAWAL RESTRICTIONS)

Cash, cash equivalents and other marketable securities consisted of the
following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1992 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Cash...................................................... $ 6,041 $ 32,221
Municipal put bonds....................................... 49,330 9,800
Tax advantaged auction preferred stocks................... -- 4,000
Municipal put bond mutual funds........................... 8,000 2,000
Money market funds........................................ 7,447 5,449
Bankers acceptances....................................... 24 --
---------- ----------
Total cash and cash equivalents......................... 70,842 53,470
---------- ----------
Certificates of deposit................................... 1,279 1,108
Municipal put bonds....................................... 13,795 1,860
Municipal put bond mutual funds........................... -- 5,000
Collateralized mortgage obligations....................... -- 1,000
---------- ----------
Total other marketable securities....................... 15,074 8,968
---------- ----------
Total cash, cash equivalents and other marketable
securities (approximates market value)............... $ 85,916 $ 62,438
========= =========
</TABLE>

3. OTHER ASSETS

Other assets consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1992 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Notes and accounts receivable............................. $ 2,187 $ 2,968
Investment in Caretenders Health Corp..................... 7,380 7,382
Investments in other unconsolidated subsidiaries.......... -- 3,991
Investment in land held for expansion..................... -- 3,023
Other..................................................... 1,525 3,880
---------- ----------
$ 11,092 $ 21,244
========= =========
</TABLE>

The Company has a 24% ownership interest in Caretenders Health Corp.
(Caretenders). Accordingly, the Company's investment is being accounted for
using the equity method of investments in common stock. The investment was
initially valued at $7,250,000. The Company's equity in earnings of Caretenders
for the years ended December 31, 1992 and 1993 was not material to the Company's
results of operations. At December 31, 1993, the Company guaranteed $6,000,000
on a line of credit for Caretenders. The line of credit bears interest at the
banks' prime rate plus 1/2% and is secured by Caretender's receivables and
inventory pursuant to an asset based lending formula. In return for the
guarantee, Caretenders granted the Company warrants to purchase 500,000 shares
of Caretenders common stock at a price of $2.50 per share that expire on
December 31, 2002.

F-19
<PAGE> 96

HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1992 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land......................................................... $ 37,334 $ 60,048
Buildings.................................................... 170,216 441,885
Leasehold improvements....................................... 11,729 16,454
Furniture, fixtures and equipment............................ 120,097 215,590
Construction in progress..................................... 33,399 29,274
-------- --------
372,775 763,251
Less accumulated depreciation and amortization............... 37,717 55,046
-------- --------
$335,058 $708,205
======== ========
</TABLE>

5. INTANGIBLE ASSETS

Intangible assets consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1992 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Organization, partnership formation and start-up costs....... $ 35,408 $ 41,939
Debt issue costs............................................. 1,308 1,527
Noncompete agreements........................................ 19,983 24,862
Cost in excess of net asset value of purchased facilities.... 46,632 136,196
-------- --------
103,331 204,524
Less accumulated amortization................................ 21,334 29,103
-------- --------
$ 81,997 $175,421
======== ========
</TABLE>

6. LONG-TERM DEBT

Long-term debt consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1992 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Notes and bonds payable:
Advances under a $390,000,000 credit agreement with a
bank.................................................... $288,000 $370,000
Due to National Medical Enterprises, Inc................... -- 361,164
Notes payable to banks and various other notes payable..... 4,415 4,201
Noncompete agreements payable with payments due at varying
intervals through December 2003............................ 10,000 12,050
Hospital revenue bonds payable............................... -- 24,862
Other........................................................ -- 12,272
-------- --------
302,415 784,549
Less amounts due within one year............................. 2,907 4,859
-------- --------
$299,508 $779,690
======== ========
</TABLE>

F-20
<PAGE> 97

HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

During 1992, the Company entered into a Credit Agreement with NationsBank
of North Carolina, N.A. and participating banks (the 1992 Credit Agreement)
which consists of a $390,000,000 revolving facility and term loan. The 1992
Credit Agreement replaced a previous credit agreement with AmSouth Bank N.A.
Interest is paid quarterly based on LIBOR rates plus a pre-determined margin, a
base rate, or competitively bid rates from the participating banks. The Company
is required to pay a fee of 0.25% on the unused portion of the 1992 revolving
credit facility. The principal amount is payable on November 20, 1995. The
maturity date is extendible for two one year periods upon the mutual agreement
of the Company and the lenders. The Company has provided a negative pledge of
all its assets and has granted a first priority security interest in and lien on
all shares of stock of its subsidiaries and rights and interests in its
partnerships.

Effective December 31, 1993, the Company completed an acquisition of
selected rehabilitation facilities from National Medical Enterprises, Inc. (NME)
(see Note 9). The acquisition was financed by the Company through a $410,000,000
Acquisition and Revolving Credit Facility (the NME Acquisition Credit Facility)
with NationsBank of North Carolina, N.A., and six participating banks. Interest
is paid quarterly based on LIBOR or a base rate plus a predetermined margin.
This credit facility has an initial term ending June 30, 1994, but may be
extended to June 30, 1995. The Company has provided a negative pledge on all
assets acquired in the NME Selected Hospitals Acquisition and granted the banks
a first priority security interest in all shares of stock of its subsidiaries
and rights and interests in its controlled partnerships relating to facilities
acquired in the NME Selected Hospitals Acquisition.

The amount shown as Due to National Medical Enterprises, Inc. at December
31, 1993 was subsequently financed through the NME Acquisition Credit Facility.

On February 1, 1994, the Company filed a Registration Statement on Form S-3
with the Securities and Exchange Commission to issue $250,000,000 ($287,500,000
if the underwriter's over-allotment option is exercised in full) in Senior
Subordinated Notes Due 2001 and $100,000,000 ($115,000,000 if the underwriters'
over-allotment option is exercised in full) Convertible Subordinated Debentures
Due 2001. The Company intends to use proceeds from these debt offerings to repay
indebtedness outstanding under its existing bank credit facilities. Accordingly,
all amounts outstanding under the Company's existing bank credit facilities are
shown as non-current in the accompanying financial statements at December 31,
1993.

Principal maturities of notes and bonds payable are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
----------------------------------------- --------------
<S> <C>
1994..................................... $ 4,859
1995..................................... 375,630
1996..................................... 5,544
1997..................................... 4,602
1998..................................... 3,462
After 1998............................... 390,452
--------------
$784,549
===========
</TABLE>

The fair value of total long-term debt approximates book value at December
31, 1992 and 1993.

7. STOCK OPTIONS

The Company has various stockholder-approved stock option plans which
provide for the grant of options to Directors, officers and other key employees
to purchase common stock at 100% of the fair market value as of the date of
grant. During 1993, the Company's Board of Directors adopted the 1993 Stock
Option Plan, which is subject to approval by the stockholders at their next
meeting. The Board of Directors administers the stock option plans. Options may
be granted as incentive stock options or as non-qualified stock options.

F-21
<PAGE> 98

HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Incentive stock options vest 25% annually, commencing upon completion of one
year of employment subsequent to the date of grant. Non-qualified stock options
generally are not subject to any vesting provisions. The options expire at dates
ranging from five to ten years from the date of grant.

The following table summarizes activity in the stock option plans:

<TABLE>
<CAPTION>
1991 1992 1993
------------- --------------- ---------------
<S> <C> <C> <C>
Options outstanding January 1:................. 2,580,113 3,368,571 5,339,742
Granted...................................... 1,725,750 2,762,000 1,770,000
Exercised.................................... 898,854 765,328 180,455
Cancelled.................................... 38,438 25,501 53,501
------------- --------------- ---------------
Options outstanding at December 31............. 3,368,571 5,339,742 6,875,786
============ ============== ==============
Option price range for options granted during
the period................................... $18.33-$27.41 $15.25-$19.88 $13.50-$16.88
Option price range for options exercised during
the period................................... $2.67-$21.41 $5.67-$21.41 $5.91-$19.17
Options exercisable at December 31............. 1,901,565 4,155,817 5,332,940
Options available for grant at December 31..... 1,473,075 546,050 324,550
</TABLE>

8. LIMITED PARTNERSHIPS

HEALTHSOUTH operates a number of rehabilitation centers as limited
partnerships. HEALTHSOUTH serves as the general partner and operates the
partnerships as comprehensive outpatient rehabilitation facilities or inpatient
rehabilitation facilities. These limited partnerships are included in the
consolidated financial statements (as more fully described in Note 1 under
"Minority Interests"). The limited partners share in the profit or loss of the
partnerships based on their respective ownership percentage (ranging from 1% to
50% at December 31, 1993) during their ownership period.

Beginning in 1992, due to federal and state regulatory requirements, the
Company began the process of buying back the partnership interests of its
physician limited partners. The buyback prices for the interests were in general
based on a pre-determined multiple of projected cash flows of the partnerships.
The excess of the buyback price over the book value of the limited partners'
capital amounts was charged to the Company's retained earnings.

9. ACQUISITIONS

Effective December 31, 1993, the Company completed an acquisition from
National Medical Enterprises, Inc. (NME) of 28 inpatient rehabilitation
facilities and 45 outpatient rehabilitation centers, which constituted
substantially all of NME's rehabilitation services division (the NME Selected
Hospitals Acquisition). The purchase price was approximately $296,661,000 cash,
plus net working capital of $64,503,000, subject to certain adjustments as of
June 30, 1994, the assumption of approximately $16,313,000 of current
liabilities and the assumption of approximately $17,111,000 in long-term debt
(see Note 6).

Also, at various dates during 1993, the Company acquired outpatient
operations in nineteen cities located throughout the United States. The Company
also acquired eight satellite locations. The combined purchase price of these
acquired outpatient operations and satellites was approximately $23,943,000.

In connection with these transactions, the Company entered into non-compete
agreements totaling $4,730,000.

The fair value of the total net assets acquired in 1993 was approximately
$301,382,000. The total cost for 1993 acquisitions exceeded the fair value of
the net assets acquired by approximately $83,725,000. This excess

F-22
<PAGE> 99

HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

is being amortized over a forty-year period on a straight-line basis. The
allocation of the purchase price of the NME Selected Hospitals Acquisition is
tentative pending completion of appraisals on the facilities and equipment
acquired. The allocation may change with the completion of these appraisals.

All of the acquisitions described above were accounted for as purchases
and, accordingly, the results of operations of the acquired businesses are
included in the accompanying consolidated financial statements from their
respective dates of acquisition.

The following table summarizes the unaudited consolidated pro forma results
of operations, assuming the NME Selected Hospitals Acquisition described above
had occurred at the beginning of each of the following periods. This pro forma
summary does not necessarily reflect the results of operations as they would
have been had the Company and the acquired entities constituted a single entity
during such periods.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1992 1993
-------- --------
<S> <C> <C>
(In thousands, except for per share amounts)
Revenues................................................... $922,136 $937,173
Net income................................................. 45,869 14,566
Net income per common and common equivalent share.......... 1.53 .49
</TABLE>

As a result of the NME Selected Hospitals Acquisition, HEALTHSOUTH
recognized an expense of approximately $49,742,000 during the year ended
December 31, 1993. This expense represents management's estimate of the cost to
consolidate operations of thirteen existing HEALTHSOUTH facilities (three
inpatient facilities and ten outpatient facilities) into the operations of
certain facilities acquired from NME. This plan was formulated by HEALTHSOUTH
management in order to more efficiently provide services in markets where
multiple locations now exist as a result of the acquisition. The plan of
consolidation calls for the affected operations to be merged into the operations
of the acquired facilities over a period of twelve to twenty-four months from
the date of the NME Selected Hospitals Acquisition. Due to the single-use nature
of these properties, the consolidation plan does not provide for the sale of
these facilities.

The total expense of $49,742,000 is broken down into the following
components: First, approximately $39,000,000 relates to the writedown of the
assets of the affected HEALTHSOUTH facilities to their estimated net realizable
value. Of this $39,000,000, approximately $31,500,000 relates to the assets of
the three inpatient facilities and approximately $7,500,000 relates to the
assets of the ten outpatient facilities. The $39,000,000 is broken down into the
following asset categories (net of any related accumulated depreciation or
amortization):

<TABLE>
<CAPTION>
INPATIENT OUTPATIENT
FACILITIES FACILITIES TOTAL
---------- ---------- -------
<S> <C> <C> <C>
(IN THOUSANDS)
Land.............................................................. $ 2,898 $ 0 $ 2,898
Buildings......................................................... 16,168 0 16,168
Equipment......................................................... 4,326 2,920 7,246
Intangible assets................................................. 6,111 3,455 9,566
Other assets...................................................... 1,997 1,125 3,122
---------- ---------- -------
Total................................................... $ 31,500 $ 7,500 $39,000
======= ======= =======
</TABLE>

Second, $7,700,000 relates to the write-off of certain capitalized
development projects. These projects relate to planned facilities that, if
completed, would be in direct competition with certain of the acquired NME
facilities.

Finally, approximately $3,000,000 has been accrued for costs of employee
separations, relocations and other direct costs related to the planned
consolidation of the affected operations. In formulating the plan of
consolidation, management initially estimated that approximately 430 employees
would be affected by separations at an average cost of approximately $7,000 per
employee. The $7,000 cost per employee was based

F-23
<PAGE> 100

HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

on an average annual compensation of $30,000 (including fringe benefits) for a
period of 12 weeks. Upon further and more detailed analysis by HEALTHSOUTH
management, it was determined that the plan of consolidation would more
effectively be carried out through fewer employee separations, increased
separation benefits and the provision for relocation allowances wherever
possible. As a result, during the second quarter of 1994, management revised its
estimate of the cost of the employee separations and relocations. The revised
estimate calls for approximately 150 employees to be affected by separations and
approximately 400 to be affected by relocations. Separation benefits under the
revised plan range from one month's to one year's compensation and total
approximately $2,188,000. Relocation benefits are estimated to be $2,000 per
employee and total $800,000. An additional $350,000 has been provided for
additional direct administrative costs associated with the implementation of the
plan, including outplacement services, travel and legal fees. Accordingly, the
total revised estimated cost of employee separations and relocations is
$3,338,000. The difference between the initial estimate and the revised estimate
will be treated as a change in accounting estimate and charged to operations in
the second quarter of 1994.

The accrual for employee separations and relocations reflects expenses
which will be paid over the life of the plan (twelve to twenty-four months) and
is the only cash expense included in the acquisition-related expense. Management
estimates that this accrual is adequate to cover all direct costs associated
with the planned consolidation.

10. INCOME TAXES

HEALTHSOUTH and its subsidiaries file a consolidated federal income tax
return. The limited partnerships file separate income tax returns. HEALTHSOUTH's
allocable portion of each partnership's income (loss) is included in the taxable
income of the Company. The remaining income (loss) of each partnership is
allocated to the limited partners.

Effective January 1, 1993, the Company changed its method of accounting for
income taxes to the liability method required by Financial Accounting Standards
Board (FASB) Statement No. 109, "Accounting for Income Taxes". The cumulative
effect of adopting Statement 109 was not material. Previously, the Company had
used the liability method as prescribed by FASB Statement No. 96.

Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1993 are as
follows:

<TABLE>
<CAPTION>
CURRENT NONCURRENT TOTAL
------- ---------- -------
<S> <C> <C> <C>
(IN THOUSANDS)
Deferred tax liabilities:
Depreciation and amortization.......................... $ -- $ 24,497 $24,497
Other.................................................. 340 -- 340
------- ---------- -------
Total deferred tax liabilities......................... 340 24,497 24,837
Deferred tax assets:
NME Selected Hospitals Acquisition related expense..... -- 19,399 19,399
------- ---------- -------
Total deferred tax assets................................ -- 19,399 19,399
------- ---------- -------
Net deferred tax liabilities............................. $ 340 $ 5,098 $ 5,438
====== ======== =======
</TABLE>

The current portion of the Company's deferred tax liability is included
with accrued interest payable and other current liabilities on the accompanying
balance sheet.

F-24
<PAGE> 101

HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The provision for income taxes was as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1991 1992 1993
------- ------- -------
<S> <C> <C> <C>
(IN THOUSANDS)
Currently payable:
Federal............................................. $ 7,639 $ 9,497 $ 9,695
State............................................... 693 1,141 985
------- ------- -------
8,332 10,638 10,680
Deferred expense (benefit):
Federal............................................. 2,616 4,175 (5,933)
State............................................... 552 520 (678)
------- ------- -------
3,168 4,695 (6,611)
------- ------- -------
Total provision..................................... $11,500 $15,333 $ 4,069
======= ======= =======
</TABLE>

The components of the provision for deferred income taxes for the years
ended December 31, 1991 and 1992 are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1991 1992
------ ------
<S> <C> <C>
(IN THOUSANDS)
Depreciation and amortization.................................. $1,579 $5,483
Bad debts...................................................... 1,264 (953)
Installment sale............................................... 240 --
Other.......................................................... 85 165
------ ------
$3,168 $4,695
====== ======
</TABLE>

The difference between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate to income before
taxes was as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1991 1992 1993
------- ------- ------
<S> <C> <C> <C>
(IN THOUSANDS)
Federal taxes at statutory rates....................... $11,516 $15,324 $3,765
Add (deduct):
State income taxes, net of federal tax benefit....... 457 753 650
Tax-exempt interest income........................... (1,267) (1,012) (382)
Other................................................ 794 268 36
======= ======= ======
$11,500 $15,333 $4,069
======= ======= ======
</TABLE>

11. COMMITMENTS AND CONTINGENCIES

At December 31, 1993, anticipated capital expenditures for the next twelve
months approximate $100,000,000. This amount includes expenditures for the
construction and equipping of additions to existing facilities, the construction
of three inpatient rehabilitation facilities for which regulatory approval has
been obtained and the acquisition or development of comprehensive outpatient
rehabilitation facilities.

Beginning December 1, 1993, the Company became self-insured for
professional liability and comprehensive general liability. The Company
purchased coverage for all claims incurred prior to December 1, 1993. In

F-25
<PAGE> 102

HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

addition, the Company purchased underlying insurance which would cover all
claims once established limits have been exceeded. It is the opinion of
management that at December 31, 1993 the Company has adequate reserves to cover
losses on asserted and unasserted claims.

Operating leases

Operating leases generally consist of short-term lease agreements for
buildings where facilities are located. These leases generally have 5-year
terms, with one or more renewal options, with terms to be negotiated at the time
of renewal. Total rental expense for all operating leases was $8,801,000,
$13,099,000 and $18,177,000 for the years ended December 31, 1991, 1992 and
1993, respectively.

The following is a schedule of future minimum lease payments under all
operating leases having initial or remaining non-cancelable lease terms in
excess of one year:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 (IN THOUSANDS)
----------------------------------------------------------------------- --------------
<S> <C>
1994............................................................ $ 35,922
1995............................................................ 33,207
1996............................................................ 30,530
1997............................................................ 28,295
1998............................................................ 26,151
After 1998...................................................... 92,834
--------------
Total minimum payments required...................................... $246,939
===========
</TABLE>

12. EMPLOYEE BENEFIT PLANS

The Company has a 401(k) savings plan which matches 15% (10% in 1991) of
the first 4% of earnings that an employee contributes. All contributions are in
the form of cash. All employees who have completed one year of service with a
minimum of 1,000 hours worked are eligible to participate in the plan. Company
contributions are gradually vested over a seven-year service period.
Contributions to the plan by the Company were approximately $196,000, $396,000,
and $430,000 in 1991, 1992 and 1993, respectively.

In 1991, the Company established an Employee Stock Ownership Plan (ESOP)
for the purpose of providing substantially all employees of the Company the
opportunity to save for their retirement and acquire a proprietary interest in
the Company. The ESOP currently owns approximately 830,000 shares of the
Company's Common Stock, which were purchased with funds borrowed from the
Company, $10,000,000 in 1991 (the 1991 ESOP Loan) and $10,000,000 in 1992 (the
1992 ESOP Loan). At December 31, 1993, the combined ESOP Loans had a balance of
$18,932,000. The 1991 ESOP Loan, which bears an interest rate of 10%, is payable
in annual installments covering interest and principal over a ten-year period
beginning in 1992. The 1992 ESOP Loan, which bears an interest rate of 8.5%, is
payable in annual installments covering interest and principal over a ten-year
period beginning in 1993. Company contributions to the ESOP began in 1992 and
shall at least equal the amount required to make all ESOP Loan amortization
payments for each plan year. The Company recognizes compensation expense based
on the shares allocated method. The total compensation expense related to the
ESOP recognized by the Company was $367,000, $1,701,000 and $3,198,000 in 1991,
1992 and 1993, respectively. Interest incurred on the ESOP Loans was
approximately $367,000, $964,000 and $1,743,000, in 1991, 1992 and 1993,
respectively.

13. CAPITAL STOCK

On October 17, 1991, the Company's Board of Directors authorized a
three-for-two stock split to be effected in the form of a 50 percent stock
dividend. The stock dividend was distributed on December 31, 1991 to holders of
record on December 13, 1991. An amount equal to the par value of the shares
issued has been

F-26
<PAGE> 103

HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

transferred from additional paid-in capital to the common stock account. All
weighted average share and per share amounts have been restated to give effect
to the stock split.

14. TERMINATED MERGER

On January 2, 1992, the Company and Continental Medical System, Inc. (CMS)
jointly announced an agreement to combine their business operations as provided
in an Agreement and Plan of Reorganization (the Plan). On May 6, 1992, the
Company and CMS jointly announced the termination of the Plan. Accordingly, all
costs and expenses incurred in connection with the Plan were charged to
operations in 1992 and reported as terminated merger expense in the accompanying
statements of income.

F-27
<PAGE> 104

HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................ $ 59,728 $ 53,470
Other marketable securities...................................... 9,918 8,968
Accounts receivable.............................................. 157,132 143,807
Inventories, prepaid expenses and other current assets........... 55,022 55,465
----------- ------------
TOTAL CURRENT ASSETS..................................... 281,800 261,710
OTHER ASSETS....................................................... 25,389 22,732
ASSETS HELD FOR SALE............................................... 40,456 -0-
PROPERTY, PLANT AND EQUIPMENT -- NET............................... 684,159 708,205
INTANGIBLE ASSETS -- NET........................................... 206,967 175,421
----------- ------------
TOTAL ASSETS............................................. $ 1,238,771 $1,168,068
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................. $ 52,824 $ 41,200
Salaries and wages payable....................................... 30,880 21,442
Accrued interest payable and other liabilities................... 29,129 22,606
Current portion of long-term debt and leases..................... 5,095 4,859
----------- ------------
TOTAL CURRENT LIABILITIES................................ 117,928 90,107
LONG-TERM DEBT AND LEASES.......................................... 804,165 779,690
DEFERRED INCOME TAXES.............................................. 5,507 5,098
MINORITY INTERESTS -- LIMITED PARTNERSHIPS......................... (1,956) (1,799)
STOCKHOLDERS' EQUITY
Preferred Stock, $.10 par value -- 1,500,000 shares authorized;
issued and outstanding -- none................................ 0 0
Common Stock, $.01 par value -- 50,000,000 shares authorized;
29,337,000 and 29,026,000 shares issued at March 31, 1994 and
December 31, 1993, respectively............................... 293 290
Additional paid-in capital....................................... 247,803 243,229
Retained earnings................................................ 82,771 70,648
Treasury Stock................................................... (263) (263)
Receivable from Employee Stock Ownership Plan.................... (17,477) (18,932)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY............................... 313,127 294,972
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............... $ 1,238,771 $1,168,068
========= ==========
</TABLE>

See notes to consolidated financial statements.

F-28
<PAGE> 105

HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1994 1993
-------- --------
(IN THOUSANDS, EXCEPT
FOR PER SHARE DATA)
<S> <C> <C>
Revenues............................................................. $231,296 $116,149
Operating expenses:
Operating units.................................................... 178,183 86,027
Corporate general and administrative............................... 6,105 3,271
Provision for doubtful accounts...................................... 4,164 2,356
Depreciation and amortization........................................ 13,923 8,352
Interest expense..................................................... 9,603 3,044
Interest income...................................................... (673) (760)
-------- --------
211,305 102,290
-------- --------
Income before minority interests and income taxes.................... 19,991 13,859
Provision for income taxes........................................... 7,734 5,111
-------- --------
Income before minority interests..................................... 12,257 8,748
Minority Interests................................................... (134) 72
-------- --------
Net income................................................. $ 12,123 $ 8,820
======== ========
Weighted average common and common equivalent shares outstanding..... 32,255 29,850
======== ========
Net income per common and common equivalent share outstanding........ $ .38 $ .30
======== ========
</TABLE>

See notes to consolidated financial statements.

F-29
<PAGE> 106

HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................................. $ 12,123 $ 8,820
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization....................................... 13,923 8,352
Provision for doubtful accounts..................................... 4,164 2,356
Income (loss) applicable to minority interests of limited
partnerships....................................................... 134 (72)
Provision for deferred income taxes................................. 6,456 3,324
Provision for deferred revenue from contractual agencies............ 0 (49)
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable............................................... (16,498) (19,106)
Inventories, prepaid expenses and other current assets............ 442 (5,105)
Increase (decrease) in accounts payable and accrued expenses...... 21,427 9,833
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................... 42,171 8,353
INVESTING ACTIVITIES
Purchase of property, plant and equipment.............................. (24,313) (24,107)
Additions to intangible assets, net of effects of acquisitions......... (8,476) (4,466)
Assets obtained through acquisitions, net of liabilities assumed....... (11,681) (1,665)
Changes in other assets................................................ (2,656) (2,051)
Proceeds received on sale of other marketable securities............... 50 30
Investments in marketable securities................................... (1,000) (16)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES.......................... (48,076) (32,275)
FINANCING ACTIVITIES
Proceeds from borrowings............................................... 353,505 16,706
Principal payments on debt and leases.................................. (347,084) (389)
Proceeds from exercise of options on common stock...................... 4,578 437
Reduction in receivable from Employee Stock Ownership Plan............. 1,455 710
Proceeds from investment by minority interests......................... 36 0
Purchase of limited partners' interests................................ 0 (844)
Payment of cash distributions to limited partners...................... (327) (405)
-------- --------
NET CASH PROVIDED FROM FINANCING ACTIVITIES.................... 12,163 16,215
-------- --------
(INCREASE)(DECREASE) IN CASH AND CASH EQUIVALENTS........................ 6,258 (7,707)
Cash and cash equivalents at beginning of period......................... 53,470 70,842
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................... $ 59,728 $ 63,135
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest............................................................ $ 9,583 $ 2,778
Income taxes........................................................ 1,053 2,385
</TABLE>

See notes to consolidated financial statements.

F-30
<PAGE> 107

HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1994 AND 1993

NOTE 1

The accompanying consolidated financial statements include the accounts of
HEALTHSOUTH Rehabilitation Corporation (the "Company") and its subsidiaries.
This information should be read in conjunction with the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993. It is management's
opinion that the accompanying consolidated financial statements reflect all
adjustments (which are normal recurring adjustments) necessary for a fair
presentation of the results for the interim period and the comparable period
presented.

NOTE 2

The Company has a $390,000,000 revolving line of credit with NationsBank of
North Carolina, N.A. and eleven other participating banks (the "Credit
Agreement"). At March 31, 1994, the Company had $390,000,000 outstanding under
the Credit Agreement.

The Company also has a $410,000,000 Acquisition and Revolving Credit
Facility with NationsBank of North Carolina, N.A. and other participating banks,
consisting of a $350,000,000 acquisition credit facility and a $60,000,000
revolving credit facility (the "Acquisition Credit Facility"). The Acquisition
Credit Facility was used in part to finance the December 31, 1993 acquisition of
selected rehabilitation facilities from National Medical Enterprises, Inc. At
March 31, 1994, the Company had $20,000,000 outstanding under the revolving
portion of the Acquisition Credit Facility and have repaid all indebtedness
under the acquisition portion thereof.

On March 24, 1994, the Company issued $250,000,000 principal amount of 9.5%
Senior Subordinated Notes due 2001 (the "Notes"). Interest is payable on April 1
and October 1. The Notes are senior subordinated obligations of the Company and
as such will be subordinated to all existing and future senior indebtedness of
the Company. Also on March 24, 1994, the Company issued $100,000,000 principal
amount of 5% Convertible Subordinated Debentures due 2001 (the "Convertible
Debentures"). Subsequent to March 31, 1994, the Company issued an additional
$15,000,000 principal amount of the Convertible Debentures to cover
underwriters' over-allotments. Interest is payable on April 1 and October 1. The
Convertible Debentures are convertible into Common Stock of the Company at the
option of the holder at a conversion price of $37.625 per share, subject to
adjustment in certain events. The net proceeds from the issuance of the Notes
and Convertible Debentures were used by the Company to pay down indebtedness
outstanding under its other existing credit facilities.

At March 31, 1994 and December 31, 1993, long-term debt consisted of the
following:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Advances under the $390,000,000 Credit Agreement............. $ 390,000 $370,000
Due to National Medical Enterprises, Inc..................... 0 361,164
Advances under the $410,000,000 Acquisition Credit
Facility................................................... 20,000 0
9.5% Senior Subordinated Notes due 2001...................... 250,000 0
5% Convertible Subordinated Debentures Due 2001.............. 100,000 0
Other long-term debt......................................... 49,260 53,385
--------- ------------
809,260 784,549
Less amounts due within one year............................. 5,095 4,859
--------- ------------
$ 804,165 $779,690
======== ==========
</TABLE>

F-31
<PAGE> 108

HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

NOTE 3

During the first three months of 1994, the Company acquired or opened eight
new outpatient facilities. The total purchase price of the acquired facilities
was approximately $6,385,000. The Company also entered into non-compete
agreements totaling approximately $1,170,000 in connection with these
transactions. The cost in excess of net asset value of the acquired outpatient
facilities was approximately $4,234,000. The results of operations (not material
individually or in the aggregate) of these outpatient acquisitions are included
in the consolidated financial statements from their respective acquisition
dates.

NOTE 4

During the first three months of 1994, the Company granted incentive and
non-qualified stock options to certain Directors, employees and others for
1,549,250 shares of Common Stock at an exercise price of $28.375 per share.

NOTE 5

In May 1994 the Company reached an agreement to sell selected properties to
Capstone Capital Trust, Inc. These properties include six ancillary hospital
facilities, three outpatient rehabilitation facilities, and one research
facility. The transaction is expected to be consummated during June 1994. The
net book value of these properties is disclosed as "assets held for sale" in the
accompanying consolidated balance sheet.

NOTE 6

During 1993 the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 93-6, "Employers' Accounting for Employee Stock
Ownership Plans." Among other provisions, SOP 93-6 requires that compensation
expense relating to employee stock ownership plans be measured based on the fair
market value of the shares when allocated to the employees. The provisions of
SOP 93-6 apply only to leveraged ESOPs formed after December 31, 1992, or shares
newly acquired by an existing leveraged ESOP after December 31, 1992. Because
all shares owned by the Company's ESOP were acquired prior to December 31, 1992,
the Company's accounting policies for the share currently owned by the ESOP will
not be affected by SOP 93-6.

F-32
<PAGE> 109

REPORT OF INDEPENDENT AUDITORS

The Boards of Directors
National Medical Enterprises, Inc. and
HEALTHSOUTH Rehabilitation Corporation

We have audited the accompanying combined balance sheets of Selected
Rehabilitation Hospitals of National Medical Enterprises, Inc. as of May 31,
1992 and 1993 and the related combined statements of income, owners' equity and
cash flows for the three years ended May 31, 1993. These combined financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We did not audit the financial statements of certain rehabilitation hospitals,
which statements reflect $83,947,000 (or 23%) of the combined total assets at
May 31, 1992 and $88,939,000 (or 21%) and $110,761,000 (or 23%) of the combined
net operating revenues for the years ended May 31, 1991 and 1992, respectively.
Those statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to the amounts included
for those rehabilitation hospitals, is based solely on the reports of the other
auditors.

In our opinion, based on our audits and the reports of the other auditors,
the combined financial statements referred to above present fairly, in all
material respects, the combined financial position of Selected Rehabilitation
Hospitals of National Medical Enterprises, Inc. as of May 31, 1992 and 1993 and
the results of their operations and their cash flows for the three years ended
May 31, 1993 in conformity with generally accepted accounting principles.

KPMG PEAT MARWICK

Los Angeles, California
January 31, 1994

F-33
<PAGE> 110

SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.

COMBINED BALANCE SHEETS
MAY 31, 1992 AND 1993
(IN THOUSANDS)

<TABLE>
<CAPTION>
1992 1993
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 4,202 $ 1,082
Accounts and notes receivable (net of allowance for bad debts of
$12,551 at May 31, 1992 and $7,714 at May 31, 1993)............... 99,563 75,233
Inventories of supplies, at cost..................................... 3,383 3,523
Prepaid expenses and other current assets............................ 8,834 5,466
-------- --------
Total current assets......................................... 115,982 85,304
Long-term notes receivables and other long-term assets................. 6,225 4,619
Due from owner and affiliates, net (note 4)............................ 42,854 55,545
Property, plant and equipment, net (note 3)............................ 189,067 193,042
Intangible assets, at cost, net of accumulated amortization ($20,799 at
May 31, 1992 and $22,735 at May 31, 1993)............................ 12,316 14,671
-------- --------
$366,444 $353,181
======== ========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 5)........................... $ 1,704 $ 1,923
Accounts payable..................................................... 19,082 12,547
Income taxes payable (note 6)........................................ 30,462 7,537
Employee compensation and benefits................................... 16,813 16,472
Other current liabilities............................................ 10,459 10,192
-------- --------
Total current liabilities.................................... 78,520 48,671
Long-term debt, net of current portion (note 5)........................ 56,773 61,082
Deferred income taxes and other long-term liabilities.................. 25,543 23,869
Minority interest...................................................... 2,113 1,456
Commitments and contingencies (notes 6, 7, 8, and 9)................... -- --
Owners' equity......................................................... 203,495 218,103
-------- --------
$366,444 $353,181
======== ========
</TABLE>

See accompanying notes to combined financial statements.

F-34
<PAGE> 111

SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.

COMBINED STATEMENTS OF INCOME
YEARS ENDED MAY 31, 1991, 1992 AND 1993
(IN THOUSANDS)

<TABLE>
<CAPTION>
1991 1992 1993
-------- -------- --------
<S> <C> <C> <C>
Net operating revenues............................. $432,197 $499,555 $476,692
Operating and administrative expenses (note 4)..... 340,585 388,441 420,694
Depreciation and amortization...................... 12,417 15,831 15,171
Interest, net of capitalized portion of $53 in 1992
and $29 in 1993 (note 4)......................... 7,432 6,817 6,448
-------- -------- --------
Total costs and expenses................. 360,434 411,089 442,313
-------- -------- --------
Minority interest in earnings of certain
Selected Hospitals............................... 1,492 2,143 1,233
-------- -------- --------
Income before income taxes......................... 70,271 86,323 33,146
Income taxes (note 6).............................. 27,777 33,804 13,570
-------- -------- --------
Net income............................... $ 42,494 $ 52,519 $ 19,576
======== ======== ========
</TABLE>

See accompanying notes to combined financial statements.

F-35
<PAGE> 112

SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.

COMBINED STATEMENTS OF OWNERS' EQUITY
YEARS ENDED MAY 31, 1991, 1992 AND 1993
(IN THOUSANDS)

<TABLE>
<CAPTION>
TOTAL
OWNERS'
EQUITY
--------
<S> <C>
Balance, May 31, 1990............................................................. $ 93,112
Net income........................................................................ 42,494
Capital contribution.............................................................. 2,000
--------
Balance, May 31, 1991............................................................. 137,606
Contribution of net assets of certain rehabilitation hospitals by NME (note 4).... 20,390
Capital contribution.............................................................. 980
Net income........................................................................ 52,519
Dividends paid.................................................................... (8,000)
--------
Balance, May 31, 1992............................................................. 203,495
Capital contribution.............................................................. 32
Net income........................................................................ 19,576
Dividends paid.................................................................... (5,000)
--------
Balance, May 31, 1993............................................................. $218,103
========
</TABLE>

See accompanying notes to combined financial statements.

F-36
<PAGE> 113

SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.

COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1991, 1992 AND 1993
(IN THOUSANDS)

<TABLE>
<CAPTION>
1991 1992 1993
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 42,494 $ 52,519 $ 19,576
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 12,417 15,831 15,171
Provisions for bad debts.............................. 12,029 14,260 7,242
Changes in assets and liabilities:
Accounts and notes receivable....................... (21,704) (39,905) 17,963
Inventories, prepaid expenses and other current
assets........................................... (3,211) (3,740) (3,228)
Accounts payable, income taxes, accrued expenses and
other current liabilities........................ 12,351 38,388 (30,725)
Deferred income taxes and other long-term
liabilities...................................... 1,114 (3,920) (1,674)
-------- -------- --------
Net cash provided by operating activities........ 55,490 73,433 24,325
-------- -------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment................ (23,843) (70,797) (16,419)
Intangible assets........................................ (3,527) (2,777) (5,082)
Proceeds from long-term notes and other long term
assets................................................ 1,897 2,283 1,606
-------- -------- --------
Net cash used in investing activities............ (25,473) (71,291) (19,895)
-------- -------- --------
Cash flows from financing activities:
Proceeds from borrowings................................. 7,121 8,585 6,232
Net change in amounts due from owners and affiliates..... (30,632) (5,941) (7,110)
Principal payments on borrowings......................... (1,354) (5,803) (1,704)
Cash dividends paid to owners............................ -- (8,000) (5,000)
Capital contributions.................................... 2,000 980 32
-------- -------- --------
Net cash used in financing activities............ (22,865) (10,179) (7,550)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 7,152 (8,037) (3,120)
Cash and cash equivalents at beginning of year............. 5,087 12,239 4,202
-------- -------- --------
Cash and cash equivalents at end of year................... $ 12,239 $ 4,202 $ 1,082
======== ======== ========
Supplemental disclosures:
Interest paid, net of amounts capitalized................ $ 7,422 $ 6,829 $ 6,520
======== ======== ========
Supplemental disclosure of noncash financing activities:
Contribution of net assets of certain rehabilitation
hospitals by NME...................................... -- 20,390 --
======== ======== ========
</TABLE>

See accompanying notes to combined financial statements.

F-37
<PAGE> 114

SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS
MAY 31, 1991, 1992 AND 1993

(1) SIGNIFICANT ACCOUNTING POLICIES

The combined financial statements have been prepared in connection with the
purchase by certain subsidiaries of HEALTHSOUTH Rehabilitation Corporation
(HEALTHSOUTH) of 28 inpatient physical rehabilitation hospitals and 45 related
satellite outpatient clinics (collectively, the "Selected Hospitals") from
various subsidiaries of National Medical Enterprises, Inc. ("NME"), which
transaction is described in more detail in note 10. These hospitals serve
patients who have lost physical or cognitive function through illness or trauma
by providing acute medical rehabilitation services.

The combined financial statements present the historical combined financial
position and results of operations of the Selected Hospitals and, as a result,
include certain assets and liabilities of the Selected Hospitals that
HEALTHSOUTH did not acquire or assume as part of the transaction described in
note 10.

Significant intercompany accounts and transactions have been eliminated.

Net Operating Revenues

Net operating revenues consist primarily of net patient service revenues
which are based on the hospitals' established billing rates less allowances and
discounts principally for patients covered by Medicare, Medicaid and other
contractual programs. These allowances and discounts were $229,359,000 in 1991,
$286,725,000 in 1992 and $302,140,000 in 1993. Payments under these programs are
based on either predetermined rates or the costs of services. Settlements for
retrospectively determined rates are estimated in the period the related
services are rendered and are adjusted in future periods as final settlements
are determined. Management of NME believes that adequate provision has been made
for adjustments that may result from final determination of amounts earned under
these programs, however such provisions are necessarily based on estimates.
Approximately 47% of net operating revenues in both 1991 and 1992 and 57% in
1993 are from the participation of the Selected Hospitals in Medicare and
Medicaid programs.

The Selected Hospitals provide care to patients who meet certain financial
or economic criteria without charge or at amounts substantially less than its
established rates. Because the Selected Hospitals do not pursue collection of
amounts determined to qualify as charity care, they are not reported as gross
revenue, nor are they included in deductions from revenue or in operating and
administrative expenses.

Bad debt expense for estimated uncollectible accounts and notes receivable,
net of recoveries, is included in operating and administrative expenses and was
$12,029,000 in 1991, $14,260,000 in 1992 and $7,242,000 in 1993.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost, net of accumulated
depreciation. The Selected Hospitals principally use the straight-line method of
depreciation for buildings, improvements and equipment over their estimated
useful lives as follows: buildings and improvements - generally 20 to 50 years;
equipment -- 3 to 15 years.

Intangible Assets

Preopening costs are generally amortized over 3 to 5 years. Costs in excess
of the fair value of identifiable net assets of purchased businesses are
generally amortized over 40 years. The straight-line method is used to amortize
most intangible assets.

F-38
<PAGE> 115

SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Leases

Capital leases are recorded at the beginning of the lease term as assets
and liabilities at the lower of the present value of the minimum lease payments
or the fair value of the assets.

Cash Equivalents

The Selected Hospitals treat highly liquid investments with an original
maturity of three months or less as cash equivalents.

Income Taxes

The operations of the Selected Hospitals are included in the NME
consolidated federal income tax return. The provision for income taxes
represents taxes computed on earnings of the Selected Hospitals.

(2) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash, cash equivalents, accounts receivable,
accounts payable and interest payable approximates fair value because of the
short maturity of these instruments. The fair values of investments, both
short-term and long-term, based on quoted market prices, approximates carrying
value. The fair values of long-term receivables based on discounting scheduled
cash flows through estimated maturity using estimated market discount rates,
also approximates carrying value. The fair value of the Selected Hospitals'
long-term debt, (1) calculated by discounting scheduled cash flows through the
estimated maturity using estimated market discount rates that reflect the credit
and interest rate risk inherent in the loans, or (2) based on current rates
offered to the Selected Hospitals for debt of the same remaining maturities,
also approximates the carrying value of the debt.

(3) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following at May 31 (in
thousands):

<TABLE>
<CAPTION>
1992 1993
-------- --------
<S> <C> <C>
Land......................................................... $ 13,633 $ 16,007
Buildings and improvements................................... 112,200 134,604
Construction in progress..................................... 23,316 2,722
Equipment.................................................... 71,754 82,890
Facilities under capital leases.............................. 16,466 16,339
-------- --------
237,369 252,562
Less accumulated depreciation and amortization............... (48,302) (59,520)
-------- --------
$189,067 $193,042
======== ========
</TABLE>

(4) RELATED PARTY TRANSACTIONS

The Selected Hospitals and certain NME-owned entities participate in the
NME cash management program which requires that cash deposits be transferred to
NME-controlled bank accounts. In this system, generally all cash accounts are
zero-balance accounts. Increases and decreases in the intercompany account are
principally a function of cash flow and accrued interest (10% in 1991, 1992 and
1993) and to a lesser extent, noncash entries for certain overhead and expense
allocations.

Total interest income recognized relating to balances with NME and
NME-owned entities was $3,958,000, $8,242,000 and $8,609,000 for the years ended
May 31, 1991, 1992 and 1993, respectively.

F-39
<PAGE> 116

SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Operating and administrative expenses include gross insurance premiums of
approximately $6,803,000, $5,899,000 and $7,279,000 paid to Health Facilities
Insurance Corporation, Ltd. (HFIC), a wholly owned Subsidiary of NME, for
professional and other insurance coverage for the years ended May 31, 1991, 1992
and 1993, respectively.

NME provides certain management and administrative services to the Selected
Hospitals for which it charges a fee. Each of the Selected Hospitals is
allocated a portion of the fee based on the relative amount of patient days by
facility to total patient days. Fees of $22,022,000, $30,477,000 and $48,020,000
were paid to NME for the years ended May 31, 1991, 1992, and 1993, respectively.

During the year ended May 31, 1992, NME converted two former psychiatric
hospitals to rehabilitation hospitals and contributed the net assets of the
hospitals totaling approximately $20 million to the Selected Hospitals.

(5) LONG-TERM DEBT

Long-term debt of the Selected Hospitals at May 31 is as follows (in
thousands):

<TABLE>
<CAPTION>
1992 1993
------- -------
<S> <C> <C>
Notes secured by property, plant and equipment at rates
ranging from 5.18% to 12.95% in 1992 and 4.20% to 12.90% in
1993....................................................... $44,556 $49,871
Obligations under capital leases............................. 13,618 12,893
Other unsecured.............................................. 303 241
------- -------
58,477 63,005
Less current portion......................................... (1,704) (1,923)
------- -------
$56,773 $61,082
======= =======
</TABLE>

In connection with the sale of the Selected Hospitals discussed in note 10,
all of the debt outstanding at May 31, 1993, with the exception of obligations
under capital leases and approximately $4.9 million of notes secured by
property, plant and equipment which were assumed by HEALTHSOUTH, was repaid
subsequent to May 31, 1993. Following are the minimum principal payments for the
remaining notes for the five years subsequent to May 31, 1993:

<TABLE>
<S> <C>
1994............................................................. $ 113
1995............................................................. 128
1996............................................................. 146
1997............................................................. 165
1998............................................................. 188
Thereafter....................................................... 4,160
------
$4,900
======
</TABLE>

F-40
<PAGE> 117

SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(6) INCOME TAXES

Taxes on income for the years ended May 31 consist of the following amounts
(in thousands):

<TABLE>
<CAPTION>
1991 1992 1993
------- ------- -------
<S> <C> <C> <C>
Current payable
Federal............................................. $23,096 $26,602 $ 9,301
State............................................... 6,328 10,089 4,238
------- ------- -------
29,424 36,691 13,539
------- ------- -------
Deferred taxes:
Federal............................................. (1,341) (725) 211
State............................................... (306) (2,162) (180)
------- ------- -------
(1,647) (2,887) 31
------- ------- -------
Total taxes on income....................... $27,777 $33,804 $13,570
======= ======= =======
</TABLE>

Income taxes paid, net of refunds, to NME and state taxing authorities
during the years ended May 31, 1991, 1992 and 1993 were $21,699,000, $7,519,000
and $36,387,000, respectively.

Deferred income taxes reflect the effect of timing differences in the
recognition of revenues and expenses for tax and financial statement purposes.
Deferred tax expense is composed of the following for the years ended May 31 (in
thousands):

<TABLE>
<CAPTION>
1991 1992 1993
------- ------- -------
<S> <C> <C> <C>
Current year impact of change in tax accounting
methods............................................. $(1,587) $(1,778) $(1,832)
Excess of tax depreciation over book depreciation..... 303 52 919
Deferred costs amortized for financial statement
purposes and deducted as incurred for tax
purposes............................................ 326 149 768
Deferred compensation................................. (56) (180) 690
Provision for doubtful accounts in excess of write
offs................................................ (1,069) 307 (649)
Other................................................. 436 (1,437) 135
------- ------- -------
$(1,647) $(2,887) $ 31
======= ======= =======
</TABLE>

Effective June 1, 1993, the Selected Hospitals adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Among
other provisions, this standard requires deferred tax balances to be determined
using enacted income tax rates for the years in which the taxes will actually be
paid or refunds received. At May 31, 1993, the Selected Hospitals' deferred tax
accounts reflect the statutory rates that were in effect when the deferrals were
initiated. The Selected Hospitals recognized a net income benefit, based on
current enacted tax rates, of approximately $10 million as the cumulative effect
of an accounting change in its quarter ended August 31, 1993.

The main difference between the federal statutory rate of 34% and the
effective tax rates is attributable to state income taxes, net of federal income
tax benefit. In addition, taxes are increased for various items treated as
permanent differences which increase taxable income.

F-41
<PAGE> 118

SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(7) LEASE OBLIGATIONS

The Selected Hospitals have entered into capital lease obligations for
several facilities and various equipment. The related obligations bear interest
ranging from 10% to 31% with installment payments to 2022. These leases are
collateralized by certain leased facilities, equipment and letters of credit.

Future minimum lease payments for both capital and operating leases for the
next five years are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1994........................................................ $ 882 $ 15,189
1995........................................................ 750 18,175
1996........................................................ 853 18,104
1997........................................................ 1,025 18,114
1998........................................................ 1,130 17,763
Thereafter.................................................. 8,253 67,428
------- ---------
$12,893 $ 154,773
======= ========
</TABLE>

Rental expense under operating leases, including contingent rent expense
and short-term leases, was $28,696,000 in 1991, $30,744,000 in 1992 and
$30,662,000 in 1993.

(8) PROFESSIONAL AND GENERAL LIABILITY INSURANCE

The professional and comprehensive general liability risks of the Selected
Hospitals are insured by HFIC. The coverage provided is limited to $25,000,000
per occurrence with an annual aggregate limit of $25,000,000. HFIC reinsures
risks in excess of $500,000 per occurrence with major insurance carriers. The
Selected Hospitals may receive periodic premium rebates based upon actual
experience as determined by HFIC management.

The Selected Hospitals also have umbrella coverage with major insurance
carriers for losses above the limits provided by HFIC. The excess coverage
provided is limited to $75,000,000 per occurrence with an annual aggregate limit
of $75,000,000.

(9) EMPLOYEE RETIREMENT PLAN

Substantially all of the Selected Hospitals participate in a defined
contribution 401(k) plan administered by NME. Employees who elect to participate
made contributions equal to 3% of their eligible compensation, with such
contributions matched by NME. Total expense related to this plan and to all
previous plans totaled, $2,458,000, $2,775,000 and $367,000 for the years ended
May 31, 1991, 1992 and 1993, respectively. The Selected Hospitals do not have a
plan that provides postretirement benefits.

(10) SUBSEQUENT EVENTS

On January 6, 1994, certain subsidiaries of HEALTHSOUTH purchased
substantially all of the assets, subject to certain assumed liabilities, of the
Selected Hospitals from various subsidiaries of NME for a purchase price of
approximately $350,000,000, including approximately $50,000,000 (subject to
certain adjustments to be made at June 30, 1994) for the working capital of the
Selected Hospitals. Under the terms of the December 3, 1993 Asset Sale
Agreement, amended as of January 3, 1994, substantially all of the risks and
rewards of ownership of the Selected Hospitals were effectively transferred to
HEALTHSOUTH as of December 31, 1993.

F-42
<PAGE> 119

SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NME and certain of its subsidiaries are currently involved in significant
legal proceedings and investigations of an unusual nature related principally to
NME's psychiatric business. These investigations and proceedings have been
described in various filings by NME with the Securities and Exchange Commission.
At this time, the ultimate disposition of the investigations and proceedings nor
the amount of liabilities or losses arising from them can be determined, and
accordingly no provision for any liability resulting from the ultimate
disposition of these matters has been recognized in the accompanying combined
financial statements. HEALTHSOUTH did not assume, and has been indemnified by
NME with respect to, any liabilities of NME and those NME subsidiaries that
owned the Selected Hospitals arising from or in connection with such proceedings
and investigations insofar as any such liabilities arise from actions taken (or
any failure to act) prior to the date of the purchase of the Selected Hospitals.

F-43
<PAGE> 120

SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.

COMBINED CONDENSED INTERIM BALANCE SHEET
NOVEMBER 30, 1993
(IN THOUSANDS)

<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 1,466
Accounts and notes receivable (net of allowance for bad debts of $9,752 at
November 30, 1993)........................................................... 85,131
Inventories of supplies, at cost................................................ 3,582
Other current assets............................................................ 5,766
--------
Total current assets.................................................... 95,945
Due from owner and affiliates................................................... 65,918
Property, plant and equipment, net.............................................. 199,590
Intangible assets (net of accumulated amortization of $25,181 at November 30,
1993)........................................................................ 14,296
Other long-term assets.......................................................... 8,304
--------
$384,053
========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................... $ 3,552
Accounts payable and other accrued expenses..................................... 43,480
Income taxes payable............................................................ 2,243
Other current liabilities....................................................... 9,659
--------
Total current liabilities............................................... 58,934
Long-term debt, net of current portion.......................................... 72,654
Other long-term liabilities..................................................... 17,156
Commitments and contingencies................................................... --
Owners' equity.................................................................. 235,309
--------
$384,053
========
</TABLE>

See accompanying note to combined condensed interim financial statements.

F-44
<PAGE> 121

SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.

COMBINED CONDENSED INTERIM STATEMENTS OF INCOME
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED NOVEMBER
30,
-------------------------
1992 1993
-------- --------
<S> <C> <C>
Net operating revenues............................................. $243,324 $227,780
Operating and administrative expenses.............................. 210,852 209,038
Depreciation and amortization...................................... 7,350 8,101
Interest, net of capitalized portion............................... (506) 175
-------- --------
Total costs and expenses................................. 217,696 217,314
-------- --------
Minority interest in earnings of certain selected hospitals........ 1,658 1,827
-------- --------
Income before income taxes......................................... 23,970 8,639
Income taxes....................................................... 8,869 3,196
-------- --------
Net income before cumulative effect of an accounting
change................................................. 15,101 5,443
Cumulative effect of change in accounting for income taxes......... -0- 10,578
-------- --------
Net income............................................... $ 15,101 $ 16,021
======== ========
</TABLE>

See accompanying note to combined condensed interim financial statements.

F-45
<PAGE> 122

SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.

COMBINED CONDENSED INTERIM STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED NOVEMBER
30,
-------------------------
1992 1993
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................... $ 15,101 $ 16,021
Cumulative effect of change in accounting for income taxes....... -- 10,578
-------- --------
Net income before cumulative effect of accounting change......... 15,101 5,443
-------- --------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 7,350 8,101
Provisions for losses on accounts and notes receivable........ 3,363 4,392
Changes in operating assets and liabilities:
Accounts and notes receivable............................... 13,159 (14,290)
Inventories of supplies..................................... 33 (59)
Other current assets........................................ 1,204 394
Accounts payable and accrued expenses....................... (2,465) 14,461
Income taxes payable........................................ (26,329) (5,294)
Other current liabilities................................... (1,967) (533)
Other long term liabilities................................. 682 3,865
-------- --------
Net cash provided by operating activities................ 10,131 16,480
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment....................... (1,730) (13,249)
Intangible assets................................................ (1,531) (1,025)
Purchases of long term assets.................................... -- (3,685)
Proceeds from sales of long term assets.......................... 1,257 --
-------- --------
Net cash used in investing activities.................... (2,004) (17,959)
-------- --------
Cash flows from financing activities:
Proceeds from borrowings......................................... -- 14,163
Principal payments on long term debt............................. (533) (962)
Cash dividends paid to NME....................................... (4,000) (2,000)
Net change in amounts due from parent and affiliates............. (5,317) (10,373)
Other............................................................ -- 1,035
-------- --------
Net cash (used in) provided by financing activities.............. (9,850) 1,863
Net (decrease) increase in cash and cash equivalents............. (1,723) 384
Cash and cash equivalents at beginning of period................. 4,202 1,082
-------- --------
Cash and cash equivalents at end of period....................... $ 2,479 $ 1,466
======== ========
</TABLE>

See accompanying note to combined condensed interim financial statements.

F-46
<PAGE> 123

SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.

NOTE TO COMBINED CONDENSED INTERIM FINANCIAL STATEMENTS
NOVEMBER 30, 1993

The accompanying combined condensed interim financial statements as of
November 30, 1993 and for the six-month periods ended November 30, 1993 and
November 30, 1992 include the accounts of 28 inpatient physical rehabilitation
hospitals and 45 related satellite outpatient clinics (collectively, the
"Selected Hospitals" formerly owned by subsidiaries of National Medical
Enterprises, Inc. ("NME")).

On January 6, 1994, HEALTHSOUTH Rehabilitation Corporation acquired
substantially all of the assets, subject to certain assumed liabilities, of the
Selected Hospitals from subsidiaries of NME.

These combined financial statements are unaudited and were prepared by
management of HEALTHSOUTH following the acquisition described above. NME has not
prepared combined financial statements for the Selected Hospitals for the
periods indicated in these statements. HEALTHSOUTH believes that the accounting
policies used in the preparation of these combined financial statements are
consistent with accounting policies of the Selected Hospitals. These combined
financial statements reflect all adjustments that are, in the opinion of
HEALTHSOUTH's management, necessary to present fairly the combined financial
position and results of operations for the periods indicated. All such
adjustments are of a normal recurring nature.

HEALTHSOUTH presumes that users of this interim unaudited financial
information have read the audited financial statements, (included elsewhere in
this Prospectus), and the adequacy of additional disclosure needed for a fair
presentation may be determined in that context. The interim financial
information herein is not necessarily indicative of operations for a full year
for various reasons, including levels of occupancy, interest rates, revenue
allowance and discount fluctuations, the timing of price changes and other
factors.

Effective June 1, 1993, NME recorded the cumulative effect of the change in
accounting for income taxes to adopt the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." In connection with
the adoption of this statement, NME recorded $10,578,000 related to the net
deferred tax liabilities of the Selected Hospitals. As of June 1, 1993, the tax
effect of differences between the tax basis of assets and liabilities of the
Selected Hospitals is summarized as follows:

<TABLE>
<CAPTION>
DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES
------------ ------------
<S> <C> <C>
Depreciation and fixed asset basis differences..................... $ -- $ 10,522
Receivables -- adjustments and allowances.......................... 4,775 --
Cash basis accounting change....................................... -- 7,358
Intangible assets.................................................. -- 807
Benefit plans...................................................... 1,494 --
Other.............................................................. -- 505
------------ ------------
$6,269 $ 19,192
========= =========
</TABLE>

F-47
<PAGE> 124

HEALTHSOUTH REHABILITATION CORPORATION
AND SUBSIDIARIES

PRO FORMA FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31, 1993

Effective December 31, 1993, HEALTHSOUTH Rehabilitation Corporation (the
"Company") completed the acquisition from National Medical Enterprises, Inc.
("NME") of 28 inpatient rehabilitation facilities and 45 outpatient
rehabilitation facilities (the "NME Selected Hospitals Acquisition"). In
connection with the NME Selected Hospitals Acquisition, the Company acquired
substantially all of NME's rehabilitation services division, consisting of 24
rehabilitation hospitals (plus a 50% interest in another rehabilitation
hospital), two transitional living centers, one skilled nursing facility, a
free-standing comprehensive outpatient rehabilitation facility and 44 outpatient
rehabilitation facilities operated in conjunction with certain of the acquired
inpatient facilities. The total consideration paid was approximately
$394,600,000, consisting of $296,700,000 in cash for NME's non-current assets,
$64,500,000 in cash for net working capital, (subject to certain adjustments as
of June 30, 1994), the assumption of $17,100,000 in long-term debt obligations,
and the assumption of $16,300,000 in current liabilities.

The following pro forma condensed combined income statement (the "Pro Forma
Income Statement") is based on the historical financial statements of the
Company and the NME Selected Hospitals. The Pro Forma Income Statement was
prepared on the assumption that the NME Selected Hospitals Acquisition had
occurred as of January 1, 1993. The Pro Forma Income Statement does not purport
to represent what the Company's results of operations would actually have been
if such transaction had, in fact, occurred on such date or to project the
Company's results of operations for any future period.

F-48
<PAGE> 125

HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES

PRO FORMA CONDENSED COMBINED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1993

<TABLE>
<CAPTION>
NME
SELECTED PRO FORMA PRO FORMA
HEALTHSOUTH HOSPITALS ADJUSTMENTS COMBINED
----------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues.......................... $ 482,304 $ 461,148 $ 21,155(5) $ 937,173
(27,434)(7)
Operating expenses:
Operating units................. 348,912 410,609 (45,010)(1) 714,511
Corporate general and
administrative............... 14,020 0 10,000(2) 24,020
Provision for doubtful accounts... 12,680 8,271 20,951
Depreciation and amortization..... 36,494 15,922 2,924(3) 55,340
Interest expense.................. 12,683 7,129 29,044(4) 48,856
Interest income................... (3,173) 0 (3,173)
NME Selected Hospitals Acquisition
related expense................. 49,742 0 49,742
----------- --------- ----------- ---------
471,358 441,931 (3,042) 910,247
========= ======== ========= ========
Income before income taxes and
minority interests.............. 10,946 19,217 (3,237) 26,926
Provision for income taxes........ 4,069 7,897 (1,198)(6) 10,768
----------- --------- ----------- ---------
Income before minority
interests....................... 6,877 11,320 (2,039) 16,158
Minority interests................ 190 1,402 1,592
----------- --------- ----------- ---------
Net income.............. $ 6,687 $ 9,918 $ (2,039) $ 14,566
========= ======== ========= ========
Weighted average common and common
equivalent shares outstanding... 29,858 29,858
========= ========
Net income per common and common
equivalent share outstanding.... $ .22 $ .49
========= ========
</TABLE>

See accompanying notes.

F-49
<PAGE> 126

NOTES TO PRO FORMA CONDENSED
COMBINED INCOME STATEMENT

HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, 1993

1. To eliminate intercompany management fees and corporate overhead of the
NME Selected Hospitals. The total management fees and corporate overhead expense
for the period equals $45,010 and is included in operating unit expense in the
accompanying statement.

2. To adjust corporate general and administrative expenses for estimated
additions necessary to assimilate and operate the acquired facilities.

3. To adjust depreciation and amortization to reflect the purchase price
allocation as follows (in thousands):

<TABLE>
<CAPTION>
PURCHASE
PRICE USEFUL ANNUAL
NME ASSET ALLOCATION LIFE DEPRECIATION
----------------------------------------------------- ---------- ------ ------------
<S> <C> <C> <C>
Buildings............................................ $ 122,968 30 $ 4,099
Leasehold values..................................... 105,000 15 7,000
Equipment............................................ 61,226 10 6,123
Goodwill............................................. 64,979 40 1,624
------------
Total...................................... 18,846
Historical NME depreciation and amortization......... 15,922
------------
Pro forma adjustment................................. $ 2,924
=========
</TABLE>

4. To adjust interest expense to reflect the Company's pro forma
capitalization, as if it were outstanding during all of the fiscal year ended
December 31, 1993, computed as follows (in thousands):

<TABLE>
<CAPTION>
AVERAGE
AMOUNT AVERAGE INTEREST
OUTSTANDING RATE EXPENSE
----------- ------- --------
<S> <C> <C> <C>
Line of credit........................................ $ 293,000 5.75% $ 16,856
Convertible debentures................................ 100,000 5.0% 5,000
Subordinated notes.................................... 250,000 9.0% 22,500
Other................................................. 45,000 10.0% 4,500
--------
Total....................................... $ 48,856
=======
</TABLE>

5. To adjust estimated Medicare reimbursement for the increases in
reimbursable expenses described in Notes 2, 3 and 4 above. These increases in
expenses include corporate overhead of $10,000,000 (see Note 2), depreciation
expense of $1,300,000 (see Note 3) and interest expense of $29,044,000 (see Note
4).

6. To adjust the provision for income taxes to an incremental rate of 37%
(net of minority interests).

7. To remove estimated Medicare reimbursement of management fees and
corporate overhead eliminated in Note 1 above.

F-50
<PAGE> 127

- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF
COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
----------------
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 9
Use of Proceeds....................... 16
Distributions to Stockholders......... 17
Dilution.............................. 18
Capitalization........................ 19
Selected Historical, Pro Forma and
Estimated Financial Information..... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 24
Investment and Other Policies......... 40
Management............................ 44
Principal Stockholders................ 49
Description of Securities............. 49
Certain Provisions of Maryland Law and
of The Company's Charter and
Bylaws.............................. 52
Federal Income Tax Considerations..... 54
ERISA Considerations.................. 64
Underwriting.......................... 66
Legal Matters......................... 67
Experts............................... 67
Available Information................. 68
Glossary.............................. 69
Index to Financial Statements......... F-1
</TABLE>

------------------
UNTIL JULY 18, 1994 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------

- ------------------------------------------------------
- ------------------------------------------------------
5,800,000 SHARES

[LOGO]

CAPSTONE CAPITAL
CORPORATION

COMMON STOCK
------------------

PROSPECTUS

JUNE 23, 1994
------------------
SMITH BARNEY INC.

J.C. BRADFORD & CO.
- ------------------------------------------------------
- ------------------------------------------------------